INNOVATE Corp.

Good afternoon and welcome to InnovateCorp third quarter 2024 earnings conference call. All participants will be in a listen-only mode. After prepared remarks and presentation, there will be a question and answer session. Please note, this event is being recorded. I would now like to turn the conference call over to Anthony Rasmus with Investor Relations. Please go ahead.

Good afternoon. Thank you for being with us to review Innovate's third quarter 2024 earnings results. We are joined today by Paul Voigt, Innovate's interim CEO, and Mike Sena, Innovate's CFO. We have posted our earnings release and our slide presentation on our website at InnovateCorp.com. We will begin our call with prepared remarks to be followed by a Q&A session. This call is also being simulcast and will be archived on our website. During this call, management may make certain statements and assumptions which are not historical facts, will be forward-looking, and are being made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Any such forward-looking statements involve risk assumptions and uncertainties and are subject to certain assumptions and risk factors that could cause Innovate's actual results to differ materially from these forward-looking statements. The risk factors that could cause these differences are more fully discussed in the cautionary statement that is included in our earnings release and the slide presentation and further detailed in our 10-K and other filings of the SEC. In addition, the forward-looking statements included in this conference call are only made as of this date of this call and as stated in our SEC reports. Innovate disclaims any intent or obligation to update or revise these forward-looking statements except as expressly required by law. management will often refer to certain non-GAAP financial measures such as adjusted EBITDA. We believe that these measures provide useful supplemental data that, while not a substitute for GAAP measures, allow for greater transparency in the review of our financial and operational performance. At this point, it is my pleasure to turn things over to Paul Boyd.

Paul Boyd Good afternoon. We are pleased to report our strong third quarter financial results and we'll update you on key milestones reached that exemplify the progress across each business segment. Innovate delivered consolidated revenues of 242.2 million and adjusted EBITDA of 16.8 million in the third quarter of 2024. DBM Global achieved revenues of 232.8 million and adjusted EBITDA of 20.9 million. During the quarter, DBM has seen gross margin improvement year-over-year of approximately 360 basis points to 18.8% and adjusted EBITDA year-over-year by approximately 70 basis points to 9%. As we've discussed on previous calls, we are expecting results for the full year to come in slightly lower versus last year. DBM delivered a very strong first half However, as expected, and as we signaled on previous calls, the back half of 2024 will be lighter compared to the same period of 2023. This year has been unusual with the first half outperforming the second half, and the results for the first nine months have met our expectations, aligning with results from the previous year. While third quarter sales were lighter than expectations, This was offset by higher margins in the quarter. We still expect adjusted EBITDA to be slightly lower than last year results. DBM's total adjusted backlog, which takes into consideration awarded but not yet signed contracts, increased to $1.1 billion at the end of the third quarter. There continues to be high volume of bidding opportunities in the commercial market today. although many projects have not yet been released to start construction. Moving on to life sciences, R2 posted another strong financial quarter and made significant commercial progress. Year-to-date, worldwide top-line sales reached 5.7 million, a record high. R2's top-line sales grew 217% for the first nine months, and it's September 30th. 2024 compared to the same period last year, and also already 73% higher than top line sales for the full year 2023. System unit sales worldwide saw a massive increase of 416% growth from third quarter 23 to third quarter 24. R2 has also secured a robust backlog of over 60 systems worldwide positioning the company well as it heads into the fourth quarter. Since its commercial launch, R2 has sold systems into multiple countries outside the U.S., including Canada, Mexico, UAE, Saudi Arabia, Qatar, Hong Kong, Japan, Singapore, Vietnam, and China. R2 plans to expand its international footprint in months to come. R2 is also pleased to announce the launch of a partnership with its very first national account chain. Glacial providers continue to see incredible results using glacial skin devices, evidenced by 168% growth in patients treated and the increase in average monthly utilization by 58% for glacial provider over the same period. Glacial brand awareness has a significant impact And we have seen repeated and continued growth in this area throughout 2024, exceeding industry competitor growth by 1,429%. R2 experienced year-over-year growth of 4,086% increase in social mentions, 498% increase in web users, and 104% increase in patient provider searches. We are extremely pleased with the progress and momentum of R2. They are well positioned in the market and have enough product capabilities to meet the current demand. MetaBeacon remains dedicated to collaborating with the FDA as they conduct substantive review of the kidney monitoring program. MetaBeacon continues to see great opportunities in the market for real-time monitoring of kidney function. The transdermal GFR in the first in-kind product for real-time assessment of kidney function, which is unlike any current methodologies in the market. And finally, Spectrum continues to achieve strong financial results with the launch of new networks and expanded coverage with existing customers. The quarter was highlighted by an improvement in profitability once again, with adjusted EBITDA of $1.7 million in the third quarter, a $2 million improvement year-over-year. Year-to-date, Spectrum has delivered $4.8 million in adjusted EBITDA, a significant increase compared to $900,000 through the first nine months of 2023. New launches once again drove higher revenue growth in the quarter. Of note, Free TV's network, Defy, launched in the third quarter. Broadcasting continues to see many OTA network opportunities on the horizon for 2025 as streaming networks explore over-the-air coverage. Broadcasting also continues to make progress on discussions with prospective strategic partners in pursuit of new spectrum-related revenue opportunities in ATSC 3.0, lighthousing, data casting, and 5G broadcasting. We are very happy with the operational results of all three of our segments. DBM's margin continues to be strong, and business has a robust pipeline well-positioned for 2025. At PanSend, R2 made significant progress in way of growth, and we continue to make progress at MetaBeacon. And Spectrum's profitability has improved dramatically in the quarter and year-to-date. We continue to see the benefits firsthand of the strong management teams in place at each of our business segments with the right path forward as evidenced by key milestones achieved so far in 2024. Addressing our capital structure remains a primary focus. We are consistently making headway in exploring strategic alternatives with non-pass-flowing businesses. We are encouraged by 2024 milestones we have seen at our non-cash flowing businesses as we work to execute on a strategy to address the capital structure. Our strategy requires patience within our established timeframe to ensure we maximize the value of these assets. We maintain optimism about the overall M&A market and remain encouraged by the positive market indicators along with ongoing progress and momentum around these assets. With that, I'll turn it over to Mike Sena, our CFO, for a review of our financials and capital structure.

Thanks, Paul. Consolidated total revenue for the third quarter of 2024 was $242.2 million, a decrease of 35.5% compared to $375.3 million in the prior year period. The decrease was primarily driven by our infrastructure segment. which was partially offset by increases at our life sciences and spectrum segments. Net loss attributable to common stockholders and participating preferred stockholders for the third quarter of 2024 was $15.3 million or $1.18 per fully diluted share compared to a net loss of $7.3 million or $0.93 per fully diluted share in the prior year period, which has been retroactively adjusted to reflect the 1 for 10 reverse stock split affected on August 8, 2024. Total adjusted EBITDA was $16.8 million in the third quarter of 2024, a decrease from $22.1 million in the prior year period. The decrease was driven by the infrastructure segment, which was partially offset by our spectrum, life sciences, and non-operating corporate segments. At infrastructure, revenue decreased 37% to $232.8 million from $369.3 million in the prior year quarter. The decrease was primarily driven by the timing and size of projects at Banker Steel and DBMG's commercial structural steel fabrication and erection business, both of which had increased activity in the comparable period on certain large commercial construction projects that are at that are now at or near completion in the current period. This is partially offset by an increase in the industrial maintenance and repair business as a result of an increase in project work. Infrastructure adjusted EBITDA for the third quarter of 2024 decreased to $20.9 million from $30.8 million in the prior year period. The decrease was driven by lower revenue at both DBMG's commercial structural steel fabrication and erection business and Beggar Steel. partially offset by higher margins due to timing of projects that are now at or near completion, as well as low margins at the construction, modeling, and detail business. This was partially offset by an increase in revenue and margins at the industrial maintenance and repair business and a decrease in recurring SG&A expenses, primarily as a result of a decrease due to timing of compensation-related expenses in the current year period. As of September 30, 2024, And in line with our expectation, reported backlog was $916.1 million, and adjusted backlog, which takes into consideration awarded but not yet signed contracts, was $1.1 billion, compared to reported backlog of $1.1 billion and adjusted backlog of $1.2 billion at the end of 2023. PBMG ended the quarter with $176.8 million in principal amount of debt, which is an increase of $3 million from the second quarter, primarily driven by an increase in the credit line due to normal working capital fluctuations, which was partially offset by normal debt amortization payments. DBMG has been able to reduce its debt obligations since this time a year ago through line reduction as invested working capital has continued to return to the business, a trend that began at the end of 2023. As backlog stabilizes, working capital needs have flattened throughout 2024 and expect to continue as such. As a reminder, DBMG has reduced its outstanding debt by approximately $56 million in the last 12 months. At Life Sciences, revenue increased 400% to $3 million from $600,000 in the prior year quarter. The increase in revenue was attributable to R2, primarily due to an increase in glacial FX system sales in North America, which launched during the third quarter of 2023. An increase in consumable sales, incremental glacial spa unit sales outside of North America, and the launch of the glacial FX system outside North America subsequent to the prior period. Life Sciences adjusted EBITDA losses decreased for the quarter. which is primarily due to fewer equity method losses recognized from our investment in MetaBeacon and Triple Ring, and an increase in gross profit at ARCA driven by the increase in revenue, which is partially offset by a slight increase in recurring SG&A expenses. At Spectrum, revenue was $6.4 million, an increase of $1 million compared to the third quarter of 2023, primarily driven by network launches and expanded coverage with existing customers, which was partially offset by the termination of a small number of smaller networks in individual markets subsequent to the comparable period. Spectrum reported adjusted EBITDA in the third quarter increased to $1.7 million from a loss of $300,000 in the prior quarter. The increase is primarily due to the increase in revenue and unrepeated severance in the prior year period. Non-operating corporate adjusted EBITDA losses were $2.8 million for the third quarter of 2024, a $1.3 million improvement from the third quarter of 2023. The improvement was primarily driven by unrepeated severance in the prior year period. At the end of the third quarter, the company had 51 million of cash and cash equivalents, excluding restricted cash, compared to 80.8 million as of December 31, 2023. On a standalone basis, as of September 30, 2024, our non-operating corporate segment had cash and cash equivalents of 20.2 million compared to 2.5 million at the end of 2023. As announced earlier in the year, we received notice that we were not in compliance with NYSC listing requirements as our stock price had fallen below $1 per share. As a result of the reverse stock split, we were notified by the NYSC that as of August 26th, we have regained our compliance. As of September 30, 2024, Innovate had total principal outstanding indebtedness of $699.2 million down $23.6 million from $722.8 million at the end of 2023, driven by the decrease in infrastructure's outstanding debt, a decrease in corporate debt as a result of the partial redemption of the CGIC note and partial convertible note repurchases, which was partially offset by R2's extension with Lancer Capital, which capitalized interest payments into the principal balance. With that, Operator, we'd now like to open the call up for questions.

Thank you, ladies and gentlemen. We will now begin the question and answer session. Should you have a question, please press the star followed by the number one on your touchtone phone. You will hear a prompt that your hand has been raised. Should you wish to decline from the polling process, please press the star followed by the number two. If you're using a speakerphone, please lift the handset before pressing any keys. One moment, please, for your first question. Your first question comes from the line of Brian Trouts from RW Press Bridge. Your line is now open. Please go ahead.

Thanks for taking my question. A couple of questions. I'm just wondering, I know you're waiting for approval from the FDA at MediBeacon. Do you have any color on the communication that you've had with the FDA? Is it ongoing? Are they asking for more material, or are you just sort of in waiting mode until they come back with an approval?

You know, we continue to work with the FDA. I mean, you know, we can't really get too far into the details, but we continue working with the FDA as we work towards hopefully getting approval.

Okay. So have there been any developments that you were not expecting or are things just sort of progressing as expected?

As soon as we have something to update the market with, we certainly will. You know, we need to just continue through the process. And as the FDA gets comfortable, you know, that time will come and we'll obviously update the market when we can.

Okay, good enough. Then over to DBM Global. It looks like your year-end guidance or four-year guidance is coming in pretty much as expected. With the bump in the backlog, is it too soon to talk about 2025 and what that profile might look like in terms of revenue and EBITDA?

It is. I mean, look, we... You know, we're expecting, as we kind of said in the beginning of the year, we expect the backlog to kind of settle in around this area. It's continued to do that throughout the year. We continue to see a lot of activity in the market. There has been some holdback in releasing jobs, but, you know, we're expecting at some point those do get released, and I think, you know, we have great confidence in the DBM team and you know, their ability to win projects with a good profit.

Okay, thanks. And then finally, I know sort of a monetization of life sciences could help refinance the Holco notes that are coming up. Are there other avenues you're also exploring as you wait for them?

Yeah, I mean, we continue to explore strategic alternatives with the non-cash flowing assets, and we are looking at a host of other ways to address the capital structure. But, you know, I think as we continue to make progress on these initiatives, we're very happy with the way everything is, our operating subs are performing. As you, you know, kind of noted, R2 had a great quarter. spectrum continues to improve and infrastructure is coming in as we kind of expected.

Okay, fair enough. Thanks. I'll get back into you.

Thank you.

Again, should you have a question, please press the star followed by the number one on your touchtone phone. You will hear a prompt that your hand has been raised. Once again, for questions, please press the star followed by the number one on your touch-tone phone. There are no further questions at this time. Please continue, Mr. Palvoit.

Yeah, we appreciate everybody's support, time, and patience. Again, all of our platforms are performing very well, and hopefully we'll have some very, very positive news in the very near future for everyone. Thanks again.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.