Q1 2024 Star Equity Holdings Inc Earnings Call

Participants

Richard Coleman; Chief Executive Officer, Director; Star Equity Holdings Inc

David Noble; Chief Financial Officer; Star Equity Holdings Inc

Theodore O'Neill; Analyst; Litchfield Hills Research LLC

Tate Sullivan; Analyst; Maxim Group LLC

Presentation

Operator

Greetings, ladies and gentlemen, and welcome to Star Equity Holdings, first quarter 2024 results conference call. Please be advised that the discussions on today's call may include forward-looking statements such forward-looking statements involve certain risks and uncertainties, that may cause actual results to differ materially from those contained in the forward-looking statements.
Please refer to Star Equity's most recent 10-K, 10-Q and other filings for a more complete description of risk factors that could affect these projections and assumptions. The company assumes no obligation to update forward-looking statements as a result of new information, future events or otherwise.
Please also note that on this call, management will reference non-GAAP financial measures, including EBITDA, adjusted EBITDA, adjusted net income and adjusted earnings per share. Which are all financial measures not recognized under US GAAP. As required by SEC rules and regulations. These non-GAAP financial measures are reconciled to their most comparable GAAP measures in our earnings release issued this morning.
If you did not receive a copy of the earnings release and would like one after the call, please contact Star equity at 2034899500 or its Investor Relations representative [Lena KT] of The Equity Group at 2128369611. Also, this call is being broadcast live over the Internet and may be accessed at Star Equity's website at www.starequity.com, please note this call is being recorded shortly after the call a replay will also be available on the company's website.
It is now my pleasure to introduce Rick Coleman, Chief Executive Officer of Star Equity.

Richard Coleman

Thank you, operator. Good morning, everyone. Thanks for joining us for our first quarter 2024 results conference call. On the call with me today are our Executive Chairman, Jeff Eberwein, and our Chief Financial Officer, Dave Noble, will begin today's call with an update on our first quarter 2024 results, and then we'll discuss the acquisition of Timber Technologies, which we announced earlier this morning.
Additional acquisition details can be found on the 8-K we filed with the Securities and Exchange Commission and on the updated investor presentation on our website at www.starequity.com. Our first quarter 2024 results were weaker than expected due primarily to the continued impact of economic headwinds facing our business solutions division, specifically for large commercial projects which we expected to be completed in the first quarter, could not be completed due to customer financing delays.
Three of these projects slipped into the second quarter and have now been completed, while the remaining project is now financed and is scheduled to be completed this fall. As a result, our first quarter 2024 revenue decreased 26.1% to $9.1 million compared to $12.3 million in the first quarter of 2023.
Our gross margin was 17.3% versus 34.6% in the same period last year. And our gross profit decreased by 63.1% year over year. These quarter-to-quarter fluctuations aren't unusual and are a key reason for our focus on expanding and diversifying our revenue base. Despite the challenging environment, sector-wide, our sales pipeline and signed backlog. Remain roughly equivalent to historical averages.
We believe the impact we're seeing is temporary and that there is strong demand for new construction in the markets we serve. Our reputation as a reliable and high-quality partner is strong, and we continue to focus on all elements of our growth strategy. Including Business Solutions, division expansion, acquisitions that would mark our entry into new industries, and exploring new opportunities at our investments division. This focus is exemplified by our acquisition of Timber Technologies, which I will discuss later.
Now I will turn the call over to Dave Noble, our CFO, to provide additional first quarter consolidated financial highlights.
Dave, please go ahead.

David Noble

But let's now turn to Star equity's consolidated financial results. Due to the sale of our healthcare business on May 4, 2023, our results and historical comparisons relate only to continuing operations, which include our Building Solutions and investments divisions.
Of note, Digirad Health, which we sold last year, is now reported as part of our discontinued operations. In Q1 2024, SG&A increased by 11.1% versus Q1 of 2023. This is mainly due to increases in legal and outside services expenses related to acquisition activities. At the bottom line, for Star Equity, we reported a net loss from continuing operations of $2.2 million in Q1. Compared to a net breakeven results in Q1 of 2023.
Non-gaap adjusted net loss from continuing operations in Q1 was $1.4 million compared to an adjusted net income of $0.5 million in Q1 of 2023.
Non-gaap adjusted EBITDA from continuing operations was a loss of $1.1 million in Q1 versus a positive $0.8 million in Q1 of 2023. On a stand-alone basis before public-company costs, our Building Solutions division generated a non-GAAP adjusted EBITDA loss of $0.3 million in Q1. Which was down from positive $2.2 million in Q1 of 2023. Consolidated cash flow from continuing operations for Q1 was an outflow of $2.4 million versus an inflow of $5.1 million in Q1 of 2023.
This cash flow decrease was driven primarily by lower revenues for our Building Solutions division and higher networking capital expenditures. As of March 31, 2024, our consolidated balance sheet and liquidity remained strong. At the end of the first quarter, we had just $1.9 million interest bearing debt and our consolidated unrestricted cash balance stood at $14.7 million at the end of Q1 as compared to $5.0 million a year ago.
Turning to our investments division, our Equity securities at the end of the quarter amounted to $5.6 million. While our rollover Equity and note receivable investments resulting from the sale of our healthcare business TTTG. are valued at $6.0 million and $7.6 million respectively.
Now I'd like to turn the call back over to Rick, to provide some additional information on our TimberTech acquisition.

Richard Coleman

As I mentioned this morning, we announced the acquisition of Timber Technologies, a Wisconsin-based engineered wood products manufacturer, which since its founding in 2003 has established itself as a leader in the manufacturing of glue laminated wood products. Timber Tech will operate within our Building Solutions division, and its team will continue to run the day-to-day manufacturing operations at its existing 69,000 square foot facility.
As part of the acquisition, we will also acquire the manufacturing facility and associated real estate in a separate transaction expected to close in June of 2024. As you probably noted, we've renamed our construction to vision to building solutions to better describe the division's expanded capabilities and future opportunities with the acquisition of TimberTech, we entered the engineered wood products industry, one that is experiencing increasing adoption of our structural alternatives.
It's glue laminated wood products or glue. Lam have superior strength, durability and environmental sustainability compared to solid Timber and are also taking market share from less sustainable building materials such as steel, concrete and aluminum. We believe this market is poised for long-term growth and consolidation.
TimberTech has a strong market footprint in the Midwest and Northwest. They manufacture products that augment the multifamily and residential construction segments we currently serve, TimberTech products are important components of a broader range of end markets. For example, their agricultural and industrial products are used to build livestock and dairy Barnes, bridge decking, wastewater treatment facilities, Crane, Mats, machine sheds and even airline hires. We believe this is an expanding market and we're looking forward to sharing more with you in the coming months.
In addition to creating scale. We expect TemberTech's history of profitability and strong cash generation to improve our overall financial position.
In fiscal year 2023 to TemberTech's unaudited financials reported revenue of $18.8 million and adjusted EBITDA of $5.5 million in comparison to our Building Solutions Division reported 2023 revenues of $45.8 million and adjusted EBITDA of $4.4 million. Again, using unaudited financials on a trailing 12 months pro forma basis, TemberTech would have represented roughly one-third of our Building Solutions division revenue in over half of the vision is EBITDA.
Before opening the floor to questions, I want to emphasize that this transaction and the 2023 acquisition of Big Lake lumber are significant steps in the execution of our overall growth strategy. As has been the case for several years and especially following the $40 million sale of our Digirad business last May.
We are focused on creating additional shareholder value through our targeted business development initiatives. Star Equity today is a much better business operationally and financially than five years ago when we established our holding company structure.
We've also made great progress in the last 12 months. We have a stronger and cleaner balance sheet, a well established Building Solutions division and an Investments division with stakes in several undervalued public and private companies, which we believe have significant upside potential. In the coming months, we look forward to sharing our progress as we continue our determined efforts to create shareholder value through profitable organic growth and disciplined accretive acquisitions.
I will now turn the call over to the operator for questions.

Question and Answer Session

Operator

We will now begin the question and answer session. (Operator Instructions)
Our first question today comes from Theodore O'Neill, Litchfield Hills Research. Please go ahead.

Theodore O'Neill

Hey, thanks very much. Rick, the quarter seems self-explanatory. So I'd like to ask questions about Timber Technologies. The a couple of things. Could you talk about what the synergies are between Timber Technologies and the and the other components of building solutions?
And is there a is there is this going to be helpful to you on the East Coast. Could you ship this stuff out here? Is that makes sense or is this something that is pretty much a local business limited by limited by shipping? And then could you talk about the financing for it as well, please?

Richard Coleman

Just give me -- let me take the question about shipping first as usual, and I think of shipping the product from Wisconsin to the East Coast is probably not the best approach. However, we did have a Vacon factory, as you recall, and we have an expanding group of very, very talented executives in our Building Solutions division.
We're looking at a number of different alternatives of how to expand into our Vacant factory and the expansion of our grew them. Business is one of those alternatives. And we are located. I'm currently sitting very close to our new factory in Colfax, Wisconsin, a short drive to our businesses in and around the Minneapolis area. So there are obvious opportunities for synergies. We haven't we identified those as the rationale for the deal, but we do expect the co-operation and coordination between the different divisions. It's going to yield benefits for us?

Theodore O'Neill

Please talk a little bit about the financing for this?

Richard Coleman

(Multiple Speakers) Dave, You going to take down that?

David Noble

Sure.
So on the financing piece, we did use a lot of our cash hoard to help purchases, but we were able to leverage it to some extent with Bridgewater bank, which is a local bank in the Minneapolis area. And so we did a $7 million acquisition term loan. It's a five year structure that amortizes over those five years, and that's at a 7.85% rate, which we think in this environment is pretty attractive.

Theodore O'Neill

Okay.
Thanks very much.

Operator

(Operator Instructions)
Tate Sullivan, Maxim Group.

Tate Sullivan

On Timberlake.
Can you can you say that the Engineered Wood Products label or EWP. applies to what you already do KBS. and edge builder? Or is that a different consideration with the cool?

Richard Coleman

Yes, I would say it's a different different sector from. Obviously, there are some opportunities for expansion in both of those businesses. So there's probably some overlap down the road, but it is a new sector for us and one that we believe is strong and growing.

Tate Sullivan

And just so EWP are engineered wood products. I mean, specifically refers to Timber Technologies, it that industry there else.

Richard Coleman

Yes, Timber Technologies are part of the engineered wood products industry?

Tate Sullivan

And what can you what what is the manufacturing process process search just briefly for glue laminated Timber? What kind of facility does the company have?

Richard Coleman

It's a very -- First of all, it's a very impressive facility is very large. The company has been building and expanding in that facility for since its inception. The primary inputs are lumber and glue. But the process of combining those to build structural wood products is much more sophisticated than one might think there's been a number of different companies that have attempted over the years to get into the business and failed. And we're really pleased with the talent and dedication that this team has has undertaken over the years and built a very, very successful business.

Tate Sullivan

Thank you.
And is it did you mention it because of two separate facilities, the 69,000 square foot facility and then the separate manufacturing facility or a versatile one facility virtual.

Richard Coleman

It's all one of.

Tate Sullivan

Okay.
So the subsequent real estate transaction is for the 69,000 square?

Richard Coleman

The yes, the Right.

Tate Sullivan

Okay.
And then on [PBSR] you mentioned I mean, it's mostly related to the financing environment and to confirm or are you seeing any competition willing to take lower prices in this market?
Or is it purely the pipeline being pushed out from the financing availability.

Richard Coleman

From the feedback that we're getting and the intelligence we can gather everyone in the industry is experiencing to some degree, the same issue financing is just taking longer and costing more. So in a small business, relatively small business like ours, if we expect a large project to be completed in this particular month. It has a significant impact on our quarter or the month, and that project is delayed for financing.
Okay.
Thank you very much.

Operator

(Operator Instructions)
This concludes today's question and answer session. I will turn the call back over to Rick Coleman for closing remarks.

Richard Coleman

Thank you, operator.
Before concluding, I want to reemphasize, you were always available to take your call and discuss any additional questions you might have. Don't hesitate to contact us. As always, we appreciate your interest in our company as well as your continued feedback and support. Thank you.

Operator

Thank you for joining the STAR equity holdings. first quarter conference call. Today's call has been recorded and will be available on the Investors section of our website at www.starequity.com.