INNOVATE Corp. (NYSE:VATE) Q4 2023 Earnings Call Transcript

INNOVATE Corp. (NYSE:VATE) Q4 2023 Earnings Call Transcript March 4, 2024

INNOVATE Corp. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good afternoon, and welcome to INNOVATE Corp.’s Fourth Quarter 2023 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 over to Anthony Rozmus with Investor Relations. Please go ahead.

Anthony Rozmus: Good afternoon. Thank you for being with us to review INNOVATE’s fourth quarter 2023 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 and 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 risks, 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 with the SEC. In addition, the forward-looking statements included in this conference call are only made as of the date of this call and as stated in our SEC report. INNOVATE disclaims any intent or obligation to update or revise these forward-looking statements, except as expressly required by law. Management will also 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 Voigt.

Paul Voigt: Good afternoon. INNOVATE delivered revenues of $361 million and adjusted EBITDA of $21.5 million in the fourth quarter, and revenues of $1.4 billion and adjusted EBITDA of $65 million for the full year of 2023. We are pleased with these results and the performance of our three operating segments in 2023. To provide some perspective of the magnitude of progress at INNOVATE, when we made the strategic decision to start the transformation of HC2 to INNOVATE back in 2020, at that time, annual revenue was $716.9 million, adjusted to exclude our former insurance company, and adjusted EBITDA for only approximately $25.5 million. Since then, INNOVATE has experienced significant growth and today’s results represent roughly a three-year 25.7% CAGR on the top-line and approximately 36.6% CAGR for the adjusted EBITDA.

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Q&A Session

Over that time, DBM has continued to be a cash flow machine for INNOVATE, and most recently, experienced strong margin expansions in 2023. Pansend has benefited from key milestones hit each year by MediBeacon and R2, and Spectrum remains focused on delivering profitability by adding new station bills, launching new networks and existing — exiting unprofitable operations. We are pleased with the progress that INNOVATE has made over the last three years, but there is still much work to be done. We will continue to look for ways to optimize the value in each of our assets and remain encouraged by the future prospects at INNOVATE. Now, moving on to the fourth quarter highlights and results. In the fourth quarter, DBM Global delivered another strong quarter with revenues of $353.8 million and adjusted EBITDA of $30 million.

Year-over- year, DBM significantly expanded gross margins by approximately 200 basis points and adjusted EBITDA margin by 25 basis points to 16.4% and 8.5%, respectively. As we forecasted at the beginning of 2023, DBM delivered increased adjusted EBITDA margins for the full year 2023 of 7.2% compared to 6.4% for the full year 2022 DBM’s total adjusted backlog, which takes into consideration awarded but not yet signed contracts, is beginning to stabilize and was at $1.2 billion at the end of the year. Given the trend in backlog DBM experienced in the past year, we would expect 2024 results for DBM to be slightly lower than 2023. That being said, we are optimistic that this will only be a short-lived phenomenon as opportunities at DBM looks strong exiting the year into 2025 and beyond, when we expect to see more projects of size to enter the pipeline.

Moving on to Life Sciences, R2 Technologies had another incredible quarter. On the heels of launching its new Glacial fx system in Q3 2023, R2 sold out of Glacial fx inventory in Q4, securing R2’s best system sales growth in a single quarter. From Q3 to Q4, R2 experienced a 76% increase in North American system sales, and in the full year 2023, experienced 111% increase in North American system sales year-over-year. This growth lent to R2’s single largest revenue earnings quarter since inception. R2 continued its growth in other areas of the business, experiencing 173% increase in monthly patient treated year-over-year, and 106% increase in average monthly utilization per Glacial provider from the same period last year. The machine is being used post operatively to reduce inflammation, pain, recovery time and for skin conditions and greatly expanded the usefulness of the machine.

To date, R2 has provided over 20,000 patient treatments. R2 continues to expand global reach in fourth quarter, with market approvals received in both Saudi Arabia and the UAE. Additionally, market awareness continues to skyrocket. From 2022 to 2023, R2 experienced a 213% increase in social media impressions, a 491% increase in provider location searches, and a 50% increase in lead generation and product interest. R2 Glacial providers surveyed say that the customer satisfaction and practice retention rates have dramatically increased since the introduction of a Glacial product. Solidifying that the Glacial product portfolio’s ability to improve patient outcomes through the reduction of inflammation is the new standard of care. At MediBeacon, the company continues to work through their substantive review for the kidney monitoring program with the FDA.

MediBeacon met with the FDA in the first quarter of 2024 and is working interactively to resolve outstanding questions in order to move to approval status. MediBeacon has disclosed positive findings in its pivotal study in 2023 for which it met the pre-negotiated primary and secondary endpoints for efficacy and safety respectively. The study can be found at clinicalstudies.gov. The study results are expected to post on this site within the next 30 days. As a reminder, the FDA previously granted FDA breakthrough device designation in the United States. We continue to be pleased with the progress across the Pansend portfolio. And, at Spectrum, the company is gaining considerable traction with sizable new network launches. Specifically, we’ve launched FreeTV and three large sports networks.

These new network launches include favorable revenue agreements across the board, and early results are promising. As a reminder, we are also focused on repurposing our spectrum to maximize revenues. We are entering into an agreement with the public broadcasters to provide ATSC 3.0 stations to lighthouse their network signals. We are pursuing a much larger relationship with public media venture group who represent over a hundred PBS stations in major markets across the country. In addition to lighthousing PBS signals, we will be pursuing PBS station commercial opportunities and data casting and other profit applications. As it relates to 5G broadcast TV, we are actively exploring opportunities in the United States and have filed an application with the FCC to convert existing stations to 5G broadcast in order to participate in Phase 2 proof of concept.

The most important reminder here is that 5G technology will be able to readily deliver broadcast signals to hundreds of millions of smartphones across the United States using its existing technology. We are working closely with Qualcomm, the technology leader in 5G broadcasting. This will allow broadcasting to optimize for future revenues moving forward. We are highly focused on addressing our capital structure, which we believe is the key driver to underperformance of our stock price. Our focus for 2024 will be to utilize our non-cash flowing assets to address our capital structure and set the company up for refinance in 2024. To that end, we continue to make progress exploring opportunities for our non-cash-flowing businesses. However, exiting these businesses for the right value takes time.

We are optimistic on the overall M&A market and hope to reach resolution in 2024 as we are beginning to see positive indicators in the market along with positive momentum with these assets as discussed above. We have engaged bankers as there has been incoming interest from strategics on both R2 and MediBeacon. As we announced in late February, we are launching a fully backstop $35 million rights offering and a private sale to shore up our liquidity needs for 2024 and believe this will give us the runway we need to push our non-cash flowing assets past important milestones and exit these businesses for the right value. As we move into 2024 here, we are encouraged by the positioning of each of our business segments and look forward to updating you on their progress throughout the year.