Star Equity Holdings, Inc. (NASDAQ:STRR) Q4 2023 Earnings Call Transcript

Star Equity Holdings, Inc. (NASDAQ:STRR) Q4 2023 Earnings Call Transcript March 22, 2024

Star Equity Holdings, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Greetings, ladies and gentlemen, and welcome to Star Equity Holdings, Inc. Fourth Quarter 2023 Results Conference Call. Please be advised the discussions on today’s call may include forward-looking statements. Such forward-looking statements involve certain risks and uncertainties that could cause actual results to differ materially from those contained in the forward-looking statements. Please refer to Star Equity’s most recent 10-K and 10-Q 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 the most comparable GAAP financial 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 203-489-9500 or its Investor Relations representative, Lena Cati, of The Equity Group at 212-836-9611. Also, this call is being broadcast live over the Internet. You may access at Star Equity’s website via www.starequity.com. 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.

Rick Coleman: Thank you, operator. Good morning and thank you all for joining us today for our fourth quarter 2023 results conference call. On the call with me today are Executive Chairman, Jeff Eberwein; and Chief Financial Officer, Dave Noble. In the fourth quarter of 2023, our construction revenue and gross profit declined compared to the fourth quarter of 2022. However, for the full year 2023, strong pricing discipline and an improved business mix resulted in year-over-year construction gross margin improvement from 21.6% to 26%. Credit tightening in the second half of 2023was a contributing factor and caused delays in some commercial projects pushing revenue into 2024 and in some cases indefinitely. However, single-family residential activity and our overall backlog and sales pipeline indicate continued pent-up demand.

Although the timing continues to be tampered by ongoing interest rate sensitivity. We believe this is a temporary situation and are continuing our focus on the niche markets where we’ve built significant expertise and a strong reputation, including affordable and workforce housing, educational buildings and dormitories, and environmentally sustainable housing. In these markets, we feel our experience and reputation give us a sustainable competitive advantage. Based on our sales pipeline, we believe demand in all of these sectors will remain strong. We also have continued conviction in the ongoing growth of factory-built construction in the United States, which according to Modular Building Institute’s most recent report now accounts for 6% of all new construction starts in North America, having tripled from 2% in 2015.

Despite lower revenue in 2023 versus 2022, we achieved and continued to maintain our mid 20s gross margin target for our construction division. Sustained execution quality has contributed to the division’s ability to maintain pricing levels and has contributed to the division’s gross margin improvement. We remain confident in the division’s ability to maintain strong gross margins as revenues recover amid a stronger macroeconomic backdrop. Lastly, we closed the accretive Big Lake Lumber bolt-on acquisition in the fourth quarter and have successfully integrated it into our Glenbrook operation. As Dave will discuss, our balance sheet is strong and we’ve ample cash to expand our business. During the coming quarters, we will continue to evaluate construction division acquisition opportunities to augment our focus on sustainable organic growth.

We will also examine potential acquisitions in new industries and explore opportunities in our investments division. Now I’ll turn the call over to Dave Noble, our CFO, who will provide additional fourth quarter consolidated financial highlights. Dave, please go ahead.

Dave Noble: Thank you, Rick, and good morning. Let’s move on to Star Equity’s consolidated results. In Q4 2023, SG&A decreased by $1 million or 23.8% versus Q2 in ’22. As a percentage of revenue, SG&A decreased in Q4 22.8% versus 23.9% in Q4 of 2022. In Q4, we generated net income from continuing operations of $1.8 million versus net income from continuing operations of $0.9 million in Q4 of ’22. Non-GAAP adjusted net income from continuing operations in Q4 was a negative $0.4 million. This compares to adjusted net income of $0.5 million in Q4 of 2022. Non-GAAP adjusted EBITDA from continuing operations decreased to negative $0.1 million in Q4 from a positive $0.9 million in Q4 of ’22. Segment non-GAAP adjusted EBITDA at our construction division decreased $0.7 million in Q4 this year, down from $2.9 million in Q4 of ’22.

Despite some economic headwinds, which impacted our construction revenue all year, we continue to make progress across this operating segment in 2023. For the full year, our construction gross margins were 26.5% versus 22.2% in 2022. We also closed a bolt-on acquisition in this segment in Q4 as Rick mentioned, which will bolster revenues in 2024. Construction non-GAAP adjusted EBITDA for 2023 was $4.4 million versus $6.3 million in 2022. As of December 31, 2023, our consolidated balance sheet and liquidity were strong. The outstanding balance on our interest bearing debt was $2 million, while our cash balance stood at $18.3 million. Now I’d like to turn the call over to the operator for questions.

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Q&A Session

Operator: [Operator Instructions] The first question today comes from Tate Sullivan with Maxim Group. Please go ahead.

Tate Sullivan: Hi, thank you. Good morning. Can you talk about the lumber yard acquisition a bit more. Is — are you selling the products mostly to outside customers and both your legacy Glenbrook operations? And if so, what is the relative mix if you can address?

Dave Noble: Sure. Yes, I’ll take that. So that acquisition was, as you mentioned, in the lumber yard arena. So it’s a building products distribution business to mainly professional builders. And it’s very similar to the existing Glenbrook piece of our EdgeBuilder business, right. So our EdgeBuilder business already had distribution business and also manufactures wall panels. So we’re just expanding the geography of coverage for our building products distribution business. It’s just tuck into that. And that’s called Glenbrook. That’s the brand name. So we no longer have the Big Lake brand name. We’ve merged that into Glenbrook and just expanded that distribution business.

Tate Sullivan: Okay. And then on the income, the other income line of — about approximately $1.4 million, is that all mostly mark-to-market for your investments? I think it’s also with the gain [ph].

Dave Noble: Yes, there’s a gain, we sold a factory that we were not using midyear last year. And we also got some one-time sort of rebates on some prior year insurance policies.

Tate Sullivan: Okay. So that’s a lot about with cash flow, cash, okay. And then Your niche markets stood — I think you mentioned affordable housing, student housing, and is it pockets in New England or spread across New England, the strength that you mentioned?

Dave Noble: I mean, throughout New England, I mean, a lot of the activity as you can imagine, is in and around the Boston area, that’s the most density of population. But we operate all across New England, primarily Massachusetts, New Hampshire, Maine, but we will produce projects in any of the New England states.

Tate Sullivan: Okay. Thank you, Dave.

Operator: The next question comes from Theodore O’Neill with Litchfield Hills Research. Please go ahead.

Theodore O’Neill: Oh, thanks very much, and congratulations on a good quarter. Rick, this question I’ve been meaning to ask this for months, either the workforce housing project on Nantucket. Are you building housing and shipping it to the island? How does that work?

Dave Noble: Go ahead, Rick.

Rick Coleman: Dave, you want to take that one?

Dave Noble: Okay. Yes, I mean, yes, it’s modular housing. So we build it in our factory in Maine, and we truck it down to a port, put it on a barge and then move it over to the island. And that it’s trucked to the site, and the local developer will or local general contractor will button it up and finish the project.

Jeff Eberwein: This is Jeff. I would add that we’re seeing a trend where there’s really strong focus on solving workforce housing problems. Nantucket, Cape Cod, Martha’s Vineyard, parts of Boston, it’s gotten very expensive for their workforce, there’s no place for them to live. So they have to travel a really long way to work. And so, workforce housing solutions has really gotten the attention of developers and policymakers. And in some cases, groups will get together form a nonprofit, people will donate to the nonprofit, buy land, and they’ll want to use that land for workforce housing. But those organizations for all their wonderful intentions don’t really have experience doing construction projects. And that’s where we come in, we’ve partnered with several of them.

We have designs, solutions, and several other projects that we can show them where they can do a tour of the finished project. And we’ve gotten some really good traction on with the segment of development.

Theodore O’Neill: That’s really interesting. Is it a nonprofit on Nantucket that you’re talking about here that’s doing the same thing?

Jeff Eberwein: I think so. I sometimes get the projects confused. We serve — most of them have been nonprofit. In other cases, there’ll be some local program where a developer will get some credits, expedited zoning, things like that if it’s specifically for workforce housing.

Theodore O’Neill: Okay. And …

Jeff Eberwein: And we did — we did a — yes, I was just going to say we did a similar project on Martha’s Vineyard, I believe it was ’22. And that was definitely a not for profit organization that had some money coming in from the state of Massachusetts.

Rick Coleman: Okay. I would just add, Theo, that, that’s a nationwide trend, and a lot of municipalities are actually forming committees and subcommittees to communicate with other parts of the country on how they go about building those solutions. So we think that trend is entirely sustainable, and it’s just a problem that they were able to solve.

Theodore O’Neill: Oh, yes, I am seeing that other places as well, which is part of the reason I asked the question. The other was just the logistics of getting built house over to the island.

Rick Coleman: Well, I think that’s …

Dave Noble: Is that the only — I think that might be the only time we’ve barged units over. But I’m not 100% sure about that.

Theodore O’Neill: Yes, well, if you think about it, it’s much easier. I know it sounds complicated. It’s much easier to barge, a finished product over and install it than it is to get all the materials there, all the workers there to build it on site that’s much more expensive and much more difficult. So that’s what makes our solution a really great solution for those expensive hard to reach places.