Star Equity Holdings, Inc. Price & Performance (STRR)

Also, this call is being broadcast live over the Internet and may be accessed 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. Thank you, operator. Good morning, and thank you for joining us today for our fourth quarter twenty twenty four results conference call. On the call with me today are Executive Chairman, Jeff Eberwein and Chief Financial Officer, Dave Noble. I'll start today by providing an overview of our recent business developments and financial highlights. Then Dave will provide additional details on our consolidated financial results. In the fourth quarter of twenty twenty four, revenue increased by 21.1% to $17,100,000 versus 14,100,000.0 in the fourth quarter of twenty twenty three. For the full year 2024, revenue increased 16.5% to 53,400,000.0 from 45,800,000.0 in 2023. The revenue increases in both periods are largely attributable to M and A activity, particularly the acquisition of Timber Technologies which we completed in the second quarter of twenty twenty four, and the full year revenue impact of our Big Lake Lumber acquisition, which we completed in the fourth quarter of twenty twenty three.

Fourth quarter twenty twenty four gross profit increased 55.3% to $4,500,000 versus $2,900,000 in Q4 twenty twenty three. Due primarily to the inclusion of gross profit from Timber Technologies, which generates the highest gross margin of Star's Business Solutions businesses. Full year 2024 gross profit declined 7.2% due to a one time $574,000 purchase price accounting adjustment related to the Timber Technologies acquisition. As well as lower revenues and utilization at our KBS and EBGL businesses. Our Building Solutions division was negatively by demand softness during the first half of twenty twenty four. As project starts were delayed primarily due to interest rate sensitivity and credit availability. However, during the second half of twenty twenty four, and especially in Q4, momentum shifted as several large projects placed on hold earlier in the year received final approvals and began production. This positive momentum has continued into the first quarter of twenty twenty five, as evidenced by our recent announcements of multiple large project signings. Our signed backlog representing committed projects and orders stood at $17,200,000 at year end. And has increased year to date as demand continues to build. Over the long term, we have conviction in the structural tailwinds for our Building Solutions division.

As factory built construction continues to gain market share versus traditional building methods. While we are well positioned for a strong 2025, we are continuing to monitor the potential impact of the current administration's fiscal policy on our operating businesses. The application of tariffs is one example, and we have taken preemptive action to reduce our businesses exposure to Canadian lumber in favor of domestic lumber.

In addition, we have implemented strategies and enhanced our contract language to further reduce the risks associated with changes in input costs. Although we can pass some price increases through to the customer, drastic or rapid price increases risk impacting overall demand for wood based construction. Lastly, I want to highlight our recently announced acquisition of Alliance Drilling Tools, which established our energy services division, diversifying our operating business portfolio, and providing a new platform for growth. We are excited to partner with a business of ADT's caliber and growth potential and expect them to contribute significantly to Star's consolidated results going forward. Since its founding, ADT has exhibited strong revenue and profitability growth with consistent cash generation. As previously announced, for full year 2024, ADT generated revenue of approximately $10,500,000 gross margin of 48% and adjusted EBITDA of $2,400,000 Its business model allows for the majority of costs, including freight, repairs and damages, to be passed directly to customers which minimizes ADT's operational expenses CapEx and risk exposure. We believe all of our operating companies operate in industries that support further expansion and will continue to evaluate opportunities for organic growth as well as additional acquisitions. Now, I'll turn the call over to Dave Noble, our CFO who will provide additional fourth quarter consolidated financial highlights.

Dave, go ahead. Thank you, Rick, and good morning. Let's move on to Star Equity's consolidated financial results. Which for the fourth quarter and full year of 2024 are represented by our two operating divisions.

Building Solutions and Investments. In Q4 twenty twenty four, consolidated gross profit was $4,400,000 up 55.9% versus Q4 of twenty twenty three, driven by increased revenues and higher gross margins in our Building Solutions division. However, for the full year, profit decreased by 7.3% to 11,100,000.0 from $11,900,000 in 2023. Driven primarily by lower gross margin percentages in our Building Solutions division during the first half of the year. SG and A increased by $1,000,000 or 31.7% versus Q4 of twenty twenty three. As a percentage of revenue, SG and A increased in Q4 of twenty twenty four, to 24.7% versus 22.8% in Q4 of twenty twenty three. For fiscal year twenty twenty four, SG and A was 17,000,000 versus $14,500,000 in 2023. The main driver of the increase in SG and A are the full year impacts of the TimberTech Technologies and the Big Lake Lumber acquisitions. In the fourth quarter of twenty twenty four, we reclassified the 2024 impairments of our cost method investment from SG and A to other income and expense to align this with the gains and losses of our Investments division. For reference, these impairments follow the mark to market valuations done by Catalyst, formerly TTG, their largest shareholder, the private equity fund.

Moving to the bottom line, in Q4, our net loss from continuing was $2,500,000 versus net income from continuing operations of $1,800,000 in Q4 of twenty twenty three. Non GAAP adjusted net income from continuing operations in Q4 was $500,000 income of $0.15 per diluted share. This compares to adjusted net loss of 300,000.0 in Q4 of twenty twenty three, or a loss of $0.10 per diluted share. Non GAAP adjusted EBITDA from continuing operations increased to 1,100,000.0 in Q4, a negative $100,000 in Q4 of twenty twenty three. Segment non GAAP adjusted EBITDA at our Business Solutions division increased to 2,300,000.0 in Q4 this year, up from $700,000 in Q4 of twenty twenty three. Q4 twenty twenty four cash flow from consolidated operations was an outflow of 1,500,000.0 compared to an inflow of $28,000 for the same period in the prior year. The decrease in operating cash flow was primarily due to increases in working capital associated with the increased business activity. In Q4 of twenty twenty four. As of 12/31/2024, the outstanding balance in our bearing debt was 11,300,000.0 versus $2,000,000 at the end of, December 2023. Our cash balance, including restricted cash, stood at 5,600,000.0 down from 18,900,000.0 at the end of twenty twenty three.

The changes in both debt and cash balances can largely be explained by the Timber Technologies acquisition acquisition and its related financing. Both of which closed in May of twenty twenty four. Turning to our Investments division. Our holdings in public equity securities at the end of the year amounted to 3,400,000.0 versus $4,800,000 a year ago. As we substantially exited one of our public equity positions following its acquisition. Our rollover equity investment and seller note receivable from the sale of Digirad Health to Catalyst formerly TTG, May of twenty twenty three, were valued at $1,400,000 and $8,200,000 respectively. As disclosed in ENSERVCO's public filings, in the fourth quarter of twenty twenty four, provided Enservco a notice of default regarding the $1,000,000 promissory note issued to Star related to our initial investment. As a result of this default, we canceled the issuance of 250,000 Star preferred shares. Which collateralized that note. Continue to hold approximately 12,500,000.0 of common shares on Enservco, and we remain in contact with ENSERVCO regarding potential opportunities to collaborate on business opportunities. I'd like to turn the call back over to Rick for some additional remarks.

Thank you, Dave.

We ended 2024 with strong activity across our business Solutions division, and that momentum is carried forward into the first quarter of twenty twenty five. We're encouraged by the recent performance at all of our businesses, our growing sales pipeline and backlog, and the opportunities presented by our establishment of our Energy Services division. In short, we're excited for the year ahead. Now I'd like to turn the call over to the operator for questions.

Thank you. We will now begin the question and answer session. Before pressing the key. If at any time your question has been addressed, and you would like to withdraw your question, please press then 2. At this time, we will pause for a moment to assemble our roster. Our first question today will come from Theodora O'Neill of Litchfield Hills Research. Please go ahead.

Thank you very much, and congratulations for beating the revenue and the non GAAP EPS numbers.

I I'd like to ask about building side of the business. The, building solutions, you so two questions. One is you announced two big wins in March and I think you disclosed how those are gonna flow through through 2025.

Can we read anything into that in terms of additional business? And I'd like to know what what accounts for the the margin improvement in building solutions?

Thanks, Theo. I appreciate the question. This is Rick. One of the things that definitely impacts the margin improvements in the building solutions division is increased revenues. We do have a platform in place that's necessary to operate the business. And those fixed costs are now being spread across a number of different projects and our broader revenue base. So that's a big piece of it. We're looking for in the future is really indicated by what our sales pipeline looks like. The new opportunities that come into the pipeline are evaluated every week. We negotiate those deals and hopefully when we win them, we we add them to our backlog. And what we see in the pipeline and the backlog is fairly substantial growth beginning in the fourth quarter, of 'twenty four and carrying forward into 2025.

Okay. And can you break out what's in the $1,700,000 of, other other expense? In the quarter? Dave, do you wanna take that one?

Sure, I can take that. Yeah, the big thing we mentioned this in the commentary. We we had to take a bit of a write down on our investment in the equity a former Digirad, which we sold to TTG, now Catalyst. And you know, we we pretty much have stayed in sync with the private equity firm that put that company together. And given that they're in the midst of a turnaround, they've had some write down of that equity. And we've had that in three of the four quarters of last year, and so the final quarter was around that 1.7 number. Furthermore, we recharacterized that. We had been showing that in SG and A, but we've reclassified that into other income because it better aligns with our other investments related activity.

Okay. All right. And that's pretty much all of it now. Is it you've that down to close to zero?

The equity portion is down [indiscernible] again, they're in the midst of a turnaround, and this is a long term hold, so from an accounting perspective, we can never write it back up. But I think all of the senior management are super hopeful that this is going to be a win over the long term. We believe Sentinel, who's the is gonna turn this thing around and a good investment. So we're happy to be part of it.

Okay. So there's nothing from go ahead, Sam. Yeah, is Jeff. We also have a debt investment with them. So we own equity and we own debt in Catalyst. And unfortunately, way that GAAP accounting works is we have to write it down if there's a possibility of it being impaired. As Dave said, our methodology is just to follow the mark to market that the PE firm does. And if it does turn around the way we think it will, unfortunately, we don't get to write that back up.

Under the GAAP accounting rules. The more important thing is that the PE firm will sell this business at some point It's in a fund that ends in a few years. And so what we really care about is that exit a few years from now and our hope is that both the note and the equity our original equity of 6,000,000 are fully recouped, there's even upside to that, So the mark to market is just non cash item on paper until the business gets sold.

Right. Right. Okay. And and I asked about it because I I thought there might be something from from the Inservco issue. But will that appear in next quarter?

Bill, do you want to handle that? [indiscernible] The write down of the Insurfco note actually ends up hitting our stockholders' equity because it was over collateralized. So it never hit the P and L. Okay. And my last question is what's going on in the Servco have any impact on Alliance Drilling?

No.

Great. Thanks very much.

Our next question today will come from Kate Sullivan of The Maxim Group. Please go ahead.

Thank you. You covered this on the acquisition call and Alliance Drilling, but what specifically did you like about their business? Even after your investment or during your investment in Servco? And can you comment on Alliance Drilling's customer mix? Is it smaller operators, larger operators or a mix? There please?

Rick, why you handle that? [indiscernible] Are you there, Rick? This is Jeff. Sorry, I'm sorry, I was on mute. I appreciate the question, Tate. I apologize for that. One of the things we liked about Alliance Drilling obviously was the fact that they operate in multiple sectors of the the drilling stream. [indiscernible] experience is pretty substantial. The founders are still part of the company and are planning to stay for a while while we transition. There's a strong management team beneath them. And all of them, when we've talked to them about their growth opportunities have noted that they think that the company has a great upside potential. With additional customers, but also tapping into additional revenue from their current customer base. So, we believe that a minimal investment in additional tools, and some geographic expansion will really help grow that business over time. [indiscernible] Sorry. Yeah.

Go ahead.

Yeah. They're their two biggest customers are household names in the in the energy sector. So great counterparties I think they they have no no credit risk. With their customers, no history of bad debt expense. So it's a mix of public companies and some private companies. And think it's a healthy mix. And as Rick mentioned, it's about two thirds traditional energy but they've been very successful in growing other sectors geothermal, water wells, a little bit of minerals and mining, mainly in The US, but there's some occasional activity elsewhere in The Americas.

Thank you. And then not to overlook tariff issue, which I tend to, but I mean, you commented on the timber from Canada for your modular construction business. And is that mostly the New England KBS operation? Does KBS mostly get timber from Canada? Are there substitutes on The U. S. Side? Can you just talk about where the current sourcing is for KBS?

Yeah. Rick will talk about the sourcing, but I'd say lumber it's not quite a global commodity, but The US and Canada are very closely linked [indiscernible] So regardless of where one source is if lumber prices go up in Canada, they go up in The US.

Vice versa.

But Rick, why don't you talk about the sourcing issue?

Sure, regarding KBS, which you specifically asked about, KBS sources mostly domestic lumber. There are some inputs, windows, trusses, things like that, that come from other suppliers that may contain Canadian lumber. So, we do expect there could be some price impact. And as Jeff mentioned, if prices go up for Canadian lumber prices are likely to go up. For domestic lumber as well. As long as those price increases are not overly sudden or large, we can address them. We can adjust our pricing and pass along some of that to our customers. But any large or dramatic increase is going to be it's going to impact construction across the country. So we'll have to keep an eye on that. We do have a hedging strategy. We have other strategies in our customer contracts that protect us. Tempur Tech uses very little Canadian lumber. They source almost exclusively domestic lumber southern yellow pine from southern states. And EdgeBuilder is probably where we have the most concentration of Canadian lumber.

But they also have they're watching it very carefully, they use a a hedging strategy to protect us there.

Thank you all.

Our next question today will come from Al Hill, a private Please go ahead.

Hey, good morning, guys. Hey, I'm looking at your balance sheet and it seems it looks like your book value is about $11,400,000 and your obviously per share and your stock price is about $2.22, that's five times book. Have you ever thought about just selling the company or some of parts of it and return all the equity to shareholders. It just seems like we're kicking a dead horse. And I just I just don't see any positivity I hear what you're saying, but I'm very, very disappointed in the results. You're given preferred dividends out when you're making money. I'd just like to the the board considers selling the company.

This is Jeff, and I'm Executive Chairman of the Board and the company's biggest shareholder And I would say all options are on the table to maximize value for shareholders and we agree the stock is really cheap, ridiculously cheap, [indiscernible] with respect to the preferred stock, by paying a dividend [indiscernible] causes the preferred stock to trade pretty close to par. And we have been able to use it as an acquisition currency. So if you look at the ADT acquisition, most of that purchase price was paid in preferred stock, and yes, a 10% dividend yield is a healthy [indiscernible] but if we can buy businesses at three and four times EBITDA and use our preferred stock it's very very accretive to the common to the common stock. So the situation between our stock price and the intrinsic value isn't sustainable over the long term, We share your frustration and all I can say is all options are on the table to maximize value for shareholders, including the one you mentioned.

A question, then one. This concludes our question and answer session. I would like to turn the conference back over to Rick Coleman, for any closing remarks.

Thank you, operator.

Before concluding, I just want to note that we're always available to take your call and discuss any additional questions you might have. So, please don't hesitate to contact us We'll continue to share our story with existing and potential investors in the coming weeks and months. As always, we appreciate all of our shareholders and your continued feedback and support. Thank you.

Thank you for joining the STAR Holdings Fourth Quarter Conference Call. Today's call has been recorded. And will be available on the Investors section of our website www.starequity.com. The conference has now concluded. Thank you for attending today's presentation. And you may now disconnect.