Safe & Green Holdings Corp (SGBX) 2018 Q1 法說會逐字稿

Good day and welcome to the SG Blocks first-quarter 2018 conference call and webcast.

(Operator Instructions).

Please note this event is being recorded.

I would now like to turn the conference over to Chris Tyson, Managing Director of MZ North America.

Please go ahead.

Thank you and good afternoon.

I'd like to thank you all for taking time to join us for SG Blocks' first-quarter 2018 conference call.

Your hosts today are Mr. Paul Galvin, Chief Executive Officer, and Mr. Mahesh Shetty, the Company's President and Chief Financial Officer.

Paul will provide a business update which will cover customer and partner announcements, while Mahesh will discuss the financial results.

A press release detailing these results crossed the wires this afternoon at 4 PM Eastern and is available in the Company's website, SGBlocks.com.

Following management's prepared comments we will open the floor for questions.

Before I turn the call over to management, please remember that certain statements contained in this release are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

All statements other than statements of historical facts contained in this presentation, including statements regarding our future operations and financial position, business strategy and plans and objectives of management for future operations are forward-looking statements.

In some cases forward-looking statements can be identified by terminology such as believe, may, estimate, continue, anticipate, intend, should, plan, expect, predict, potential, or the negative of these terms or other similar expressions.

While we have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy and financial needs, these forward-looking statements are subject to a number of risks, uncertainties and assumptions described in those set forth in our various filings with the Securities and Exchange Commission, SEC, which are available at www.SEC.gov.

You should not rely upon forward-looking statements as predictions of future events.

We cannot assure you that the events and circumstances reflected in the forward-looking statements will be achieved or occur.

This presentation also includes non-GAAP financial measures.

SG Blocks uses certain non-GAAP financial measures in assessing its business and operations.

Reference to these non-GAAP financial measures should be considered in addition to GAAP financial measures but should not be considered a substitute for results that are presented in accordance with GAAP.

Finally, this conference call is being webcast.

The webcast link is available in the Investor Relations section of our website at www.SGBlocks.com.

At this time I would like to turn the call over to Paul Galvin.

Paul, the floor is yours.

Thank you, Chris, and welcome to the SG Blocks first-quarter 2018 earnings conference call.

Before I discuss the operational highlights and milestones achieved during the first quarter of 2018 I want to provide a quick overview on SG Blocks for some of our new attendees on today's call.

SG Blocks is the premier innovator in providing industry approved code-engineered cargo shipping containers to meet the growing demand for safety and green modular construction.

Rather than consuming new steel and lumber, SG Blocks capitalizes on the structural engineering and design parameters of a shipping container (inaudible) and repurpose them for use in construction.

This disruptive prefabricated methodology represents a new operating system for construction and delivers to our customers a safe, sustainable, green and scalable solution that lowers their cost and decreases lead time to market while exceeding many standard building code requirements including seismic and hurricane.

SG Blocks is also an asset light platform Company that has a proprietary ESR, or evaluation service report certification, and an exclusive relationship with ConGlobal, North America's largest full-service supplier to the intermodal industry.

In April 2017 we were awarded an ESR from the International Code Council and it is the first ever awarded to a recycled building material and we believe will be a key differentiator as we scale our business to disrupt the conventional construction sector.

For the number crunchers on today's call, backlog without the ESR was $500,000 and the backlog with the ESR after 12 months is $102.8 million.

At a macro level the global construction industry is projected to grow by 70% over the next eight years to become a $14 trillion industry.

I don't think there's any argument about the sheer size and growth prospects of this vertical.

However, inflation in building materials, labor shortage and now most recently the higher cost of capital with increasing interest rates makes our value proposition even more attractive.

We believe our solution is starting to disrupt the status quo with a faster to market, stronger, more efficient, sustainable and cost effective solution; it reduces costs, accelerates revenue and increases the life of the asset.

This is why in states like California and New York, for building projects in urban areas we are such a natural fit.

Mahesh will elaborate more on our scalable platform later on the call, but I wanted to highlight why our solution is quickly gaining momentum as is reflected in our backlog.

Now moving on to SG Blocks' operational performance in the first quarter of 2018.

The first quarter demonstrated continued progress and execution with our new operating platform for construction.

We achieved several operational milestones and ended the quarter with sequential record backlog.

This was mainly attributable to the second largest project award in the Company's history for a major workforce housing project in Sullivan County, New York.

This four building 190,000 square feet multi-story multi-family workforce housing development represents an estimated revenue opportunity of $27.5 million over the next three years.

As of March 31, 2018, our construction backlog now stands at approximately $103 million or approximately 700,000 square feet across 16 projects.

Other highlights achieved during the first quarter of 2018 include: commenced delivery of a 24,760 square foot Community Arts and Recreation Center in Los Angeles to be completed in the second quarter of 2018.

We designed and delivered a two-story 11,500 square foot container-based office facility for ETC, a global leader in the manufacture of lighting and rigging technology in Middleton, Wisconsin.

We completed fabrication and commenced delivery of a 19,440 square feet athletic facility in West Africa.

We secured a four building workforce housing development totaling 190,000 buildable square feet, representing the second largest single project in the Company's history.

We contracted with Iron-Tek to design and manufacture container based cubicles for its expanding flexible workspace.

We were selected by Elle Woodworking to design and construct a container-based seasonal cocktail bar in Battery Park, Lower Manhattan.

And finally, but most importantly, we named CFO Mahesh Shetty as President, and Company Founder Stephen Armstrong as Chief Technology Officer.

On the financial front our gross profit margin was muted in the first quarter of 2018 and we do anticipate subsequent quarters will transition from legacy low-margin projects to an anticipated margin of 20% as we commence projects that are fully module and encompass all three phases we offer: design, architectural and engineering, and construction and delivery.

We believe that, given the asset light nature of our business model, we can handle incremental revenue with a relatively modest increase in general and administrative expenses.

We leverage both inventory and labor on our suppliers' balance sheets and, in most cases, pay for products and services only after we have been paid by the customers.

Our model creates significant leverage and reduces working capital constraints to growth.

As we move forward I couldn't be more excited about our pipeline of opportunities that now stands the over $275 million with multi-family residential, humanitarian residential, schools, and hospitality in the United States and abroad.

Since delivering and fabricating our 46 containers at the heart of Los Angeles Community Arts and Recreation Center in March and April, we have received several inbound requests from developers to replicate similar projects in the area and across the United States.

It is now evident that we are past the proof of concept stage on a large commercial scale.

And adoption is gaining momentum as the value proposition versus alternative traditional construction is just too great.

I will now turn the call over to our President and Chief Financial Officer, Mahesh Shetty, for his financial summary.

Mahesh?

Thank you, Paul.

Revenue in the first quarter of 2018 totaled $1.5 million, up 155% compared to $0.6 million in the first quarter of 2017.

This increase in revenue was primarily as a result of revenue being recognized on a large project that was in progress for the quarter ended March 31 of 2018 as compared to March 31 of 2017.

As Paul mentioned earlier, construction backlog totaled $102.8 million at March 31 of 2018 as compared to $76.7 million at December 31 Of 2017 and $0.8 million at March 31 of 2017.

The increase in backlog as of March 31 of 2018 compared to March 31 of 2017 is largely attributable to the commissioning of three housing development projects in New York State representing the largest project award in the Company history in the amounts of $55 million, $15 million and $27.5 million.

Two other projects totaled 390,000 square feet of multi-story multi-family projects and will be fully modular, prefabricated and installed.

The third large project for 190,000 square feet, as Paul mentioned, is a workforce housing project in Sullivan County, New York.

The second quarter 2018 revenue outlook, due to the extended delivery timeline for the Company's $5.6 million project in Los Angeles, the Company anticipates that the project will be largely complete in Q2 of 2018.

And based upon anticipated backlog conversion, the Company believes revenue in the second quarter of 2018 will be in the range of $3.5 million to $4.5 million.

Gross profit totaled $164,000 in the first quarter of 2018 as compared to $153,000 in the first quarter of 2017.

Gross profit margin as a percentage of revenue decreased 11% in the first quarter of 2018 as compared to 25% in the first quarter of 2017.

Gross profit margin in Q1 of 2018 was negatively affected by lower contracted margins on revenue realized from a large legacy contract.

Of note, these contracts are signed at lower margins for the Company to establish its competence in the school and the office verticals and are important reference clients for the future.

The Company typically targets gross margins of 20% on newer projects.

In tandem, SG Blocks is also working aggressively with suppliers on cost-saving measures to further improve margins.

With the current environment of high interest rates and increases in construction costs, management expects to leverage the speed of construction and lower costs of modular construction and negotiate better pricing and thereby improve margins.

Operating expenses increased to $0.9 million in the first quarter of 2018 from $0.8 million in the first quarter of 2017.

The increase in operating expenses was primarily due to an increase in headcount, professional fees and business development related expenses.

Net loss totaled $0.8 million or $0.18 per basic and diluted share in the first quarter of 2018 compared to a net loss of $0.7 million in the first quarter of 2017.

The increase in net loss was primarily due to an increase in operating expenses.

Adjusted EBITDA loss in the first quarter of 2018 totaled $0.5 million versus $0.3 million in the first quarter of 2017.

A full reconciliation of GAAP to non-GAAP financials can be found in the financial tables at the end of our first-quarter 2018 results press release issued today, as well as in the quarterly report filed today on Form 10-Q with the SEC.

Cash at March 31 of 2018 totaled $4.5 million as compared to $0.3 million at March 31 of 2017.

The increase in cash (inaudible) is primarily due to the Company's successful initial public offering in June of 2017.

At March 31 of 2018 we had approximately 4.3 basic and diluted shares outstanding.

In summary we expect subsequent quarters to transition from legacy low margin projects to a targeted margin of approximately 20% as we commence projects that are fully modular and encompass design, architecture and engineering, construction and delivery phases.

Based upon progress to date, including new revenue visibility, we expect the Company to reach cash flow breakeven in 2018.

We believe that given the asset light nature of our business model we can handle incremental revenue with a relatively modest increase in SG&A expense.

We leverage both inventory and labor on the supplier's balance sheet and in most cases pay for products and services only after we have been paid by our customers.

Our model creates significant leverage and reduces working capital constraints to growth.

The Company also has approximately $14 million in carry-forward operating losses, which will reduce the tax burden to two years.

The net operating loss expires [through] 2037.

The Company's net operating loss carry forward may be subject to annual limitations.

We ended the first quarter of 2018 with a stable balance sheet, no debt, record backlog of $102.8 million and a project pipeline of almost $275 million, positioning SG Blocks for significant financial performance in 2018 and beyond.

I will now turn the call back over to Paul.

Paul?

Thank you, Mahesh.

Since our initial public offering in 2017 we have focused on three primary areas.

One, achieving cash flow positive operation; two, growing our backlog and pipeline of opportunities; and three executing on our current backlog to drive top-line revenue growth with a consistent 20% margin profile.

As evidenced with our low first-quarter 2018 Q1 cash burn rate of $400,000, any material increase in revenue will quickly achieve one of our key goals for 2018 and we believe the upcoming quarters are setting up to deliver significant top-line revenue growth.

In fact, we introduced a new metric regarding our project activity to provide an insight into when project level revenues may be realized.

And during the first quarter of 2018 we commenced activity with 10 out of our 16 total projects in the backlog and completed two projects in Q1 2018.

As Mahesh mentioned during his financial summary, based on current backlog and our expectations as a management team, we believe second-quarter 2018 revenues will be in the $3.5 million to $4.5 million range with approximately $1.9 million attributable to the project in Los Angeles and the remaining amount based on anticipated backlog conversion.

Furthermore, based upon conversations with our customers for our three specific projects in excess of 10 million, we expect to recognize revenue on our backlog as follows.

On the $15 million contract, management expects to recognize approximately 30% of the project revenue in 2018 and the balance in 2019.

On the $55 million contract, management expects to realize approximately 10% of the project revenue in 2018 and the remaining balance equally in each of 2019 and 2020.

On the $27.5 million contract we expect to start design and engineering services no later than the fourth quarter of 2018.

Let's talk about the future.

Already in the second quarter we've continued to strengthen our corporate governance through the addition of Yaniv Blumenfeld, a widely respected candidate with over 20 years of real estate experience and significant investment experience on Wall Street.

We expect to leverage his relationships on the business development front for SG&A and believe his experience as an entrepreneur and a veteran of the capital markets will further strengthen our Board's breadth of talent.

On the PR and IR front, during the second quarter we held a successful construction site tour of our Heart of Los Angeles project with Kathy Ireland, our brand ambassador, approximately a dozen institutional investors and five leading media outlets including the Los Angeles Times and Fox Business News.

Our continued recognition in the media has certainly been a driver of increased inbound interest on the commercial side and we are immensely grateful for the media coverage that we have received to date.

As CEO of SG Blocks I have never been more optimistic about our long-term growth prospects than I am today.

We continue to grow and execute on our backlog, spreading awareness of our proprietary construction method and generating increased inbound interest from customers.

We will be opportunistic and continually look for ways to expand capacity and reduce costs.

I am eager to continue to execute upon our goals and create long-term value for our shareholders.

We look forward to sharing more on our developing story at the soon to be announced Heart of Los Angeles ribbon-cutting ceremony and the 8th annual LD Micro Invitational Conference on June 4 through the 6 in Los Angeles, California.

At this time I'd like to open up the call to questions from our listeners.

Operator?

(Operator Instructions).

Ashok Kumar, Fordham Financial.

Thank you and congratulations, Paul and Mahesh.

And Mahesh, congratulations for the expanded responsibility.

On the revenue side, Paul and Mahesh, based on Q1 results and guidance for Q2 and your backlog conversion, that will translate to about $20 million to $25 million revenue for the full year with about three quarters coming in the second half.

Is that the right interpretation?

Thank you.

Hey, Ashok, thank you very much for your kind words.

I really appreciate it.

As you know, we are not really giving any specific guidance based on the breakdown of revenues.

Our position is that we will be breakeven, cash flow breakeven this year.

That is our number one priority from a Company perspective, and convert as much of the backlog to revenue as we can.

So we -- our revenue breakdown on our backlog is primarily meant to kind of give the investors a sense of what the conversion rate is going to be.

So, we feel comfortable about those conversions, but we are not giving specific guidance on the actual revenue number.

Mahesh, on the backlog, the $102 million plus, what percentage, if you have those numbers, would be -- you could put it in the architecture and engineering bucket versus the construction and delivery?

So this would also give you the higher confidence indicators in terms of your revenue performance for the rest of the year.

I'll breakdown the pipeline for our listeners and if Mahesh wants to supplement that he can.

So our pipeline of $274 million is comprised of 30 separate projects.

23 of those projects are under $10 million and seven of those projects are over $10 million.

We are putting a probability rate on the under $10 million projects at 60% and we are putting a probability rate for the over $10 million projects at 50%, that's just more a function of size and lifecycle than any other indication.

So, that is the profile of the projects that are in our pipeline.

Those are not reflective or do not capture leads, bids or opportunities that don't meet that threshold but are currently in some form of dialogue.

Thank you very much also for the clarification.

One last question is I think, Mahesh, you had talked about (inaudible) as a key reference [client].

So I assume with that delivery date confirmed for the current quarter you should be able to significantly continue to improve your conversion rate from pipeline to backlog with this key reference account.

So the answer is that particular project completion is going to be an important reference point.

We have done similar projects before, but in the military sector, nothing that our customers could touch and feel.

But being able to have a project in downtown Los Angeles that our customers can visit is going to be an important litmus test.

And it allows the customers to look at a product and actually walk through it and we believe it's going to be a fairly significant catalyst for our backlog.

Any update, Mahesh, on the (inaudible) opportunity in the Caribbean or is that still in your pipeline or how do you classify that?

What I would say is that in our pipeline and in our opportunities there are projects and bids and offerings made, solutions proposed for a variety of people in the sector and it's something we are advocating actively.

It seems that HUD is preparing to start initiating their rebuilding plan of Puerto Rico and we plan on being at those meetings and attending.

So, I think the rebuilding efforts are starting to head from the energy parts of these rebuilding activities and heading towards construction.

And so, we are continuing to network and those opportunities are reflected in the pipeline and then just in unrecorded opportunities.

(Operator Instructions).

Paul Cooney, Joseph Gunnar.

Fantastic job with increasing your backlog and your pipeline.

Can you maybe go into a little bit the difference between the pipeline and the backlog, specifically what that means?

So a backlog is a selling contract for one of the three phases of services we provide or all three at the same time.

So, those projects that are in our backlog comprise approximately $102 million across I believe 14 or 16 projects, each of them in their own distinct phase of revenue.

The pipeline, which currently sits at $274 million, represents pending offers we've made to clients who have asked us to price projects who have come to us uninitiated and who have worked with us to put together estimates for the 30 projects in the pipeline.

And then there are -- I would put a number on them, but quite a number of opportunities where we are currently pricing or negotiating and trying to get them up to that 50%, 60%, 70% probability.

So that ultimately the backlog becomes revenue, the pipeline becomes backlog, the opportunities become pipeline and we deliver it all at 20% and that we have great visibility and predictability on our revenue.

Because of the disproportionate impact of the HOLA project we wanted to issue one-time guidance on revenue for the second quarter so people would realize that the project slid but has been delivered.

And while it's not something we want to do routinely, we did want to do it as a onetime effort for helping people to understand the flow of how our business is unfolding and how HOLA Q1 has rolled into HOLA Q2.

I really appreciate the way you guys broke down how you are going to recognize the revenue on each specific project, so I thank you for that.

As far as your pipeline is concerned, the $274 million, how long is the typical cycle of -- from when they -- a proposal to contract?

It's a great question.

The reason why we're starting to break projects to two categories above and below $10 million, it's starting to be our experience that projects that are $10 million or greater either have such a density or are urban-based involving some city regulations.

So, we are being careful in conservative on the lifecycle of those deals, both the ones that are signed in the ones that are pending.

So you could look for a proposal to be sitting with a client anywhere from 90 days to a full year if it's a multi-hundred million dollar type project.

So, you figure you get an answer within a year, hopefully sooner, but realistically some of these are very big institutions that have their chain of command.

The projects that are under $10 million that we are currently waiting for answers on, those are projects that can sign any day from tomorrow within the next quarter or two.

And those tend to be projects that can be recognized in four quarters or less just because of the size or the replicability of them.

So again, if somebody was just trying to model potential, I'm not holding you guys to any numbers, but out of the $274 million in pipeline it's very possible, based on your 50% and 60% numbers, as far as the likelihood of them signing with you.

It would be -- if I was modeling it and I said, well, the potential for these guys, just based on what they have right now, is another $130 million, $140 million in backlog in the next 12 months.

Is that a fair way to look at it?

Mahesh, I will defer to your answering his rather pointed question, Mr. Cooney.

Paul, how are you.

Thank you for your question.

I think it's mathematically -- you could derive that number.

The probability of each lead is it's a unique lead on its own or unique opportunity on its own.

So trying to extrapolate percentages across the board may not be appropriate, but we believe that a fair number of that will convert.

I think if you look at our track record of building our backlog over the last year, we're going to continue to do everything we can to improve that at the same pace, but we want to level set expectations.

And on the $102 million of the backlog, what's the total time frame of that -- of the total?

Is that like a three-year over three years that will all be recognized as revenue?

Or what's the total timeframe on the whole $102 million.

I know you guys broke down on the bigger projects how you did it, but just wondering what the total time frame is on that.

Paul, I will take that.

So, we expect all of the revenue to be recognized the latest by December of 2020.

Okay, okay.

And the last question I have is -- we've had -- we've seen some cool announcements like the thing that you're doing downtown here in Manhattan.

And I know you've got some big projects that you guys were talking about in the pipeline.

Are most of those projects similar to -- the bigger ones I'm talking about -- similar to the two big ones you signed here in New York as far as the low-income housing projects?

Or are they more like other contracts -- contractors building apartment buildings or municipalities?

Who are you dealing with on most of those?

It's a great question.

It's a combination of small and large companies, it's a lot of entrepreneurs, it's across asset classes.

There's some density in the over $10 million projects.

There's some fluidity and momentum with the under $10 million projects.

It's geographically diverse, though we're seeing an uptick in the New York and the California areas just because of the business that's been previously signed and announced and delivered as in HOLA.

So, it -- really every asset class in the military is represented and it's a way we are going to continually -- to address concentration issues is to have as broad and wide a base of business both from asset class, geography, deal size.

I appreciate it, guys.

Again, congratulations on your progress.

This concludes our question-and-answer session.

I would like to turn the conference back over to Paul Galvin, Chief Executive Officer, for any closing remarks.

Yes, thank you, operator.

So just in final thinking, we appreciate everybody's support.

We're going to continue to work tirelessly to execute on our backlog and get the top-line revenue number up.

We've done an excellent job, as you can see, of managing our burn rate expending only approximately $400,000 into Q1, and we have good things coming for the balance of the year.

We want to thank you for following our story and we look forward to seeing many of you out at the LD Micro conference.

Back to you, operator.

The conference has now concluded.

Thank you for attending today's presentation.

You may now disconnect.