Safe & Green Holdings Corp (SGBX) 2018 Q3 法說會逐字稿

Ladies and gentlemen, good day and welcome to the SG Blocks third-quarter 2018 conference call and webcast.

Today's conference call is being recorded.

At this time I'd like to turn the program over to Chris Tyson, Managing Director of MZ North America.

Thank you, sir.

Please go ahead.

Thank you and good afternoon.

I'd like to thank you all for taking time to join us for SG Blocks' third-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 4PM Eastern and is available on 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 similar expressions.

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, including those set forth in our of 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 these 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, www.sgblocks.com.

At this time, I'd like to turn the call over to Paul Galvin.

Paul, the floor is yours.

Thank you, Chris, and welcome to the SG Blocks third-quarter 2018 financial results conference call.

Third quarter of 2018 was highlighted by strong improvement in our core gross margins from 11% in Q3 2018 as compared to 7% in Q3 2017.

Excluding the HOLA project, which is a legacy project, our margins on all other projects have averaged 24% during the first nine months of 2018.

We expect future margins to be in line with our stated goal of 20% on current backlog and new projects.

During the third quarter, SG Blocks completed five projects and realized revenue from 15 contracted projects.

We recognized revenue for 24 projects, year to date.

Notably, we entered into contracts for projects with Tavistock, the NBA, and the U.S. Navy during 2018, each of which we recognized revenue on during the third quarter, and which we anticipate will be largely completed before the end of this year.

We continue to convert our backlog to revenue while obtaining projects with both new and existing customers who continue to find innovative new applications for our container-based approach to construction.

Now moving on to some of the important milestones achieved during the quarter.

In the third quarter of 2018, we established SG Residential in conjunction with several senior financial services executives and housing market executives to address sales and financial opportunities within the significant single family modular housing market on a nationwide basis.

The housing market in the US is in crisis, with a lack of affordable and safe homes available for millions across the country.

According to a New York Times article from July of 2018, millions of low income Americans are paying 70% or more of their incomes for shelter, while rents continue to rise and construction of affordable rental apartments lags far behind the need.

Nevada, ground zero in housing crisis a decade ago, is now the epicenter of the affordable crunch, with low income residents squeezed out of once affordable apartments by an exodus from California due to its rental prices.

Median national rents rose by 32% in constant dollars from 2001 to 2015, while wages remained flat, according to the Pew Charitable Trust.

The pace has picked up over the last few years, buoyed by an improving economy.

The rent increases are hitting poor and elderly people, African Americans, and low income wage earners hardest.

A survey by the National Low Income Housing Coalition found that a worker earning the state minimum wage could afford a market-rate one-bedroom apartment in only 22 of more than 3,000 counties across the US.

An estimated 12 million Americans, including renters and homeowners, now spend more than half of their annual earnings on housing, according to the US Department of Housing and Urban Development statistics.

SG Residential will aim to offer the safest, greenest, and most cost-effective solution available.

SG Blocks will be the exclusive supplier of modular homes; and, through its subsidiary, will have the right to appoint the majority of SG Residential's directors, and manage its day-to-day operations.

From a financial perspective, we receive 100% of our normal gross margin on sales on our modular homes, and 50% of the entire gross profit the subsidiary generates.

We are currently working on projects to convert our 500-home pipeline into signed contracts, addressing the affordable housing crisis that the United States is facing today.

Since establishing SG Residential during the third quarter, we entered into a strategic relationship with Capital Plus Financial, one of the nation's largest community development financial institutions and a subsidiary of Crossroads Systems, Inc., to provide affordable housing aimed at low to moderate income areas across the country and across Puerto Rico.

The companies will focus on the sale and financing of single family containerized modular homes by focusing on delivering sustainable housing to some of the most vulnerable areas and underserved borrowers.

These partnerships will allow new homebuyers and homebuilders to purchase container-based modular homes and connect them to a network of funding sources and down payment assistance programs.

You can start to see a key theme now being targeted and addressed by SG Residential.

This marries nicely with our corporate social responsibility initiatives, including our work with nonprofits and community development organizations that see our affordable and rapidly built modular housing as the best solution for the problems they are facing.

In the contiguous United States, we are working with SOLDIER ON as its exclusive modular residences provider to help this organization achieve its goals of providing homeless veterans with safe housing.

SOLDIER ON is a nonprofit organization whose mission is to end veteran homelessness and provide veteran supportive services using donated lands for veterans in need across the United States.

A 2017 report by the US Department of Housing and Urban Development estimated that there are over 40,000 homeless veterans.

We believe our partnership is off to a great start, as we have identified five sites for potential development in selected markets with new design and engineering renderings coming from Grimshaw Architects.

On the operations front during the third quarter, we announced that Scott Hill will be our new Vice President of Operations.

In his new position, Scott will work closely with the senior executive team to help oversee and implement day-to-day business activities and strategies.

Scott brings 30 years of experience in all aspects of construction industry, including recent modular construction projects in New York City, to SG Blocks.

He has overseen all elements of construction, including architectural design, construction management, and large modular projects.

Scott brings his own pipeline to the Company, and he has hit the ground running.

On the media front, during the third quarter, we had several high-profile interviews with leading media outlets, including CBS National News, CNBC, and Fox Business News.

We are seeing an increase in interest as a result of the destruction that has occurred during this year's hurricane and fire season.

Our ability to deliver a stronger, better, faster, and sustainable housing solution to victims in these ravaged areas were some of the key highlights reporters focused on during the interviews.

As we move forward, I couldn't be more excited about our anticipated pipeline of opportunities, including single family and multifamily residential, humanitarian residential, education and hospitality, in the United States and abroad.

We continue to see inbound requests from developers to replicate some of our previously announced projects across the United States.

We believe adoption of our construction model is gaining momentum in the industry as the value proposition, as compared to traditional construction, is and remains very compelling.

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

Mahesh?

Thank you, Paul, and good afternoon, everybody.

Our revenue in the third quarter increased 49% to $2.1 million as compared to $1.4 million in Q3 of 2017.

This increase in revenue is primarily a result of revenue being recognized on additional projects that were in progress or completed in the three months ended September 30, 2018, compared to September 30, 2017.

Revenue in the first nine months of 2018 totaled $5.9 million, an increase of 98% compared to $3 million in the same period of 2017.

Construction backlog totaled $102.8 million at September 30, 2018, as compared to $77.1 million at September 30, 2017.

As of September 30, 2018, the Company had 15 projects or approximately 700,000 square foot in backlog.

The construction backlog at September 30 included three large contracts in the amounts of $55 million, $15 million, and $27 million, respectively.

The Company expects that all of this revenue will be realized by December 31, 2020.

Gross profit totaled approximately $225,000 in the third quarter of 2018, as compared to $98,000 in the third quarter of 2017.

Gross profit margin as a percentage of revenue increased to 11% in the third quarter of 2018 as compared to 7% in the third quarter of 2017.

Gross profit in the first nine months of 2018 totaled $420,000, an increase of 5.8% compared to $397,000 in the same period of 2017.

As a percentage of revenue, gross profit margin was 7.1% in the first nine months of 2018 as compared to 13.2% in 2017.

Excluding a single $5.6 million legacy contract, gross profit margin as a percentage of revenue increased to 22% in Q3 of 2018 and 24% in the first nine months of 2018.

Gross profit margin for the first three months and the nine months ended September 30, 2018, was positively affected by the commencement of projects that are fully modular and encompass all three phases: design, architecture and engineering, and construction and delivery.

Operating margins -- forgive me, operating expenses -- increased to $1.3 million in Q3 of 2018 compared to $1.1 million in Q3 of 2017.

Operating expenses in the first nine months of 2018 totaled $3.5 million, an increase of 35% compared to $2.6 million in the same period of 2017.

The increase in operating expenses was primarily due to the costs associated with the formation and the operating expenses of SG Residential, and an increase in professional fees and personnel costs in the three and nine months ended September 30, 2018, compared to the same period in 2017.

Net loss totaled $1 million or $0.24 per basic and diluted share in Q3 of 2018 compared to a net loss of $1 million or $0.25 per basic and diluted share in Q3 of 2017.

Net loss for the first nine months of 2018 totaled $3 million or $0.71 per basic and diluted share, a decrease of 12.3% as compared to a net loss of $3.4 million or $2.09 per basic and diluted share for the same period of 2017.

Adjusted EBITDA loss increased to $0.8 million in Q3 of 2018 from $0.5 million in Q3 of 2017.

Adjusted EBITDA loss for the first nine months of 2018 totaled $2.3 million as compared to $1.1 million for the same period of 2017.

Please note today's press release under the heading use of non-GAAP financial information for a discussion of adjusted EBITDA and a reconciliation of such measure to the most comparable measure calculated under US Generally Accepted Accounting Principles, or GAAP.

Cash at September 30, 2018, totaled $2.9 million as compared to $3 million at June 30, 2018, and $4.9 million at December 31, 2017.

As of November 13, 2018, we had approximately 4.26 million basic and diluted shares outstanding.

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

Based upon our progress to date, we anticipate the Company will be cash flow breakeven exiting Q4 of 2018.

The Company also has approximately $15 million in carryforward operating losses which will reduce our tax burden in future years.

These net operating losses expire in 2037.

The Company's use of its net operating loss carryforward may be subject to annual limitations.

We ended the third quarter of 2018 with a stable balance sheet, no debt, record backlog of $103 million, and a promising project pipeline which we believe positions SG Blocks for promising financial performance in the balance of 2018 and beyond.

I'll now turn the call back over to pull.

Paul?

Thanks, Mahesh.

During 2018, we have focused on three primary areas: achieving cash flow positive operations, which we anticipate doing as we exit Q4, as stated by Mahesh; growing our backlog and our pipeline of opportunities, which has occurred; and executing on our current backlog to drive top-line revenue growth with a consistent 20% margin profile.

We believe we made progress in achieving all of these goals in the third quarter of 2018, and that our momentum has already accelerated into the fourth quarter of 2018.

We are currently negotiating projects that we anticipate will drive construction backlog to over $120 million by the end of 2018.

Our backlog now includes recent architectural and engineering services contracts for an innovative kitchen prototype on the West Coast.

And our pipeline also includes single family container-based modular homes from our new subsidiary, SG Residential.

We continue to look for innovative ways to expand our operations, including forming key strategic partnerships that we believe will bring our business to the next level.

We believe that as a result of such actions, we are closer than ever to achieving our goal of sustainable cash flow operations.

Based on our expected backlog conversion, we believe we now have a clear line of sight to achieve our stated goal of cash flow breakeven exiting 2018.

I believe that we are well positioned to accelerate revenue growth and create, for our shareholders, long-term value.

I look forward to sharing more on our developing story at the upcoming institutional investor conferences, including the 11th Annual LD Micro Main Event in LA, and the sixth annual ROTH New Industrials conference in New York.

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

Operator?

(Operator Instructions).

Ashok Kumar, ThinkEquity.

A two-part question.

One is can you please confirm that the cost escalations associated with the LA school building, is that -- or the change order, is that complete yet?

And the second part of the question is, the revenue targets for the year, $12 million to $16 million, is that still in place?

Thank you.

So the school project, as we have talked about during the call, the school project was a legacy project that we had signed before.

There is some [site] delays.

We expect the project to be completed either in the first quarter -- sorry, either in this fourth quarter of this year or the first quarter of next year.

In terms of the revenue guidance, we are not giving specific revenue guidance.

But we do expect -- if we look at a run rate through the first nine months of the year, we still expect to be cash flow breakeven for the fourth quarter, which should give you a fairly good idea about the anticipated revenue for the quarter.

Great.

Paul and Mahesh, in terms of the residential and I guess your focus on generating a pipeline of family residential opportunities -- and do you expect that to translate to revenues this year?

And if you do the math, I guess, even 100 of homes would translate to about $15 million in revenues and take you to, potentially, profitability.

What will be the timeline for that, Paul and Mahesh?

Ashok, we currently have had four homes leave our pipeline in SG Residential and go into backlog at an amount of I think about $0.5 million.

SG Residential anticipates building 50 homes in 2019, which will contribute to the SG Blocks' production margins and contribute to our positive year.

Okay, great.

And then also, I guess one of your three main objectives -- cash flow positive, conversion of backlog to revenue, and increasing backlog -- and so you are making progress on all those fronts.

And in the last 30 to 60 days, you've announced projects in Orlando and then Greenville, and Navy and some additional projects.

I assume some of them are going to transition to revenue this year and then accelerate that timeline early next year.

That's correct.

We will have cash flow breakeven this year because we worked on 24 paying projects while our [bigger] projects that are noteworthy are moving closer and closer to launch.

We have managed to attract a whole bunch of business through hard work and through a very active sales process.

And at this point in Q3, we have 15 paying projects, 24 year to date.

We will be cash flow breakeven in December.

Our backlog remains over $100 million.

We're expecting to be $120 million at year's end.

And our pipeline is comfortably over $200 million, even with the conversions and fallout.

Got it.

Also Paul, in terms of granularity and some of your projects in New York, your $55 million project in upstate New York.

I'm not sure if that was what you were waiting for, zoning approval.

Is that done?

(multiple speakers) Go ahead.

Without getting into specific of the developer's business, the project is going through normal term sheet reviews and planning reviews.

We anticipate coming out of winter with the project -- we anticipate being in manufacturing in early Q3 of next year.

One of the cold facts of construction in the Northeast is that there's a couple of months of the year you are not going to do site work.

And so we anticipate for both the Bronx project and for the $55 million contract that we will recognize revenue during the year, but we expect to hit major manufacturing in the beginning of Q3 2019; and that, as stated in the earnings script, we do not envision any of those projects extending beyond 2020.

Great.

[The problem is] another -- just a macro question, right?

I guess you continue to focus on increasing the diversity of your backlog, so to enable you to buffer the timing.

So I was wondering, what are the milestones that we should look for there?

Well, I think that we've had 24 paying projects, and quite a number of projects with bids pending shows that our Company is going to be able to be cash flow consistent with predictable margins and predictable revenue.

As indicated by the fact of how we've operated this year; and that when our large and big paying projects -- of the project in upstate New York is $55 million, spread over seven buildings.

What we're trying to do and what we've done this year is to run the business on good, core, solid business contracts that deliver in quarters one, two, and three; and then the large projects will unfold, as developments often do.

So that's the strategy we have employed.

We are confident with it.

Okay.

Once again, Paul and Mahesh, congratulations, and thank you on the progress.

Paul Cooley, Joseph Gunnar & Co.

So just a couple things.

First off, as far as the -- you're saying that you think this quarter, you will be breakeven by the end of the quarter.

I'm trying to model that out a little bit.

The way it looks right now, if you are losing $1 million based upon your last quarter, and you have 20% margins -- so would your breakeven quarter be about $7.2 million?

Is that the way to look at it?

Well, I think the way that we have always talked about this before, Paul, is if you look at our gross margins, our expected gross margins of 20%, and (technical difficulty) of about $1 million in operating expenses.

So we have to be in the range of -- depending on our margins, somewhere between $4.5 million to $5 million in revenue for the quarter in order to deliver the margins to support our current operating expenses run rate.

All right.

So it's not $7 million -- I'm just trying to do the math based upon -- if you guys lost $1 million this quarter on $2 million in revenue, $5 million at 20% margins would be breakeven, no?

Am I looking at it wrong?

Yes, we are looking -- when we talk about breakeven, we are talking about cash breakeven, which would be basically carving out the non-cash expenses like stock comp expenses and (multiple speakers).

So you have to look at that on an adjusted EBITDA basis.

That will give you a better idea of what (multiple speakers)

So a cash flow breakeven quarter for you guys would be $4.5 million to $5 million?

Based on the expected margins of about 20%, that is a good number, Paul.

Okay, okay.

Not to hold you or pigeonhole you to a number, but on this call now we're saying that the $102 million backlog, the entire amount will be realized by the end of 2020.

So how does that break out?

Is that, like, $51 million next year and $51 million the next year?

Or how does it kind of, percentage-wise, break up year-to-year as far as expected realization of revenue?

Well, without sharing proprietary information to the developer, what I would say is that, if we are doing site work and finalizing planning through the cold weather and started fabricating buildings in Q3, you would probably anticipate second half of the year having manufacturing revenue, and then all of 2020 having significant manufacturing revenue related to that contract.

Okay.

So the bulk of the growth, you think, would happen towards late next year?

I mean, can we anticipate -- again, I'm trying to figure out, because it seems like we've stalled a little bit, to be honest with you.

I mean, you guys had -- announced a backlog of $102 million at the end of the first quarter, $102.9 million at the end of the second quarter, and now $102.8 million at the end of the third quarter, so it doesn't seem like the backlog is growing, okay?

The revenue for the last couple quarters hasn't been growing.

So just wondering when are we going to see this growth?

(multiple speakers) It seems like it's -- I don't know -- something that has been holding it up.

I'm just asking.

No.

And, in fact, in the conversations we've had directly and as a part of these earning calls, our three main goals as a new company in 2018 was to be cash flow positive from operations at the end of the year, and we are projecting we will be.

Our backlog was to go up, and we're projecting it to be at $120 million at the end of the year.

And our pipeline is over $200 million.

So to spin your argument 180 degrees, I would think you would be happy that we could cash flow breakeven, and we haven't tapped into any of our big projects yet.

Okay, okay.

And then as far as what your statement about potentially 50 houses built next year on the residential side, if you can give me an idea: like, revenue per house is roughly what?

That is --

It depends on where we're building it and what kind of a house it is.

We're looking at anywhere from $100 to $150 a square foot.

And the average house is 1,000 to 1,200, 1,000 to 1,300 square foot.

Those are some yard markers.

All right.

So $100,000 to $200,000 is a fair number to put, roughly?

(multiple speakers)

That's mostly what we're seeing, Paul, to be honest.

That's the (multiple speakers).

Okay, all right.

No, I'm just saying -- so basically that would be like a $5 million to $7.5 million potential revenue opportunity for 2018 if you build 50?

If we converted 50 out of the 500, yes.

Okay.

And now the 500 is -- and now that's a -- is that pipeline?

That's pipeline, 500 is pipeline?

Yes, that's projects we're pricing; we've priced; we're designing and pricing, working on getting the things teed up.

And SG Residential is really active since the hurricanes and the storms and the activity around the Ring of Fire earthquakes.

We are getting an enormous amount of government and non-governmental activity, trying to build as climate-resistant residences as possible.

And so we're getting a lot of attention now because of the safety factor.

55 million American households are in extreme danger of having a climate-related housing catastrophe.

And so between developments and building and rebuilding, we have a lot of activity going on now.

You know a three container house is roughly about 1,000 feet, and we can deliver that in six weeks.

So that's a -- that's why we set up the Company.

That's why we put a lot of time and attention into it this summer.

The housing crisis in America affects every other crisis in America.

And we feel extremely well positioned to meet that need in the under $300,000 market, whether it's through apartments and tax credits or a small, discrete, standard houses.

We have lined up banks to loan against our mortgages.

We will have a lending platform established on our website by the end of the year to facilitate faster transactions for our housing-needy pipeline.

Okay.

And just one other: I know you guys had that announcement earlier in the year with the big engineering firm.

Is there anything -- any traction being developed there?

What's going on with that?

I'd say they are involved right now in about 20% of our pipeline and about 10%, 15% of our backlog.

They are being integrated into our existing network.

And they are designing an array of products that, when finished, we'll jointly bring to the market.

Okay.

All right, Paul.

Thank you very much.

Thank you.

(Operator Instructions).

Ladies and gentlemen, we have no further questions in queue at this time.

I'd like to turn the floor back over to management for closing.

Thank you, Adam, and Chris, Mahesh, and for everyone who joined us today.

We have many dedicated and hard-working people throughout SG Blocks.

Our sales, marketing, international, and business development folks; architects, engineers, MET experts, manufacturing partners; truck drivers, logistics experts -- we couldn't do it without you, and we appreciate everybody's hard work.

We appreciate the efforts of MZ in organizing this call.

Most importantly, we appreciate our shareholders and the people that are interested in seeing a safe and green and profitable alternative to traditional construction make its way into the marketplace.

It was just 15 short months ago that we did not have an internationally approved product.

Two years ago, we were not on NASDAQ.

We didn't have a pipeline of more than $10 million.

And a lot of amazing things have happened in a short period of time.

We're going to continue to convert that backlog into revenue, and create a business model that is going to be one that's quite compelling as a platform.

So, we look forward to sharing our future results, and wish everybody a very happy Thanksgiving next week.

Thank you.

Thank you, ladies and gentlemen.

This does conclude our teleconference for today.

You may now disconnect your line at this time.

Thank you for your participation and have a wonderful day.