Star Equity Holdings Inc (STRR) 2025 Q2 法說會逐字稿

Greetings, ladies and gentlemen, and welcome to Star Equity Holdings second quarter 2025 results conference call. Please be advised that the discussions on today's call may include forward-looking statements. Such forward-looking statements involve certain risk and uncertainties that may cause actual results to differ materially from those contained in forward-looking statements.

Please refer to Star Equity's most recent 10-K, 10-Q and other filings for more complete description of risk factors that could affect these projections and assumptions. The company assumes no obligations to update forward-looking statements as a result of new information, future events, or otherwise.

Please note that on this call, management will refer non-GAAP financial measures including EBITDA, adjusted EBITDA, adjusted net income, and adjusted earnings per share, which are all financially 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 earning release issued this month.

If you do not receive a copy of the earnings release and would like one after the call, please contact Star Equity at 203-489-9500 or it's investor relations representative Lena Cati of the Equity Group at 212-836-9611. Also, this call is being broadcast live over the internet and may be accessed at Star Equity website via www.starequity.com. Shortly after the call, replay will also be available on the company's website. It is now a pleasure to introduce Rick Coleman, Chief Executive Officer of Star Equity. Please go ahead.

Thank you, operator. Good morning, everyone. We appreciate you joining us for our second quarter 2025 results conference call. On the call with me today are Jeff Eberwein, our Executive Chairman; and Dave Noble, our Chief Financial Officer. 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. Before we open the floor to questions, Jeff will also discuss recent corporate milestones. Our second quarter revenue increased 76% over the second quarter of 2024, driven primarily by organic growth from our KBS business and the inclusion of Alliance Drilling Tools acquired in March this year.

The inclusion of a full quarter of Timber Technologies revenue which we acquired in May 2024 also contributed to the increase. Gross margin improved to 26% versus 16% in the same quarter last year, mainly due to higher revenues as well as the inclusion of Alliance Drilling Tools and Timber Technologies, which are two of our higher margin businesses.

Building solutions division revenues increased by 51% to $20.4 million compared to $13.5 million in the same quarter last year, primarily driven by increased KBS revenues and the inclusion of a full quarter of timber technologies revenues. Overall, we've seen a significant uptick in customer interest in construction activity over the past few quarters. Our building solutions backlog representing orders under contract remains strong at $25.7 million at quarter end, compared to $14 million at the end of the second quarter of 2024. This gives us high confidence in the division's full year 2025 outlook and positions us well for a strong start to 2026.

In our energy services division, the integration of Alliance Drilling Tools or ADT is continuing smoothly. Despite macroeconomic headwinds, including rig count declines, ADT generated $3.3 million in revenue and a half a million dollars in non-GAAP adjusted EBITDA. We're pursuing ADT's organic growth opportunities and also studying potential high quality acquisitions to strengthen the division. Now I'll turn the call over to Dave Noble, our CFO, to provide additional second quarter consolidated financial highlights. Dave, please go ahead.

Thank you, Rick, and good morning. Let's now turn to Star Equity's Consolidated financial results, which are represented by our three operating divisions building solutions, energy services, and investments. In Q2 2025, gross profit was $6.3 million, up 182% versus Q2 2024, driven by increased revenue at KBS as well as the addition of TT and ADT to our portfolio of companies. SG&A increased by $1.1 million or 20% versus Q2 2024, driven largely by the inclusion of SG&A from ADT and to a lesser extent the inclusion of a full quarter of TT. As well as increased expenses related to M&A activity. SG&A as a percentage of revenue decreased to 27% compared to 40% in the second quarter of last year.

Moving on to bottom line results for Star Equity, we reported a positive net income from operations of $3.5 million in Q2 2025 compared to a net loss from operations of $3.8 million in Q2 2024. Non-GAAP adjusted net income from operations in Q2 was $6 million or $1.87 per share compared to an adjusted net loss of $0.9 million or $0.29 a share in Q2 2024. Non-GAAP adjusted EBITDA from operations was a positive $7 million in Q2 versus an adjusted EBITDA loss of $0.5 million in the same period last year, primarily driven by realized gains on securities and our investments division.

Consolidated cash flow from operations for the second quarter 2025 was an outflow of $1.7 million versus an outflow of $1.9 million in the second quarter 2024. Six month 2025 cash flow from operations was an outflow of $1.1 million compared to an outflow of $4.3 million for the first six months of 2024. The operating cash flow improvement is attributable to more favorable results from operations, particularly in our building solutions division and also strong accounts receivable collections.

It is also worth noting that the subsequent to the quarter end in early July, our large $6.7 million dollar receivable for brokers was converted to cash and will therefore be cash flow in the third quarter of 2025. At the end of the second quarter, our consolidated unrestricted cash balance stood at $1.9 million compared to $4.0 million at the end of 2024. This difference is primarily driven by the upfront cash used to close the acquisition of ADT in March 2025 plus associated transaction related costs.

Turning to our investments division, our holdings in public equity securities at the end of the quarter amounted to $1.8 million versus $3.4 million at the end of 2024. Our rollover equity investment and seller note receivable from the sale of Digirad to Catalyst Medtech in May 2023 were valued at $1 million and $8.6 million respectively. Now I'd like to turn the call back over to Jeff for some additional remarks.

Thank you, Dave. I'd like to expand on two major milestones that occur during the quarter. First, in our investments division, Star Equity's $5.8 million and adjusted EBITDA was driven by a $5.5 million realized gain from Star Equity Fund's investment in Servitronics, which was acquired by TransDigm at the close of Q2. At a 300% pre-premium to where the stock was trading pre-announcement. This marks a significant milestone and watershed win for Star Equity Fund, the public investments arm of our investments division. This outcome underscores our ability to identify and execute on high value opportunities that generate meaningful returns to our stockholders.

Second, in May 2025, Star Equity entered into a definitive merger agreement with Hudson Global. While the transaction remains subject to shareholder approval with shareholder meetings scheduled for August 21, the combined entity is expected to generate considerable value for stockholders due to increased scale, further diversification of revenue streams, and elimination of redundant public company costs. We urge our shareholders to vote for the merger on August 21. Our existing businesses are also performing well. We're encouraged by the recent momentum we're experiencing at our building solutions division, new growth opportunities at our energy services division, and the value we're creating in the investments division, as well as the progress we're making on the M&A front.

The Star Equity board and management team are fully focused on creating shareholder value through our targeted business development initiatives and will continue to identify additional accretive acquisition opportunities at all our divisions. 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. (Operator Instructions) Tate Sullivan, Maxim Group.

Hi, thank you. Good morning, and then great results in the divisions. Can you talk about what the business division on the star side has the best pricing power, if you can compare in that way? I know Alliance Drilling Tools, maybe it’s a market share game versus Building Solutions. Can you single out a single business that has very good pricing power currently, please?

Rick, why don't you take that?

Yeah, I'll address that tape. Thank you for the question. What we found is that when there's volatility in the lumber market, our building solutions division has the opportunity to either maintain prices when lumber prices are declining or to some extent raise prices to keep up with lumber price increases. As we're also we've talked about this in the past. We also have a number of different methodologies in place to ensure that we manage the price of a particular job with input from our customers as to how they want to control the purchase of materials and whether they want them purchased before the job is done at a predetermined price or at a later point in time. So that's the general story for the building solutions division. What we've seen so far is very little price, very little restriction on our ability to gently raise prices in the energy services division, and we've been doing that as we determine the relationship that we have with our customers and also increase our supply of more, I'll call them more in demand tools that they need for their drilling operations. So in general, as long as we don't get too carried away, I think we've got the opportunity to raise prices as the market for raw materials increases as well.

Okay, thank you, Rick. And regarding the plan merger, depending on the outcome and if provided positive shareholder votes, the outcome, will you plan to close the merger as soon after the vote, or are there some contingencies after the vote, please?

Yeah, that's the plan. It would be as quickly as we possibly can, the last hurdle at this point is getting the shareholder vote, which is both companies are meeting on the 21.

Thank you all.

Michael Madison, Sidoti and Co.

Congratulations on the quarter, you guys.

Thanks, Michael.

A couple of questions from me. Let’s go back to energy services. It kinda caught my attention that you feel you’re able to put through price increases in that division. Many energy servicing companies have been reporting declining revenue, pressure on pricing. Why do you think you’re standing out in that way?

Yeah, Michael, so I think. Rick, let me start, Rick, and then you can you follow up. So, ADT has a really high service level and a lot of what they do, the tools that they rent are mission critical and they're a small piece of the total cost of drilling a well and there's a lot of different tools that are needed for what they do and we have been selectively replenishing some of their inventory of the most in-demand tools and we've been able to increase utilization and gain share because of that. We have seen some pricing pressure in the marketplace on some of the more commodity, common tools where demand has declined and so supply exceeds demand, but there's still a few tools out there that are in very high demand and those are the ones that Rick was referring to earlier.

That's exactly what I was going to say, Jeff. We've got two scenarios. One is when the only tools we have available for a particular customer are more commodity-based tools, then yes, there's pricing pressure. So part of our strategy is to increase the number of tools that we have that are more in demand and to some extent harder to come by so that when we get the call from a customer we can meet their needs regardless of what they are.

Okay, great, makes sense. Let's turn to building products. To start with, let me just clarify, in your release, you mentioned that you had won several large commercial contracts. Are those commercial in the sense that they were multi-family, or is this actually away from the residential space?

There's a mix of a little bit of everything in the backlog at this point, and you know it's encouraging to see that some of the pent up demand that we expected to break loose has been over the last few quarters, and that's what's got us excited about the backlog and the number of opportunities that we see. And by the way, those are really solid opportunities where we have signed contracts and pretty substantial deposits.

And Michael, this is Jeff. I would just add that at KBS we have a policy of issuing a press release on any large projects which we define as $2 million or greater. And if you look back at all the press releases over the last year, you'll see that we started to get some of those projects unclogged, some of the projects that had been delayed, deferred that Rick was talking about, and there were a series of press releases last fall and earlier this year on projects that we want. And so kind of step one is winning the project. Getting the signed contract, then it goes into our backlog, then we start to produce it, then it starts showing up in revenue, and then the final step is the profit recognition, which can sometimes be back and loaded.

Okay good well thank you for the clarification and I'll go look up those releases. Again, the big picture, it feels to me like you're kind of bucking the trend a little bit. A lot of headlines about pressure on home builders. How do you, why do you feel you're standing out?

I think to some extent it's. Go ahead, Jeff.

You go ahead, Rick.

I say to some extent it's a function of the territory we serve. We've got in the Northeast, in particular around Maine and the you know the radius that we typically deliver to, there's still a significant shortage of affordable housing, of residential housing in general, and we've been able to take advantage of that, and we're also getting what we think is a larger share of market from traditional stick built construction. We're working with some partners that we've had great success with. They and their customers are getting more comfortable with what we can do from KBS, and you know that's that's helping us generate opportunities and fill the backlog.

Hey, well, excellent news again. So looking forward, we have the shareholder vote coming up next week. Of course, we'll have to see how the shareholders vote, but assuming the merger goes forward, as an analyst, I'll want to be modeling the combined companies. Anything you can say in the way of guidance on Q3 and Q4 that will help you get off the ground there?

Michael, this is, Jeff. We stopped giving formal guidance. I think it was pre-COVID. So we don't give formal guidance but if you go kind of division by division, we are confident in the building solutions outlook for the next few quarters. It should be at least flat with what we did in Q2, I would say the same on energy services and then on the new companies, the Hudson business, the new company we're going to call that business services, we think that business is past the trough and we've had three quarters of higher year-over-year revenue, higher year EBITDA, and we see that trend continuing. And then if you look at the corporate cost of the two companies, what we've guided to is that we believe we'll be able to remove $2 million of redundant public company costs, corporate overhead costs. That doesn't happen on day one, but a few quarters, certainly a year, and we think those cost savings will be fully realized. So hope that helps.

It does very much. So thank you for all of that information. Again, congratulations on the quarter. Thank you.

(Operator Instructions) Theodore O'Neill, Litchfield Hills Research.

Oh thanks and congratulations on a good quarter. I would like to know about the $4.9 million of other income in the quarter. Does that include the $5.5 million Jeff, you talked about at the realized gains

Yes, it does.

Okay, and I'm just curious about the dynamics. I'm following up on the previous question about stick build versus prefab. I'm curious about the dynamics that are going on there that are making the prefab more popular. I mean, just, I'm looking at some of my own personal experiences in New England and the prices we're getting for stick built stuff is crazy and I'm just wondering if there's something going on here between what you guys can do and prefab versus stick bet that's, it's probably maybe more than what's going on with tariffs that explains the success there?

Rick, why don't you take that one?

Yeah, certainly, I think it's worth remembering that we're building a modular home or you know something larger in a factory, the quality is higher because we've got a controlled environment, materials are less likely to be damaged by weather and other factors and you know we've got a dedicated crew that typically has much less turnover than what you would see on a stick built site. So there are quality advantages. There are timing advantages. There are advantages to being able to construct in bad weather, and all of those things have worked in our favor. It's probably more impacted though just by overall demand in the area and the need for additional housing and construction in general. So we've got a very small percentage still of the overall construction in the Northeast. So as more and more of our partners and builders in general get comfortable with modular construction, then you know those, that creates additional opportunities for us.

And does necessarily mean that you’ve got lower waste because instead of throwing stuff in the dumpster at the job site, you might save it and use it for some other job?

Absolutely. I don’t know how much of it gets used for other jobs exactly, but yes, you’re right. There is much lower waste and in general, you know, a higher quality construction process.

One small example, Theo, that I would give you on that is our factory in Maine. Doing the prefab, of course, there’s going to be small pieces of wood that are left over after we’ve finished constructing a module. We use those small pieces of wood to heat the factory.

Yeah. Right. Okay, thanks very much.

Thank you.

Thank you. This concludes our question and answer session. I would like to turn the conference back over to Rick Coleman for closing the marks.

Thank you, operator. Thanks for your time today. We appreciate your interest and always appreciate your feedback and support, so don't hesitate to contact us at any time. We're excited about the business and we're excited about the steps we're taking on your behalf, and we look forward to updating you as our story develops.

Thank you for joining the Star Equity Holdings second quarter conference call. Today's call has been recorded and will be available on the investor section of our website www.starequity.com.