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DATE

Thursday, March 20, 2025 at 10 a.m. ET

CALL PARTICIPANTS

  • Chief Executive Officer — Richard Coleman
  • Executive Chairman — Jeffrey Eberwein
  • Chief Financial Officer — David Noble

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TAKEAWAYS

  • Revenue -- $17.1 million, up 21.1% from $14.1 million, driven by acquisitions of Timber Technologies and Big Lake Lumber.
  • Full-Year Revenue -- $53.4 million, an increase of 16.5% attributable to M&A activities and full-year contribution from recent acquisitions.
  • Gross Profit (Q4) -- $4.5 million, up 55.3%, reflecting inclusion of Timber Technologies with the division’s highest gross margin.
  • Gross Profit (Full-Year) -- Down 7.2%, impacted by a $574,000 purchase price accounting adjustment for Timber Technologies and lower utilization at KBS and EBGL.
  • SG&A Expense (Q4) -- Increased by $1 million or 31.7%; as a share of revenue, SG&A rose to 24.7%.
  • Non-GAAP Adjusted Net Income (Q4) -- $0.5 million, or $0.15 per diluted share, compared to a $0.3 million loss previously (loss of $0.10 per share).
  • Non-GAAP Adjusted EBITDA (Q4) -- $1.1 million, up from negative $0.1 million; segment Business Solutions EBITDA was $2.3 million versus $0.7 million.
  • Operating Cash Flow (Q4) -- Outflow of $1.5 million, compared to an inflow of $28,000; the company attributes this to increased working capital due to higher business activity.
  • Debt -- Interest-bearing debt of $11.3 million at year-end, up from $2.0 million, primarily due to the Timber Technologies acquisition and related financing.
  • Cash Balance -- $5.6 million including restricted cash at year-end, down from $18.9 million, explained by acquisition financing.
  • Backlog -- Signed backlog for Building Solutions at $17.2 million at year-end and has risen further year-to-date.
  • Impairment Charges -- $1.7 million in other expense from write-downs tied to Catalyst (formerly TTG) investment, following Catalyst’s mark-to-market valuations.
  • Energy Services Division -- Acquired Alliance Drilling Tools ("ADT") with FY24 revenue of approximately $10.5 million, a 48% gross margin, and $2.4 million adjusted EBITDA; "Its business model allows for the majority of cost, including freight, repairs and damages, to be passed directly to customers, which minimizes ADT's operational expenses, CapEx and risk exposure."
  • Public Equity Holdings -- $3.4 million at year-end, down from $4.8 million after exiting a significant public equity position.
  • Enservco Relationship -- Notice of default on a $1 million promissory note was issued; company continues to hold approximately $12.5 million in Enservco common shares.
  • Tariff Exposure -- Company "have taken preemptive action to reduce our business' exposure to Canadian lumber" and implemented contractual risk mitigation for input cost changes.
  • Customer Mix (Energy Services) -- Alliance Drilling Tools customer base includes "two biggest customers are household names in the energy sector." with low credit risk.
  • Segment Sourcing Risks -- KBS sources mostly domestic lumber, Timber Technologies nearly all domestic, while EdgeBuilder has greatest concentration of Canadian lumber but is hedging price risks.

SUMMARY

Diversification accelerated with the introduction of a new Energy Services division following the Alliance Drilling Tools acquisition, which demonstrated high margin and cash generation. The Building Solutions division converted delayed projects into increased backlog and production, fueling operational momentum into 2025. Financial leverage rose on recent acquisitions, notably Timber Technologies, reflected in higher year-end debt and lower cash balances. Substantial impairment charges from the Catalyst investment drove other expense, as management adhered to mark-to-market assessments. Adjusted profitability measures improved notably in the quarter, despite recorded net losses and negative cash flow due to expansion-related working capital consumption.

  • Management stated, "all options are on the table to maximize value for shareholders," responding to concerns about the gap between the stock price and book value.
  • Preferred stock was emphasized as an acquisition currency in the ADT transaction, with its 10% yield considered accretive at target valuations.
  • Unidentified Company Representative confirmed that the write-down on Enservco’s promissory note "ends up hitting our stockholders' equity because it was overcollateralized," thus avoiding an income statement impact.
  • Management reported that the Building Solutions division is benefitting from structural tailwinds as factory-built construction gains share versus traditional methods.
  • Key risk mitigation included updated customer contracts and sourcing diversification to address volatile lumber prices and tariff developments.

INDUSTRY GLOSSARY

  • Backlog: The total value of signed but undelivered contractual orders for goods and services, representing committed future revenue.
  • EBGL: EdgeBuilder and Glenbrook Lumber, brands within the company’s modular construction segment.
  • Timber Technologies: Acquired engineered wood product and structural wall panel business, contributing high gross margins in the Building Solutions segment.
  • ADT: Alliance Drilling Tools, newly acquired subsidiary forming the Energy Services division focused on drilling tool services and sales.
  • Enservco: Publicly traded energy services partner, part of Star Equity Holdings’ investment and debt portfolio.
  • Catalyst (formerly TTG): Private equity sponsor and majority owner of Digirad Health, with which Star Equity has equity and note receivable exposure.
  • KBS: KBS Builders, subsidiary specializing in modular residential and commercial construction.

Full Conference Call Transcript

Richard Coleman: Thank you, operator. Good morning, and thank you for joining us today for our fourth quarter 2024 results conference call. On the call with me today are Executive Chairman, Jeffrey 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 2024, revenue increased by 21.1% to $17.1 million versus $14.1 million in the fourth quarter of 2023. For the full year 2024, revenue increased 16.5% to $53.4 million from $45.8 million in 2023.

The revenue increases in both periods are largely attributable to M&A activity, particularly the acquisition of Timber Technologies, which we completed in the second quarter of 2024, and the full year revenue impact of our Big Lake Lumber acquisition, which we completed in the fourth quarter of 2023. Fourth quarter 2024 gross profit increased 55.3% to $4.5 million versus $2.9 million in Q4 2023 due primarily to the inclusion of gross profit from Timber Technologies, which generates the highest gross margin of Star's Building Solutions businesses.

Full year 2024 gross profit declined 7.2% due to a onetime $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 impacted by demand softness during the first half of 2024 as project starts were delayed primarily due to interest rate sensitivity and credit availability. However, during the second half of 2024 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 2025 as evidenced by our recent announcements of multiple large project signings.

Our signed backlog representing committed projects and orders stood at $17.2 million 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 business' exposure to Canadian lumber in favor of domestic lumber.

In addition, we have implemented strategies that 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 the 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 $10.5 million, gross margin of 48% and adjusted EBITDA of $2.4 million. Its business model allows for the majority of cost, 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 we'll 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.

David Noble: 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 2024, consolidated gross profit was $4.4 million, up 55.9% versus Q4 of 2023, driven by increased revenues and higher gross margins in our Building Solutions division. However, for the full year, gross profit decreased by 7.3% to $11.1 million from $11.9 million in 2023, driven primarily by lower gross margin percentages in our Building Solutions division during the first half of the year. SG&A increased by $1 million or 31.7% versus Q4 of 2023.

As a percentage of revenue, SG&A increased in Q4 of 2024 to 24.7% versus 22.8% in Q4 of 2023. For fiscal year 2024, SG&A was $17 million versus $14.5 million in 2023. The main driver of the increase in SG&A are the full year impacts of the Timber Technologies and the Big Lake Lumber acquisitions. In the fourth quarter of 2024, we reclassified the 2024 impairments of our cost method investment from SG&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 operations was $2.5 million versus net income from continuing operations of $1.8 million in Q4 of 2023. Non-GAAP adjusted net income from continuing operations in Q4 was $0.5 million or income of $0.15 per diluted share. This compares to adjusted net loss of $0.3 million in Q4 of 2023 or a loss of $0.10 per diluted share. Non-GAAP adjusted EBITDA from continuing operations increased to $1.1 million in Q4 from a negative $0.1 million in Q4 of 2023. Segment non-GAAP adjusted EBITDA at our Business Solutions division increased to $2.3 million in Q4 this year, up from $0.7 million in Q4 of 2023.

Q4 2024 cash flow from consolidated operations was an outflow of $1.5 million 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 '24. As of December 31, 2024, the outstanding balance on our interest-bearing debt was $11.3 million versus $2.0 million at the end of December 2023. Our cash balance, including restricted cash, stood at $5.6 million, down from $18.9 million at the end of 2023.

The changes in both debt and cash balances can largely be explained by the Timber Technologies acquisition and its related financing, both of which closed in May of 2024. Turning to our Investments division. Our holdings and public equity securities at the end of the year amounted to $3.4 million versus $4.8 million 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, in May of 2023 were valued at $1.4 million and $8.2 million, respectively.

As disclosed in Enservco's public filings, in the fourth quarter of 2024, we provided Enservco a notice of default regarding the $1 million 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. We continue to hold approximately $12.5 million of common shares in Enservco and we remain in contact with Enservco regarding potential opportunities to collaborate on business opportunities. Now I'd like to turn the call back over to Rick for some additional remarks.

Richard Coleman: 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 2025. 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 are excited for the year ahead. Now I'd like to turn the call over to the operator for questions.

Operator: [Operator Instructions] Our first question today will come from Theodore O'Neill of Litchfield Hills Research. Please go ahead.

Theodore O'Neill: Thank you very much. And congratulations for meeting the revenue and the non-GAAP EPS numbers. I'd like to ask about building side of the business, the Building Solutions. So two questions. One is you announced two big wins in March. And I think you disclosed how those are going to flow through to 2025. Can we read anything into that in terms of additional business? And I'd like to know what accounts for the margin improvement in Building Solutions?

Richard Coleman: Thanks, Theo. 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 a broader revenue base. So that's a big piece of it. What 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 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 '24 and carrying forward into 2025.

Theodore O'Neill: Okay. And can you break out what's in the $1.7 million of other expense in the quarter?

Richard Coleman: Dave, do you want to take that one?

David Noble: Sure, I can take that. Yes, the big thing -- we mentioned this in the commentary. We had to take a bit of a write-down on our investment in the equity of former Digirad, which we sold to TTG, now Catalyst. And 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 million number. Furthermore, we recharacterized that.

We had been showing that in SG&A, but we've reclassified that into other income because it better aligns with our other investments related activity.

Theodore O'Neill: Okay. All right. And that's pretty much all of it now, is it? You've written that down to close to zero?

David Noble: The equity portion is down. 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 firm, is going to turn this thing around and make good investment. So we're happy to be part of it.

Theodore O'Neill: Okay. So aside from -- go ahead.

Jeffrey Eberwein: Yes, this is Jeff. We also have a debt investment with them. So we own equity and we own debt in Catalyst. And unfortunately, the way GAAP accounting works is you have to write it down if there's a possibility of it being impaired and our, as Dave said, our methodology is 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 or original equity of $6 million are fully recouped and there's even upside to that. So the mark-to-market is just a noncash item on paper until the business gets sold.

Theodore O'Neill: Right. Right. Okay. And I asked about it because I thought there might be something from the Enservco issue. But will that appear in next quarter?

Jeffrey Eberwein: Bill, do you want to handle that?

Unidentified Company Representative: Write-down on the Enservco notes -- the write-down on the Enservco note actually ends up hitting our stockholders' equity because it was overcollateralized. So it never hits the P&L.

Theodore O'Neill: Okay. And my last question is what's going on in Enservco have any impact on Alliance Drilling?

Jeffrey Eberwein: No.

Theodore O'Neill: Great. Thanks very much.

Operator: Our next question today will come from Tate Sullivan of the Maxim Group. Please go ahead.

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

Jeffrey Eberwein: Rick, why don't you handle that. Rick? Are you there, Rick?

Richard Coleman: I'm sorry, I was on mute. I appreciate the question, Tate. I apologize for that. Yes, one of the things we liked about Alliance Drilling, obviously, was the fact that they operate in multiple sectors of the drilling stream. Their 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.

Jeffrey Eberwein: Yes, their two biggest customers are household names in the energy sector. So great counterparties. I think they have 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 we think it's a healthy mix. And as Rick mentioned, it's about two-third 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 U.S., but there's some occasional activity elsewhere in the Americas.

Tate Sullivan: And then not to overlook the 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?

Jeffrey Eberwein: Yes. Rick will talk about the sourcing. But I'd say lumber, it's not quite a global commodity, but the U.S. and Canada are very closely linked markets. So regardless of where one sources, if lumber prices go up in Canada, they go up in the U.S. and vice versa. But Rick, why don't you talk about the sourcing issue?

Richard Coleman: 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, then 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. Timber Tech uses very little Canadian lumber. They outsource 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 and they use a hedging strategy to protect us there.

Tate Sullivan: Thank you, all.

Operator: Our next question today will come from [indiscernible], a Private Investor. Please go ahead.

Unidentified Analyst: Hi. Good morning, guys. I'm looking at your balance sheet, and it looks like your book value is about $11.4 million, and there's obviously per share and your stock price is about $2.22. That's 5x book. Have you ever thought about just selling the company or selling the parts of it and return all the equity to shareholders? It just seems like we're kicking a dead horse. And I just don't see any positivity. I hear what you're saying, but I'm very, very disappointed in the results. You're giving preferred dividends out when you're not making money. I'd just like to -- would the Board considers selling the company?

Jeffrey Eberwein: 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. And with respect to the preferred stock, by paying a dividend, it 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, the 10% dividend yield is a healthy yield.

But if we can buy businesses at 3x and 4x EBITDA and use our preferred stock it's very, very accretive 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.

Operator: [Operator Instructions] This concludes our question-and-answer session. I would like to turn the conference back over to Rick Coleman for any closing remarks.

Richard Coleman: 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.

Operator: Thank you for joining the Star Equity 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.