VATE - NYSE

Good afternoon, and welcome to INNOVATE Corp.'s First Quarter 2023 Earnings Conference Call. All participants will be in a listen-only mode. After prepared remarks and presentation, there will be a question-and-answer session. Please note, this event is being recorded. I would now like to turn the conference call over to Anthony Rozmus, with Investor Relations. Please go ahead.

Good afternoon. Thank you for being with us to review INNOVATE's first quarter 2023 earnings results. We are joined today by Avi Glazer, Chairman of INNOVATE; Wayne Barr, CEO of INNOVATE; and Mike Sena, INNOVATE's Chief Financial Officer. We have posted our earnings release and our slide presentation on our website at innovatecorp.com. We will begin our call with prepared remarks to be followed by a Q&A session. This call is also being simulcast and will be archived on our website. During this call, management will make certain statements and assumptions, which are not historical facts, will be forward-looking and are being made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Any such forward-looking statements involve risks, assumptions and uncertainties and are subject to certain assumptions and risk factors that could cause INNOVATE's actual results to differ materially from these forward-looking statements. The risk factors that could cause these differences are more fully discussed in the cautionary statement that is included in our earnings release and slide presentation and further detailed in our 10-K and other filings with the SEC. In addition, the forward-looking statements included in this conference call are only made as of this date, of this call and as stated in our SEC reports. INNOVATE disclaims any intent or obligation to update or revise these forward-looking statements, except as expressly required by law. Management will also refer to certain non-GAAP financial measures such as adjusted EBITDA. We believe that these measures provide useful supplemental data that, while not a substitute for GAAP measures, allow for greater transparency in the review of our financial and operational performance. At this point, it is my pleasure to turn things over to Avi Glazer.

Good afternoon. INNOVATE generated solid momentum across our three business segments during the quarter and we continue to make progress on the transformation the company started over two years ago. Since that time, we have rightsized the company to focus on our best-in-class assets and maximize their exposure to attractive areas of the economy, and we continue to evolve to capture new and emerging opportunities in the market. We are focused on ways to increase profitability, insulate the company from market downturns and changing macroeconomic conditions and fuel growth for years to come in order to extract optimal value from each of the businesses. In the first quarter, infrastructure for revenue was impacted by project delays, but the DBM team continues to build upon its strong foundation. It is important to note that these projects have only shifted in their timing and we're still in backlog at the end of the quarter. In Life Sciences, both R2 and MediBeacon continue along their growth plans, with positive progress toward anticipated milestones ahead. R2 announced three new FDA clearances in April and MediBeacon's pivotal study remains on track for final regulatory submission in the near future. In Spectrum, the legacy channels previously occupied by Azteca has largely been filled and programming on these channels began in the first quarter. Also with the success of our initial experiment using LPTV frequencies in Fort Wayne, Indiana, we are designing the second phase experiments intended to continue to demonstrate use of our Spectrum in a variety of applications and potential opportunities for innovation in this space. With that, I am pleased to turn the call over to Wayne Barr.

Thanks, Avi, and thank you all for joining us today. I would like to start by sharing first quarter highlights for each of our operating segments. DBM Global delivered revenue of $311.7 million for the first quarter which was a decrease from the same quarter a year ago. Gross margin, however, expanded 200 basis points to 13% from 11% in the quarter. Adjusted EBITDA margin for the first quarter was 5.2%, which was impacted by the lower revenues but still 10 basis points higher year-over-year. We continue to expect margins to generally improve over the prior year. But as a reminder, we anticipate fluctuations quarter-over-quarter due to project timing. To that end, as we have explained in the past, the construction, commercial and industrial markets can be lumpy at times and cause revenue to push from one quarter to another. In the first quarter, customer and general contractor-driven delays from certain larger projects resulted in the work performed by DBM to be delayed, impacting our quarterly results. DBM continues to see sizable projects in the market and in its pipeline, and the business has a total reported backlog of $1.6 billion, providing visibility for the future. However, they are beginning to see the market somewhat tighten and more competition on project bids. Turning to Life Sciences. R2 has now shipped 273 Glacial devices globally and its newly implemented subscription sales program continues to accelerate its growth. As Avi mentioned earlier, R2 recently announced three new FDA clearances, which include minimizing pain, inflammation and thermal injury when paired with laser and dermatological treatments and provide topical anesthetic relief of injection sites, reducing patient discomfort. R2 has also partnered with renowned skin care company, Allies of Skin, to launch a multi-patient backbar treatment kit, delivering more treatments with less waste and reduced packaging. At MediBeacon, following the completed enrollment of the U.S. pivotal study, final reconciliations and audits are being completed in preparation of the clinical study report for FDA regulatory submission. Final regulatory submission is anticipated in the second quarter. We are pleased with the progress we are making in the Life Sciences portfolio. And we believe we are well positioned to generate long-term value by executing our strategy and further leveraging these innovative solutions. At Spectrum, the new customers added to backfill the previously occupied Azteca stations are up and running. However, several of the channels that were expected to begin their programming in January did not start until March which impacted first quarter results. The new programming will be additive to Spectrum over the long term as we expect the higher gross margins to lead to greater profitability going forward. Among the new networks launched on broadcasting was Law & Prime, a popular live trial network, founded by Dan Abrams of ABC News, previously available only on cable. Industry-wide, broadcast television has experienced shortfalls in advertising revenues in the face of a weaker economy and increased competition from streaming networks and fast channels. The industry is looking ahead to more positive trends in 2024. As we reported last quarter, we were happy with the results of our initial two-way experiment using certain of our LPTV channels in Fort Wayne, Indiana. We are currently working with our engineering and spectrum consultants to design additional experiments and expect to see continuing positive results as we seek to expand the uses of LPTV while maintaining the quality of our legacy linear broadcast service. We will continue to keep you apprised of developments as they occur. While our overall results were impacted by seasonality and delays, we remain encouraged by the fundamentals across each of our operating segments and are focused on achieving results through execution and operational excellence in the coming quarters. Finally, yesterday, we consummated the purchase of all of the Series A fixed-to-floating rate perpetual preferred stock issued by DBM Global Intermediate Holdco, Inc. and held by Continental General Insurance Company. The purchase price for the Series A preferred was $42 million, consisting of $7 million of cash and a $35 million subordinated unsecured note that is due in 2026. The purchase was precipitated by a redemption notice received from CGIC, which notice was permitted to be delivered by CGIC under the terms of the Series A preferred. The unsecured note has an interest rate that will substantially increase on the first and second anniversaries of issuance and has certain requirements to make partial payments under certain circumstances and events such as a qualified equity raise. The board believes that while a full redemption in cash was not an option, the purchase of the Series A preferred and this structure is aligned with our short- to medium-term strategic planning. With that, I'll turn it over to Mike for a review of our financials and capital structure.

Thanks, Wayne. Consolidated total revenue for the first quarter of 2023 was $317.9 million, a decrease of 23% compared to $412.8 million in the prior year period. The decrease was primarily driven by our Infrastructure segment and to a lesser extent, our Spectrum segment. DBMG's fabrication and erection and maintenance and repair businesses encounter customer and general contractor-driven delays, resulted in the timing of work performed by DBMG to be delayed in the current period. Revenues in our Spectrum segment decreased primarily as a result of the termination of HC2 network and its associated Azteca America network content at the end of last year. Net loss attributable to common stockholders for the first quarter of 2023 was $10.2 million or $0.13 per share compared to a net loss of $13.6 million or $0.18 per share in the prior year period. Total adjusted EBITDA was $4.9 million in the first quarter of 2023, a decrease from an adjusted EBITDA of $11.5 million in the prior year period. The decrease was primarily driven by the Infrastructure, Life Sciences and Spectrum segments as well as a decrease in our equity method income from our investment in HMN. As previously disclosed, the sale of the remaining 19% of our HMN investment closed in March of 2023. The decrease was partially offset by lower EBITDA losses at the nonoperating corporate segment. At Infrastructure, revenue decreased 22.5% to $311.7 million from $402.2 million in the prior year quarter. As discussed earlier, this decrease was primarily driven by timing of projects at DBMG's fabrication and erection and maintenance and repair businesses, both of which encountered customer and general contractor-driven delays resulting in the timing of work performed by DBMG to be delayed at several projects, including and JFK. Infrastructure adjusted EBITDA for the first quarter of 2023 decreased to $16.3 million from $20.5 million in the prior year period. The decrease was largely driven by the decrease in revenue as previously discussed and a slight increase in SG&A. While the fabrication and erection business experienced delays in the current period that impacted revenue, the decrease in adjusted EBITDA was partially offset by a margin improvement as the projects completed in the comparable period which had lower margins due to market pressure on point-of-sale project margins during the COVID-19 pandemic were replaced with more recent projects with higher point-of-sale markets in the current period. While EBITDA margin was up slightly year-over-year, EBITDA margin was sequentially lower as a result of the lower profit contribution caused by the project delays and largely fixed SG&A costs. As of March 31, 2023, reported backlog was $1.6 billion compared to $1.8 billion as of December 31, 2022. Adjusted backlog, which takes into consideration awarded but not yet signed contracts, was $1.7 billion compared to $1.8 billion at the end of December 2022. While we have now seen our revenues exceed our backlog sales for the past two quarters, the size of the projects in the market that DBMG is pursuing would have a meaningful impact on backlog in the upcoming quarters, if successful in their bid process. DBMG ended the quarter with $237 million of debt, which is a decrease of $6 million from year-end 2022, driven by normal debt amortization payments and a small reduction in the credit facility. At Life Sciences, the increase in adjusted EBITDA losses primarily driven by higher equity method losses from our investment in MediBeacon. In February of 2023, MediBeacon issued $7.5 million of preferred stock to Huadong in exchange for additional shares of preferred stock. As a result of this equity transaction, recognized $3.8 million of unrecognized equity method losses as carrying amount of its investment in MediBeacon have been previously reduced to zero. At Spectrum, revenue decreased $4.1 million or 41.8% to $5.7 million, primarily driven by the elimination of advertising revenues at Azteca which ceased operations at the end of last year. This was partially offset by an increase in station revenues, which launched new customers in the current period. Spectrum delivered adjusted EBITDA of $0.4 million in the first quarter compared to adjusted EBITDA of $1.3 million in the prior year quarter. The decrease was primarily driven by the termination of HC2 network and increases in SG&A to satisfy responsibilities previously performed by the network group. Our spectrum has backfilled the channels that were broadcasting Azteca content, several of the channels were not launched until the back end of the quarter and thus impacted their revenue and contribution for the quarter. Non-operating corporate adjusted EBITDA losses were $3.5 million for the first quarter of 2023, down from the first quarter of 2022 by $1.1 million. The improvement was driven mostly by unrepeated expenses related to the settlement with the former CEO recorded in the prior period and a decrease in accounting and employee costs. During the first quarter, the company closed on the sale of its 19% interest in HMN and received $32 million in proceeds. The proceeds were used to repay $15 million of the corporate credit line and provide $10 million of working capital funding to DBMG through intercompany and fund normal overhead costs in the first quarter. At the end of the first quarter, the company had $16.6 million of cash and cash equivalents compared to $80.4 million as of December 30, 2022. On a standalone basis, as of March 31, 2023, the corporate segment had cash and cash equivalents of $3.6 million compared to $9.1 million at the end of 2022. As mentioned in the previous call, the cash balance at year-end was elevated due to a temporary reduction in working capital as a result of receivables collected prior to the end of the year. As of March 31, 2023, INNOVATE had total principal outstanding indebtedness of $706.5 million, down $18.8 million from $725.3 million at the end of 2022, driven primarily by corporate's credit line repayment and infrastructure's principal payments, which was partially offset by R2's additional borrowings from Capital. As Wayne mentioned above, after the quarter, we also entered into a new $35 million unsecured note yesterday. Additionally, subsequent to the quarter, the company amended the credit agreement -- corporate credit agreement, which pushed the majority date to March 16, 2025, with the other terms materially unchanged and borrowed an additional $8 million on the credit line on May 8. For the most part, the draw was to purchase the DBMG preferred stock previously discussed. With that, operator, we'd now like to open up the call for questions.

Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] And your first question comes from the line of Brian Charles from R.W. Pressprich. Your line is now open.

Hi, good afternoon. Thanks for taking the call. I am -- I'm just wondering, I guess, about the trend for EBITDA and infrastructure going forward over the course of the year. The delays that affected the first quarter pushed some revenue, I guess, into the second quarter. Is that -- would that make the second quarter sort of a catch-up quarter? Or are we in just sort of a delayed environment in which we might see some headwinds over the course of the year?

We -- right now, the current thinking is that these are just project delays in the start of the projects or the delays in completing certain work in the case of add-back. But they expect -- I wouldn't say that it all gets made up in the quarter. Everything shifts, right? So by year-end, I think they are still largely in line with what we were expecting to happen.

Okay. Okay. Fair enough. And the other projects you're looking at now, you see -- I guess, you're saying the environment is getting a bit more competitive, but there are still some large-scale projects that you're bidding on that you can reasonably expect to land, that would be still in that sort of margin -- improved margin area that you were discussing at year-end and I guess today?

Yeah. I mean I think -- like we said, we're starting to see some tightening in certain areas that were -- previously we were Ruston and his team were able to negotiate around. We still see better margins. So the margins haven't really been impacted in the process at this point from what Ruston has told us.

Okay. Okay. Another quick question about broadcasting. I guess you -- I think you had said you had signed up the bandwidth dictated by Azteca. By quarter end, is there any kind of guidance you can give us on what like maybe the run rate might be for EBITDA once now that this -- all the space is signed up?

Yeah. I mean I think we'll continue to fill space. We've largely filled -- we've exceeded what we were from an intercompany perspective, charging Azteca at a broadcast on those stations and still have more space to sell. I think when you think about how the quarters progressed last year, one to four, Azteca was profitable in 2021 and really into the first quarter of 2022. It then started to go flat to a slight loss by the end of the third quarter when we made the decision to shut down. There were some onetime good guys, small things that helped a little bit in the fourth quarter, but we should continue to see improvement as we get the full impact of the quarter for those new customers and continue to sell out the space. But I think you have to be cautioned in what you're thinking as far as -- it's not going to all of a sudden jump up significantly. It's going to gradually increase. We should see a pretty decent bump by getting the full quarter impact in Q2. But I think it's going to increase gradually over the course of time.

Okay. Thanks. And just one last question about the unsecured note issue to Continental. You say the coupon is going to jump up, I guess, on an annual basis over the next couple of years. Well, what are your plans for kind of dealing with that? Would you try to pay it off sooner than later? Or less outstanding for a while?

Yeah. I think we wanted to have a little bit of a runway and a little bit of flexibility so that the board can continue to make good decisions and not be forced into having to do something because of timing or maturities. And so our plan definitely is to take a look at the entirety of the debt across the holding company. And we're obviously looking at different opportunities to handle that debt and to refinance it and the subordinated note would be no different.

I think by the time we get to the second anniversary, we're already -- that's a well inside a year of when our senior secured notes mature. So we would obviously have to take care in the same time. So that's the broad process there.

Okay. That's all I got. I'll now jump back in queue. Thanks.

Thank you.

Thank you. [Operator Instructions] And your next question comes from the line of Andrew White from Nut Tree. Please proceed.

Hey, guys. Can you clarify if that new note is issued by DBM or issued by the HoldCo? Thank you.

Go head.

So it was issued by the HoldCo Bancorp. And we -- now the HoldCo owns that preferred stock as well.

So it's unsecured subordinated notes in the convert.

Correct.

Got it. Thanks, team.

Thank you.

Thank you. There are no further questions at this time. Please continue.

Very good. We'd like to thank everybody for joining us today. We will continue to keep you apprised as developments warrant. We look forward to speaking to you next quarter. Thank you.