VATE - NYSE

Good afternoon, and welcome to INNOVATE Corp.'s Second 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 second quarter 2023 earnings results. We are joined today by Avie Glazer, Chairman of INNOVATE; Paul Voigt, INNOVATE's Interim CEO; and Mike Sena, INNOVATE's Chief Financial Officer. We have posted our earnings release and 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 may 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, 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 the 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 Avie Glazer.

Good afternoon. INNOVATE achieved strong second quarter results with revenue of $368.8 million and adjusted EBITDA of $16.5 million. We remain focused on increasing profitability by driving growth across all of our operating segments. Our infrastructure business DBM Global delivered second quarter revenue of $362.4 million and DBM expanded gross margin by approximately 160 basis points and adjusted EBITDA margin by approximately 100 basis points to 13.7% and 6.5% respectively. As indicated, gross margins for the business have come in above the low as we saw in 2022. However, we have seen lower revenue so far in 2023. This is driven in part by project delays in the commercial sector due to the tightening of the credit markets, which have primarily impacted office buildings in the western half of the country. DBM's top-line in the quarter was also impacted by delays with the start of a new project in the industrials business as it expands into new markets. While it took longer to work out the details of this first project, we are excited about this project and future opportunities in this space. We continue to utilize DBM's capabilities to capitalize on its expertise to pivot into different market opportunities. When looking at earned gross margins, DBM delivered better margins versus last year, which we expect to continue as we work our way through the balance of 2023. As a reminder, DBM does not always control the timing of when projects are awarded or whether a project may experience delays that ultimately push out revenue recognition to the right from one quarter to another. That said, total adjusted backlog remains strong at $1.5 billion at the end of the second quarter, providing visibility into future periods. DBM continues to see sizable -- see some sizable opportunities in the market and we are focused on converting these opportunities into backlog. Turning to Life Sciences, R2 Technologies continues to make progress in addition to an increase in worldwide unit shift; R2's utilization and social media presence have experienced notable increases throughout 2023 indicating growth in market awareness and penetration. In the second quarter, R2 also showcased Glacial Rx with five major Trade Shows: the American Society for Aesthetic Plastic Surgery, the American Society for Laser Medicine and Surgery, the Vegas Cosmetic Surgery, the International Esthetics Cosmetics & Spa Conference, and The Aesthetic Show. For MediBeacon, subsequent to completion of the Phase 3 Transdermal GFR pivotal study, the Phase 3 clinical study report and other related information was included in the final FDA module submission. FDA reviewed the full module submission package for completeness and is now conducting the substantive review. In addition, the FDA provided formal feedback on MediBeacon clinical program plans for other applications of the fluorescent technology platform in gastroenterology, ophthalmology, and surgical visualization. The company expanded their management team in May by appointing Dr. Steve Miller as Chief Medical Officer. We are excited to have him on Board to drive a range of clinical and strategic initiatives at MediBeacon. We are pleased with the progress of our Life Sciences portfolio; we believe we are well-positioned to generate long-term value by executing our strategy and further leveraging these innovative solutions to meet key needs in the market. At Spectrum, linear broadcast TV networks particularly diginets have been experiencing falling ad dollars in the face of a software economy and increased competition from streaming networks and FAST channels, including mounting pressure from smart TVs. We are now seeing indications of market stabilization in the second quarter. Most diginets are looking ahead and anticipating a stronger 2024. New business opportunities are emerging in other areas, including from religious networks and FAST channels looking for over-the-air distribution. We are also in the midst of discussions for new revenue opportunities in light housing and data casting, which are moving forward. We expect to start realizing revenues in those in 2024 and believe this is the beginning of expanded utilization of the Spectrum beyond current use. Lastly, we were pleased to a point Matt Katrosar as CEO of our Spectrum business in July. Matt joins us from Paramount Global where he was Vice President of Sales leading the streaming and programmatic sales functions. We are excited for him to help our Spectrum business continue to execute on the numerous opportunities in the market. From a corporate perspective, we recently announced the appointment of our Interim CEO, Paul Voigt. Paul previously served as Senior Managing Director of Investments at INNOVATE for four years until 2018. Given Paul's prior experience and his knowledge of our three business segments, we are confident in our ability to execute on near-term opportunities. Before I turn the call to Paul, I'd like to pay tribute to Wayne Barr. We are deeply saddened by Wayne's passing and we will forever be grateful for his leadership. His contributions to INNOVATE over the last three plus years have been instrumental in guiding our transformation, helping to tighten our focus on our three segments and setting up the company for future success. Wayne was an outstanding colleague and an incredible person who'll be greatly missed by all at INNOVATE. With that, I turn the call over to Paul Voigt.

Thanks, Avie. First, I’d like to extend my gratitude and say thank you for this opportunity to Avie, the Board of Directors, Suzi Herbst and Mike Sena. Avie, Suzi, and Mike have made this seamless transition in a very difficult time for the entire INNOVATE team. As the majority equityholder of INNOVATE, I know Avie is committed to ensuring decisions are being made in the best interest of investors and I will partner closely with them and the entire team to unlock future value for our shareholders. Across INNOVATE's three business segments, we have world class management teams in place. In my experience, having a strong engaged management is the most important trait for successful business and I believe in Rustin Roach and Mike Hill at DBM Global, Cherine Plumaker and David Present at Pansend Life Sciences, and Matt Katrosar and Lex Levy at the Spectrum Platform. I look forward to working closely alongside all of them to drive future value at INNOVATE. Rest assured that I'm not stepping into this position unacquainted with INNOVATE or its business segments. As Avie explained I am very familiar with the businesses having worked with them during my previous tenure at INNOVATE. To briefly touch on the businesses and reiterate some of Avie's prior commentary, I'm extremely excited to work with the three operating segments with all three having a strong foundation. At Infrastructure DBM Global is -- has a $1.5 billion backlog and sizable opportunities in their markets. I have full confidence in Rustin and the rest of the management team to capitalize on those opportunities. At Life Sciences, Pansend continues to reach critical milestones in MediBeacon, our kidney machine, and R2 is gaining strong momentum in their markets. And lastly, Spectrum is exploring future prospects and opportunities with over 250 broadcast TV stations covering approximately 70% of the United States with 2.4 billion megahertz POP, a very valuable UHF spectrum that will be included as Band 108 in the 5G spectrum lineup. While the businesses continue to perform well and have substantial opportunities ahead, we are taking steps to strategically address short-term liquidity challenges for the company. In order to strengthen the company's balance sheet and address liquidity, we will evaluate potential divestitures of one or more of our non-cash flowing businesses. We will provide an update when we have additional information to share on this front. With that, I'll turn it over to Mike Sena, CFO for a review of our financials and capital structure. Thank you.

Thanks, Paul. Consolidated total revenue for the second quarter of 2023 was $368.8 million, a decrease of 6% compared to $392.2 million in the prior year period. The decrease was primarily driven by our Infrastructure segment and to a lesser extent, our Spectrum segment. Net loss attributable to common stockholders for the second quarter of 2023 was $10.5 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 $16.5 million in the second quarter of 2023, an increase from $12.1 million in the prior year period. The increase was primarily driven by the Life Sciences, Infrastructure and Spectrum segments, which was partially offset by the elimination of equity method income from our investment in HMN, which was sold in March of 2023. At Infrastructure, revenue decreased 5.2% to $362.4 million from $382.1 million in the prior year quarter. As discussed earlier, this decrease was primarily driven by the timing and size of projects at the steel fabrication business and lower revenue at DBMG's maintenance and repair business, which was partially offset by an increase in revenue of Banker Steel due to timing and size of projects and backlog. Infrastructure adjusted EBITDA for the second quarter of 2023 increased to $23.5 million from $20.9 million in the prior year period. The increase was primarily driven by timing of higher margin projects at the steel fabrication business. This was partially offset by lower contributions in the maintenance and repair business and Banker Steel due to timing and size of projects, as well as an increase in SG&A. As of June 30, 2023, reported backlog and adjusted backlog, which takes into consideration awarded but not yet signed contracts was $1.5 billion compared to $1.8 billion at the end of 2022. As Avie explained earlier, we continue to see meaningful opportunities in the market and DBM remains focused on converting those opportunities into backlog. DBMG ended the quarter with $234.4 million of debt, which is a decrease of $8.6 million from year-end 2022 driven by normal debt amortization payments and a partial note repayment and was offset in part by an increase in the credit facility. At Life Sciences, the decrease in adjusted EBITDA losses was primarily due to Pansend's net carrying amount of its investment in MediBeacon being zero, which resulted in no additional losses being recognized in our equity investment in MediBeacon in the current period, as well as the decrease in SG&A expense at R2. At Spectrum, revenue was $5.7 million, a decrease of $3.4 million compared to the second quarter of 2022, primarily driven by the elimination in advertising revenues at Azteca, which ceased operations at the end of 2022. This was partially offset by an increase in station revenues, which launched new markets and networks with its customers in the current period. Spectrum delivered adjusted EBITDA of $800,000 in the second quarter compared to adjusted EBITDA of $400,000 in the prior year quarter. The increase was primarily driven by the elimination of networks EBITDA losses in the comparable period as a result of the termination of network and an increase in revenues at station group, which was partially offset by an increase in salaries and benefits. Non-operating corporate adjusted EBITDA losses were $3.4 million for the second quarter of 2023, which was consistent with prior year. At the end of the second quarter, the company had $28.8 million of cash and cash equivalents compared to $80.4 million as of December 31, 2022. On a standalone basis, as of June 30, 2023, the corporate segment had cash and cash equivalents of $9.5 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 June 30, 2023, INNOVATE had total principal outstanding indebtedness of $749.7 million, up $24.4 million from $725.3 million at the end of 2022, driven primarily by Corporate's new unsecured note with CGIC and R2's additional borrowing from Lancer Capital, which was off -- which was partially offset by Infrastructure's principal payments and Corporate's net decrease in the credit line. Additionally, Spectrum reached a short-term extension on its respective debt while we work on a longer-term solution over the next few months. Subsequent to the end of the quarter, we also borrowed an additional $7 million on the credit line. We recognize that liquidity remains tight as we work to build value in each of the three segments and explore various strategic options to address liquidity in the capital structure. Before I turn the call over to the operator, I'd like to acknowledge Wayne Barr's many contributions to INNOVATE as CEO over the past several years. We were all fortunate to have known and worked with Wayne. He was an excellent leader and a tremendous person that we all miss dearly. On behalf of INNOVATE, I'd like to extend our condolences to Wayne's family and friends. With that, operator, we'd now like to open up the call for questions.

Thank you. [Operator Instructions]. And your first question would be from Brian Charles at RW Pressprich. Please go ahead.

Hi, good afternoon. Thanks for taking my call. And yes, first I'd like to extend my condolences on Wayne's passing as well. That's a real loss. So I was lucky to meet him. But welcome, Paul, let's look forward to a strong second half of 2023 and 2024. Couple of quick questions if I can. Regarding just the pace of EBITDA at the Infrastructure business, it did pop a little bit in the second quarter positively from the first quarter. Is there any guidance you have on how that transpired? I guess it is timing, but like what effect that might have in the second half of the year in terms of EBITDA generation?

Yes. Thanks for the question, Brian, and the condolences. Yes, I mean similar to what we've seen historically over the past few years with DBM, the back half of the year tends to be a lot stronger than the first half. And we do expect a strong back half similar to what we've seen in prior years and the historical numbers.

Okay. Good enough. The backlog has come down a bit, is that you all being more selective? Do you have any color on like the state of the market and the opportunities you're looking at now?

Yes. This is Paul. Thanks, Brian. What I would say to you is if you look at the margins, the margins are expanding. Our backlog is still at $1.5 billion and there are a lot of big opportunities still out there to be had that we're pursuing. So we're very confident that the market is still very strong.

Okay. Yes, I think so. That's what I've heard. But I wonder, just one question I thought about just on the call. Do you have any thoughts on the -- I guess the potential decline in demand for office construction given what people are expecting in terms of office occupancy like CBD, particularly down the road. Would that affect your business much and to what extent might that offset the tailwind you're expecting from the recent Infrastructure Bill passed.

I mean it's a -- the first part of the question and there's a component Avie touched on it earlier in the -- on the call where we are seeing tightening, but we are seeing opportunities in other areas that have not seen the same thing such as stadiums, arenas, things in Vegas such, so there are a lot of opportunities out there outside of what we've seen from this office part of the sector.

Okay. Good enough. If it's okay, one last question then I'll just get back in the queue. Just regarding strategic, I'm not sure I call them initiatives, but exploration of potential divestitures to address liquidity, is that across your segments or like within segments, like within Spectrum, are you thinking about selling some stations or are you thinking about potentially selling the segment itself?

What I said during the presentation, we're looking to divest non-cash flowing assets. So you can read into that what you may, and as we get closer down the path, we'll keep everybody abreast.

[Operator Instructions]. And at this time, we have no other questions. Please proceed with closing remarks.

Yes. Thanks to everyone for their time on the conference call today. I think we have a vision and we have four or five chess moves that we plan on to implement into the company to unlock value for all shareholders. We look forward to keeping in contact with you and have open communications and look forward to benefiting shareholder value here. Thank you.