VATE - NYSE

Good afternoon, and welcome to the INNOVATE Corporation’s Second Quarter 2024 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] Please note, this event is being recorded. And now I would 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 2024 earnings results. We are joined today by Paul Voigt, INNOVATE’s Interim CEO; and Mike Sena, INNOVATE’s CFO. 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 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 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 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 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 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 Paul Voigt.

Good afternoon. Our momentum continued into the second quarter as showcased by our financial results. INNOVATE delivered revenues of $313.1 million and adjusted EBITDA of $26.7 million in the second quarter of 2024. Rustin and his team delivered another strong quarter at DBMG with revenues of $305.2 million and adjusted EBITDA of $32.5 million. Adjusted EBITDA growth was once again driven by significant gross margin expansion of approximately 650 basis points to 20.2%. Adjusted EBITDA margin also expanded year-over-year by approximately 420 basis points to 10.6% in the second quarter. DBMG total adjusted backlog, which takes into consideration awarded but not yet signed contracts, remains at a healthy level of $1 billion at the end of the second quarter. DBMG has continued to work through its backlog. DBMG has been as active from a project bidding perspective and remain steadfast in assessing opportunities as they come to market. There are a lot of big projects coming online, and I’m confident that we will be able to add substantially to our backlog in a smart and profitable way. While we had a strong second quarter and our expectations for the year have improved, we still expect results to be slightly lower than last year. However, we do expect margin levels to be slightly better than 2023. DBMG continues to have a robust pipeline for 2025. Moving on to Life Sciences, R2 posted another fantastic quarter. The success of the recently launched Glacial fx system is clear and landing to phenomenal growth in all aspects of the business. R2 achieved a 200% increase in system unit sales growth from Q2 2023 to Q2 2024 and a record high system sales in North America for the third quarter in a row. This is the third consecutive quarter posting its largest top line revenue in a single quarter. Worldwide R2 experienced 143% growth in top line revenue over Q2 2023. We are seeing demand outpace production, and the team at R2 is focused on ramping up production to meet demand. Glacial providers demonstrated continued utilization growth prior periods with 170% increase in patients treated and a 53% increase in average monthly utilization per Glacial provider over the same period as last year. Glacial brand awareness is growing at an exponential rate due to promotion from existing Glacial providers as well as top key opinion leaders in the industry. This is represented by year-over-year growth of 477% in website users, 1,006% increase in social mentions and 491% in patient provider searches. R2’s engagement growth outpaced industry competitors by 94%. We are encouraged by the momentum of R2 is building in the market as we continue to see expanded use in demand of the state-of-the-art technology, and this momentum has continued into the third quarter. We expanded our sales of the Glacial product into the U.S., Mexico, Canada, China and the Middle East. Additionally, during the second quarter, we closed a new Series D preferred stock investment in R2. As part of the transaction, R2 converted $15.5 million of intercompany notes and related accrued interest that was previously issued into a Series D shares as well as additional $5.8 million of cash. Janssen’s ownership increased to 81.4% as compared to 56.8% prior to the transaction. On a fully diluted basis, Janssen now owns 73.1% at the end of the second quarter. At MediBeacon, we continue to work through substantive review of the kidney monitoring program with the FDA. MediBeacon continues to see great opportunity in the market for real-time monitoring of kidney functions. This is evidenced further by continued MediBeacon R&D collaborations with leading health care industry partners. Nephrology continues to be a key investment focus for pharmaceutical companies globally. Assessment of kidney functions across a range of clinical settings is growing in importance in part to the expansion of potential therapeutic interventions, which are designed to slow the development of kidney disease. Furthermore, MediBeacon’s landmark peer-reviewed publication in Kidney International in July 2024 described broadly the company’s technology as a reference standard for the measurement of GFR kidney function. Kidney International is one of the top peer-reviewed nephrology journals globally. The company received immediate positive feedback from the prominent clinicians and key opinion leaders. And at BeneVir, which was sold to Janssen Biotech, Inc, one of Janssen’s pharmaceutical companies of Johnson & Johnson back in 2018; entered Phase 1 of the clinical study related to the oncolytic virus as monotherapy and in combination for the advanced solid tumor. Moving on to Spectrum, Les and the team delivered another strong quarter as we are incrementally adding to the top line, which has in turn led to better profitability. In the second quarter, Spectrum nearly doubled their adjusted EBITDA to $1.5 million year-over-year. We continue to see revenue and adjusted EBITDA growth, driven by the launch of new networks, reduced churn and continued cost cutting. On July 1, FreeTV launched their third network, the Defy, with HC2 providing broadcast distribution across 60% of the United States. Additionally, we recently launched news channels, Salem Media and First TV that are benefiting from the in-focus presidential news cycle. Additionally, Spectrum continues to work with the Public Media Venture Group, PMVG, to advance our collaborative efforts with PBS stations across the country in areas such as ATSC 3.0 and datacasting. Overall, OTA broadcast market continues to strengthen as advertising continues to show improvement over prior two years. The FCC recently announced strong regulatory incentives to low-power and Class A TV stations, which HC2 Broadcasting is taking full advantage of by preparing to submit engineering modifications to optimize station performance in selective markets. As it relates to 5G broadcasting, we are working closely with Qualcomm among other companies to explore potential opportunities in the United States. And finally, Spectrum is beginning to selectively add stations in markets where we have no coverage and have filed to acquire a station in Monterey, California, which will strengthen our statewide coverage in California. We are very happy with the operational results of all three of our segments as DBMG continues to perform at a high level with a robust pipeline, encouraging growth and momentum in R2, progress at MediBeacon and an increase in OTA demand combined with next-gen opportunities continue to develop. We continue to be highly focused on addressing our capital structure, which we believe is the key driver in the underperformance of our stock price. We have now closed on our rights offering and an intercompany transaction where DBMG redeemed $41.8 million of our preferred stock in cash, which was upstream to INNOVATE and has created sufficient runway to execute our strategy to utilize our noncash flowing assets to address our capital structure and set the company up to refinance our debt later this year. To that end, we continue to make progress exploring opportunities for our noncash flowing businesses. Our focus remains on being patient within the time frame we created to ensure that we maximize the value of these assets. Exiting these businesses for the right value takes time. We continue to be optimistic on the overall M&A market and hope to reach resolution later this year as we continue to see positive indicators in the market along with continued progress and momentum surrounding these assets, as discussed above. We look to build off this momentum from the second quarter and continue for the remainder of the year. With that, I’ll turn it over to Mike Sena for a review of our financials and capital structure.

Thanks, Paul. Consolidated total revenue for the second quarter of 2024 was $313.1 million, a decrease of 15.1% compared to $368.8 million in the prior-year period. The decrease was primarily driven by our Infrastructure segment, which is partially offset by increases at our Life Sciences and Spectrum segments. Net income attributable to common stockholders and participating preferred stockholders for the second quarter of 2024 was $14.1 million or $0.10 per fully diluted share compared to a net loss of $10.5 million or $0.13 per fully diluted share in the prior-year period. Total adjusted EBITDA was $26.7 million in the second quarter of 2024, an increase from $16.5 million in the prior-year period. The increase is driven by all segments with the exception of Life Sciences segment, primarily as a result of timing of previously unrecognized losses from MediBeacon. At Infrastructure, revenue decreased 15.8% to $305.2 million from $362.4 million in the prior-year quarter. This decrease was primarily driven by the timing and size of projects of Banker Steel and DBMG’s commercial structural steel fabrication and erection business, both of which had increased activity in the comparable period on certain large commercial construction projects that are now at or near completion in the current period. This was partially offset by an increase of the industrial maintenance and repair business as a result of an increase in project work. Infrastructure adjusted EBITDA for the second quarter of 2024 increased to $32.5 million from $23.5 million in the prior-year period. The increase was driven by higher margins on certain large commercial construction projects that are now at or near completion in the current period at DBMG’s commercial structural steel fabrication and erection business. This increase was partially offset by a decrease in margins at Bankers Steel due to timing of completion of a large commercial construction project and an increase in recurring SG&A expenses. As of June 30, 2024, and in line with our expectation, reported backlog was $822.7 million, and adjusted backlog, which takes into consideration awarded but not yet signed contracts, was $1 billion compared to reported backlog of $1.1 billion and adjusted backlog of $1.2 billion at the end of 2023. DBMG entered the quarter with $173.8 million in principal amount of debt, which is an increase of $14.1 million from the first quarter, primarily driven by an amendment to the credit agreement, which added an incremental separate term loan of $25 million, which is partially offset by a prepayment as a result of property sales and normal debt amortization payments. DBMG has been able to reduce its debt obligations through line reduction as invested working capital has continued to return to the business, a trend that began at the end of 2023. As the backlog stabilizes, we expect flat working capital needs throughout 2024. As a reminder, DBMG has reduced its outstanding debt by approximately $59 million in the last nine months. At Life Sciences, revenue increased 142.9% to $1.7 million from $700,000 in the prior-year quarter. The increase in revenue was attributable to R2, primarily due to incremental unit sales from the launch of the Glacial fx system in the second half of 2023 and an increase in Glacial Rx units sold compared to the prior-year period. Life Sciences adjusted EBITDA losses increased in the – for the quarter, which was primarily due to higher equity method losses recognized from our investment in MediBeacon. At Spectrum, revenue was $6.2 million, an increase of $0.5 million compared to the second quarter of 2023, primarily driven by network launches and expanded coverage with existing customers, which was partially offset by the termination of a number of smaller networks and individual markets subsequent to the comparable period. Spectrum reported adjusted EBITDA in the second quarter increased to $1.5 million from $0.8 million in the prior-year quarter. The increase was primarily due to the increase in revenue. Non-operating corporate adjusted EBITDA losses were $2.5 million for the second quarter of 2024, an improvement from the second quarter of 2023 of $0.9 million. The improvement was primarily driven by a decrease in compensation-related expenses due to headcount changes and a decrease in legal fees. At the end of the second quarter, the company had $80.2 million of cash and cash equivalents, excluding restricted cash compared to $80.8 million as of December 31, 2023. On a stand-alone basis, as of June 30, 2024, our non-operating corporate segment at cash and cash equivalents of $43.6 million compared to $2.5 million at the end of 2023. As Paul mentioned earlier, INNOVATE received $41.8 million in cash in the second quarter as a result of the intercompany preferred stock redemption of DBMG. As announced earlier in the year, we received notice that we are not in compliance with the NYSE listing requirement as our stock price has fallen below $1 per share. As previously disclosed, effective August 8, 2024, after market close, the Board approved the one for 10 reverse stock split to increase the per share market price to meet the minimum per share requirements of the NYSE. As of June 30, 2024, INNOVATE had total principal outstanding indebtedness of $698 million, down $24.8 million from $722.8 million at the end of 2023, driven by the decrease in Infrastructure’s outstanding debt, a decrease in corporate debt as a result of the partial redemption of the CGIC note, which was partially offset by R2’s extension with Lancer Capital, which capitalized interest payments into the principal balance. With that, operator, we’d now like to open up the call for questions.

[Operator Instructions] Your first question comes from the line of Brian Charles from R.W. Please go ahead.

Hi. Good afternoon. Can you hear me okay? I may have a bad one – I’m sorry, gentlemen, can you hear me?

All right. We can hear you. Go ahead.

Okay. Great. Thanks. Just a couple of questions. Thanks for taking my question. A couple of questions about the backlog. It has come down, and it’s really not much below guidance. But could you just give sort of the kind of the tenor of the backlog? I know you’ve been delivering in your bidding process, but are you getting enough interest such that you’re pretty confident that backlog is going to stay pretty much where it is?

Yes. I mean – this is Mike. Hi, Brian. How are you doing? So we kind of said in the beginning of the year, we expect the backlog to kind of stabilize. It was sitting at that on an adjusted basis, $1.2 billion level. It has come down a little bit, but there is some timing aspects to these things, and it’s sitting at $1 billion. Rustin is telling us he still sees a ton of bidding activity, and we’re pretty confident in these guys to be able to convert as these projects come into the market. So...

Okay. In the bidding process, are they seeing – is it a competitive market? Or are there some things that are just too tight for you to really...

It is a competitive market for sure. There are some projects that Rustin is doing a good job of making sure that they’re getting profitable jobs that makes sense to do. And so we’re sitting in a position where we see a lot of RFPs out there, but less are getting released right now. And as we kind of work through the year, the expectation is that they will get released, and we will participate as the management team always has.

Okay. I know I’m sorry, not to keep working, but just one last question on this. Just given, the state of the market now, would you expect margins to remain stable in 2025? Or will they come down a bit just because the market seems a bit more competitive?

Well, I think there are some pressures on margins in the market, is what we have been told. But again, I think there is a significant amount of projects out there in the market. We expect for 2024 to kind of see margins slightly better than we did last year. And we’ll see as we kind of work through and receive some of the other successful in winning some of the projects that are out there.

Okay. All right. Thanks. Appreciate that color. Away from that, one other question on MediBeacon. I know you’ve been working with the FDA. Is there any color or maybe update to a time frame for when you might get some approvals there?

Yes. I mean we continue to work through the process with the FDA. And as soon as we have more information to provide, we’ll certainly update the market.

Okay. Okay. Thanks. And for the 8.5% notes, I know they’re not due until February 2026, where you’ve talked about addressing them this year. Have you had any conversations with bondholders? Have we started that? Or are you getting some other ducks in the row before you do that?

Yes. I mean, we are not ready to have, I guess, refinancing discussions at this point, but we do talk to our bondholders on a regular basis and try and be very transparent as to where we are. As you know, we’re exploring strategic alternatives with our Life Sciences businesses. And as we get further along in that process, we think that there’ll be a right time to start talking about refinancing as we kind of near the end of the year.

Okay, thanks for that. I’ll get back in the queue.

Great. Thanks.

[Operator Instructions] There are no further questions at this time. So I’ll hand the call over back to Paul Voigt, CEO, for closing remarks. Please go ahead.

Yes. Thank you very much to everybody who listened to the call. We look forward to being transparent and talking to you guys in the future with some positive news on the sale of the health care assets. I appreciate everybody’s support and look forward to our next call. Thank you.