Safe & Green Holdings Corp.
Q1 2018 Earnings Call Transcript

Published: 13 May 2018

[Operator:]

Good day and welcome to the SG Blocks First Quarter 2018 Conference Call and Webcast. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Chris Tyson, Managing Director of MZ North America. Please go ahead.

[Chris Tyson:]

Thank you and good afternoon. I'd like to thank you all for taking time to join us for SG Blocks first quarter 2018 conference call. Your hosts today are Mr. Paul Galvin, Chief Executive Officer; and Mr. Mahesh Shetty, the Company’s President and Chief Financial Officer. Paul will provide a business update which will cover customer and partner announcements, while Mahesh will discuss the financial results. A press release detailing these results crossed the wires this afternoon at 4 PM Eastern and is available on the company’s website sgblocks.com. Following management’s prepared comments, we will open the floor for questions. Before I turn the call over to management, please remember that certain statements contained in this release are forward-looking statements within the meaning of the private securities litigation reform act of 1995. All statements other than statements of historical facts contained in this presentation including statements regarding our future operations and financial position, business strategy and plans and objectives of management for future operations are forward-looking statements. In some cases, forward-looking statements can be identified by terminology such as believe, may, estimate, continue, anticipate, intend, should, plan, expect, predict, potential or the negative of these terms or other similar expressions. While we have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our financial conditions, results of operations, business strategy and financial needs. These forward-looking statements are subject to a number of risks, uncertainties, and assumptions described in those set forth in our various filings with the Securities and Exchange Commission, SEC which are available at www.sec.gov. You should not rely upon forward-looking statements as predictions of future events. We cannot assure you that the events and circumstances reflected in the forward-looking statements will be achieved or occur. This presentation also includes non-GAAP financial measures. SG Blocks uses certain non-GAAP financial measures in assessing its business and operations. Reference to these non-GAAP financial measures should be considered in addition to GAAP financial measures but should not be considered a substitute for results that are presented in accordance with GAAP. Finally, this conference call is being webcast. The webcast link is available in the Investor Relations section of our website at www.sgblocks.com. At this time, I would like to turn the call over to Paul Galvin. Paul, the floor is yours.

[Paul Galvin:]

Thank you, Chris and welcome to the SG Blocks first quarter 2018 earnings conference call. Before I discuss the operational highlights and milestones achieved during the first quarter of 2018, I want to provide a quick overview on SG Blocks to some of our new attendees on today’s call. SG Blocks is the premier innovator in providing industry approved code engineered cargo shipping containers to meet the growing demand for safe and green modular construction. Rather than consuming new steel and lumber, SG Blocks capitalizes on the structural engineering and design parameters of a shipping container must meet and repurposes them for use in construction. This disruptive prefabricated methodology represents a new operating system for construction and delivers to our customers a safe, sustainable, green and scalable solution that lowers their costs and decreases lead-time to market while exceeding many standard building code requirements including seismic and hurricane. SG Blocks is also an asset light platform company that has a proprietary ESR or evaluation service report certification, and an exclusive relationship with Con Global, North America’s largest full-service supplier to the intermodal industry. In April 2017, we were awarded an ESR from the International Code Council and it is the first ever awarded to a recycled building materials and we believe will be a key differentiator as we scale our business to disrupt the conventional construction sector. So the number of crunchers on today’s call, backlog without the ESR was $500,000 and the backlog with the ESR after 12 months is $102.8 million. At a macro level, the global construction industry is projected to grow by 70% over the next 8 years to become a $14 trillion industry. I don’t think there’s any argument about the sheer size and growth prospects of this vertical. However, inflation in building material, labor shortage and now most recently the higher cost of capital with increasing interest rates makes our value proposition even more attractive. We believe our solution is starting to disrupt the status quo with a faster to market stronger more efficient sustainable and cost effective solution. It reduces costs, accelerates revenue and increases the life of the asset. This is why in states like California and New York for building projects in urban areas, we are such a natural fit. Mahesh will elaborate more on our scalable platform later on the call, but I wanted to highlight why our solution is quickly gaining momentum as is reflected in our backlog. Now, moving on to SG Block’s operational performance in the first quarter of 2018. The first quarter demonstrated continued progress and execution with our new operating platform for construction. We achieved several operational milestone and ended the quarter with sequential record backlog. This was mainly attributable to the second largest project award in the company’s history for a major work force housing project in Sullivan County, New York. This four building 190,000 square foot multistory multifamily, work force housing development represents an estimated revenue opportunity of $27.5 million over the next three-year. As of March 31, 2018 our construction backlog now stands at approximately $103 million or approximately 700,000 square feet across 16 projects. Other highlights achieved during the first quarter of 2018 include commence delivery of 24,760 square feet community arts and recreation center in Los Angeles to be completed in the second quarter of 2018. We designed and delivered a two storey 11,500 square foot container base office facility for ETC a global leader in the manufacture of lighting and rigging technology in Middleton, Wisconsin. We completed fabrication and commenced delivery of a 19,440 square foot athletic facility in West Africa. We secured a four building workforce housing development totaling 190,000 buildable square feet representing the second largest single project in the company’s history. We contracted with Irontek design and manufacture container-based cubicles for its expanding flexible workspace. We were selected by Elle Woodworking to design and construct a container-based seasonal cocktail bar in Battery Park, Lower Manhattan and finally but most importantly we named CFO Mahesh Shetty, as President and company founder Stevan Armstrong as Chief Technology Officer. On the financial front, our gross profit margin was muted in the first quarter of 2018 and we do anticipate subsequent quarters will transition from legacy low margin projects to an anticipated margin of 20% as we commence projects that are fully modular and encompass all three phases we offer, design, architectural and engineering and construction and delivery. We believe that given the asset light nature of our business model we can handle incremental revenue with a relatively modest increase in general and administrative expenses. We leverage both inventory and labor on our suppliers balance sheet and in most cases pay for product and services only after we have been paid by the customers. Our model creates significant leverage and reduces working capital constraints to growth. As we move forward, I couldn’t be more excited about our pipeline of opportunity that now stands over $275 million with multifamily residential, humanitarian residential, schools and hospitality in the United States and abroad. Since delivering and fabricating our 46 containers at the heart of Los Angeles Community Arts and Recreation Center in March and April, we have received several inbound request from developers to replicate similar projects in the area and across the United States. It is now evidence that we have the past the proof of concept stage on a large commercial scale and adoption is gaining momentum as the value proposition versus alternative traditional construction is just too great. I will now turn the call over to our President and Chief Financial Officer, Mahesh Shetty for his financial summary. Mahesh?

[Mahesh Shetty:]

Thank you, Paul. Revenue in the first quarter of 2018 totaled $1.5 million up 155% compared to $0.6 million in the first quarter of 2017. This increase in revenue was primarily as a result of revenue being recognized on our large project that was in progress for the quarter ended March 31, 2018 as compared to March 31, 2017. As Paul mentioned earlier, construction backlog totaled $102.8 million at March 31, 2018 as compared to $76.7 million at December 31 of 2017 and $0.8 million at March 31 of 2017. The increase in backlog as of March 31, 2018 compared to March 31, 2017 is largely attributable to the commissioning of three housing development projects in New York State representing the largest project awards in the company history the amount of $55 million, $50 million and $27.5 million. Two other projects totaled 390,000 square feet of multistory, multifamily projects and will be fully modular prefabricated and installed. The third large project for 190,000 square feet as Paul mentioned is workforce housing project in Sullivan County, New York. Our second quarter 2018 revenue outlook due to the extended delivery timeline for the company’s $5.6 million project in Los Angeles the company anticipates that the project will be largely complete in Q2 of 2018 and based upon anticipated backlog conversion the company believes revenue in the second quarter of 2018 will be in range of $3.5 million to $4.5 million. Gross profit totaled 164,000 in the first quarter of 2018 is compared to 153,000 in the first quarter of 2017. Gross profit margin as a percentage of revenue decreased to 11% in the first quarter of 2018 as compared to 25% in the first quarter of 2017. Gross profit margin in Q1 of 2018 was negatively affected by lower contracted margins on revenue realized from a large legacy contract. Of note these contracts are signed at lower margins by the company to establish it’s competent in the school and the office verticals and are important reference clients for the future. The company typically targets gross margins of 20% on newer projects. In tandem, SG Blocks is also working aggressively with suppliers on cost-saving measures to further improve margins. With the current environment of higher interest rates and increase in construction cost, management expects to leverage the speed of construction and lower cost of modular construction to negotiate better pricing and thereby improve margins. Our operating expenses increased to $0.9 million in the first quarter of 2018 from $1.8 million in the first quarter of 2017. The increase in operating expenses was primarily due to increase in headcount, professional fees and business development related expenses. Net loss totaled $0.8 million or $0.18 per basic and diluted share in the first quarter of 2018 compared to a net loss of $0.7 million in the first quarter of 2017. The increase in net loss was primarily due to an increase in operating expenses. Adjusted EBITDA loss in the first quarter of 2018 totaled $0.5 million versus $0.3 million in the first quarter of 2017. A full reconciliation of GAAP to non-GAAP financials can be found in the financial tables at the end of our first quarter 2018 results press release issued today as well as in the quarterly report filed today on Form 10Q with the SEC. Cash at March 31 of 2018 totaled $4.5 million as compared to $0.3 million at March 31 of 2017. The increase in cash balance is primarily due to the company’s successful initial public offering in June of 2017. At March 31 of 2018, we had approximately $4.3 million basic and diluted shares outstanding. In summary, we expect subsequent quarters to transition from legacy low margin projects to a targeted margin of approximately 20%, as we commenced projects that are fully modular and encompass design, architectural engineering, construction and delivery phases. Based upon progress to-date including our new revenue visibility, we expect the company to reach cash flow breakeven in 2018. We believe that given the asset light nature of our business model we can handle incremental revenue with a relatively modest increase in SG&A expense. We will leverage both inventory and labor on a supplier’s balance sheet and in most cases pay for products and services only after we have been paid by our customers. Our model creates significant leverage and reduces working capital constraints to growth. The company also has approximately 14 million in carry forward operating losses which will reduce the tax burden in future years. The net operating loss expires through in 2037. The company’s net operating loss carry forward may be subject to annual limitations. We ended the first quarter of 2018 with a stable balance sheet, no debt, record backlog of $102.8 million and a project pipeline of almost $275 million positioning SG Blocks for a significant financial performance in 2018 and beyond. I’ll now turn the call back over to Paul. Paul?

[Paul Galvin:]

Thank you, Mahesh. Since our initial public offering in 2017 we have focused on three primary areas one achieving cash flow positive operation. Two, growing our backlog and pipeline of opportunities and three, executing on our current backlog to drive topline revenue growth with a consistent 20% margin profile. As evidenced with our low first quarter 2018 Q1 cash burn of $400,000 any material increase in revenue will quickly achieve one of our key goals for 2018 and we believe the upcoming quarters are setting up to deliver significant topline revenue growth. In fact we introduced a new metric regarding our project activity to provide an insight into when project level revenue maybe realized. And we’re in the first quarter of 2018 we commenced activity with 10 out of our 16 total projects in the backlog and completed two projects in Q1 2018. As Mahesh mentioned during his financial summary based on current backlog and our expectations as a management team we believe second quarter 2018 revenues will be in the $3.5 million to $4.5 million range with approximately $1.9 million attributable to the project in Los Angeles and the remaining amount based on anticipated backlog conversion. Furthermore, based upon conversation with our customers for our three specific projects in excess of $10 million we expect to recognize revenue on our backlog as follows

[Operator:]

[Operator Instructions] The first question comes from [Ashok Kumar of Rodman Financial]. Please go ahead.

[Unidentified Analyst:]

Congratulations Paul and Mahesh and Mahesh congratulations for the added responsibility. On the revenue side, Paul and Mahesh based on Q1 results and guidance for Q2 to your backlog conversion - that would translate to about $20 million to $25 million revenues for the full year with about two quarters coming in the second half is the right interpretation? Thank you.

[Mahesh Shetty:]

Ashok thank you very much for your kind words, I really appreciate it. As you know we’re not really giving any specific guidance based on the breakdown of revenues our position is that we will be breakeven cashable breakeven this year that’s our number one priority from our company perspective. And convert as much of the backlog to revenues as we can. Our revenue breakdown on a backlog is primarily meant to kind of give the investors a sense of what the conversion rate is going to be. So we feel comfortable about those conversions but we’re not giving specific guidance on the actual revenue number.

[Unidentified Analyst:]

Mahesh in the backlog the 102 million plus, what percentage if you have those numbers would be you could put it in the architecture and engineering bucket versus the construction and delivery so that - so this would also give you the higher confidence in the data in terms of revenue performance for the rest of the year?

[Paul Galvin:]

This is Paul I’ll breakdown the pipeline for our listeners and if Mahesh wants to supplement that he can. So our pipeline of $274 million is comprised of 30 separate projects, 23 of those projects are under $10 million and seven of those projects are over $10 million. We’re putting probability rate on the under $10 million projects at 60% and we’re putting a probability rate for the over $10 million projects at 50% but it’s just more a function of size and lifecycle than any other indication. So that’s the profile of the projects that are in our pipeline those are not reflective or do not capture leads bids or opportunities that don’t meet that threshold but are currently in some form of dialog.

[Unidentified Analyst:]

One last question is I think Mahesh you talked about HOLA as key reference client right I assume with that delivery confirmed for the current quarter I should be able significantly improve – continue to improve your conversion rate from five times to backlog right with this key referenced account?

[Mahesh Shetty:]

So the answer is that particular project completion is going to be an important reference point. We had done similar projects before but it was in military sector nothing that our customers could touch and feel being able to have a project in downtown Los Angeles that our customers can visit is going to be important litmus test and allows the customers to look at the product and actually walk through it and we believe it’s going to be a fairly significant catalyst for our backlog.

[Unidentified Analyst:]

Any update Mahesh or Paul on the seismic opportunity in Caribbean or is that still in your pipeline or how do you classify that? Thank you very much.

[Paul Galvin:]

What I would say is that in our pipeline and in our opportunities there are projects and bids and offerings made solutions proposed for a variety of people in the sector and it’s something where advocating actively it seems that [H.A.A.D.] is preparing to start initiating their rebuilding plan of Puerto Rico and we plan on being at those meetings and attending. So I think the rebuilding efforts are starting to head from the energy parts of these rebuilding activities and heading towards construction. And so we’re continuing to network and those opportunities are reflected in the pipeline and in just unrecorded opportunities.

[Operator:]

[Operator Instructions] The next question comes from Paul Cooney of Joseph Gunnar. Please go ahead.

[Paul Cooney:]

By the way fantastic job with increasing your backlog and your pipeline. Can you maybe go into a little bit the difference between the pipeline and the backlog specifically what that means?

[Paul Galvin:]

So thanks Paul so our backlog is signed contract for one of the three phases of services we provide all three at the same time. So those projects that are in our backlog comprise approximately $102 million across I believe 14 or 16 projects each of them in their own distinct phase of revenue. The pipeline which currently sits at $274 million represents pending offers we’ve made to clients who have asked us to price projects who come to us uninitiated and who have worked with us to put together estimates for the 30 projects in the pipeline. And then there are I won’t put a number on them but quite a number of opportunities where we’re currently pricing or negotiating and trying to get them up to that 50%, 60%, 70% probability. So that ultimately the backlog becomes revenue the pipeline becomes backlog the opportunities because pipeline and we deliver it all at 20% and that we have great visibility and predictability on our revenue. Because of the disproportionate impact of the holder project we wanted to issue one-time guidance on revenue for the second quarter so people would realize that the projects slid but has been delivered and while that’s not something we want to do routinely we just want to do as one-time effort for helping people to understand the flow of how our business is unfolding and how whole of Q1 is rolled into whole of Q2.

[Paul Cooney:]

I really appreciate the way you guys broke down how you’re going to recognize the revenue on each specific project so thank you for that. As far as your pipeline is concerned the $274 million how long is the typical spike of when they – proposal to contract?

[Paul Galvin:]

It’s great question the reason why we’re starting to break projects to two categories above and below 10 million it’s starting to be our experience that projects of 10 million or greater have either such a density or on a urban based involving some city regulations. So we’re being careful and conservative on the lifecycle of those deals both the ones that are signed and the ones that are pending. So you could look for proposal to be sitting with a client for anywhere from 90 days to a full year if it’s a multi $100 million type project. So if you get answer within a year hopefully sooner but realistically some of these are very big institutions that have their chain of command. The projects that are under 10 million that we’re currently waiting for answer on those are projects that can sign any day from tomorrow within the next quarter or two and those tend to be project that can be recognized in four quarters or less just because of the size or the replicability of them.

[Paul Cooney:]

So again if somebody who is like just trying to like model potential I am not holding you guys any numbers but at $274 million in pipeline it’s very possible based on your 50%, 60% numbers as far as the likelihood of them signing with you. It would be if I was modeling and I say well the potential for these guys just on, based on what they have right now is another 130 million 140 million in backlog in the next 12 months is that a fair way to kind of look at it?

[Paul Galvin:]

Mahesh, I’ll defer to you - answering is rather pointed question as to Cooney.

[Mahesh Shetty:]

I think it’s mathematically you could drive that number, the probability of each lead is it’s a unique lead on its own or unique opportunity on its own. So trying to extrapolate percentage across the board may not be appropriate but we believe that a fair number of that will convert. I mean if we look at our track record of building a backlog over the last year, we’re going to continue to do everything we can to improve that at the same pace but we want to level that expectation.

[Paul Cooney:]

And on the 102 million of the backlog, what’s the total timeframe of that - of the total like is that like a three year over three years that all be recognized as revenue or what’s the total timeframe on the whole 102, I know you guys broke down on the bigger project how you did it but just wondering what the total timeframe is on that?

[Mahesh Shetty:]

So Paul I’ll take that. So we expect all of the revenue to be recognized latest by December of 2020.

[Paul Cooney:]

And the last question I have is, we have seen some cool announcements like the thing that you’re doing downtown here in Manhattan and I know you’ve got some big projects that you guys we’re talking about in the pipeline. Are most of those projects similar to the bigger ones I’m talking about similar to the two big ones that you saw here in New York as far as the low income housing projects or are there more like on a contract is building apartment buildings or is municipalities who are you dealing with them most of those?

[Paul Galvin:]

It’s a great question it’s a combination of small and large companies, it’s a lot of entrepreneurs, its across asset classes there is some density in the over 10 million projects. There is some fluidity and momentum with the under 10 million projects. Its geographically diverse though we’re seeing an uptick in New York and the California just because of the business that’s been previously signed and announced and delivered as in HOLA. So really every asset class and military is represented and it’s a way we’re going to continually to address potential concentration issues is to have as broad and wide a base of business both from asset class geography deal size.

[Operator:]

This concludes our question and answer session. I would like to turn the conference back over to Paul Galvin, Chief Executive Officer for any closing remarks.

[Paul Galvin:]

Yes, thank you operator. So just some final thinking. We appreciate everybody's support. We’re going to continue to work tirelessly to execute on our backlog and get that topline revenue up. We’ve done an excellent job as you can see of managing our burn rate, expending only approximately $400,000 into Q1, and we have good things coming for the balance of the year. We want to thank you for following our story and we look forward to seeing many of you out at the LD Micro Conference. Back to you operator.

[Operator:]

The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.