Safe & Green Holdings Corp.
Q3 2018 Earnings Call Transcript

Published: 15 Nov 2018

[Operator:]

Ladies and gentlemen, good day and welcome to the SG Blocks Third Quarter 2018 Conference Call and Webcast. Today’s conference call is being recorded. At this time, I’d like to turn the program over to Chris Tyson, Managing Director of MZ North America. Thank you, sir. 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’ third 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

[Paul Galvin:]

Thank you, Chris, and welcome to the SG Blocks third quarter 2018 financial results conference call. Third quarter of 2018 was highlighted by strong improvements in our core gross margins from a 11% in Q3 2018, as compared to 7% in Q3 2017. Excluding the HOLA project, which is a legacy project, our margins on all other projects have averaged 24% during the first nine months of 2018. We expect future margins to be in line with our stated goal of 20% on current backlog and new projects. During the third quarter, SG Blocks completed five projects and realized revenue from 15 contracted projects. We recognized revenue for 24 projects year-to-date. Notably, we entered into contracts for projects with Tavistock, the NBA and the U.S. Navy during 2018, each of which we recognized revenue on during the third quarter and which we anticipate will be largely completed before the end of this year. We continue to convert our backlog to revenue, while updating projects with both new and existing customers, who’ll continue to find innovative new applications for our container-based approach to construction. Now moving on to some of the important milestones achieved during the quarter. In the third quarter of 2018, we established SG Residential in conjunction with several senior financial services executives and housing market executives to address sales and financial opportunities within the significant single-family modular housing market on nationwide basis. The housing market in the U.S. is in crisis with a lack of affordable and safe homes available for millions across the country. According to New York Times article from July of 2018, millions of low-income Americans are paying 70% or more of their incomes for shelter, while rents continue to rise and construction of affordable rental apartments lags far behind the need. Nevada ground zero in housing prices a decade ago is now the epicenter of the affordable front, with low-income residents squeezed out of once affordable apartments by an exodus from California due to rich rental prices. Median national rents rose by 32% in constant dollars from 2001 to 2015, while we just remain flat according to The Pew Charitable Trusts. The pace has picked up over the last few years fully by the improving economy. The rent increases are hitting poor and elderly people, African-Americans and low-income wage earners and foreigners [ph] a survey by the National Low Income Housing Coalition found that a worker earning in the state minimum wage could afford a market rate one bedroom apartment in only 22 of more than 3,000 counties across the U.S. An estimated 12 million Americans, including renters and homeowners, now spend more than half of their annual earnings on housing according to the U.S. Department of Housing and Urban Development statistics. SG Residential will aim to offer the safest, greenest and most cost-effective solution available. SG Blocks will be the exclusive supplier of modular homes and room [ph] subsidiary will have the right to appoint the majority of SG Residential’s directive and manage day-to-day operations. From a financial perspective, we received 100% of our normal gross margin on sales on our modular homes and 50% of the entire gross profit the subsidiary generates. We are currently working on projects to convert our 500-home pipeline into signed contracts, addressing the affordable housing crisis that the United States is facing today. Since establishing SG Residential during the third quarter, we entered into a strategic relationship with Capital Plus Financial, one of the nation’s largest community development financial institutions and a subsidiary of Crossroads Systems, Inc. to provide affordable housing aimed at low to moderate income areas across the country and across Puerto Rico. The companies will focus on the sale and financing of single-family containerized modular homes by focusing on delivering sustainable housing to some of the most vulnerable areas and underserved borrowers. These partnerships will allow new home buyers and homebuilders to purchase container-based modular homes and connect them to a network of funding sources and down payment assistance programs. You can start to see a key thing now being targeted and addressed by SG Residential. This marries nicely with our corporate social responsibility initiatives, including our work with nonprofits and community development organization that see our affordable and rapidly build modular housing as the best solution for the problems they’re facing. In the contiguous United States, we are working with SOLDIER ON as its exclusive modular residences provider to help this organization achieve its goals of providing homeless veterans with safe housing. SOLDIER ON is a nonprofit organization, whose mission is to end veteran homelessness and provide better and supportive services using donated lands for veterans that need across the United States. A 2017 report by the U.S. Department of Housing and Urban Development estimated that there are over 40,000 homeless veterans, who believe our partnership is off to a great start, as we have identified five sites for potential development in selected markets with new design and engineering renderings coming from Grimshaw Architects. On the operations front during the third quarter, we now expect Scott Hill will be our new Vice President of Operations. In his new position, Scott will work closely with the senior executive team to help oversee and implement day-to-day business activities and strategies. Scott brings 30 years of experience in all aspects of construction industry, including recent modular construction projects in New York City to SG Blocks. He has overseen all elements of construction, including architectural design, construction management and large modular projects. Scott brings his own pipeline to the company and he has hit the ground running. On the media front during the third quarter, we had several high-profile interviews with leading media outlets, including CBS National News, CNBC and Fox Business News. We are seeing an increase in interest as a result of the destruction that has occurred during this year’s hurricane and fire season, our ability to deliver a stronger, better, faster and sustainable housing solution to victims in these ravaged areas were some of the key highlights reporters focused on during the interviews. As we move forward, I couldn’t be more excited about our anticipated pipeline of opportunities, including single-family and multi-family residential, humanitarian residential, education and hospitality in the United States and abroad. We continue to see inbound requests from developers to replicate some of our previously announced projects across the United States. We believe adoption of our construction model is gaining momentum in the industry, as the value proposition as compared to traditional construction, is and remains very compelling. I will now turn the call over to our Chief Financial Officer and President, Mahesh Shetty, for his financial summary. Mahesh?

[Mahesh Shetty:]

Thank you, Paul, and good afternoon, everybody. Our revenue in the third quarter quarter increased 49% to $2.1 million, as compared to $1.4 million in Q3 of 2017. This increase in revenue was primarily a result of revenue being recognized on additional projects that were in progress or completed in the three months ended September 30th of 2018, compared to September 30 of 2017. Revenue in the first nine months of 2018 totaled $5.9 million, an increase of 98%, compared to $3 million in the same period of 2017. Construction backlog totaled $102.8 million at September 30 of 2018, as compared to $77.1 million at September 30th of 2017. As of September 30th of 2018, company had 15 projects, or approximately 700,000 square foot in backlog. The construction backlog at September 30, included three large contracts in the amounts of $55 million, $15 million and $27 million, respectively. The company expected all of this revenue will be realized by December 31st of 2020. Gross profit totaled approximately $225,000 in the third quarter of 2018, as compared to $98,000 in the third quarter of 2017. Gross profit margin as a percentage of revenue increased to 11% in the third quarter of 2018, as compared to 7% in the third quarter of 2017. Gross profit in the first nine months of 2018 totaled $420,000, an increase of 5.8%, compared to $397,000 in the same period of 2017. As a percentage of revenue, gross profit margin was 7.1% in the first nine months of 2018, as compared to 13.2% in 2017. Excluding a single $5.6 million legacy contract, gross profit margin as a percentage of revenue increased to 22% in Q3 of 2018 and 24% in the first nine months of 2018. Gross profit margin for the first three moths and nine months ended September 30th of 2018 was positively affected by the commencement of projects that are fully modular and encompass all three phases

[Paul Galvin:]

Thanks, Mahesh. During 2018, we have focused on three primary areas

[Operator:]

Thank you. Ladies and gentlemen, we will now be conducting our Q&A session. [Operator Instructions] Our first question comes from the line of Ashok Kumar from ThinkEquity. You are now live.

[Ashok Kumar:]

Well, thank you, Paul and Mahesh. Two-part question. One is in the increased insolvency, cost escalation associated with LA school building, is that the changeover event complete yet? And the second part of the question is the revenue targets for the year $12 million to $16 million, is that still in place? Thank you.

[Paul Galvin:]

So the school project, as we have talked about during the call, the school project was a legacy project that we have signed before. There is some site delays we expect the project to be completed either in the first quarter, sorry, either in the fourth quarter of this year or the first quarter of next year. In terms of the revenue guidance, we are not giving specific revenue guidance. But we do expect, if you look at our run rate through the first three months – first nine months of the year, we still expect to be cash flow break-even for the fourth quarter. We should give you a fairly good idea about the anticipated revenue for that quarter.

[Ashok Kumar:]

Great. Paul and Mahesh, in terms of the residential and I guess, your focus on generating a pipeline of family residential opportunities. And do you expect that to translate to revenues this year? And if you do the math, I guess, even 100 of homes would translate to about $15 million in revenues and take you to profit – potentially profitability. What would be the timeline for that, Paul and Mahesh?

[Paul Galvin:]

Well, Ashok, we currently have had four homes leave our pipeline in SG Residential and going to backlog at amounts, I think, about $0.5 million. SG Residential anticipate building 50 homes in 2019, which will contribute to the SG Blocks production margins and contribute to our positive year.

[Ashok Kumar:]

Okay, great. And then also, I guess, one of your three main objective cash flow positive conversion of backlog revenue and increasing backlog and so you’re making progress on all those fronts. And in the last 30 to 60 days, you’ve announced projects in Orlando and then Greenville in Navy and some additional projects. I assume some of them are going to transition to revenue this year and then accelerate the timeline early next year?

[Paul Galvin:]

That’s correct. We’ll have cash flow break-even this year, because we worked on 24 paying projects, while our bigger projects that are noteworthy are moving closer and closer to launch. We’ve managed to attract a whole bunch of business through hard work and through a very active sales process. And at this point in Q3, we had 15 paying projects, 24 year-to-date. We’ll be cash flow break-even in December. Our backlog remains over $100 million. We’re expecting to be $120 million at year’s end, and our pipeline is comfortably over $200 million even with the conversions and fallout.

[Ashok Kumar:]

Okay. Also, Paul, in terms of some granularity on some of your projects in New York, your $55 million project in Upstate New York. I’m not sure that was what you’re reading for the only approval with that done and [Multiple Speakers] you. Go ahead, Paul?

[Paul Galvin:]

Without getting any specifics of the developer’s business, the project is going through normal term sheet reviews and planning reviews. We anticipate coming out of winter with the project. We anticipate being in manufacturing in early Q3 of next year. One of the old facts of construction in the Northeast is that, there’s a couple of months through the year. You’re not going to do site work. And so we anticipate for both the Bronx project and for the $55 million contract, that will recognize revenue during the year, but we expect to hit major manufacturing in the beginning of Q3 2019. And that, as stated in the earnings script, we do not envision any of those projects extending beyond 2020.

[Ashok Kumar:]

Okay, great. Paul and Mahesh another different macro question. Well, I guess, you continue to focus on increasing the diversity of your bank loan, so it enable you to buffer the timing. So I was just wondering what are the milestones that we should look for there?

[Paul Galvin:]

Well, I think that we’ve had 24 paying projects and quite a number of projects with big spending shows that our company is going to be able to be cash flow consistent with predictable margins and predictable revenue as indicated by the fact of how we’ve operated this year. And that when our large and big paying projects, the project in Upstate New York is $55 million spread over seven buildings. What we’re trying to do and what we’ve done this year is to run the business on good core solid business contracts that deliver in quarters one, two and three and then the large projects will unfold as developments often do. So that’s the strategy we’ve employed, we’re confident with it.

[Ashok Kumar:]

Okay. Once again Paul and Mahesh, congratulations and thank you on the progress.

[Paul Galvin:]

Thank you.

[Operator:]

Thank you. Our next question comes from the line of Paul Cooney from Joseph Gunnar & Co. You are now live.

[Paul Cooney:]

Hey, guys, how are you doing?

[Paul Galvin:]

Hello, Paul.

[Paul Cooney:]

All right. So just a couple of things. First off, as far as the – you’re saying that you think this quarter you’ll be break-even by the end of the quarter. I’m trying to like just model that out a little bit the way it looks right now if you’re losing $1 million based upon your last quarter and you have 20% margins. So would your break-even quarter be about $7.2 million? Is that the way to look at it?

[Mahesh Shetty:]

Well, I mean, I think, the way we have always talked about this before Paul is, if you look at our gross margins – expected gross margins of 20% and year-to-date [ph] knocked off about a $1 million in operating expenses. So we have to be in a range of – depending on the margin somewhere between $4.5 million to $5 million in revenue for the quarter in order to deliver the margins to support our current operating expenses only.

[Paul Cooney:]

All right. So it’s not $7 million. I’m just trying to do the math based upon, you guys lost a $1 million this quarter on $2 million in revenue, $5 million to 20% margins would be break-even now. Am I looking at it wrong?

[Mahesh Shetty:]

Yes. We’re looking – when we talk about break-even, we’re talking about cash break-even, which would be basically carving out the non-cash expenses like stock comp expenses, amortization. So you have to look at that on an adjusted EBITDA basis that will kind of give you a better idea of what…

[Paul Cooney:]

Okay. So a cash flow break-even quarter for you guys would be $4.5 million to $5 million?

[Mahesh Shetty:]

Based on the expected margins of about 20%, that is a good – that’s a good number, Paul.

[Paul Cooney:]

Okay, okay. Now and not to hold you – pigeonhole you to a number, but on this call now we’re saying that the $102 million backlog, the entire amount will be realized by the end of 2020, okay?. So how does that break out? Is that like $51 million next year and $51 million in the next year, or how does that kind of percentage-wise break up year-to-year as far as expected utilization in revenue?

[Paul Galvin:]

Well, without sharing proprietary information to the developer, what I would say is that, if we’re doing site work and finalizing planning through the cold weather and started fabricating buildings in Q3, you would probably anticipate second-half of the year having manufacturing revenue and then the whole of 2020 having significant manufacturing revenue related to that contract.

[Paul Cooney:]

Okay. So the bulk of the growth you think would that happen towards late next year? I mean, can we anticipate, again, I’m trying to figure out, because it seems like we’ve stalled a little bit to be honest with you. I mean, you guys had – and now a backlog of $102 million at the end of the first quarter, $102.9 at the end of the second quarter and now $102.8 million at the end of the third quarter. So it doesn’t seem like the backlog is growing, okay? The revenue from the last couple of quarters hasn’t been growing, okay? So just wondering when we’re going to see this growth, okay?

[Paul Galvin:]

Well, I think…

[Paul Cooney:]

It seems like, it’s – I don’t know there has been something that has been holding it up, I’m just asking?

[Paul Galvin:]

No. And, in fact, in the conversations we’ve had directly and as a part of these earnings calls are three main goals. As a new company in 2018 was to be cash flow positive from operations at the end of the year and we are projecting we will be. Our backlog was to go up, and we are projecting it to be at $120 million at the end of the year and our pipeline is over $200 million. So to kind of spin your optimism [ph] to 180 degrees, I would think you would be happy that we could direct cash flow break-even that we haven’t tapped into any of our big projects yet.

[Paul Cooney:]

Okay, okay. And then as far as what your statement about potentially 50 houses built next year on the residential side.

[Paul Galvin:]

Yes.

[Paul Cooney:]

If you can give me an idea, like revenue per house is what – is roughly what?

[Paul Galvin:]

That is – it depends on where we’re building it and what kind of a house it is. We’re looking at anywhere from 100 to 150 a square foot and the average house is 1,000 to 1,200 or 1,000 to 1,300 square foot, those are some yard markers.

[Paul Cooney:]

All right. So 100,000 to 200,000 is a fair number to put roughly?

[Paul Galvin:]

It’s mostly what we’re seeing, Paul, to be honest, that’s the market [indiscernible].

[Paul Cooney:]

Okay, all right. No, I’m just saying – so basically, that would be like a $5 million to $7.5 million potential revenue opportunity for 2018, if you build 50?

[Paul Galvin:]

If we converted 50 out of the 500, yes.

[Paul Cooney:]

Okay. And now the 500 is – now that’s a – is that pipeline? That’s not – that’s pipeline, 500 is pipeline?

[Paul Galvin:]

Yes, that’s projects we’re pricing, we’ve priced – we’re designing and pricing, working on getting the things heat up. And SG Residential is really active since the hurricanes and the storms. And the activity around the ring of fire earthquakes, we are getting an enormous amount of government and non-governmental activity trying to build as climate resistant residences as possible. And so we’re getting a lot of attention now because of the safety factor. 55 million American households are in extreme danger of having a climate-related housing catastrophe. And so between developments and building and rebuilding, we have a lot of activity going on now. A three container house is roughly about a 1,000 feet and we can deliver that in 6 weeks. So that’s why we set up the company, that’s why we put a lot of climate attention into it this summer. The housing crisis in America affects every other crisis in America. And we feel extremely well-positioned to meet that need in the under $300,000 market, whether it’s new apartment and tax credits or small discrete standard houses, we wind up banks to loan against our mortgages. We’ll have a lending platform established on our website by the end of the year to facilitate faster transactions for our housing annuity pipeline.

[Paul Cooney:]

Okay. And just one other. I know you guys had that announcement earlier in the year with a big engineering firm. Is there anything – any traction being developed there with what’s going on with that?

[Paul Galvin:]

I’d say, they’re involved right now about 20% of our pipeline and about 10%, 15% of our backlog. They’re being integrated into our existing network and they are designing an array of products at – when finished will jointly bring to the market.

[Paul Cooney:]

Okay. All right, Paul. Thank you very much.

[Paul Galvin:]

Thank you.

[Mahesh Shetty:]

Thank you. Thank you. [Operator Instructions] Ladies and gentlemen, we have no further questions in queue at this time. I’d like to turn the floor back over to management for closing.

[Paul Galvin:]

Thank you, Adam and Chris, Mahesh and for everyone who joined us today. We have many dedicated and hard-working people throughout SG Blocks. Our sales, marketing, international and business development folks, architects, engineers, MET experts, manufacturing partners, truck drivers, logistics experts, we couldn’t do without you and we appreciate everybody’s hard work and we appreciate the efforts of MZ in organizing this call. Most importantly, we appreciate our shareholders and the people that are interested in seeing a safe and green and profitable alternative to traditional construction make its way into the marketplace. It was just 15 short months ago that we did not have an internationally approved product. Two years ago, we were not on NASDAQ. We didn’t have a pipeline of more than $10 million. And a lot of amazing things have happened in a short period of time. We’re going to continue to convert that backlog into revenue and create a business model that is going to be one that’s quite compelling as a platform. So we look forward to sharing our future results and wish everybody a very Happy Thanksgiving next week. Thank you.

[Operator:]

Thank you, ladies and gentlemen. This does conclude our teleconference for today. You may now disconnect the line at this time. Thank you for patience, and have a wonderful day.