Digirad Corporation (DRAD) CEO Matthew Molchan on Digirad Strategy Update Call (Transcript)

Digirad Corporation (DRAD) Digirad Strategy Update Call September 10, 2018 11:00 AM ET

Executives

Matt Molchan - CEO and Interim CFO

Jeff Eberwein - Chairman of the Board

David Noble - COO

Hannah Bible - General Counsel

Analysts

Operator

Greetings, and welcome to the Digirad Strategy Update Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded.

It’s now my pleasure to introduce your host, Matt Molchan, CEO and Interim CFO of Digirad. Thank you, Mr. Molchan, you may begin.

Matt Molchan

Thank you, Doug, and thank you all for joining us this morning. If you didn’t receive a copy of our press release and like one, please contact our office at 858-726-1600 after the call, and we will be happy to get you one. Also, this call is being broadcast live over the Internet and may be accessed at Digirad’s website via www.digirad.com. Shortly after the call, a replay will also be available on the Company’s website.

I would like to remind everyone that certain statements made during this conference call, including the question-and-answer period, are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and other federal securities laws. These forward-looking statements include, but are not limited to, statements about the Company’s revenues, costs and expenses, cost reduction initiatives, margins, operations, financial results, acquisitions and related integration and other topics related to Digirad’s business strategy and outlook.

These forward-looking statements are based on current assumptions and expectations and involve risks and uncertainties that could cause actual events and financial performance to differ materially. Risks and uncertainties include, but are not limited to, business and economic conditions, technological change, industry trends, the Company’s ability to complete successful acquisitions and execute related integration, the Company’s ability to execute on its business strategy including cost reduction plans, the Company’s ability to realize expected benefits of restructuring and cost cutting actions and changes in the Company’s market and competition. More information about the risks and uncertainties is available in the Company’s filings with the U.S. Securities and Exchange Commission, including annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K as well as today’s press release.

The information discussed on this morning’s conference call should be used in conjunction with the consolidated financial statements and notes included in those reports and speak only as of the date of this call. The Company undertakes no obligation to update these forward-looking statements. Hosting the call today from Digirad is Chairman of the Board, Jeffrey Eberwein. Jeff will update us on the Company’s strategy and comment on the Company’s outlook. A question-and-answer period will then follow.

With that, I’d like to turn the call over to Jeff Eberwein. Good morning, Jeff.

Jeff Eberwein

Good morning, Matt. Thank you very much and thank you all for joining. We appreciate you being with us today. And we want to talk about an exciting vision. We believe, we’re creating a platform for the future, a platform for growth, and we think we have a great team and a great plan and we strongly think this new structure, this new plan will create grow and maximize stockholder value. And we’re really making three announcements today.

The first one is that Digirad is converting to a holding company structure. The second one is that we are hiring David Noble, as COO immediately for Digirad, and he’ll also be the COO of the holding company once it's formed. And the third announcement is that we're having an intention of acquiring ATRM Holdings as an initial kickoff transaction to prove up the concept and the structure and deliver cost savings that we think will lead to -- potentially lead to future additional acquisitions that could create a lot of value for the Digirad stockholders.

So we have a presentation that is on our website, if you don't have it and would like a copy, I would encourage you to go to the Digirad website where you can download it. And I'll walk through just a few slides from that presentation and then we can open up to questions and answers. And just before I do that, I wanted to let everyone know that in addition to me on the call, Matt Molchan, the CEO of Digirad is on the call; David Noble, the new COO is here; as well as Hannah Bible who will be the General Counsel for the holding company once it's formed.

So if we turn to Slide 3 in the presentation is the financial highlights, just three quick financial highlights. We think by the end of 2019 under this new structure and with the acquisition of ATRM, we think that adjusted EBITDA should increase approximately a 100% because we have some leverage in the structure. Free cash flow is expected to increase by more than that. So we're projecting a 140% increase in free cash flow. And it's all comes with an increase in the share count of less than 5%.

So these financial metrics lead us to think that this transaction will be very accretive for the Digirad stockholders. Also our dividend covered ratio goes from roughly 1 time to 2 to 3 times under this new structure, and we can talk more about that later. Our net debt to adjusted EBITDA level is expected to stay the same in a range of 1.1 to 1.3, which we would describe as a modest leverage.

And if we flip to Slide 4, we believe there is a lot of benefits to the transaction and some are financial and quantifiable and others are very real, but may be harder to quantify and we'll just prove themselves out hopefully overtime. So one of those is that if we have a stronger growth outlook, we believe this new company that we're creating could have a higher multiple in the marketplace, and we believe that Digirad's current multiple is depressed and so upside coming up from that.

Another interesting item is that under the structure, the operating CEOs of the businesses will be really freed up to focus on the operations and on growth. We think this is a very real benefit, even if it's hard to quantify. And we believe that management teams of many companies, but particularly thinly staffed small-cap and micro-cap companies have to spend a lot of time on overhead items, public reporting, compliance items, SEC filing items, and by taking those items off their plate, we think we're freeing up some of our most productive people to focus on things that really add value for stockholders.

And as I mentioned before, we felt like we needed to have an initial kickoff transaction to launch the holding company concept to form the shared services center, which is at the core of the concept. And this will, we believe deliver cost savings and that will not only benefit Digirad's stockholders by delivering cost savings, but it will also really prove up the concept that will make future acquisitions easier. So in other words, under the structure of the first transaction is the hardest. And it should get easier after that. So we thought it would be more powerful to have initial kickoff transaction than to announce the change without an initial kickoff transaction.

Also wanted to assure everybody that the Board of Directors of Digirad is and has been and will be laser focused on creating value for stockholders that is our overarching mission. We do own a meaningful amount of Digirad stock and we do expect to grow our ownership overtime and that is something we're looking forward to.

Few other things I would mention are on financial side. We think this new structure will improve access to capital, lower the cost of capital and improve returns on capital. For example, Digirad has one lender that it deals with, ATRM has two. And under this new structure, we prefer to have one and we think there is a lot of benefits both cost benefits and otherwise of having one financial partner instead of three. We think this merger will close in the first quarter of 2019. We've already talked about the management team.

On Slide 7 in the presentation, we have a diagram that's showing the structure where we have a publicly traded holding company at the top and then we have business divisions. And we're starting with two basically the legacy Digirad business and the legacy ATRM business. And then one element that really makes this new structure exciting and really drives it, is the shared services center in the middle that we're creating, that will handle many of the finance, accounting, IT, legal functions.

And we think the benefit of having one center that provides that for multiple operating companies is going to be significant. We think there is a many public company targets and private companies that would benefit from being part of this structure. And we know that people will bring us ideas and so we look forward to receiving those.

Flipping forward to Slide 9, we have a description of how to allocate the duties amongst various parties. So the Board of Directors of the holding company will really focus on capital allocation, management oversight of the operating management teams as well as the holding company management team will be involved in anything M&A related, capital markets related, Investor Relations related and as we've talked about the operating CEOs will really focus on managing their operating businesses and pursuing growth opportunities.

And then we'll have a management team at the holding company structure that not only creates and manages the shared services center, but also will help the operating CEOs in terms of sharing best practices and just doing everything we can to help them maximize the performance of their operating businesses.

On Slide 11, we talk about the cost benefits of this new structure forming the shared services center. We believe that the cost savings will come in phases. The first phase will be some of the obvious things any two public companies don’t need two CFOs, two audits, two D&O insurance policies. So, there is a lot of things that can be eliminated just from having one public company instead of two public companies, but then as we create the shared services center and get deeper into that structure, we think some additional cost savings will come and these will be more in the realm of IT savings, procurement savings, and just greater efficiencies having a lot of the shared services center staff work for multiple companies instead of just working for one company.

And in the back of the presentation, we have some highlights on various operating companies. But before we get to that Slide 14 shows some other publicly traded holding companies and we wanted to show that we’re not creating something, converting to something that no-one has ever done before. We’re going to take the best that we’ve learned from some of these other companies. And you can see from this list that there’s a variety of different other publicly traded holding companies with disparate holdings in their portfolio, some of them do have a shared services center concept. And all of these are ones that we know and are in touch with and are learning from.

And so as I mentioned in the appendix, we have slides on Digirad's business for the ATRM stockholders who wanted to get up to speed on that. And then for the Digirad stockholders who want to get up speed on ATRM's business, we have slides in the back describing what that business is, what it does and one thing I would really highlight there is in the KBS side of that company, there are two large factories in Maine and one of them is currently idle and the other one is operating in about half of capacity. The ATRM companies have a backlog of $9 million, which is significant. And we think with just an improved working capital structure and better access to capital, lower costs of capital, there’s really a lot of upside in that business from being part of the structure.

So with that, I’ll open it up to questions and happy to take questions from anybody on the line.

Question-and-Answer Session

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] It appears there are no questions in the queue. I’d like to hand the call back to management for closing comments.

Matt Molchan

Well, thank you very much everybody. We appreciate you joining us today. And we know this is a lot of information to absorb as you have time to read the press release, go through the presentation, we also have an 8-K that we filed this morning. Feel free to give us a call with questions. The contact information is in the press release. And we really look forward to getting input from our stockholders.

So operator unless someone is queued for a question, I think that will end our call today.

Operator

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time. And have a wonderful day.