Capstone Holding Corp(CAPS) - 2024 Q4 - Annual Results

Disclaimer and Forward-Looking Statements This section outlines the inherent risks and uncertainties associated with forward-looking statements, emphasizing that the information provided is for background purposes only and not investment advice Forward-Looking Statements This presentation contains forward-looking statements based on management's current estimates and assumptions in a dynamic economic environment, subject to substantial risks and uncertainties where actual results may differ materially - The presentation includes forward-looking statements regarding operations, business strategy, and financial performance, which are based on current expectations and subject to significant risks and uncertainties[7][8] - The content is for general informational purposes, is not intended to be complete, and should be read in conjunction with Capstone's SEC filings, and is not a recommendation for investment[9] - Financial forecasts and illustrations are based on hypothetical assumptions and are not reliable indicators of future performance; investors should conduct their own analysis and not rely on this presentation as a sole basis for investment decisions[10][11][13] Capstone Goals for 2025 Capstone targets achieving $100 million in revenue and $10 million in Adjusted EBITDA by end of 2025, driven by a strategic acquisition approach focusing on geographic expansion and synergistic investments Key Milestones 2025 Capstone aims to achieve a run-rate of $100 million in revenue and $10 million in Adjusted EBITDA for its operating subsidiaries by the end of 2025, with growth accelerated by a series of acquisitions leveraging favorable market conditions 2025 Financial Targets | Metric | Target | | :--- | :--- | | Run-Rate Revenue | $100 million | | Adjusted Operating Income / EBITDA | $10 million | - The company plans to announce a series of acquisitions to meet its growth objectives[19] - The current M&A environment is considered favorable, with target acquisition multiples of 4-6x EBITDA and structures where 20% - 45% of the consideration is non-cash[19] Acquisition Strategy The company employs a three-pronged acquisition strategy focused on geographic expansion, synergistic business investments, and acquiring platform companies with strong fundamentals in the building products sector - The acquisition strategy includes: - Tuck-In Acquisitions: To expand Instone's geographic presence beyond the Northeast and Midwest into the South, Southeast, and Mountain States - Sister Companies: To invest in businesses with strong product or channel synergies - Platform Acquisitions: To acquire companies with strong fundamentals and growth potential in the broader building products and services sector[20] Performance of Instone in 2024 Instone's 2024 performance was impacted by interest rate fluctuations and seasonality, yet showed Q4 revenue growth and improved profitability after adjusting for non-recurring costs Instone Trends: 2024 The 2024 operating environment was significantly affected by rapid interest rate increases, which suppressed existing home sales; however, the market tone improved by mid-year, leading to Q4 revenue growth of over 8% supported by new products - Short-term interest rates rose from near 0.0% to over 5.0% between March 2022 and August 2023, impacting the housing market[24] - Market conditions improved in the latter half of the year, with Q4 revenue growing by over 8% relative to the previous year[24] - The rollout of new products, specifically the Toro and Pangea combination, is gaining traction with dealers and is expected to drive future growth[23] Analysis of 2024 Profitability Instone reported a GAAP net loss of $1.7 million in 2024, but after adjusting for non-recurring costs and normalizing gross profit margins to 23.5%, pro-forma Adjusted EBITDA would have been $2.5 million, reflecting normalized freight costs and sustainable SG&A reductions Illustration of 2024 Adjusted Earnings (in USD $000s) | Metric | Instone (GAAP) | Instone Adjusted (Non-GAAP) | | :--- | :--- | :--- | | Revenue | 44,876 | 44,876 | | Gross Profit | 9,569 | 10,546 | | Gross Profit % | 21.3% | 23.5% | | Operating Income / Adjusted EBITDA | 1,073 | 2,525 | | EBITDA % | 2.4% | 5.6% | | Net Income | (854) | 598 | - Gross profit margin was negatively impacted by high-cost inventory from the Covid era due to increased freight costs, which have since normalized[30] - Overhead costs were reduced throughout 2023 and 2024, resulting in a sustainable SG&A run rate of about $8 million[29][30] Instone: Seasonality Explained Instone's revenue is subject to seasonal variations, primarily driven by weather, where cold winters typically result in lower first-quarter revenue compensated in subsequent months, while warmer winters can lead to a stronger Q1 - Seasonal temperatures directly impact the timing of Instone's revenue throughout the year[32] - Historically (2016-2019 average), Q1 represents the lowest revenue quarter (17%), while Q2 and Q3 are the strongest (33% and 31% respectively)[33] - Cold winters tend to shift revenue from Q1 to later quarters, while warmer winters can result in a stronger Q1[34] Earnings Plan for 2025 The 2025 earnings plan for Instone projects revenue and Adjusted EBITDA targets, considering both macroeconomic and company-specific factors, while distinguishing core operational costs from corporate overhead 2025 - Instone Earnings Power For 2025, Instone projects revenue between $47.5 million and $49.0 million, with a plan focused on organic growth, maintaining a 23.5% gross margin, and controlling costs, expected to generate Adjusted EBITDA between $3.1 million and $3.5 million 2025 Instone Earnings Forecast (in USD $000s) | Metric | Low Case | Upside Case | | :--- | :--- | :--- | | Revenue | 47,500 | 49,000 | | Gross Profit | 11,163 | 11,515 | | Gross Profit % | 23.5% | 23.5% | | Operating Income / Adjusted EBITDA | 3,142 | 3,494 | | Adjusted EBITDA % | 6.6% | 6.8% | | Adjusted Instone Net Income | 1,602 | 1,954 | Factors Affecting Performance Instone's performance is influenced by a combination of external macroeconomic factors and internal company-specific initiatives, including weather, housing market conditions, interest rates, product launches, geographic expansion, and operational efficiency - General Factors: - Weather variability - Housing shortage relative to household formation - Interest rates - Personal income and unemployment[38][41] - Company Factors: - Product launches - Territory expansion to Southeast and Mountain states - Market share gains - Operational excellence[39][41] Capstone Corporate Costs Capstone's corporate overhead comprises both fixed and variable costs, which are considered non-essential to Instone's core operations and are excluded for valuation purposes - Corporate costs are separated into relatively fixed (CEO/CFO salaries, legal, insurance) and variable (Investor Relations, marketing) categories[42][43] - When valuing Capstone's core asset, Instone, corporate overhead and management fees are excluded as they are not essential to Instone's operations[44] Key Principals Of Capstone Capstone operates under core corporate principles of transparency, accountability, and adaptability to foster trust and drive performance in a dynamic business environment Corporate Principles Capstone is guided by three core principles: Transparency, to build trust with stakeholders; Accountability, to drive performance and ownership; and Adaptability, reflecting the need to update plans quarterly in a dynamic environment - The company's key principles are: - Transparency: Providing a clear view into performance to build trust - Accountability: Enabling performance management and a sense of ownership - Adaptability: Committing to update guidance quarterly as the year progresses[47][48][49] Appendix The appendix provides detailed reconciliations of GAAP to non-GAAP financial measures and defines key non-GAAP metrics used for performance evaluation Reconciliation of Non-GAAP Results This section provides detailed tables reconciling GAAP financial figures to the non-GAAP measures used in the presentation, including full-year 2024 and 2025 budget reconciliations 2024 Reconciliation Summary (in USD $000s) | Metric | FY 2024 | | :--- | :--- | | Capstone Consolidated Net Income (loss) | (2,562) | | Instone Net Income (loss) | (1,683) | | Adjusted Instone Net Income (loss) | (854) | | Adjusted Instone EBITDA (loss) | 1,073 | | Adjusted Instone EBITDA @ 23.5% Gross Profit | 2,525 | 2025 Budget Reconciliation Summary (in USD $000s) | Metric | Low Case | Upside Case | | :--- | :--- | :--- | | Instone 2025 Net Income Budget (GAAP) | 776 | 1,128 | | Instone Adjusted Net Income | 1,602 | 1,954 | Financial Measures - Non-GAAP Definitions Capstone explains the use of non-GAAP measures like Adjusted Instone EBITDA as supplemental tools for performance evaluation, defining "Adjusted Instone EBITDA" and "Adjusted Instone EBITDA @ 23.5% Gross Profit" for current run-rate assessment - Non-GAAP measures like Adjusted EBITDA are used to facilitate period-to-period comparison of operating performance[54][56] - “Adjusted Instone EBITDA” is defined as earnings (loss) before interest, taxes, depreciation & amortization, management fees (to Capstone and Brookstone), Instone board fees, share-based compensation, and transaction costs[56] - “Adjusted EBITDA @ 23.5% Gross Profit (Loss)” is a measure used to assess Instone's adjusted EBITDA on a current run-rate basis, reflecting estimated future gross profit and recent SG&A costs[57]