Presentation Transcript
Capstone Holding Corp.
2024 Year-End Financial Results Presentation
Page 1
Thank you for downloading Capstone’s 2024 year-end financial results presentation.
Page 2
The following content is completely qualified by the legal disclosures on the following two slides. Our goal is to share with you some of the strategic thinking and financial analysis we are using to guide our business.
The content is in line with our principles of being accountable. As content, parent, and shareholders, we operate in a hyper-dynamic economic environment. That’s a fancy way of saying economic things change quickly.
What we are telling you here is based on our estimates and assumptions, which are our best guesses. We reserve the right to revise our point of view based on new information and changes in the business environment.
Due to an uncertain, dynamic environment, we must plan and make operating and investment decisions. This presentation lays out some of that for your review.
Page 7
Our goal is to come out of this year with our operating subsidiaries having a run-rate revenue of $100 million and Adjusted EBITDA of $10 million.
We expect to achieve this through Instone’s focus on organic revenue growth, margin expansion, and cost control, as well as through a series of strategic acquisitions.
We are having discussions with potential acquisition candidates, and based on what I know as of now, this is an achievable target for the year.
As we have discussed, we will focus on three types of acquisitions: tuck-ins, sister companies, and platforms. I will elaborate more about this on the next page.
From my experience, this is a favorable market for acquisitions. We believe that we can negotiate fair but attractive purchase multiples and structures.
We are targeting purchase multiples between four to six times EBITDA and purchase structures that consist of 20% to 45% non-cash consideration.
Page 8
To those of you new to what we are doing, we place our acquisitions into three buckets.
First, tuck-in acquisitions. These are typically a little smaller. They would be consolidated into a platform—in this case, Instone—and are intended to accelerate organic growth.
For this year, we are laser-focused on tuck-ins to grow Instone’s presence into the Southeast and Mountain States.
Second, we’ll be looking for sister companies. These would be independently run businesses, but ones that would have a product or channel synergy with Instone. It would be an opportunity to achieve cost synergies or accelerate the growth of both companies.
Third, and a little further into our timeline, would be platform acquisitions. These would be larger, standalone businesses that would be out looking for their own tuck-in acquisitions and sister company acquisitions.
Page 10
I would like to walk you through some of the key factors in Instone’s performance in 2024.
As you know, over the last couple of years, we’ve had a rapid increase in interest rates, which has had a significant and negative impact on building products companies in general. From March of 2022 to August of 2023, we saw short-term interest rates rise from near zero to over 5%.
As interest rates have started to decline, we have noticed the market tone improve.
Instone’s third quarter grew slightly over the third quarter of 2023, and Instone’s fourth quarter grew by more than 8% relative to the fourth quarter 2024.
In addition, it’s been a great year for traction with Instone’s products, Toro and Pangea. The products have resonated extremely well with dealers, and the rollout and introduction to existing customers and new customers will continue into 2025, powering our organic growth.
Page 11
Instone made some fundamental changes to its business during 2024. This slide is meant to show you what would have been the financial results had these changes been in effect at the beginning of the year.
Thie first factor is gross margin. During 2024, Instone sold through most of its remaining high-cost COVID-era inventory, which is expected to allow gross profit margins to normalize in 2025 and beyond.
The second factor is SG&A expense. The team continued its cost-out efforts from 2023, further lowering overhead costs.
Had these changes been in place since January 1, 2024, Instone would have achieved $2.5 million of Adjusted EBITDA on its $44.8 million in revenue.
Page 12
Delving further into the cost changes that occurred in 2024:
Over the past few years, gross margins have been negatively impacted by the higher-cost inventory acquired during the COVID years—specifically due to higher-cost freight.
Largely, the high-cost inventory has been sold through by the end of 2024, which will allow for higher gross margins going forward.
As you can see in the SG&A chart on this page, the team meaningfully reduced fixed costs over the last two years—reducing adjusted SG&A from $9.6 million a year in 2023 to a run rate of just over $8 million today.
The current lower overhead costs are possible due to incredible efforts by the team to drive process change and adopt technology.
Page 13
This graph on this page is intended to give some color into how Instone’s revenue can vary throughout the year, and how that seasonality changes based on that year’s weather patterns.
In years with extremely cold winters, we tend to see a very slow start to the year.
Many of our products require mortar for installation, which means our products can only be installed on days that are well above 32 degrees.
When we experience years with extremely cold winters, we tend to have a very slow start to the year, but a much busier second quarter as installers catch up on their contracts.
In years with extremely warm winters, sometimes we have a faster start but then a slightly slower Q2. All in, by the end of the year, it tends to average out.
Page 15
Diving into 2025:
Based on what we are seeing, Instone is positioned for revenue and profits growth. The team has been hyper-focused on rolling out displays and opening new customers while maintaining cost discipline to ensure that our operating margins increase.
Instone is positioned for 2025 revenue of $47.5 to $49 million and Adjusted EBITDA of between $3.1 and $3.5 million.
Every quarter, as we put out our numbers, we will continue to update and tighten our estimates to provide clear guidance into our performance expectations.
Page 16
I want to provide some insight into the various factors that will impact our performance.
Some of these factors are not so in our control—here listed as general factors—and others that are in our control—here listed as company factors.
As we provide updated guidance in future quarters, we will refer back to many of these and how they are impacting our year.
Page 17
A word about Capstone’s corporate costs:
As a public company, we are subject to a number of expenses that are not required to run our underlying assets—in this case, Instone.
We have relatively fixed costs, including management, board expenses, and legal expenses. And we have substantial variable costs, namely investor relations—which can be adjusted upwards or downwards as required.
Most importantly, and consistent with the way that we’ve presented the numbers in this presentation—we believe that when valuing our company, it’s important to set aside certain costs including Capstone corporate expense, Brookstone & Instone management and board fees that are each outlined in this presentation.
These expenses are non-essential to any potential acquiror of the operations of Instone. An acquirer of Capstone or Instone would not include these expenses in its valuation of the business.
Page 18
These are our key principles. This is a promise that I want to make to you, our investors.
First, transparency. We will be transparent. We will always give you the information you need to understand how your company is performing.
Second, we will hold ourselves accountable. We will make commitments and share targets. We expect to meet or beat many of our targets, but we also will fail to hit some of them. We will hold ourselves accountable and honestly measure our performance.
And lastly, we will be adaptable. Business and markets change. We will provide regular updates on our company and the environment. We expect to adapt to changes in the economy and the market with a goal to always outperform.
Thank you for listening, and please feel free to reach out with any questions.