Catching Up with SG Blocks…an Interview with Mahesh Shetty, President

On March 1st, SG  Blocks (SGBX) reported earnings for the 4th quarter and full-year of 2017. Some of the key highlights were the following:

  • Backlog increased to $76.7 million, as compared to $0.5 million at December 31, 2016
  • As of March 1, backlog had further increased to $104 million
  • Revenue increased 163% to $5.1 million, as compared to $1.9 million in FY 2016

The Company also provided positive guidance. In the words of their CEO, Paul Galvin, “we believe subsequent quarters will transition from low-margin projects to an anticipated margin of 20%…Based on current backlog and projects in the pipeline and contingent on acceleration of delivery on certain projects, we believe we will be cash flow positive in 2018.”

In the opinion of Tailwinds’, it all comes down to execution for SG Blocks. The opportunity is there, just based on current backlog, much less the pipeline of opportunities in front of the Company.

We recently had the opportunity to catch up with the Company’s president, Mahesh Shetty. Below are some of the more salient data points from our conversation.

Tailwinds Research (TR): Your backlog has increased rapidly. Can you talk about the size and activity of the pipeline that is driving this strength in backlog?

Our backlog has indeed increased rapidly to over $100 million. In addition to this, our pipeline has increased from 160 million at the end of the 3rd quarter to over $250 million as of today.

The growth in both our backlog and the pipeline is a direct result of the ESR ( that was granted to SG Blocks by the International Code Council*. The ESR created waves among building officials all over the country as it validated our technology and rendered us equivalent to a wood or a brick for commercial construction. This recognition and our successful IPO enables us to present our company as a viable alternative to developers, particularly in high density and urban markets.

Architectural and engineering firms are increasingly embracing modular construction and our product meets or exceeds all safety, durability and environmental standards. Additionally, the pervasive labor shortages and record high lumber prices make container based modular products advantages on cost, speed and quality self-evident, all of which adds up to a rapidly growing pipeline of opportunities.

* The International Code Council is a member-focused association with over 64,000 members, dedicated to developing model codes and standards used in the design, build and compliance process to construct safe, sustainable, affordable and resilient structures. As far as Tailwinds’ knows, SGBX is the only container based construction company that has this ESR certification.

TR: Your backlog has grown exponentially from under $1 million to over $100 million. As you work through this backlog, your revenues should jump dramatically. How are you positioned to execute on backlog and what are the biggest hurdles you foresee in translating backlog into revenues?

MS: Management is laser focused on execution. The clear advantage of modular construction is our ability to develop fabrication and production schedules in sync with the customer site readiness timelines. It introduces an element of predictability and stability for our manufacturing partners and allows them to be more productive and quality centric as compared to site-based construction. Our current production capacity is capable of supporting our backlog. In anticipation of increasing the backlog, management is also actively engaged in conversations to augment our production capacity. 

TR: With employment at historic lows, staffing and overall costs are a major concern for many companies, particularly in the construction industry. How are you positioned for expansion of sales and execution of production from an internal, staffing standpoint, as well as a cost-management standpoint?

MS: We are hiring talent that is experienced in project management and in construction to ensure that we can deliver our projects on time and within budget. We have already hired an experienced Director of Operations and will build that team as more projects come on line for manufacturing and installation. Fortunately, we expect the issues surrounding traditional construction to result in staff turnover at construction companies as they seek to rationalize and reduce project management personnel. That will be a great source for our future talent. Furthermore, our ecosystem’s value proposition to a construction worker is more compelling. Just think of it as an automotive assembly position – One place, one job (controlled environment versus job to job, uncertainty and harsh weather environments).

In regards to overall cost escalation, we address this up front in each contract as we enter fixed price contracts with our suppliers. Which is not to say we’re completely immune to possible pressure from price escalation, but we really mitigate this on each contract and are able to adjust our model as we migrate to newer contracts. 

TR: You are nearing completion of your marquee project in Los Angeles. How is the project proceeding and what will completion mean to SGBX?

MS: The school building in downtown LA is the largest commercial structure in our history and one of the largest container projects in the country. At almost 25,000 sq. ft, it will be a testimonial to our technical ingenuity and our ability deliver a product at less than 50% of the prevailing construction costs in the Los Angeles market. We believe it will release the flood gates for new customers who will now be able to experience the innovation, the architectural elegance, the quality and strength of our product.

TR: We know backlog continues to grow and you should be hitting breakeven cash flow soon. Besides these items, are there any other foreseeable events or catalysts that investors should be looking forward to?

MS: Well, as you mentioned, we expect to be cash flow positive in 2018, so that is a very key milestone for the Company and really highlights our asset light model. Management continues to pursue opportunities to increase our production capacity. We have also initiated discussions with architectural and engineering firms to include them in the SGBX ecosystem, so they can mutually benefit from the widespread adoption of container based modular construction in general and our technology in particular. We hope to be able to announce more about this in coming months.

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