DIRTT Environmental Solutions Q3 2023 Earnings Report

DIRTT Environmental Solutions EPS Results

• Actual EPS: -C$0.08
• Consensus EPS: N/A
• Beat/Miss: N/A
• One Year Ago EPS: N/A

DIRTT Environmental Solutions Revenue Results

• Actual Revenue: $66.46 million
• Expected Revenue: N/A
• Beat/Miss: N/A
• YoY Revenue Growth: N/A

DIRTT Environmental Solutions Announcement Details

• Quarter: Q3 2023
• Date: 11/9/2023
• Time: N/A
• Conference Call Date: Friday, November 10, 2023
• Conference Call Time: 10:00AM ET

DIRTT Environmental Solutions (TSE:DRT) Ltd is a manufacturer of customized interiors. The company combines its (3D) design, configuration, and manufacturing software (ICE or ICE Software) with in-house manufacturing of its prefabricated interior construction solutions and a distribution partner (DP) network. It offers services to various sectors which include healthcare, education, commercial and other sectors. DIRTT operates its activity through the U.S and Canada of which, the United States generates a majority of revenue.

DIRTT Environmental Solutions Q3 2023 Earnings Call Transcript

[Operator]

Welcome to the DIRTT Environmental Solutions Third Quarter 2023 Financial Results Conference Call. As a reminder, all participants are in listen only mode and the conference is being recorded. I would now like to turn the conference over to Shawna Mason, Director of for Corporate Affairs. Please go ahead.

[Speaker 1]

Thank you, operator, and good morning, everyone. Welcome to today's call to discuss DIRTT's Q3 2023 results. Joining me on the call today will be Benjamin Urban, CEO and Fareed Khan, CFO. Today's call will include forward looking statements within the meaning of applicable Canadian and United States Security Laws. These statements are based on the company's current intent, expectations and projections.

[Speaker 1]

They are not guarantees of future performance. In addition, this call will reference non GAAP results, excluding special items. Please reference our Form 10 Q as filed on November 9, 2023, with the Securities and Exchange Commission or SEC and other report filings with the SEC for information regarding forward looking statements and reconciliations of non GAAP results to GAAP results. I will also remind you that this webcast is being recorded and a replay will be available early next week. I now turn the call over to Benjamin.

[Speaker 2]

Thank you, Shauna, and good morning, everyone. A sincere thank you to all of our team members at DIRTT as well as our valued construction partners and clients for all their hard work during our seasonally strongest quarter. I would like to share a few highlights from our team for the quarter. Our technology business continues to expand our partnership with Armstrong World Industries as well as further our internal ICE software development progress. I'm proud to share that through partner consultation and independent market research, DIRTT's product management, product development And software development teams aligned for the first time on a coordinated go to market strategy that resulted in the release of 3 new products to market in the 3rd quarter.

[Speaker 2]

In our relentless pursuit of safety excellence, we continue in our journey to 0 recordable incidents and maintaining our position as a world class leader in safety performance. As mentioned in our last call, DIRTT was one of 12 companies nominated by Canadian Occupational Safety as a 2023 Excellence Awardee. We are excited to share that our Director of Health, Safety and Environment, Ian Opelik, was selected as Canada's Safety Leader of the Year. We continue to relentlessly focus on quality. During the Q3, we saw a 36% improvement from prior year in our external defects per $1,000,000 of revenue.

[Speaker 2]

Also, our on time performance during the Q3 was 98%, a major improvement from the 88% on time performance during the Q3 of last year. We are grateful for our clients, partners and hard working employees for their dedication and hard work. With that, I'll hand it over to Faria to share some more about our financial results.

[Speaker 3]

Thank you, Benjamin, and good morning, all. Please note that we have issued a press release discussing our Q3 results, which is now posted on our website. My comments this morning add more color to our financial results and liquidity for the quarter. Revenues for the Q3 were 49,500,000 up 6% compared to the same period in 2022 and up 11% from the Q2 of 2023. On gross profit, consistent with the first half of twenty twenty three, we again achieved significant year over year margin expansion.

[Speaker 3]

Compared to the Q3 of 2022, Gross profit margin increased 1950 basis points from 15% to 34.4% in the Q3 of 2023. Adjusted gross profit margin, which excludes the impact of depreciation, increased 15 20 basis points from 21.7% in the Q3 of 2022 to 36.9 percent in the Q3 of 2023. Operating expenses for the Q3, excluding impairment charges and reorganization costs, were $14,900,000 a 15% decrease over the same period in 2022 and also sequentially down by $1,000,000 from Q2 2023. The reduction in costs are primarily from the cost reduction initiatives implemented over the past 24 months as well as more disciplined discretionary spending. Adjusted EBITDA for the Q3 was $5,300,000 an improvement of CAD10,700,000 from a loss of CAD5,400,000 during the Q3 of 2022.

[Speaker 3]

This improvement is driven by the reduction in operating expenses and increasing gross profit margin just described. With respect to liquidity and working capital, The quarter finished with $19,500,000 in unrestricted cash, up $8,600,000 from $10,800,000 at December 31, 2022 and up $600,000 from June 30. Cash provided by operations for the Q3 was $1,900,000 compared to cash consumed by operations of 10,700,000 during the Q3 of 2022. Capital expenditures in the quarter were 700,000 for free cash flow in the Q3 of $1,300,000 For the 9 months ended September 30, 2023, we generated cash from operations of CAD 4,700,000 compared to cash consumed of CAD 47,500,000 through the 9 months ended September 2022. Liquidity, which includes $10,800,000 of availability under our asset backed lending credit facility, was $30,300,000 as of September 2023.

[Speaker 3]

We have not had to draw on this facility to date. We also continue to focus on managing our working capital. Net working capital at the end of the quarter was CAD 25,700,000 down $800,000 from June 30, 2023. This decrease is primarily due to the reclassification of $6,000,000 of equipment leases related to the Rock Hill facility from long term to short term, which I'll discuss later on in this call. Excluding this reclassification, working capital improved by $5,200,000 from June 30, 2023.

[Speaker 3]

Our days sales outstanding has improved from 27 days at December 2022 to 24 days at September 2023. In addition, we continue to work on reducing our inventory levels through improved sales, inventory and operational planning processes. We have decreased inventory by $2,000,000 or 10.5 percent from $19,400,000 at June 30, 2023. Turning to our outlook. Through the 1st 6 months of 2023, we experienced continued volatility in economic conditions, especially in regions with concentrated sales to the technology and banking sectors.

[Speaker 3]

This trend has continued into the Q3 of 2023. The return to work transition continues with some companies mandating a hybrid policy. We note that we are exiting our seasonally strongest quarter and are now entering our typically weaker winter period. Our view and wider macroeconomic conditions indicate That we are in an uncertain late cycle environment with the near term potential for deteriorating macroeconomic conditions. Regardless, we continue to focus on what is within our control, supporting our current construction partners, increasing penetration in targeted geographies, onboarding new construction partners and engaging in new strategic partnerships.

[Speaker 3]

I would also like to comment on 2 decisions taken during the quarter. Effective October 12, 2023, we are no longer listed on the Nasdaq Capital Markets. Our shares continue to trade on the Toronto Stock Exchange in Canada and over the counter in the U. S. As explained in our September 6 press release, we did not believe it was beneficial to shareholders to continue to incur The second decision was around our Rock Hill facility in South Carolina.

[Speaker 3]

In August 2022, we announced a temporary suspension of operations After a detailed analysis of current and anticipated manufacturing capacity over the next several years, We determined that the Rockhold facility will not be reopened. With annual production capacity at our Savanna and Calgary facilities of approximately $400,000,000 in revenue. The closure is part of our ongoing focus on realigning the organization, increasing efficiency and improving profitability. We expect to sell or transfer the assets at Rock Hill to other DIRTT facilities. This process is expected to take several months.

[Speaker 3]

We will continue to maintain the building lease and we are pursuing sublease arrangements. Non cash impairment charges related to the Rockwell facility equipment of CAD8 1,000,000 has been recorded in the Q3 financial statements. As part of this process, we also plan to settle associated Rock Hill equipment leases amounting to $8,200,000 in the next 12 months. This now wraps up our financial review. I will turn it back to Benjamin to conclude.

[Speaker 2]

Thank you, Faria. We feel good about our work on improving our cost structure, product mix and pricing. We also continue to closely monitor the market To ensure we are well positioned to deliver value to our clients and manage our business through a variety of macroeconomic scenarios. In closing, I wanted to say thank you again to all of our amazing clients who understand the differentiated value of DIRTT as well as our construction partners and team members for their ongoing hard work and commitment on behalf of the company. Thank you all for joining us today.