DIRTT Environmental Solutions Q1 2024 Earnings Call Transcript

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May 9, 2024

There are 4 speakers on the call.

Operator

Thank you for standing by. This is the conference operator. Welcome to the DIRTT Environmental Solutions First Quarter 2024 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 Corporate Affairs.

Operator

Please go ahead.

Speaker 1

Thank you, operator, and good morning, everyone. Welcome to today's call to discuss DIRTT's First Quarter 2024 Results. Joining me on the call today will be Benjamin Urban, CEO and Faria 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, including special items. Please reference our Form 10 Q as filed on May 8, 2024, with the Securities and Exchange Commission or SEC and other reports and 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'll now turn the call over to Benjamin.

Speaker 2

Thank you, Shawna, and good morning, everyone. We are pleased that our Q1 results reflect the significant progress our team has made since our Q1 results last year. We achieved double digit revenue growth year over year and a 16 10 basis point expansion in our adjusted EBITDA margin, making this the first time DIRTT was profitable in the seasonally slower Q1 since COVID, which is an accomplishment we are proud of. I would like to thank our incredible team at DIRTT for helping us achieve these results. Every layer of our organization from our factory teams and technicians in the field to our commercial organization and corporate staff.

Speaker 2

Each of them directly contributed to this year over year improvement. I'm also proud to share this is our 4th consecutive quarter of year over year revenue growth. 1st quarter orders continue to represent a broad and diverse balance of recognized brand name companies across our market segments. These include corporate clients such as Keywood Corporation, Visa, First National Bank, Helmerich and Payne, MNP Corporation, CBRE and Cadence Bank. Healthcare providers, the likes of Nebraska Medicine, Ohio Health Doctors, NYU, Langone Health and Cambridge Memorial Hospital government organizations such as the U.

Speaker 2

S. Federal Government, the Veterans Administration, the City of Pittsburgh and the City of San Diego And lastly, prestigious educational institutions such as Kansas City University, University of Buffalo, the University of Texas and Purdue University. Looking forward, our team is focused on driving sustainable revenue growth by leaning into our inherent advantages. As a superior provider in a large addressable market, our technology, speed, quality and ability to customize is how we win. We remain under penetrated and will continue to aggressively pursue greater market share in the commercial construction market.

Speaker 2

DIRTT and its valued construction partner network continues to grow stronger and scale up for enhanced distribution and implementation of our interior construction solutions. In Q1 2024, we added new partners and expanded existing partners bolstering DIRTT's geographic coverage in multiple growing markets with a focus on the Western United States region. We thank all of our partners for demonstrating their commitment to scaling their DIRTT business and delivering quality to our shared clients. We have also seen high engagement, attendance and investment in staffing and training across our partners, indicating that the future is bright. Our investment in innovation is reflected in Q1 through the continued theme of aligning software development efforts to DIRTT's commercial and product strategy.

Speaker 2

There was a new ICE software release in Q1, which included the creation of a new casework catalog, new thin profile doors for all lines, new hardware options, as well as a new backhanded glass finish. We are excited to debut many of these innovations along with additional ones introduced over the last year at our largest annual sales conference at Konnect next month. In addition to the enhancements to our existing offerings, we are also excited to announce that we will also be releasing new innovative products in Q2 designed for the healthcare sector in collaboration with We continue on our journey to 0 defects, 0 missed deliveries and 0 recordable incidents. For Q1 twenty twenty four, we reduced our external defects per $1,000,000 of revenue to 14.3 percent, a 38% improvement from Q1 2023 and a 6% improvement from last quarter. Our on time performance for Q1 2024 was 99.2%, which is the highest in DIRTT's history.

Speaker 2

Our total recordable incident frequency at the end of Q1 2024 was 0.93, which is 78% below the industry average. Safety excellence is a core value and we take pride in maintaining our position as a world class leader in safety performance. ESG and sustainability commitments remain a key business priority. We strive to make the world better, both through our own design and responsible manufacturing practices and by helping our customers achieve their sustainability commitments through the implementation of our solutions. We know that our proactive and transparent approach to establishing, measuring and reporting on ESG factors impacts our bottom line.

Speaker 2

This quarter, we established DIRTT Sustainability Council, which comprises a cross functional team of DIRTT employees from our commercial, manufacturing, technology and project management teams to take DIRTT's ESG initiatives to the next level and stay 2 steps ahead of the industry and regulations. And finally, we continue to make progress in the ongoing litigation between DIRTT and Falkbelt as explained in the legal proceedings section of our 10 Q. In summary, in addition to the $4,000,000 of outside investment secured in Q1 to fund the litigation and the summary judgment, dates are being secured in September of next year, both in Canada and the United States. Additionally, DIRTT is seeking $100,000,000 in damages as noted in the 2nd amended complaint. During this transformational time at DIRTT, we are proud of our performance this quarter.

Speaker 2

We are grateful for our team, partners and clients who helped make this happen. 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 Q1 results, which is available on our website. Revenues for the Q1 were $40,800,000 up 11% compared to the same period in 2023. Q1 is our seasonally slowest quarter, and we are pleased with the year on year increase in revenues. On gross profit, we continue to maintain strong margins.

Speaker 3

Compared to the Q1 of 2023, gross profit margin increased from 23.7% to 35.9% in the Q1 of 2024. Adjusted gross profit margin, which excludes the impact of depreciation and amortization, increased from 28.5% in the Q1 of 2023 to 37.9% in the Q1 of 2024. Consistent with what we have shared before, the improved margin is primarily due to revenue growth, operating efficiencies, cost reduction initiatives and improved product mix. Operating expenses for the Q1, excluding impairment charges and one time related party reimbursements as well as reorganization costs, were $14,200,000 a $1,500,000 or 9.5 percent decrease from the same quarter last year. This is in line with our initiatives to reduce costs in the business.

Speaker 3

Adjusted EBITDA for the first quarter was $2,700,000 an improvement of $6,200,000 from a $3,500,000 loss during the Q1 of 2023. This improvement is driven by the increase in adjusted gross profit margin and reduced operating expenses just described. We note that this is now DIRTT's 4th consecutive quarter of positive adjusted EBITDA. Our net income after tax for the Q1 of 2024 was $3,000,000 compared to an $11,400,000 net loss after tax for the same period of 2023. Apart from the adjusted EBITDA gains discussed above, we benefited from a gain on a substantial issuer bid, which I'll discuss later on this call, of 2,900,000 higher interest income and a $1,200,000 increase in foreign exchange gain due to the devaluing Canadian dollar.

Speaker 3

I will now turn to our balance sheet and discuss some Q1 events. In November 2023, we announced a CAD 30,000,000 rights offering. The rights offering successfully closed on January 9, 2024. As explained in the related documents, the purpose of the funds raised from the rights offering was to invest in the business and to reduce debt. On February 15, 2024, we announced a substantial issuer bid of CAD 15,000,000 to buy back some of our outstanding debentures.

Speaker 3

Through this bid, our intention was to reduce DIRTT's debt and strengthen our balance sheet. The bid closed on March 22, 2024, and we received offers for CAD10.5 million of our debentures. We accepted all the offers and tendered CAD6.9 million resulting in a gain of CAD2.9 million on extinguishment of the debt. We are pleased with this result as we continue to strengthen our balance sheet. The quarter finished with $39,000,000 in unrestricted cash, up $14,200,000 from $24,800,000 at December 31, 2023.

Speaker 3

Cash used in operations was 2,000,000 mainly due to timing differences related to vendor payments of CAD 4,000,000 at year end. Liquidity, which includes CAD 8,500,000 of availability under our ABL credit facility, was $47,500,000 as of March 31, 2024. We have not drawn on this facility to date. On February 9, 2024, we successfully renewed our ABL with Royal Bank of Canada for an additional year. Our working capital continues to improve.

Speaker 3

Net working capital at the end of the quarter was $46,100,000 up $16,300,000 from December 2023, primarily due to net proceeds of $21,300,000 from the rights offering and improved operational results, offset by a decrease in working capital of $4,100,000 mainly due to the $5,100,000 repayment on debt principal under the issuer bid. Our 12 month sales pipeline, excluding leads at 1 April 2024 was CAD 270,000,000 dollars growing over 7% compared to $252,000,000 at April 1, 2023. We regularly scrutinized our pipeline and are pleased to see our increased pipeline converting into revenue growth. A key driver of our gross profit margin is our pipeline and forecasting management. I'm particularly proud of our commercial organization success in this matter with our 3rd consecutive quarter of more than 95% accuracy in our revenue forecasting.

Speaker 3

Looking forward, we will be entering our seasonally stronger quarters. Macroeconomic risks still exist and recent increases in aluminum costs may cause pressure on our margins. Having said that, we remain focused on maintaining our adjusted gross margins and delivering on time and in full to our valued clients. This concludes our section on the financial results. I would like to draw our listeners' attention to an investor deck we published on April 22, 2024 on our website showing DIRTT's journey to excellence over the past few years.

Speaker 3

We are proud of what we have achieved and are focused on continuing to grow revenue and improve the business. I will now turn it back to Benjamin to conclude.

Speaker 2

Thank you, Faria. We are on a journey to excellence. We are excited for DIRTT's future and are focused on revenue growth. We recognize ongoing market uncertainty. However, with our strength in the balance sheet, financial discipline and investment in innovation, we believe we are well prepared to take care of our clients and partners through a variety of economic conditions.

Speaker 2

It is often said that employees are the number one asset of any business. We not only believe this, but have also witnessed the incredible achievements driven by our hardworking, talented team. From the factory floor to the office, their dedication, passion and unwavering commitment fuels our success. They have demonstrated resilience in the face of obstacles and difficult decisions and embody the spirit, teamwork and excellence every day. To our outstanding DIRTT team, thank you.

Speaker 2

And thank you again to all of our amazing clients who understand the differentiated value of DIRTT as well as our construction partners for their ongoing hard work and commitment on behalf of the company. Together, we are continuing to change the world of interior construction. I'd like to thank you all for joining us today.

Operator

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.

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DIRTT Environmental Solutions Q1 2024
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