Q1 2020 Earnings Call
Yep.
Thursday
Yes.
For information regarding forward-looking statements and reconciliations of non-gaap results to get results.
Also remind you that this webcast is being recorded and a replay will be available today at approximately 1 p.m. Eastern time. I will now turn the call over to Kevin.
ladies and gentle
I keep Cam and thank you. Everyone joining us today for Jeff reviews. Our first-quarter financial results. I'd like to discuss both the impact of the covid-19 pandemic on our business and how we're proceeding of strategic plan in this uncertain environment. These are summarized on slide for
Search response to cope with an early and continues to emphasize the health and safety of our employees customers and communities across most of North America construction was deemed in the center of service early in the pandemics. On-site Hyundai manufacturing operations have continued uninterrupted. We've implemented work from home policies for our non-factory employees and have instituted strict instructions and social distancing measures within our factories all consistent with health authority protocols almost construction sites remain open across North America and we continue to deliver projects. We've seen some project delays impacted by the implementation of social distancing and other safety-related measures on site within our media pipeline. We are seeing some delays but so far no cancellation of orders.
As a result of all of these factors, we were taking more measured approach to executing our strategic plan moving forward to make the most of opportunities before us without incurring excessive force cancel risk held discretionary not essential spending including our annual connect trade show how we are continuing to selectively higher for sales and marketing positions that are critical to the success of old music plan. Notably. We harder direct your partner programs or third Regional sales director and added one person to our strategic accounts team these additions we have completed the hiring of all the money directly to our chief commercial officer.
We will delay filling certain other roles and people have a better sense of business conditions. We continue to upgrade our sales management process and move forward with improving our commercial systems. We also need two new distribution Partners one in Texas and one in Wisconsin and having ongoing conversations with several other perspective distribution partners and under-penetrated Geographic areas. Finally, we made the choice to move forward with commissioning of our South Carolina plant in the first half of 2021 was state-of-the-art automation. We expect a new plan to provide significant Improvement and cost efficiency and materials all the same time reduce the risk inherent in operating a single tile plant. We consider this a very important business decision for the future and it clear and mitigation of risk.
We've been deploying our new marketing capability to respond to the pandemic in March when all indications were that North America's Health Care Systems would come under considerable strain and require additional infrastructure month. We quickly mobilized increase our visibility among targeted Healthcare clients and other organizations who influence Health Care Facility decisions. Our teams collaborated develop a pre-designed scalable stage Healthcare solution. It could be ordered delivered and installed quickly in the ensuing weeks with lower than anticipated need for Peak or overflow facilities. The large-scale emergency response demand is diminishing once had some small covid-19 projects. The relationships have grown out of our covid-19, it initiatives and that we will build upon post-pandemic represent excellent opportunities for both our strategic account and large project teams.
From an operational perspective the most critical short-term goal. We laid out in our strategic plan was focused on safety last quarter. We were reported a 50% reduction in safety-related recordable incidents off at the end of 2019 vs. 2018 in the first quarter of this year. We achieved a 92% reduction from the same period last year in real terms. This means that four or five facilities had no reportable injuries during the first quarter and V facility had to don't get me wrong even one injury is too many. However, these results are an indication of how far we've come in a short period of time and is a tremendous accomplishment for our entire organization.
Removing cold with quality delivery improvements as well as identifying opportunities to further Implement lean manufacturing processes to ensure operational efficiency. In fact last week was our first name on every facility met or exceeded our quality goal. We remain on track to achieve continuous improvement with our manufacturing operations by year-end.
Looking forward we recognize this pandemic rough long-held assumptions about how people and businesses interact and gather and this will present both challenges and opportunities for us organization embrace the ability of their Workforce to operate from home. Just reducing the need for commercial office space. We may also see an increased desire for Less open work spaces and more focus on opportunities for social distancing from both physical and mental well-being in addition needs May evolve over time. This company's experience new ways of working regardless of the trans that emerge the flexibility to create custom spaces to meet current needs a modify them is need to evolve is court-ordered DNA the ability to reduce the number of Trades people working on a job site is also a long-standing part of our value proposition, which we believe will become even more relevant going forward.
Is Our intention to deploy our newly established commercial organizational capabilities to maximize sales opportunities and engagement with an clients Architects and designers in general contractors throughout targeted wage marketing campaigns. We are prepared and eager to drive market share growth for dirt in whatever Market is available to us with that. I will turn the call over to Jeff for financial review.
Thank you, Kevin. I'd like to begin by reviewing some of the additional steps. We took to address the cobit pandemic in early 2020. We commenced a process of reviewing. Our credit facility wage process expanded to include other forms of equipment lease financing to ensure the quiddity in the face of considerable and certain Deeds on May 4th. We entered into a 7-year revolving Canadian dollar equipment Capital lease facility and implied lease rate of 4.25% We also entered into a five-year 16 million dollar equipment capitalist facility wage to find equipment purchases for our new South Carolina plant add an implied lease rate of approximately 3.5%
The facility is extendable for an additional year. We expect to draw on approximately 7.3 million of these facilities in May to fund purchases. I purchased and deposits made in 2019.
With the establishment of the equipment leasing facility and the increase liquidity it provides we will provide proceed with commissioning activities of the South Carolina plants promo code production line in the second half of 2020 with commercial operations expected to commence in the first half of 2021 the incremental cash cost of commissioning. The plant is approximately fifty million dollars of which approximately 2 million is expected to be funded with our new capital lease facility and two million from cash on hand.
If you recall.
In the second half of 2019 we made equipment deposits of 4 and 1/2 million dollars. We expect her spending in 2020 related to the South Carolina plant to be 10 and 1/2 Million Dead comprised of the remaining cost of the equipment as well. As a portion of the commissioning cost with a balance of commissioning completed in 2021 the with a balance completed twenty Twenty-One with the timing of these expenditures depends on the receipt of the major pieces of equipment being manufactured in Italy that were originally scheduled to be delivered in September. We estimate covid-19 will delayed by two to three months.
We're going to we're going to defer moving forward on the Millwork component, which is expected to cost approximately two million dollars of the total 18.5 million while we are correct in compliance with all of our revolving credit facility covenants. We have taken steps to ensure the availability of the revolver during these challenging times accordingly. We have reached an agreement in principle with our lender subject to definitive agreements to provide near-term Covenant relief on our existing credit facility modifying the borrowing base to be based on working capital subject to an aggregate cap Canadian fifty million dollars, including the aforementioned leasing facilities, the Covenant relief extends until October 2020 at which point we will seek further relief if necessary off at the end of the quarter we had Canadian Thirty million dollars or twenty one point four million dollars u.s. Equivalent of unused credit capacity under a revolving credit facility and 43.5.
billion dollars of cash
With that background, let's now turn to the first quarter results on Slide Five.
Revenue for the first quarter was $41 a decline of 37% from the comparable period of 2019 and a sequential decline from last year's fourth-quarter as we've discussed with an experience a prolonged disruption to our sales pipeline particularly with respect to larger sized projects as it relates to our partner Network in the quarter. We added the reporting of discrete partner and ships which was 78 as well as opposed to or as opposed to partner locations, which is 93. That is the way we only recorded previously. We believe this is more appropriate presentation.
I slide six adjusted gross profit. Margin was 38% in the quarter a declined from 39.6% for the from the comparable 2019. But a sequential Improvement despite our Revenue as in Q4 2019. We separately classified trillion dollars of costs related to our underutilized capacity within cost of sales. This number is reflected in the adjusted gross profit margin calculation. The Improvement compared to Q4 2019 was result of the many steps. We took to manager operational costs in the quarter. We reduced our Factory Thing by 14% We also reduce the length of shifts in our Factory from 12 hours to ten hours per day and Institute the plan factory curtailments subsequent to the end of the quarter of prefer the reduced our Factory labor by an additional 12% bringing the total production head count to 600 in response to current sales volumes.
Slide seven as a result of a shift in the cost structure of our plants and the recent changes in Revenue levels in the near-term. Our monthly fixed plant overhead costs are approximately 1.922 million month from a contribution margin perspective every dollar of Revenue contributes, approximately $0.54 of gross margin after deducting direct materials as well as variable labor costs home number's are an update from what we shared with you at our analyst a last November is important to note that our labor is causing variable being more variable that activity increases the use of overtime and increased hours but sticky to the downside slide 8 details of breakdown of operating expenses, as you can see overall operating expense just have remained relatively consistent from the comparable period of last year looking at slide 9 adjusted ebitda and adjusted even a margin for the years for the quarter decreased. Yep.
5.4 million and -13.2 per cent respectively compared to the first quarter of 2019. This decrease decrease was driven by the 10.1 million decrease in a jetpack is profit the two million dollars of underutilized capacity and $800,000 of higher litigation costs incurred in 2020.
Ensuring we maintain the quiddity through the uncertain. Is Paramount. We remain highly focused on the conversion of working capital to cash including an increased focus on accounts receivable collection off despite this and during the quarter. We increased our allowance for doubtful accounts by six hundred thousand to reflect increased collection risk related to certain distribution partners.
We continue to monitor the Financial Health of our partners as a backstop. We acquired Trade Credit insurance effective April 1st, 2020 like us our partners are focused on the safety of their employees at 5:30. We are encouraged that construction in North America has not stopped and that we have only seen project deferrals as opposed to cancellations that said these are challenging times for everyone.
Net working capital as of March 31st 2020 was 51 million compared to fifty eight point six million at December 31st, 2019 and included forty three point five million dollars of cash with no debt, despite a slow quarter. Our current ratio remained healthy at two point four times vs 2.7 times at December 31st, 2019.
Turning to slide ten net loss for the quarter was 5.3 million or 6 cents per share driven largely by the change in gross profit. The loss is consistent with the first quarter of 2019 which included six point four million of stock-based compensation expense and two point six million of reorganization expenses compared to five five hundred thousand and Neil respectively in 2020. We also benefited from increased foreign exchange gains and income tax recoveries in the first quarter of 2020.
Excluding the cost of the equipment and commissioning of the South Carolina plant is described previously, which is largely funded by our new equipment leasing facility. We expect our ongoing Capital expenditures for 20 28 to be between 6 million and 8 million directed mainly towards RDX refresh and Chicago or new in Dallas commercial systems implementations and software development activities.
It's not touch on a revenue Outlook.
Given word dirt fits in the construction schedule typically closer to completion. Our current deliveries are for projects that are well underway as a covid-19 pandemic it North America are average wage orders entry level for April have been only slightly lower than the average daily order entry for the first quarter of this year.
However, since none of us know how long the crisis will last or as Kevin discuss what the overall impact on the commercial construction industry will be we have taken decisive action to enhance its Financial flexibility during what maybe a prolonged period of economic uncertainty we have done an extensive analysis and developed multiple contingency plans depending on the timing and magnitude of the effects of covid-19 on our end markets and the related cash needs of the company while in a worst-case scenario further actions to reduce costs would be required. We are confident that we will continue to have the balance sheet to support operations going forward. I will now turn the call back to Kevin for closing remarks turning 2/11. I want to conclude by talking about the Strategic plan. We laid out in November both the management team and the board remain wholly committed to those priorities and strategies.
The roadmap we laid out then remains as relevant. If not more in the current environment what we will encounter some delays and implementation of the overall strategic plan as a result. We continue to focus on the following measures of success Staffing our commercial organization while retarding to complete the hiring in our commercial organization by your ad we are now delaying non-critical hires to remain financially flexible dealing with the current market uncertainty. However, we have made nearly all of the critical additions to our commercial team.
Implementing sales tools. We are focused on improving our CRM processes and related commercial systems. We're revising the partner portal. We'd planned rebuilding the user ID and building out resources for our partners on our existing platform rather than migrating to a new Standalone site total cost of ownership tool remains a priority to be launched in the fourth quarter. This tool was just our sales reps partners and everyone involved in the construction process to accurately assess the value dirt delivers over conventional construction, including about day one costs and ongoing operating costs.
Tracking conversion rates at every stage in sales fund. We've begun tracking conversion rates in our current forecasting system and we'll continue on this path once our CRM system is in place long. We anticipate fully tracking to be in effect by mid-year.
security
National account agreements we continue have active discussions with numerous clients and feel confident. We're moving forward in these conversations.
Injury rates below BLS standard, we believe we are now operating as the same level far below BLS standards improving quality and on-time delivery performance our success and dramatically improve safety is enabling us to devote additional time to improving our quality and on-time delivery as well as Drive efficiency throughout our operations. We will complete our step function improvements by the end of 2020 and not enter into continuous Improvement phase of Arlene's yard.
Wrapping up now on slide twelve while covid-19 is presented considerable uncertainty to North American economic activity. We've responded with appropriate conservative financial and operational management decisions. And we remain fully committed to the objectives of our strategic plan while continually evaluating long-term Financial targets associated with that plan.
We are positioning dirt to take full advantage of the range of opportunities to develop in our Market. I would like to specifically thank our tremendous employees who have demonstrated resiliency and commitment to the face of extraordinary circumstances over the past several months your dedication to dirt and our Collective mission is a foundation of our organization operator would now like to open the call for any questions. I asked a question. You will need to press star one on your telephone to withdraw your question, press the pound or hash key just to reminder to ask a question. You must be on the telephone. You cannot ask a question the other webcast, please standby we compiled the Q&A roster.
Your first question comes from the line of from National Bank your line is open.
Good morning, everyone.
Good morning. When one of Rupert, can you give us a sense of the percentage of the orders that you've seen being postponed with with covid-19?
It's it's it's in the it's mainly been in the second quarter so far off somewhere in the range of uh, you know, five to five to ten million ish. But we're also seeing some stuff come in, but that's that's kind of what we're seeing right now. It is fluid. I think it's it's more a function of people looking to see what's what's happening within their areas and then updating the construction schedules accordingly.
And do you have any any color on when those orders may be delivered? Is it in determinant at this point or are you seeing some of the markets which had shut down starting to open up or some indication of when they they could open UPS?
interpreted
The short answer is nominally the shift either to a later month or two later quarter. It's driven less by law jurisdictions being open or not open, then it is individual job sites and the other job site closed for 14 days because somebody was diagnosed with covid-19 general contractor decides to shut it off for where historically you might have both the electricians in the plumbers working on the floor and instead they split it up to get more social distancing and that slows the process down. I think the reality is nobody knows a good job site by job site analysis and and location by location. It's not as simple as saying, you know, 20% of the jurisdictions won't let us work and now dead and so that that will come forward. It's it's very uncertain even on topside basis.
Okay, thanks. And you mentioned that the order entry in Q2 so far is only slightly lower than than q1. So is that an indication for where revenues home for for Q2 at this point would would q1 be a a good proxy for what we should expect in Q2. I'll answer that in a couple of ways. I think the the first piece is long as you know, the shelter-in-place orders really started happening in in the last half of March and wage. We were encouraged that that the order entry uh a continued into into April at that at that same level those were jobs where we're currently on-going the the larger question for us is what happens in the next two months and it's Kevin said it's it's it is pretty uncertain relative to Thursday.
What happens on each of the individual job sites and how that goes? I think the other thing that I would say on that Liberty is when you look at the split of what the the projects were, they they follow our normal distribution. We had 67% in the commercial side at 12 in the healthcare 11:00 in in government and 10 in education. We'll see how that moves forward, but I'm very difficult at this point for us to tell what kind of the next two months will look like as as areas open up and as job sites, uh deal with long distance in the trades,
Okay. Thanks and just finally I understand that sales and marketing efforts can be challenged today. But are you seeing any green shoots for any benefits of your efforts to start pulling in some some larger jobs?
Yes, I think we are starting to get some traction on some larger jobs consists of all these said looking backwards those have long sales office. So I don't know that any of those are ones that you will see in 2020, but we are starting to see a pick-up in the pipeline of the larger jobs that are over two million.
All right. Thanks a lot of jump back in the queue.
like River
your next question comes from line of Greg Palm from craig-hallum Capital your line is open.
Hi guys, this is actually Danny and John for Greg today. Hey, Donnie, I guess just looking at at the demand environment possibly coming out of this current situation. Could you bring some collar on on possible pent-up demand for renovations or what about new builds? And and could you possibly remind us of the mix between those two?
It's it's highly variable. I don't know that we've got great numbers as it relates to to our mix, which is only part because we're a lot of the activity happens. It's important part of our part of our value proposition is our partners doing reconfigurations that are happening everyday every weekend of the year. So I'll have do you have to give you kind of his approximation where I finish but but that'll just be a small piece of the reconfiguration renovation number and Thursday news. That's because you can reuse in our in our Solutions or modular. We don't necessarily sell a whole lot more when somebody does a reconfiguration but setting that aside as it turns off in terms of what people are going. It's very early days and people are still trying to figure out what's the right approach for them to take and and being very strategic about it and kind of Dipping their toe back.
Again, just wanted to make sure that they're people remain safe. And so that's where we're mobilizing our efforts to make sure that our value proposition that has been the same for fifteen years and and his office mates for what's going on. Now in terms of very quickly times the ability to do the reconfigurations. So if you want to have lots of discrete offices now, but the equipment down the road project be reasons you might want to have them are open plan. We could certainly help you with that all with very few people on the job site and very clean construction and job site. And so I think that that is something that that we will be playing to the other thing that we will put a strong sales push on is jobs that are currently in process where somebody objected to go with conventional construction and they find out that the schedule really hasn't moved even though you've lost one to three months of construction time. Now, they may reconsider and decide wage.
No hitter original construction schedule. They need to finish the interior with a prefabricated solution from us as opposed to staying conventionally. So there are any number of avenues that we're going to pursue it's just early may know exactly how much traction we're going to get and getting a sense as to what the coming quarters hold and Jeff. Do you want to go ahead and answer the split between renovation and and new construction in our mix? Yeah, and and and and off our data is not phenomenal on that historically, but it's it's tended to Trend around fifty fifty so
All right, great. That's really helpful.
And then I guess moving to distribution partners and the financial shape. Are you are you guys worried at all about about certain distribution partners and their ability to withstand wage of near-term shocking? Yeah. We're I guess like every like every like every company where we're looking at what our what our customers which our distribution partners and what their faith health is our our best measure of that is how payments are coming in and what are what are receivables in dsos look like our DSL was wrong. He was still really healthy. Um, we haven't seen any significant impact on our collections, but I would be uh, I I would be it would be imprudent for us not to be watching that they're watching the cash just like we're watching our cash. I'd say so far so good. We'll see what happens as this, Kentucky.
And if if uh, if construction says get back get back to work very quickly and Commercial Market opens up really quickly. Probably don't need quite as much attention as we're we're putting on it, but we're watching it. We don't have concerns yet, but it is it is certainly very high on our radar.
Great, and then just one last one for me. How do you see the I guess potential for the use of Technology as we emerge from this crisis and wage, um, possibly even like like your VR solution.
Increasing fairly significantly throughout everything that we do starting with we're going to be rolling out a virtual life experience. So that the experience that we give people when they come to Calgary and and meet our people and sure the plants and and get the full experience of our capabilities. We're going to be able to do that on a on a virtual basis, which I think will become comfortable critically important. And then also one of the attributes of our Solutions is the ability that bad technology throughout everything that we do. So be it touchless entry sensors or enhance video conferencing capability cetera. We can put together the depending upon which where you're going with me to fully install it in one of our plants or put in place the the wiring and the infrastructure in order to do that. So we're very well positioned to respond to whatever the technical aaja
Needs are that somebody who will need we'll need in their space.
All right, great. That's that's all for me. Thanks guys.
I guess again, if you would like to ask a question, please press star and then one on your telephone your next question comes from the line of William Wilson from Raymond James. Thursday is open. Thanks. Good morning, Southern Jeff and thanks for taking my questions. I had trouble getting connected to the call. So I apologize if some of this has been covered. But you you talked in the the filing some about eliminating some underperforming distribution partners and also recruiting some new ones. Could you walk us through the decision process in the eliminations and what the pipeline might look like for adding others to the to the fold in the coming quarters?
Sure, I'll take that one.
The single probably biggest determinant of the likelihood of a of a distribution partner being successful life is where are they in their individual market in terms of of size of competitors? So for an office furniture dealer, we would like to have the number one or number two, obviously because we're relying on them for their customer relationships as well as their installation capability and their financial wherewithal all of that comes together with size and width Market presence and and the history of 16th. And so what we have seen is that a couple of things in a couple of of core markets either we didn't have enough Partners New York is is an example of that and and the part was there was clearly not number one or number two, and then the in in the Texas Market the part that we had was like the sixth largest and you also see it in terms of how they wage.
Historically are they selling the full solution et cetera? We have found a very strong reception when we have approached potential Partners in terms of taking on dirt and we're focusing down the number one or number two that we think will drive the most success. And then after you have the initial conversation would become very important is asking them for business plan and what kind of resources are they committed to in the marketplace investing because what our history shows is that you need to have a stand-alone dedicated Dirty Money. A lot of times it will be rebranded and we can really help them through that but there is a start-up amount of capital that's required to get going. And so we help um through that in terms of the the line. I think that you could see anywhere over the next six to twelve months.
To 8 to get a wideband. This is also where we've had a variety of experiences with with covid-19 a couple just took a couple of weeks away and then we were able to sign up pretty quickly a few others released a little bit longer. So I think we will have a little bit of a delay going forward and there's a little bit of a challenge getting them on boarded. It is easy to get people on board and to have them come to the tax rate and get hands-on experience. But we're also prepared to onboard partners with with virtual tools and have a dedicated team for onboarding them wage.
Thanks, and just so we're clear on the the gross. Margin Outlook that that slide you provided. Is that following all of the the labor cuts? And how should we think about that to be under utilization persisting in the the next few quarters? Yeah, so that that that is following the the cuts that we did at the end of April. So you will see some underutilization within within April though. I don't think it's sufficient for us to call out but that's that's really the the Goforth at the plant level got it fixed. There are no further questions at this time, Kevin O'Meara. I turn the call back over to you.
Thanks for joining us today. I hope we give you a thorough picture of the steps. We're taking keep our employees safe improve our operations enhance our commercial organization may be very prudent with our finances for a highly focused on execution such to whatever the timing and pace of economic recovery and related demand where position take full advantage of the market available to us.
Thank you and have a good rest of your day. Ladies and gentlemen, this concludes this conference call. Thank you for participating you may now disconnect.
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