Full Year 2020 DIRTT Environmental Solutions Ltd Earnings Call
Yeah.
Ladies and gentlemen, thank you for standing by and welcome to the 'twenty and 'twenty Q4, a year and financial results Conference call.
At this time all participant lines are in a listen only mode.
After the speaker's presentation, there will be a question and answer session to ask the question. During the session you will need the press star followed by the number one on your telephone keypad.
If you require further assistance. Please press star zero and I would now like the hand, the conference average of your speaker Mr. Kim.
Okay can you. Please go ahead.
Thank you operator, and good morning, everyone welcome to today's call to discuss your its fourth quarter 2020 results. Joining me on the call are Dirks, Chief Executive Officer, Kevin O'meara, and Chief Financial Officer, John Kraus.
Management's prepared remarks today are accompanied by presentation slides to access the slides. Please view them from the web page of this webcast.
Today's call will include forward looking statements within the meaning of applicable Canadian and United States Securities laws.
Statements are based on the company's current intent expectations and projections they are not guarantees of future performance.
In addition, the call will reference non-GAAP results, excluding special items. Please reference our form 10-K as filed on February 24th 2021, with the Securities and Exchange Commission of our S E T and.
On the reports and filings with the SEC for information regarding forward looking statements and reconciliations of non-GAAP results to GAAP results.
I lost the remind you that this webcast is being recorded and a replay will be available today at approximately one P M eastern time.
I'd now like to turn the call over to Kevin.
Thank you Kim and thank you to everyone joining the call today.
And getting on slide four the construction industry continues to grapple with the consequences of the ongoing COVID-19, pandemic with pronounced weaknesses and the nonresidential sector.
Reality negatively impacted our revenue and 2020, whereas early in the year, we benefited from the projects that were underway at the beginning of the pandemic generally being seen through the completion well it became evident of the pandemic continue whereas the customers became increasingly reluctant to commit capital to new construction projects due to economic uncertainty for all sectors.
Of society, and the lack of clarity for health care clients with respect to how their patient delivery models might change post COVID-19 and all in an environment of ever changing restrictions and COVID-19, and the bearing searches and infection rates across North America.
This dynamic has continued into 2021 and we expect it to negatively impact our revenue during the first half of the year relative to the second and third quarters of 'twenty and 'twenty.
As organizations finalize their real estate needs and we collectively wait for clarity on amongst other things vaccine rollouts and and eventual return of employees from the built environment.
Despite these challenges we remain cautiously optimistic of recovery will begin in the second half of 2021.
The interest of all the analysis from sources like Dodge data and analytics predict commercial construction starts of all of copper slightly this year increasing by 5%.
Further we are in constant contact with our distribution partners monitoring activity levels within their respective regions.
While the majority of these partnership confirmed our view of slower first half activity levels compared to the third and fourth quarters of 2020. The same partners of recently confirmed their expectations of higher activity levels for the back half of 'twenty and 'twenty one.
And we find this encouraging but we'll remain cautious until their expectations and turn into orders.
We know the expectations of workplaces health care and education spaces will continue to change dramatically over the coming months and years. Similarly decision makers will now need to worry about building the right environment for their needs and initially the historical concerns about meeting budgets and construction schedules.
This change will demand spaces that are flexible adaptable and supported by technology, all key components of dirt and value proposition.
This past year, we've seen the extraordinary importance of better connectivity and bandwidth and virtually every space.
The skilled labor shortages and tighter construction timelines, our capabilities and modular power and data infrastructure, Oh, I'm, sorry of our ability to integrate technology position us as the full solution into your construction providers.
Our ability to deliver these adaptable connected spaces with faster execution and conventional construction and a competitive cost differentiates us and the world of interior construction.
Well some organizations may expect of shrink the real estate footprint are infinitesimal share of what will remain a multi multibillion dollar market combined with our enhanced marketing capability.
Should allow us to identify and address potential clients for whom our value proposition resonates.
We believe this will support attractive long term growth rates for <unk>.
So despite a difficult short term demand outlook. The long term market opportunity remains very compelling for dirt and we remain highly committed to the execution of our strategic plan in order to properly take advantage of that opportunity.
While we did not envision a pandemic of right now and start planning and late 2019, the tenants of the plan or the leverage of brilliant innovative approach to ensure construction and build the commercial and manufacturing capabilities necessary for the brilliant idea to scale and achieve its full marketplace potential.
The pandemic has not changed the importance of executing the strategy to position the company for future growth.
With the successful completion of our $40 million Canadian convertible debenture financing last month, we secured ample financial liquidity for us to continue executing our plan while the recovery takes hold.
The additional funds will enable us to avoid costly retrenchments of the transformational investments, we've made and increase our flexibility should the recovery take longer than expected.
Pandemic has allowed us to flex our innovation muscle and demonstrate our capabilities from North American health care customers in ways that we haven't before and will likely not have had the opportunity to do apps and coke.
From the delivery of acute care and chairs and modular hospitals to the development of freestanding vaccination and testing and it's part of our cross functional rapid response health care initiative, we have demonstrated our ability to quickly adapt our dirt DNA to meet our clients' ever changing needs and to do it in ways. They never would have expected.
I'm pleased to say that last week, we received our first order for 30 mobile trailer base vaccination units for a major U U S health care provider totaling approximately $2 million.
Well and itself not sufficient to offset the first half slowdown and nonresidential activity. It raises our profile within the health care community and with the new breed of customers.
Looking at our accomplishments in 'twenty and 'twenty I'm happy to confirm that we reached the continuous improvement stage in our manufacturing operations.
Since Jeff Hawkins, our Chief operating officer joined US and early 2019, he and his team of devoted themselves to establishing infrastructure processes and management systems based on lean manufacturing principles they've.
And they've also work you've got all of our employees up and running and trained with the systems, including lean manufacturing training certification the lead.
And all the way to win Black belt certification for some.
We expect the financial benefits from our improvements and efficiency and material yield and become readily apparent with an increase in sales and positive operating leverage.
As we reported throughout the year, we continue to achieve safety performance far better than industry standards, which is one of the highest priority commitments, we make on an ongoing basis.
Early this year the team introduced one piece flow to our aluminum manufacturing facilities and the simplest terms. This means parts of fabricated sequentially with no in process inventory and a dramatic reduction and unproductive employee movement throughout the plant. The result is increase the efficiency with less time and labor required for warfarin.
Our focus for the balance of the year will be the continue to refine and the improvements we've made of the operations since Jeff's arrival and leverage them to enhance our quality management systems sales and operations planning and the sustainability initiatives.
I'm also pleased to confirm that our new South Carolina facility is now and the commissioning stage and on schedule to be fully operational during the second quarter.
Turning to slide five within our sales and marketing organization, we will complete feeling territory sales representatives roles, we identified as priority one hires at the onset of the pandemic and shift our focus to leveraging the commercial organization. We built over the last 18 months to drive sales and sales pipeline growth.
Yeah.
This will include a continuation of marketing campaigns focused on the new paradigm and the interior construction return of the office initiatives and refining and promoting the dirt brand.
In addition, we will be increasing our focus on and the architect and designer community and general contractors.
The key participants and the interior construction decision making process.
Finally, we'll be building on the segment marketing by targeting key customer segments within our previously defined industry verticals as well of solutions that are complementary to our core wall offering, including casework embedded power and data networks and timber.
The ultimate objective of our marketing organization is to provide qualified leads and sales tools to our sales force. We are supplementing these with continued enhancements to our CRM system to increase the effectiveness of our sales representatives.
We've created three focus areas within our sales force first are the traditional territory sales reps focused on their local markets.
Next our segment sales specialist and most notable of which is our health care focused sales effort and the last one of our strategic accounts team.
We're beginning to gain real traction with strategic accounts, even and a business with a long sales cycle with over 35 target strategic accounts and various stages of engagement.
As an example, the $2 million sale I mentioned earlier emanated from our strategic accounts group.
Finally, we recently signed an agreement to become part of the CBRE Fusion program CBRE group is one of the world's largest commercial real estate services and investment firms and their project management group facilitated over $25 billion of total construction spending in 2019, and we think inclusion and their fusion program will be of strong source of cash.
High quality sales leads.
Before concluding I'd like to comment on some of the core tenets underlying everything we do at dirt.
This year, he's brought environmental social and governance concerns to the forefront like never before.
Stained ability is one of the founding pillars of dirt the.
Fundamental design advantages of our solutions prolongs the useful life of adult space.
And we reconfiguration and ongoing adaptability, rather than creating landfill waste by demolishing and replacing conventional built spaces.
We operate with sustainability in mind, and our factories were precision manufacturing improves material efficiency and limits waste on the job site, we eliminate and dry wall, which is one of the largest contributors to landfills from the construction industry.
People have always been at the core of dirt success because of our company is built on intellectual property that has enhanced every day by our highly talented team.
Shortly after my arrival, we made employee safety and the number one focus of our culture and we achieved the dramatic results we shared throughout last year.
We have internal programs in place and ensure not only that we recruit and retain a diverse group of people, but the these people are also able to comfortably bring their true selves to work and fully participate and the activities of our company.
We recognize the increasing importance of making these aspects of our business more transparent to all our stakeholders and I'm pleased to say that we're currently developing the analysis measurement and metrics required for more formalized reporting and we look forward to sharing more on these efforts later this year.
Finally in conjunction with announcing our strategic plan on November 2019, we articulated ambitious targets for revenue between $450 million of $550 million and.
And adjusted EBITDA margins between 18% and 22% by the end of 2000 and twenty-three.
The nonresidential construction market is much less favorable than in late 2019, and our 'twenty and 'twenty revenues declined 31% compared to 2019.
We are starting from a lower base and we anticipated when we originally discussed our plan and the outlook for at least the first half of 'twenty and 'twenty one as challenging however.
However, given our confidence and our business model our people our strategic plan and our progress on its execution, we believe the operating environment and transformation of our company are sufficiently dynamic that these targets are still achievable with that I will turn the call over to Jeff will review of the financials.
Thank you Kevin.
And that's we've done and recent quarterly calls I'm going to start with the quick review of our liquidity on slide six on.
The working capital and management focus continued in the fourth quarter with no reportable disruptions or delays and accounts receivable collections day sales outstanding net of deposits and income taxes receivable continued to run and under 30 days. We finished the year with cash balances of $45 $8 million, while the net working capital of at <unk>.
<unk> 31 was 50 335 million our current ratio remains healthy at two seven times.
In addition, we took further steps to bolster our financial resources to ensure we have the financial wherewithal to weather the current period of uncertainty and to be ready for when the recovery takes hold.
During this month, we finalized the $25 million Canadian senior secured asset backed credit facility, which replaces our previous cash flow and earnings based facility.
Most of asset backed facilities. The borrowing base is calculated based upon the percentage of our accounts receivable and inventory and the pricing is only slightly higher than our previous facilities.
The specific borrowing terms of the new facility can be found in our 10-K.
As of December 31st 2020 available borrowings under the new facility would have been Canadian and $9 3 million or $7 3 million U S. The facility remains undrawn.
During 2020, we entered into two equipment leasing facilities as you know the first is the Canadian dollar $5 million facility of which $3 $6 million Canadian withdrawn during 'twenty and 'twenty unchanged from Q3 of this year.
The second is the U S dollar facility of which three of the half million was drawn during 2020 also unchanged from Q3.
And as part of the conversion to the asset backed facility. The equipment facility was decreased to 14 million of U S from 16 million U S. We anticipate drawing an additional approximate $11 million on these lines and the first half of 'twenty 'twenty. One as we have now received most of the equipment for our South Carolina plant.
Updating on government subsidies and the fourth quarter, we qualified for an additional $3 $9 million through two Canadian government programs, the Canadian emergency wage subsidy and the Canadian emergency rent subsidy for the full year 'twenty and 'twenty, we qualified for a total of $12 $7 million of government subsidies of what's the.
$7 million was received in 'twenty, and 'twenty and the balance received and 2021.
This program has been expend extended to June 'twenty 'twenty, one and we will review our eligibility each month, we have already qualified for and made an application for approximately $1.5 million for the January of 2021 period.
As Kevin mentioned subsequent to year, and we issued $45 million Canadian of convertible unsecured subordinated debentures for net proceeds after cost of Canadian and $37 $7 million.
The debentures will accrue interest at a rate of 6% and are convertible into common shares at an exercise price of Canadian and 465 per common share or if not converted will mature and will be repayable on January 31st 'twenty 'twenty six to put it in context and pro forma the net financing proceeds of our cash debt.
Year and would've been approximately $75 million had been completed at December 31, 2020.
Now, let's turn to the financial results beginning on slide seven.
Revenue for the fourth quarter of 2020 was $42 2 million compared to $53 2 million and the fourth quarter of 2019 for the full year 'twenty and 'twenty revenues declined 31% $271 5 million compared to the full year 2019.
Turning to slide eight of adjusted gross profit margin decreased for the fourth quarter to 32% from 33, 4% and the prior year period, and 2019, we excluded $2 2 million from the calculation related to costs of underutilized capacity with no similar adjustments in the fourth quarter of 'twenty and 'twenty.
For the year adjusted gross profit margin declined to 37% versus 39.
5% for 2019.
We reduced our factory staffing levels and early 'twenty, and 'twenty and while those adjustments real lines of capacity with the then expected activity levels. The subsequent market softness caused further negative leverage on our fixed costs, which affected our adjusted gross profit margin.
Further our variable factory labor is sticky to the downside, particularly at slow or highly variable revenue levels. There is the minimum amount of staffing you need at our facilities to keep them running and responsive to activity levels.
And as a result, we expect to remain below historical percentages until sales improve.
Turning to the breakdown of operating expenses on slide nine general and administrative expenses decreased due to the reversal of a $1 $2 million provision relating to a claim for severance by one of our former founders.
Lower sales and marketing expenses for Q4, and full year 'twenty and 'twenty reflect lower commissions on decreased revenues. In addition, and across the board COVID-19 restrictions resulted in materially lower travel meals and entertainment expenses lower trade show expenses and reduced the building operating expenses. This include the.
The cancellation of our annual connect event it is reasonable to assume that the wording of the pandemic and associated restricted restrictions ease and we will see an increase in these types of expenses from current levels.
On slide 10, adjusted EBITDA and adjusted the EBITDA margin for the quarter were $2 $9 million loss or negative six 8% a slight improvement from a $3 4 million dollar loss and negative six 4% and the same period of 2019.
For the full year, 'twenty and 'twenty adjusted EBITDA and adjusted EBITDA margin was a $7 $2 million loss or a negative four 2% of decline of $18 $2 million or six 7% for 2019, most directly impacted by the $33 $1 million decrease in adjusted gross profit in 'twenty and 'twenty compared.
The 2019, we.
We have excluded the government subsidies for from adjusted EBITDA.
On slide 11, net loss for the quarter was $4 $2 million or negative <unk> <unk> per share compared to net loss of $7 $5 million or of nine cents loss per share for the fourth quarter of 2019.
Net loss for the year ended December 31, 2019 was $11 3 million compared to a net loss of $4 4 million for 2019.
The decrease in net loss is attributable to the reduction in gross profit and a $1.4 million increase and income tax expense, partially offset by $14 3 million dollar reduction in the operating costs at <unk>.
$7 million decrease and foreign exchange losses, and government subsidies of $12 $7 million.
In conclusion on slide 12, Covid, 19 made 'twenty and 'twenty and incredibly challenging year for the economy, our end customers, our partners and our employees and we see that extending into at least the first half of 'twenty and 'twenty, what specifically, we anticipate first quarter 'twenty 'twenty, one revenues to be sequentially lower.
Compared to Q4 of 2020.
That said the steps we've taken to bolster our liquidity give us the confidence to not only weather these changes but to prudently continue the execution of our strategic plan.
We remain ready to take action should business conditions worsen, we plan to maintain our current cost and manufacturing capacity structure to ensure that when the inevitable returned to a more normalized construction of environment happens, we are well poised both from a sales and production of standpoint to take full advantage of what we believe will eventually be.
A very active market operator, we would like to now open the call for questions.
And as a reminder, if you'd like to ask a question. Please press star followed by the number one on your telephone keypad.
And that is star one to ask the question well pause for just a minute and thank you call that Q&A roster.
Yes.
And of our first question comes from has seen kind of.
The National Bank.
And good morning.
So on on behalf of Rupert.
And we get some color on what we can expect from here on <unk>.
We see headwinds from Covid and the levers at your disposal of books disposal to help mitigate some of that impact whether it's more subsidies temporary closures or deferral of capex items.
And it's Jeff here and so there's a couple of things that come with it and certainly we believe we believe and we know that the government subsidies program.
The program has been extended to June 'twenty, 'twenty, one and as I said and the remarks.
We applied for a one and a half million U S of those subsidies.
In January.
If our Canadian revenues continued to be the law.
All of that threshold and we haven't seen what the calculation thresholds will be for.
The second quarter, but if we remain within that certainly we will take advantage of those sorts of those sorts of programs as they become available I think the second piece is.
And is a key objective for US is as the pandemic took hold was to ensure that.
And where possible we could exit the pandemic and a position that enabled us to take advantage of the pieces that we put in place from a production and marketing perspective, and so therefore, we've been very reticent to and.
To retrench on on those investments Accordingly, we did the the 40 million Canadians and debenture debt our debt we issued as you know in January of this year, we put in place the leasing facilities with bolstered our credit the credit facility.
And as the result of we believe we have more of them and the liquidity to get us through two on the recovery of curse.
Last but not least is our is part of our our response to the pandemic. We initiated our rapid response health care program and of rapid response healthcare program were products that we had never had and the system before and as Kevin mentioned, we got our first the order for.
$2 million for mobile vaccination trailers, we're going to continue to pursue those types of opportunities, which we hope will mitigate some of the impact of our.
Of the the AR reduction.
And commercial construction activity and then if it takes a lot longer than we will continue to revisit but this is something we're monitoring daily.
And thank you for the great color.
Conversely, how quickly can things turnaround when we do see of reopening of the economy and I ask this because the sales pipeline historically and peak.
Long lead times.
And what I'm trying to get is how much of the loss of and the opportunity can be view as deferrals.
Which should come back in.
And pent up demand and how much should we view as the lost opportunity.
Those are all really good questions and are difficult to answer.
The part that I that I can't answer is that as of.
Clients and hence partners place orders with US we can ramp up our capacity very very quickly I do think the sales cycle for the next 12 to 18 months will be significantly shorter than it's been historically I think that could also play to our strength in terms of of our short lead times and shorter construction schedule.
Because I do think there may be some pent up demand or and it's all of the liquidity and the economy starts to release.
I'm sure of seen reports of a pretty aggressive growth projections and and the economy and so forth.
And I think that there is some of it is a reasonable chance that that happens and.
Fortunately from where we said, it's very hard to have visibility and of that and so we try.
And the best we can talking to clients talking to partners to get our arms around that but I think oftentimes even the clients don't really have a sense because they're trying to figure out where their businesses are on the winter and they coming out of one of their space and it's going to be and how are there people are going to react and so forth and so we're only as good as those people figuring out how to manage their businesses.
And that's fair and and thank you for the great kind of goes on stuff.
And on Q for now.
Thanks.
And again, if you'd like to ask the question. Please press star godmother of the number one on your telephone keypad.
Your next question comes from Greg Palm with the curve.
Okay.
Paul on capital.
Yeah, I think some I guess just first off as you sort of look back on the the last quarter or last couple of quarters any geographies that are performing better or worse and what about you know metro versus secondary markets kind of curious if theres any noticeable difference there in terms of activity.
I think the single biggest determinant is COVID-19 restrictions.
And so you had and fewer of those and the south so relatively speaking the south has been stronger other areas of the Bay area and California, it's been pretty locked down.
The new England was a little bit more locked down and then other places and then New York just with everything that's going on there on the density and New York has been softer. So that's how I would characterize the regional differences.
Okay. It makes sense and of the projects that Youre doing now that you know maybe you know work and the backlog of the pipeline pre Covid and I'm curious if there's any noticeable differences and you know the types of those projects. The average order size and I'm just trying to get a sense for whether the you know the type of the scope of the projects have changed at all over the last day.
And whether you think that will be significantly different going forward and what you've seen in the past.
Yes.
It hasn't been markedly different today I do think it will be the complexion of the will be different going forward, but it's not going to be the due to COVID-19 and it'll be due to the management changes and the commercial organization and what I mean by that is with the salespeople.
Positioned.
To sell large enterprise sized projects all of the do more strategic accounts I think you'll see that rippling through you also saw you know what we had talked about before and.
The transformation of the business fewer larger projects than we historically would have done and say two or three years ago, and I think you'll see those ramping up as well, but as we've talked before those kind of have a little bit longer sales cycle as well. So I think the big news will be over the coming.
Two to four years.
And the impact that.
Much like sales team that didn't exist before will have on the book of business.
Okay interesting and last one just in terms of the you know.
And the cadence of how we should be thinking about 'twenty 'twenty, one and you know so so Q1 sequentially down from Q4 would you expect growth on a sequential basis, you know going forward. So as we get into Q2, maybe just remind us what normal seasonality usually it looks like.
Sorry, I was on mute, great and I don't think normally normal seasonality of applies from the type scenario.
But I think it would be reasonable to expect that that the the recovery is he's not going to necessarily a necessarily a hockey stick. There there is going to be some recovery into it but it's really hard to predict and.
And with vaccines get delayed and stuff pushes out it's it's it's tough to tell and.
We do see that back half being stronger, but how it builds into that that back half. You know is is is it is a tough call.
Understood, Okay, Alright, and I'll get back in the queue best of luck going forward. Thanks.
Thanks.
And there are no further questions at this time I would now like to turn the call back over to Kevin.
Before closing I'd like to thank our tremendous employees and distribution partners, who continue to demonstrate resiliency and commitment and the face of the extraordinary circumstances I strongly believe that the path. We're on guided by our strategic plan and executed by the incredibly talented team we have at or will continue to propel our organization forward.
In 'twenty and 'twenty, one and I look forward to leveraging the investments we've made the date and working with our distribution partners to enhance their ability to drive sales growth and achieve the market penetration of this fabulous company and people deserve as well the increasing the visibility of our sustainability and people strategies initiatives and thank you for joining us today.
That does conclude today's call you may now disconnect.