Q1 2021 DIRTT Environmental Solutions Ltd Earnings Call
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Thank you for standing by and welcome to debt 2021 Q1 financial results Conference call. All lines are currently in a listen only mode. After the speaker's presentation. There will be a question and answer session. If he would like to ask a question at that time, you may do so by pressing star and then.
Number one on your telephone keypad.
It is now my pleasure to hand, the conference average Mckim. Okay. Quinn. Please go ahead.
Thank you operator, and good morning, everyone and welcome to today's call to discuss first quarter 2021 results. Joining me on the call are Chief Executive Officer, Kevin O'meara, and Chief Financial Officer, Jeff price.
Management's prepared remarks today are accompanied by presentation slides to access the slides. Please view them from the web page of this webcast or on our website.
Today's call will include forward looking statements within the meaning of the applicable Canadian and United States Securities Laws. These statements are based on the company's current intent expectations and projections. 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 was filed on May the first 2021 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 and it.
I'll also remind you that this webcast is being recorded and a replay will be available today at approximately one P M eastern time and.
And now turn the call over to Kevin.
Thank you Kim and thank you to everyone joining us today.
Beginning on slide four as we discussed in February when we released our year end results, we expect them to slow down and the first half of 2020, one compared to the fourth quarter of 2020.
Projects that were and flight when the pandemic commenced were largely completed in 2020 and as a result sales on the first quarter of 2021 for the full brunt of the COVID-19 induced downturn in North American nonresidential construction activity.
We believe this quarter's revenue of $29 5 million represents our low point and the pandemic impacted operating environment.
It should be noticed was $29 5 million does not include approximately $2 million from the COVID-19 vaccination trailers, we sold in February and order, we discussed on our last quarterly call and which were delivered in April we are reasonably confident revenues and the second quarter will be at or near the quarterly revenue range. We experienced in the first half of 2020.
We also remain cautiously optimistic that robust and government stimulus plans across North America, and the growing success and vaccination Rollouts will increased business confidence and drive a recovery and the second half of 2021.
And the specific timing and magnitude of this recovery remains uncertain and muscle results are still subject to the effects from the pandemic additional waves of infections such as the one candidate is currently experiencing due to the prevalence of COVID-19, Barry and it can create.
Individual project delays and uncertainty, thereby impacting the timing of sales inhibition.
In addition supply chain delays with other building trades that come before us and the construction process can delay projects and thus far sales simple.
With what we experienced from the vaccination trailers, a few days movement and the shipping and I've been in or around the end of the reporting period can shift revenue from one quarter to another.
Despite the onset of COVID-19 last year, our commitment to the prudent execution of our strategic plan has been relentless, including our approach to creating commercial organization capable of driving the gretchen sales growth and market penetration I believe to be possible when I joined <unk> in 2018.
And this commitment positions us to take advantage of a resumption of normalized activity and nonresidential construction and grocery items.
We encouraged by the growing customer engagement, we see to increase demand for tours and both virtual and in person at our dirty experience centers and and ongoing high level of project quoting activity.
While we are unable to quantify quoting activity into our reported backlog, we see ample anecdotal evidence that our new commercial capabilities are working synergistically to allow us to speak to a broad range of prospective clients and a more coherent coordinated and thoughtful manner than ever before.
This was evident across all three focus areas within our sales force, which includes our territory sales reps, our segment sales specialists, including health care specialists and our strategic accounts team.
To support all of these areas and our distribution partners our strategic marketing team has been working closely with both our product development group and our sales team to strength in how we can pay our value proposition.
They've developed sales tools to illustrate the breadth of our unique capabilities, while also conveying the depth and specificity of our offering and some of the more technical aspects of construction, including acoustics and power and network integration.
The strategic marketing team also continues to evolve our brand awareness and strengthening our voice and the market as a thought leader and generate a growing pool of sales.
Our total cost of ownership our TCE O tool is beginning to generate results would you use of the tool to guide the conversation. We recently won a project working with freedom and architectural firm.
Although they were historically reluctant to embrace start the detailed articulation of our value proposition over the life of a project one them over and empowered them to deploy their newfound knowledge of dirt convinced their client to build richer.
Moreover, it helped transform what was initially a 50000 dollar glass from project into a whole solution sale many orders of magnitude larger.
We said the Tcl tool makes it easier to compare and contrast, and conventional construction process with the dirt project as well as quantify the day, one economics and long term value dark brings and we're optimistic clarity brings and sales conversation as a result, and a deeper understanding support and enthusiasm for <unk>.
Organizationally, our regional sales directors have now been in place for over a year and are working well with our partner network to leverage their relationships into sales opportunities. Our strategic accounts team is increasing the relationships and development, which now stand at 40 versus 35 at year end.
The culmination of this work is that we are seeing opportunities to compete for projects of all sizes and are doing some more confidently and with a clear articulation of our value proposition.
As construction activity picks up and building programs and resume at a more normalized pace the groundwork, we've relayed and establishing our organizational capabilities developing relationships and actively pursuing early stage sales conversations will put us in a competitive position to win projects.
Further increasing our competitiveness and these new sales opportunities is our rock Hill, South Carolina facility, which began producing salable tiles. During the month of April with full commissioning on track for early June 2020 one.
As a reminder, this new facility, which is highly automated operates with approximately one sixth of the labor required for similar production capacity and our Calgary plant reduces single plant risk and increases our total tie up capacity.
Physical proximity to customers located on the East coast results and an improvement of up to four days and shipping time with commensurate reductions and freight costs for the end customer.
Adding this facility to our existing operations ensures we have ample manufacturing capacity to compete for large projects.
From a broader market perspective, we monitor conventional construction closely and we believe that as our biggest competitor and where we have the greatest opportunity and gain market share and.
Conventional construction, we are observing increases and the price of steel and wallboard as well with shortages on some raw materials.
This is negatively impacting project budgets and in some cases delaying project schedules.
As dirt is installed and the final stages of a project any pre installation schedule delays risk negatively impacting the timing and their project delivery. How are we ultimately believe the current challenges face and conventional construction has the potential to drive demand for dirt due to the increasing price competitiveness of our solutions as well as our ability to help preserve projects.
Casuals with our short lead times.
<unk>, two largest raw material and puts our medium density fiberboard and aluminum while they've experienced some price increases it has not been nearly to the same extent as steel and wallboard.
And been able to mitigate these increases through efficiency improvements and our manufacturing process to date and we've not experienced any major raw material shortages.
We further believe that increased activity, partially driven by the resulting price competitiveness between our solution and conventional construction will further allow us to absorb commodity price inflation by leveraging plant fixed cost.
That said this is something we are watching and if we see inflation outside the bounds and which we believe we can reasonably absorb we will take action.
We also provided an update on our fault built litigation and our most recent form 10-Q as you will see we've been very actively prosecuting our multiple lawsuits against our founders and their new venture aggressively taking the fight to them as.
As an example, we recently defeated and application for partial summary dismissal, that's ought to have the restrictive covenants and we believe we're clearly violated declared unenforceable.
Alberta Court sided with us and just Mr application and that vision was upheld on appeal.
In addition, we have been busy question defendants and witnesses and the Canadian case with more to come over the next few months as.
As we said and our 10-Q, we believe the results from the question give strong support to our allegations and we intend to continue to pursue and the case vigorously.
Before concluding I'd like to provide a quick update on our commitment to our first formal ESG report.
As I mentioned last quarter sustainability is one of the founding pillars of dirt the fundamental design advantage of our solution prolongs the useful life of a built space, allowing and reconfiguration and ongoing adaptability, rather than creating landfill waste by demolishing and replacing conventionally built spaces.
Price chart, I software and deployment of lean manufacturing techniques and our plants allows us to minimize the waste generated and producing our solutions, but our commitment goes beyond that we operate with sustainability and mine throughout our business and we recognize the importance of transparency and all of our efforts as a result, I am pleased to confirm that we expect to release.
Our sustainability report later this quarter and conclusion, while activity levels. This quarter were slow and we are not out of the woods yet in terms of the effects of COVID-19 on our business, we are confident and the progress we've made and our strategic plan.
We see a market that is demanding flexible flexibility and adaptability and their physical spaces and this is no longer unique to a discussion of returned to work initiatives, but is more pervasive really being considered and all projects.
Our ability to empower people to build sustainably for the future with cost certainty and on and accelerated schedule is unique and the industry and we are better positioned than ever before to execute on that exciting opportunity with that I will turn the call over to Jeff for a review of the financials.
Thank you Kevin.
As we've done and recent quarterly calls I'm going to start with a quick review of our liquidity on slide five.
Our working capital management focus continued and the first quarter with no reportable disruptions or delays and accounts receivable collections day.
Net sales outstanding net of deposits and income taxes receivable continued to run and under 30 days. We finished the first quarter of 2021 was $58 $7 million of cash compared to $45 8 million at year end.
The increase reflects 29 and a half million dollars of net proceeds from the convertible debenture issuance in January offset by cash used in operations of $12 1 million and Capex of $3 6 million.
Cash used in operations included noncash working capital usage of $4 4 million.
And to note is that subsequent to quarter and we completed a $7 2 million dollar draw of our U S equipment facility, primarily related to our South Carolina plant and anticipate drawing an additional $3 million to $4 million during the second and third quarter of this year.
In short we remain in a very strong financial position, which enables us to continue the prudent execution of our strategic plan, but the flexibility to pivot quickly should we need to.
Our net working capital at March 31st with $75 million and our current ratio improved to three four times from two seven times at December 31 2020.
Updating on government subsidies and the first quarter, we qualified for $4 $1 million through two Canadian government programs and the Canadian emergency wage subsidy and the Canadian emergency rent subsidy from a cash perspective, and the first quarter of 2021, we received $1 $7 million sub was outstanding at December <unk>.
<unk> 2020, and $2 million from the 2021 amounts with the balance to be received and the second quarter.
Both programs are considered for extension to September 25th 2021, and we will continue to evaluate our eligibility for each qualifying period.
Turning to the financial results on slide six revenue for the quarter was $29 5 million a decline of $11 5 million or 28% from $41 million for the first quarter of 2020.
This reflects for the first time, the full impact of the slowdown and nonresidential construction activity under its business as Kevin noted earlier. This does not include approximately $2 million of revenue from the COVID-19 vaccination trailers, we discussed last quarter as those were delivered to the customer after quarter end.
On slide seven adjusted gross profit was $7 $2 million or 24, 3% of revenue have declined from $15 $6 million or 38% of revenue for the quarter ended March 31 2020.
Adjusted gross profit margin was negatively impacted by lower revenue revenue levels and negative fixed cost leverage as well as the inherent inefficiency that comes with these low activity levels as a result, and the first quarter of 2021, we separately classified $1.8 million of overhead costs related to our underutilized.
<unk> or 6% of gross profit margin in cost of sales and.
And the first quarter of 2000 $22 million of overhead costs were excluded from adjusted gross profit due to operating at lower than normal capacity levels and that period as well.
It is important to note that we have deliberately maintained manufacturing head count and the first quarter of 2021, despite the shortfall in revenues relative to capacity in.
In light of the positive indicators that Kevin described we are preserving our skilled workforce and ability to respond to the anticipated recovery of demand in the second half of 2021.
And we mitigated the cost of this strategy to a certain extent by implementing plant furlough days.
In addition, I would reiterate my comments from last quarter, our variable factory labor is sticky to the downside, particularly at slow or highly variable revenue levels. There is a minimum amount of staffing we need to keep at our facilities to keep them running and responsive to activity levels.
As a result, we expect adjusted gross profit to remain below historical percentages until sales improve which as Kevin mentioned, we believe will begin happening in the second quarter.
Turning to the breakdown of operating expenses on slide eight all categories were down slightly and the first quarter of 2021 compared to the first quarter of 2020.
Sales and marketing expenses decreased due to the reduction in commission expenses on lower revenue and lower travel meals and entertainment expenses as a result of ongoing COVID-19 travel restrictions it is reasonable to assume debt when the pandemic and associated restrictions ease and we will see an increase in expenses from current levels.
General and administrative expenses declined as a result of lower professional fees and a point $6 million credit loss recorded in the first quarter of 2020 that was not repeated in 2021, partially offset by increased severance costs in 2021.
On slide nine adjusted EBITDA, and adjusted EBITDA margin for the quarter decreased two and 11 $4 million loss or minus 38, 6% from a $5 $5 million loss or minus 13, 4% in the same period of 2020.
This reflects an $8 $4 million decrease in adjusted gross process, partially offset by a <unk> 3 million lower cost of under utilized capacity as described earlier lower professional fees reduced commissions on lower revenues and cost reductions as a result of reduced activity related to COVID-19.
And the first quarter of 2020 as I said, we increased our provision for expected credit losses of $5 6 million, which partially offset these reductions.
Turning to slide 10, net loss increased to $12 5 million or <unk> 15, net loss per share and the first quarter of 2021 from a net loss of $5 3 million or six net loss per share for the first quarter of 2020 and.
The increased loss is primarily the result of a $7 $9 million decrease and gross margin a $2 $5 million net decrease and foreign exchange gains a $1.4 million increase and income tax expense and a $6 million increase and net interest expense, partially offset by a $1 $2 million decreasing operating expenses.
<unk> and $4 $1 million of government subsidies and 2021.
In conclusion on slide 11, Q1 of 2021 was a challenging quarter for dirt and the impact of COVID-19 induced slowdown on our revenues resulted in cash utilization within the business, particularly as we hold on manufacturing capacity steady in anticipation of responding to increased revenue levels.
And the second half of 2021.
The steps, we've taken to bolster our liquidity, including lease financing to cover the majority of the cost of our South Carolina facility and the convertible debenture financing and January give us confidence to stay the course as we see encouraging early indications of the commercial success of our strategic plan and improvements and economic conditions.
While we remain ready to take action should can business conditions deteriorate, we plan to maintain our current costs and manufacturing capacity structure to ensure that when the inevitable returned to a more normalized construction environment cabinets, we are well poised both from a sales and production standpoint to take full advantage of what we believe will eventually.
<unk> be a very active market.
Operator, we would now like to open the call for questions.
As a reminder, I would like to ask and ideas.
Can you may do so by pressing star and the number one and on your toes.
Keypad again that star one we'll pause for just a moment.
Great.
The first question will come from the line of Greg Palm.
Hey, guys. This is actually Danny acreage on for Greg Palm today, Thanks for taking the questions.
Good morning, Dan.
I'm just wondering if you could give maybe a little color on on cadence of order activity throughout Q1, what you saw there and maybe if you could.
What youre, maybe seeing daily order rates as we move through April and and that compared to Q1 last year.
And.
Yeah.
And if it's done it's Jeff here.
And as we are as we came through Q1.
From a cadence perspective January was certain to lowest of the lowest period that we saw with improving sequentially on a month over month basis.
I think as we moved into April we've continued to see see that pattern and we'll see how that plays out for the for the rest of the second quarter.
One thing I would point you to is on the balance sheet. If you look at customer deposits at December 31, 2020 versus customer deposits.
For the March 31, 2021 period, you can see a dramatic increase and that which is reflective of the increased activity that's coming at us and the second quarter.
Got it and that's good and then.
Maybe as it relates to order activity was there any geographies or end markets that maybe surprised you guys to the downside.
You know I think not really surprising.
Price and the Canadian market continues to be very slow and you can see that in in our segmented note.
Canadian the Canadian orders were about 10% of revenues compared to.
Compared to the U S. The overall commercial segments.
From a 2020 'twenty, one was down 43% and education was down 57%, but.
But we did see improvements on the healthcare side as well as the government side.
Both of the commercial and education are reflective of the Lockdowns that we've seen across North America, but I think it's also fair to say that we are seeing.
And quoting activity and those sorts of things pick up as the U S begins to reopen.
Got it and how much of that was driven by by new construction.
Compared to like a renovation type.
I don't really have that data at my fingertips.
And.
I think in general, though it's it's a function of.
And of projects that have been that have been brought along overtime.
And I think what we've been seeing is is and customers that are bringing projects to to a point.
And then pausing as they try and figure out when is the time to bring the right people back into the office and so I think it's more it's more of that but the the first quarter was definitely that that slowdown from not having a 2020 and process stuff coming through.
Okay makes sense and then last one from me it looks like during the quarter.
And maybe shed a few more distribution partners.
And that's when do you expect that that kind of churn and the distribution channel to loblaw.
And maybe start to increase the amount of partners guidance.
And.
This is Kevin.
It's leveling out, but you'll always see some theres always going to be a bottom 10 per cent theres always going to be places, where we feel like we're underpenetrated and so I think that you will see debt will be continued activity and I don't think that you necessarily can draw a correlation between number of partners and our sales because.
We as we.
Upgrade partners and improve penetration, it's possible that we actually.
And are able to improve our sales per partner so that we.
We grow even with a stable.
Plus or minus shrinking or growing set of partners.
Got it thanks for answering the questions.
Norris.
The next question will come from the line of Rupert <unk> with National Bank.
Good morning, everyone.
Good morning Rupert.
Martin can you give us some more color on on your strategic accounts I see you increase then in the quarter to 40 can you talk about.
And our relationships are developing but also what's defined and the relationship if any commitments are made on on either side.
Yes.
Hum.
And for can you repeat your second question I think I missed something and they have cut out.
So just looking at your your strategic accounts and he can talk about.
How theyre developing but also what's defined and your relationship with the strategic accounts for.
For example are you offering some.
On pricing commitments to that and are there any volume commitments from the strategic accounts I think just give us some color on how the relationship is defined.
Got it.
He and the.
And the relationships are coming from all different to different areas.
It's people that we have done business with in the past and one market, where historically the company didn't have the capability.
To build on that relationship and and help them and other geographies. We've seen increase in companies issuing rfps that historically, we werent and are positioned to respond to so it will be part of formalized processes.
Some of it comes from individual personal relationships from a variety of people within the company and so it can really arrives.
Anywhere I think was characterized by most of these are typically.
And typically multibillion dollar companies.
And her two exceptions, but they also have real estate needs across North America, and they also benefit from having somebody like us that has.
Design standards in place that Ken.
Codify exactly how they build on with some of these clients. We literally have a manual and says okay. When youre doing a project for this particular customer here's exactly how and how it's supposed to go in terms of commitments. It varies based on whatever their needs are.
In an ideal world and we do is at a high level kind of define our commitment to them.
There may or may not be some sort of comments as it relates to pricing, we do prefer that on a project by project basis. They have entered into an agreement with our individual distribution partners and what we're doing from a strategic accounts standpoint, and just providing a single point of contact and consistency of experience.
Great and are you seeing much of your revenue coming from that group, yet seeing seeing traction from the relationships. It's starting to build and we are seeing some revenue coming in and even where we'll be in an RFP process and we haven't heard a formal decision, but the next thing you know, we've got and several projects from them.
Along the way.
So yes, we clearly are seeing increased activity from.
From a strategic accounts side of the business.
And then on on your strategic marketing initiatives, you mentioned and more targeted now can you talk about.
Your your resource allocation and VI.
While the fee or I mean are you finding any pockets of the markets that look, particularly attractive for you right now.
And may be different from from where the company used to focus.
We are finding pockets, but they're consistent with where the company is focused historically on the commercial side I would say talent intensive businesses the more high tech companies.
Any of whom have done extraordinarily well is coming through the pandemic. There's a lot of interest there there's a lot of activity there health share as well.
And the lessons that the various health care providers have learned coming through the pandemic.
Really accentuates the value of adaptable spaces, and so we're seeing renewed interest there.
So both of those are consistent with with pre pandemic and consistent with how we put together.
Our strategic plan overall.
Great. Thank you I'll get back on queue.
The next question will come from the line of Josh Wilson with Raymond James.
Good morning, Kevin and Jeff Thanks for taking my questions.
Sure.
I wanted to get into the change in activity a little more.
To what extent is the increase in activity completely brand new projects versus maybe projects that were put on hold prior to the pandemic.
We haven't quantified debt, but a significant number of them are ones that were put on hold and pre pandemic and a lot of whats happening is its projects that could be anywhere between 70% to 90% of the way ready to go and then we're getting calls and say, okay. We're ready to go and what that's doing is compressing.
And the sales cycle and so we've made comments on the prepared remarks about having a hard time turning activity and tobacco. That's that's part of the reason is we will get phone calls.
Out of the Blue that say, okay, we're ready to go and will dramatically increase.
Both the size of the project because we might have reflected it in our pipeline as well as the time and so that is a very definite.
Aspect of what we're doing and I think will continue for the next quarter or two.
Got it and and on that topic of the sales cycle and.
Any changes youre seeing and conversion rate either because of where we are and the and the pandemic recovery because of the new tools, we for all day.
Anecdotally I think it's higher.
We're still refining our CRM system and be able to capture that and those specifically.
But we are having what feels to me and the markets are higher degrees of success and conversion rate.
And.
And as the increase in activity focused and any end markets or regions within the U S.
No it's.
It's more I wont say opportunistic, but episodic based on people's needs and and how they're thinking about their individual projects. There's no correlation and that can really draw you too.
Got it and then last one from me and you talked about taking action as inflation gets worse could you run through the menu of actions and how you might rank them or how you might consider responding and if that does play out.
I mean, it's primarily as much as we don't want to do it looking as to enter pricing structure I think that we did a pretty comprehensive supply chain review over the last year or so.
And we were able to take some cost out that way.
And we've talked and any number of quarters as our sales were declining and the impact of negative operating leverage and so.
We will take advantage of the first and second one I think we'll just kind of happen naturally.
As we shift production into the Iraq Hill facility that will help as well, but ultimately.
About the only lever you have at the end of the day, if those aren't sufficient to start looking at your pricing structure.
Got it good luck with the quarter.
Thank you thank.
Thank you.
And with that we are showing no further audio questions at this time.
I'll now hand, the conference back to Mr. Kevin O'meara for closing remarks.
As always I would like to thank our tremendous employees and distribution partners, who continue to demonstrate resiliency and commitment in the face of extraordinary challenges I continue to strongly believe that the path. We're on guided by our strategic plan and executed by the incredibly talented team, we have a dirt or prepare and propel our organization forward and 2021.
We continue to refine the commercial capabilities that are beginning to deliver tangible results and the market. Thank you for joining us today.
This does conclude today's conference call. We thank you for your participation and ask that you. Please disconnect your line.
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And.
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