Q2 2021 DIRTT Environmental Solutions Ltd Earnings Call

August 5, 2021

[music].

Yeah.

Good morning, My name is Thea and I will be the conference operator today at this time I would like to welcome everyone to the dirt 2021 Q2 financial results conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. If you would like to ask a question.

During that time simply press star and the number 1 on your telephone keypad to withdraw the question press the pound key. Thank you at this time I would like to turn the conference over to Kim Macaire Cochran. Please go ahead.

Thank you operator, and good morning, everyone. Welcome to today's call to discuss <unk> second quarter 2021 results. Joining me on the call of Dirks, Chief Executive Officer, Kevin O'meara, and Chief Financial Officer, Geoff Krause.

<unk> prepared remarks today are accompanied by presentation talks of the slides. Please view them from the web page of this webcast on our website.

Today's call will include forward looking statements within the meaning of applicable Canadian in the United States Securities Laws. These statements are based on the company's current intent expectations and projections and are not guarantees of future performance in.

In addition, this call will reference non-GAAP results, excluding special items. Please reference our form 10-Q was filed on August 4.2021, with the Securities and Exchange Commission of our SEC and other reports and filings with the SEC for information regarding forward looking statements and reconciliations of non-GAAP result to GAAP result.

I'll also remind you that this webcast is being recorded in the replay will be available today at approximately 1 P. M. Eastern time, I would now like to turn the call over to Kevin.

Yeah.

Thank you Kim and thank you to everyone joining us today.

Starting on slide 4 as expected revenue from the second quarter of $41.1 million was nearly 40% higher than our first quarter revenue strengthening our conviction that the first quarter of 2021 represented the trough of our pandemic impacted revenue, even though the overall environment remains challenging.

We're closely monitoring potential surges and COVID-19 infection rates, driven by the delta of variance and the resulting impact on demand labor availability supply chains and our own operations.

Health care represented 34 per cent of revenue this quarter higher than are typical of health care mix of approximately 20% to 25% driven by 2 larger projects.

The first was approximately $2 million from the delivery of the Covid vaccination trailers, we discussed on our last quarterly call and the second was over $6 million in revenue from projects for a long standing strategic accounts.

While the revenue from this client will be less over the balance of the year. We are pleased with both the confidence in the prospects for their business. They showed in their longstanding confidence endured solutions looks.

Looking at a broader market perspective, I'd like to reiterate some comments I made during our last quarterly call.

Conventional construction is continuing to experience input price pressures of lack of skilled onsite labor and material shortages from supply chain constraints. In addition to other delays in project schedules.

These realities maker of long term customer value proposition more attractive but in.

Unfortunately also delay our ability to realize upticks from commercial activity.

From a cost perspective, we have strategically elected not to pass along with raw material price increases in order to enhance our relative price competitiveness versus conventional construction.

While this decision will weigh on our gross profit margins in the short term is our expectation that the increased price competitiveness of our solutions will ultimately drive higher demand, allowing us to improve profitability through the absorption of unused labor capacity and fixed cost leverage within our plants.

From the perspective of project schedules the.

<unk> and conventional construction combined with permitting backlogs are resulting in unanticipated an abnormally long scheduled delays both of them the number of projects experiencing delays and the longer duration of the delays.

These delays will continue for a period of time as permitting delays will translate into delays from municipal building code inspectors during the project execution.

On the 1 hand dirty is uniquely positioned to recapture a portion of the time loss of the schedule delays, making of some more attractive option compared to conventional construction. However.

As dirt is installed in the final stages of the project. These delays are impacting the timing of our project delivery.

We have maintained sufficient raw material inventory and labor capacity in our plants to sustain our 3 week lead times and 99% on time and complete job site delivery performance.

Carlos from Rone capabilities. Many of our clients are experiencing delays, which has resulted in a corresponding shift of our projects from the second half of 2021 into 2022.

We now expect a slower pace of recovery with third quarter revenue anticipated to be similar to the second quarter.

At the same time, we continue to be encouraged by the level of customer engagement, we are seeing.

Currently nearly every conversation we have with a current from prospective client starts where they are expressing the need for flexible adaptable spaces.

The dialogue often expands in the skilled labor shortages and scheduled delays all of which are central to the customer value proposition.

Our increased customer engagement as evidenced by the growth in the number of strategic account relationships in development, which increased to 44 versus <unk> 40 at the end of last quarter and by the increased demand for tours, both virtually and more frequently now in person in.

In June we had a 30 month high for the number of tours. We hosted we expect demand for customer tours to continue to increase as we opened our Dallas store experience center late in the fourth quarter.

Even more exciting we have been successful on the number of large strategic accounts, rfps, which we define as projects in excess of $2 million with delivery dates beginning in 2022.

An important accomplishment because we know that having a sustainable pipeline of large projects is necessary to achieve our growth targets.

1 of the goal we articulated in the strategic plan, we presented in November 2019, and this coal was met despite the many unforeseen challenges we have since experienced.

To be clear we are still in the early stages of establishing the pipeline. We believe is necessary to drive our long term revenue growth targets. However, we were encouraged by the gradual rebuilding of the number of large projects in our pipeline.

We continue to leverage our total cost of ownership of T. C O tool to illustrate the advantages dirt brings versus conventional construction and our strategic marketing team continues to work closely with our sales team to strengthen how we convey our customer value proposition the end clients as well as to the architect design and general contractor community.

We've made considerable progress in strengthening our distribution partner network in sales force since the beginning of 2020.

Over that time, we've added 11, new distribution partners and 28, new sales reps.

Some of the partner addition, supplemented in the existing market others replace incumbent partners without exception the replacement partners are larger and better capitalized than the partners. They replaced.

Nevertheless, the began his dirt partners during the pandemic generally the smaller teams are minimal interior construction pipeline and the Onboarding process that was conducted virtually.

As such they have had a limited impact on our revenue to date.

As we emerge from the pandemic and these new partners are able to supplement their teams and build their sales pipelines the potential impact is significant.

Our new sales reps have had limited personal client interaction and their training has been virtual versus in person in Calgary as well as the practice pre pandemic.

Similar to our new distribution partners or new sales reps, who made of limited contribution to our revenue today, but represent significant future sales potential.

During the second quarter, we are able to have in person client distribution partner and sales meetings and the dramatic difference between personal interaction versus meeting virtually on a computer monitor cannot be overstated.

In conclusion, we encourage the sales activity, we see within the organization as a result of the investments and progress we've made within our commercial organization over the last 18 months.

While many challenges remain we are delivering on our strategic plan in a market that has shown some signs of recovery from pandemic closed and where the cost and schedule dynamics of our largest competitor conventional construction should be favorable the dirt.

We see a market that is demanding flexibility and adaptability and the physical spaces.

This is not a discussion of limited to return to work initiatives, but rather as a more widely being considered and all projects are.

Our ability to empower people to build sustainably for the future with cost certainty and on an accelerated schedule is unique in the industry and we are better positioned than ever before to execute on that opportunity with that I will turn the call over to Jeff for a review of the financials.

Thank you Kevin.

I'm going to start with a quick review of our liquidity on slide 5.

We finished the second quarter of 2021 with $58.3 million of cash compared to $58.7 million at March 31 of this year.

In the second quarter of 2021 cash provided by operations was $1 million capital expenditures of $6.4 million in the second quarter were funded by equipment leasing facility draws of $8.4 million.

Addition, and in accordance with the terms of the leasing facility, we restricted a further $1.7 million of cash and made $6 million of scheduled repayments, we expect to draw an additional $2 million to $3 million on our equipment leasing facilities in the third quarter of 2021.

Our working capital management focus continued in the second quarter with total recordable disruptions or delays in the accounts receivable collections day sales outstanding net of deposits income taxes and government subsidies receivable continued to run in under 30 days.

Net working capital at June 30 was $67.2 million and our current ratio was 2.8 times down from 3.4 times at March 31, 2021, but up from 2.7 times at December 31, 2020, and still very healthy.

Updating on government subsidies in the second quarter, we qualified for $3.4 million through 2 Canadian government programs, the Canadian emergency wage subsidy and the Canadian emergency rent subsidy.

From a cash perspective, 2 of the $5 million receivable at June 30 of 2021 with most of that received in July.

Both programs were just recently extended to October 23, 2021. They were set to expire September 25, 2021 of the last federal budget and we will continue to continue to evaluate our eligibility for each qualifying period.

Turning to the financial results on slide 6 as expected revenue for the second quarter returned to quarterly revenue range as we experienced in the first half of 2020 and showed a substantial sequential increase from Q1 of this year rep.

Revenue of $41.1 million was weighted 34% to the health care vertical for the reasons Kevin outlined earlier.

Due to the Lumpiness of project revenue, we would anticipate of revenue mix by vertical will revert to historical weighted over the short to mid term.

As Kevin also mentioned many of our customers are experiencing schedule delays in the projects, while we have seen little disruption to our manufacturing or installation times. These broader project delays have resulted in greater forecasting uncertainty and the number of our projects being pushed from the second half of 2021 into.

2022.

Consequently, we are now expecting a slower pace of recovery in the second half of 2021 with third quarter revenue anticipated to be similar to the second quarter.

I would like to emphasize however that we remain encouraged by the increase of sales activity success in large project rfps and growth and opportunities, but recognize that the conversion to revenue will likely take longer than we previously anticipated due to all of the upstream factors we have discussed to date.

On slide 7 adjusted gross profit was $11.3 million or 27, 4% of revenue a decline of $4.9 million from the quarter ended June 30 of 2020.

The reduction was attributable to $1.3 million of higher transportation costs due to third party trucking cost increases $1.3 million of higher direct material costs due to the combined impact of the 5% increase in the cost of materials and a specialized projects that required additional third party manufacturing inputs.

$5 million of incremental costs related to our new rock Hill plants as well as an estimated $1.1 million dollar impact of the stronger Canadian dollar Canadian based manufacturing costs.

I will also point out that in Q2 of last year, we had a $1.2 million reversal of Tim.

Timber provision, which did not reoccur this year.

I would like to remind everyone.

2 strategic decisions, we made as it pertains to pressures we are experiencing in adjusted gross profit.

First we are currently running with excess manufacturing capacity and have done so deliberately to be prepared for increasing the net debt.

Speed and magnitude of the recovery and how quickly it turns into orders for us remains highly uncertain as we come out of the pandemic.

Our variable factory labor sticky to the downside and there was the minimum amount of staffing we need at our facilities to keep them responsive to activity levels. We.

We believe there would be risks associated with reducing these costs should we see an accelerated return to revenue growth that said, we are working to further optimize our costs in light of the commissioning of our new Rock-eel facility and the capacity of provides.

The strength of our balance sheet and the steps we have taken to increase liquidity enable us to undertake the strategy.

Second.

As Kevin noted earlier, we have made the deliberate decision not to pass along higher direct material cost of the customer in the face of the modest inflationary pressures. We are experiencing it is our view that the increase in our relative price competitiveness versus conventional construction will drive higher demand, allowing us to improve profitability.

The absorption of unused labor capacity and fixed cost leverage within our plants as.

As activity improves we expect gross margins to improve accordingly that said, we are actively monitoring the inflationary pressures and the impacts on our cost structure.

Turning to the breakdown of operating expenses on slide 8 sales and marketing expenses increased by $1.4 million over the comparable quarter last year as travel the travel restrictions ease and travel meals and entertainment expenses increased the increase was also attributable to salary and wage expense as we continue to build their sales.

Organization.

General and administrative expenses increased by $1.6 million due to the impact of the stronger Canadian dollar higher salaries and benefits expense and professional fees.

Operations support expenses at the technology and development expenses both decreased nominally.

Well, we called out the negative effects of the stronger Canadian dollar on our gross profit already we saw a similar effect on the SG&A spread across the 4 categories of sales and marketing G&A operations support and technology and development in.

In total the impact of the stronger Canadian dollar on Canadian based SG&A was about $1.3 million from the quarter and $1.9 million year to date.

Depreciation and stock based compensation from this so as to determine the impact on adjusted EBITDA. The estimated impact was $1.2 million and $1.7 million for the 3 and 6 months of 2021, respectively.

In the second quarter of 2021 Canadian dollar the piece of V. The U S. Dollar was 123 versus $1.3 9 last year on a year to date basis in 2021. It was 125 versus $1.37 of last year.

Yeah.

On slide 9 adjusted EBITDA, and adjusted EBITDA margin for the quarter decreased to $6.8 million loss or negative 16, 6% from point of $3 million or 6% from the same period of 2020 the.

This reflects the $4.9 million decrease in adjusted gross profit and increased expenses as I've already discussed.

As a reminder, we excluded the government subsidies from our adjusted EBITDA I would point out of the combined impacts of the stronger Canadian dollar of Canadian dollar expenses in the quarter on both gross profit and SG&A was about $2.4 million.

Turning to slide 10, net loss increased to $9.7 million of 11 net loss per share in the second quarter from net income of <unk> 3 million or zero cents per share in the second quarter of 2020. The increased loss is primarily the result of the $5 million decrease in gross profit of $4.2 million dollar increase in <unk>.

<unk> expenses $8.9 million reduction in government subsidies and a $7 million increase in interest expense.

Do you think decreases were partially offset by <unk> $9 million reduction in foreign exchange losses.

In conclusion on slide 11, we are encouraged by the sequential increase in quarterly revenue and the return to 2020 levels. We remain cautious however on the timing of a recovery through the second half of the year. The steps we've taken to bolster our liquidity, including lease financing to cover the majority of the cost of the new South Carolina facility.

And the convertible debenture financing in January of 'twenty, 'twenty, 1 give us the confidence to stay the course as we have seen encouraging early indications of the commercial success of our strategic plan and improvements in economic conditions.

While we remain ready to take action should business conditions deteriorate, we plan to maintain our current cost of manufacturing capacity structure subject to optimization to ensure that we are well poised from both the sales and production standpoint to take full advantage of what we believe will eventually be a very robust market, we believe that.

We are able to drive higher revenues, there's ample leverage in our business model to achieve significant profitability.

Operator, we would like to now open the call for questions.

Thank you. So at this time I would like to remind everyone that if he would like to ask a question you May press star followed by the number 1 on your telephone keypad again that star and the number 1 on your telephone keypad now.

The loss for just a moment to compile the Q&A roster.

Yeah.

And your first question will come from Greg Palm with Craig Hallum Capital. Please go ahead.

Yeah. This is Danny acreage on for Greg today, Thanks for taking the questions.

1 of your Daddy.

I guess as we're looking at second half revenue you kind of said slower pace of revenue growth in the second half.

I think for Q3 that those comments are pretty clear, but looking out to Q4.

Are there any expectation for Q4 growth still or has the entirety of that kind of second half activity shifted in the.

2022.

Yeah, we haven't given we haven't given guidance on Q4 as you probably as you probably noticed I think the.

The the key thing there is it's still very opaque.

We are seeing delays push outs, we are doing what we can to mitigate that.

The <unk> projects coal projects into the quarter, but but it's pretty opaque for us we are expecting that the recovery of itself is slower than what we'd originally anticipated.

But also as you would have heard from our car.

Our comments, we are quite encouraged of boat.

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Got it and then maybe just touching on the decision not to pass material inflation on of the customer maybe.

A little bit the behind the scenes color on the puts and takes.

I guess attacking that.

Kris demand with the competitive pricing versus maybe constraints of the margins for the near term I guess, how should we look at that.

Yeah.

I think I think that's the.

The the way to look at is as we look at as we look of what the what the the price increases were relative to our.

Our historical norms, just a couple of things in play first of all of them, we had the impact of of.

<unk>.

The the higher cost of trailers rolled through which.

Through the quarter, which which impacted the prices I think the other thing that we've seen is the intake of packaging or overall material pricing is perhaps less than you would expect and that's the result of a lot of the work that we've done of the plaque in fact, the pricing when we look at the materials.

It's actually at similar levels as a percentage of our revenue relative to 2018 to 2017, so we've been able to absorb a lot of that through efficiencies.

When you look at the overall fixed cost structure of our clients that we have and the unused excess labor capacity, we get a lot more impact from profitability and the impact by using up that excess capacity and that the fixed cost leverage by driving increased demand through the competitiveness that we believe will come out of.

Out of not raising our prices.

And so that's that's the fun, obviously, we're going to continue to moderate in the state.

The keep driving up we'll take a look at it but we think we get better Bang for Buck out of the increased competitiveness.

Great. That's helpful and then maybe 1 more.

On the larger strategic accounts and and maybe the increased activity you've seen in the pipeline and maybe on the Rfps you've been seeing are those coming from from existing clients or are those new customers. What can you say I'm not.

Sure.

But a couple of color on that.

Both existing and new clients.

We are quite pleased with the activity that's going on in our strategic account growth and you would have seen that we had another 10% increase in the amount of of.

Accounts debt that we're engaged with.

On the on the Rfps themselves.

We define largest greater than $2 million there across multiple industries. Those include healthcare financials energy professional services and tech. So it's a broad range. They were also competitive and so we were against other we were against other organizations there.

Came out of ahead. So we're quite encouraged by that we're now into the scope and schedule in the discussions with them.

The delivery expected on those in 2022 and 'twenty 3.

Yeah and are those more for for activity and remodel or new construction.

I think they are primarily in the new construction range, but I suspect, it's a combination of the tea.

Got it all I'll leave it there thanks.

The next question will come from Rupert Mirror with National Bank. Please go ahead.

Good morning, everyone.

Good morning, good morning.

The larger project awards that you discuss discussed in a push of the revenue to next year. It seems like you have more visibility on future revenue than what we might have had.

Last quarter I'm, just wondering if you can talk to us in terms of sort of the scale of of the backlog and the visibility that the do not have into sales and how that's trending.

Hey, Rupert it's Kevin.

What I would tell you is crazy and you've been following us for a while to compare and contrast them for several years ago.

The tools that we have in place.

CRM systems and power and so forth. The people that are doing the analysis and the quality of the sales reps and how we train them to do the forecasting are all significantly better than what it would've been a couple of years ago.

The issue and just giving you a direct answer to your question is the operating environment.

Now there's 2 dynamics going on 1 we've talked about in which was the supply chain issues of matters continuing Unfortunately, the world is not been setup to.

To do of hard reset after the pandemic and then the other which we're probably feeling a little bit more south of the border of the north is the delta variant and so trying to figure out the exact timing of these very very difficult. So I do feel like we have a better job of kind of overall, having our arms around this where the opportunities general magnitude.

So forth, but in terms of exact timing.

It's more difficult than ever given the operating environment.

Okay, Great do you have a sense of the scale of the backlog, though of timing aside just the same dollar number of of jobs or what you've been awarded contracts are of good visibility on contracts.

We have we have.

A decent sense of that.

1 of the things we've experienced over the course of the project getting design and so forth is the scope and scale can move around fairly substantially and so at any given time, we've got a decent.

<unk>.

A decent census to where things stand and sometimes it's good news I'm not giving the example, I think remember mentioned this on the last quarter. We're early days of our T. C. O tool, we have a relatively modest glass run totally project. The we're able to morph into an entire pool solution. There was order of magnitude larger. So you have those things happen from time to time, which are good things.

So its more dynamic than you would think it would be otherwise.

Okay. Thanks, and if we look at the the strategic relationships.

Can you give us some more color on what's contemplated in the strategic relationships.

Maybe how the the structure of those relationships can help you with rfps, even if it's just getting an opportunity to bid on some of these rfps and you mentioned that.

The processes have been competitive.

Competitive advantages due to get out of these relationships.

Well I think first of all you need to recognize that not every 1 of the strategic accounts.

The go straight to RFP.

A fair number of them are just ease of we've done business with them in the past.

For its relationships, where people know that they want to work with us in the not formally bidding out of.

Any of their work and so that's important to note.

But when things do go to RFP, it's the full.

Array of of our customer value proposition.

The customization of what we do the scope of what we do nobody else can do.

The adaptability is better than anybody else's the ice software the.

Redeploy is head and shoulders of above anybody else and so all of those come into play.

It depends on the customer of what they're really looking for where we really shine is when somebody is doing a full solution with tall wood walls glass walls of technology.

Et cetera et cetera.

Where you get into more cost competitive situations and where theres more competitors is where people are just thinking of the simple glass current conference rooms, and that's when it might get a little bit more competitive.

Even in those situations, we're looking to expand those into being the broader scope.

So are you finding there any cases here, where some of the towards capabilities are.

Scoped into the Rfps and maybe that gives you a competitive advantage or share.

Yeah.

Pricing of competitive advantage of any other elements of the relationships that will help you in the future.

Most of it it's all of the above.

Youre building.

Make no mistake about it we would prefer not to be an RFP process, we would prefer to leverage the relationship where we just start working on projects.

Not surprisingly tend to take a fairly active role in the.

And leading some of the strategic accounts and starting new relationships, what I like to encourage our clients to say, let's pick a project that you are in the design phase and I'm not sure of what we can do it let's just do 1 and then see how it plays out and kind of go from there in charge of capabilities. That's the ideal way to do it building on the honor.

Our relationship in the using the various tools that we have at hand, we recently came out with a very effective of dirt overview sales presentation of the use of a couple of the potential strategic accounts.

The dirt experienced centers play in where they're strategically located.

We've got the New York and Chicago, they're very active Dallas.

He has been very active even though in terms of construction.

People can touch and feel of what we do and then your leverage it into an ongoing relationship and show them. How you can make their business better because they are doing business with us the common design standard reduced.

Cycle time, better quality and so forth.

Okay. Thanks for the color.

And once again, ladies and gentlemen, if you would like to ask a question. Please press star 1 again Thats star 1 for any questions. The next question will come from Josh Wilson with Raymond James. Please go ahead.

Good morning, Kevin Jeff Thanks for taking my questions. Good.

Good morning.

Once again to the delay just a little more I think last quarter, you talked about orders improving month over month in each of February through April can you give us a sense of how order in true trended through the quarter and into July.

The.

Oh, Yeah, it's been.

As you would expect.

Through the pandemic actually.

System with with other other companies call. It the reason that some goods from core choppy.

Good day from you've had slower days.

But it all of it at all kinds of trends to where we are.

Looking at where we're looking at Q3 to be.

Consistent with Q2.

It's pretty much all I can say all of that.

And what's your sense of how much of.

I don't know what's called backlog is probably not quite the right word but how much of your current activity is still jobs that were.

In process prior to pandemic versus a brand new jobs.

Well I think most of the most of most of the pre pandemic stuff as it has.

It has played out so I think we are we are into.

Stuff that we'd hunted in the last of all 3 if you remember of lead time.

Is is 6 to 24 months from general depending on the size of the project. So.

I think most of that is is.

Is stuff that we've hunted I cant say definitively.

Thanks.

That would be 90% of the case.

And as we think about Opex sequentially given the sales are flat should we assume those are also fairly flatter where some of your new hires towards the end of the quarter and we don't quite have the full run rate on those.

<unk>.

You'll see you'll see a bit of a we've got a few hires to build out and the sales and marketing side.

<unk>.

I wouldn't say anything really material there I think.

We are planning for.

Connect trade show in October so that would come in Q4.

So that's kind of kick up the kick up a bit of cost I think the other thing to think about is.

As as things open up a little bit.

Travel and entertainment expenses and increase and that's a good thing of that means that our salespeople are getting in front of the clients and selling more so if I compare if I compare.

Where we were in in.

In Q2 of this year versus Q2, when the pandemic hit we are up about 4 times from their travel not if I compare it to where we were in 2019 were down about 45 per cent of where we were in the in.

In 2019 so.

So I expect that that cost is continuing is going to continue to grow a little bit probably not to the same level as we were in 2019 because people realize they can do stuff.

Virtually.

But we will see the increasing as I said, that's a good day that meets their sales people are getting out and talking to people.

And looking to close yes.

Got it I'll turn it over the others.

The next question will come from Neil mental with I E capital markets. Please go ahead.

Hey, good morning, guys.

Chip just sticking on the short term if we're if I'm trying to model out the gross margin of the EBIT margin in Q3, and Q4 now that rock Hill is fully functional is there anything we should think about other than what you've already said with the pressure of the transportation costs and anything that would really change the.

Gross margin from the level that we saw in Q2 as we look true through the end of the year.

It's really it's really top line really top line focused.

We had the fixed cost of raw kill roll in the second quarter, which we called out we will do some optimization between plants.

However, the the real key movers for us will be as as revenue increases and.

And as I said in the ER.

<unk> said in the in the remarks, we deliberately.

I chose to keep that capacity in place. It's it's really easy to knock on your capacity, it's a lot harder to bring it back up so so the live.

Currently kicked them out of in place.

Right understood.

Really all of scaling on the revenue side.

And if we look at the pickup in <unk>. In 2022, you had previously had some pretty lofty targets for like 2023, as those kind of off the table now within this macro environment.

I haven't we haven't we haven't pulled it off the table because quite frankly, we're not sure what.

How fast 'twenty 2 as you go into a couple of.

We'll see I think it's just too soon to say.

Okay, so, but you've now built out the capacity to be able to support those targets, but you sure. It's all the macro environment.

And then if you had to look at.

And if we look at you know.

Maybe north of south of of the border, but even within the U S are you seeing certain areas that you are getting more traction.

As far as people or companies trying to reconfigure their office space or.

Specifically I think in health care are you getting health care facilities now that are willing to look at those major revamps to try and fix how we're going to work with our space post pandemic.

Alright.

I would say that the vast vast majority of what we're looking at is not so much adapting existing spaces.

As new projects be it a new project in an existing building or a brand new building.

And it's across the board.

Rapidly you would be.

The large commercial construction markets as well as.

Typically we talked about in terms of the talent intensive businesses, which can be some of the higher tech businesses and things like that.

We will skew a little bit higher to that as well.

The larger ticket.

The items are going to be the new projects as opposed to somebody tweaking the their space.

That may come about over the next 18 months of those people will get back in the space and the can predict things that they need to work a little bit differently, but at the moment that has not been a huge part of it but I will tell you you mentioned health care in particular there is.

I think we will find over the next few years the adoption rate of what we do on health care will be significantly faster than what it's been historically just from the conversations I'm, having it's almost like they're doing our sales presentation of course in terms of talking about the importance of adaptability and not knowing as an example of going to need to become of telehealth room.

And those kinds of things.

Okay. So yeah health care has always been 1 of my favorite aspects.

Just finally can you just kind of recap on the Capex spending where you stand now I guess rocket was finished Dallas is getting finished you talked about I think $2 million to $3 million.

And the Q3 still being spent on the build out.

After that are we looking at going down to a more normalized capex of 8 or 10 million of year or what should we look at it from that perspective.

Yeah, so to clarify of the $2 million to $3 million is the draw on our leasing facility. So.

We can only draw on our leasing facilities once all the payments have been done.

The title of paths to us so that's more on the financing side as opposed to the capital expenditure side of the equation.

If you when you are.

We said in.

Q1.

We're thinking we're seeing extensions around the $14 million of tier.

From the from a cash basis as we look to next year with Rock-eel done.

Yes, you're probably right, we're probably in that 8 to 10 range.

Pending on on what demand looks like we still at some point of wanted to put the case work into rock Hill, we still want to do.

The extending of some of our DXP into some other served markets.

This will be more game content decisions, there's still investments to be made on that side.

But some of that does depend upon activity levels from vertical.

Okay, Alright, that's it from me Thanks a lot.

Okay.

And at this time there are no further questions I would like to turn the conference over to Kevin O'meara for any closing comments.

Thank you as always I'd like to thank the extraordinary commitment and efforts of our employees and distribution partners.

The continued strongly believe the path we're on guided by our strategic plan and executed by the incredibly talented team we have of dirt poor prepare organization forward as we strengthen our brand and market presence and begin the it'll deliver tangible results in the market. Thank you for joining us today.

Ladies and gentlemen, thank you for participating in today's conference you may now disconnect.

Yeah.

Okay.

[music].

Good morning, My name is Sia and I will be the conference operator today at this time I would like to welcome everyone to the dirt 2021 Q2 financial results conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. If you would like to ask a question during that time.

<unk> simply press star and the number 1 on your telephone keypad to withdraw the question press the pound key. Thank you at this time I would like to turn the conference over to Kim Macaire Cochran. Please go ahead.

Management's prepared remarks today are accompanied by presentation slides talks of the slides. Please view them from the web page of this webcast on our website.

I'll also remind you that this webcast is being recorded and a replay will be available today at approximately 1 P. M. Eastern time, I would now like to turn the call over to Kevin.

Yeah.

Thank you Kim and thank you to everyone joining us today.

Starting on slide 4 as expected revenue from the second quarter of $41.1 million. It was nearly 40% higher than our first quarter revenue strengthening our conviction that as the first quarter of 2021 represented the trough of our pandemic impacted revenue, even though the overall environment remains challenging.

We're closely monitoring potential surges and COVID-19 infection rates driven by the delta of the range and the resulting impact on demand labor availability supply chains and our own operations.

Healthcare represented 34 per cent of revenue this quarter higher than our typical health care mix of approximately 20% to 25% driven by 2 larger projects.

The first 1 was approximately $2 million from the delivery of the Covid vaccination trailers, when we discussed on our last quarterly call in.

And the second was over $6 million in revenue from projects for a long standing strategic accounts.

The revenue from this client will be less over the balance of the year. We are pleased with both of the confidence in the prospects for their business day showed and their long standing confidence in dirt solutions looking.

Looking at a broader market perspective, I'd like to reiterate some comments I made during our last quarterly call.

These realities make our long term customer value proposition more attractive but in.

Fortunately also delay our ability to realize upticks in commercial activity.

From a cost perspective, we have strategically elected not to pass along with raw material price increases in order to enhance our relative price competitiveness versus conventional construction. While this decision will weigh on our gross profit margins in the short term, it's our expectation that the increased price competitiveness of our solutions will ultimately drive higher demand, allowing us to improve.

Profitability through the absorption of unused labor capacity and fixed cost leverage within our plants.

From the perspective of project schedules the challenges in conventional construction combined with permitting backlogs are resulting in unanticipated an abnormally long scheduled delays.

And the number of projects experiencing delays and the longer duration of the delays.

These delays will continue for a period of time as permitting delays will translate into delays from municipal building code inspectors during the project execution.

On the 1 hand dirty is uniquely positioned to recapture a portion of the time loss of the scheduled delays, making us the more attractive option compared to conventional construction. However.

As dirt is installed in the final stages of of project. These delays are impacting the timing of our project delivery.

We have maintained sufficient raw material inventory and labor capacity of our plant to sustain our 3 week lead times and 99% on time and complete job site delivery performance.

Carlos of our own capabilities. Many of our clients are experiencing delays, which has resulted in a corresponding shift of our projects from the second half of 2021 into 2022.

We now expect a slower pace of recovery with third quarter revenue anticipated to be similar to the second quarter.

At the same time, we continue to be encouraged by the level of customer engagement, we are seeing.

Currently nearly every conversation we have with the current from prospective client starts with they're expressing the need for flexible adaptable spaces. The Dol.

The golf and expands in the skilled labor shortages and schedule delays all of which of your central the nurse customer value proposition.

Our increased customer engagement as evidenced by the growth in the number of strategic account relationships in development, which increased to 44 versus <unk> 40 at the end of last quarter and by the increased demand for tours of both virtually and more frequently now in person in.

In June we had a 30 month high for the number of tours. We hosted we expect demand for customer choice to continue to increase as we opened our Dallas store experience center late in the fourth quarter.

Even more exciting we've been successful on the number of large strategic accounts, rfps, which we define as projects in excess of $2 million with delivery dates beginning in 2022.

As an important accomplishment because we know that having a sustainable pipeline of large projects is necessary to achieve our growth targets.

This was the goal we articulated in the strategic plan, we presented in November 2019, and this goal was met despite the many unforeseen challenges we have since experienced.

To be clear we are still in the early stages of establishing the pipeline. We believe is necessary to drive our long term revenue growth targets. However, we are encouraged by the gradual rebuilding of the number of large projects in our pipeline.

We continue to leverage our total cost of ownership of <unk> tool. The illustrate the advantages dirt brings versus conventional construction and our strategic marketing team continues to work closely with our sales team to strengthen how we convey our customer value proposition to end clients as well as to the architect design and general contractor community.

We've made considerable progress in strengthening our distribution partner network in sales force since the beginning of 2020.

Over that time, we've added 11, new distribution partners and 28, new sales reps.

Nevertheless, the began as Europe partners during the pandemic generally of the smaller teams are minimal and share your construction pipeline and the onboarding process that was conducted virtually.

As such they have had a limited impact on our revenue to date.

As we emerge from the pandemic and these new partners are able to supplement their teams and build their sales pipelines the potential impact is significant.

Our new sales reps have had limited personal client interaction and their training has been virtual versus in person in Calgary as well as the practice of pre pandemic.

Similar to our new distribution partners or new sales reps are made of limited contribution to our revenue today, but represent significant future sales potential.

During the second quarter, we were able to have in person client distribution partner and sales meetings and the dramatic difference between personal interaction versus meeting virtually on a computer monitor cannot be overstated.

In conclusion, we encourage the sales activity, we see within the organization as a result of the investments and progress we've made within our commercial organization over the last 18 months.

We see a market that is demanding flexibility and adaptability and the physical spaces.

This is not a discussion of limited to return to work initiatives, but rather as a more widely being considered and all projects are.

Our ability to empower people to build sustainable for the future with cost certainty and on an accelerated schedule is unique in the industry and we are better positioned than ever before to execute on that opportunity.

That I will turn the call over to Jeff for a review of the financials.

Thank you Kevin.

I'm going to start with a quick review of our liquidity on slide 5.

We finished the second quarter of 2021 with $58.3 million of cash compared to $58.7 million at March 31 of this year.

In the second quarter of 2021 cash provided by operations was $1 million capital expenditures of $6.4 million in the second quarter were funded by equipment leasing facility draws of $8.4 million.

Net working capital at June 30 was $67.2 million and our current ratio was 2.8 times down from 3.4 times at March 31, 2021, but up from 2.7 times at December 31, 2020, and still very healthy.

Updating on government subsidies in the second quarter, we qualified for $2.4 million through 2 Canadian government programs, the Canadian emergency wage subsidy and the Canadian emergency rent subsidy.

From a cash perspective, 2 of the $5 million receivable at June 30 of 2021 with most of that received in July.

The revenue of $41.1 million was weighted 34% to the health care vertical for the reasons Kevin outlined earlier.

Due to the Lumpiness of project revenue, we would anticipate our revenue mix by vertical will revert to historical weighted over the short to mid term.

As Kevin also mentioned many of our customers are experiencing schedule delays in the projects, while we have seen little disruption to our manufacturing or installation times. These broader project delays as the greater forecasting uncertainty and the number of our projects being pushed from the second half of 2021 into.

2022.

Consequently, we are now expecting a slower pace of recovery in the second half of 2021 with third quarter revenue anticipated to be similar to the second quarter.

On slide 7 adjusted gross profit was $11.3 million or 27, 4% of revenue a decline of $4.9 million from the quarter ended June 30 of 2020.

The reduction was attributable to $1.3 million of higher transportation costs due to third party trucking cost increases $1.3 million of higher direct material costs due to the combined impact of a 5% increase in the cost of materials and a specialized projects that required additional third party manufacturing inputs.

$5 million of incremental costs related to the new rock Hill plants as well as an estimated $1.1 million dollar impact of the stronger Canadian dollar Canadian based manufacturing costs.

I will also point out that in Q2 of last year, we had a $1.2 million reversal of Tim.

Timber provision, which did not reoccur this year.

I would like to remind everyone.

The 2 strategic decisions, we made as it pertains to pressures we are experiencing in adjusted gross profit.

First we are currently running with excess manufacturing capacity and have done so deliberately to be prepared for increasing the net debt.

Speed and magnitude of the recovery and how quickly it turns into orders for us remains highly uncertain as we come out of the pandemic.

Our variable factory labor is sticky to the downside and there is the minimum amount of staffing we need at our facilities to keep them responsive to activity levels.

We believe there with the risks associated with reducing these costs should we see an accelerated return to revenue growth that said, we are working to further optimize our costs and letting the commissioning of our new rock-eel facility and the capacity of provides.

The strength of our balance sheet and the steps we have taken to increase liquidity enable us to undertake the strategy.

Second.

The absorption of unused labor capacity and fixed cost leverage within our plants as.

As activity improves we expect gross margins to improve accordingly that said, we are actively monitoring the inflationary pressures and the impacts on our cost structure.

Organization.

General and administrative expenses increased by $1.6 million due to the impact of the stronger Canadian dollar higher salaries and benefits expense and professional fees.

Operational support expenses at the technology and development expenses both decreased nominally.

Well, we called of the negative effects of the stronger Canadian dollar on our gross profit already we saw a similar effect on the SG&A spread across the 4 categories of sales and marketing G&A operations support and technology and development.

In total the impact of the stronger Canadian dollar on Canadian based SG&A was about $1.3 million from the quarter and $1.9 million year to date.

Excluding depreciation and stock based compensation from this so as to determine the impact on adjusted EBITDA. The.

Estimated impact was $1.2 million and $1.7 million for the 3 and 6 months of 2021, respectively.

In the second quarter of 2021, the Canadian dollar piece of V. In the U S. Dollar was 123 versus $1.3 9 last year on a year to date basis in 2021. It was 1 <unk> versus 137 of last year.

On slide 9 adjusted EBITDA, and adjusted EBITDA margin for the quarter decreased to $6.8 million loss or negative 16, 6% from point of $3 million or 6% from the same period of 2020.

This reflects the $4.9 million decrease in adjusted gross profit and increased expenses as I've already discussed as a reminder, we excluded the government subsidies from our adjusted EBITDA I would point total it because of the combined impacts of the stronger Canadian dollar of Canadian dollar expenses in the quarter on both gross profit and SG&A was about 2.

$4 million.

Expenses $8.9 million reduction of government subsidies and a $7 million increase and the interest expense.

Zinc decreases were partially offset by $9 million reduction in foreign exchange losses.

Steps, we've taken to bolster our liquidity, including lease financing to cover the majority of the costs of the new South Carolina facility and the convertible debenture financing in January of 2021 give us the confidence to stay the course as we have seen encouraging early indications of the commercial success of our strategic plan and improvements in economic conditions.

<unk>.

If we are able to drive higher revenues, there's ample leverage in our business model to achieve significant profitability of.

Operator, we would like to now open the call for questions.

Thank you Sir at this time I would like to remind everyone that if he would like to ask the question you May Press star followed by the number 1 on your telephone keypad again, the star and the number 1 on your telephone keypad now well pause for just a moment to compile the Q&A roster.

And your first question will come from Greg Palm with Craig Hallum Capital. Please go ahead.

Yeah. This is Danny acreage on for Greg today, Thanks for taking the questions.

Good morning Denny.

I guess as we're looking at second half revenue you kind of said slower pace of revenue growth in the second half.

I think for Q3 that those comments are pretty clear, but looking out to Q4.

Is there any expectation for Q4 growth still or has the entirety of that kind of second half activity shifted into the 2.

2022.

Yeah, we haven't given we haven't given guidance on Q4 as you probably as you probably noticed I think the.

The key thing there is it's still very opaque.

We are seeing delays push outs.

We are doing what we can to mitigate that.

The <unk> projects pulp projects into the quarter, but but it's pretty opaque for us we are expecting that the recovery of itself is slower than what we'd originally anticipated.

But also as you would have heard from our current comments, we are quite encouraged about the.

About 22.

Got it and then maybe just touching on the decision not to pass material inflation on of the customer maybe a little.

A little bit the behind the scenes color on the puts and takes.

I guess attacking that.

Increased demand with the competitive pricing versus maybe constraints of the margins for the near term I guess, how should we look at that.

Yeah.

I think I think that's the the the way to look at is as we look at as we look of what the what the the price increases were relative to our.

Our historical norms of this couple of things in play the first of all we had the impact of.

The.

The higher cost of trailers roll through which through the quarter, which which impacts of the prices I think the other thing that we're seeing is the intake impacting our overall material pricing is perhaps less than you would expect and that's the result of a lot of the work that we've done of the plaque in fact the pricing when.

We look at our materials.

It's actually at similar levels as a percentage of our revenue relative to 2018 to 2017, so we've been able to absorb a lot of that through efficiencies.

Of not raising our prices.

And so that's what that's the plan obviously, we're going to continue to moderate in the state.

The keep driving up the who will take a look at it but we think we get better Bang for Buck out of the increased competitiveness.

Great. That's helpful and then maybe 1 more.

On the large strategic accounts and maybe the increased activity you've seen in the pipeline and maybe on the Rfps you've been seeing are those coming from from existing clients or are those new customers. What can you say I'm not.

Sure I'll take it.

But a couple of color on that.

Both existing and new clients.

We are quite pleased with the activity that's going on in our strategic account growth and you would have seen that we had another 10% increasingly amount of of.

Accounts debt that we're engaged with.

On the on the Rfps themselves.

We define largest greater than $2 million there across multiple industries. Those include healthcare financials energy professional services and cash. So it's a broad range. They were also competitive and so we were against other we were against other organizations there.

Came out of ahead. So we're quite encouraged by that we are now into the scope and schedule in the discussions with them.

Delivery of expected on the list in 2022 of 23.

Yeah and are those more for activity and remodel or new construction.

I think they are primarily in the new construction range, but I suspect it's a combination of the 2.

Got it all I'll leave it there thanks.

The next question will come from Rupert <unk> with National Bank. Please go ahead.

Good morning, everyone.

Good morning.

The larger project awards that you've discussed discussed in the push of the revenue next year and it seems like you have more visibility on future revenue than we might've had.

Last quarter I'm, just wondering if you can talk to us in terms of the sort of the scale of the backlog and the visibility that you might have into sales and how that's trending.

Hey, Rupert it's Kevin.

What I would tell you is true and you've been following us for a while to comparing contrasting for several years ago.

The tools that we have in place.

The issue and just giving you a direct answer to your question is the operating environment.

Now there's 2 dynamics going on 1 we've talked about in which was the supply chain issues and that is continuing unfortunately, the world is not been setup to.

To do of hard reset after the pandemic and then the other which we're probably feeling a little bit more south of the border of the north is the delta there and so trying to figure out the exact timing of these very very difficult. So I do feel like we have a better job of kind of overall, having our arms around this where the opportunities general magnitude.

And so forth, but in terms of exact timing.

It's more difficult than ever given the operating environment.

Okay, Great do you have a sense of the scale of the backlog, though of timing aside just the same dollar number of of jobs or what you've been awarded contracts are of good visibility on contracts.

We have we have abuse in the sense of that 1 of the things that we've experienced.

Over the course of the project getting design and so forth.

Is the scope and scale can move around fairly substantially and so at any given time, we've got a decent.

<unk>.

From sensors to where things stand and sometimes it's good news from I'll give an example, I think remember mentioned this on the last quarter. We're early days of our TCE O tool, we had a relatively modest.

Glass run totally project, the we're able to morph into an entire pool solution. There was order of magnitude larger. So you have those things happen from time to time, which are good things and so its more dynamic than you would think it would be otherwise.

Okay. Thanks, and if we look at the the strategic relationships.

Can you give us some more color on what's contemplated in the strategic relationships.

Maybe how the the structure of those relationships can help you with rfps, even if it's just getting an opportunity to bid on some of these rfps I mean, you mentioned that.

The processes have been competitive what competitive advantages to you to get out of these relationships.

Well I think first of all you need to recognize that not every 1 of the strategic accounts.

Just go straight to RFP.

A fair number of them are just the we've done business with them in the past.

Sure, it's relationships, where people know that they want to work with us in the not formally bidding out.

Any of their work and so that's important to note.

But when things do go to RFP, it's the.

So.

Array of of our customer value proposition.

The customization of what we'd do the scope of what we do nobody else can do.

The adaptability is better than anybody else's the ice software the.

Redeploy is head and shoulders of above anybody else and so all of those come into play.

It depends on the customer of what they're really looking for where we really shine is when somebody is doing a full solution with solid walls glass walls of technology.

Et cetera et cetera.

Where you get into more cost competitive situations and where theres more competitors is where people are just thinking of the simple glass growth conference rooms, and that's when it might get to the a little bit more competitive.

And of those situations, we're looking to expand those into being the broader scope.

So are you finding there any cases here, where some of <unk> capabilities are.

Scoped into the Rfps and maybe that gives you a competitive advantage or a share.

Yeah.

Pricing of competitive advantage of any other elements of the relationships that will help you in the future.

Most of it it's all of the above.

Youre building.

Make no mistake about it we would prefer not to be an RFP process, we would prefer to leverage the relationship where we just start working on projects.

Not surprisingly tend to take a fairly active role in the.

And leading some of the strategic accounts and starting new relationships, what I like to encourage our clients to say, let's pick a project that you are in the design phase and let true where we can do it let's just do 1 and then see how it plays out and kind of go from there in charge of capabilities. That's the ideal way to do it building on the other.

Our relationship in the using the various tools that we have at hand, we recently came out with a very effective of dirt overview sales presentation of all the use of a of couple of the potential strategic accounts.

The dirt experienced centers play in where they are strategically located.

We've got the New York and Chicago, they're very active Dallas.

He has been very active even though it's under construction.

Cycle time, better quality and so forth.

Okay. Thanks for the color.

Yeah.

And once again, ladies and gentlemen, if you would like to ask the question. Please press star 1 again Thats star 1 for any questions. The next question will come from Josh Wilson with Raymond James. Please go ahead.

Good morning, Kevin Jeff Thanks for taking my questions. Good morning.

Once again to the delay is a little more I think last quarter, you talked about orders improving month over month in each of the February through April can you give us a sense of how order in true trended through the quarter and into July.

Hum.

Yes.

Oh, Yeah, it's been.

As you would expect.

Through the pandemic actually.

System with with other other companies' calls so we think of some goods from core choppy.

The case, we've had slower day.

Hum.

But it all of it at all kinds of trends to where we are looking at where.

Where we're looking at Q3 to be.

Consistent with Q2.

It's pretty much all I can say all of that.

And what's your sense of how much of.

I don't know what to call backlogs, probably not quite the right word, but how much of your current activity is still jobs that were in.

In process prior to pandemic versus brand new jobs.

Well I think most of the most most of the pre pandemic stuff as it has.

It has played out so I think we are we are into.

Stuff that we'd hunted in the in the last of all 3 if you remember of lead time.

Is is 6% to 24 months in general of depending on the size of the project. So.

I think most of that is is.

It is stuff that we punch it I can't say defensive is that the sort of things of that.

That would be 90% of the case.

And as we think about Opex sequentially.

Given the sales are flat should we assume those are also fairly flatter where some of your new hires towards the end of the quarter and we don't quite have the full run rate all of those.

Yeah.

You'll see you'll see a bit of a we've got a few hires to build out and the sales and marketing side.

I wouldn't say anything really material there I think.

We are planning for.

<unk> trade show in.

October so that would come in Q4.

So that's kind of kick up the kick up a bit of cost I think the other thing to think about is.

As as things open up a little bit.

Travel and entertainment expenses and increase and Thats a good thing of that means that our salespeople are getting in front of the clients and selling more so if I compare if I compare.

Where we were in.

In Q2 of this year versus Q2, when the pandemic hit.

We're up about 4 times in their travel not if I compare it to where we are in 2019 were down about 45% of where we were in the <unk>.

In 2019 so.

So I expect that that cost is continuing is going to continue to grow a little bit probably not to the same level. As we were in 2019 because people realize they can do stuff a.

Virtually.

But we will see the increasing as I said, that's a good day.

Sales people are getting out and talking to people.

And looking to close sales.

Got it I'll turn it over to others.

The next question will come from Neil mental with I E capital markets. Please go ahead.

Hey, good morning, guys.

Morning.

Just sticking on the short term if we're if I'm trying to model out the gross margin of the EBIT margin in Q3, and Q4 now that rock Hill is fully functional is there anything we should think about other than what you've already said with the the pressure of the transportation costs and anything that would really change the gross margin from.

The level that we saw in Q2 as we look true through the end of the year.

It's really it's really top line really top line focus we.

We have the fixed cost of raw killed roll in the second quarter, which we called out we will do some optimization between plants.

However, the the real key movers for us will be as as revenue increases and.

And as I've said in the ER as I've said in the in the remarks, we deliberately.

Chose to keep that capacity in place, it's it's really easy to knock on your capacity, it's a lot harder to bring the backup so so.

Deliberately keeping out of place.

Right I understood. So it's really all of scaling on the revenue side.

And if we look at the pickup in <unk> in.

2022, you had previously had some pretty lofty targets for like 2023, as those kind of off the table now within this macro environment.

I Havent said, we havent, we havent pulled it off the table because quite frankly, we're not sure what.

So first wanted to us is going to recover.

We'll see I think it's just too soon to say.

Okay, so, but you've now built out of the capacity to be able to support those targets, but you should it's all the macro environment.

And then we've got to look at.

And if we look at.

Maybe north of south of of the border, but even within the U S are you seeing certain areas that you're getting more traction.

As far as people or companies trying to reconfigure their office space or.

Specifically I think in health care are you getting health care facilities now that are willing to look at those major revamps to try and fix how we're going to work with our space post pandemic.

Alright.

I would say that the vast vast majority of what we're looking at is not so much adapting existing spaces as it is.

As new projects be it a new project in an existing building or a brand new building.

And it's across the board.

Geographically you would be.

The large commercial construction markets as well as from.

Typically we talked about in terms of the talent intensive businesses, which can be some of the higher tech businesses and things like that.

Skew a little bit higher to that as well.

The larger ticket.

Items are going to be the new projects as opposed to somebody tweaking their space.

And that May come about over the next 18 months of those people will get back from the space and the look and predict things that they need to work a little bit differently, but at the moment that has not been a huge part of it but I will tell you.

You mentioned health care in particular there is.

I think we will find over the next few years the adoption rate of what we do in health care will be significantly faster than what it's been historically just from the conversations I'm, having it's almost like Youre doing our sales presentation of course in terms of talking about the importance of adaptability and non.

The knowing as an example of going to need to become of Telehealth room.

And those kinds of things.

Okay. So yeah. The health care has always been 1 of the my favorite aspects.

And just finally can you just kind of recap on the Capex spending where you stand now of course Rocco was finished Dallas is getting finished you talked about I think $2 million to $3 million.

And the Q3 still being spent on the spilled out.

After that or are we looking at going down to a more normalized capex of 8 or 10 of millions a year or what should we look at it from that perspective.

Yes, so to clarify of the $2 million to $3 million is the draw on the leasing facility. So.

We can only draw on our leasing facilities once all of the payments have been done.

The title of SaaS to us so that's more on the financing side as opposed to the capital expenditure side of the equation.

If you when you.

As we said in Q1.

We're thinking we're seeing extensions around the $14 million of here.

From cash.

Cash basis, as we look to next year with Rob kill done.

Yes, you're probably right, we're probably in that 8 to 10 range.

Depending on what demand looks like we still at some point of wanted to put the case work into rock Hill, we still wanted to do.

The extending of some of our DSD into some other served markets.

Those will be more game content decisions, there's still investments to be made on that side, but.

But some of that is dependent upon activity levels from vertical.

Okay, Alright, that's it from me Thanks a lot.

Yes.

And at this time there are no further questions. So I'd like to turn the conference over to Kevin O'meara for any closing comments.

Thank you as always I'd like to think of the extraordinary commitment and efforts of our employees and distribution partners.

<unk> strongly believe the path, we're on guided by our strategic plan and executed by the incredibly talented team. We have of dirt. We're prepare organization forward as we strengthen our brand and market presence and begin the will deliver tangible results in the market. Thank you for joining us today.

Ladies and gentlemen, thank you for participating in today's conference you may now disconnect.

Q2 2021 DIRTT Environmental Solutions Ltd Earnings Call

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