Q3 2021 DIRTT Environmental Solutions Ltd Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to the 2021 Q3 financial results Conference call.
At this time, all participants Oh, no listen only mode. After the speaker's presentation, there will be a question and answer session. If you'd like to ask a question during that time. Please press star one on your telephone.
If you require further assistance please press star zero.
I would now like to hand, today's call over to Kim Okay, Glynn director of Investor Relations. Please go ahead.
Thank you operator, and good morning, everyone welcomed.
Welcome to today's call to discuss their dirt third quarter of 2021 results joining me on the call or Dirty Chief Executive Officer, Kevin Nomura, and Chief Financial Officer, Jeff gross manner.
Management is 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 applicable Canadian and United States Securities Laws. These statements are based on the company's current intense expectations and projections that you're not guaranteed the future performance.
In addition, this call will reference non-GAAP results, excluding special items, please reference or Form 10-Q as filed on November 3rd 2021, with the Securities and Exchange Commission or SEC Another report two filings with the SEC for information regarding forward looking statements and reconciliations of non-GAAP results to get results.
I would also remind you that this webcast is being recorded in a replay will be available today at approximately one P. M. Eastern time, I would now like to turn the call over to Kevin.
Thank you Kim and thank you to everyone joining us today.
You're you're employed for third quarter revenue of three or 4.1 million. So short of our expectations that would be consistent with second quarter revenues as the resurgence of delta very driven COVID-19 infections increase than certainty and reduce clients sense of urgency to complete in process project further our shipments went away just project you experienced delays.
Clark to the stage Windows is installed due to factors such a supply chain issues and labor shortages.
The circumstances resulted in projects that we expect them to ship in the third quarter moving out to the fourth quarter or into 2022.
You're scheduling delays, we're not isolated instances they've been affecting all vertical to refer and all types of projects.
Oh sure a few specific project examples to provide insight into the challenges presented by the current operating environment.
We've been working on a large office project for Tech fine with a signed contract in hand, Ah completed design and what we thought was a definitive construction scheduled on.
On short notice we were advised with a third of our scope of the project has been put on hold due to a variety of job site delays.
Second project in the commercial vehicle has been delayed six months because imported custom components have yet to be offloaded to support.
Finally, the health care client at the last minute change the scope of work of their project to accommodate higher acuity level isolation rooms in response to cope with.
That change required not only the dirt design, but also substantial H V a C and engineering modifications.
In each of these instances the time between our intended delivery and whether you received notice of the delay was less than three months for one fiscal quarter.
Each of these examples represents a large project for dirt and offers a glimpse into how rapidly scheduled can change the laying a revenue realization.
You can see even short term motor activity has been impacted by uncertainties in this quarter's material into my volatility impacted our adjusted EBITDA loss to a greater degree than if month to month revenue had been stable.
September revenue was the second lowest monthly revenue number we've seen this year with January being the lowest.
Approximately 40% of your adjusted EBITDA loss for the quarter was caused by the September drop in activity.
Orders and shipments in October have improved approximately 50 per cent from September and sofa orders for November delivery remain strong.
If we had adjusted our capacity consistent with September's production requirements, we would not have been able to fulfill the October demand with the lead times that are critical to our value proposition.
We believe the October rebound reflects the resumption of activity as adults away begins to bake as.
As a result, we currently anticipate the fourth quarter of 2021 revenue will be between 40 and $45 million.
Like many manufacturing businesses, we've been seeing increases in raw material prices, including aluminum medium density fiberboard and glass as well as transportation costs.
We had previously flea elected not to pass along these calls from the strategic decision to drive our price competitiveness versus conventional construction, but more recently as raw material prices continue to increase we napster price increase on an interior solutions plus an adjustment 12th grade charges, resulting in an overall increase of approximately 6.5% effective November <unk>.
16 2021.
Despite these increased we believe our solution to remain competitively priced with conventional construction, which is experienced a higher relative level of raw material costs and places.
The pandemic recoveries, taking longer than anticipated, resulting in a mixed view on the return to normalize level of nonresidential construction activity.
In general there's been abroad before I'll have returned to office plans and also saw occupancy rates continued to be meaningfully below prepandemic levels.
Your organizations have a need to build but are evaluating their delivery models for example to roll a telehealth, which has become much more prominent over the past 18 months.
Nevertheless, we are seeing bright spot for example, we recently went several modest sized project shipping and early 20th 22 for strategic account clients are moving forward with the expansion plans and have been able to move rapidly because their design standards in place the dirt.
It reinforces the importance of our strategic count strategy and being position to capitalize on the projects that move ahead. Despite the overall uncertainty.
In early October we held our first connect trade show it or Chicago dirt experienced center or D. Etsy since December 2019.
Chicago Dx. He was recently renovated and we hosted more than a thousand clients architects designers and contractors with half attending in person and have experienced and connects virtually.
One large of a virtual tourist has been a great success and expanding our ability to reach people during the pandemic and it's allowed us to introduce their tomato new stakeholders gonna highly accessible way.
He was unmistakable value in face to face meetings, which nurtures stronger relationships trust and understanding that are difficult to achieve virtually.
Half of our distribution partners were represented to connect in person and a number of our current and potential strategic account clients also attended in person both of which we find encouraging.
Or distribution partner network of strengthening having hired over 75 dirt dedicated people since the start of 2021.
Of which more than 50% rather than the third quarter.
We continue have success using our total cost of ownership or T. C. O tool. For example, we recently deployed it too and health care project for delivery and early 2022.
The T C O two was instrumental in providing the architect with a framework to accurately compares to conventional construction understand potential schedule savings.
Quantify the value of early occupancy an impact on cost flexibility and maintenance.
Yesterday it was the official Grand opening of our new Galaxy S. C. It will serve as a flagship sales center for the company [noise] showcasing everything dirt has to offer to inspire innovative sustainable design.
Even though we officially opened our doors yesterday, the Dx he's already been extraordinarily busy during October within person towards with large facility management teams, including some of our strategic account relationships, making the trip from all over North America.
This is in addition to the numerous tours, we conducted while it was under construction.
Early feedback as it is a robust representation of limitless possibilities of building with dark not only does a feature our newest innovations in terms of our inspire and reflect wall offerings. It speaks to what is possible crosser and markets from commercial to health care and education and highlights innovation is often about imagining the infinite waste the space can be designed with dirt.
Before turning the call over to Jeff I'd like to address the financial targets. We articulated in November 2019, when we announced our strategic plan.
The analysis on which those targets were based include the historical achievements of the company size of the market. The extensive scope of our solutions and our ability to compete with conventional construction.
It also reflected a growing acceptance of industrialized construction.
Nick inefficiencies and sustainability driven to our approach and the benefits of a corporate transformation. Both in terms of increased revenue growth from the execution of our commercial strategy and the appointment of our cost structure from the upgrading of our manufacturing operations, we'd be done prior to the onset of the pandemic.
All of these assumptions remain valid today the revenue targets. So between 450 million 550 million with adjusted EBITDA margins between 18, and 22% are we believe achievable.
However, even as we continue to execute our strategic plan disruptive impact of the pandemic of nonresidential construction activities has been substantial impeding our ability to realize the full benefits of our manufacturing improvements in or commercial initiatives within our original timeframe.
What we've tried our best to just to online meetings remote work I think it is widely recognized that there are limitations to these online interactions.
Ah don't experience program, which takes our new hires and distribution partners through a full we convert education, our sales training programs and our client relationship development are all parts of our commercial efforts you'll benefit substantially from the return to impersonate interactions.
I believe this return is coming although the transition will be choppy I remain confident in our ability to cheat the financial targets, we set out and we expect to reevaluate Jaime required to obtain them as we gain clarity on the resolution of the pandemic I'll now turn it over to Jeff to review the financial.
Thanks, Kevin has been previous calls I'm going to start with a quick review of our liquidity on slide five.
We finished the third quarter of 2021 with 43.3 million of unrestricted cash compared to 58.3 million at June 30th of this year and 45.8 million at December 31st 2020.
And the third quarter, we made point 5 million of schedule repayments on long term debt.
Cash used in operations was 12.3 million and capital expenditures were 2.2 million.
Year to date capital expenditures totaled $12.3 million and we anticipate approximately $1.7 billion of additional spend in queue for.
Equipment basing facility draws with between two and 3 million that were expected to occur in the third quarter are now expected in the fourth quarter do still ace and timing of receipts of the associated equipment.
With both of our major Dallas, Dixie and Rockhill facility projects completed we are anticipating a significantly reduced capital program in 22 of approximately 7 million comprised of approximately two and a half million related to refreshes, the <unk> and commercial systems, approximately two and a half million of software development and a further.
2 million of manufacturing and other capital upgrades.
Are working capital management focus continued in the third quarter with no reportable disruptions or delays in accounts receivable collections.
A sales outstanding net of deposits income taxes and government subsidies receivable continued to run it under 30 days networking capital at September 30th was 52.8 million. This includes 43.3 million of cash $2.8 million, a restricted cash as well as 1.5 million of Canadian emergency wage subsidy.
[noise] receivables and approximately $3.3 million of income tax refunds receivable.
Despite the high castes usage, a current ratio was 2.5 times at the end of the third quarter down slightly from 2.8 times at June 30th 2021, but still very healthy.
Updating on government subsidies in the third quarter, we qualified for 2.9 million three two Canadian government programs Canadian emergency wage subsidy and the Canadian emergency rent subsidy.
From a cash perspective as noted previously $1.5 million with receivable at September 30th 2021.
Both programs expired on October 23rd 2021, and are being replaced with new more targeted programs.
We will while we will continue to evaluate our eligibility for the new progress. It is unclear at this time, whether we will qualify or not eat.
Even if we do qualify the amount of the subsidy available would be substantially reduced from what we have previously received.
For the purposes of our internal modeling and finding we've assumes government subsidies ceased at October 23rd 2021.
Based on your current sales so I'll look for the remainder of 2021 and 20 twenty-two we believe we have sufficient liquidity for at least the next 12 months based on current cash reserves in available credit facilities.
Turning now to the financials on slide six.
Revenue for the third quarter was below our expectations coming in at $34.1 million is Kevin addressed in his earlier comments, we experienced an unexpected shift the projects from the back half of the third quarter into the fourth quarter of 21 and 22.
This air pocket was driven by the Delta variant resurgence and upstream supply chain issues and they're related impacts on construction activity weeks.
We experienced a bounce back in order shipping in October and November such that we anticipate fourthquarter 2021 revenues to be between 40 and $45 million subject to any unforeseen impacts of the pandemic like we experienced in the third quarter.
Turning to adjusted gross profit on slide seven I would reiterate that it is exceedingly difficult for us to flexor manufacturing labor capacity down for short term curious of low activity as we saw on September when low activity levels occur suddenly and unpredictably, followed by a sharp increase in activity levels in October.
We have assembled a skilled workforce that we're maintaining to meet our very short lead times, which is a key component of our value proposition, while we can reduce headcount quickly, which we have done in the past we balance that cost reduction with ensuring that we can flex back up quickly to meet increased to match.
Attracting hiring and training new personnel takes time, and it's made more difficult by the increasing labor shortages in the U S. However, during the third quarter, we were able to take advantage of our highly automated rockhill facility by optimizing our labor force, therefore, gaining efficiency and reducing our manufacturing workforce.
By 5%.
As we saw in the third quarter, the exact timing of future projects and delivery remains subject to change. Therefore, we're maintaining a based off of manufacturing capacity, both physical and labor to remain responsive to the medium term opportunity pipeline. We are seeing despite the possibility of inter months volatility.
This has and is expected to continue to negatively <unk> negatively pressured gross <unk>.
Gross margins.
This is what we saw in the third quarter in the extreme with adjusted gross profit for the quarter of 4.8 million or 14% of revenue.
Further impacting gross profit with an increase in the cost of materials transportation and packaging, which negatively impacted gross profit margin by 10% in the quarter and six per cent near to date relative to the same periods of 2020.
Have a noted these increased input costs prompted us to announce a price increase on our solutions plus an adjustment to our freight charges effective November 16th 2021 that largely offset these input cost increases.
Finally, the stronger Canadian dollar negatively impacted gross margin by approximately 0.59 in the third quarter of 2021 compared to the third quarter of 2020.
Looking at a breakdown of operating expenses on slide eight sales and marketing expenses increased by point 6 million over the same quarter last year, driven largely by increased salary and wage expenses as we continue to build their sales organization Ah return as expected of travels meals and entertainment expenses as economies reopen and travel restrictions.
Fees and higher depreciation expenses as we completed our Chicago Dx C in 2020.
General and administrative expenses increased by point 6 million over last year's quarter, reflecting the impact of the stronger Canadian dollar on our cost structure higher salaries and benefits expense and professional fees, partially offset by decreased variable compensation expense.
Operation support and technology and development expenses remain consistent with the same period of 2020th.
Overall, we estimate that there was a point 3 million dollar impact of a stronger Canadian dollar on Canadian based operating expenses in the quarter versus the same period in 2020.
On slide nine adjusted EBITDA, and adjusted EBITDA margin for the quarter decreased to a 13.3 million dollar loss or negative 39.1% from point 9 million or 1.8% in the same period of 2020.
This was largely driven by a 13.4 million decrease in adjusted gross profit S. We've discussed and more modestly by increased operating expenses.
It is worth highlighting again that the unusually low activity level in September drove approximately 40% of the adjusted EBITDA loss for the quarter.
Finally, a slide 10 net loss increased to 15.4 million or 18 sentence net loss per share in the third quarter of 2021 from a net loss of 2.1 million or two cents per share for the 20th 20 quarter.
The increase loss is primarily the result of a 13.8 million decrease in gross profit at $1.6 million increase in operating expenses at $1.6 million reduction of government subsidies and $8.7 million increase in interest expense.
These decreases were partially offset by $3.3 million a decrease in income tax expense and a 1 million dollar reduction in foreign exchange losses.
In summary on slide 11, this quarter was more challenging than anticipated and as Kevin discussed the disruptive impact of the pandemic on nonresidential construction activity has been substantial impeding our ability to realize the 2023 financial targets within our original time frame.
Despite the uncertain macro environment, we remain encouraged by the level of sales activity within our organization.
Quality of engagement with our strategic accounts and the commitment to register abuse. Your partners, we remain committed to managing our liquidity through the send certain period and capitalizing on the transformation of our commercial and operational functions as a pandemic recovery takes hold ultra.
Ultimately this will enable us to put you are long term objectives of scaling our operations to profitably capture the substantial market opportunity we believe access.
Operator, we'd like to know open the call for questions.
<unk>.
At this time, if you'd like to ask a question. Please press star one I'm Gonna telephone keypad again in order to ask a question press Star one.
What part so just a moment to composite Q&A roster.
Yeah first question is from a line of great Palm with quick Harlem capitalism.
Hey, guys. This is Danny on for Danny Hygroton for Greg today.
Thanks for their questions.
I'd like to start with maybe the elements of some of these pushouts that you're seeing I I guess and in some cases is dialogue still like constantly ongoing with these customers or is it something that an hour more than a year and a half since COVID-19 started as our our customers, saying, yeah. We have no idea what's going on.
Will reach back out if anything changes I guess, what do you see in there.
Alright, it's an ongoing dialogue in it and it's case by case, there's some projects where they do get put on the shelf and they'll call us when they are.
When they are ready to proceed others that are more in process, there's ongoing dialogue day to day actively managing the job. So it just it it it's.
The entire range of possibilities and obviously, what we're trying to stay as close to it as possible. So we can react as soon as a job moves either moving out or in some limited to instances moving in.
Yep.
Makes sense I mean.
It makes sense on the commercial side all the push ups I guess what are you seeing from so many other end markets made me specifically you want like health care I know previously.
Kind of mention travel trailer colored vaccinations for colored vaccination trailer or stuff like that maybe you would've thought that you'd still be seeing some of that what you see in there.
So a lot of the issues on delays are not specific just to the to the commercial vertical so supply chain labor goes across all the vertical some so so nobody is immune from that as we mentioned in the script you do see a little bit where they're taking a pause and read.
Looking at their delivery model, a lot of that's getting behind us and they're starting to reengage on their projects and get some scheduled and on the board.
And so.
I'm, sorry remind me your second to the second part of your question.
Yeah, I guess, just specifically as it pertains to health care, Oh, the trailers with trailers yep.
No that really is an opportunity this has come and gone and what we've seen generally I think.
North Americans, largely getting I get rid of the boosters I'll be getting somewhat saturated relates to come neutral vaccinations.
Boosters will probably be spread out over a period of time and then.
It would benefit of hindsight.
In North America, we had the delivery places in place to meet the demand b at the drugstores.
Drive up one time clinics that have kind of largely gone away as well as doctors offices in that pediatricians offices. So that was kind of a limited opportunity I think there was less demand for the end service of taking a trailer into a rural area than we'd initially hoped.
Okay. That's that's helpful. Maybe just digging into your comments on October trend, obviously, promising considering what you saw what you saw in September how confident are you that what you saw on October is is something that might be sustainable throughout the corner just given the.
Monthly fluctuations in in order trends.
It's it's just here I think I think one thing that that's important to note is is the V air pocket that we saw on September move projects by in some cases three to four weeks so move them over the move them over the the reporting period as opposed to.
Uhm driving them, it's like six months to a year. So I think that's a really important point to understand we've seen our our order entry was very strong in in October as we've talked about and with a truly <unk>. Two weeks lead time. So we can see that that same levels uhm moving into Ah November.
Certainly we remain subject to sort of what we saw in in in three Q with with delays caused by COVID-19 but so far so far we are encouraged with what we're seeing which is why we gave the guy So we did.
Alright, maybe just one last one on the on implementing the price hikes I know you initially wanted not pass on those costs and then try to gain some sure but I mean, I think it makes sense given the crazy inflationary pricing environment <unk>, maybe just dig more into the thought process. There if you could.
Well as you May know historically, that's not something dark is done. So we gave it an enormous amount of thought I think it was a combination of sense of things in the marketplace and.
What the etcetera rejection might be combined would just pressures on cost and it finally got to the point, where would you balance the two it just made sense to move forward with the price increase we did it something that we gave a significant amount of salt two more than we would have.
If in the ordinary course of business, we adjusted prices, but at the end of the day just became clear that that's what we needed to do.
Got it makes sense that's it for me thanks.
As a reminder, if you would like to ask a question. Please press star one on your telephone keypad. So next question is from the line I will put my aunt with National Bank.
Good morning.
Everybody you discuss a couple of of of jobs that you saw it delays on how many how many jobs would you have seen being delayed or postponed in this last quarter. It would have been dozens and projects of all different sizes and.
And where do they concentrated in any particular geographies.
Mmm Mmm projects for moving around all the time, one way or another so I can't tell you that we track the number versus ones that actually get Bill twin scheduled I think from the first time it goes into our internal system until it actually gets built doesn't generally I suspect the percentage word doesn't move is pretty slim pretty small.
But it it's not.
It's not limited to any one vertical there's no trend that you could point to that says okay. It's in this one area of this one geography and this is this is where we need to be concentrated on I think that will coming into now <unk>. If you think about say a year ago, where you had certain places were really locked down or other places were not quite so locked it.
So we can say, okay, Northern California, or New York or what have you had.
Many more shipped out to me more problems, we're not seeing that quite so much it's more.
Port delays are are fairly universal supply chain delays are fairly universal that being said it was it was much more substantial than it uhm than it has been in the past and so we've kind of gotten used to the the moving around but this time was much larger than it's been historically.
Okay. Thank you and and discussions on the pipeline, though I know you have a two week lead time, which makes it difficult to.
Forecast much much beyond November but you did mentioned a couple of strategic accounts with project wins in early 2022, just wondering if you are able to look out a little.
Further and maybe talk about the level of activity you see.
Early in the new year, how that my compared to the sort of level of activity might see forward by by three months historically.
We feel good about the activity level and and things have been fairly busy we've used our new Dallas a D. S. C to really drive increased interest in dirt as clients are starting to think about how are they going to build adaptability is at the top of their mind I've been in any number of prime meetings, where it was almost like they were.
<unk>.
They were selling us rather than a than a selling them at the at the beginning of the call. We continue to expand our roster of strategic accounts, because we're finding people that want to engage with us in that pipeline is starting to build and so we are we are encouraged by the activity levels that where you're saying in 2020.
Two.
And you had a mention of of our new hires amongst your distribution partners.
How how long does it take for those hires to translate into revenue and maybe if you can get some color on on how that might be impacting your your activity levels.
It depends on the rolling their background, because we were highlighting all all different walls, I think that a designer or somebody that's involved in project execution to the extent that it's a partner that is reacting to a building pipeline you will see that immediately if it's a sales rep that needs to be trained and is leveraging prior relationships but.
It doesn't have a book of business I think you're you're looking at probably I mean, they'll start getting revenue small projects within the first plus or minus six months I think for them to really pay for themselves on a profit to the partner standpoint, I think you're probably looking at plus or minus a year.
[noise] alright. Thank you and then finally on on inflation and your your price increases can you talk about.
What you've seen on inflation and would you consider it to be transitory or a permanent and and if you do get some some drop in your cough does that to end up coming out of your your price in the future. If you can can talk a little about that.
Yeah. So <unk>. So we we saw as we noted in the in the in the queue and you spend the the remarks with a fairly substantial spike in the in the third quarter Uhm, driven largely by we'll see mtf's, an aluminum aluminum pricing.
What we're seeing on aluminum aluminum, we have about a 40% exposure to the to the actual commodity price and aluminum it's about 30% of our direct material costs that we have.
Whether that continues or not looking at I, just thought talk specifically aluminum V. A L. O me pricing for aluminum has come off from its peak I think it's down in November by a boat by about 20% from where it.
Was at its peak in in late September October.
I also think that the new terrace deal between the U S and Europe, probably will E. Some of the.
E as some of the.
Demand on aluminum, but we'll have to see we'll have to see how that that plays out M. B S haven't seen signs of it abating, yes. It seems to have stabilized, but we haven't seen signs of it abating it and the other part that we have seen is is on the transportation side.
The as you know the the whole transportation Arena has had extremely high levels of demand on it which is impacted pricing the other things to practice price and quite frankly, it's a packing materials to go along with it those packing material costs come down cause their O S B and.
And lumber, but given that we haven't increased in the past I don't foresee that absent a substantial reduction those costs, we would be who would be reversing course.
Okay. Thank you only put there.
<unk>.
This conclusive Q&A questioning that today's call I will now hand, the call back over to Kevin for any closing remarks.
Thank you as always I would like to thank you extraordinary commitment and effort to our employees and distribution partners I can choose too long, we believe that the path. We're on Gotta buy a strategic plan and executed by the incredibly talented team. We have a dirt will move an organization forward as we're starting from a brand and increase their market penetration. Thank you for joining us today.
This concludes today's call. Thank you for joining you may now disconnect your lines.
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