Q2 2022 DIRTT Environmental Solutions Ltd Earnings Call
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Yeah.
Good day, and thank you for standing by and welcome to <unk> second quarter 2022 financial results Conference call. At this time, all participants are in a listen only mode.
After the speaker's presentation, there will be a question and answer session.
To ask a question during the session you will need to press star one one on your telephone please.
Be advised that today's conference is being recorded.
I'd now like to hand, the conference over to your Speaker today, Kim the Cochrane director of Investor Relations. Please go ahead.
Thank you operator, and good morning, everyone. Welcome to today's call to discuss <unk> second quarter 2022 results. Joining me on the call today are Benjamin urban <unk> newly appointed CEO and Jeff <unk> CFO .
Today's prepared remarks are accompanied by presentation slides to access the slides. Please view them from the web page of this webcast are on our website.
Today's call will include forward looking statements within the meaning of the applicable Canadian and United States Securities Laws. These statements are based on the company's current intent expectations and projections. They are not guarantees of future performance.
In addition, this call will reference non-GAAP results, excluding special items. Please reference the Form 10-Q filed on July 27, 2022, with the Securities and Exchange Commission or SEC and other reports and filings with the SEC for information regarding forward looking statements and reconciliations of non-GAAP results to get resolved.
I'll also remind you that this webcast is being recorded and a replay will be available today at approximately one PM Eastern time, I would now like to turn the call over to Benjamin.
Thank you Kim and good morning, everyone.
Beginning on slide four is my pleasure to be joined here for the first time today Mr. CEO .
Been an exhilarating first few weeks and that's to be expected and hit the ground running.
In a short period of time I've worked with the board of management to execute on some crucial short term actions, while we develop our long term plan.
As you know I come to this position with a great deal of firsthand knowledge of dirt having worked as a third partner for over 14 years I believe for many years and more strongly now than ever that the growth opportunity for <unk> as it was for me as a distribution partner with significant.
There is more than the market that can do what we can do.
Clients are by their completed projects.
This is due to the unique manner in which we deliver our solutions.
This holistic approach is unmatched in our largest opportunity for growth continues to be displacing conventional construction.
I also believe that ice is still our most powerful sales and manufacturing tool and I'm also a strong proponent of Ebola.
I think some of the pain points and getting orders entry revenue, which uses up valuable time and resources.
The Big picture is encouraging notably we are starting to see demand increase in the industry more specifically for those products as we emerge from the pandemic induced market uncertainty of the past several years.
Our 12 month forward pipeline and cleaning needs was up 13% for April 2000, $22 million to $359 million, excluding the impacts of the 2022 price increases.
Partners continue to report that they are quite busy.
Instead, our <unk> trade show, which we held in June 2022 was about 10% higher than it was in 2019.
All of these indicators are pointing in the right direction.
It's especially important to me however to ensure that while we consider what we could grow into in the future. We also recognize where we are now where we are currently facing are escalating costs that are impacting our profitability and manufacturing constraints, which are impeding our ability to scale up with increased demand.
And are taking specific steps to address these immediate tactical issues, which I expect will positively impact third quarter results and beyond.
First to combat inflationary efforts on our raw materials and labor. We recently implemented two price increases a 5% increase effective June one 2022, and a further 10% increase effective July 21 2022.
Also terminated a pilot price reduction program four reflected inspire.
Furthermore, we have increased our governance around discounts provided during.
During the pandemic, we use discounts as a means to drive increased volume at a period of low demand.
They are increasing and in a rising cost market, we recognize that.
We needed to curtail this activity, we expect the positive profitability impacts of both these items will begin to be realized mid third quarter.
Secondly, we are marketing, our physical manufacturing capacity through multiple actions.
As Jeff will talk about it a bit during the quarter, we increased our manufacturing head count by 9% mainly in Calgary that are continuing to work on hiring in Savannah, which has proved more challenging.
It takes about 45 days of our new employee to become fully productive. So we will begin to see the effects of this in the third quarter.
Given this lead time, we have moved to a proactive hiring stance and have begun to hire in advance of anticipated growth.
Adding head count, though is only part of the solution increasing the pace of projects going through our engineering process, improving our internal communications by breaking down silos and optimizing our manufacturing processes for new products like reflect an inspire is also key.
So that and we have established a cross functional working group to address these first two issues and have seen immediate improvements. We're also implementing.
Any changes to manufacturing processes for reflected in fiber that will reduce manufacturing and equipment bottlenecks a portion of which is already in place and the remainder of which will be completed by mid Q3.
Turning to slide five we are also focused on improving overall productivity across the organization not simply in our manufacturing facilities.
<unk> taken a good look at our approach to distribution partner requirements, Onboarding management, and accountability and involves redefining our approach to strategic accounts and market segment management.
Evaluating how these two important components of our commercial function interacts with our partners and drive results that includes reigniting, our culture by bringing our people back together and above all it needs streamlining the overall organization, including our sales organization such that we can be agile responsive, while we grow our market share and establish our market presence.
This latter component that has enabled us to input implement further fixed cost reductions.
Turning 36 salary positions for a total annual savings of approximately $5 billion.
This also includes some leadership changes, we announced the departures that Charles Crouse, Senior Vice President and General Counsel, and Colin Blehm, Vice President product development as well as the promotion of Trevor did launch the Vice President product Development Road map.
<unk> has been promoted to senior Vice President talent, and General Counsel and corporate Secretary of the company.
That's crouse dirt cheap I encourage financial officer as announced is retention.
To retire from the company effective September 32022.
Our search for suitable replacement has commenced and we are also making good progress on our search for a chief Operation Officer.
Like to take this opportunity to thank Chuck a call and Jeff for their dedication and service to the company.
As we look forward and complete the aforementioned near term realignment initiatives anticipate prosperity and opportunity ahead for this company today, we have a renewed stronger it altogether different and.
And it is through the efforts of all the passionate individuals here at our distribution partners and our board.
<unk>.
We will continue to affect rate and rapid change by re Kindle and that culture and dedication that is so unique return.
We believe that there isn't another company that can affect change the way that we have with the people and technology and solutions that we deliver.
Method of construction will continue to change the construction industry and with it not only the growth of dirt, but also those partners that journey with us.
I will now turn it over to Jeff to provide some further financial color on the quarter and the items that I discussed.
Jeff.
Thanks, Andrew and good morning, everyone.
Turning to slide six revenues for the quarter were $44 7 million consistent with our expectations at an increase of 16, 8% and eight.
Eight 8% over the first quarter of 2022, and the second quarter of 2021, respectively.
As a result of the increased activity, we experienced some manufacturing capacity constraints, resulting from the need for additional staff at our Calgary and Savannah facilities to handle the increased volumes.
It is important to note that between December 31, 2019 at December 31, 2021, and in response to declining demand, we reduced our overall hourly head count by about 34% with demand increasing we are now into a hiring mode to unlock our physical capacity, which is constrained by labor levels.
The challenge of attracting and training manufacturing employees on short notice and in a tight labor market resulted in revenue being delayed.
Some revenue being delayed into the third quarter.
To increase our competitiveness, we have also raised hourly wages in both Calgary and Savannah.
During the quarter, we increased our overall manufacturing head count by 9% all of which in Calgary, which has previously proofing easier to staff up in Savannah.
We also commenced nine ships for certain operations in calendar <unk>.
Manufacturing head count productivity continued to be a focus for us and we will continue to proactively add resources as necessary as we see sales continuing to improve.
Turning to slide seven gross profit margin for the quarter decreased to 14% from 22, 4% for the same period in 2021.
Simpler Readjusted cross profit margin declined to 18, 9% from 27, 4% for the same period in 2021.
As we've discussed in prior quarters, we've experienced significant increases in the realized cost of raw materials transportation and packaging during.
During the second quarter material transportation and packaging costs increased by approximately five 4% as a percentage of revenue compared to the second quarter of 2021.
In response to these inflationary pressures on inputs and in an effort to drive ourselves back to historical margin levels. We have instituted a number of price increases to date.
This includes a 5% increase announced in February that was effective June one 2022.
As a result of honoring price quotes for certain projects in process. There is some degree of lag before we recognize the full benefit of a price increase and we expect to see the benefits of bitumen increase from the third quarter.
We also determined that based on current input price increases and additional 10% price increase was warranted, which we implemented on July 21.
We also terminated a pilot price reduction program for reflected in inspire and have curtailed the amount of discounting that we've been doing as Benjamin has discussed we expect to see the benefits of these items beginning in the middle of the third quarter of 2022.
We continue to monitor the trends of our input prices and are ready to take further action should it warrant that said it looks like we are beginning to see some relief in upward pressure.
Aluminum commodity prices have recently come off their highs and other input costs appear to have levels.
The current quarter margins were also impacted by additional labor costs and inefficiencies associated with adding and training manufacturing employees in Calgary in Savannah. Following the closure of the Phoenix plant in anticipation of continued higher volumes.
Further compared to the second quarter of 2021 incurred incremental fixed cost of our manufacturing facility in Rock Hill South Carolina.
Increases were slightly offset by a weakening Canadian dollar this quarter with a $2 $8 million benefit are Canadian dollar denominated manufacturing costs and by marginal fixed cost leverage on account of the 9% now.
A 9% increase in revenue compared to the same period last year.
Looking at a breakdown of operating expenses on slide eight sales and marketing expenses increased by <unk> 2 million to $7 8 million for the three months ended June 32022, which was largely related to an increase of <unk> $9 million in travel meals and entertainment expenses offset by a decrease in salaries and benefits costs due to <unk>.
Count reductions as part of the cost savings initiatives announced in February .
I would note that travel was higher this quarter due to both the eating easing of travel restrictions and increased business activity as well as our <unk> trade show in June compared to last year. When we did a much scaled down version of the events in the fourth quarter.
General and administrative expenses decreased by <unk> 9 million to $6 9 million for the three months ended June 32022, approximately <unk> $3 million of professional fees associated with the contested election of directors, which more than offset by lower salaries and benefits costs.
Operations support expenses increased by <unk> 3 million to $2 5 million for the three months ended June 32022, the increase was due to lower cost capitalized on internal projects with the completion of rock Hill, and Dallas, TX <unk> last year, and an increase in salaries and benefits of <unk> 2 million.
Technology and development expenses were consistent with prior period costs as $2 million of lower capitalized costs due to fewer internal projects were offset by reductions in salaries and benefits expense.
For the quarter ended June 32022, we incurred $5 2 million in reorganization costs attributed to the closure of the Phoenix facility reduction in workforce and change of control of the board.
Actual costs are higher than originally anticipated up $4 4 million due to additional severance arising in June 'twenty, two with the departure of two executives and additional cost totaling $3 $7 million of.
Our director and officer run off insurance and renewal costs falling change of control of the board of directors that was part of the $4 four we announced previously.
On slide nine adjusted EBITDA, and adjusted EBITDA margin for the quarter decreased to $9 4 million dollar loss or negative 21, 1% from $6 $8 million loss of 16, 6% in the same period of 2021, driven by the reduction of gross margin profit gross profit margin as already.
Just.
On slide 10, net loss for the quarter increased to $19 3 million or 22 net loss per share per share in the three months ended June 32022 from a net loss of $9 7 million or 11 net loss per share for the three months June 32021.
The higher net loss is primarily the result of the lower gross profit margin of four.
$4 $2 million increase in operating expenses, driven by onetime reorganization costs of $3 $4 million reduction in government subsidies and a $5 million increase in interest expense offset by $1 $3 million increase in foreign exchange gains.
Turning to slide 11, we finished the quarter with $19 7 million of unrestricted cash compared to $38 9 million at March 31, 2022, net working capital at the end of the quarter was $31 $8 million and we used approximately $19 1 million of cash in the second quarter, which included $6 million onetime restructuring proxy.
Content costs and other related payments.
Our cash usage has been at unsustainable levels and we've taken numerous steps to address the issue we have lowered our overall fixed cost base in a number of ways, including the closing of the manufacturing facility in the second quarter of 2022 reductions in our hourly head count in 2021.
Salary head count reductions and other fixed cost savings initiatives announced in February 22, and today in July 2022.
As I've said it before since March of this year, we've experienced a significant increase in demand, particularly within our commercial and education verticals and response.
Efforts to increase manufacturing accounts that are countering savannah facilities in order to meet both immediate demand and anticipate future increase we believe the manufacturing head count additions training and Debottlenecking will begin to be realized in the middle of the third quarter of 2023, continuing through the balance of the year. This will support higher revenue.
Levels and mitigate cash usage through anticipated.
Gross profit, including that leverage effects.
We have also implemented three price increases, which I spoke to earlier to mitigate the inflationary impact on our raw material transportation and packaging costs and significantly curtailed pricing discounts. Given this is also expected to drive higher gross profit.
We have assessed the company's liquidity using multiple downside and upside scenarios taking into account our sales outlook for the next 12 months and the actions I've just described and in combination with existing cash balances and available credit facilities. We believe we have sufficient liquidity for the next 12 months and we expect cash usage to improve throughout the year.
Sequentially, improving revenues, including the effects of price increases.
Discounts, a lower fixed cost base and reduced one time costs.
Available in Undrawn borrowing under our asset backed credit facility with RBC stands at $11 3 million at the end of the quarter.
From a working capital perspective, we continue to experience a buildup in inventory primarily in aluminum extrusion, reflecting a difficult pain, increasing price productive capacity relative to expectations.
Inventory increased by $3 7 million and $3 4 million in the second half of first quarter of 2022, respectively. We have taken steps to moderator supply and we expect to begin to reduce inventory levels in the third and fourth quarters.
Days sales outstanding net of deposits and income taxes receivable was 27 days in line with our targets. Our current ratio at June 30 was one eight times compared to two two times at March 30 <unk>.
For the full year of 2022, and our revenue guidance remains unchanged at between 175 and $185 million the midpoint of which represents an approximate 22% increase over 2021 revenue.
We expect to see improved adjusted EBITDA net loss to the balance of 2022 approaching monthly cash flow breakeven in Q4.
Operator, we can now open the call for questions.
Thank you and as a reminder to ask a question. Please press star one one.
Again, Thats Star one wanted to ask a question.
And our first question will come from Rupert Murdoch from National Bank and your line is now open.
Hi, good morning, everyone.
Good morning, Richard.
Oh well.
So Jeff you've talked about head count reductions in increasing pricing and other actions that you've taken too.
Push you towards breakeven.
Can you talk about what that work looks like from where we are today.
To the year end and what the impacts of all the actions you've taken should have on your quarterly EBITDA by year end.
Absolutely. Thanks.
Thanks for that question.
So.
And I'll reference back to the current quarters is kind of a baseline so.
Our current quarter cash burn was $19 million.
Just on $47 million of revenue or $44 million of revenue.
$47 million of revenue sorry.
That's around $44 million of revenue with nominal impact from the June price price June 1st price increase and no impact of the July 21 price increase that we just did so included in that $19 million cash usage.
<unk> 6 million of onetime costs.
$2 million of reward.
<unk> the D&O insurance.
Run off.
$3 million of contested election at about $6 million of DSV payments and cash to former directors.
That makes that not year about $13 million a quarter on $44 7 million of revenue content for spots.
First since June one and including July 21.
Increase with base prices by about 15%.
We expect to see the impact of that.
Third quarter.
Second.
We have significantly curtailed activities and that should benefit us to the tune.
3% to 5%.
Revenue increase.
So the combination of that is anywhere between 18 and 20%.
We expect to see the impacts of those mid third quarter.
Third we have reduced our cost base at the end of the July at the end of July by about $5 million Crinum, that's above one in a quarter million dollars per quarter.
The effect of the Phoenix closure, which is a boat.
Quarter $1 million per quarter since we staffed up some of our.
Our variable labor offsetting some of the previously announced savings. So there is an <unk>.
Total is about 1 million and a half quarterly savings there.
All of those things that I've talked about go directly to the bottom line.
And it gets you close with the Debottlenecking in the plants that Benjamin and I discussed the increased revenue and demand that we've seen.
Our new hires getting trained and productive.
That increases our overall labor efficiency and that gets us to the rest of the way and I think the other thing which.
Is important.
<unk>.
A large part of our gross margin compression.
It's come with be inflationary impacts that we've seen which is why we've gotten the price increases.
We're seeing those input costs come back.
Come back down.
And I think that will also also benefit although we haven't taken that into account.
To help you.
Yes, that's great. Thank you.
Thank you and again, ladies and gentlemen to ask a question. Please press star and then one now.
Our next question will come from Neil Wednesday, <unk> from <unk> capital markets. Your line is now open.
Yeah, Hi, good morning, guys.
Good morning.
Good morning.
For Benjamin I'm really curious about your perspective being recently being a distribution partner.
Up to dirt.
From working with clients how have you seen client requirements decision, making processes changed specifically in the last couple of last few years.
And how are they dealing with the macro environment, because I'm really curious as to how you look at dirt as far as not.
Having addressed that before or trying to put some processes in place that help respond to some of these changes.
Thanks Neil.
That is great question, having come from the distribution partner directly.
I can say with certainty that their requirements and decision making processes have changed significantly in the last few years.
By both the pandemic as well as uncertainty in the economy.
I think that the.
The pandemic has shown with the limitation in raw materials and resources, including labor.
Our clients needs for cost certainty.
Rapid construction.
With the ability to also have changed have proven more difficult for them to obtain through conventional construction.
Now as well as in the immediate future and.
That is where our sweet spot is with <unk> to be honest.
We're also seeing some additional needs from them a request for sustainability.
More so than we've seen previously.
And your question about what we can do better to respond to that and I would say that we can continue to improve our response to these types of changes through improved communication from our distribution partners as.
As well as our direct sales force.
Beyond that I think where our opportunity is to affect more changes even further decreasing the lead times on our products as well as disciplined.
Innovation from our product development team to response, probably needs to come out.
Let's say in closing all of that really.
This is.
The perfect time for <unk>.
Neel the way that we deliver construction is perfectly in line.
Perfectly aligned with what our.
Our customers are looking for even more so than previously.
Okay fair enough. Thanks.
Youre welcome.
Thank you.
And that does conclude our Q&A session for today's conference I'd now like to turn the call back over to Benjamin urban for any closing remarks.
Thank you so much.
I'd like to thank you all for joining us today and I look forward to speaking with you in the coming months.
My earlier comments I anticipate austerity and opportunity ahead for this company.
And that is what inspired me to take the role of CEO we.
We have decisively made changes to the organization that will result in a renewed stronger and altogether different <unk>.
The big picture demand environment is improving and we are addressing our immediate inflationary and manufacturing challenges.
Continue to see 2022 is a Europe revenue growth over 2020 guidance of between 175 and $185 million.
I think all the passionate individuals here at <unk>, our distribution partners and our board for their tremendous efforts to set up.
Yes.
Thank you.
Thank you. This concludes today's conference call. Thank you for your participation you may now disconnect everyone have a great day.
The conference will begin shortly to raise your hand during Q&A you can dial one one.
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