Q3 2022 DIRTT Environmental Solutions Ltd Earnings Call

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Walking through the dirt environmental solutions 2022, Q3 financial results Conference call.

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After the presentation, there will be an opportunity to ask questions.

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I would now like to turn the conference over to Cassandra ticking director of strategic marketing.

Please go ahead.

You operator, and good afternoon, everyone welcome to today's call to discuss <unk> third quarter 2022 results. Joining me on the call today are Benjamin urban dirt CEO and Brad Little CFO today's prepared remarks are accompanied by presentation slides.

To access the slides please view them from the web page of this webcast or on our website at <unk> Dot Com. 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 intent expectations and projections they are.

They're not guarantees of future performance.

This call will reference non-GAAP results, excluding special items. Please reference our Form 10-Q as filed on November 14th 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.

non-GAAP results to GAAP results I'll also remind you that this webcast is being recorded and a replay will be available tomorrow I'll now turn the call over to Benjamin.

Thank you Cassandra and good afternoon, everyone. It is my pleasure to be joining you today. Following my first full quarter as CEO I'm excited to share with you many of the outcomes of the transformational progress we have made it in the last quarter. It is through the diligent efforts of all the dynamic employees here at <unk> that have driven the success of these achievements.

Externally I have spent much of my time with the company on the road with our partners and end customers listening carefully and collaborating with them and evaluating ways to successfully grow our businesses together.

In House I've worked closely with our board and building out our extended leadership team. We remain focused on developing a cross functional team adapted leadership communication and passion for our people and our partners. It was through this lens the guided our recruitment of each of the newly appointed executives and with the recent hire of Jeff Dill feed as chief revenue.

Officer I'm excited to say that our team is largely in place also internally we have been focused on improving our service levels cost structure and restructuring the business in response to many of the macroeconomic conditions. Our industry is currently facing and we are starting to see the benefits of our actions, resulting in improvements in virtually all of our measurable financial.

Metrics. These improvements show that through the actions taken by our management team, we have been able to affect the business favorably for long term growth as well as eliminate further areas for refinement. We have also been focused on stabilizing cash flow, which improved during the quarter and strengthening our balance sheet as we announced today and as Brad will talk about them.

More detail, we have launched a private placement offering with our two largest shareholders as well as all directors and officers demonstrating our confidence in the long term growth capabilities of our company. This modest capital raise along with several other strategic cash initiatives will help provide runway as we approach adjusted EBITDA and cash flow break.

Even levels of operations, while continuing to invest in our business before I talk about operations I want to start with safety something we take very seriously. We are proud to report that we were incident free in the third quarter and have now gone over 1 million hours without an incident nothing is more important including profit than sending our people home each day.

In the same condition. They arrived during this last quarter, we made the decision to temporarily close the Rockville facility discontinue our reflex product line and further reduce head count in our back office. These decisions are never made lightly and we're all done to align our cost structure with current demand and order pace further within our manufacturing.

During and supply chain organizations, we have worked to improve accuracy and efficiency, leading to lower deficiencies and improved lead time performance the improvement in our third quarter gross margins are a direct result of these actions at the forefront of all that we do is our commitment to our construction partners and our support of their respective businesses.

As I mentioned I've spent a good portion of the third quarter in the field with our clients partners and sales reps and it is even more clear. This is the area we need to direct our efforts nearly all of our partners are investing in their own businesses by adding head count and investing in their dirt experienced centers. Our partners are also showing strong growth with multiple <unk>.

<unk> project wins with outstanding companies like Google align it helps and several other leading global corporations. We have also added new construction partners in the last quarter, along with existing partners that are seeing successful growth through expansion. Similarly to our partners' investment. We have also put further resources towards the commercial business.

<unk>, our new Chief revenue Officer, Jeff go feed who brings a wealth of knowledge and experience within our construction industry. In addition to Jeff. We have also added additional partner support resources focused our direct sales force added sales representatives and continued furthering our efforts towards Onboarding strategic partners that will drive business directly.

Two our construction partners lastly, but certainly not least innovation is a critical component of dirt that it's been part of our DNA. Since inception, we have made great strides in narrowing our focus on innovation, both within our solutions as well as through our ice software. These renewed communication lanes have allowed us to better prioritize those.

<unk> that drive the greatest impact to our partners and customers. The return of one of <unk> founders, Jeff gasoline has also greatly helping with both innovation and improved communication with our partner and internal sales channel.

While our numbers have improved from last year and the second quarter, we are not where we want to be and are tirelessly working to continue to improve as we look forward to the fourth quarter and into 2023, regardless of the challenges that lie ahead, a greatly believe in dirt and the high value, we bring to our clients through our wonderful solution offerings I'll now.

Turn it over to Brad to provide some further financial color on the quarter and the items I've discussed.

Thank you Benjamin and good afternoon as is customary we've issued a press release discussing our third quarter results and provided additional analysis and the supplemental information, which is now posted on our website.

My comments. This afternoon are designed to add additional color on our financial results for the quarter as well as the various liquidity initiatives currently have in flight.

Revenues for the third quarter for $46 7 million, an increase of 5% and 37% over the second quarter of 2022 in the third quarter of 2021, respectively.

The improvement over the prior year is driven primarily by increased demand for our products. While the majority of the sequential quarter growth is related to commercial discipline.

As you are aware, we have announced and successfully implemented several price increases over the past year.

These price increases have allowed us to catch up to a prolonged inflationary environment in which most of our input cost have significantly risen, especially since early 2021 he.

He is not only include raw material costs, such as aluminum and wood, but also transportation and labor cost volumes have remained relatively consistent between the second and third quarters of 2022, and while our pipeline has increased by 10% from July one to October one and our project win rates have generally improved during that same time period, we have.

Our entire than usual push out rates on orders a trend that many other construction and product companies are seeing as well.

We believe the primary factor has been job site readiness and addition to labor shortages and supply chain disruptions. We believe that rising interest rates have contributed to commercial loan timing further rising material input costs have forced many contractors to reevaluate pricing and product profitability. These factors have all served to stretch construction sketch.

<unk> and by extension the timing at which our products are ordered we believe these trends will normalize over time.

Gross margin for the quarter increased 780 basis points to 15% from seven 2% for the same period in 2021, and similarly, adjusted gross profit margin increased 770 basis points to 21, 7% from 14% in the same period of 2021.

The improved margin is due to more efficient pass through of the rising material input costs through the price increases just discussed as well as improved leverage from increased volume and better manufacturing efficiencies. Our third quarter gross profit margin includes approximately $2 million or 4% of revenue and non cash charges associated with the write down and access.

<unk> depreciation of discontinued product lines, primarily our reflect line.

Our gross margins were also favorably impacted by the strengthening U S dollar versus the Canadian dollar has favorably impacted our third quarter gross margins by about 600000 or 1% of revenue as compared to the second quarter of 2022, a gross profit margin increased approximately 100 basis points. Despite the net unfavorable impact of these UN.

Guidance.

Related to operating expenses, we have seen decreases across all of our normal back office operating expense line items, mostly due to cost reduction initiatives implemented throughout the year as well as lower professional service fees and discretionary spend within G&A cost reduction initiatives, primarily consisted of reduction in workforce earlier in the year.

During the quarter, we incurred $3 4 million in reorganization costs attributed to these workforce reductions as well as the temporary suspension of the Rockville facility and leadership changes, we expect the pace of reorganization expenditures to decline in the fourth and subsequent quarters.

Adjusted EBITDA for the quarter improved to a $5 4 million loss from a $13 3 million loss in the same period of 2021, driven by improved volume and demand as well as the reduction in operating expenses and improvements in gross profit margin I've just discussed.

You can find further detail on these as well as other financial statement fluctuations in our Investor presentation deck, which again is published on our website turning to liquidity. There is no larger priority I have right now the strengthening our balance sheet through improved financial results and implementing a number of strategic initiatives designed to drive improved cash flow.

We finished the quarter with $15 8 million in liquidity, including $6 8 million of unrestricted cash compared to $60 3 million at December 31, 2021 networking capital at the end of the quarter was $26 9 million and we used approximately $12 5 million in cash in the third quarter, which included the.

$3 4 million of onetime reorganization cost just discussed availability under our asset backed credit facility stands at $9 million at the end of the quarter, we did not need to draw on that facility in the third quarter and have not to date during the fourth quarter either I'm also pleased to report that as of October 31 cash on hand remained flat at $6 seven.

Million due to the improved operating results as well as good working capital conversion.

From an operational standpoint, we have seen improvement in monthly cash usage, especially into early fourth quarter, we have been focused on reducing inventory where possible and are actively negotiating and in some cases better enforcing the underlying commercial terms with both customers and vendors, we are offering customer friendly incentives for those customers in good standing include.

The ability to take advantage of modest discounts for early payment of receivables. In addition to the cash impact from operations. We are also implementing or evaluating several strategic initiatives meant to infuse the business with additional cash and demonstrate improved balance sheet health.

First during the third quarter as a result of the recently announced employee retention tax credit program by the United States. We recognized the tax receivable of $7 1 million. This tax credit reward those companies that maintain payroll throughout the pandemic despite rapidly declining revenues.

Second we have certain company owned properties that we are evaluating from a sale leaseback standpoint.

To note that we do not intend to vacate these premises as they still serve a critical aspect of our value proposition.

Third in.

And recognizing the growth and opportunities around the <unk> software platform, we are evaluating multiple strategic initiatives in order to advance long term vision around this platform collectively we expect these initiatives to generate meaningful cash flow during 2023.

Finally, as Benjamin spoke about earlier today, we announced the launch of a private placement to our two largest shareholders and all directors and officers to issue up to $8 8 million shares with expected gross proceeds of up to $4 million subject to certain pricing mechanisms that are mentioned in our press release.

In connection with this placement the two shareholders subscribing to deficient went to volatile irrevocably committed backstopping any future rights offering occurring by the company in the next 12 months and the amount of $1 million in the aggregate and a shortfall if any between the maximum anticipated gross proceeds under the private placement and the actual gross proceeds amounts received by the <unk>.

Company upon closing.

This capital raise is meant to be minimally dilutive and is expected to bridge the gap between now and the strategic gasoline initiatives. Just discussed we expect this offering to close within the next week in closing we have assessed the company's liquidity using multiple downside and upside scenarios taking into account our improved sales outlook for the next 12 months the.

<unk> of our price increases and cost reductions and the strategic initiatives I've, just described and in combination with the existing cash balance and available credit facilities. We believe we have sufficient liquidity for the next 12 months.

And now we will open the call for your questions operator.

Thank you.

As a reminder to ask a question you would need to press star one on your telephone.

One wants to ask the question.

Please standby, while we compile the Q&A roster.

Our first question comes from the line of Great Palm with Craig Hallum. Your line is open.

Yes, thanks for taking the questions here I guess I wanted to just start Benjamin it sounds like you've been pretty busy these last couple of months.

Maybe wanted to get a broad overview of what have you learned as you've traveled across and met with partners and.

And customers Whats surprised you what do you think are sort of the biggest kind of near and mid term opportunities for the company.

Hey, Greg Yeah. Thank you for that question.

Yes, I've spent a significant portion of this last quarter in the field with our partners and our customers.

And really Greg the things that I think stood out more than anything that was.

It's not unexpected but not to that level was the I guess bullishness of our partner community.

And the amount that they're investing in their own.

Staff as well as their experience centers.

Most of our partners are typically on a bit of a cycle with refreshes.

But this is the first time I think I've seen is that many of them all a putting money into their own real estate. But then also nearly all of them are hiring additional staff to satisfy the demand of the dirt projects that they're pursuing.

In addition to the ones that they've actually closed we've had significant projects.

Multiple million dollar size that had been awarded between now and into 2024, they require those additional resources.

The thing that I noticed that was probably most interesting.

On the partner side with regards to our customers.

I too have spent quite a bit of time across North America with many different customers.

And what I've seen is there I would say again a better understanding.

Where <unk> value proposition is with regards to uncertainty.

And that.

They are also investing in us knowing that they don't know what the future holds right and does that kind of realization is much more.

I guess, what's the right way is much more current than it has been historically.

Yes interesting.

As you talk to partners and customers.

I mean, it seems to me at least based on the commentary that.

The demand is.

It's actually pretty good.

Might have all that in mind, we're all reading and seeing every day this does that.

<unk> do you think that.

Just from an end market standpoint.

Our product standpoint that the cycle for what you do is a little bit.

Do you think maybe that you are seeing some momentum more or less share gain opportunities that are maybe contributing to some of this.

Yes, Greg I think it's really threefold, one is youre absolutely right that I won't say, we're insulated from macro forces, but I will say that due to their specialized nature and the higher end.

Build outs that we participate in they arent necessarily has affected us greatly as as commodity products and certain general construction.

So I think thats part of it I think you are right also that we are seeing organic growth throughout our partner community.

With a new partners, but then also some of our.

Veteran partners that are experiencing that growth directly so it's a combination of those two.

I'm going to let Brad comment a little bit with regards to some of the things that we track.

And in the market in general yes.

Yes, Benjamin when we look at the AIA for mixed index, it's been above 50 for several months in a row now.

And where we sit in the normal construction cycle the work that we're delivering now.

And over the next three to six months are for projects that commenced or kicked off.

About a year, maybe a little less ago. So.

We're actively looking at new construction starts very closely and staying close with our partners to really understand their quoting theyre quoting volume and.

We made the decisions and the cost reduction initiatives earlier in the year to realign our cost structure and a cost structure that we have realigned to us.

Is sufficient to support kind of the demand that we're seeing.

And do you have any idea I'm sure you are.

Tracking this somewhat but in terms of the pipeline.

What is the.

Breakout.

New versus customers that you've dealt with before then but more importantly, just sort of the growth and potential new customers as a whole I mean is that something that you're tracking them and talk about or not.

Yes, so Greg as far as a percentage I don't have one off hand of exactly what that is of new versus existing customer base, but I can say that.

A good portion of fees by actually not a good portion, let's say, it's actually fairly closely split between existing customers that have awarded as projects that are up we'll just call. It they are material enough over the next 12 to 24 months.

That are of note.

With that.

Interesting seeing the section of the vertical where these other projects are coming from we're also seeing growth.

In the healthcare vertical over the next 12 months to 24 months with some fairly massive sized projects in there.

Interesting because they are somewhat like I said earlier, not insulated, but they're on an entirely different cycle than traditional construction in the commercial space. So we've really been to answer your question, we've been really seeing about half and half of net new customers right.

Of that size and then returning customers that are also longtime dirt.

Orders.

Okay, Good and then.

Then last one.

I'll hop back in the queue, maybe I missed it but did you.

Talk about the fiscal year 'twenty two guidance at all I don't know if you if you reiterate or that are if you talked about that.

Expectation is still to be.

<unk> adjusted EBITDA in Q4 based on everything we know today.

Yes, yes, Greg So we were generally silent to it this time around it's there's been no significant changes to the guidance right now as we look out into the fourth quarter.

It's looking flattish versus the third quarter from a revenue standpoint, which puts it puts us right near the low end of the range that we previously set.

Candidly as a management team, we're getting our hands around the.

The pipeline and.

And further furthering our understanding of that.

And what about a breakeven on adjusted EBITDA basis, yes.

Have line of sight to breaking even in the fourth quarter at the EBITDA line.

And potentially at the cash flow line in the fourth quarter correct still.

And I will I.

I will say that the original Brit.

The revenues, even at a slightly lower revenue number than what we had previously contemplated in our guidance.

Through the efforts and the cost reduction initiatives and through the price increases and through just the manufacturing efficiencies that we're seeing.

We are realizing that the breakeven point is a bit lower than what we previously contemplated.

Okay good to hear.

Best of luck congrats on the.

The progress so far thank.

Thank you Greg Thanks, Greg I appreciate it.

Thank you.

Reminder, ladies and gentlemen, Thats star one to ask the question.

I'm showing no further questions in the queue I would now like to turn the call back over to Benjamin for closing remarks.

Thank you.

I'd like to thank you all for joining us today and I look forward to speaking more with you as we continue through this transitional period I speak on behalf of our more than 900 person team here at <unk>. We are committed to continuing to move this organization forward and believe strongly that our best days are ahead of US we look forward to talking with you again either on the road our next.

Clearly earnings call.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation you may now disconnect.

The conference will begin shortly to raise your hand during Q&A you can dial one one.

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Okay.

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