Q4 2022 DIRTT Environmental Solutions Ltd Earnings Call
The conference will begin shortly.
Jayson lower Johan during Q&A, you can dial star one one.
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Thank you for standing by this is the conference operator, welcome to dirt Environmental solutions fourth quarter 2022 financial results Conference call.
As a reminder, all participants are in a listen only mode and the conference is being recorded.
After the presentation, there will be an opportunity to ask questions to join the question queue. You May Press Star one one on your telephone keypad.
You will then hear an automated message if I see your hand is raised to withdraw your question. Please press star one one again I would now like to turn the call over to Sean Mason director. Thanks.
Thanks, Robert and good morning, everyone welcome to today's call to discuss <unk> fourth quarter 2022 results joined.
Joining me on the call today are Benjamin urban dirt CEO and Brad Little CFO .
Today's prepared remarks are accompanied by presentation slides.
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 not guarantees of future performance.
In addition, this call will reference non-GAAP results, excluding special items.
Please reference our Form 10-K as filed on February 22nd 2023, with the Securities and Exchange Commission or SEC.
And other reports and filings with the SEC for information regarding forward looking statements and reconciliations of non-GAAP results to GAAP results.
I will also remind you that this webcast is being recorded and a replay will be available tomorrow I now turn the call over to Benjamin.
Thank you Shannon and good morning, everyone.
It's my pleasure to be joining you today and to share the highlights of a very productive fourth quarter closing out a challenging 2020 to Europe .
Europe turnover market volatility and disruption.
It has been a particularly challenging year for our people our partners and our key stakeholders.
On behalf of my entire leadership team I want to personally. Thank all of you for continuing to support us through this year of great change and transition.
Before I talk about the fourth quarter I want to reflect on some of the critical observations I've made over my first two full quarters with the company first.
First over the years. It is clear that we had gotten away from the emphasis we have historically placed on innovation and the importance. It has played in the success of dirt.
Innovation is very much a participation sport and we're getting back to a place where our customers and construction partners planned active role in our innovation of solutions our ecosystem relies on.
Second if I look back at the key decisions that have been made over the past several years the ones that have been most successful are the decisions that were made in the spirit with which Curt was created was.
<unk> was created in the spirit of adaptability flexibility customization and removing risk from construction.
Continued to provide solutions that support a rapidly changing workplace, a changing health care and education landscape.
No one knows what the future holds but we pride ourselves in supporting our end users through whatever comes their way and.
In retrospect some of the decisions made we're not in service to this core principle and we learned a tough lesson from that and we will apply those lessons learned to future decisions and strategy.
Lastly, maybe like greatest observation is the resiliency of our people.
Patient and loyal to <unk>.
And our founding vision through so many changes and challenges our people are our most valuable resource and are the single biggest reason we will be successful as we continue to improve for years to come.
Turning to our fourth quarter performance the improvements we made in the business earlier during 2022 paid off and improved financial results during the quarter on our last call. We indicated that we had line of sight to cash flow and adjusted EBITDA breakeven during the fourth quarter and that is exactly what happened.
Ed will outline we achieved positive adjusted EBITDA and an increase in cash flow from operations during a quarter for the first time since 2020.
We continued our world class safety record with zero recordable incidents during the fourth quarter, finishing the year with the total reportable incident frequency rate of <unk> one.
This equates to about one recordable incident every 2 million working hours I've been amazed at the commitment from everyone in the organization around keeping our team members safe.
On the commercial side of the business, we have added new construction partners at our further expanding and refining both our sales channels and go to market strategy.
Continue to see adoption of our solutions within some of the most prestigious and recognizable companies like visa, Google and Frost Bank of Texas, among many others, we're gaining strategic advantages through collaboration with our construction partners in both innovation and efficiency and this is resulting in a healthier sales pipeline.
We see great opportunity for growth in 2023, and beyond and we are channeling resources directly at our commercial organization in order to do that we are operating with a high sense of urgency and recognize that time is of the essence. It has that vein that we have announced certain staffing changes and realigned responsibilities.
In order to maximize efficiency and direct communication to our people construction partners and end customers.
Personally leveraging my experience and will be taking on an even more active role in our commercial organization to help drive topline growth.
Also been actively involved with our partner's success team as we continue to bolster that group with successful dirt veterans that also know our business intimately from an operations standpoint, our team members in both Calgary and Savannah are hard at work improving production efficiencies and quality, while mitigating against rising supply chain.
And overtime rates during the fourth quarter, our improved gross margin is as much about their performance as it is from the pricing actions taken over the past year, while we have not restarted operations at rock Hill, we continue to maintain that facility and are actively monitoring demand levels in 2023 and 2024, we believe that this.
<unk> supports a critical aspect of future expansion and growth, we remain committed to our sustainability journey and our ESG commitments, we strive to build a better world through our products and by leveraging our solutions to help our customers achieve their sustainability commitments. We note that our proactive and transparent approach to establish.
King measuring and reporting on ESG factors impacts our bottom line. This year as we published our third annual ESG report, we celebrate our second IR magazine nomination for the best ESG reporting by a small cap award.
I'd like to emphasize that we are never satisfied with our performance be it safety optimization or profitability with a full quarter to measure and observe the effects of our changes made in Q3. It has aided in further eliminating areas for additional refinement or alternatively, a required investment some of these changes have already been implemented at the <unk>.
Beginning of Q1 2023, as we continue to move with precision in haste entitled alignment with our board of directors. The continued increase in the understanding of underlying factors that drive our cost efficiency and pipeline further direct our investments and resources, even with reaching positive adjusted EBITDA.
And operating cash flow in the quarter, we continue to be relentless with strategic initiatives to further improve our balance sheet as well as provide additional investment for growth more so than financial results. Our performance is continuing to build increased trust and credibility with our construction partners customers and employees this renewed stability.
<unk> provides us with a solid operating platform for 2023 to both drive organic growth and implement our planned strategic initiatives.
I am excited about the future of dirt and the opportunities in front of US I will now turn it over to Brad to discuss our financial results in greater detail.
Thank you Benjamin and good morning, all.
As is customary we have issued a press release discussing our fourth quarter results and it provided additional analysis and a supplemental presentation, which is now posted on our website.
My comments. This morning are designed to add additional color on our financial results for the quarter and update you on the progress of the various liquidity initiatives, we discussed last quarter.
Revenues for the fourth quarter were $42 4 million in line with prior year.
As expected revenue during the fourth quarter reflects virtually all of the price increases we have implemented over the previous 15 months.
Revenue declined 9% compared to the third quarter of 2022, driven by a reduction in volume offset by favorable impact from pricing. The volume decrease is primarily the result of a normal seasonal pattern shipments and order pace slowing around the major holidays in the U S and Canada in the last two weeks of the fiscal year <unk>.
Packed with muted during 2021 due to price increases announced early in the fourth quarter, 2021, which motivated our customers to accelerate delivery of materials to avoid the increases.
Turning to gross profit, we continue to see meaningful expansion in gross profit margin compared to the fourth quarter of 2021 gross profit margin increased 770 basis points from 19, 6% to 27, 3% in the fourth quarter of 2020 Q similar.
Similarly, adjusted gross profit margin, which excludes the impact of depreciation increased 670 basis points from 25, 3% in the fourth quarter of 2021% to 32% in the fourth quarter of 2022 compared to the third quarter of 2022 gross profit margin increased 1232 basis points.
From 15% to $27 three in the fourth quarter of 2020 Q adjusted gross profit margin increased from 21, 7% in the third quarter to 32% in the fourth quarter of 2020 Q. The improved margin is due to the realization of the price increases just discussed and cost reduction initiatives executed during the second and third.
Quarters. Additionally, we are continuing to see sequential quarter improvement in manufacturing efficiencies. Despite lower volumes during the fourth quarter of 2022 regarding operating expenses. We saw again decreases across all of our normal back office operating expense line items, mostly from the cost reduction initiatives implemented throughout 2020 Q.
But also due to more disciplined discretionary spending from January 2022 through January 2023, the company has reduced production overhead and G&A head count by 111 or 20% as Benjamin mentioned previously we achieved adjusted EBITDA for the first time since the third quarter of 2020 to adjust.
EBITDA for the fourth quarter improved to 600000 from a $9 7 million loss in the period of 2021, and a loss of $5 4 million during the third quarter of 2022, despite approximately 15% lower volumes in both comparable periods.
The improved profitability has been driven by the reduction in operating expenses and improvements in gross profit margin. Just described all while still delivering at our historical short lead times you can find further detail on these as well as other financial information in our supplemental presentation, which again is published on our website.
Turning to liquidity when I came on board I indicated there was no larger priorities and strengthening our balance sheet through improved financial results and implementing a number of strategic initiatives to drive improved cash flow.
We finished the year with $10 8 million in unrestricted cash up 4 million from $6 eight at.
At September 32022.
Cash provided from operations for the fourth quarter was $3 2 million compared to cash consumed by operations of $10 $7 million during the third quarter of 2022, and $7 3 million in cash consumed by operations during the fourth quarter of 2021.
This marks the first time, we have delivered sequential quarter improvement in cash flow from operations since the third quarter of 2020. The improvement from September 2022 was driven by a combination of improved profitability and cash proceeds from the private placement offering announced in November and increased rigor around our working capital management program liquidity.
<unk>, which includes our availability under our ABL credit facility with $16 1 million at December 2022, up 300000, or 2% from September 32020 to the.
The improved cash and liquidity at December 31, 2022 is particularly important as we shift into a seasonal period with increased cash and working capital requirements.
Networking capital at the end of the quarter was $26 1 million or even with September 2022 availability under our ABL facility was $5 3 million at the end of the quarter, we did not need to draw on that facility in the fourth quarter and have not had to thus far in the first quarter of 2023 also of note earlier in the month, we completed <unk>.
<unk> of this facility through February 2024, similar terms, giving us flexibility as we expect to invest in working capital as volumes and revenues improve availability under this facility is expected to range between five and $15 million. During 2023 I also wanted to update you on the cash initiatives I've discussed with you during our third quarter call.
First during the fourth quarter, we implemented certain customer friendly incentives for those customers in good standing, including the ability to take advantage of modest discounts for early payment of receivables. This program contributed an incremental $2 million in cash to our fourth quarter, while only impacting revenue by approximately 50000.
Second.
During the third quarter of 2022, we recognized the tax receivable of $7 1 million associated with the employee retention tax credit program in the United States. This remains accrued at December 31, and we expect to receive this in 2023.
We're continuing to evaluate certain company owned properties from our sale leaseback, where sublease standpoint, we made meaningful progress on two such properties to date and expect to have resolution on one or both of them as early as March as a reminder, we do not intend to vacate these premises as they still serve a critical aspect of our value proposition Lastly, we are continue.
To evaluate multiple strategic initiatives to advance their long term vision around the ice platform. We have also made progress on this initiative during the fourth quarter and expect our evaluation to be completed within the next 90 days collectively we expect these initiatives to generate meaningful cash flow during 2023 as early as the second quarter turning to <unk>.
<unk> thousand 23, our 12 month forward sales pipeline at January one 2023 was $391 million compared to 311 million at January one 2022, or about 26% higher driven by a combination of price and expected volume in particular, we have seen year over year growth and.
<unk> at higher stages in the sales cycle, increasing the likelihood of ordering during the year. While we are encouraged by the pipeline growth our order pace in quarterly revenue and supply chain forecasting continues to be challenged by high push out rate and longer than normal engineering and design time associated with large and complex projects. We are closely monitoring our call.
Structure, including the underlying materials that comprise our products. Although we are somewhat insulated from the near term effects from a potential recession in the United States or Canada as our pipeline is largely comprised of projects that have already started we are susceptible to the inflationary impact of labor and commodity pricing, particularly aluminum and wood and.
Lance to the risk associated with these items, we have taken additional actions over the past few months that will reduce our annualized overhead cost by $3 million to $5 million. These cost reductions were related to efficiencies and streamlining our back office and operational support functions not pursuant to our planned restructuring program. We are also evaluating certain instruments.
That will hedge against inflation and volatility associated with our primary materials, we believe that the combination of growth in our sales pipeline the improved margins from pricing actions already taken and the reduced cost structure will set us up well to deliver year over year growth in revenue gross margin and adjusted EBITDA during 2023.
And now we'll open the call for your questions operator.
As a reminder to ask a question. Please press star one one on your telephone and wait for your name to be announced to withdraw. Your question. Please press star one again, please standby, while we compile the Q&A roster.
And our first question is from Greg Palm with Craig Hallum. Your line is open.
Yeah. Thanks, good morning, everyone.
Everyone. Congrats on the results.
Quite a long time since we've been talking about a profitable quarter. So kudos to you guys. Thanks, Greg. Thank you Greg.
Yes. My first question was just around that I mean, you achieve EBITDA profitability on a much lower revenue run rate than what I was expecting so I guess do you think that this level of revenue as you know.
Now a better approximation of our breakeven point I'm, just trying to get a sense of how youre thinking about sustained profitability this year and going forward.
Well I'll start and then let Benjamin kick in.
No the level of revenue here is not what we are certainly not what we're looking for.
I think this was an inflection point, where we in April too.
Implement the price increases and we're starting to see the efficiencies.
And our operations, our supply chain and our pricing and discounting structure.
Our pipeline year over year has gone up 26%.
The mix within the pipeline has a higher mix of products and projects that are further along in the cycle.
So we do see we see growth in 2023.
But for the we don't see costs going up commensurate with that.
With the revenue generation.
Yes sure Greg.
Further that brad's comments I think it's.
It's very representative of what the opportunity is there for us that if we can break even at these revenue numbers that means that as we continue to increase conversion rates and organically add growth in the pipeline the ability to handle that additional capacity isn't around retooling more around adding additional shifts.
But not to satisfy that so.
To Brad's point, the increased pipeline over last year, and then anything organic on top of that as well.
We were expecting.
Got it so just to be clear, if you're expecting a little bit of a revenue bump in this year relative to what you just reported in Q4. There is no reason why.
Shouldnt see sort of a similar bump in EBITDA relative to what the levels. You just reported just want to make sure that's clear.
Yes, that's right.
Thank you.
The larger issue as the leverage from our cost structure that we've taken out I think as volumes improve and clearly from a pricing and revenue standpoint, we feel very confident.
Our pricing.
You will start to see better leverage of our fixed cost structure.
Meaningful investment in that structure as revenues increase.
Yes, Okay makes sense.
Big picture, you alluded to the pipeline pretty solid growth year over year I don't know, maybe just touch on the value proposition of your solution in today's world I mean, it feels like to me there's some.
New tailings that are emerging or at least getting stronger.
Covid post supply chain best of the World I mean, do you have any thoughts maybe just a little bit more on kind of the makeup of the pipeline and some of the drivers behind that.
Yes, sure Greg Youre, absolutely right I think if you if you unpack that two ways. One is the diversification of the pipeline, we're seeing year over year growth from different verticals to be E. Commerce, not just commercial but in health care as well as government and education those helped bolster the pipe.
And over the next 12 to 18 months, but additionally to that in your comment around some kind of higher level discussion on post Covid. If you will.
Every value proposition that <unk> provides is in direct support of Derisking everything that we do be it.
Price certainty.
Lead times.
<unk>.
Ability to change and I think thats, probably the biggest thing that has been embraced.
Out of all of the values that there are circling circling dirt is the unknown right so being able to.
Basically plan for not knowing what's coming in using <unk> to do that.
Before the pandemic.
It wasn't painful enough with general construction.
Come full circle and know the value of this there is much more.
Amplified.
Do you have evidence that.
Some of the pipeline activity is directly attributable to stuff.
Stuff like that I don't know if you've got any.
Description of.
What's in the pipeline is it mostly customers who work with before or is it new customers that are looking at really how base.
Sort of change how they procure the stuff in a post Covid world, Yes, Greg I think it's two two fold. One is return repeat customers clearly that understand the value of dirt. So they continue to utilize us as a construction solution.
And that tends to be many times some of the larger customers that we have national accounts with.
That we and the depend on but further to that I'd say, what's interesting within the pipeline is the conversion from companies that may have maybe only looked at us for acoustic reasons or aesthetic.
And maybe not the full solution that provides now entertaining or investing in okay. We understand now that we've lived through having to reconfigure or uncertainty, we're going to invest more with dirt and essentially those projects that may have been.
Just speaking rhetorically 100 brands.
And products are now 200 grand because they have a full solution associated with them was our solid petitions modular power raised flooring et cetera.
Interesting okay.
Maybe I'll ask a couple more I know, it's maybe too early to talk about long term targets, but I'm going to try anyways.
Have any thoughts around long term aspirational goals, whether that's revenue growth earnings power just give us some idea on how you are thinking about the trajectory of this business over the next two or three or four or five years.
Yes, Benjamin do you want to start kind of on the aspirational and I can I can layer in a financial overture as to what that would mean from a profitability standpoint, yes, great.
Yeah, Greg from a longer term perspective.
We touched on it a little bit at the beginning of the call, but some of the redirection of resources that were applied towards growth.
Really around the commercial organization.
We've got a good handle on the operational side, we're back to regular lead times clearly, we've got sufficient capacity and we can satisfy the demand thats coming in strategically.
Strategically from long term growth and how do we increase conversion rates within the pipeline, how do we add topline growth.
I touched on how do we increase scope on those projects that we have.
A lot of that is.
Things that we can affect internally, but also I'd say that we've proven that we've been at $300 million before right.
And so year over year growth, not saying, we're going to be there that fast.
But we do have.
By adding and diversifying our.
Construction partners in markets, which were under serviced previously that applied with strategic channels for additional top line revenue growth that had previously not been.
Entertained is also opening up some windows to revenue that we in the past or unable to actually even participated so if you layer those two on top of each other where you have some standard growth just through the base distribution construction partner model and then Les.
Here on some additional revenue channels to us those two things alone.
Will help us with that long term growth that's sustainable.
So assist on the manufacturing capacity side, yes.
I would say is in the first six months of being at the company alongside Benjamin being Blessed with a really strong finance team that has really helped me get out onto the road.
We've been engaging with customers and end users and partners had a very deep level.
And it's really clear that.
It's very important that we rebuild the trust with our partners our people and our key stakeholders and.
As we return to levels of revenue generation that we've demonstrated previously.
It's really imperative that.
We're doing what we say we're going to do we're reconnecting better understanding the partner community.
The opportunities there.
If you were the structure now that we have in place both from a pricing supply chain and a cost structure standpoint.
We can return to levels of revenue previously generated.
While demand while delivering gross margins in the <unk>.
Higher than 40% range simply from the leverage from the cost structure.
The indirect overhead production overhead.
EBITDA margins of 15% to 20%.
Certainly.
We are capable of delivering those once we get our volume levels to the to the optimal level.
Hey, Greg.
Yes, I wanted to add one more thing too to that question.
Other things that we've seen is increased adoption of our technology platform. So that the ice software is continuing to prove to be.
Valuable part of our actual portfolio as well as our value proposition with other manufacturers interested in it.
Okay.
Yeah. Okay. I appreciate all the color I guess last one more of a <unk>.
Keeping question, but can you just give us any update on the litigation with <unk>.
Yes, sure I'll take that one.
As you know we filed a summary judgment applications last year.
November .
Paul.
<unk> filed the duplicative lawsuit the court instructed finding it to be.
The general use of the process earlier this month, the court dismissed and application, but look to strike or some re judgment application.
In order for them to submit the cross examination on which we are in the process of performing.
Making good progress there.
The court has directed that I'm hearing for the summary judgment application will be scheduled in the justice chambers at the first available hearing dates after June 15th of this summer this year.
And we believe we've tendered strong evidence supporting our claims.
We will be.
We're optimistic that summary judgment application will succeed.
Got it well I think I'd, probably over my allotment. So I will leave it there best of luck going forward. Thanks.
Thanks, a lot Greg Thanks, Craig.
Thank you.
I would now like to turn the conference back to Benjamin urban for closing remarks.
Yeah.
Thank you.
I'd like to take all of you for joining us today.
On behalf of our more than 900 person team. 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 order our next or at our next quarterly earnings call. Thank you.
And this concludes today's conference call. Thank you for participating you may now disconnect.
The conference will begin shortly to raise and lower Johan during Q&A you can dial one one.
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