DIRTT Environmental Solutions Ltd. Q1 2023 Earnings Call
[music].
Thank you for standing by this is the conference operator welcome to.
The dirt environmental solutions first quarter 2023 financial results conference call.
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 then one one on your telephone keypad.
We'll then hear an automated message advisory your hand is raised to withdraw your question. Please press star one one again I would now like to turn the call over to Shauna Mason director of corporate Affairs.
Please go ahead.
So operator and good morning, everyone welcome to today's call to discuss Stuart's first quarter 2023 results. Joining me on the call today will be dirt CEO and CFO Benjamin urban and Brad Little today's prepared remarks are accompanied by presentation slides to access the slides. Please view them from the web page of this webcast.
<unk> 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-Q as filed on May nine 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 before I begin I want to start by thanking all of our team members are approximately 70 partners and numerous end customers.
Coaching the completion of my first full year with dirt I'm amazed to see the progress we are making in nearly every facet of our business.
I'm also encouraged by the level of enthusiasm from our partners regarding the future of <unk>.
We are seeing more and more partners investing in their own design centers, our partner Advisory Council and numerous other partners are giving us valuable feedback regarding what is and isn't working in their markets and how we can best address those items. We are preparing to have our sales team in Calgary. This week and next month, we will host connects our annual open house in Chicago.
It coincides with Neocon I feel confident in saying that <unk> is in a significantly better place than we were at this time last year.
To that end, we are in the midst of a challenging macroeconomic environment with recessionary concerns and uncertainty across many fronts, especially the technology and finance sectors to which we clearly have exposure as an example, one large project with a technology company with projected revenue of nearly $5 million.
It was scheduled to order in the first quarter, then pushed to the second quarter and now expect it to be delivered in 2024, we look forward to delivering that project, but it certainly impacted our first quarter results and our 2023 pipeline.
While we have seen improvement in our order pace during April and into May and believe we have good line of sight to our second and third quarter orders. There is still uncertainty in our addressable markets as Brad will discuss we continue to proactively remove unnecessary costs from the business and focus on cash generating initiatives all things we have control over.
Regardless of whatever comes our way from the economy in the meantime, we haven't slowed down our focus on strengthening our pipeline, our commercial organization and creating value for our partners and customers.
Beginning in late Q4, we also restructured our commercial organization and refined our growth strategy centered around the following core elements expansion and diversification of our construction partner network, increasing scope on projects as well as short cycle sales opportunities, adding sales representatives, including vertical market specialist.
And entering into new agreements with third party integrators, new purchasing programs manufacturing partnerships and negotiating standardization programs within our key customer base.
We are experiencing success with these initiatives and expect to see organic pipeline growth as a result within 2023 and into 2024.
Just within the last month, we've been awarded large projects with a backfill Apache and visa on projects expected to deliver this year. We are seeing an increase in quoting activity within the healthcare and education vertical markets. However, these are longer lead sales cycles and will take time to be realized as sales as I mentioned our.
<unk> partners also continued to invest in their own dirt experience centers and organizations bolstering our commercial efforts to continue to drive revenue growth, we talked about it in the Q4 earnings call, but we had a decrease in construction partners from 2019 to 2022, we have added more than 16, either new or partners, who may have.
Had their geographical territories expanded in the last nine months. However, it takes time for them to get up to speed and generating revenue.
<unk> is known for innovation not only within our solutions, but also in our approach to manufacturing and that continues to prove beneficial with removing costs from the business while simultaneously improving our manufacturing efficiencies Q1 has demonstrated that we have excelled in continuing to move the needle within manufacturing operations showing the highest on time and.
Full production balanced with the lowest efficiency rates, we have seen in years layered with our lowest overtime labor costs.
While accomplishing this we also implemented the cost reduction measures. We commented on in February decreasing the distance to EBITDA and cash flow breakeven, we will continue to optimize our business to be prepared for a variety of market conditions.
The pace of innovation and product development has also increased as we rollout new enhancements in Q3, and Q4 to specific product lines, such as inspire but also with solutions that are universal across our product lines with new door systems, and acoustical enhancements some of which have already been released with select premier customers further.
Ensing our value proposition. We are also exploring opportunities for further development of innovative solutions with our manufacturing partners. As you have heard us talk about for the last couple of quarters. We have been continuing to further develop our proprietary ice software with additional libraries and features supporting many of our existing solutions, while adding India.
After mentioned innovations some of our commercial initiatives also overlap with our technology solutions for example, Im happy to announce our partnership with Armstrong World Industries, who also utilize the ice platform for their project work software. This partnership not only provides commercial opportunity for both of our companies to leverage our complementary.
<unk>, but also drives direct revenue to dirt and our partners and with that I'll hand, it over to Brad to comment on our financials as well as further elaborate on the cash initiatives in play Brad.
Benjamin and good morning, all I would also echo Benjamin sentiments regarding our people our partners and our customers I would also extend that to our shareholders and our material suppliers. All of these parties have a shared dependents on Dirt's continued financial stability for the betterment of their families their businesses in their portfolios, we do not take that lightly and it's why we've been working tire.
This lead to remove costs and improve the financial results. Thank you to all of you.
As a reminder, we have issued a press release discussing our first quarter results and provided additional analysis and a supplemental presentation, which is now posted on our website. My comment. This morning are designed to add additional color on our financial results for the quarter and update you on key developments impacting our liquidity and cash initiatives, we've been discussing over the last several quarters.
Revenues for the first quarter were $36 7 million down 4% from the same period in 2022, the modest year over year decrease in revenues are primarily related to lower volumes and a decrease in average order size offset by improved pricing realizations and the price increases implemented over the previous 18 months as Benjamin mentioned.
Earlier, our first quarter was also impacted by the deferral of a large project within the technology sector.
Turning to gross profit, we once again achieved significant year over year margin expansion. Despite the deleveraging effect from lower volumes compared to the first quarter of 2022 gross profit margin increased 1507 basis points from eight 6% to 23, 7% in the first quarter of 2023.
Adjusted gross profit margin, which excludes the impact of depreciation increased 1086 basis points from 17, 7% in the first quarter of 2022 to 28, 5% in the first quarter of 2023.
The improved margin is due to the realization of the price increases and cost reduction initiatives executed from March 2022 through March 2023, further we've aligned our manufacturing cost with the current order pace, which has led to further margin improvement.
Regarding operating expenses, we continue to see decreases across all of our normal back office operating expense line items, mostly from the cost reduction initiatives implemented throughout 2022, but also due to more disciplined discretionary spend.
From January 2022 through March 2023, the company has reduced related head count by 81 or 20%.
As a result of this head count reduction and when combined with decreased third party consulting spend and increased management of discretionary spend first quarter 2023 recurring cash based operating expenses are 19% lower than the first quarter of 2022.
Adjusted EBITDA for the first quarter was a loss of $3 5 million, an improvement of $8 4 million or 75% from a loss of $12 million during the first quarter of 2022.
This improvement has been driven by the reduction in operating expenses and an increase in gross profit margin. Just described you can find further detail on these as well as other financial information in our supplemental presentation, which is again published on our website turning to liquidity and working capital as I spoke about on our fourth quarter earnings call and a normalized <unk>.
<unk>. The first quarter is typically the highest cash usage quarter as volumes are usually lower and we have several annual cash commitments in that quarter.
First quarter liquidity and working capital was impacted by two non operational items.
We benefited by the partial receipt of our previously established tax receivable in March we received $4 8 million of the previously accrued $7 $3 million, we expect to receive the remaining $2 5 million in 2023.
Also during March the company entered into an agreement to reimburse 22 northwest a related party for the legal fees incurred and paid by 'twenty two northwest during the 2022 contested director elections, the company intends to settle the obligations in shares not cash subject to approval by our shareholders as required as.
At March 31, this obligation was valued at $2 1 million.
We finished the quarter with $8 1 million in unrestricted cash down $2 7 million from $10 8 million at December 31, 2022 cash consumed by operations for the first quarter was $1 million compared to cash consumed by operations of $19 million in the first quarter of 2022.
Liquidity, which includes our availability under our ABL credit facility was $13 3 million as of March 2023.
Networking capital at the end of the quarter was $17 3 million down $8 8 million from December primarily due to seasonal operating patterns accentuated by the lower volumes and the establishment of the related party obligation previously discussed as a reminder, during February we extended our ABL facility by one year availability under that facility.
<unk> was $5 2 million at the end of the quarter, we did not need to draw on that facility in the first quarter and have not had to thus far in the second quarter of 2023.
I also wanted to update you on our ongoing non dilutive cash initiatives, excluding the tax receivable just discussed.
First we continue to see good adoption in compliance with our early pay discount customers in good standing our days sales outstanding has improved from 27 days at December 2022 to 22 days at March 2023, and by comparison days sales outstanding as of March 2022 was 25 days.
We are continuing to evaluate certain company owned leased properties from a sale leaseback or sublease standpoint effective April one 2023, we have sub leased our Plano DXP to one of our construction partners in that specific market. We estimate total annualized savings from this arrangement to be approximately $1 million. We also made.
<unk> on a similar property and expect to have resolution on that during 2023.
Lastly, we have been actively evaluating how to advance our vision and competitive advantage around the ice software as a result, and as we just released we have entered into a joint arrangement with Armstrong World Industries for Kona ship of certain intellectual property interest and Dirty ice software and enhanced commercial partnership opportunities.
Cash consideration to be received during the second quarter more information on this transaction can be found within our forms 10-Q, and 8-K filed with the SEC yesterday.
Turning to the outlook as Benjamin mentioned earlier over the past 60 to 90 days, we have seen continued weakening in economic conditions, especially in regions with concentrated sales to the technology and banking sectors. Our 12 month forward sales pipeline at April one 2023, excluding leads with $252 million and.
Increase of 2% from January one 2023, and a 4% increase year over year, primarily due to the recently awarded large projects Benjamin discussed as disclosed in our Form 10-Q, we have refined our method of communicating pipeline to exclude leads from dollar value of pipeline as we believe this improved transparency and quality of our.
Line disclosures.
At April one 2023 qualified leads being pursued with expected projects in the next 12 months was 969 compared to 721 at January one 2023, and 395 as of January one 2022.
The increase in leads as a result of improved inside sales work over the last six months, mainly from improved communication and collaboration within the commercial group.
Although orders declined during the first quarter of 2023 due to the factors discussed previously we have experienced an uptick in order pace during mid April and early May in addition to the pipeline. We use the trailing 28 day order pace to gauge near term revenue and overall demand as of May five 2023, the trailing 28 date order pace.
$16 million the highest level it had been since mid fourth quarter of 2022.
This isn't a guarantee of future revenue run rate, but it is a positive indicator for us as it implies improved revenue performance in Q2 and Q3.
While we are encouraged by the modest growth in the pipeline and the recent increase in order pace, we recognize the macroeconomic uncertainty in the medium to long term.
In response to this uncertainty and pipeline risk discussed we have taken a thoughtful look at our cost structure over the past three months during the first quarter of 2023 as we discussed on our previous earnings call. We took actions to reduce annualized operating expenses by approximately $5 million. In addition, during the second quarter to date, we have taken additional actions that will.
Generate $4 million in annualized savings, including a planned head count reduction with annualized savings of approximately $3 1 million exclusive of termination benefits of 700000.
These modest reductions while never easy were designed to improve efficiencies and streamline our back office and order fulfillment processes in light of the longer range uncertainty.
To that end. These actions are not expected to have a material impact on product delivery. We believe the combination of the cash initiatives just discussed along with improved margins from actions already taken to improve pricing and reduce the cost structure set us up to weather. The economic uncertainty, we will continue to monitor and be proactive with pricing and cost.
<unk> in response to the ever changing market conditions.
And now we'll open the call for your questions operator.
Yes.
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.
Please standby, while we compile the Q&A roster.
And our first question comes from Greg Palm with Craig Hallum. Your line is open.
Great. Thanks for taking the questions I wanted to maybe start with <unk>.
Just kind of trying to tie out youre more I don't know maybe cautious commentary around the macro and some of these potential recessionary headwinds with the.
First the large sequential increase in leads and then more importantly, your recent order activity or are you just seeing more benefits from some of these commercial initiatives or is there something else going on.
Thanks, Greg Yes, it's definitely announce some of these recent commercial initiative.
And as I think you know our sales cycles are significantly longer than that.
Many other products out there such that a.
A six to 12 months.
Based on comments.
Our commentary around the uncertainty of the headwinds just basically making sure that we're prepared for what comes after Q4 at all.
But we are seeing increased order pace and strengthening of the pipeline.
And the trailing 28 day order pace of $16 million that you talked about does that taken to account any of the three large projects that you alluded to are those in addition.
Hey, good morning, Greg I Hope things are good no that does not include the three large projects typically are trailing 28 day order base as a leading indicator for the following months revenue.
It's one month of orders that we look at.
And the projects that we alluded to earlier.
Second to deliver in Q3 and into Q4.
Okay. Thanks for the clarification.
When taking into account the results from Q1 some of these additional cost cuts what do you think a good level of revenue would be to achieve either breakeven or even profitability on an EBITDA basis has that changed significantly from maybe what you thought last quarter.
Yes, good question.
We're seeing good realization of price.
Despite.
Then we would like volumes.
Delivering close to 29%.
And gross profit margin adjusted.
Our breakeven point is much lower in 2023 than it was in 2022 clearly.
And we continue to review and evaluate all of our all of our cost structure.
Manufacturing efficiencies, which we're seeing.
And just trying to do things.
Better smarter.
In order to fulfillment.
I don't have an actual answer for you on what breakeven point is for the company.
But it's lower than it was last year and in terms of kind of how we see the year.
How do we see the year playing out we talked about Q1 is our lowest is typically our lowest seasonal quarter with.
It was the case in 2021 pace again in 2022.
Yes.
So we expect that to be the case in 2023.
We see sequential growth in Q2, and Q3 based on our pipeline our recent order increase.
But just like everyone else just what.
What is going to happen with Congress and with the spending the physical policy and interest rates and inflation.
We've got decent visibility into Q2 and Q3 and.
We're just.
We're being very careful with the longer range.
Structure.
Yes makes sense.
And I guess last one if you can maybe talk a little bit more about this deal with Armstrong may be a little bit about the background. There and then just in terms of some of that.
<unk> opportunities the direct revenue potential of the partnership how do you see that playing out over the next few years.
Yes, it's a great question.
Really excited to announce that that partnership with Armstrong.
Yes.
Participating with them in the past.
They are an indication sector to us so they have very many of their products are complementary to the things in solutions.
<unk>.
So I'll break it into two things for you one on the software portion of it.
And their investments in the technology that they are using for their platform.
Thank you.
We see it.
Design cost certainty.
Really helping move those.
Projects forward.
Similarly to how we use ice preserves the other piece of this great.
The commercial alignment if you will.
Our sales team and our go to market strategy.
Their sales team and their go to market strategy are very complementary.
This provides us a forums such that we can.
Kind of work those commercial organizations at the same time so it's.
We'll see how it evolves over the next few years here.
But even in the immediate timeframe I think we will see great things coming from that partnership.
Yes.
A big name it seems like a big opportunity so excited to see how that plays out I'll leave it there. Thanks.
Thanks, Greg Thank you.
As a reminder to ask a question. Please press star one one on your telephone.
And Im showing no further questions at this time I would now like to turn the conference back to Benjamin urban for closing remarks.
Thank you.
Yes, Brad laid out a year ahead of us includes market uncertainty and economic headwinds. Despite this we believe the combination of business optimizations and cash initiatives already completed and those in the near future position <unk> for long term success employees and culture at <unk> continue.
To prove strong resilient to the rise to the challenge to drive change those things that are within our control to increased partner customer value. While also driving cost out of the business in 2023 and beyond.
I'd like to thank you all for joining us today.
And this concludes today's conference call. Thank you for participating you may now disconnect.
Okay.
[music].
Okay.
Okay.
[music].
Okay.
[music].
Okay.
[music].
Okay.
[music].
<unk>.
Yes.
[music].
Uh huh.
Okay.
[music].
Yeah.
[music].
Yes.