Q2 2023 DIRTT Environmental Solutions Ltd Earnings Call
Thank you for standing by this is the conference operator, welcome to the dirt Environmental solutions second quarter 2023 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 and to join the question queue. You May Press Star one one on your telephone keypad to withdraw your question. Please press star one again.
I would now like to turn the conference over to Charlotte Amazing Director of Corporate Affairs. Please go ahead.
Operator, and good morning, everyone welcome to today's call to discuss <unk> second quarter 2023 results. Joining me on the call today will be Benjamin urban CEO , Brad Little CFO , and Freia Khan Vice President of Finance today's prepared remarks are.
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 Security laws. These statements are based.
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 August <unk> 2023, with the Securities and Exchange Commission or S. E C 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 will 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 our partners and numerous end customers looking back on the completion of my first full year with dirt I'm proud of the successful efforts of all of our team members and partners who have helped to transform this company. We have more work to do however, we have better line of sight.
Consistent profitability and growth with Q2 results proving that out the positive feedback shared from our customers in construction partners continues to grow on the heels of our most successful connect our open house in Chicago that coincides with neocon. The sentiment was a strong dirt is back buzz with attendance up 30% over last.
Year more importantly, within the <unk> of more first time attendees, both customers as well as architects and designers the revised strategy within our commercial organization continues to provide improved results in the last quarter.
<unk> connect our product development team unveiled seven new competitive product solutions, which received overwhelmingly positive feedback from our customers in construction partners. We will continue to rollout additional products and enhancements throughout the second half of the year.
He is undertaking a strategic initiative aimed at augmenting and broadening our partner network in line with this objective we have successfully on boarded a new partner in both Florida, and Alabama, and Additionally, we have strengthened our presence by expanding partnerships in northern California, and Winnipeg, alongside six Grand openings of new experience centers in the <unk>.
Last quarter with five more before the end of the year. These experience centers are a critical component to our success by growing and converting sales opportunities.
May we conducted our first inaugural in person Master class for all of our sales representatives in Calgary, making the first such event in the last four years the feedback from our sales Representatives and leadership is that we haven't been this aligned as a commercial organization in recent memory. In addition to the sales training. Our sales force is also growing we added six new sales reps.
And our health care vertical specialist in the last quarter and will fill more more roles in the second half of the year. We also successfully secured four new commercial agreements exemplifying our commitment to strategic growth and expansion.
Agreements encompassed two third party integrators in laboratory environments, and multifamily residential or purchasing program for one of the largest general contractors in the United States and a manufacturing partnership with the magnesium oxide manufacturer. We also added two standardization programs for key accounts with two major financial institutions.
During our previous earnings call I highlighted some large wins and we are witnessing the fruition of those projects as they progress into the ordering phase underscoring the robustness of our pipeline. We continue to see large project wins in our pipeline grow with examples like Armstrong School District, CFT Bank and Maverick natural resource.
<unk>, which will order and deliver this year.
And our relentless pursuit of safety excellence, we remain steadfast in our commitment to achieve our journey to zero recordable incidents and being seen as a world class leader in safety performance, notably our dedication and exceptional safety programs have been recognized by Canadian Occupational safety as a 2023 Excellence award.
Extensive list recognizes dozens of organizations, who have demonstrated excellence in their safety programs and our commitment to ensuring the health and safety of their employees. The people they serve and the environments in which they operate we are one of 12 companies vying for Canada's safest manufacturing employer, our year to date total recordable incident frequency is.
Six compared to our year to date June 22 frequency of point to the Bureau of Labor Statistics standard benchmark for dirt peer manufacturing industry is a trs of five one dirt is 80% below the industry benchmark, we continue to focus on quality improvement as well during the second quarter.
Order, we had 662 external defects per million dollars of revenue a 40% improvement from prior year also our on time performance. During the second quarter was 98% a major improvement from the 83% on time performance during the second quarter of last year.
We launched a significant update to our proprietary ice technology platform with more than 10 unique functions. More importantly, these improvements were from direct feedback from our construction partners that wherever the most value to them as we continue to develop the platform in conclusion, our unwavering commitment to excellence and innovation has driven sustainable grew.
And profitability, while prioritizing safety product development and customer satisfaction with this foundation, we are poised for greater achievements in the future and with that I'll hand, it over to Brad to comment on our financials breath.
Thank you Benjamin and good morning, all as a reminder, we've issued a press release discussing our second 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 key developments impacting our liquidity and cash initiatives, we've been discussing over the.
The last several quarters revenues for the second quarter were $44 8 million about flat with the same period in 2022 and up 22% from the first quarter of 2023, the sequential quarter increase was driven by a combination of normal seasonal shipping patterns amplified by the commencement of previously delayed projects turning to gross profit.
We once again achieved significant year over year margin expansion compared to the second quarter of 2022 gross profit margin increased 1850 basis points from 14% to 32, 5% in the second quarter of 2023, adjusted gross profit margin, which excludes the impact of depreciation increased 1700.
Third 33 basis points from 18, 9% in the second quarter of 2022 to 36, 2% in the second quarter of 2023. This improved margin is due to pricing and cost reduction initiatives executed between March 2022, and June 2023, as well as improved product mix as we continue to incentivize full.
Some projects manufacturing cost inefficiencies continued to track better than prior year, which has also led to further improve our margins operating expenses for the second quarter were $16 8 million or 34% decrease over the same period in 2022. The reduction in cost are primarily from the cost reduction initiatives implemented over the past 12 months.
As well as more disciplined discretionary spending during the second quarter of 2023, we took additional actions to proactively remove cost, including a planned head count reduction with annualized savings of approximately $2 6 million exclusive of termination benefits of 700000 from January 2022 through June 2023.
The company has reduced related head count by 147 or 15%.
Adjusted EBITDA for the second quarter was $1 9 million, an improvement of $11 3 million or 120% from a loss of $9 4 million. During the second quarter of 2022. This improvement has been driven by a 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 again is published on our website.
Turning to liquidity and working capital we finished the quarter with $18 9 million in unrestricted cash of $8 1 million from $10 8 million at December 31, 2022 cash provided by operations for the second quarter was $3 8 million compared to cash consumed by operations of $17 8 million during the <unk>.
Quarter of 2022 and for the six months ended June 2023, we generated cash flow from operations of $2 8 million compared to cash consumed of $36 8 million through the six months ended June 2022 liquidity, which includes $9 2 million of availability under our ABL credit facility was $28.
$1 million as of June 2023, we did not need to draw on that facility in the second quarter and have not had to thus far in the third quarter of 2023.
Beyond the non dilutive cash initiatives that I'll talk about shortly we've also been working hard to improve our conversion and lower the overall investment in working capital net working capital at the end of the quarter was $26 5 million.
Up $9 2 million from March 2023, primarily due to the proceeds from the AWS agreement and an increase in demand commensurate with seasonal operating patterns. Our days sales outstanding has improved from 27 days at December 2022 to 20 days at June 2023 by comparison days sales outstanding.
Standing as of June 2022 was 2009 days, our DSO has been favorably impacted by certain programs to incentivize faster payment of receivables as cash flow and profitability have improved we have decided to discontinue this program effective August one while this will likely return our collection times to historical levels, we will achieve higher <unk>.
Margin on the applicable projects by eliminating the associated discount. We have also been working to actively reduce our inventory levels through improved sales inventory and operational planning processes. This serves to not only identify and manage our slow moving or obsolete inventory, but the improved sales forecasting will allow us to better manage inventory purchasing of our core raw.
Cereals year over year, we have reduced our inventory levels by $5 9 million or 23% to $19 4 million at June 2023, we expect that balance to decrease by December 31, providing a positive cash flow impact in offsetting the DSO impact previously discussed as I have alluded we have also been execute.
Various non dilutive cash initiatives designed to bolster our cash position as we discussed in our previous earnings call. We entered into an agreement with Armstrong World Industries for co ownership of certain intellectual property interest and dirt ice software and an enhanced commercial partnership opportunities for cash consideration of $10 million, which was received during the second quarter.
A portion of the proceeds was used to pay off certain equipment leases.
Also in the second quarter effective April one we have sub leased our Plano dirt experience center to one of our construction partners in that specific market with annualized savings of approximately $1 million.
Lastly, we received the remainder of the IRS tax receivable and May contributing about $2 6 million in cash as of June 32023.
Turning to the outlook throughout the first six months of 2023, we have seen continued volatility in economic conditions, especially in regions with concentrated sales to the technology and banking sectors.
Some aspects the macroeconomic uncertainty has subsided and various inflation metrics have improved over the past three months and certain indications of the recession has eased we've seen improved demand for our products beginning in mid April from May <unk> to June 32023, the company generated $33 3 million in total revenue and in.
Associated $3 5 million and adjusted EBITDA with adjusted gross profit during the same period, a 39, 2% as we discussed in our last call. We were awarded several projects during the second quarter of 2023, including Battle Apache and visa two of which have begun to order and all are expected to deliver a combined 10%.
$15 million in aggregated revenue during 2023 as previously discussed we achieved a 22% increase in revenue between the first and second quarter of 2023, we expect a sequential increase in revenue in the third quarter over the second quarter of 2023, though not to the same extent for.
For 2023, we continue to project low to mid single digit growth in total revenue over 2022, a trend we expect to continue into 2024 based on our current 12 month forward pipeline. We believe that the combination of cash initiatives discussed along with improved margins from actions already taken to improve the pricing and reduce the cost structure set us up to risk.
Bond to the ever changing market conditions before we open it up for questions I wanted to address two other matters first our compliance with NASDAQ stock requirements. As you know our stock trades, then leave for a variety of factors and our stock price has not exceeded $1 for the previous 10 months at this time, assuming our NASDAQ price does not exceed one.
<unk> consistently by September 5th it is our intention to withdraw from the NASDAQ and for our stock to trade over the counter rather than perform a reverse stock split I will remind you that we've been trading on the Toronto stock exchange under the ticker symbol D. R T.
Since 2013, we absolutely intend on continuing that into the future.
Lastly, as we released last night I had made the very difficult and deeply personal decision to leave dirt working at dirt has been an incredibly fulfilling experience and I want to express my heartfelt gratitude to the board of directors and the entire team for the support and camaraderie that I've experienced here.
I want to take a moment and share why I've decided to leave dirt and where I'm going next firstly I have loved my time at <unk>. It's also been a challenge personally for me with the work being largely remote with long commutes family is of utmost importance to me and after much contemplation.
Come to realize that money to work closer to my family in Fort worth, Texas with that in mind I have accepted a position at Sabre industries as its chief Financial Officer Sabre industries as a market leader in both utility and telecom engineered structured and markets and I'm excited to be joining their team. Once we finished my transition in closing I want to express my.
Gratitude to the entire <unk> family for making my time here truly memorable and I wish dirt and this team continued success in the future.
Women.
Thank you Brad I would also like to share some additional thoughts regarding the change to our leadership team that we announced in yesterday's earnings release, Firstly I want to take a moment to acknowledge and express my gratitude to Brad Little our Chief Financial Officer, who has decided to step down from his position brad's dedication and contributions to <unk> had been invaluable he has been instrumental.
It'll in helping us reestablish credibility with our people partners and most importantly, our clients on behalf of the entire team at <unk> I want to thank Brad for his many contributions and leadership over the past year, Brad led several company wide efforts to reduce our fixed cost structure for manufacturing and operations and improve our operational planning and sales and <unk>.
Revenue forecasting largely because of these foundational improvements we were able to produce more accurate product costing models and better align our product mix with market demand and opportunity. All of these actions have helped fuel a significant margin expansion over the past four quarters, leading to meaningful growth in both EBITDA and liquidity brad's not only us.
Strong CFO , but also a tremendous team leader and mentor. He has built a strong and disciplined finance team that understands the critical role <unk> play in helping our business leaders further stabilized cash flow improve our revenue and sales forecasting and be more diligent and thorough in operational planning, while we are sad to see Brad leave we under.
<unk> and fully respect his decision we also take great solace in knowing we have a strong team behind him. One that will continue leading us forward without missing a beat I'll have more to share on that front in just a moment, but first I want to close by personally thanking you Brad for your commitment to our company and the positive influence you've instilled in each of US we all wish you and your family.
Well in your future endeavors would you like to see a few words on your final earnings call. Thank you Benjamin for those kind words, we have accomplished so many great things over the past year and that would not have happened without the hard work focus and expertise of my colleagues in finance and all of our dedicated team members here at <unk>, It's been my distinct honor to lead and support each of them over the <unk>.
<unk> year, and although I am embarking on a new journey personally I know I'm, leaving everyone at dirt and good financial hands the company broadly and the finance team specifically is prepared and well positioned to continue what we've begun ensuring that the company continues to produce improved growth and margin expansion.
I am very excited to watch, albeit from the sidelines now as a shareholder first.
Our final day will be August 25th and I hope to remain part of the dirt family Forever.
Benjamin Thank.
Thank you Brad.
With your stewardship, we have enhanced our financial management practices and aligned our financial strategy with our broader business objectives I have personally benefited from your steady counsel and strategic insights and I'm proud of the team you've built cultivated and motivated since joining us now I'd like to introduce you to <unk>, who will be stepping into the role of chief financial.
Officers, succeeding Brad on August 25th Korea has been an integral part of our team for the past five years. Most recently, serving a dirt as the vice President of Finance for Ya has served in several key roles that dirt and is uniquely prepared for the additional duties. She will assume his CFO . Firstly Korea has worked side by side with Brad on a majority of.
Not all of the finance initiatives I just highlighted these initiatives are driving our strong results and improved profitability for the company with over 20 years of finance experience for Ria grew up in Zimbabwe, where she completed her chartered accountancy with Deloitte and obtained her bachelors and accounting services at the University of South Africa after completing.
Her studies for your move to the United States and worked at Deloitte and their Houston and Fort Lauderdale offices. Following her time at Deloitte for Ria joined at price Waterhouse Coopers working in Pakistan and later in Calgary before joining dirt in 2019 during her tenure with price Waterhouse, Coopers Korea worked with private and public companies and SEC.
<unk> in various roles, including audit training by Si financial due diligence Secondments and advisory for he is a member of the Institute of chartered Accountants in England, and Wales, and the Institute of chartered Accountants in Zimbabwe of importance to me personally Korea comes from within our ranks and because of that she has a deep understanding of the business.
And I know she holds the respect of our colleagues across the company I'm confident in <unk> ability to ensure a seamless transition and lead our financial team with Excellence Korea would you like to say a few words.
Thank you Benjamin and Hello to everyone I'm incredibly excited about this opportunity and honored by the trust that the company continues to play Sidney I have thoroughly enjoyed my time at <unk> and I'm looking forward to continuing to serve our company and the role as the Chief Financial Officer, as we move forward I am committed to upholding the financial strength and integrity object I also look forward.
To join these calls in the future and collaborating more closely with our investors the investment community and our valued clients.
I want to take a moment to thank Brad for his leadership and Mentorship over the past year because of him we have a strong and unified bench of finance talent that is both prepared and highly capable as we advanced the business Benjamin.
<unk>, we are delighted to have you in this new role and we have no doubt that <unk> is our CFO . We are also taking the necessary steps to ensure a smooth transition to this and Brad will work closely with Korea to pass on as the remaining duties ensuring a seamless handover of all CFO responsibilities on August 28th I also want to highlight that Brad is gracious.
<unk> agreed to provide ongoing counsel to Korea, and our team throughout Q3 as continued support will be invaluable. During this transition period, demonstrating the strong sense of teamwork and camaraderie, we have within our organization. We believe that this carefully planned approach will set for Ria and the entire financial team up for success and we look forward to a bright future for <unk>.
Under <unk> leadership, we will now open the line for questions.
Thank you and as a reminder to ask a question. Please press star one on your telephone and wait for your name to be announced to withdraw your question. Please press star one again.
Please stand by while we compile the Q&A roster.
And for your first question it comes from Danny.
Dani <unk> from Craig Hallum Capital Group Danny Your line is open please ask your question.
Yeah, Thanks on for Greg Palm today.
That's on a really good results guys.
Okay.
I guess just starting it.
It sounds like demand trends really improved as we moved throughout the quarter.
I guess just kind of overall have you seen that continue into July and I guess early August now, what's what's the overall feel for the market right now.
Yes sure.
We indicated.
After Easter.
And our second quarter.
Improved rapidly.
Combination of demand.
But also we had some delays in projects that were supposed to start in Q1 that started in Q2, and we got a bit of a bump there.
Pace has generally continued into Q3.
So.
Last year going from Q2 to Q3.
An 8% increase.
We see that trend continuing essentially a little better in the third quarter of this year.
Yeah.
Got it and then it looks like maybe healthcare seem like a really positive spot in this quarter.
Was that just based on some of those larger orders heading or are you seeing that market as a whole come back stronger.
I heard you announced.
You hired a new health care vertical specialists. So I guess, just what are you seeing in that market right now that causes strength this quarter.
Yeah, I'll start from a quantitative standpoint in that and then more broadly about our approach now.
We had two or three fairly large projects one in the northeast and then one in Houston that was originally scheduled to commence in late one that pushed into Q2 and those were both large healthcare project. So we view that.
That trend will continue but Q1 was lighter than normal not really indicative of what we have in our pipeline.
Yes, good commentary Brad.
Yes, Youre right, we are seeing growth in the health care vertical.
Large a large part of that is due to the efforts.
Previous years, where we are now.
Those projects tend to have a bit longer.
Michael on them.
Just as a traditional commercial projects and we are seeing growth into 2024 and 2025.
The ups.
Many times those projects tend to be quite large in nature and the adoption rate for the solutions. We provide continues to improve.
As you that that industry change.
Okay. That's that's good maybe if I can just hit on that gross margin quick obviously came in well above what what we and I think many others were expecting.
You said that in July and August you kind of hit that 39, 2% margin I think dollars on adjusted basis.
Should we expect that to.
Yes, great question Danny.
When we think about the first half of the year and really the second quarter.
First off the dollar was fairly.
It is.
Two Canadian dollar a lot of our officer in Canada.
It's a little tailwind on that.
On that front in the second quarter.
We have really good product mix as well.
In the quarter.
Now the 39% that we achieved in combination of May and June that we discussed on the call.
A lot of that was driven by leverage of our fixed cost structure as we started to push past.
Further.
The breakeven point.
So.
I think that 36, 2% also reflects the very low volumes, we had in April so.
On balance I feel like mid.
Mid <unk> upper <unk> is probably fair as we get into pushing back 45% to 40 $45 million to $50 million per quarter run rate.
Not suggesting that.
At that run rate going forward, but.
Okay.
Question on AWS now that that's completed.
Sales cycles can be 12 to 18 months, so I think what youll start to some of those opportunities starting to.
Old into our pipeline right now.
The early stages Hwy commercial agreements, but I will say that it is going quite well.
And then beginning to get.
Our sales forces working together as well as our product development and research.
Alright, great I'll leave it there thanks, everyone.
Thanks, Dan Thank you.
Once again, if you'd like to ask a question. Please press star one one on your telephone keypad.
Ladies and gentlemen, there are no further questions at this time. Thank you for participating in today's conference. This concludes the program you may now disconnect.
And have a wonderful day.
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