DIRTT Environmental Solutions Ltd

TSX:DRT

Earnings Call Transcript 2023-Q4

[Operator]

Thank you for standing by. This is your conference operator. Welcome to the DIRTT Environmental Solutions Fourth Quarter 2020 Financial Results Conference Call. [Operator Instructions] And the conference is being recorded. I would now like to turn the conference over to [ Shauna Mason ], Director of Corporate Affairs. Please go ahead.

[Unknown Executive]

Thank you, operator, and good morning, everyone. Welcome to today's call to discuss DIRTT's Fourth Quarter 2023 results. Joining me on the call today will be Benjamin Urban, CEO; and Fareeha Khan, CFO. 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 21, 2024, 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 early next week. I now turn the call over to Benjamin.

[Benjamin Urban, executive]

Thank you, [ Shauna ], and good morning, everyone. 2023 was a transformative year for DIRTT. A sincere thank you to all of our team members at DIRTT as well as our valued construction partners and clients. I'd like to start the call by highlighting some of the projects ordered by our valued customers in Q4. There were 769 distinct DIRTT opportunities ordered in Q4, which continue to represent a broad and diverse balance of recognized brand name companies across all of our segments, including corporate clients such as TJX Companies, MNP LLP, Bell Bank, JPMorgan Chase, Apache Corporation, Visa and M&T Bank. Health care providers, the likes of Kaiser Permanente, OhioHealth, Grady Health, Surgical Centers of America and Houston Methodist. Government organizations, such as the Veterans Administration, Omaha Power, Province of Manitoba, United States Geological Survey and the United States Citizenship and Immigration Services. And lastly, prestigious educational institutions such as Berea College, Western Kentucky University, Utah Valley University and the Florida Institute for Human and Machine Cognition. Today, I also want to highlight the outstanding performance of our Healthcare segment, a key driver of our overall growth in Q4 and throughout 2023. Our Healthcare segment continues to benefit from increased awareness of the importance of flexible and adaptable spaces within the healthcare industry. We've seen strong demand for our solutions from hospitals, clinics and long-term care facilities seeking to enhance patient experience, improve operational efficiency and adapt to evolving health care delivery models. Looking ahead, we remain optimistic about the growth prospects for our healthcare business and are committed to investing in innovation to capitalize on this opportunity. Driven by fundamental shifts in the healthcare landscape and the increasing demand for innovative solutions that support patient-centric care delivery, healthcare is a key pillar of our long-term strategy. However, the opportunity in Class A office space, the education and government sectors as well as residential adaptive reuse are more immediate driven by factors such as population growth, return-to-office mandates and the need for modern learning environments. We see a compelling opportunity to leverage our modular construction expertise to address the evolving needs of educational institutions, particularly in the higher education markets. Our construction partner network continues to grow stronger and expand as we continue to capitalize on these opportunities. In Q4, we added 2 new partners in Southern California and Ohio and expanded an existing partner into the Washington, D.C. and Virginia region to support the growing pipeline of public sector design and construction work. To date, partners added to our network in late 2022 and throughout 2023 have generated over $70 million in net new pipeline. In addition, our partner network invested over $2 million in aggregate into their own DIRTT Experience Centers in 2023, demonstrating their commitment to scaling their DIRTT business. At the beginning of 2023, we launched a new partner portal and support program to create a framework for development, growth and success across our construction partner network. By year-end, 2 of our partners graduated to the highest tier and 11 of our partners graduated to the second highest tier. I'm also pleased to announce that we have recently appointed 2 seasoned executives to key leadership roles within our commercial organization. Joining us as the new Vice President of Sales is Jay Phillips. As we continue to focus on accelerating our growth trajectory, particularly in our sales initiatives, having someone of Jay's caliber leading our sales efforts is a significant asset for our company. In the new Vice President of Integrated Solutions role, we have added Josh Mensinger, who will be responsible for spearheading the growth of DIRTT's off-site prefabricated solutions, leveraging his extensive experience in the construction industry and his proven track record of driving innovation and delivering results with prefabrication. Innovation is at the core of our culture at DIRTT. Within our Product Solutions group, we released 50% more products than in 2022. In 2024, we intend to continue growing our product portfolio. Innovation is at the core of our culture at DIRTT. Within our Product Solutions group, we released 50% more products than in 2022. In 2024, we intend to continue growing our product portfolio. In support of these new innovations, our technology team in Q4 released a new update to our ICE software and have already released an additional update this year. Innovation with our technology processes is allowing us to add assets into our ICE software at a much more rapid pace. The technology team also released a very robust quoting tool in Q4 to reduce the friction in estimation, enabling project volume growth. We continue to relentlessly focus on quality. For 2023, we reduced our external defects per million dollars of revenue to [ $12.4 million ], a 28% improvement year-over-year. Also, our on-time performance for 2023 was 98%, a major improvement from the 2022 on-time performance of 89%. Safety excellence is a core DIRTT value, and we continue in our journey to 0 recordable incidents and maintaining our position as a world-class leader in safety performance. Our total recordable incident frequency for 2023 was 0.4, which is 92% below the industry average. We remain committed to our sustainability journey and our ESG commitments. We strive to make it a better world, both through our products and by leveraging our solutions to help our customers achieve their sustainability commitments. We know that our proactive and transparent approach to establishing, measuring and reporting on ESG factors impacts our bottom line. This year, we are again celebrating our third IR Magazine nomination for the best reporting by a small cap award. And finally, regarding the ongoing litigation between DIRTT and Falkbuilt. On February 4, 2024, DIRTT entered into an agreement with a litigation funding partner that will provide up to $4 million to DIRTT in support of specific claims and the litigation reimbursement of the funding will only be provided through proceeds from future litigation awards and/or settlements and is otherwise not repayable by DIRTT. We believe this funding agreement is an important independent validation of the strength of our claims against Falkbuilt and affirms our confidence in our eventual success. The agreement will allow DIRTT to continue the litigation while eliminating up to $4 million in future operating expenses. We are also pleased to note that we recently requested the Court of King's Bench of Alberta to schedule the summary judgment application for our Canadian litigation. The court has proposed 3 potential dates in September 2025, and we expect to have the date finalized in the next several weeks. It's an exciting time at DIRTT, and we are proud of our performance this quarter. we are grateful for our clients, partners and hardworking employees who made this happen. With that, I'll hand it over to Fareeha to share some more about our financial results.

[Fareeha Khan, executive]

Thank you, Benjamin, and good morning, all. Please note that we have issued a press release discussing our fourth quarter results, which is available on our website. Revenues for the fourth quarter were $50.9 million, up 20% compared to the same period in 2022 and up 3% from the third quarter of 2023. This is the highest quarterly revenue we've had since 2019. On gross profit, we continue to see significant year-over-year margin expansion. Compared to the fourth quarter of 2022, gross profit margin increased from 27.3% to 37.8% in the fourth quarter of 2023.

Adjusted gross profit margin, which excludes the impact of depreciation, increased from 32% in the fourth quarter of 2022 to 39.5% in the fourth quarter of 2023. The improved margin is primarily due to operating efficiencies and cost reduction initiatives executed over the past 24 months and improved product mix as we continue to incentivize full solution projects. Manufacturing costs and efficiencies continue to track better than prior year, which has benefited our margin. Operating expenses for the fourth quarter, excluding impairment charges and reorganization costs were $16.4 million, a $1.8 million increase from the same quarter last year. The higher costs are primarily due to higher commissions, higher variable compensation pay and increased professional services related to transactions, which I will discuss later. Adjusted EBITDA for the fourth quarter was $4.3 million, an improvement of $3.7 million from $0.6 million during the fourth quarter of 2022. This improvement is driven by the increase in gross profit margin just described. With respect to liquidity and working capital, the quarter finished with $24.7 million in unrestricted cash, up $13.9 million from $10.8 million at December 31, 2022, and up $5.3 million from September 30, 2023. Cash provided by operations for the fourth quarter was $10.1 million compared to $3.2 million during the fourth quarter of 2022. Liquidity, which includes $10.3 million of availability under our asset-backed lending credit facility was $35 million as of December 31, 2023. We have not drawn on this facility to date. On February 9, 2024, we successfully renewed our ABL with Royal Bank of Canada for an additional year. Our working capital continues to improve. Net working capital at the end of the quarter was $29.8 million, up $4.7 million from September 2023, primarily due to cash generated from operations. We are pleased with our inventory levels, which are down $0.8 million from September 2023 and down $5.7 million from December 31, 2022. Turning to 2024. Our 12-month forward sales pipeline, excluding leads at January 1, 2024, was [ $270 million ] compared to $247 million at January 1, 2023, or about 9% higher. In particular, we have seen year-over-year growth in projects at higher stages in the sales cycle, increasing the likelihood of ordering during the year. We are excited that Jay and Josh have joined the team and continue to work on growing our pipeline. I would also like to comment on a few additional items. First, in our last call, we advised about the closure of our Rock Hill facility. We continue to work on disposing and repurposing the assets we held at our facility. With annual production capacity at our Savannah and Calgary facilities of approximately $400 million in revenue, the closure is part of the company's ongoing focus on realigning the organization, increasing efficiency and improving profitability. During the fourth quarter, we already settled $7.8 million of equipment lease liabilities related to the Rock Hill assets, thereby reducing a significant portion of our long-term debt. Secondly, in November 2023, we announced CAD 13 million rights offering. The rights offering successfully closed on January 9, 2024. As explained in the related documents, the purpose of the funds raised from the rights offering is to invest in the business and to reduce debt. On February 15, 2024, we announced a substantial issuer bid of CAD 15 million to buy back some of our outstanding debenture debt. Details of this offer can be found in our 10-K. Through this bid, we want to reduce DIRTT's debt and strengthen our balance sheet. The debt buyback has been offered at a premium, so we hope investors will take opportunity of the offer. This concludes the formal section of the call. I will turn it back to Benjamin to conclude.

[Benjamin Urban, executive]

As Fareeha discussed, we have made meaningful improvement in the profitability and cash flow of the company. We are excited for DIRTT's future and are focused on revenue growth. We recognize ongoing market uncertainty. However, with our strength in the balance sheet and financial discipline, we believe we are well prepared to take care of our clients through a variety of economic conditions. In closing, I wanted to say thank you again to all of our amazing clients who understand the differentiated value of DIRTT as well as our construction partners and team members for their ongoing hard work and commitment on behalf of the company. I'd like to thank you all for joining us today.

[Operator]

Thank you. Ladies and gentlemen, this does conclude today's presentation. You may now disconnect, and have a wonderful day.