DIRTT Environmental Solutions Ltd
TSX:DRT
DIRTT Environmental Solutions Ltd
TSX:DRT
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Earnings Call Transcript
Earnings Call Recording
Other Earnings Calls
Good morning. My name is Virgil, and I will be your conference operator today. At this time, I would like to welcome everyone to the DIRTT 2017 Q4 and Year-End Results Conference Call. [Operator Instructions]Michael Goldstein, Interim CEO of DIRTT, you may begin your conference.
Thank you, operator, and good morning, and welcome to the DIRTT Environmental Solutions Fourth Quarter 2017 Results Call.With me this morning, I have Peter Henry, our Interim CFO for DIRTT. Peter will provide a financial review of the quarter and of the 2017 results. And then, I will discuss the company's current performance, and also about the path we're are on to value creation.We're also joined here by Steve Parry, and he's the Lead Director of DIRTT's Board of Directors. Steve will be available for question and answers during the Q&A portion of this call.I'll remind you that certain information on our call today, including responses to questions posed, could constitute forward-looking statements that are subject to risks and uncertainty relating to DIRTT's financial future and financial performance. Actual results could differ materially from those anticipated in these forward-looking statements.Risk factors that may be -- that may affect results are detailed in DIRTT's filings with the Canadian Securities Commission, which can be accessed at www.sedar.com.Please note that DIRTT is under no obligation to update any forward-looking statements today except as required by applicable law, and investors are cautioned not to place too much undue reliance on these statements.So I'll begin this call by briefly addressing an item not directly related to our 2017 fiscal results. Namely, the recent actions taken by one of our shareholders. As you know, on March 8, Iron Compass, one of our shareholders announced its intention to the solicit proxies for use at the upcoming Annual General Meeting of Shareholders of DIRTT. Subsequent to this action, Iron Compass also requested a shareholders meeting to consider various proposals. DIRTT's Board will respond to this in 21 days, which is the required time frame. While we don't comment on specific shareholder interactions, we are convinced that a proxy fight at such a pivotal time for DIRTT would be an unnecessary and costly distraction from our objective of enhancing shareholder value. We will take the necessary actions to protect DIRTT and its shareholders, and we will not abandon this objective.But now let's get back to the focus of the call. I'll turn the call over to Peter for a financial review. I'll then follow-up with an update on our strategy and our outlook for 2018. Peter?
Thank you, Michael. To begin, I will reiterate something we communicated to shareholders in our first call back in January. There continues to be no accounting issues at DIRTT. The work of senior -- the finance and senior management teams since January has been on increasing the depth of analysis of our data to provide more insight into our financial plan, and also on introducing processes to provide additional controls over our cost, which I will speak to shortly.I'll address some of our key financial metrics and draw your attention to some details. 2017 revenue increased by 9.9% over 2016 to $293.4 million. Unlike the past several years, we did not see a pickup in revenue in Q4 with the quarterly revenue being down 5.1% to $74.3 million compared to Q4 2016.As we've consistently cautioned investors, we regularly experience order postponements or other delays due to the nature of the construction business are rapidly -- and in manufacturing site conditions being behind schedule or other general conditions beyond our control. This results in forecasted orders moving from one quarter to the next. We believe this is what we saw in Q4. As evidence of this movement of orders and our confidence in our visibilty for Q1 at this point, we are confirming that we expect revenue for Q1 2018 to be in the range of $78 million to $80 million, which represents a 20% increase on what is traditionally a weak quarter. While Q4 revenue did not meet our expectations, we again, would encourage investors to evaluate our business on a long-term trailing 12-month basis.Adjusted gross profit for 2017 declined to 43.5% from 44.7% in 2016. During the course of 2017, we made investments to increase our manufacturing capacity, which we would currently estimate at approximately $450 million in revenue. As a result, we added some fixed labor costs that resulted in slightly lower adjusted gross profit numbers throughout 2017. However, we would anticipate being able to demonstrate margin expansion with increased revenue, particularly as we continue to make advancements in healthcare -- in the healthcare vertical, which typically involves more complex, whole solution projects at a slightly higher margin.In Q4 2017, the weaker revenue resulted in a reduction in adjusted gross profit to 42.4% from 44.4% in Q4 2016. Adjusted SG&A expenses increased by $23.4 million in 2017 compared to 2016, bringing the adjusted SG&A percentage up to 37.8% from 32.8% last year. In Q4, adjusted SG&A percentage was 43.8%.I would like to elaborate on the increases, in particular, some of those that are from unusually high expenses. $2.2 million relates to the restructuring of our biggest and most successful trade show, DIRTT Connext. In 2017, in addition to that additional Connext event in Chicago, we also hosted an additional DIRTT partner training event in Phoenix in November 2017. The Phoenix event was a great success. Going forward, we won't conduct partner training during Connext in June. Connext traditionally occurs at the same time as a large interior design trade show in Chicago called NeoCon. This coming June and onward, Connext will instead focus solely on connecting with our end users.Similar to the Phoenix event, the training portion of Connext will instead become a separate stand-alone event that will be focused on accelerating partners' efforts and success. The addition of this Phoenix event in 2017 did result in additional costs. By holding a stand-alone partner training session instead of combining it with the Connext moving forward, we believe DIRTT will have approximately 3.5 -- will save approximately $3.5 million annually. Without the distraction of a larger trade show, this new format leads to an improved partner training experience.There are 2 additional components of adjusted SG&A in 2017 that we expect to be isolated events. These relate to $2.3 million in severance and associated legal costs unrelated to the January 2, 2018 management changes, as well as a $4.3 million expense for development costs related to our initiatives in timber and residential.Approximately 85% of the $4.3 million cost was allocated between research and development and marketing expense with respect to the build of Mogens Smed's primary residence named Hygge. Hygge represents a collaborative shared-risk effort between Mogens and the company, with Mogens contributing more than $4.1 million to the flagship residential project.DIRTT has benefited greatly in this joint investment. In 2017, there were more than 180 client events held at Hygge, generating significant interest in DIRTT's timber and residential design and construction capabilities. As such, adjusted EBITDA for 2017 decreased significantly from 2016 to $15.8 million, as a result of the gross profit and expenses previously discussed. This brought our full year adjusted EBITDA percentage to 5.4%.We're also in the process of implementing controls such as a new expense tracking system that provides greater detail and accountability in the travel and marketing costs incurred by our employees. We are committed to continued investment in our sales efforts, and we know the addition of these controls will provide positive leverage on this discretionary portion of our SG&A.I'll now turn the call back over to Michael.
Thank you, Peter. So to begin with, let's start off where we left off at the January 2 call -- conference call. At that point, we announced some management changes. Since then, the Board and management have received questions regarding those changes. Those changes were required to be made after significant due diligence by the Board. It became clear that difficult decisions were required and there was no other appropriate resolution. Myself and Peter were brought on at that time to assist with the transition, and in our interim roles as CEO and CFO, since then we've launched searches for both a full-time CEO and CFO and are currently underway with participation from management and good progress.So now I want to focus on future, which is -- that we said last January when we were on the last call, that going forward, DIRTT would continue to focus on growth, opportunity and profitability. And as such, we would leverage the investments made to date, and that includes those made last year, to increase shareholder value.So now let's look at 2018 and beyond. I'd like to provide some insights into how we see DIRTT evolving, and then update you on the status of our strategy work. To start, one consistent bit of feedback I've received from investors during the past 12 weeks is a desire for more financial guidance. While DIRTT's management team has developed enhancements to its budgeting process and finally modeling that allows us to offer guidance for the first time, we're targeting adjusted EBITDA now in the 13% to 15% range for 2018 and gross revenues for Q1 in the range of $78 million to $80 million.And importantly, going forward there are a couple of factors we expect will impact DIRTT's financial performance this year. First is that much of the investments made in 2016 and 2017 that you've heard about, were to build capacity. These were largely onetime costs, where we expect to see the returns in 2018 and beyond and as we demonstrate operating capacity going forward. Secondly, DIRTT's team has continued to enhance its financial planning, controls and reporting processes, allowing for increased effectiveness around modulating SG&A expenses while we grow.We believe that the multiple benefits and efficiencies created with DIRTT's construction, method and solutions, results in a superior alternative to construction. We're committed to maintaining DIRTT's lead position and increasing market share. And in January, we announced a plan to launch a strategic growth analysis and gave the leading consulting firm to assist in developing options to consider as we evolved to both our near and our long-term strategies. The report was just delivered a few days ago and identified a number of concepts for DIRTT's management to consider. For example, while there's compelling evidence that while DIRTT's growth is solid, there are substantial opportunities to strengthen market penetration. DIRTT has invented, incubated and evolved a revolutionary, end user-driven digital construction platform that is unique, advantaged, scalable and can have consistent strong financial performance. The combination of ICE software, DIRTT's design and manufacturing capabilities and the ability of DIRTT's purpose-driven culture to drive an exceptional customer experience makes market share growth achievable in the existing verticals.So let me give you a couple of illustrations: one is that there are number of ways in which DIRTT may be able to accelerate adoption in market growth. The report highlights the critical importance of our partners in the future of DIRTT's success. It also identified increased support from DIRTT to our partner network as a near-term opportunity to continue to increase market share. Another example would be strategic alliances and acquisitions that add or reinforce capabilities around DIRTT's offerings about the -- what DIRTT offers today and those are noted as potential paths to acceleration. There is something that DIRTT has been open to historically, where several of our past strategic acquisitions, such as the acquisitions of -- acquisition of Spider Agile Technology accelerated our growth in the past.With delivery of the report, we have much additional tools to help us in the company continue to evolve our strategy going forward. And there are many strategic elements in here, we're going to examine more in the periods ahead. In closing, the management team and I have worked hard to put in place immediate enhancements that reinforce consistent financial performance. In the longer term, we now have more input and tools to consider, as we evolve our strategy for DIRTT and continue to drive shareholder value.I have never met a more committed team of passionate and purpose-driven people, and I think the DIRTT customer experience proves it. We are committed to delivering certainty and confidence to our partners, to our customers and to you, our shareholders. And I'm confident that DIRTT has accomplished to date, especially in 2017 and now in Q1, what we've accomplished provides a solid foundation on which to base and build the company's future.I believe DIRTT and DIRTT alone is uniquely positioned to take advantage of this moment in time, and we believe that the numbers in 2018 will bear that truth out.So that concludes our prepared remarks for today. I'd like to thank you all for your time and attention. And to remind you that this will be -- webcast will be archived on DIRTT's website, dirtt.net.Operator, we're now ready for questions.
[Operator Instructions] Your first question comes from Rupert Merer from National Bank.
If I can start with your EBITDA margin target, 13% to 15%. Can you walk us through the changes that we should see in 2018 that'll get us to that number? So how much is going to be supported by revenue increases or gross margin increases or cuts to SG&A?
Rupert, thanks for your question. Peter, would you take that?
Yes, I think we stated a range for adjusted EBITDA as a percentage of revenue for 2018, and that's 13% to 15%, and we'll be accountable for that this year. I mean that is really driven off our budget of what we see as revenue growth, a strong gross margin and more control over our SG&A expenses.
So looking at SG&A in 2018, do we look at that as being flat or down or how should we model it?
Well, we discussed our commitment to investments in product technology and sales over the past few years. And those investments are now complete. Going forward we'll be holding SG&A consistent to 2017 levels in absolute dollars. And we'll drive our adjusted EBITDA to the stated range of 13% to 15%.
And do we expect anymore onetime items in 2018? Do we see any more severance costs or legal costs? Of course, understand that the potential for a proxy battle could introduce some uncertainty, but not considering that?
No, we're not expecting those costs to recur again in 2018.
Great. And then just one final question on this track. Will the results start to show in Q1 or do you think the margins will be looking better towards the back half of the year?
I think you're going to start to see the improvements right away in Q1. I think we've already stated we've got -- we're looking at very strong revenue for -- compared to other first quarters, and we should see stronger margins as a result of that.
Your next question comes from the line of David Quezada from Raymond James.
My first one is just on the residential side. Since it sounds as though the residential segment kind of increased in profile with the Hygge project and the tours through there. Wondering if you have any updated thoughts on potentially the commercialization of the residential vertical or what you're thinking there?
Yes, thanks, David. Great question. The way DIRTT's solution works is we're a design-driven by and large. And so what you're saying is design features, that sound like a vertical, will end up in multiple verticals. And I'll give you an example. In healthcare, especially when you get into extended care in categories like that, there's an increasing demand now for, lack of a better word, homey types of feelings. And so if you were to look at the installations in the projects we're doing today, they play off a lot of the development work that we did last year in a residential space. So hard to parse out a single industry. I'll give you another example. In timber, where it sounds like it's a method of construction and it's structural. Actually, timber is pulling through a lot of other projects where that look and feel of -- in the environmental aspects of it are now in demand and creating demand for our solutions as a whole, irrespective of timber. So it's interesting in the way our different design features play in the market. It's not as septic as a single vertical actually. There's a lot of interplay across verticals, and that's really the immediate demand side of this that we're seeing.
Okay, great. I appreciate that. And then maybe another, just a question on the strategic planning document that you guys received. Wondering what -- I guess, what the intention is there? Will you at some point release what the findings were or will it more just be -- we'll see the results in the change in the strategy, if any, going forward?
David, great question. Look, all companies do have a planning cycle and this is ours. Part of the idea of bringing in a recognized international third-party is to give us new insights from an outsiders in. We want to be -- continue to be a learning organization. And so we'll feed that material into our planning process, not only now, which some of these changes we're looking at as things that we're doing today, but on an ongoing basis. So what I doubt is, like any company, we won't be coming out and showing our full hand of cards. But I believe as we go forward, you'll be seeing evidence of some of the changes that we said today about the strength of our markets and of our value proposition play out in how we accelerate our go-to-market approach.
Okay, great. And then maybe just one last question. I'm wondering if you have any specific timeline for a final decision on the executive searches that you have going?
Well, the final -- this is another good question. Thanks, David. The decision has been made to get the absolute best person for the role. This is about doing it right, not doing it fast. The CFO search is going very well and we've seen some great candidates, but you know how this goes. It's -- until we're through the whole process, we're not done. So know that we are keenly focused on getting it right, and making sure that the team that's in here is the value-adding team. Steve, our Lead Director, do you want to add anything?
Process is well underway. We're determined to make it a robust process involving management which is the key here. In fact, it'll be a collective decision and we're dedicated to making that happen and that process is well underway.
Thank you, Steve.
Your next question comes from Neil Linsdell from Industrial Alliance Securities.
Just want to go again on this strategic plan that you're looking at. And maybe this is going to be better directed at Steve, but in what you've read so far, when you came into the job 12 weeks ago or so obviously you come in with a certain set of ideas about what you think you need to do in the business, and it sounded, confirm if I'm right here, that it was more on the financial controls internal aspects of the business. And as you're looking at this strategic platform, I'm wondering if there's new insight which is coming in which you really hadn't thought of or if it really just reaffirms the importance of the distribution partners and things you need to do to improve the business? So what's the scope or what was kind of more surprising or different than what we already know?
Great question. What I would say is that and just to roll back, is financial controls were a part of it. I mean, this -- we're -- Peter and I as interim leaders here, really are looking at this as what's the best thing for the company? So yes, there was an aspect of helping with, take the next step -- taking the next step around crystallizing the adjusted EBITDA going forward. Yes. But any good company like ours has a planning process and we do too. And so, some of the effort had to be around, how do we go about doing that? And if we think about planning, one starts from strategy, down to the plan, down to execution and then results, right? So there's a clear path from where are we heading to, where's that -- how does that translate into value creation. So I look at that to some extent as a learning process. So the short answer to that would be that it wasn't, and there were no surprises around that. I think it was just Peter and I and the team working together to sharpen our thinking around what's next. There is an exciting future in this company. And the number of ideas that are in front of us to accelerate are strong. So I just couldn't be -- we hit the ground running and we just couldn't be more excited by this company in the future.
Neil, do you want me to comment a little further? I think you wanted some comment from a Board perspective?
Well and from a continuity perspective, as far as what you'd seen in previous years on how it's developed versus what you're seeing from your internal planning and discussions on what we might be able to look at? Because that kind of feeds into my next question which was, if there's going to be any kind of immediate or a gradual shift in anything that we already expect out of the business, industries being targeted, types of approaches to manufacturing improvement that type of thing?
Great. So just from a Board perspective, and I've been around the company for quite a few years now, when Mogens, Jeff and Barrie, originally invented DIRTT, they had a strategy. And there's been a strategy here since day one. This is not an absence of that characteristic of a good company. In fact, it's been quite robust. You'll know the 5-pillar strategy quite well. When you bring in an outside party, what that's done -- the reason to do that is to stimulate the conversation. To start everybody's gears turning about what's next, what happens and where you can improve and find things. It's less about some epiphany about some specific thing that you're going to do. And that's really never how strategy works. As a Board member, what you look for, is how much new thinking comes out of it. So yesterday, really the whole team including the Board and management got to look at this report and talk about it openly. What I saw was a huge amount of engagement around things that we could do, things that we could think about, data we can collect that would change the view of DIRTT over time. And that's exactly what a Board hopes to see when they push for these kinds of moves. And I think we got 100% value for our part in doing that because that conversation is now underway. But it's not about just, here's a packaged thing we're going to do based on strategy. It's a much more comprehensive process, and I'm frankly delighted with what I saw yesterday. I thought we were -- we ended up in a really good place in terms of forward momentum on this.
Thank you, Steve.
Okay. Well, yes, we're all looking forward to hearing more I think on what you get out of this. So maybe I can just finish off and ask, you mentioned alliances and acquisitions. Is that -- would that be much more prominent than we've seen previously from DIRTT?
Well, there has been -- first of all, just to remind you, there have been a history of alliances and acquisitions. And so, it's not -- that's not a pivot or anything like that. Just getting -- the report gives an example, I'm just trying to give you a flavor of some of the things in the report. And the report gives an example of this is one way to build on the portfolio of solutions that we have to add acceleration. Remember, the more content in our product, the higher the average transaction would be. So that's -- it's that kind of a -- or it would accelerate work we're doing for example. So that's all that means.
Your next question comes from Elizabeth Johnston from Laurentian Bank Securities.
Just to start with the restructuring of the Connext event and the fall training camp. Can you walk us through what the fall event included specifically? Is it just that section of the Connext event as a stand-alone? And as well walk us through how the $3.5 million of savings will be achieved?
Peter, would you mind taking that?
I'll try. Not having been here last year, that makes it a more difficult question for me to answer. But in 2017, we had the Connext event and we spent about $3.6 million on that. Then in -- then we also did an event in Phoenix and that was another $2.2 million. So about $5.8 million in total costs. Going forward, we're only planning to spend in total $2.3 million on Connext and Phoenix. So we're really looking at a cost savings, Elizabeth, of about $3.5 million next year, and a lot of that has to do with focusing the training on Phoenix and focusing on our partners and helping them with solutions to go-to-market and to build their businesses and their success. And so we've sort of separated the sales or marketing side from the training side and focused on getting the number of people attending, correct.
And so should I think about Connext in 2018 then costing $100,000? Or am I thinking about this the wrong way?
No. I'm just -- Connext, this coming year should be about $1.1 million of the total $2.3 million that we're going to spend. And Phoenix is about $1.2 million.
Okay. And so what were the additional costs of Phoenix this year that won't occur in 2018 then?
Training.
No, I understand. But if there's going to be training every year, what you're telling me is that training in Phoenix is going to be less than the prior year?
Yes, I think we've now focused all of our training on Phoenix. And we've left Connext without the training portion to it. And so we're focusing on the sales or marketing effort there.
Okay. And when was this plan decided? At what point -- was it a management and the Board that decided to make this split? How did that come about?
Yes, I guess, part of it I think would go back to management's thinking in the latter part of 2017, right after the last Connext conference. I guess, it culminated really as the senior management team here work towards the budget for 2018. And we were focusing -- we went back and we said, 2015 was a good benchmark year for us in terms of how SG&A expenses, including Connext and that sort of thing, related to sales. And so if we looked at 2015 as a benchmark, as we go forward during our budget for 2018, that created sort of some goals for us at least in terms of adjusted EBITDA. Then when we drilled down into the expenses in 2016 and '17, we recognized some very large expenses that we were incurring. One, particularly, I'll call now under trade shows, Connext and Phoenix. And we recognized that a bunch of costs could now be taken out of those trade shows. And so it really came about as part of the detailed budgeting process.
So late 2017 then?
Late 2017, early '18, yes. The -- what I'm going to -- I will just build on your point, Peter. Last year, we had a lot of experience, right? We had both Connext and the Phoenix event. And what -- after taking in lots of feedback from the partners we were actually working with, the training that what we did, it became clear that we need to separate those 2 events, really focus our training resources for training without all the outside noise of the trade show around it, and that became the genesis of the Phoenix event. And from that, we downscaled, moved back the -- what we were doing at Connext because it was -- it wouldn't be required anymore. The event would but the training that we did there, which is expensive, would not. So we're just shifting the strategy around how we train.
Okay, that's fair. Just moving on to revenue. Regarding the Fortune 100 contract which was announced last April, can you tell us how much it contributed in the Q4 period?
I don't have that handy.
Neither do I.
But if it's okay, why don't I get that to you later if that's all right. I just don't have it in my fingertips.
Okay, sure. And likewise, if you have any expectation for what it might contribute in 2018? Or can we get a follow-up on that?
Yes, okay. Got it written down here, Elizabeth.
Okay. And just going over to the comment regarding outlook for 2018 and a 13% to 15% adjusted EBITDA margin. Does that include the additional severance related to the management changes in January of this year?
It -- we have -- we will continue to have some reorganization costs that we're going to incur in 2018 that will not be part of SG&A. They will be add -- well, they'll be part of SG&A but they'll be add-backs in arriving at adjusted EBITDA. And I think, what's the number that we're expecting in continued reorg cost is about $2.5 million coming year?
Yes, that's right.
With $1.5 million to...
$1.5 million to $2 million.
$1.5 million to $2 million we budgeted, yes.
And those are costs related to the severance and the management changes?
That's correct. Yes, that's right.
Okay. Because for the margin, typically you haven't been backing that out, so I'm just trying to make sure I'm comparing apples to apples here.
Yes, we did -- that's the number that this year, as in terms of reorganization costs, we had about $1 million -- $1.45 million. Next year, we expect that to be between $1.5 million and $2 million.
Okay. And just changing to a new topic here. Regarding [ CapEx ] Smed in terms of the R&D costs, I mean, the project was under construction for multiple periods. And correct me if I'm wrong, but it had already finished construction, so I'm trying to understand, why the hit in this quarter specifically from those increased costs year-over-year?
You're talking about Q4?
Yes.
Steve, would you take that?
Yes, sure. Maybe I should take that since I was here through 2017, Elizabeth. The -- when this project was conceived, it was conceived as a shared-risk project between Mogens personally and the company. With the idea being it was an opportunity to learn how to build in the residential market and how to use technology in that setting. And so, over the course of the year, that cost-sharing went on. Mogens contributed something over $4.1 million of the project. On our books, we were showing a deferred class of...
$1.2 million.
About $1.2 million. And that was shown on our books as went forward. But really the full cost being, I'd say, crystallized in fourth quarter, when we could start to see -- and we could start to apply what I would call benefit tours. We can start the whole tours and start to see the impact it was having on our business. And so it was in Q4 that we're able to make an analysis of what's the cost/benefit sharing was, and therefore, those costs were really put together in the Q4 time frame. That then raised the second question, which is whether this was an operating expense or a capital item. And that judgment was made -- Peter, do you want to talk about that piece of it?
Yes, happy to talk about that. So once you then looked at that approximately $3.8 million or that number, we looked at the components of it. Part of it was pure R&D. The things we learned about timber and residential construction went directly to R&D. The -- then there were also some things that we did around the house that I will call, not research and development, but were marketing expenditures because they enhanced the experience of somebody coming in and actually seeing the timber and the residential construction that we'd employed. So I think in the end we ended up with like 180 tours in the second -- in the fourth quarter, which really showed that the investment was worthwhile. But there was -- we also thought about the capitalization aspect. And I think there's just no way to capitalize R&D. That's a past cost and the accounting rules won't let us do that. If you looked at the marketing cost as well, even I, as an accountant, would have thought, now we should think about the capitalization of the marketing piece, but the truth is that Mogens owns the house. We don't own the house. We don't have an agreement with Mogens that he absolutely has to do tours through it. But we have his undertaking that, that will happen. We just didn't believe that it was appropriate to continue to capitalize those marketing costs, so we wrote them off.
And maybe talk a little bit about the nature of some these expenditures. When this was going on, it was very much like an R&D project. We were doing some pieces of construction, let's say, 4 and 5x. Testing out different ways to do things and then finding out how it optimized for the residential environment. And so the cost of this is significantly more than the cost when we paid to build the house. It was truly a laboratory that make sure that happened. And the sharing of those costs, understanding that against the benefit was a Q4 decision, which is why you're seeing the numbers were accumulated as deferred expenditures through the first 3 quarters and then crystallized in the fourth quarter. Peter, I think I've said that right from an accounting perspective?
Yes.
Okay, that's great. Very helpful. And just finally a quick one for me. Michael, in your opening remarks, you made comments specifically in -- with respect to Iron Compass. Are they able to elaborate any further on actions that you intend to take? You said you protect shareholders or really should we just be waiting for your response to, I guess, which is coming in 21 days, I guess?
Thanks, Elizabeth. So we don't generally comment on specific shareholder interactions. The company is aware of the communications with Iron Compass and we're treating those respectfully. And we'll deal with them in due course and we'll communicate back to shareholders as that progresses. In the notes we've made, we've commented on timing regards to specific things like requisitions, and we're continuing to do what's right and proper with respect to their information. But can't really say more about that at this time.
Your next question comes from Gabriel Leung from Beacon.
Couple of things. I want to go back to that conversation about that Fortune 100 company that was talked about last year by your predecessors. So first off, as far as you know, has there been any change to the scope of that particular contract? I think the last sort of the quantitative numbers we got were sort of USD 30 million-plus which you recognized over several quarters. As far as that scope of that contract changed, increased or decreased?
Thanks. Great question, Gabriel. On that contract, we have seen no changes. Now we knew there'd be a Q4 slowdown associated with the holiday season, but that's normal. We're seeing order strengths from Q2, Q3 pretty much at the rate we'd expected. And the relationship is strong. The same people are connected with it, and we're enjoying that as one of our top programs.
Awesome. And you sort of alluded to it but maybe just talking about Q1 revenue guidance between $78 million to $80 million. And I presume maybe you can provide the guidance, you pretty much scrubbed what's going to go in there. So can you at least talk about whether or not that particular customer is a meaningful part of that revenue guidance? Is it a 10% -- plus customer or less?
No, we can't talk about that. But what I can say is that, that customer continues to be a strong customer with -- and as really -- as a result of the changes and so forth, I want to be clear that the relationships and the processes with that customer haven't changed. It's -- we continue to have a robust process with them and expect that relationship to continue to grow.
Okay, perfect. And then just in terms of the full year EBITDA margin guidance of between 13% to 15% EBITDA margins. I just kind of want to walk through that -- those assumptions there for a second, because that -- I mean, if you were to hit those targets, it'll be great. I mean, as far as I can remember that would be sort of all-time high as in terms of full year margins anyways. So maybe let's walk through from Q4 to Q1, what sort of costs we can expect to come out of the system? And you talked a little bit about it but I just want to run through them to make sure I got everything. So if I look at adjusted SG&A from Q4 to Q1, what we should see gone is about the $3 million -- sorry. Yes, $3 million or so associated with the JV with DIRTT and Mogens. Is that fair?
That's fair. But it's not a quarterly issue. Sure that was there in Q4 of 2017. That will not repeat itself at all in the year-ended 2018.
Okay. So that's -- so we can assume that at least from a quarter-over-quarter basis, that cost will be gone, that's fine. There's another $1.5 million associated with the restructuring. That's not tied to the recent management changes. Is that correct?
There were about $1.5 million of severance and that sort of thing that was not related to that. That's correct.
And then there's also going to be $2.2 million associated with the training camp, I guess, in Q4 that's not going to repeat in Q1, although it'll probably -- there will be some costs over the course of '18, right?
That's correct.
I'm sorry, yes. I'm just looking for starting points. Okay, so that's -- so those would be the key ones. Okay, so we can sort of build from there. That's helpful. Okay, and then last question for me. So Peter, you talked about R&D, sales and marketing capitalized costs and whatnot. Now I guess, if I sort of look at the cash flow in Q4, it looks like you're still capitalizing about $2.5 million of intangibles, which have historically been, I guess well, capitalized already, I guess. So I mean, I don't know how much scrubbing you've done in it, but what's your view on go-forward the historical capitalized R&D? Is that going to be continued to be capitalized in '18 or do you think some of that will flow through to the P&L?
Well, we don't -- we never capitalize R&D. We expense all our R&D. But we do have deferred product development costs. So a number of costs that we will continue to -- we will continue to capitalize intangibles around product development as it relates to residential. And that's really the major process of anything being capitalized in intangibles in 2018.
Got you. Do you have a sort of target in place? I think it was about just over $10 million in calendar '17. Is there a number in '18? Should we expect sort of flat year-on-year?
About flat, yes.
Okay, perfect. And maybe one last question for you, Michael. Historically, visibility has been challenging. At least, top line visibility has been challenging for DIRTT. Are there any changes you can put in place in terms of reporting structure from your sales guys that could help to enhance the visibility, at least provide you better than sort of 30-day visibility?
It's a great question. And revenue visibility is one of the things we've been doing a lot of work on. I think we're getting better in terms of understanding our forecast data better just analytically and statistically. But remember, our central -- one of our central value propositions is this idea that we can deliver between 10 days and 2 weeks. So if you think about a job site and the uncertainty going on there with trades not showing up, the inability to get trades, problems with the project, delays. And then -- and so the idea of being able to dial in when our product shows up is an enormous piece of value for our customers. And so the good news there is that, that is something that others cannot do. The downside for us is just that it does dial in a bit of uncertainty on when that work comes in. We know we're going to get it, but it could fall across 1 month or 1 quarter versus another. So we're working on sharpening that. I think we're getting better at it, but the truth is that this is a business that on a quarterly basis will see that lumpiness. And that lumpiness is a direct result of the value proposition we've got. So the way to look at this is on a quarterly, across a year or a TTM basis. And on that basis, we have very consistent results.
Your next question comes from Rupert Merer from National Bank.
Yes, just a follow-up on the revenue visibilty for 2018. You talked a little bit about your largest customer and that the -- perhaps the guidance there hasn't changed. How about on the healthcare and hospital market? You had some color on previous quarters about some large orders that were expected to materialize in 2018. Has anything changed there? Have you had any more progress in that market over the last few months?
Rupert, that's a great question. It's interesting. Actually, the one phenomena that I would highlight is, if we look at the number of large projects last year versus this, there is clearly a building of larger projects. And remind you that larger projects take longer to develop, they have some uncertainty in exactly when they hit, but when they hit, they're very substantial, right? So we're seeing a build of those. It's more than 5x what we've seen historically. So we're super positive about the future and segments like healthcare, where we know we're getting traction. Just understand that for a company that's really just getting into it, that the cycle time from initiation of those opportunities to actually closing it is longer, more involved than some of our other segments. So that's a good new story, and we expect to see the results in this year.
Would you give us a sense of how much revenue you could see from large healthcare quarters this year?
We don't -- we're not guiding on that right now. There has been a building of -- in that segment as you can see. So that's good. We can't really give you a lot of other guidance around exactly what that would be, because they are longer-term projects, and one can't be completely sure when they're going to hit. But just in perspective, we've -- we're in the double-digit growth rate for that vertical.
Okay. Great. And then the residential markets, I know you touched on that but do you anticipate that, that can start to become material in 2018 or is that more of a longer-term story? And same question on international, of course, you've typically had some revenue from international, but how do you see that business going?
I see our domestic business really driving the numbers in 2018. With an exception or two around the Middle East where we've just got some great traction right now. The rest of them are earlier markets. They're acorns, they're not saplings yet. But they are important investments and we expect them to grow over time. But the real -- where the real action is, is going to be North America.
And on residential? Do you anticipate having any benefit from...
That was -- the key benefit -- the key near-term benefit, in other words, in 2018 for residential is the amount of traction we're getting around using the residential design aspects to get and win important projects in healthcare and commercial. Even some of our officing environments now, there's a real trend in especially in technology to make those environments feel a lot more homey, where people feel comfortable. Kitchens and eating areas that are less institutional. Well, that's a residential feeling.
Okay. Maybe just one final question. Obviously, the balance sheet is strong. The share price is down. You had an NCIB in place previously. Are you buying stock in this market or how should we look at the potential for share buybacks?
Well, good question, Rupert. Remember, we're currently in blackout. The Board is considering a number of strategies around capital allocation. Obviously, every dollar we spent should be to generate you the highest return. And so just one of those options is NCIB, there's some others. That's really something that's always under consideration. Right now, of course, we're still in blackout.
There are no further questions at this time. I will turn the call back over to the presenters.
Thank you, operator. That concludes our call today. We're looking forward to coming back to you next quarter and talking about the traction that we're getting and some of the exciting developments here at DIRTT.Again, thank you for your support. We appreciate that. Operator, that concludes the call today.
This does conclude today's call, and you may now disconnect.