DIRTT Environmental Solutions Ltd. (DRTT) on Q1 2021 Results - Earnings Call Transcript
Operator: Thank you for standing by and welcome to DIRTT’s 2021 Q1 Financial Results Conference Call. It is now my pleasure to hand the conference over to Ms. Kim MacEachern. Please go ahead.
Kim MacEachern: Thank you, operator and good morning everyone. Welcome to today’s call to discuss DIRTT’s first quarter 2021 results. Joining me on the call are DIRTT’s Chief Executive Officer, Kevin O’Meara and Chief Financial Officer, Geoff Krause. Management’s prepared remarks today are accompanied by presentation slides. To access the slides, please view them from the webpage of this webcast or on our website. 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 5, 2021 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 today at approximately 1:00 p.m. Eastern Time.
Kevin O’Meara: Thank you, Kim and thank you to everyone joining us today. Beginning on Slide 4, as we discussed in February when we released our year end results, we expected the slowdown in the first half of 2021 compared to the fourth quarter of 2020. Projects that were in-flight when the pandemic commenced were largely completed in 2020, and as a result, sales in the first quarter of 2021 bore the full brunt of the COVID induced downturn in North American non-residential construction activity. We believe this quarter’s revenue of $29.5 million represents our low point in the pandemic-impacted operating environment. It should be noticed this $29.5 million does not include approximately $2 million from the COVID vaccination trailers we sold in February, an order we discussed on our last quarterly call and which were delivered in April. We are reasonably confident revenues in the second quarter will be at or near the quarterly revenue range we experienced in the first half of 2020. We also remain cautiously optimistic that robust government stimulus plans across North America and the growing success of vaccination rollouts will increase business confidence and drive a recovery in the second half of 2021. The specific timing and magnitude of this recovery remains uncertain and thus our results are still subject to the effects of the pandemic. Additional waves of infections, such as the one Canada is currently experiencing due to the prevalence of COVID-19 variants, can create individual project delays and uncertainty, thereby impacting the timing of sales. In addition, supply chain delays with other billing trades that come before us in the construction process can delay projects and thus our sales. Similar to what we experienced with the vaccination trailers, a few days movement in the shipping of around the end of a reporting period can shift revenue from one quarter to another. Despite the onset of COVID-19 last year, our commitment to the prudent execution of our strategic plan has been relentless, including our approach to creating commercial organization capable of driving the aggressive sales growth and market penetration I believe to be possible when I joined DIRTT in 2018. This commitment positions us to take advantage of a resumption of normalized activity in non-residential construction to gross sales. We are encouraged by the growing customer engagement we see to increase demand for tours, both virtual and in-person, at our DIRTT experience centers and our ongoing high level of project quoting activity. While we are unable to quantify quoting activity into a reported backlog, we see ample anecdotal evidence that our new commercial capabilities are working synergistically to allow us to speak to a broad range of prospective clients in a more coherent, coordinated and thoughtful manner than ever before. This is evident across all three focus areas within our sales force, which includes our territory sales reps, our segment sales specialists, including healthcare specialists and our strategic accounts team.
Geoff Krause: Thank you, Kevin. As we have done in recent quarterly calls, I am going to start with a quick review of our liquidity on Slide 5. Our working capital management focus continued in the first quarter with no reportable disruptions or delays in accounts receivable collections. Days sales outstanding, net of deposits and income taxes receivable continue to run at under 30 days. We finished the first quarter of 2021 with $58.7 million of cash compared to $45.8 million at year-end. The increase reflects $29.5 million of net proceeds from the convertible debenture issuance in January offset by cash used in operations of $12.1 million and CapEx of $3.6 million. Cash used in operations included non-cash working capital usage of $4.4 million. Important to note is that subsequent to quarter end, we completed a $7.2 million draw of our U.S. equipment facility primarily related to our South Carolina plant and anticipate drawing an additional $3 million to $4 million during the second and third quarter of this year. In short, we remain in a very strong financial position, which enables us to continue the prudent execution of our strategic plan, but the flexibility to pivot quickly should we need to. Our net working capital at March 31 was $70.5 million, and our current ratio improved to 3.4x from 2.7x at December 31, 2020. Updating on government subsidies, in the first quarter, we qualified for $4.1 million through two Canadian government programs, the Canadian Emergency Wage Subsidy and the Canadian Emergency Rent Subsidy. From a cash perspective, in the first quarter of 2021, we received $1.7 million that was outstanding at December 31, 2020 and $2 million from the 2021 amounts, with the balance to be received in the second quarter. Both programs are considered for extension to September 25, 2021 and we will continue to evaluate our eligibility for each qualifying period.
Operator: The first question will come from the line of Greg Palm.
Danny Eggerichs: Hey, this is actually Danny Eggerichs on for Greg Palm today. Thanks for taking the questions.
Geoff Krause: Good morning, Danny.
Danny Eggerichs: I am just wondering if you could give maybe a little color on cadence of order activity throughout Q1 what you saw there? And maybe if you could, what you are maybe seeing daily order rates as we move through April and that compared to Q1 last year?
Geoff Krause: Danny, it’s Geoff here. As we came through Q1, from a cadence perspective, January was certainly the lowest period that we saw with improving sequentially on a month-over-month basis. I think as we moved into April, we have continued to see that pattern, and we will see how that plays out for the rest of the second quarter. One thing I would point you to is, on the balance sheet, if you look at customer deposits at December 31, 2020, versus customer deposits for the March 31, 2021 period, you can see a dramatic increase in that, which is reflective of the increased activity that’s coming at us in the second quarter.
Danny Eggerichs: Got it. That’s good. And then maybe as it relates to order activity, was there any geographies or end markets that maybe surprised you guys to the downside?
Geoff Krause: I think, we’re not really surprised us. The Canadian market continues to be very slow. You can see that in our segmented note. The Canadian orders were about 10% of revenues compared to the U.S. The overall commercial segment from 2020 to ‘21 was down 43%, and education was down 57%. But we did see improvements on the health care side as well as the government side. Both of the commercial and education are reflective of the lockdowns that we’ve seen across North America. But I think it’s also fair to say that we are seeing quoting activity and those sorts of things pickup as the U.S. begins to reopen.
Danny Eggerichs: Got it. And how much of that was driven by new construction, I guess, compared to like a renovation type?
Geoff Krause: I don’t really have that data at my fingertips. I think, in general, though, it’s a function of projects that have been brought along over time. I think what we’ve been seeing is end customers that are bringing projects to a point and then pausing as they trying to figure out when is the time to bring the right people back into the office, and so I think it’s more of that, but the first quarter was definitely that slowdown from not having 2020 in-process stuff coming through?
Danny Eggerichs: Okay, makes sense. And then last one for me. It looks like during the quarter maybe shed a few more distribution partners. I guess when do you expect that the kind of churn in the distribution channel to level out or maybe start to increase the amount of partners again?
Kevin O’Meara: This is Kevin. It’s leveling out, but you’ll always see some. There is always going to be a bottom 10%. There is always going to be places where we feel like we’re under-penetrated. And so I think that you will see that it will be a continued activity. And I don’t think that you necessarily can draw a correlation between number of partners in our sales, because as we upgrade partners and improve penetration, it’s possible that we actually are able to improve our sales per partner so that we grow even with a stable plus or minus shrinking or growing set of partners.
Danny Eggerichs: Got it. Thanks for answering the questions.
Kevin O’Meara: No worries.
Operator: The next question will come from the line of Rupert Merer with National Bank.
Rupert Merer: Good morning everyone.
Kevin O’Meara: Good morning, Rupert.
Rupert Merer: Can you give us some more color on your strategic accounts? I see you increased them in the quarter to 40%. Can you talk about how the relationships are developing, but also what’s defined in the relationship if any commitments are made on either side?
Kevin O’Meara: Rupert, can you repeat your second question? I think I missed something you may have cut out.
Rupert Merer: So just looking at your strategic accounts, if you can talk about how they are developing, but also what’s defined in your relationship with the strategic accounts? For example, are you offering some pricing commitments to them? Are there any volume commitments from the strategic account? Just give us some color on how the relationship is defined.
Kevin O’Meara: Got it. The relationships are coming from all different areas. It’s people that we have done business with in the past, in one market where historically the company didn’t have the capability to build on that relationship and help them in other geographies. We’ve seen an increase in companies issuing RFPs that historically, we weren’t in a position to respond to, so we formulized processes. Some of it comes from individual personal relationships from a variety of people within the company. So it can really arise anywhere. I think what’s characterized by most of these are typically multibillion-dollar companies, one or two exceptions, but they also have real estate needs across North America. And they also benefit from having somebody like us that has design standards in place that can codify exactly how they build. With some of these clients, we literally have a manual that says, Okay, when you’re doing a project for this particular customer, here’s exactly how it’s supposed to go. In terms of commitment, it varies. It’s based on whatever their needs are. In an ideal world, what we do is at a high level kind of define our commitment to them. There may or may not be some sort of comments as it relates to pricing. We do prefer that on a project-by-project basis, they enter into an agreement with our individual distribution partners. And what we’re doing from a strategic account standpoint is providing a single point of contact and consistency of experience.
Rupert Merer: Great. And are you seeing much of your revenue coming from that group yet? Are you seeing traction from the relationships?
Kevin O’Meara: It’s starting to build and we are seeing some revenue coming in even where we will be in an RFP process and we haven’t heard a formal decision. But the next thing that we’ve gotten several projects from them along the way. So yes, we clearly are seeing increased activity from the strategic account side of the business.
Rupert Merer: And then on your strategic marketing initiatives, you mentioned the more targeted now. Can you talk about your resource allocation by topography? Or I mean, are you finding any pockets of the market that look particularly attractive for you right now that may be different from where the company used to focus?
Kevin O’Meara: We are finding pockets, but they are consistent with where the company is focused historically. On the commercial side, I would say talent-intensive businesses, the more high-tech companies, many of whom have done extraordinarily well coming through the pandemic. There is a lot of interest there. There is a lot of activity there; health care as well. The lessons that various health care providers have learned coming through the pandemic really accentuates the value of adaptable spaces. And so we’re seeing renewed interest there, so – but that – both of those are consistent with pre pandemic and consistent with how we put together our strategic plan overall.
Rupert Merer: Great. Thank you. I will get back in the queue.
Operator: The next question will come from the line of Josh Wilson with Raymond James.
Josh Wilson: Good morning, Kevin and Geoff. Thanks for taking my questions.
Kevin O’Meara: Hi, Josh.
Geoff Krause: Good morning.
Josh Wilson: Wanted to get into the change in activity a little more, to what extent is the increase in activity completely brand-new projects versus maybe projects that were put on hold prior to the pandemic?
Kevin O’Meara: We haven’t quantified that, but a significant number of them are ones that were put on hold pre pandemic. And a lot of what’s happening is, it’s projects that could be anywhere between 70% to 90% on the way ready to go. And then we’re getting calls and say, okay, we’re ready to go. And what that’s doing is compressing the sales cycle. And so we made comments in the prepared remarks about having a hard time turning activity in the backlog. That’s part of the reason. We will get phone calls out of the blue that say, Okay, we’re ready to go. And we will dramatically increase both the size of the project as we might have reflected it in our pipeline as well as the timing. So that is a very definite aspect of what we’re doing, and I think we will continue for the next quarter or two.
Josh Wilson: Got it. And then on that topic of the sales cycle, any changes you’re seeing in conversion rate either because of where we are in the pandemic recovery or because of the new tools you’ve rolled out?
Kevin O’Meara: Anecdotally, I think it’s higher. We’re still relying on our CRM system to be able to capture that and know specifically. But we are having, what feels to me, in the markets, higher degrees of success in conversion rates.
Josh Wilson: And is the increase in activity focused in any end markets or regions within the U.S.
Kevin O’Meara: No. It’s more – I don’t say opportunistic, but episodic based on people’s needs and how they are thinking about their individual projects. There is no correlation that could really draw you to.
Josh Wilson: Got it. And then last one for me, you talked about taking action if inflation gets worse. Could you run through the menu of actions? And how you might rank them or how you might consider responding if that doesn’t play out?
Kevin O’Meara: I mean, it’s primarily as much as we don’t want to do it looking at our pricing structure. I think that’s – we did a pretty comprehensive supply chain review over the last year or so, and we were able to take some cost out that way. We’ve talked in any number of quarters as our sales were declining of the impact of negative operating leverage. And so we will take advantage of the first, the second one. And I think we will just kind of happen naturally – as we shift production into the Rock Hill facility that will help as well, but ultimately, about the only lever you have at the end of the day if those aren’t sufficient just to start looking at your pricing structure.
Josh Wilson: Got it. Good luck with the quarter.
Kevin O’Meara: Thank you.
Geoff Krause: Thank you.
Operator: And with that, we are showing no further audio questions at this time. I’ll now hand the conference back to Mr. Kevin O’Meara for closing remarks.
Kevin O’Meara: As always, I would like to thank our tremendous employees and distribution partners who continue to demonstrate resiliency and commitment in the face of extraordinary challenges. I continue to strongly believe that the path we’re on, guided by our strategic plan and executed by the incredibly talented team we have at DIRTT, we will propel our organization forward in 2021 as we continue to refine the commercial capabilities that are beginning to deliver tangible results in the market. Thank you for joining us today.
Operator: This does conclude today’s conference call. We thank you for your participation and ask that you please disconnect your line.
