DIRTT Environmental Solutions Ltd.

Ladies and gentlemen, thank you for standing by and welcome to the DIRTS 2021 Q3 Financial Results Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. If you'd like to ask a question during that time, please press star 1 on your telephone. If you require further assistance, please press star 0. I would now like to hand today's call over to Kim McEachran, Director of Investor Relations. Please go ahead.

Thank you, Operator, and good morning, everyone. Welcome to today's call to discuss DIRT's third quarter 2021 results. Joining me on the call are DIRT's Chief Executive Officer, Kevin O'Meara, and Chief Financial Officer, Jeff 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 meeting 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 November 3, 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 p.m. Eastern time. I would now like to turn the call over to Kevin.

Thank you, Kim, and thank you to everyone joining us today. Beginning on slide four, third quarter revenue of $34.1 million fell short of our expectations that it would be consistent with second quarter revenue as the resurgence of Delta variant-driven COVID infections increased uncertainty and reduced client sets of urgency to complete in-process projects. Further, our shipments were delayed as projects experienced delays prior to the stage when dirt is installed due to factors such as supply chain issues and labor shortages. These circumstances resulted in projects that we expected to ship in the third quarter moving out to the fourth quarter or into 2022. These scheduling delays were not isolated instances. They've been affecting all verticals we serve and all types of projects. I will share a few specific project examples to provide insight into the challenges presented by the current operating environment. We've been working on a large office project for a tech client with a signed contract in hand, a completed design, and what we thought was a definitive construction schedule. On short notice, we were advised that a third of our scope of the project has been put on hold due to a variety of job site delays. A second project in the commercial vertical has been delayed six months because imported custom components have yet to be offloaded at the port. Finally, a healthcare client at the last minute changed the scope of work of their project to accommodate higher acuity level isolation rooms in response to COVID. That change required not only the DIRT design, but also substantial HVAC and engineering modifications. In each of these instances, the time between our intended delivery and when we received notice of the delay was less than three months or one fiscal quarter. Each of these examples represents a large project for DIRT and offers a glimpse into how rapidly schedules can change, delaying our revenue realization. As you can see, even short-term order activity has been impacted by uncertainties, and this quarter's material inter-month volatility impacted our adjusted EBITDA loss to a greater degree than if month-to-month revenue had been stable. September revenue was the second lowest monthly revenue number we've seen this year, with January being the lowest. Approximately 40% of the adjusted EBITDA loss for the quarter was caused by the September drop in activity. Orders and shipments in October have improved approximately 50% from September, And so far, orders for November delivery remain strong. If we had adjusted our capacity consistent with September's production requirements, we would not have been able to fulfill the October demand with the lead times that are critical to our value proposition. We believe the October rebound reflects a resumption of activity as the Delta wave begins to abate. As a result, we currently anticipate that fourth quarter 2021 revenue will be between 40 and $45 million. Like many manufacturing businesses, we've been seeing increases in raw material prices, including aluminum, medium-density fiberboard and glass, as well as transportation costs. We had previously elected not to pass along these costs in the strategic decision to drive our price competitiveness versus conventional construction. But more recently, as raw material prices have continued to increase, we announced a price increase on our interior solutions, plus an adjustment to our freight charges, resulting in an overall increase of approximately 6.5% effective November 16th, 2021. Despite these increase, we believe our solutions remain competitively priced with conventional construction, which has experienced a higher relative level of raw material cost inflation. The pandemic recovery is taking longer than anticipated, resulting in a mixed view on the return to a normalized level of non-residential construction activity. In general, there has been a broad deferral of return to office plans, and office occupancy rates continue to be meaningfully below pre-pandemic levels. Healthcare organizations have a need to build but are evaluating their delivery models. For example, the role of telehealth, which has become much more prominent over the past 18 months. Nevertheless, we are seeing bright spots. For example, we recently won several modest-sized projects shipping in early 2022 for strategic account clients who are moving forward with expansion plans and have been able to move rapidly because they have design standards in place for DIRT. This reinforces the importance of our strategic account strategy and being positioned to capitalize on the projects that move ahead despite the overall uncertainty. In early October, we held our first Connects trade show at our Chicago Dirt Experience Center, or DXC, since the summer of 2019. Chicago DXC was recently renovated, and we hosted more than 1,000 clients, architects, designers, and contractors, with half attending in person and half experiencing Connects virtually. While the launch of our virtual tours has been a great success in expanding our ability to reach people during the pandemic, and has allowed us to introduce it to many new stakeholders in a highly accessible way, there's unmistakable value in face-to-face meetings, which nurture stronger relationships, trust, and understanding that are difficult to achieve virtually. Half of our distribution partners were represented at Connex in person, and a number of our current and potential strategic account clients also attended in person, both of which we find encouraging. Our distribution partner network is strengthening, having hired over 75 DIRT-dedicated people since the start of 2021, of which more than 50% were added in the third quarter. We continue to have success using our Total Cost of Ownership, or TCO, tool. For example, we recently deployed it to an healthcare project for delivery in early 2022. The TCO tool is instrumental in providing the architect with a framework to accurately compare us to conventional construction, understand potential schedule savings, quantify the value of early occupancy, and impact on cost, flexibility, and maintenance. Yesterday was the official grand opening of our new Dallas DXC. It will serve as a flagship sales center for the company, showcasing everything DIRT has to offer to inspire innovative, sustainable design. Even though we officially opened our doors yesterday, the DXC has already been extraordinarily busy during October with in-person tours with large facility management teams including some of our strategic account relationships making the trip from all over North America. This is in addition to the numerous tours we conducted while it was under construction. Early feedback is it is a robust representation of limitless possibilities of building with DIRT. Not only does it feature our newest innovations in terms of our Inspire and Reflect wall offerings, it speaks to what is possible across our end markets from commercial to healthcare and education and highlights that innovation is often about imagining the infinite ways that a space can be designed with DIRT. Before turning the call over to Jeff, I'd like to address the financial targets we articulated in November 2019 when we announced our strategic plan. The analysis on which those targets were based include the historical achievements of the company, size of the market, the extensive scope of our solutions, and our ability to compete with conventional construction. It also reflected a growing acceptance of industrialized construction, the significant efficiencies and sustainability driven through our approach, and the benefits of our corporate transformation both in terms of the increased revenue growth from the execution of our commercial strategy and the improvement of our cost structure from the upgrading of our manufacturing operations that we'd begun prior to the onset of the pandemic. All of these assumptions remain valid today. The revenue targets of between $450 million and $550 million with adjusted EBITDA margins between 18% and 22% are, we believe, achievable. However, even as we have continued to execute our strategic plan, the disruptive impact of the pandemic on non-residential construction activity has been substantial, impeding our ability to realize the full benefits of our manufacturing improvements and our commercial initiatives within our original timeframe. While we've tried our best to adjust to online meetings and remote work, I think it is widely recognized that there are limitations to these online interactions. Our DIRT experience program, which takes our new hires and distribution partners through a full week of DIRT education, our sales training programs, and our client relationship development are all parts of our commercial efforts that will benefit substantially from the return to in-person interactions. I believe this return is coming, although the transition will be choppy. I remain confident in our ability to achieve the financial targets we set out, and we expect to reevaluate the timing required to attain them as we gain clarity on the resolution of the pandemic. I'll now turn it over to Jeff to review the financials.