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spk01: 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.
spk02: 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.
spk06: 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.
spk05: Thanks, Kevin. As in previous calls, I'm going to start with a quick review of our liquidity on slide five. We finished the third quarter of 2021 with $43.3 million of unrestricted cash compared to $58.3 million at June 30th of this year and $45.8 million at December 31st, 2020. In the third quarter, we made $0.5 million of scheduled repayments on long-term debt. Cash used in operations was $12.3 million and capital expenditures were $2.2 million. Year-to-date capital expenditures total $12.3 million, and we anticipate approximately $1.7 million of additional spend in Q4. Equipment leasing facility draws of between $2 and $3 million that were expected to occur in the third quarter are now expected in the fourth quarter due to delays in timing of receipt of the associated equipment. With both our major Dallas DXC and Rock Hill facility projects completed, we are anticipating a significantly reduced capital program in 2022. of approximately $7 million, comprised of approximately $2.5 million related to refreshes of our DXCs and commercial systems, approximately $2.5 million of software development, and a further $2 million of manufacturing and other capital upgrades. Our working capital management focus continued in the third quarter with no reportable disruptions or delays in accounts receivable collections. Day sales outstanding, net of deposits, income taxes, and government subsidies receivable continued to run at under 30 days. Net working capital at September 30th was $52.8 million. This includes $43.3 million of cash, $2.8 million of restricted cash, as well as $1.5 million of Canadian emergency wage subsidy receivables and approximately $3.3 million of income tax refunds receivable. Despite the high cash usage, our current ratio was 2.5 times at the end of the third quarter. down slightly from 2.8 times at June 30, 2021, but still very healthy. Updating on government subsidies, in the third quarter, we qualified for $2.9 million through two Canadian government programs, the Canadian Emergency Wage Subsidy and the Canadian Emergency Rent Subsidy. From a cash perspective, as noted previously, $1.5 million was receivable at September 30, 2021. Both programs expired on October 23, 2021, and are being replaced with new, more targeted programs. While we will continue to evaluate our eligibility for the new programs, it is unclear at this time whether we will qualify or not. Even if we do qualify, the amount of the subsidy available would be substantially reduced from what we have previously received. For the purposes of our internal modeling and planning, we've assumed government subsidies ceased at October 23rd, 2021. Based on our current sales outlook for the remainder of 2021 and 2022, we believe we have sufficient liquidity for at least the next 12 months based on current cash reserves and available credit facilities. Turning now to the financials on slide six. Revenue for the third quarter was below our expectations, coming in at $34.1 million. As Kevin addressed in his earlier comments, we experienced an unexpected shift of projects from the back half of the third quarter into the fourth quarter of 2021 and 2022. This air pocket was driven by the Delta variant resurgence and upstream supply chain issues and the related impacts on construction activity. We experienced a bounce back in orders shipping in October and November, such that we anticipate fourth quarter 2021 revenues to be between $40 and $45 million. subject to any unforeseen impacts of the pandemic like we experienced in the third quarter. Turning to adjusted gross profit on slide seven, I would reiterate that it is exceedingly difficult for us to flex our manufacturing labor capacity down for short-term periods of low activity, as we saw in September, when low activity levels occur suddenly and unpredictably, followed by a sharp increase in activity levels in October. We have assembled a skilled workforce that we are maintaining to meet our very short lead times, which is a key component of our value proposition. While we can reduce headcount quickly, which we have done in the past, we balance that cost reduction with ensuring that we can flex back up quickly to meet increased demand. Attracting, hiring, and training new personnel takes time and is made more difficult by the increasing labor shortages in the US. However, during the third quarter, we were able to take advantage of our highly automated Rock Hill facility by optimizing our labor force, therefore gaining efficiency and reducing our manufacturing workforce by 5%. As we saw in the third quarter, the exact timing of future projects and delivery remains subject to change. Therefore, we are maintaining a base level of manufacturing capacity, both physical and labor, to remain responsive to the medium-term opportunity pipeline we are seeing despite the possibility of inter month volatility. This has and is expected to continue to negatively pressure gross margins. This is what we saw in the third quarter in the extreme with adjusted gross profit for the quarter of 4.8 million or 14% of revenue. Further impacting gross profit was an increase in the cost of materials, transportation and packaging. which negatively impacted gross profit margin by 10% in the quarter and 6% year-to-date relative to the same periods of 2020. As Kevin noted, these increased input costs prompted us to announce a price increase on our solutions, plus an adjustment to our freight charges, effective November 16, 2021, that largely offsets these input cost increases. Finally, the stronger Canadian dollar negatively impacted gross margin by approximately 0.5 million in the third quarter of 2021 compared to the third quarter of 2020. Looking at a breakdown of operating expenses on slide eight, sales and marketing expenses increased by 0.6 million over the same quarter last year, driven largely by increased salary and wage expenses as we continue to build our sales organization. A return as expected of travels meals and entertainment expenses as economies reopen and travel restrictions ease and higher depreciation expenses as we completed our Chicago DXC in 2020. General and administrative expenses increased by point 6 million over last year's quarter, reflecting the impact of the stronger Canadian dollar on our cost structure. Higher salaries and benefits expense and professional fees partially offset by decreased variable compensation expense. operation support and technology and development expenses remained consistent with the same period of 2020. Overall, we estimate that there was a $0.3 million impact of a stronger Canadian dollar on Canadian-based operating expenses in the quarter versus the same period in 2020. On slide 9, adjusted EBITDA and adjusted EBITDA margin for the quarter decreased to a $13.3 million loss or negative 39.1%. from 0.9 million or 1.8% in the same period of 2020. This was largely driven by a 13.4 million decrease in adjusted gross profit, as we have discussed, and more modestly by increased operating expenses. It is worth highlighting again that the unusually low activity level in September drove approximately 40% of the adjusted EBITDA loss for the quarter. Finally, on slide 10, net loss increased to 15.4 million or 18 cents net loss per share in the third quarter of 2021 from a net loss of 2.1 million or 2 cents per share for the 2020 quarter. The increased loss is primarily the result of a 13.8 million decrease in gross profit, a $1.6 million increase in operating expenses, a $1.6 million reduction of government subsidies, and a $.7 million increase in interest expense. These decreases were partially offset by a $3.3 million decrease in income tax expense and a $1 million reduction in foreign exchange losses. In summary, on slide 11, this quarter was more challenging than anticipated. And as Kevin discussed, the disruptive impact of the pandemic on non-residential construction activity has been substantial, impeding our ability to realize the 2023 financial targets within our original time frame. Despite the uncertain macro environment, we remain encouraged by the level of sales activity within our organization, the quality of engagement with our strategic accounts, and the commitment of our distribution partners. We remain committed to managing our liquidity through this uncertain period and capitalizing on the transformation of our commercial and operational functions as a pandemic recovery takes hold. Ultimately, this will enable us to pursue our long-term objectives of scaling our operations to profitably capture the substantial market opportunity we believe exists. Operator, we would like to now open the call for questions.
spk01: At this time, if you would like to ask a question, please press star 1 on your telephone keypad. Again, in order to ask a question, press star 1. We'll pause for just a moment to compile the Q&A roster. Your first question is from the line of Greg Palm with Craig Holland Capital
spk03: Hey guys, this is Danny on for Danny Eggertron for Greg today. Thanks for the questions. I'd like to start with maybe the elements of some of these push outs that you're seeing. I guess in some cases is dialogue still like constantly ongoing with these customers or is it something that now we're more than a year and a half since COVID started is our customers saying, yeah, we have no idea what's going on. We'll reach back out if anything changes, I guess. what do you see in there?
spk06: It's an ongoing dialogue and it's case by case. Uh, there's some projects where they do get put on the shelf and, um, they'll call us when they are, um, when they're ready to proceed. Others that are more in process, there's ongoing dialogue, um, day to day actively managing the job. So it just, it's, it's, the entire range of possibilities. And obviously what we're trying to do is stay as close to it as possible so we can react as soon as a job moves, either moving out or in some limited instances moving in.
spk03: Yep. Makes sense. I mean, it makes sense on the commercial side, all the pushouts. I guess, what are you seeing from some of the other end markets, maybe specifically, you know, like healthcare? I know previously, you know, you'd kind of mentioned travel trailer, COVID vaccination or COVID vaccination, uh, trailers, stuff like that. Um, maybe you would have thought that you'd still be seeing some of that. What do you see in there?
spk06: Um, so a lot of the issues on delays are not specific just to the, uh, to the commercial vertical. So supply chain labor goes across all the verticals. And so, so nobody is immune from that. Um, As we mentioned in the script, you do see a little bit where they're taking a pause and relooking at their delivery model. A lot of that's getting behind us, and they're starting to reengage on their projects and get things scheduled and on the board. And so I'm sorry, remind me your second part of your question.
spk03: Yeah, I guess just specifically as it pertains to health care.
spk06: Oh, the trailers, the trailers. Yep, yep. No, that really is an opportunity that has come and gone, and what we've seen generally is I think North America is largely getting, we have the boosters now, but getting somewhat saturated as it relates to initial vaccinations. The boosters will probably be spread out over a period of time, and it would benefit of hindsight. In North America, we had the delivery places in place to meet the demand, be it the drugstores, pharmacies, drive-up one-time clinics that have kind of largely gone away, as well as doctors' offices and now pediatricians' offices. So that was kind of a limited opportunity. I think there was less demand for the end service of taking a trailer into a rural area than we'd initially hoped.
spk03: Okay, that's helpful. Maybe just digging into your comments on October trends, obviously promising considering what you saw in September. How confident are you that what you saw in October is something that might be sustainable throughout the quarter, just given the monthly fluctuations and order trends?
spk05: It's Jeff here. I think one thing that's important to note is the air pocket that we saw in September moved projects by, in some cases, three to four weeks. So moved them over the reporting period. as opposed to driving them like six months out to a year. So I think that's a really important point to understand. We've seen our order entry was very strong in October, as we've talked about, and with our two-week lead times, we can see that same levels moving into November. Certainly, We remain subject to sort of what we saw in 3Q with delays caused by COVID, but so far we are encouraged with what we're seeing, which is why we gave the guidance that we did.
spk03: Great. Maybe just one last one on implementing the price. I know you initially wanted to not pass along those costs and try to gain some share, but I think it makes sense. sense, given the crazy inflationary pricing environment we're in? Maybe just dig more into the thought process there, if you could.
spk06: Well, as you may know, historically, that's not something DIRT has done. So we gave it an enormous amount of thought. I think it was a combination of extensive things in the marketplace and what the extent of the rejection might be combined with just pressures on costs. And it finally got to the point where When you balance the two, it just made sense to move forward with the price increase. We did something that we gave a significant amount of thought to more than we would have if in the ordinary course of business we adjusted prices. But at the end of the day, it just became clear that that's what we needed to do.
spk03: Got it. Makes sense. That's it for me. Thanks.
spk01: As a reminder, if you would like to ask a question, please press star 1 on your telephone keypad. Your next question is from the line of Rupert Meyer with National Bank.
spk04: Good morning. Hey, Rupert. You discussed a couple of jobs that you saw delays on. How many jobs did you have seen being delayed or postponed in this last quarter? Would it have been dozens and projects of all different sizes? And were they concentrated in any particular geographies?
spk06: projects are moving around all the time one way or another so I can't tell you that we track the number versus ones that actually get built when scheduled I think from the first time it goes into our internal systems until it actually gets built there's generally I suspect the percentage where it doesn't move is pretty slim pretty small but it's not it's not limited to any one vertical. There's no trend that you could point to that says, okay, it's in this one area or this one geography, and this is where we need to be concentrated on. I think that what we're coming into now, if you think about, say, a year ago where you had certain places were really locked down and other places were not quite so locked down so we could say, okay, Northern California or New York or what have you had many more shift outs and many more problems. We're not seeing that quite so much. It's more port delays are fairly universal, supply chain delays are fairly universal. That being said, it was much more substantial than it has been in the past. And so we've kind of gotten used to the moving around, but this time was much larger than it's been historically. Okay.
spk04: Okay, thank you. And discussions on the pipeline, I know you have a two-week lead time, which makes it difficult to forecast much beyond November. But you did mention a couple of strategic accounts with Project WINS in early 2022. I was wondering if you are able to look out a little bit further and maybe talk about the level of activity you see early in the new year, how that might compare to the sort of level of activity you might see forward by three months historically.
spk06: We feel good about the activity level and things have been fairly busy. We've used our new Dallas DXC to really drive increased interest in dirt. As clients are starting to think about how they're going to build adaptability is at the top of their mind. I've been in any number of client meetings where it was almost like they were selling us rather than us selling them at the beginning of the call. We continue to expand our roster of strategic accounts because we're finding people that want to engage with us and that pipeline is starting to build. And so we are encouraged by the activity levels that we are seeing in 2022.
spk04: And you had a mention of new hires amongst your distribution partners. How long does it take for those hires to translate into revenue? And maybe if you can give some color on how that might be impacting your activity levels.
spk06: It depends on the role and their background because we were highlighting all different roles. I think that a designer or somebody that's involved in project execution to the extent that it's a partner that is reacting to a building pipeline, you will see that immediately. If it's a sales rep that needs to be trained and is leveraging prior relationships but doesn't have a book of business, I think you're looking at probably, I mean, they'll start getting revenue, small projects within the first plus or minus six months. I think for them to really pay for themselves on a profit to the partner standpoint, I think you're probably looking at a plus or minus a year.
spk04: All right, thank you. And then finally on inflation and your price increases, can you talk about what you've seen on inflation and would you consider it to be transitory or permanent? And if you do get some drop in your costs, does that end up coming out of your price in the future? Maybe you can talk a little about that.
spk05: Yeah, it's Rupert Sheff here. So we saw, as we noted in the presentation, in the queue and the remarks. We saw a fairly substantial spike in the third quarter, driven largely by both the MDF and aluminum pricing. What we're seeing on aluminum, aluminum we have about a 40% exposure to the actual commodity price, and aluminum is about 30% of our direct material costs that we have. Whether that continues or not, looking at, if I just talk specifically aluminum, the LME pricing for aluminum has come off from its peak. I think it's down in November by about 20% from where it was at its peak in late September, October. I also think that the new tariff deal between the US and Europe probably will ease some of the demand on aluminum. But we'll have to see how that plays out. MDF, we haven't seen signs of it abating yet. It seems to have stabilized, but we haven't seen signs of it abating yet. The other part that we have seen is on the transportation side. As you know, the whole transportation arena has had extremely high levels of demand on it, which has impacted pricing. The other thing that's impacted pricing, quite frankly, is the packing materials that go along with it. Those packing material costs have come down because they're OSB and lumber costs. But given that we haven't increased in the past, I don't foresee that absentee substantial reduction in those costs. We would be reversing course.
spk04: Thank you. I'll leave it there.
spk01: This concludes the Q&A portion of today's call. I will now hand the call back over to Kevin for any closing remarks.
spk06: Thank you. As always, I would like to thank the extraordinary commitment and efforts of our employees and distribution partners. I continue to strongly believe that the path we are on, guided by our strategic plan and executed by the incredibly talented team we have at Dirk, will move our organization forward as we strengthen our brand and increase our market penetration. Thank you for joining us today.
spk01: This concludes today's call. Thank you for joining. You may now disconnect your lines.
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