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spk11: Thank you for standing by. This is the conference operator. Welcome to DIRT Environmental Solutions 4th Quarter 2022 Financial Results Conference Call. As a reminder, all participants are in a listen-only mode and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. To join the question queue, you may press the star 1 1 on your telephone keypad. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 again. I would now like to turn the call over to Shauna Mason, Director of Corporate Affairs.
spk10: Thank you, Operator, and good morning, everyone. Welcome to today's call to discuss DIRT's fourth quarter 2022 results. Joining me on the call today are Benjamin Urban, DIRT's CEO, and Brad Little, CFO. Today's prepared remarks are accompanied by presentation slides. To access the slides, please view them from the webpage of this webcast or on our website at DIRT.com. Today's call will include forward-looking statements within the meaning of applicable Canadian and United States securities laws. These statements are based on the company's current intent, expectations, and projections. They are not guarantees of future performance. In addition, this call will reference non-GAAP results, excluding special items. Please reference our Form 10-K as filed on February 22, 2023, 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 tomorrow. I now turn the call over to Benjamin.
spk03: Thank you, Shauna, and good morning, everyone. It is my pleasure to be joining you today and to share the highlights of a very productive fourth quarter, closing out a challenging 2022, a year of turnover, market volatility, and disruption. It has been a particularly challenging year for our people, our partners, and our key stakeholders. On behalf of my entire leadership team, I want to personally thank all of you for continuing to support us through this year of great change and transition. Before I talk about the fourth quarter, I want to reflect on some of the critical observations I've made over my first two full quarters with the company. First, over the years, it is clear that we had gotten away from the emphasis we have historically placed on innovation and the importance it has played in the success of DIRT. Innovation is very much a participation sport, and we are getting back to a place where our customers and construction partners play an active role in our innovation of the solutions our ecosystem relies on. Second, if I look back at the key decisions that have been made over the past several years, The ones that have been most successful are the decisions that were made in the spirit with which dirt was created. Dirt was created in the spirit of adaptability, flexibility, customization, and removing risk from construction. We continue to provide solutions that support a rapidly changing workplace, a changing healthcare and education landscape. No one knows what the future holds, but we pride ourselves in supporting our end users through whatever comes their way. In retrospect, Some of the decisions made were not in service to this core principle, and we learned a tough lesson from that. And we will apply those lessons learned to future decisions and strategy. Lastly, maybe my greatest observation is the resiliency of our people. They have remained patient and loyal to DIRT and our founding vision through so many changes and challenges. Our people are our most valuable resource and are the single biggest reason we will be successful as we continue to improve for years to come. Turning to our fourth quarter performance, the improvements we made in the business earlier during 2022 paid off and improved financial results during the quarter. On our last call, we indicated that we had line of sight to cash flow and adjusted EBITDA break-even during the fourth quarter. And that is exactly what happened. As Brad will outline, we achieved positive adjusted EBITDA and an increase in cash flow from operations during a quarter for the first time since 2020. We continued our world-class safety record with zero recordable incidents during the fourth quarter, finishing the year with a total reportable incident frequency rate of 0.1. This equates to about one recordable incident every 2 million working hours. I've been amazed at the commitment from everyone in the organization around keeping our team members safe. On the commercial side of the business, We have added new construction partners and are further expanding and refining both our sales channels and go-to-market strategy. We continue to see adoption of our solutions within some of the most prestigious and recognizable companies like Visa, Google, and Frost Bank of Texas, among many others. We are gaining strategic advantages through collaboration with our construction partners in both innovation and efficiency, and this is resulting in a healthier sales pipeline. We see great opportunity for growth in 2023 and beyond, and we are channeling resources directly at our commercial organization in order to do that. We are operating with a high sense of urgency and recognize that time is of the essence. It is that vein that we have announced certain staffing changes and realigned responsibilities in order to maximize efficiency and direct communication to our people, construction partners, and end customers. I am personally leveraging my experience and will be taking on an even more active role in our commercial organization to help drive top line growth. I have also been actively involved with our partner success team as we continue to bolster that group with successful DIRT veterans that also know our business intimately. From an operations standpoint, Our team members in both Calgary and Savannah are hard at work improving production efficiencies and quality while mitigating against rising supply chain costs and overtime rates during the fourth quarter. Our improved gross margin is as much about their performance as it is from the pricing actions taking over the past year. While we have not restarted operations at Rockhill, We continue to maintain that facility and are actively monitoring demand levels in 2023 and 2024. We believe that this facility supports a critical aspect of future expansion and growth. We remain committed to our sustainability journey and our ESG commitments. We strive to build a better world, both through our products and by leveraging our solutions to help our customers achieve their sustainability commitments. We know that our proactive and transparent approach to establishing, measuring, and reporting on ESG factors impacts our bottom line. This year, as we publish our third annual ESG report, we celebrate our second IR Magazine nomination for the best ESG reporting by a small cap award. I would like to emphasize that we are never satisfied with our performance, be it safety, optimization, or profitability. With a full quarter to measure and observe the effects of our changes made in Q3, it has aided in further illuminating areas for additional refinement or alternatively required investment. Some of these changes have already been implemented at the beginning of Q1 2023 as we continue to move with precision and haste in tight alignment with our Board of Directors. The continued increase in the understanding of underlying factors that drive our costs efficiency, and pipeline further direct our investment and resources. Even with reaching positive adjusted EBITDA and operating cash flow in the quarter, we continue to be relentless with strategic initiatives to further improve our balance sheet as well as provide additional investment for growth. More so than financial results, our performance is continuing to build increased trust and credibility with our construction partners, customers, and employees. This renewed stability provides us with a solid operating platform for 2023 to both drive organic growth and implement our planned strategic initiatives. I am excited about the future of DIRT and the opportunities in front of us. I'll now turn it over to Brad to discuss our financial results in greater detail. Thank you, Benjamin, and good morning all. As is customary, we have issued a press release discussing our fourth quarter results and have provided additional analysis in a supplemental presentation, which is now posted on our website. My comments this morning are designed to add additional color on our financial results for the quarter and update you on the progress of the various liquidity initiatives we discussed last quarter. Revenues for the fourth quarter were $42.4 million, in line with prior years. As expected, revenue during the fourth quarter reflects virtually all of the price increases we have implemented over the previous 15 months. Revenue declined 9% compared to the third quarter of 2022, driven by a reduction in volume, offset by favorable impact from pricing. The volume decrease is primarily the result of a normal seasonal pattern with shipments and order pace slowing around the major holidays in the U.S. and Canada in the last two weeks of the fiscal year. This impact was muted during 2021 due to price increases announced early in the fourth quarter of 2021, which motivated our customers to accelerate delivery of materials to avoid the increases. Turning to gross profit, we continue to see meaningful expansion in gross profit margin. Compared to the fourth quarter of 2021, gross profit margin increased 770 basis points from 19.6% to 27.3% in the fourth quarter of 2022. Similarly, adjusted gross profit margin, which excludes the impact of depreciation, increased 670 basis points from 25.3% in the fourth quarter of 2021 to 32% in the fourth quarter of 2022. Compared to the third quarter of 2022, gross profit margin increased 1,232 basis points from 15% to 27.3% in the fourth quarter of 2022. Adjusted gross profit margin increased from 21.7% in the third quarter to 32% in the fourth quarter of 2022. The improved margin is due to the realization of the price increases just discussed and cost reduction initiatives executed during the second and third quarters. Additionally, we are continuing to see sequential quarter improvement in manufacturing efficiencies despite lower volumes during the fourth quarter of 2022. Regarding operating expenses, We saw, again, decreases across all of our normal back office operating expense line items, mostly from the cost reduction initiatives implemented throughout 2022, but also due to more disciplined discretionary spending. From January 2022 through January 2023, the company has reduced production overhead and G&A headcount by 111, or 20%. As Benjamin mentioned previously, we achieved adjusted EBITDA for the first time since the third quarter of 2022. Adjusted EBITDA for the fourth quarter improved to $600,000 from a $9.7 million loss in the period of 2021 and a loss of $5.4 million during the third quarter of 2022, despite approximately 15% lower volumes in both comparable periods. The improved profitability has been driven by the reduction in operating expenses and improvements in gross profit margin just described, all while still delivering at our historical short lead times. You can find further detail on these as well as other financial information in our supplemental presentation, which again is published on our website. Turning to liquidity, when I came on board, I indicated there was no larger priority than strengthening our balance sheet through improved financial results and implementing a number of strategic initiatives to drive improved cash flow. We finished the year with $10.8 million in unrestricted cash, up $4 million from $6.8 at September 30, 2022. Cash provided from operations for the fourth quarter was $3.2 million compared to cash consumed by operations of $10.7 million during the third quarter of 2022 and $7.3 million in cash consumed by operations during the fourth quarter of 2021. This marks the first time we have delivered sequential quarter improvement in cash flow from operations since the third quarter of 2020. The improvement from September 2022 was driven by a combination of improved profitability, the cash proceeds from the private placement offering announced in November, and increased rigor around our working capital management program. Liquidity, which includes our availability under our AVL credit facility with $16.1 million at December 2022, up $300,000 or 2% from September 30, 2022. The improved cash and liquidity at December 31, 2022 is particularly important as we shift into a seasonal period with increased cash and working capital requirements. Networking capital at the end of the quarter was $26.1 million or even with September 2022. Availability under our ABL facility was $5.3 million at the end of the quarter. We did not need to draw on that facility in the fourth quarter and have not had to thus far in the first quarter of 2023. Also of note, earlier in the month, we completed an extension of this facility through February 2024 with similar terms, giving us flexibility as we expect to invest in working capital as volumes and revenues improve. Availability under this facility is expected to range between $5 and $15 million during 2023. I also wanted to update you on the cash initiatives I discussed with you during our third quarter call. First, during the fourth quarter, we implemented certain customer-friendly incentives for those customers in good standing, including the ability to take advantage of modest discounts for early payment of receivables. This program contributed an incremental $2 million in cash to our fourth quarter, while only impacting revenue by approximately $50,000. During the third quarter of 2022, we recognized a tax receivable of $7.1 million associated with the Employee Retention Tax Credit Program in the United States. This remains accrued at December 31st, and we expect to receive this in 2023. We are continuing to evaluate certain company-owned properties from a sell, leaseback, or sublease standpoint. We made meaningful progress on two such properties to date and expect to have resolution on one or both of them as early as March. As a reminder, we do not intend to vacate these premises as they still serve a critical aspect of our value proposition. Lastly, we are continuing to evaluate multiple strategic initiatives to advance DIRT's long-term vision around the ICE platform. We have also made progress on this initiative during the fourth quarter and expect our evaluation to be completed within the next 90 days. Collectively, we expect these initiatives to generate meaningful cash flow during 2023 as early as the second quarter. Turning to 2023. Our 12-month forward sales pipeline at January 1, 2023 was $391 million, compared to $311 million at January 1, 2022, or about 26% higher driven by a combination of price and expected volume. In particular, we have seen year-over-year growth in projects at higher stages in the sales cycle, increasing the likelihood of ordering during the year. While we are encouraged by the pipeline growth, our order pace and quarterly revenue and supply chain forecasting continues to be challenged by high push-out rates and longer than normal engineering and design time associated with large and complex projects. We are closely monitoring our cost structure, including the underlying materials that comprise our products. Although we are somewhat insulated from the near-term effects from a potential recession in the United States or Canada, As our pipeline is largely comprised of projects that have already started, we are susceptible to the inflationary impact of labor and commodity pricing, particularly aluminum and wood. In response to the risk associated with these items, we have taken additional actions over the past two months that will reduce our annualized overhead costs by $3 to $5 million. These cost reductions were related to efficiencies in streamlining our back office and operational support functions, not pursuant to a planned restructuring program. We are also evaluating certain instruments that will hedge against inflation and volatility associated with our primary materials. We believe that the combination of growth in our sales pipeline, the improved margins from pricing actions already taken, and the reduced cost structure will set us up well to deliver year-over-year growth in revenue, gross margin, and adjusted EBITDA during 2023. And now we'll open the call for your questions. Operator?
spk11: As a reminder, to ask a question, please press star 1-1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1-1 again. Please stand by while we compile the Q&A roster. And our first question is from Greg Palm with Craig Halem. Your line is open.
spk13: Yeah, thanks. Morning, everyone. Congrats on the results. Quite a long time since we've been talking about a profitable quarter. So kudos to you guys.
spk05: Thanks, Greg.
spk13: Thank you, Greg. Yeah, my first question is just, you know, around that. I mean, you achieved EBITDA profitability on a much lower revenue run rate than what I was expecting. So I guess, do you think that this level of revenue is, you know, now a better approximation of a break-even point? I'm just trying to get a sense on how you're thinking about sustaining profitability this year and going forward.
spk03: Well, I'll start and then let Benjamin pick in. No, the level of revenue here is certainly not what we're looking for. I think this was an inflection point where we've been able to implement the price increases and we're starting to see the efficiencies in our operations, our supply chain, and our pricing and discounting structure. You know, our pipeline, you know, year over year has gone up 26%, and it's the mix within the pipeline has a higher mix of products and projects that are further along in the cycle. So we do see, you know, we see growth in 2023, but for the, you know, we don't see cost going up commensurate with the revenue generation. Yeah, sure, Greg. Yeah, to add further to Brad's comments, I think it's very representative of what the opportunity is there for us that if we can break even at these revenue numbers, that means that as we continue to increase conversion rates and organically add growth to the pipeline, the ability to handle that additional capacity isn't around retooling, it's more around adding additional shifts and whatnot to satisfy that. To Brad's point, the increased pipeline over last year and then anything organic on top of that is what we're expecting.
spk13: Got it. So, I mean, just to be clear, if you're expecting a little bit of a revenue bump in this year relative to what you just reported in Q4, there's no reason why you shouldn't see sort of a similar bump in EBITDA relative to what the levels you just reported. Just want to make sure that that's clear.
spk03: Yeah, that's right. And I think the larger issue is the leverage from our cost structure that we've taken out. I think as volumes improve and clearly from a pricing and revenue standpoint, we feel very confident in our pricing. you will start to see better leverage of our fixed cost structure without, you know, meaningful investment in that structure as revenues increase.
spk13: Yeah. Okay. Makes sense. I mean, just, you know, big picture, you alluded to the pipeline, pretty solid growth year over year. I don't know, maybe just touch on the value proposition of your solution in today's world. I mean, it feels like to me, there's some I don't know, new tailwinds that are emerging or at least getting stronger, you know, in this sort of post-COVID, post-supply chain mess of a world. I mean, do you have any thoughts, maybe just a little bit more on kind of the makeup of the pipeline and some of the drivers behind that?
spk03: Yeah, sure, Greg. You're absolutely right. I think if you unpack that two ways, one is the diversification of the pipeline where we're seeing year-over-year growth from different verticals, be it commercial, not just commercial, but in healthcare as as well as government and education, those help bolster the pipeline over the next 12 to 18 months. But additionally to that, and your comment around some kind of higher level discussion on post-COVID, if you will, every value proposition that DIRT provides is in direct support of de-risking everything that we do, be it price certainty, be it lead times, be it, you know, ability to change. And I think that's probably the biggest thing that has been embraced out of all of the values that there are. Circling dirt is the unknown, right? So being able to basically plan for not knowing what's coming and using dirt to do that, you know, before the pandemic, it wasn't painful enough with general construction. We've come full circle, and now the value that's there is much more amplified.
spk13: Do you have evidence that some of the pipeline activity is directly attributable to stuff like that? I don't know if you've got any description of what's in the pipeline. Is it mostly customers you work with before, or is it new customers that are looking at really how they – sort of change how they procure this stuff in a post-COVID world?
spk03: Yeah, Greg, I think it's twofold. One is return repeat customers clearly that understand the value of dirt, and so they continue to utilize this as a construction solution. And that tends to be many times some of the larger customers that we have national accounts with that we tend to depend on. But further to that, I'd say what's interesting within the pipeline is the conversion from companies that may have maybe only looked at us for acoustic reasons or aesthetic and maybe not the full solution that dirt provides now entertaining or investing in okay we understand now that we've lived through having to reconfigure or uncertainty we're going to invest more with dirt and essentially those projects that may have been you know Just speaking rhetorically, 100 grand in product are now 200 grand because they have a full solution associated with them with our solid partitions, modular power, raised flooring, et cetera.
spk13: Interesting. Okay. Maybe I'll ask a couple more. I know it's maybe too early to talk about long-term targets, but I'm going to try anyways. Do you just have any thoughts around long-term aspirational goals, whether that's revenue growth, earnings power? Just give us some idea on how you're thinking about the trajectory of this business over the next three, four, five years.
spk03: Yeah, Benjamin, do you want to start kind of on the aspirational? And I can layer in a financial overture as to what that would mean from a profitability standpoint. Yeah, great. Yeah, great. From a longer-term perspective, you know, we – We touched on it a little bit at the beginning of the call, but some of the redirection of resources that we're applying towards growth really around the commercial organization. You know, we've got a good handle on the operational side. We're back to regular lead times. Clearly, we've got sufficient capacity and we can satisfy the demand that's coming in. Strategically, from long-term growth in how do we increase conversion rates within the pipeline? How do we add top line growth? You know, I touched on how do we increase scope on those projects that we have? You know, a lot of that is things that we can affect internally. But also, I'd say that, you know, we've proven that we've been at 300 million before, right? And so year over year growth, not saying we're going to be there that fast. But we do have by adding and diversifying our construction partners in markets which were under serviced previously. That applied with strategic channels for additional top line revenue growth that had previously not been entertained is also opening up some windows to revenue that we in the past weren't able to actually even participate in. So if you layer those two on top of each other where you have some standard growth just through the base distribution construction partner model and then layer on some additional revenue channels to us, those two things alone will help us with that long-term growth that's sustainable to also assist on the manufacturing capacity side. What I would say is in the first six months of being at the company alongside Benjamin, being blessed with a really strong finance team has really helped me get out onto the road. We've been engaging with customers and end users and partners at a very deep level. It's really clear that it's very important that we rebuild the trust with our partners, our people, and our key stakeholders and as we return to levels of revenue generation that we've demonstrated previously, it's really imperative that we're doing what we say we're going to do. We're reconnecting, better understanding the partner community and the opportunities there. The structure now that we have in place, both from a pricing, a supply chain, and our cost structure standpoint, we can return to levels of revenue previously generated while delivering, you know, gross margins in the, you know, higher than 40% range, simply from the leverage from the cost structure and then the indirect overhead and production overhead. EBITDA margins of 15 to 20% are certainly, we are capable of delivering those once we get our volume levels to the optimal level. Hey, Greg, one thing. Okay, thanks. Yeah, I wanted to add one more thing to that question. The other thing that we've seen is increased adoption of our technology platform so that the ICE software is continuing to prove to be a valuable part of our actual portfolio as well as our value proposition with other manufacturers interested in it.
spk13: Yeah, okay. Appreciate all that color. I guess last one, more of a housekeeping question, but can you just give us any update on the litigation with Falk?
spk03: Yeah, sure. I'll take that one. So, as you know, we filed a summary judgment application last year. In November, Falkville filed a duplicative lawsuit. The court struck it, finding it to be a general abuse of the process. Earlier this month, the court dismissed an application by Falkville to strike our summary judgment applications. in order for them to submit to cross-examination, which we are in the process of performing, making good progress there. The court has, you know, directed that a hearing for the summary judgment application will be scheduled in the Justice Chambers at the first available hearing dates after June 15th of this summer, or this year. And we believe we've tendered strong evidence supporting our claims and then we'll be, we're optimistic that the summary judgment application will succeed.
spk13: Got it. Well, I think I'm probably over my allotment, so I will leave it there. Best of luck going forward. Thanks.
spk06: Thanks a lot, Greg. Thanks, Greg.
spk11: Thank you. I would now like to turn the conference back to Benjamin Urban for closing remarks.
spk03: Thank you. I'd like to thank all of you for joining us today. On behalf of our more than 900 person team, we are committed to continuing to move this organization forward and believe strongly that our best days are ahead of us. We look forward to talking with you again, either on the road or at our next quarterly earnings call. Thank you.
spk11: And this concludes today's conference call. Thank you for participating. You may now disconnect.
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spk11: Thank you for standing by. This is the conference operator. Welcome to DIRT Environmental Solutions fourth quarter 2022 financial results conference call. As a reminder, all participants are in a listen-only mode and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. To join the question queue, you may press the star 1-1 on your telephone keypad. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 1-1 again. I would now like to turn the call over to Shauna Mason, Director of Corporate Affairs.
spk10: Thank you, Operator, and good morning, everyone. Welcome to today's call to discuss DIRT's fourth quarter 2022 results. Joining me on the call today are Benjamin Urban, DIRT's CEO, and Brad Little, CFO. Today's prepared remarks are accompanied by presentation slides. To access the slides, please view them from the webpage of this webcast or on our website at DIRT.com. Today's call will include forward-looking statements within the meaning of applicable Canadian and United States securities laws. These statements are based on the company's current intent, expectations, and projections. They are not guarantees of future performance. In addition, this call will reference non-GAAP results, excluding special items. Please reference our Form 10-K as filed on February 22, 2023. 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 tomorrow. I now turn the call over to Benjamin.
spk03: Thank you, Shawna, and good morning, everyone. It is my pleasure to be joining you today and to share the highlights of a very productive fourth quarter, closing out a challenging 2022. A year of turnover, market volatility, and disruption. It has been a particularly challenging year for our people, our partners, and our key stakeholders. On behalf of my entire leadership team, I want to personally thank all of you for continuing to support us through this year of great change and transition. Before I talk about the fourth quarter, I want to reflect on some of the critical observations I've made over my first two full quarters with the company. First, over the years, it is clear that we had gotten away from the emphasis we have historically placed on innovation and the importance it has played in the success of DIRT. Innovation is very much a participation sport, and we are getting back to a place where our customers and construction partners play an active role in our innovation of the solutions our ecosystem relies on. Second, if I look back at the key decisions that have been made over the past several years, the ones that have been most successful are the decisions that were made in the spirit with which DIRT was created. DIRT was created in the spirit of adaptability, flexibility, customization, and removing risk from construction. We continue to provide solutions that support a rapidly changing workplace, a changing healthcare and education landscape. No one knows what the future holds, but we pride ourselves in supporting our end users through whatever comes their way. In retrospect, some of the decisions made were not in service to this core principle, and we learned a tough lesson from that. And we will apply those lessons learned to future decisions and strategy. Lastly, maybe my greatest observation is the resiliency of our people. They have remained patient and loyal to DIRT and our founding vision through so many changes and challenges. Our people are our most valuable resource and are the single biggest reason we will be successful as we continue to improve for years to come. Turning to our fourth quarter performance, the improvements we made in the business earlier during 2022 paid off and improved financial results during the quarter. On our last call, we indicated that we had line of sight to cash flow and adjusted EBITDA break-even during the fourth quarter. And that is exactly what happened. As Brad will outline, We achieved positive adjusted EBITDA and an increase in cash flow from operations during a quarter for the first time since 2020. We continued our world-class safety record with zero recordable incidents during the fourth quarter, finishing the year with a total reportable incident frequency rate of 0.1. This equates to about one recordable incident every 2 million working hours. I've been amazed at the commitment from everyone in the organization around keeping our team members safe. On the commercial side of the business, we have added new construction partners and are further expanding and refining both our sales channels and go-to-market strategy. We continue to see adoption of our solutions within some of the most prestigious and recognizable companies like Visa, Google, and Frost Bank of Texas, among many others. We are gaining strategic advantages through collaboration with our construction partners in both innovation and efficiency, and this is resulting in a healthier sales pipeline. We see great opportunity for growth in 2023 and beyond, and we are channeling resources directly at our commercial organization in order to do that. We are operating with a high sense of urgency and recognize that time is of the essence. It is that vein that we have announced certain staffing changes and realigned responsibilities in order to maximize efficiency and direct communication to our people, construction partners, and end customers. I am personally leveraging my experience and will be taking on an even more active role in our commercial organization to help drive top-line growth. I have also been actively involved with our partner success team as we continue to bolster that group with successful DIRT veterans that also know our business intimately. From an operations standpoint, our team members in both Calgary and Savannah are hard at work improving production efficiencies and quality while mitigating against rising supply chain costs and overtime rates during the fourth quarter. Our improved gross margin is as much about their performance as it is from the pricing actions taken over the past year. While we have not restarted operations at Rockhill, We continue to maintain that facility and are actively monitoring demand levels in 2023 and 2024. We believe that this facility supports a critical aspect of future expansion and growth. We remain committed to our sustainability journey and our ESG commitments. We strive to build a better world, both through our products and by leveraging our solutions to help our customers achieve their sustainability commitments. We know that our proactive and transparent approach to establishing, measuring, and reporting on ESG factors impacts our bottom line. This year, as we publish our third annual ESG report, we celebrate our second IR Magazine nomination for the Best ESG Reporting by a Small Cap Award. I would like to emphasize that we are never satisfied with our performance, be it safety, optimization, or profitability. With a full quarter to measure and observe the effects of our changes made in Q3, it has aided in further illuminating areas for additional refinement or alternatively required investment. Some of these changes have already been implemented at the beginning of Q1 2023 as we continue to move with precision and haste in tight alignment with our board of directors. The continued increase in the understanding of underlying factors that drive our cost efficiency, and pipeline further direct our investment in resources. Even with reaching positive adjusted EBITDA and operating cash flow in the quarter, we continue to be relentless with strategic initiatives to further improve our balance sheet as well as provide additional investment for growth. More so than financial results, our performance is continuing to build increased trust and credibility with our construction partners, customers, and employees. This renewed stability provides us with a solid operating platform for 2023 to both drive organic growth and implement our planned strategic initiatives. I am excited about the future of DIRT and the opportunities in front of us. I'll now turn it over to Brad to discuss our financial results in greater detail. Thank you, Benjamin, and good morning, all. As is customary, we have issued a press release discussing our fourth quarter results and have provided additional analysis in a supplemental presentation, which is now posted on our website. My comments this morning are designed to add additional color on our financial results for the quarter and update you on the progress of the various liquidity initiatives we discussed last quarter. Revenues for the fourth quarter were $42.4 million, in line with prior years. As expected, revenue during the fourth quarter reflects virtually all of the price increases we have implemented over the previous 15 months. Revenue declined 9% compared to the third quarter of 2022, driven by a reduction in volume, offset by favorable impact from pricing. The volume decrease is primarily the result of a normal seasonal pattern with shipments and order pace slowing around the major holidays in the U.S. and Canada in the last two weeks of the fiscal year. This impact was muted during 2021 due to price increases announced early in the fourth quarter of 2021, which motivated our customers to accelerate delivery of materials to avoid the increases. Turning to gross profit, we continue to see meaningful expansion in gross profit margin. Compared to the fourth quarter of 2021, gross profit margin increased 770 basis points from 19.6% to 27.3% in the fourth quarter of 2022. Similarly, adjusted gross profit margin, which excludes the impact of depreciation, increased 670 basis points from 25.3% in the fourth quarter of 2021 to 32% in the fourth quarter of 2022. Compared to the third quarter of 2022, gross profit margin increased 1,232 basis points from 15% to 27.3% in the fourth quarter of 2022. Adjusted gross profit margin increased from 21.7% in the third quarter to 32% in the fourth quarter of 2022. The improved margin is due to the realization of the price increases just discussed and cost reduction initiatives executed during the second and third quarters. Additionally, we are continuing to see sequential quarter improvement in manufacturing efficiencies despite lower volumes during the fourth quarter of 2022. Regarding operating expenses, We saw, again, decreases across all of our normal back office operating expense line items, mostly from the cost reduction initiatives implemented throughout 2022, but also due to more disciplined discretionary spending. From January 2022 through January 2023, the company has reduced production overhead and G&A headcount by 111, or 20%. As Benjamin mentioned previously, we achieved adjusted EBITDA for the first time since the third quarter of 2022. Adjusted EBITDA for the fourth quarter improved to $600,000 from a $9.7 million loss in the period of 2021 and a loss of $5.4 million during the third quarter of 2022, despite approximately 15% lower volumes in both comparable periods. The improved profitability has been driven by the reduction in operating expenses and improvements in gross profit margin just described, all while still delivering at our historical short lead times. You can find further detail on these as well as other financial information in our supplemental presentation, which again is published on our website. Turning to liquidity, when I came on board, I indicated there was no larger priority than strengthening our balance sheet through improved financial results and implementing a number of strategic initiatives to drive improved cash flow. We finished the year with $10.8 million in unrestricted cash, up $4 million from $6.8 at September 30, 2022. Cash provided from operations for the fourth quarter was $3.2 million compared to cash consumed by operations of $10.7 million during the third quarter of 2022 and $7.3 million in cash consumed by operations during the fourth quarter of 2021. This marks the first time we have delivered sequential quarter improvement in cash flow from operations since the third quarter of 2020. The improvement from September 2022 was driven by a combination of improved profitability, the cash proceeds from the private placement offering announced in November, and increased rigor around our working capital management program. Liquidity, which includes our availability under our ABL credit facility, was $16.1 million at December 2022, up $300,000, or 2%, from September 30, 2022. The improved cash and liquidity at December 31, 2022 is particularly important as we shift into a seasonal period with increased cash and working capital requirements. Networking capital at the end of the quarter was $26.1 million or even with September 2022. Availability under our ABL facility was $5.3 million at the end of the quarter. We did not need to draw on that facility in the fourth quarter and have not had to thus far in the first quarter of 2023. Also of note, earlier in the month, we completed an extension of this facility through February 2024 with similar terms, giving us flexibility as we expect to invest in working capital as volumes and revenues improve. Availability under this facility is expected to range between $5 and $15 million during 2023. I also wanted to update you on the cash initiatives I discussed with you during our third quarter call. First, during the fourth quarter, we implemented certain customer-friendly incentives for those customers in good standing, including the ability to take advantage of modest discounts for early payment of receivables. This program contributed an incremental $2 million in cash to our fourth quarter, while only impacting revenue by approximately $50,000. During the third quarter of 2022, we recognized a tax receivable of $7.1 million associated with the Employee Retention Tax Credit Program in the United States. This remains accrued at December 31st, and we expect to receive this in 2023. We are continuing to evaluate certain company-owned properties from a sell, leaseback, or sublease standpoint. We made meaningful progress on two such properties to date and expect to have resolution on one or both of them as early as March. As a reminder, we do not intend to vacate these premises as they still serve a critical aspect of our value proposition. Lastly, we are continuing to evaluate multiple strategic initiatives to advance DIRT's long-term vision around the ICE platform. We have also made progress on this initiative during the fourth quarter and expect our evaluation to be completed within the next 90 days. Collectively, we expect these initiatives to generate meaningful cash flow during 2023 as early as the second quarter. Turning to 2023, Our 12-month forward sales pipeline at January 1, 2023 was $391 million, compared to $311 million at January 1, 2022, or about 26% higher, driven by a combination of price and expected volume. In particular, we have seen year-over-year growth in projects at higher stages in the sales cycle, increasing the likelihood of ordering during the year. While we are encouraged by the pipeline growth, our order pace and quarterly revenue and supply chain forecasting continues to be challenged by high push-out rates and longer than normal engineering and design time associated with large and complex projects. We are closely monitoring our cost structure, including the underlying materials that comprise our products. Although we are somewhat insulated from the near-term effects from a potential recession in the United States or Canada, As our pipeline is largely comprised of projects that have already started, we are susceptible to the inflationary impact of labor and commodity pricing, particularly aluminum and wood. In response to the risk associated with these items, we have taken additional actions over the past two months that will reduce our annualized overhead costs by $3 to $5 million. These cost reductions were related to efficiencies in streamlining our back office and operational support functions, not pursuant to a planned restructuring program. We are also evaluating certain instruments that will hedge against inflation and volatility associated with our primary materials. We believe that the combination of growth in our sales pipeline, the improved margins from pricing actions already taken, and the reduced cost structure will set us up well to deliver year-over-year growth in revenue, gross margin, and adjusted EBITDA during 2023. And now we'll open the call for your questions. Operator?
spk11: As a reminder, to ask a question, please press star 1-1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1-1 again. Please stand by while we compile the Q&A roster. And our first question is from Greg Palm with Craig Halem. Your line is open.
spk13: Yeah, thanks. Morning, everyone. Congrats on the results. Quite a long time since we've been talking about a profitable quarter. So kudos to you guys.
spk05: Thanks, Greg.
spk13: Thank you, Greg. Yeah, my first question is just, you know, around that. I mean, you achieve EBITDA profitability on a much lower revenue run rate than what I was expecting. So I guess, do you think that this level of revenue is, you know, now a better approximation of a break-even point? I'm just trying to get a sense on how you're thinking about sustaining profitability this year and going forward.
spk03: Well, I'll start and then let Benjamin pick in. No, the level of revenue here is certainly not what we're looking for. I think this was an inflection point where we've been able to implement the price increases and we're starting to see the efficiencies in our operations, our supply chain, and our pricing and discounting structure. You know, our pipeline, you know, year over year has gone up 26%, and it's the mix within the pipeline has a higher mix of products and projects that are further along in the cycle. So we do think, you know, we see growth in 2023, but for the, you know, we don't see cost going up commensurate with the revenue generation. Yeah, sure, Greg. Yeah, to add further to Brad's comments, I think it's very representative of what the opportunity is there for us that if we can break even at these revenue numbers, that means that as we continue to increase conversion rates and organically add growth to the pipeline, the ability to handle that additional capacity isn't around retooling, it's more around adding additional shifts and whatnot to satisfy that. To Brad's point, the increased pipeline over last year, and then anything organic on top of that is what we're expecting.
spk13: Got it. So, I mean, just to be clear, you know, if you're expecting, you know, a little bit of a revenue bump in this year relative to what you just reported in Q4, there's no reason why you shouldn't see sort of a similar bump in EBITDA relative to what the levels you just reported. Just want to make sure that that's clear.
spk03: Yeah, that's right. And I think, you know, the larger issue is the leverage from our, you know, our cost structure that we've taken out. I think as volumes improve and, you know, clearly from a pricing and revenue standpoint, we feel very confident, you know, in our pricing. you will start to see better leverage of our fixed cost structure without, you know, meaningful investment in that structure as revenues increase.
spk13: Yeah. Okay. Makes sense. I mean, just, you know, big picture, you alluded to the pipeline, pretty solid growth year over year. I don't know, maybe just touch on the value proposition of your solution in today's world. I mean, it feels like to me, there's some I don't know, new tailwinds that are emerging or at least getting stronger, you know, in this sort of post-COVID, post-supply chain mess of a world. I mean, do you have any thoughts, maybe just a little bit more on kind of the makeup of the pipeline and some of the drivers behind that?
spk03: Yeah, sure, Greg. You're absolutely right. I think if you unpack that two ways, one is the diversification of the pipeline where we're seeing year-over-year growth from different verticals, be it commercial, not just commercial, but in healthcare as as well as government and education, those help bolster the pipeline over the next 12 to 18 months. But additionally to that, and your comment around some kind of higher level discussion on post-COVID, if you will, every value proposition that DIRT provides is in direct support of de-risking everything that we do, be it price certainty, be it lead times, be it, you know, ability to change. And I think that's probably the biggest thing that has been embraced out of all of the values that there are. Circling dirt is the unknown, right? So being able to basically plan for not knowing what's coming and using dirt to do that, you know, before the pandemic, it wasn't painful enough with general constructions. We've come full circle, and now the value that's there is much more amplified.
spk13: Do you have evidence that some of the pipeline activity is directly attributable to stuff like that? I don't know if you've got any description of what's in the pipeline. Is it mostly customers you work with before, or is it new customers that are looking at really how they – sort of change how they procure this stuff in a post-COVID world?
spk03: Yeah, Greg, I think it's twofold. One is return and repeat customers clearly that understand the value of dirt, and so they continue to utilize this as a construction solution. And that tends to be many times some of the larger customers that we have national accounts with. that we kind of depend on. But further to that, I'd say what's interesting within the pipeline is the conversion from companies that may have maybe only looked at us for acoustic reasons or aesthetic and maybe not the full solution that DIRT provides, now entertaining or investing in, okay, we understand now that we've lived through having to reconfigure or uncertainty, we're going to invest more with DIRT And essentially, those projects that may have been, you know, just speaking rhetorically, 100 grand in product are now 200 grand because they have a full solution associated with them with our solid partitions, modular power, raised flooring, et cetera.
spk13: Interesting. Okay. Maybe I'll ask a couple more. You know, I know it's maybe too early to talk about long-term targets, but I'm going to try anyways. Do you just have any thoughts around long-term aspirational goals, whether that's revenue growth, earnings power? Just give us some idea on how you're thinking about the trajectory of this business over the next three, four, five years.
spk03: Yeah, Benjamin, do you want to start kind of on the aspirational? And I can layer in a financial overture as to what that would mean from a profitability standpoint. Yeah, great. Yeah, great. From a longer-term perspective, we have... we touched on it a little bit at the beginning of the call, but some of the redirection of resources that we're applying towards growth, um, really around the commercial organization. Um, you know, we've got a good handle on the operational side. We're back to regular lead times. Clearly we've got sufficient capacity and we can satisfy the demand of coming in strategically from longterm growth. And how do we, increase conversion rates within the pipeline? How do we add top line growth? You know, I touched on how do we increase scope on those projects that we have? You know, a lot of that is things that we can affect internally, but also I'd say that, you know, we've proven that we've been at 300 million before, right? And so year over year growth, not saying we're going to be there that fast, but we do have by adding and diversifying our construction partners in markets which were under serviced previously. That applied with strategic channels for additional top line revenue growth that had previously not been entertained is also opening up some windows to revenue that we in the past weren't able to actually even participate in. So if you layer those two on top of each other where you have some standard growth just through the base distribution construction partner model and then layer on some additional revenue channels to us, those two things alone will help us with that long-term growth that's sustainable to also assist on the manufacturing capacity side. Yeah, you know, and what I would say is in the first six months of being at the company alongside Benjamin, you know, being blessed with a really strong finance team has really helped me get out onto the road. So we've been engaging with customers and end users and partners at a very deep level. And it's really clear that, you know, it's very important that we rebuild the trust with our partners, our people and our key stakeholders and as we return to levels of revenue generation that we've demonstrated previously, it's really imperative that we're doing what we say we're going to do. We're reconnecting, better understanding the partner community and the opportunities there. The structure now that we have in place, both from a pricing, a supply chain, and our cost structure standpoint, we can return to levels of revenue previously generated while delivering gross margins in the higher than 40% range, simply from the leverage from the cost structure and then the indirect overhead and production overhead. EBITDA margins of 15% to 20% are certainly – we are capable of delivering those once we get our volume levels to the optimal level. Hey, Greg, one thing – Yeah, I wanted to add one more thing to that question. The other thing that we've seen is increased adoption of our technology platform so that the ICE software is continuing to prove to be a valuable part of our actual portfolio as well as our value proposition with other manufacturers interested in it.
spk13: Yeah, okay. Appreciate all that color. I guess last one, more of a housekeeping question, but can you just give us any update on the litigation with Falk?
spk03: Yeah, sure. I'll take that one. So, as you know, we filed a summary judgment application last year. In November, Falkville filed a duplicative lawsuit. The court struck it, finding it to be a general abuse of the process. Earlier this month, the court dismissed an application by Falkville to strike our summary judgment applications. in order for them to submit to cross-examination, which we are in the process of performing, making good progress there. The court has directed that a hearing for the summary judgment application will be scheduled in the Justice Chambers at the first available hearing dates after June 15th of this year. And we believe we've tendered strong evidence supporting our claims, and then we'll be we're optimistic that the summary judgment application will succeed.
spk13: Got it. Well, I think I'm probably over my allotment, so I will leave it there. Best of luck going forward. Thanks.
spk06: Thanks a lot, Greg. Thanks, Greg.
spk11: Thank you. I would now like to turn the conference back to Benjamin Urban for closing remarks.
spk03: Thank you. I'd like to thank all of you for joining us today. On behalf of our more than 900 person team, we are committed to continuing to move this organization forward and believe strongly that our best days are ahead of us. We look forward to talking with you again, either on the road or at our next quarterly earnings call. Thank you.
spk11: And this concludes today's conference call. Thank you for participating. You may now disconnect.
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