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spk01: Thank you for standing by. This is the conference operator. Welcome to the DIRT Environmental Solutions Third Quarter 2023 Financial Results Conference Call. As a reminder, all participants are in listen-only mode, and the conference is being recorded. I would now like to turn the conference over to Shauna Mason, Director of Corporate Affairs. Please go ahead.
spk02: Thank you, operator, and good morning, everyone. Welcome to today's call to discuss DIRT's third quarter 2023 results. Joining me on the call today will be Benjamin Urban, CEO, and Faria Khan, CFO. Today's call will include forward-looking statements within the meaning of applicable Canadian and United States security 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 9, 2023, with the Securities and Exchange Commission, or SEC, and other report 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 early next week. I now turn the call over to Benjamin.
spk00: Thank you Shauna and good morning everyone. A sincere thank you to all of our team members at DIRD as well as our valued construction partners and clients for all their hard work during our seasonally strongest quarter. I would like to share a few highlights from our team for the quarter. Our technology business continues to expand our partnership with Armstrong World Industries, as well as further our internal ICE software development progress. I'm proud to share that through partner consultation and independent market research, DIRT's product management, product development, and software development teams aligned for the first time on a coordinated go-to-market strategy that resulted in the release of three new products to market in the third quarter. In our relentless pursuit of safety excellence, we continue in our journey to zero recordable incidents and maintaining our position as a world-class leader in safety performance. As mentioned in our last call, DIRT was one of 12 companies nominated by Canadian Occupational Safety as a 2023 Excellence Awardee. We are excited to share that our Director of Health, Safety, and Environment, Ian Opelik, was selected as Canada's Safety Leader of the Year. We continue to relentlessly focus on quality. During the third quarter, we saw a 36% improvement from prior year in our external defects per million dollars of revenue. Also, our on-time performance during the third quarter was 98%, a major improvement from the 88% on-time performance during the third quarter of last year. We are grateful for our clients, partners, and hardworking employees for their dedication and hard work. With that, I'll hand it over to Faria to share some more about our financial results.
spk03: Thank you Benjamin and good morning all. Please note that we have issued a press release discussing our third quarter results, which is now posted on our website. My comments this morning add more color to our financial results and liquidity for the quarter. Revenues for the third quarter were $49.5 million, up 6% compared to the same period in 2022, and up 11% from the second quarter of 2023. On gross profit, consistent with the first half of 2023, we again achieved significant year-over-year margin expansion. Compared to the third quarter of 2022, gross profit margin increased 1950 basis points from 15% to 34.4% in the third quarter of 2023. Adjusted gross profit margin, which excludes the impact of depreciation, increased 1520 basis points from 21.7% in the third quarter of 2022 to 36.9% in the third quarter of 2023. Operating expenses for the third quarter, excluding impairment charges and reorganization costs, were $14.9 million, a 15% decrease over the same period in 2022 and also sequentially down by $1 million from Q2 2023. The reduction in costs are primarily from the cost reduction initiatives implemented over the past 24 months, as well as more disciplined discretionary spending. Adjusted EBITDA for the third quarter was $5.3 million. an improvement of $10.7 million from a loss of $5.4 million during the third quarter of 2022. This improvement is driven by the reduction in operating expenses and increasing gross profit margin just described. With respect to liquidity and working capital, the quarter finished with $19.5 million in unrestricted cash, up $8.6 million from $10.8 million at December 31, 2022, and up $0.6 million from June 13th. Cash provided by operations for the third quarter was $1.9 million compared to cash consumed by operations of $10.7 million during the third quarter of 2022. Capital expenditures in the quarter were $0.7 million for free cash flow in the third quarter of $1.3 million. For the nine months ended September 30, 2023, we generated cash flow from operations of $4.7 million compared to cash consumed of $47.5 million through the nine months ended September 2022. Liquidity, which includes 10.8 million of availability under our asset-backed lending credit facility, was 30.3 million as of September 2023. We have not had to draw on this facility to date. We also continue to focus on managing our working capital. Net working capital at the end of the quarter was 25.7 million, down 0.8 million from June 30, 2023. This decrease is primarily due to the reclassification of 6 million of equipment leases related to the Rockhill facility from long-term to short-term, which I'll discuss later on in this call. Excluding this reclassification, working capital improved by $5.2 million from June 30, 2023. Our day of sales outstanding has improved from 27 days at December 2022 to 24 days at September 2023. In addition, we continue to work on reducing our inventory levels through improved sales, inventory, and operational planning processes. we have decreased inventory by 2 million, or 10.5%, from 19.4 million at June 30, 2023. Turning to our outlook, through the first six months of 2023, we experienced continued volatility in economic conditions, especially in regions with concentrated sales to the technology and banking sectors. This trend has continued into the third quarter of 2023. The return to work transition continues, with some companies mandating a hybrid policy. we note that we are exiting our seasonally strongest quarter and are now entering our typically weaker winter period. Our view on wider macroeconomic conditions indicate that we are in an uncertain late-cycle environment with the near-term potential for deteriorating macroeconomic conditions. Regardless, we continue to focus on what is within our control, supporting our current construction partners, increasing penetration in targeted geographies, onboarding new construction partners, and engaging in new strategic partnerships. I would also like to comment on two decisions taken during the quarter. Effective October 12, 2023, we are no longer listed on the NASDAQ capital markets. Our shares continue to trade on the Toronto Stock Exchange in Canada and over the counter in the U.S. As explained in our September 6 press release, we did not believe it was beneficial to shareholders to continue to incur the costs of maintaining the NASDAQ listing. The second decision was around our Rockhill facility in South Carolina. In August 2022, we announced the temporary suspension of operations of this tile manufacturing facility. After a detailed analysis of current and anticipated manufacturing capacity over the next several years, we determined that the Rockhole facility will not be reopened. With annual production capacity at our Savannah and Calgary facilities of approximately 400 million in revenue, the closure is part of our ongoing focus on realigning the organization, increasing efficiency, and improving profitability. We expect to sell or transfer the assets at Rockhill to other dirt facilities. This process is expected to take several months. We will continue to maintain the building lease and we are pursuing sub-lease arrangements. Non-cash impairment charges related to the Rockhill facility equipment of $8 million has been recorded in the Q3 financial statements. As part of this process, we also plan to settle associated Rockhill equipment leases amounting to $8.2 million in the next 12 months. This now wraps up our financial review. I will turn it back to Benjamin to conclude.
spk00: Thank you, Faria. We feel good about our work on improving our cost structure, product mix, and pricing. We also continue to closely monitor the markets to ensure we are well positioned to deliver value to our clients and manage our business through a variety of macroeconomic scenarios. In closing, I wanted to say thank you again to all of our amazing clients who understand the differentiated value of dirt, as well as our construction partners and team members for their ongoing hard work and commitment on behalf of the company. Thank you all for joining us today.
spk01: Thank you for joining today's conference. This does conclude the program. You may now disconnect.
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