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spk01: Thank you for standing by. This is your conference operator. Welcome to the DIRT Environmental Solutions fourth quarter, 2023 financial results conference call. As a reminder, all participants are on a listen only mode and the conference is being recorded. I would like to turn the conference over to Shana Mason, Director of Corporate Affairs. Please go ahead.
spk03: Thank you, operator and good morning, everyone. Welcome to today's call to discuss DIRT's fourth quarter, 2023 results. Joining me on the call today will be Benjamin Urban, CEO, and Fariha 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 10K as filed on February 21st, 2024 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 early next week. I now turn the call over to Benjamin.
spk02: Thank you, Shana, and good morning, everyone. 2023 was a transformative year for DIRT. A sincere thank you to all of our team members at DIRT as well as our valued construction partners and clients. I'd like to start the call by highlighting some of the projects ordered by our valued customers in Q4. There were 769 distinct DIRT opportunities ordered in Q4, which continue to represent a broad and diverse balance of recognized brand name companies across all of our segments, including corporate clients such as TJX Companies, MNP LLP, Bell Bank, JP Morgan Chase, Apache Corporation, Visa, and MNT Bank. Healthcare providers, the likes of Kaiser Permanente, Ohio Health, Grady Health, Surgical Centers of America, and Houston Methodist. Government organizations such as the Veterans Administration, Omaha Power, Province of Manitoba, the United States Geological Survey, and the United States Citizenship and Immigration Services. And lastly, prestigious educational institutions such as Berhea College, Western Kentucky University, Utah Valley University, and the Florida Institute for Human and Machine Cognition. Today, I also want to highlight the outstanding performance of our healthcare segment, a key driver of our overall growth in Q4 and throughout 2023. Our healthcare segment continues to benefit from increased awareness of the importance of flexible and adaptable spaces within the healthcare industry. We've seen strong demand for our solutions from hospitals, clinics, and long-term care facilities, seeking to enhance patient experience, improve operational efficiency, and adapt to evolving healthcare delivery models. Looking ahead, we remain optimistic about the growth prospects for our healthcare business and are committed to investing in innovation to capitalize on this opportunity. Driven by fundamental shifts in the healthcare landscape and the increasing demand for innovative solutions that support patient-centric care delivery, healthcare is a key pillar of our long-term strategy. However, the opportunity in Class A office space, the education and government sectors, as well as residential adaptive reuse, are more immediate, driven by factors such as population growth, return to office mandates, and the need for modern learning environments. We see a compelling opportunity to leverage our modular construction expertise to address the evolving needs of educational institutions, particularly in the higher education markets. Our construction partner network continues to grow stronger and expand as we continue to capitalize on these opportunities. In Q4, we added two new partners in Southern California and Ohio and expanded an existing partner into the Washington, D.C., and Virginia region to support the growing pipeline of public sector design and construction work. To date, partners added to our network in late 2022 and throughout 2023 have generated over $70 million in that new pipeline. In addition, our partner network invested over $2 million in aggregate into their own DIRT experience centers in 2023, demonstrating their commitment to scaling their DIRT business. At the beginning of 2023, we launched a new partner portal and support program to create a framework for development, growth, and success across our construction partner network. By year end, two of our partners graduated to the highest tier and 11 of our partners graduated to the second highest tier. I'm also pleased to announce that we have recently appointed two seasoned executives to key leadership roles within our commercial organization. Joining us as the new Vice President of Sales is Jay Phillips. As we continue to focus on accelerating our growth trajectory, particularly in our sales initiatives, having someone of Jay's caliber leading our sales efforts is a significant asset for our company. In the new Vice President of Integrated Solutions role, we have added Josh Mensinger, who will be responsible for spearheading the growth of DIRT's offsite prefabricated solutions, leveraging his extensive experience in the construction industry and his proven track record of driving innovation and delivering results with prefabrication. Innovation is at the core of our culture at DIRT. Within our product solutions group, we released 50% more products than in 2022. In 2024, we intend to continue growing our product portfolio. In support of these new innovations, our technology team in Q4 released a new update to our ICE software and have already released an additional update this year. Innovation with our technology processes is allowing us to add assets into our ICE software at a much more rapid pace. The technology team also released a very robust quoting tool in Q4 to reduce the friction and estimation, enabling project volume growth. We continue to relentlessly focus on quality. For 2023, we reduced our external defects per million dollars of revenue to 12.4, a 28% improvement year over year. Also, our on-time performance for 2023 was 98%, a major improvement from the 2022 on-time performance of 89%. Safety excellence is a core DIRT value, and we continue in our journey to zero recordable incidents and maintaining our position as a world-class leader in safety performance. Our total recordable incident frequency for 2023 was 0.4, which is 92% below the industry average. We remain committed to our sustainability journey and our ESG commitments. We strive to make it 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, we are again celebrating our third IRM Magazine nomination for the Best Reporting by a Small Cap award. And finally, regarding the ongoing litigation between DIRT and Falkbilt, on February 4th, 2024, DIRT entered into an agreement with a litigation funding partner that will provide up to $4 million to DIRT in support of specific claims in the litigation. Reimbursement of the funding will only be provided through proceeds from future litigation awards and or settlements, and is otherwise not repayable by DIRT. We believe this funding agreement is an important independent validation of the strength of our claims against Falkbilt and affirms our confidence in our eventual success. The agreement will allow DIRT to continue the litigation while eliminating up to $4 million in future operating expenses. We are also pleased to note that we recently requested the Court of King's Bench of Alberta to schedule the summary judgment application for our Canadian litigation. The Court has proposed three potential dates in September 2025, and we expect to have the date finalized in the next several weeks. It's an exciting time at DIRT, and we are proud of our performance this quarter. We are grateful for our clients, partners, and hardworking employees who made this happen. With that, I'll hand it over to Faria to share some more about our financial results.
spk04: Thank you, Benjamin, and good morning, all. Please note that we have issued a press release discussing our fourth quarter results, which is available on our website. Revenues for the fourth quarter were $50.9 million, up 20% compared to the same period in 2022, and up 3% from the third quarter of 2023. This is the highest quarterly revenue we've had since 2019. On gross profit, we continue to see significant -over-year margin expansion. Compared to the fourth quarter of 2022, gross profit margin increased from .3% to .8% in the fourth quarter, up 2023. Adjusted gross profit margin, which excludes the impact of depreciation, increased from 32% in the fourth quarter of 2022 to .5% in the fourth quarter of 2023. The improved margin is primarily due to operating efficiencies and cost reduction initiatives executed over the past 24 months and improved product mix as we continue to incentivize full solution projects. Manufacturing costs and efficiencies continue to track better than prior, which has benefited our margin. Operating expenses for the fourth quarter, excluding impairment charges and reorganization costs, were $16.4 million, a $1.8 million increase from the same quarter last year. The higher costs are primarily due to higher commissions, higher variable compensation pay, and increased professional services related to transactions, which I will discuss later. Adjusted EBITDA for the fourth quarter was $4.3 million, an improvement of 3.7 million from 0.6 million during the fourth quarter of 2022. This improvement is driven by the increase in gross profit margin just described. With respect to liquidity and working capital, the quarter finished with 24.7 million in unrestricted cash, up 13.9 million from 10.8 million at December 31, 2022, and up 5.3 million from September 30, 2023. Cash provided by operations for the fourth quarter was 10.1 million compared to 3.2 million during the fourth quarter of 2022. Liquidity, which includes 10.3 million of availability under our asset-backed lending credit facility, was 35 million as of December 31, 2023. We have not drawn on this facility to date. On February 9, 2024, we successfully renewed our ABL with the Royal Bank of Canada for an additional year. Our working capital continues to improve. Net working capital at the end of the quarter was 29.8 million, up 4.7 million from September 2023, primarily due to cash generated from operations. We are pleased with our inventory levels, which are down 0.8 million from September 2023 and down 5.7 million from December 31, 2022. Turning to 2024, our 12-month forward sales pipeline, excluding leads, at January 1, 2024, was 270 million. Compared to 247 million at January 1, 2023, or about 9% higher. In particular, we have seen -over-year growth in projects at higher stages in the sales cycle, increasing the likelihood of ordering during the year. We are excited that Jay and Josh have joined the team and continue to work on growing our pipeline. I would also like to comment on a few additional items. First, in our last call, we advised about the closure of our Rockhill facility. We continue to work on disposing and repurposing the assets we held at that facility. With annual production capacity at our Savannah and Calgary facilities of approximately 400 million in revenue, the closure is part of the company's ongoing focus on realigning the organization, increasing efficiency, and improving profitability. During the fourth quarter, we already settled 7.8 million of equipment lease liabilities related to the Rockhill assets, thereby reducing a significant portion of our long-term debt. Secondly, in November 2023, we announced a Canadian dollar 30 million rights offering. The rights offering successfully closed on January 9, 2024. As explained in the related documents, the purpose of the funds raised from the rights offering is to invest in the business and to reduce debt. On February 15, 2024, we announced a substantial issuer bid of 15 million Canadian dollars to buy back some of our outstanding debenture debt. Details of this offer can be found in our 10K. Through this bid, we want to reduce Dirt's debt and strengthen our balance sheet. The debt buyback has been offered at a premium, so we hope investors will take opportunity of the offer. This concludes the formal section of the call. I will turn it back to Benjamin to conclude.
spk02: As Faria discussed, we have made meaningful improvement in the profitability and cash flow of the company. We are excited for Dirt's future and are focused on revenue growth. We recognize ongoing market uncertainty. However, with our strength in the balance sheet and financial discipline, we believe we are well prepared to take care of our clients through a variety of economic conditions. 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. I'd like to thank you all for joining us today.
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