DIRTT Environmental Solutions Ltd.

Thank you for standing by. This is the conference operator. Welcome to the DIRT Environmental Solutions First Quarter 2024 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. Thank you, operator, and good morning, everyone.

Welcome to today's call to discuss DIRT's first quarter 2024 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, including special items. Please reference our Form 10-Q as filed on May 8, 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'll now turn the call over to Benjamin.

Thank you, Shauna, and good morning, everyone. We are pleased that our first quarter results reflect the significant progress our team has made since our Q1 results last year. We achieved double-digit revenue growth year-over-year and a 1,610 basis point expansion in our adjusted EBITDA margin. making this the first time DIRT was profitable in the seasonally slower first quarter since COVID, which is an accomplishment we are proud of. I would like to thank our incredible team at DIRT for helping us achieve these results. Every layer of our organization, from our factory teams and technicians in the field to our commercial organization and corporate staff, each of them directly contributed to this year-over-year improvement. I'm also proud to share this is our fourth consecutive quarter of year-over-year revenue growth. First quarter orders continue to represent a broad and diverse balance of recognized brand name companies across our market segments. These include corporate clients such as Kiewit Corporation, Visa, First National Bank, Helmer & Payne, MNP Corporation, CBRE, and Cadence Bank. healthcare providers, the likes of Nebraska Medicine, Ohio Health Doctors, NYU, Langone Health, and Cambridge Memorial Hospital. Government organizations such as the U.S. Federal Government, the Veterans Administration, the City of Pittsburgh, and the City of San Diego. And lastly, prestigious educational institutions such as Kansas City University, University of Buffalo, the University of Texas, and Purdue University. Looking forward, our team is focused on driving sustainable revenue growth by leaning into our inherent advantages. As a superior provider in a large addressable market, our technology, speed, quality, and ability to customize is how we win. We remain under-penetrated and will continue to aggressively pursue greater market share in the commercial construction market. DIRT and its valued construction partner network continues to grow stronger and scale up for enhanced distribution and implementation of our interior construction solutions. In Q1 2024, we added new partners and expanded existing partners bolstering DIRT's geographic coverage in multiple growing markets with a focus on the Western United States region. We thank all of our partners for demonstrating their commitment to scaling their DIRT business and delivering quality to our shared clients. We have also seen high engagement, attendance, and investment in staffing and training across our partners, indicating that the future is bright. Our investment and innovation is reflected in Q1 through the continued theme of aligning software development efforts to DIRT's commercial and product strategy. There was a new ICE software release in Q1, which included the creation of a new casework catalog, new thin-profile doors for all lines, new hardware options, as well as a new back-painted glass finish. We are excited to debut many of these innovations, along with additional ones, introduced over the last year at our largest annual sales conference at Connect next month. In addition to the enhancements to our existing offerings, We are also excited to announce that we will also be releasing new innovative products in Q2 designed for the healthcare sector in collaboration with HKS, a leading global architecture and design firm that focuses on innovative healthcare design operating from 29 offices worldwide. We continue on our journey to zero defects, zero missed deliveries, and zero recordable incidents. For Q1 2024, we reduced our external defects per million dollars of revenue to 14.3, a 38% improvement from Q1 2023, and a 6% improvement from last quarter. Our on-time performance for Q1 2024 was 99.2%, which is the highest in DIRT's history. Our total recordable incident frequency at the end of Q1 2024 was 0.93, which is 78% below the industry average. Safety excellence is a core value, and we take pride in maintaining our position as a world-class leader in safety performance. ESG and sustainability commitments remain a key business priority. We strive to make the world better, both through our own design and responsible manufacturing practices and by helping our customers achieve their sustainability commitments through the implementation of our solutions. We know that our proactive and transparent approach to establishing, measuring, and reporting on ESG factors impacts our bottom line. This quarter, we established DIRT's Sustainability Council, which comprises a cross-functional team of DIRT employees from our commercial, manufacturing, technology, and project management teams to take DIRT's ESG initiatives to the next level and stay two steps ahead of the industry and regulations. And finally, we continue to make progress in the ongoing litigation between DIRT and Falkville, as explained in the legal proceedings section of our 10-Q. In summary, in addition to the $4 million of outside investment secured in Q1 to fund the litigation and the summary judgment, dates are being secured in September of next year, both in Canada and the United States. Additionally, DIRT is seeking $100 million in damages, as noted in the second amended complaint. During this transformational time at DIRT, we are proud of our performance this quarter. We are grateful for our team, partners, and clients who helped make this happen. With that, I'll hand it over to Faria to share some more about our financial results.

Thank you, Benjamin, and good morning all. Please note that we have issued a press release discussing our first quarter results, which is available on our website. Revenues for the first quarter were $40.8 million, up 11% compared to the same period in 2023. Q1 is our seasonally slowest quarter, and we are pleased with the year-on-year increase in revenues. On gross profit, we continue to maintain strong margins. Compared to the first quarter of 2023, gross profit margin increased from 23.7% to 35.9% in the first quarter of 2024. Adjusted gross profit margin, which excludes the impact of depreciation and amortization, increased from 28.5% in the first quarter of 2023 to 37.9% in the first quarter of 2024. Consistent with what we have shared before, the improved margin is primarily due to revenue growth, operating efficiencies, cost reduction initiatives, and improved product mix. Operating expenses for the first quarter, excluding impairment charges and one-time related party reimbursements, as well as reorganization costs, were $14.2 million, a $1.5 million or 9.5% decrease from the same quarter last year. This is in line with our initiatives to reduce costs in the business. Adjusted EBITDA for the first quarter was $2.7 million, an improvement of $6.2 million from a $3.5 million loss during the first quarter of 2023. This improvement is driven by the increase in adjusted gross profit margin and reduced operating expenses just described. We note that this is now dirt's fourth consecutive quarter of positive adjusted EBITDA. Our net income after tax for the first quarter of 2024 was $3 million, compared to an $11.4 million net loss after tax for the same period of 2023. Apart from the adjusted EBITDA gains discussed above, we benefited from a gain on the substantial issuer bid, which I will discuss later on this call, of $2.9 million. Higher interest income and a $1.2 million increase in foreign exchange gain due to the devaluing Canadian dollar. I will now turn to our balance sheet and discuss some Q1 events. 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 was to invest in the business and to reduce debt. On February 15, 2024, we announced a substantial issuer bid of Canadian dollar 15 million to buy back some of our outstanding debentures. Through this bid, Our intention was to reduce DIRT's debt and strengthen our balance sheet. The bid closed on March 22, 2024, and we received offers for Canadian dollar 10.5 million of our debentures. We accepted all the offers and tendered Canadian dollar 6.9 million, resulting in a gain of 2.9 million on extinguishment of the debt. We are pleased with this result as we continue to strengthen our balance sheet. The quarter finished with 39 million in unrestricted cash, up $14.2 million from $24.8 million at December 31, 2023. Cash used in operations was $2 million, mainly due to timing differences related to vendor payments of $4 million at year end. Liquidity, which includes $8.5 million of availability under our ABL credit facility, was $47.5 million as of March 31, 2024. We have not drawn on this facility to date. On February 9, 2024, we successfully renewed our ABL with Royal Bank of Canada, for an additional year. Our working capital continues to improve. Net working capital at the end of the quarter was $46.1 million, up $16.3 million from December 2023, primarily due to net proceeds of $21.3 million from the rights offering and improved operational results, offset by a decrease in working capital of $4.1 million, mainly due to the $5.1 million repayment on debt principle under the issuer bid. Our 12-month sales pipeline, excluding leads at 1 April 2024, was 270 million, growing over 7% compared to 252 million at April 1, 2023. We regularly scrutinize our pipeline and are pleased to see our increased pipeline converting into revenue growth. A key driver of our gross profit margin is our pipeline and forecasting management. I'm particularly proud of our commercial organization's success in this matter, with our third consecutive quarter of more than 95% accuracy in our revenue forecasting. Looking forward, we will be entering our seasonally stronger quarters. Macroeconomic risks still exist, and recent increases in aluminum costs may cause pressure on our margins. Having said that, we remain focused on maintaining our adjusted gross margins and delivering on time and in full to our valued clients. This concludes our section on the financial results. I would like to draw our listeners' attention to an investor deck we published on April 22, 2024 on our website, showing DIRT's journey to excellence over the past few years. We are proud of what we have achieved and are focused on continuing to grow revenue and improve the business. I will now turn it back to Benjamin to conclude.

Thank you, Faria. We are on a journey to excellence. 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, financial discipline, and investment in innovation, we believe we are well prepared to take care of our clients and partners through a variety of economic conditions. It is often said that employees are the number one asset of any business. We not only believe this, but have also witnessed the incredible achievements driven by our hardworking, talented team. From the factory floor to the office, their dedication, passion, and unwavering commitment fuels our success. They have demonstrated resilience in the face of obstacles and difficult decisions and embody the spirit, teamwork, and excellence every day. To our outstanding DIRT team, thank you. And thank you again to all of our amazing clients who understand the differentiated value of dirt, as well as our construction partners for their ongoing hard work and commitment on behalf of the company. Together, we are continuing to change the world of interior construction. I'd like to thank you all for joining us today.

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.