DIRTT Environmental Solutions Ltd.
Q4 2020 Earnings Call Transcript

Published: 27 Feb 2021

[Operator:]

Ladies and gentlemen, thank you for standing by, and welcome to the DIRTT’s 2020 Q4 Year-end Financial Results Conference Call. I would now like to hand the conference over to your speaker, Ms. Kim MacEachern. Please go ahead.

[Kim MacEachern:]

Thank you, operator, and Good morning, everyone. Welcome to today’s call to discuss DIRTT’s fourth quarter 2020 results. Joining me on the call are DIRTT’s Chief Executive Officer, Kevin O’Meara; and Chief Financial Officer, Geoff Krause. Management’s prepared remarks today are accompanied by presentation slides. To access the slides, please view them from the webpage of this webcast. 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 24, 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

[Kevin O’Meara:]

Thank you, Kim, and thank you to everyone joining the call today. Beginning on Slide 4, the construction industry continues to grapple with the consequences of the ongoing COVID-19 pandemic with pronounced weaknesses in the non-residential sector. This reality negatively impacted our revenue in 2020, whereas early in the year, we benefited from the projects that were underway at the beginning of the pandemic generally being seen through to completion. What became evident as the pandemic continued was that customers became increasingly reluctant to commit capital to new construction projects due to economic uncertainty for all sectors of society and a lack of clarity for healthcare clients with respect to how their patient delivery models might change post-COVID, all in an environment of ever-changing restrictions due to COVID-19 and the bearing surges in infection rates across North America. This dynamic has continued into 2021, and we expect it to negatively impact our revenue during the first half of the year relative to the second and third quarters of 2020 as organizations finalize their real estate needs and we collectively wait for clarity on, amongst other things, vaccine rollouts and an eventual return of employees to the build environment. Despite these challenges, we remain cautiously optimistic that recovery will begin in the second half of 2021. Statistical analysis from sources like Dodge Data and Analytics predict commercial construction starts will recover slightly this year, increasing by 5%. Further, we are in constant contact with our distribution partners, monitoring activity levels within their respective regions. While the majority of these partners have confirmed our view of slower first half activity levels compared to the third and fourth quarters of 2020, those same partners have recently confirmed their expectations of higher activity levels for the back half of 2021. We find this encouraging, but we’ll remain cautious until their expectations turn into orders. We know the expectations of workplaces, healthcare and education spaces will continue to change dramatically over the coming months and years. Similarly, decision makers will now need to worry about building the right environment for their needs, in addition to their historical concerns about meeting budgets and construction schedules. This change will demand spaces that are flexible, adaptable and supported by technology, all key components of DIRTT’s value proposition. This past year, we’ve seen the extraordinary importance of better connectivity and bandwidth in virtually every space. With skilled labor shortages and tighter construction timelines, our capabilities in modular power and data infrastructure, alongside our ability to integrate technology, position us as a full solution interior construction provider.

[Geoff Krause:]

Thank you, Kevin. As we’ve done in recent quarterly calls, I’m going to start with a quick review of our liquidity on Slide 6. Our working capital management focus continued in the fourth quarter with no reportable disruptions or delays in accounts receivable collections. Days sales outstanding, net of deposits and income taxes receivable, continue to run at under 30 days. We finished the year with cash balances of $45.8 million, while our net working capital at December 31 was $53.5 million. Our current ratio remains healthy at 2.7x. In addition, we took further steps to bolster our financial resources to ensure we have the financial wherewithal to weather the current period of uncertainty and to be ready for when the recovery takes hold. During this month, we finalized a CAD 25 million senior secured asset-backed credit facility, which replaces our previous cash flow and earnings-based facility. Like most asset-backed facilities, the borrowing base is calculated based upon a percentage of our accounts receivable and inventory, and the pricing is only slightly higher than our previous facilities. The specific borrowing terms of the new facility can be found in our 10-K. As of December 31, 2020, available borrowings under the new facility would have been CAD 9.3 million, or USD 7.3 million. The facility remains undrawn. During 2020, we entered into 2 equipment leasing facilities, as you know. The first is a CAD 5 million facility of which CAD 3.6 million was drawn during 2020, unchanged from Q3 of this year. The second is a USD facility on which USD 3.5 million was drawn during 2020, also unchanged from Q3. As part of the conversion to the asset-backed facility, the equipment facility was decreased to USD 14 million from USD 16 million. We anticipate drawing an additional approximate $11 million on these lines in the first half of 2021 as we have now received most of the equipment for our South Carolina plant. Updating on government subsidies, in the fourth quarter, we qualified for an additional $3.9 million through 2 Canadian government programs

[Operator:]

And our first question comes from Hassaan Khan with National Bank.

[Hassaan Khan:]

This is Hassaan on behalf of Rupert. Could we get some color on what we can expect from here on as we see headwinds from COVID and the levers at your disposal to help mitigate some of that impact, whether it’s more subsidies, temporary closures or deferral of CapEx items?

[Geoff Krause:]

It’s Geoff here. So there’s a couple things that come with it. Certainly, we believe and we know that the government subsidies program has been extended to June 2021, and as I said in the remarks, we applied for USD 1.5 million of those subsidies in January. If our Canadian revenues continue to be below that threshold -- and we haven’t seen what the calculation thresholds will be for the second quarter -- but if we remain within that, certainly, we will take advantage of those sorts of programs as they become available. I think the second piece is a key objective for us as the pandemic took hold was to ensure that where possible, we could exit the pandemic in a position that enabled us to take advantage of the pieces that we put in place from a production and marketing perspective. And so therefore, we’ve been very reticent to retrench on those investments. Accordingly, we did the CAD 40 million debenture that we issued, as you know, in January of this year. We put in place the leasing facilities. We’ve bolstered our credit facility. And as a result, we believe we have more than enough liquidity to get us through to when the recovery occurs. Last but not least is as part of our response to the pandemic, we initiated our Rapid Response Healthcare program. And our Rapid Response Healthcare program were products that we had never had in the system before. And as Kevin mentioned, we got our first order for $2 million for mobile vaccination trailers. We are going to continue to pursue those types of opportunities, which we hope will mitigate some of the impact of the reduction in commercial construction activity. And then if it takes a lot longer, then we’ll continue to revisit. But this is something we’re monitoring daily.

[Hassaan Khan:]

Thank you for the great color. Now conversely, how quickly can things turn around when we do see a reopening of the economy? And I ask this because the sales pipeline historically can take long lead times. What I’m trying to get is how much of the lost revenue opportunity can be viewed as deferrals which should come back in given pent-up demand, and how much should we view as a lost opportunity?

[Kevin O’Meara:]

Those are all really good questions and are difficult to answer. The part that I can answer is that as clients and hence partners place orders with us, we can ramp up our capacity very, very quickly. I do think the sales cycle for the next 12 to 18 months will be significantly shorter than it’s been historically. I think that could also play to our strength in terms of our short lead times and shorter construction schedules, because I do think there may be some pent-up demand, or as all the liquidity in the economy starts to release -- I’m sure you’ve seen reports of pretty aggressive growth projections in the economy and so forth. I think that there is a reasonable chance that that happens. Unfortunately, from where we sit, it’s very hard to have visibility into that. And so we try the best we can, talking to clients, talking to partners to get our arms around that. But I think oftentimes even the clients don’t really have a sense because they’re trying to figure out where their businesses are and when are they coming out and what are their space needs going to be and how are their people going to react and so forth. And so we’re only as good as those people figuring out how to manage their businesses.

[Operator:]

Your next question comes from Greg Palm with Craig-Hallum Capital.

[Greg Palm:]

I guess just first off, as you sort of look back on the last quarter or last couple of quarters, any geographies that are performing better or worse? What about metro versus secondary markets? Kind of curious if there’s any noticeable difference there in terms of activity.

[Kevin O’Meara:]

I think the single biggest determinant is COVID restrictions. And so we had fewer of those in the South, so relatively speaking, the South has been stronger. Other areas, the Bay Area in California has been pretty locked down. New England was a little bit more locked down than other places. And then New York, just with everything that’s going on there and the density, New York has been softer. So that’s how I would characterize the regional differences.

[Greg Palm:]

Okay. Makes sense. And of the projects that you’re doing now that maybe weren’t in the backlog or the pipeline pre-COVID, I’m curious if there’s any noticeable differences in the types of those projects, the average order size. I’m just trying to get a sense for whether the type or the scope of the projects have changed at all over the last year and whether you think that will be significantly different going forward than what you’ve seen in the past.

[Kevin O’Meara:]

It hasn’t been markedly different to date. I do think it will be -- the complexion of it will be different going forward. But it’s not going to be due to COVID; it’ll be due to management changes in the commercial organization. And what I mean by that is with sales people positioned to sell large enterprise sized projects or to do more strategic accounts, I think you’ll see that rippling through. You also saw what we had talked about before in the transformation of the business, fewer larger projects than we historically would have done, say, 2 or 3 years ago, and I think you’ll see those ramping up as well. But as we’ve talked before, those tend to have a little bit longer sales cycle as well. So I think the big news will be over the coming 2 to 4 years, I think the impact that our specialized sales team that didn’t exist before will have on the book of business.

[Greg Palm:]

Okay. Interesting. And last one just in terms of the cadence of how we should be thinking about 2021. So Q1 sequentially down from Q4. Would you expect growth on a sequential basis going forward, so as we get into Q2? Maybe just remind us what normal seasonality usually looks like.

[Geoff Krause:]

Sorry, I was on mute. Greg, I don’t think normal seasonality applies in this type scenario. But I think it would be reasonable to expect that the recovery is not going to a necessarily hockey stick. There is going to be some recovery into it, but it’s really hard to predict. And if vaccines get delayed, if stuff pushes out, it’s tough to tell. We do see that back half being stronger, but how it builds into that back half is a tough call.

[Operator:]

And there are no further questions at this time. I would now like to turn the call back over to Kevin.

[Kevin O’Meara:]

Before closing, I’d like to thank our tremendous employees and distribution partners who continue to demonstrate resiliency and commitment in the face of extraordinary circumstances. I strongly believe that the path we’re on, guided by our strategic plan and executed by the incredibly talented team we have at DIRTT, will continue to propel our organization forward. In 2021, I look forward to leveraging the investments we’ve made to date and working with our distribution partners to enhance their ability to drive sales growth and achieve the market penetration this fabulous company and people deserve as well as increasing the visibility to our sustainability and people strategies initiatives. Thank you for joining us today.

[Operator:]

That does conclude today’s call. You may now disconnect.