DIRTT Reports Second Quarter 2023 Financial Results

DIRTT Environmental Solutions Ltd. (“DIRTT” or the “Company”) (Nasdaq: DRTT, TSX: DRT), a leader in industrialized construction, today announced its financial results for the three and six months ended June 30, 2023. All financial information in this news release is presented in U.S. dollars, unless otherwise stated. 

• Revenue of $44.8 million, up 22% from the first quarter and flat compared to prior year period.

• Gross Profit margin improvement of 1,849 bps from prior year period.

• Achieved Adjusted EBITDA⁽¹⁾ of $1.9 million (4.1% of revenue), up $11.3 million from prior year period.

• Liquidity of $28.1 million at June 30, 2023 compared to $16.1 million at December 31, 2022.

• On May 9, 2023, DIRTT entered into assignment and co-ownership agreements with Armstrong World Industries Inc. (AWI) resulting in cash inflow of $10.0 million and a gain on sale of patents and software of $6.1 million.

• Fareeha Khan, vice president of finance, has been appointed CFO effective August 25, 2023.

 (1) See “Non-GAAP Financial Measures”

Benjamin Urban, chief executive officer remarked “The excitement and energy at DIRTT is as high as it has been in a long time. The improved financial performance, stabilizing balance sheet and expanding partner network all give us confidence in the future of DIRTT. I am proud of the way our team has responded to the economic uncertainty experienced during early 2023 and encouraged by the increase in order pace, which began in April and has continued into the third quarter”.

Bradley Little, chief financial officer, added “The pricing, cost reduction and cash initiatives implemented over the past year have bolstered our liquidity and provided a solid platform from which to drive profitable growth for the future and also to navigate market uncertainty. We have made up considerable ground following a slower than expected start to 2023”.

DIRTT also announced the appointment of Fareeha Khan, vice president of finance, to the position of chief financial officer, succeeding Brad Little who is departing the company. Mr. Little’s last day at DIRTT will be Friday, August 25, 2023, and Ms. Khan will formally assume the duties of CFO on Monday, August 28, 2023.

"We extend our heartfelt gratitude to Brad for his contributions to DIRTT during his tenure as CFO, said Mr. Urban. “While we are sad to see him go, we fully support Brad’s decision to be closer to his family and wish him well.”

In addressing the appointment of Ms. Khan, Mr. Urban added: "We are excited to have Fareeha as our new chief financial officer. Her exceptional understanding of our financial landscape and deep knowledge of our business and strategy make her an exceptional fit. We have full confidence in Fareeha's ability to build upon the strong financial foundation that Brad helped us establish."

Ms. Khan has over 20 years of finance experience. Ms. Khan completed her Chartered Accountancy with Deloitte LLP and obtained her Bachelor’s in Accounting Science at the University of South Africa. After completing her studies, Ms. Khan worked at Deloitte LLP and PricewaterhouseCoopers LLP in multiple countries until she joined DIRTT in 2019.  Ms. Khan is a member of the Institute of Chartered Accountants in England & Wales and the Institute of Chartered Accountants in Zimbabwe.

Second quarter 2023 revenues were $44.8 million, an increase of 0.1% from the second quarter of 2022 and an increase of $8.0 million, or 22% from the first quarter of 2023. The modest year over year increase was driven by improved pricing and product mix, offset by a decrease in total order volume. Compared to the first quarter of 2023, second quarter activity is higher, in line with seasonal demand patterns and timing of project schedules.

Second quarter 2023 gross profit and gross profit margin were $14.6 million and 32.5% respectively , an increase of $8.3 million, or 132%, from $6.3 million and 14.0%, for the second quarter of 2022. The increase in gross profit margin was a result of realization of our price increases, better product mix, improved labor efficiency and better fixed cost leverage.

Second quarter 2023 Adjusted Gross Profit and Adjusted Gross Profit Margin (see “Non-GAAP Financial Measures”) were $16.2 million and 36.2%, respectively, or an increase of $7.7 million and 91% compared to the prior year’s second quarter.

Sales and marketing expenses decreased by $1.2 million to $6.6 million for the quarter ended June 30, 2023, from $7.8 million for the quarter ended June 30, 2022. The decreases were largely related to a realignment of back office support, territory coverage and cost structure with current demand levels. We expect to increase the investment in this function during 2023 in order to support organic revenue growth.

General and administrative expenses decreased by $1.4 million to $5.5 million for the quarter ended June 30, 2023, from $6.9 million for the quarter ended June 30, 2022. The decrease was primarily related to a decrease in professional services of $1.3 million, which included $0.3 million related to the costs of the contested director elections.

Operations support expenses decreased by $0.7 million from $2.5 million for the quarter ended June 30, 2022, to $1.8 million for the quarter ended June 30, 2023. The decrease was primarily due to a $0.6 million decrease in salaries and benefits costs associated with the planned headcount reductions as part of our cost savings initiatives.

Technology and development expenses decreased by $0.6 million to $1.3 million for the quarter ended June 30, 2023, compared to $1.9 million for the quarter ended June 30, 2022, primarily related to decreased salaries and benefits costs associated with the planned headcount reductions as part of our cost savings initiatives.

During the quarter, the Company incurred $1.5 million in reorganization costs which relate primarily to termination costs associated with actions taken to streamline our back office and operational support functions.

On May 9, 2023, we entered into agreements with AWI for the partial assignment to AWI and co-ownership of a 50% interest in the rights, title and interest in certain intellectual property rights in a portion of the ICE Software that is used by AWI, as well as the knowledge transfer relating to certain source code of the ICE Software, for cash consideration.  We also entered an agreement for the prepayment of certain development services. Cash proceeds of $10.9 million were received during the quarter and profit of $6.1 million recognized on this transaction. Further details on this transaction can be found in our Form 10-Q filed with the SEC and applicable securities commissions or similar regulatory authorities in Canada on August 2, 2023.

Net income and net income margin for the quarter was $2.2 million and 4.9% compared to $(19.3) million and (43.1)% for prior year’s second quarter, respectively. The increased net income is primarily the result of the higher gross profit margin and reduced operating expenses explained above as well as the profit from the AWI transaction.

Adjusted EBITDA and Adjusted EBITDA Margin (see “Non-GAAP Financial Measures”) for the quarter was a $1.9 million and 4.1%, respectively, an improvement of $11.3 million from a $(9.4) million and (21.1)% for the prior year’s second quarter.  Improvements in Adjusted EBITDA for the quarter were due to the above noted reasons.

Through the first six months of 2023 we have seen continued volatility in economic conditions, especially in regions with concentrated sales to the technology and banking sectors. These conditions included layoffs in the technology sector, reduction in short-term needs for office space, and increasing interest rates impacting borrowings resulting in certain larger projects that were planned for the first two quarters of 2023 being deferred or canceled.

In response, we identified and took action to reduce annualized overhead costs by $5.0 million during the first quarter of 2023. Further, on May 8, 2023, the Company reduced its salaried workforce, resulting in annualized savings of $2.6 million. One-time costs associated with these reductions, incurred in the second quarter of 2023, were approximately $0.7 million.

In some aspects, the macroeconomic uncertainty has subsided. Various inflation metrics have improved over the three months ended June 30, 2023 and certain recession indicators have eased. We have seen improved demand for our products, beginning in mid-April. From May 1 to June 30, 2023, the Company generated $33.3 million in total revenue and an associated $3.5 million in Adjusted EBITDA, with Adjusted Gross Profit during the same period of 39.2%. Further, we have been awarded several large projects during the second quarter of 2023, including Bechtel and Visa, which began to order during the second quarter of 2023, with Apache expected to order during the second half of 2023.  These projects are expected to deliver an aggregate of $10 to $15 million in revenue during 2023. 

Total revenue for the second quarter of 2023 increased by approximately $8.0 million, or 22% from the first quarter of 2023. We expect a sequential increase in revenue in the third quarter of 2023 over the second quarter of 2023, though not to the same extent.

For 2023, we continue to project low to mid-single digit growth in total revenue over 2022, a trend we expect to continue into 2024 based on our current twelve month forward pipeline.

We have meaningfully reduced our cost footprint and lowered our estimated revenue breakeven point. In tandem with the improved gross profit percentages and the cash initiatives discussed above, we believe we are positioned to weather the current macroeconomic conditions, while continuing to invest in our technology and commercial organizations. We will continue to evaluate our cost structure and respond to the inflationary impacts to labor, materials and services in an efficient manner consistent with our goal to maintain healthy gross profit and Adjusted EBITDA margins.

A conference call and webcast for the investment community is scheduled for August 3, 2023 at 08:00 a.m. MDT (10:00 a.m. EDT). The call and webcast will be hosted by Benjamin Urban, chief executive officer, and Bradley Little, chief financial officer.

The call is being webcast live on the Company’s website at dirtt.com. Alternatively, click here to listen to the live webcast. The webcast is listen-only. Those interested in participating in the question-and-answer session should follow the conference call dial-in instructions below.

Participants may register for the call here to receive the dial-in numbers and unique PIN to access the call seamlessly. It is recommended that you join 10 minutes prior to the event start, although you may register and dial in at any time during the call.

Investors are invited to submit questions to ir@dirtt.com before the call. Supplemental information slides will be available within the webcast and at dirtt.com prior to the call start.

A webcast replay of the call will be available on DIRTT’s website.