DIRTT Announces Second Quarter 2018 Results

DIRTT Environmental Solutions Ltd. (“DIRTT” or the “Company”) (DRT.TO), an interior construction company that uses technology for client-driven design and manufacturing, today announced its financial results for the three and six months ended June 30, 2018. (Canadian dollars are referred to as “$” and United States dollars are referred to as “US$”.)

Second Quarter 2018 Highlights

  • Revenue increased by $10.7 million or 15.2% to $80.7 million, over Q2 2017;
  • Gross profit increased by $2.9 million or 9.7% to $32.8 million, over Q2 2017;
  • Gross profit % decreased to 40.6% from 42.7% in Q2 2017;
  • Adjusted gross profit(1) increased to $34.7 million from $30.7 million in Q2 2017;
  • Adjusted gross profit %(1) was slightly lower at 43.0% compared to 43.9% in Q2 2017;
  • Adjusted EBITDA(1) increased to $8.2 million from $2.1 million in Q2 2017;
  • Adjusted EBITDA %(1) increased to 10.1% from 3.0% in Q2 2017; and
  • Net income and net income per share were $0.8 million and $0.01, respectively, compared to net loss and net loss per share of $2.9 million and $0.03, respectively, in Q2 2017.
  • Operational Highlights

  • First phase of leadership transition complete with permanent chief financial officer in place;
  • Revenue from healthcare industry increased from 18% to 20%; and
  • Hosted over 1,000 current and prospective clients at DIRTT Connext.
  • “We laid out a plan at the beginning of the year to focus on profitability, near term growth, and establishing a permanent leadership team,” says DIRTT interim CEO Michael Goldstein. “In the first half of 2018 we increased revenue growth by 19.5%, increased market penetration in the healthcare market, increased Adjusted EBITDA by 240%, completed a strategic review, and hired our chief financial officer.”

    “The fiscal discipline measures introduced in the first half of 2018 are proving effective with a significant impact on profitability,” says chief financial officer Geoff Krause. “Combined with previous investments and based on our sales pipeline as we move into what is traditionally the busier half of the fiscal year, we’re on track to meet our targets of adjusted EBITDA margins between 13% - 15%. DIRTT is well-positioned for profitable growth.”

    Goldstein adds that looking ahead, finalizing the permanent management team is a priority. “DIRTT’s search for a permanent CEO is expected to successfully conclude in the third quarter of this year. Finding someone with the right mix of experience, track record and vision to lead this company is of paramount importance," says Goldstein, who will assist with the transition once the role has been filled.

Summary Financial Results

Screenshot 2018-08-08 17.30.44.png

Revenue

Revenue for Q2 2018 increased by $10.7 million or 15.2%, over Q2 2017. The increase is attributable to a general increase in sales activity across a range of industry segments, partially offset by the weakening of the US dollar compared to the same quarter in 2017. Included in these segments is healthcare, which increased from 18% of total revenue in Q2 2017 to 20% in Q2 2018. Apart from acute healthcare solutions, DIRTT Solutions are industry agnostic. In addition, the Company recorded installations revenue in Q2 2018 of $2.1 million (Q2 2017 - $2.0 million).

Gross Profit / Adjusted Gross Profit / Gross Profit % / Adjusted Gross Profit %

Gross profit increased to $32.8 million in Q2 2018 from $29.9 million in Q2 2017, an increase of 9.7%. Gross profit % decreased to 40.6% from 42.7% in the same period. The decrease in gross profit % was due primarily to an increase in overall direct material costs of 0.5%, higher direct labour costs of 0.7%, higher depreciation and amortization expense relating to increased investment in manufacturing-related assets of 1.2% and partially offset by decreases in indirect costs of 0.4%. The increases in direct material and direct labour costs were due to changes in product/service revenue mix combined with greater volatility in the timing of monthly production volumes in Q2 2018.

Adjusted gross profit increased to $34.7 million in Q2 2018 from $30.7 million in Q2 2017, an increase of 13.0%. Adjusted gross profit % decreased to 43.0% from 43.9% in the same respective period for the reasons discussed above, excluding the impact from increased depreciation and amortization expense related to increased investment in manufacturing-related assets.

SG&A Expenses / Adjusted SG&A Expenses / SG&A % / Adjusted SG&A %

Selling, general and administrative (“SG&A”) expenses decreased to $31.0 million in Q2 2018 from $32.9 million in Q2 2017, a decrease of $1.9 million or 6.0%. SG&A % decreased from 47.0% in Q2 2017 to 38.4% in Q2 2018. SG&A in Q2 2018 reflects the new fiscal discipline implemented in the first half of 2018. The decrease in SG&A in Q2 2018 was due to the combined expense reduction in trade shows of $2.9 million, mostly relating to the restructuring of DIRTT Connext; travel, meals and entertainment and marketing of $1.4 million; depreciation and amortization of non-manufacturing-related assets of $0.6 million; and stock-based compensation expense of $0.7 million. These decreases were partially offset by increases in salaries, benefits and commissions of $0.9 million; reorganization costs of $1.0 million due to recent management changes; professional service fees of $1.2 million related to proxy defense costs; and other operating expenses of $0.6 million.

Adjusted SG&A expenses decreased to $26.6 million in Q2 2018 from $28.3 million in Q2 2017, a decrease of $1.7 million, or 6.0%. Adjusted SG&A % decreased from 40.4% to 33.0% in Q2 2018 compared with Q2 2017. The reason for the decrease is the same as discussed above with respect to SG&A, excluding the impact from decreased depreciation and amortization of non-manufacturing-related assets, decreased stock-based compensation expense incurred in the period and reorganization costs.

The impact of the weakening US dollar to Canadian dollar average exchange rates during the three and six months ended June 30, 2018 partially reduced the overall increase in SG&A and Adjusted SG&A expenses across the organization, as certain of these SG&A expenditures are denominated in US dollars.

Adjusted EBITDA / Adjusted EBITDA %

Adjusted EBITDA increased to $8.2 million in Q2 2018 from $2.1 million in Q2 2017, an increase of  $6.1 million or 282.8%. Adjusted EBITDA % for Q2 2018 increased from 3.0% in Q2 2017 to 10.1%. The increase was primarily due to higher adjusted gross profit of $4.0 million, lower adjusted SG&A expenses of $1.7 million and increase in foreign exchange gain of $0.4 million.

Liquidity and Capital Resources

At June 30, 2018, we had $59.9 million in cash and cash equivalents, compared to $79.6 million at December 31, 2017.

At June 30, 2018, we also had access to an undrawn US$18.0 million revolving credit facility.

Outlook

Construction is a major global industry defined by building new structures, making additions and modifications to existing structures, as well as maintenance, repair and leasehold improvements on existing structures. The total US construction market was US$1.2 trillion in 2017, of which US$710 billion was attributable to non-residential building and US$523 billion was attributable to residential building [Source: US Census Bureau]. This includes both new building and renovation projects. Total US non-residential and residential construction spending is forecast to grow to US$820 billion and US$614 billion, respectively, in 2021 [Source: FMI Overview 2018].

DIRTT is a building process powered by technology. It is a comprehensive interior construction solution that addresses the challenges frequently associated with conventional interior building methods: cost overruns, labor shortages, inconsistent quality and time delays. DIRTT’s construction method and solutions offer a superior alternative to conventional interior construction. There is an immediate addressable North American market for DIRTT Solutions, of at least $50 billion. We expect to continue to pursue opportunities in our primary focus areas of commercial (which includes corporate, education, government and target areas in residential) and healthcare.

Our plan outlined at the beginning of the year focused on profitable growth, increasing market share, and establishing a permanent leadership team. We continue to make very good progress toward these objectives as discussed further below.

We are pleased with our progress in the first half of 2018, growing revenue by 19.5% over the same period of 2017. Based upon our sales pipeline and as we move into what is traditionally the busier half of the fiscal year, our outlook for the balance of 2018 remains positive and in line with our previous expectations.  We are currently delivering on several large orders that, while not material on a stand-alone basis, collectively provide a solid base for the latter half of 2018.

Our focus on fiscal discipline continues to show favorable results, with adjusted EBITDA increasing by 239.9% in the first half of the year over the same period of last year.  We remain on track to meet our target of adjusted EBITDA margins of between 13% - 15%.

During the first half of 2018 we experienced an increase in the energy industry, where revenue increased as a percentage of total revenue from 6% in YTD 2017 to 9% in YTD 2018. The healthcare sector continues to show promise as one of our key market segments, growing in absolute terms and as a percentage of our total revenue. Healthcare orders represented 16% of revenue in the first half of 2018 versus 14% in the first half of 2017. We are encouraged by ongoing discussions around upcoming projects, adding to the thousands of completed and referenceable DIRTT healthcare projects that evidence the unique advantages this comprehensive solution offers the healthcare market before, during and after construction.

DIRTT is finalizing its permanent management team.  A permanent chief financial officer commenced with the Company in June 2018 and the search for a permanent CEO is expected to be completed in the third quarter of 2018.