DIRTT Reports Third Quarter 2024 Financial Results
CALGARY, Alberta, Nov. 06, 2024 (GLOBE NEWSWIRE) -- DIRTT Environmental Solutions Ltd. ("DIRTT" or the "Company", "we", "our", "us" or "ours") (TSX:DRT, OTC:DRTTF), a leader in industrialized construction, today announced its financial results for the three and nine months ended September 30, 2024. All financial information in this news release is presented in U.S. dollars, unless otherwise stated.
Third Quarter 2024 Highlights
Revenue of $43.4 million in the third quarter of 2024, a decrease of 12% from the prior year period.
Gross profit increased to 38.8% of revenue in the third quarter of 2024 from 34.4% of revenue in the third quarter of 2023.
Net income after tax and net income margin for the third quarter of 2024 of $7.1 million and 16.3%, respectively, compared to a net loss after tax of $6.3 million and net loss margin of 12.7% in the third quarter of 2023.
Adjusted EBITDA(1) was $4.1 million (9.4% of revenue) in the third quarter of 2024, compared to $5.3 million (10.6% of revenue) in the third quarter of 2023.
Liquidity, comprising unrestricted cash and available borrowings, was $34.3 million at September 30, 2024 compared to $35.0 million at December 31, 2023.
On August 2, 2024, the Company and 22NW Fund, LP ("22NW") closed a private repurchase of convertible debentures (the "Debenture Repurchase") in which the Company purchased for cancellation an aggregate of C$18,915,000 principal amount of its 6.00% convertible unsecured debentures due January 31, 2026 (the "January Debentures") and C$13,638,000 principal amount of its 6.25% convertible unsecured debentures due December 31, 2026 (the "December Debentures" and collectively with the January Debentures, the "Debentures"). As at September 30, 2024, C$16,642,000 principal amount of the January Debentures and C$15,587,000 principal amount of the December Debentures remained outstanding, and 22NW no longer holds any Debentures.
On August 2, 2024, the Board of Directors adopted the amended and restated shareholder rights plan (the "Amended and Restated SRP") which supersedes the plan adopted on March 22, 2024 and was approved by the Company's shareholders at a special meeting held on September 20, 2024 (the "SRP Meeting"). The Company also entered into a support and standstill agreement (the "Support Agreement") with 22NW, DIRTT's largest shareholder, and WWT Opportunity #1 LLC ("WWT"), DIRTT's second largest shareholder. The Support Agreement replaces the previously announced support and standstill agreement entered into with 22NW on March 22, 2024.
On August 28, 2024, the Company commenced a normal course issuer bid for the Company's Debentures, which permits DIRTT to acquire up to C$1,664,200 principal amount of the January Debentures and C$1,558,700 principal amount of the December Debentures (the "NCIB"). As at September 30, 2024, C$0.1 million and C$nil principal amounts of the December Debentures and January Debentures were acquired through the NCIB, respectively.
(1) See "Non-GAAP Financial Measures"
Management Commentary
Benjamin Urban, chief executive officer, remarked "We are continuing on our Journey to Excellence. Our financial position remains strong and we believe we have a robust short- and long-term pipeline. We recently finalized a commercial strategy that will diversify our business and have new senior leadership across key parts of the organization to help drive this forward. Our key differentiators, including a custom, adaptable product, industry-leading delivery time and sustainability benefits continue to attract end customers seeking a better alternative to traditional construction. With regard to the Falkbuilt litigation, we are very pleased with the decision of the Court of King's Bench of Alberta to schedule a trial after December 8, 2025 and before June 30, 2026. We have confidence in the strength of our case and are glad that this matter will finally be heard in court. On the U.S. Falkbuilt litigation, we are seeking $100 million of damages as part of the second amended complaint."
Fareeha Khan, chief financial officer, added "We are reporting another quarter of positive Adjusted EBITDA despite lower revenue compared to the prior year quarter. As we plan for 2025, we are aligning our budget and investments with our strategic priorities of revenue growth, innovation, reinvesting in our ICE software and talent development."
Third Quarter 2024 Results
Third quarter 2024 revenue was $43.4 million, a decrease of $6.2 million, or 12.4%, from $49.5 million for the same period of 2023, and an increase of $2.2 million, or 5.3%, from the second quarter of 2024. Third quarter revenue was in line with the expected guidance range of $40 million to $44 million provided last quarter. The decrease in revenue, as compared to the same period of 2023, was primarily the result of three large commercial projects and one large healthcare project that were completed in the third quarter of 2023 and were not repeated in the same period in 2024, partially offset by higher volume in the education sector.
Gross profit and gross profit margin for the quarter ended September 30, 2024 were $16.8 million or 38.8% of revenue, a decrease of $0.3 million from $17.1 million or 34.4% of revenue for the quarter ended September 30, 2023. Adjusted Gross Profit (see "Non-GAAP Financial Measures") for the three months ended September 30, 2024 was $17.6 million, a decrease of $0.7 million from $18.3 million for the third quarter of 2023. Adjusted Gross Profit Margin (see "Non-GAAP Financial Measures") for the third quarter of 2024 was 40.7% as compared to 36.9% in the comparative period of 2023. These increases in Adjusted Gross Profit Margin are the result of improved material optimization to offset the inflationary impacts on material costs.
Sales and marketing expenses decreased by $1.0 million to $5.2 million for the three months ended September 30, 2024 from $6.2 million for the three months ended September 30, 2023. The decrease was driven by a $0.4 million decrease in commissions, a $0.3 million decrease in salaries and benefits costs, a $0.3 million decrease in pass through charges, and a $0.2 million decrease in other individual costs, offset by a $0.2 million increase in marketing and tradeshow expenses related to the "Partner Camp" event hosted by the Company for our construction partners held at the end of the third quarter of 2024.
General and administrative expenses increased by $1.2 million to $5.8 million for the three months ended September 30, 2024, from $4.7 million for the three months ended September 30, 2023. The increase was primarily related to a $1.1 million increase in professional services costs, a $0.1 million increase in salaries and benefits costs, and a $0.1 million increase in building costs, offset by a $0.1 million decrease in office costs, and a $0.1 million decrease in communications costs. Professional services costs increased as a result of the special meeting held in the third quarter, the private repurchase of convertible debentures, the Support Agreement and the normal course issuer bid that we commenced during the third quarter.
Operations support is comprised primarily of project managers, order entry and other professionals that facilitate the integration of our construction partner project execution and our manufacturing operations. Operations support expenses for the three months ended September 30, 2024 were $1.9 million, an increase of $0.1 million from $1.8 million for the comparative period of 2023.
Technology and development expenses increased by $0.1 million to $1.3 million for the three months ended September 30, 2024 from $1.2 million for the three months ended September 30, 2023. This increase was primarily related to a $0.1 million increase in professional services costs.
Stock-based compensation expense for the three months ended September 30, 2024 was $0.8 million compared to $1.1 million in the same period of 2023. The decrease in this expense was largely due to a higher number of RSUs outstanding in the prior year's period compared to the third quarter of 2024. The decrease in RSU expense was offset by a higher DSU expense, as a result of a higher share price during the third quarter of 2024 compared to the third quarter of 2023.
During the quarter, the Company incurred $0.6 million in reorganization costs, which related primarily to movement of equipment from the closed Rock Hill facility to the manufacturing facility in Calgary. The Company is in the process of moving the remaining assets at the Rock Hill facility to other operating locations.
During the first nine months of 2024, C$43.1 million ($31.7 million) of principal amount of Debentures was repurchased for cancellation through a substantial issuer bid completed in the first quarter of 2024, a private repurchase, and a normal course issuer bid which triggered an extinguishment of debt. The gain on extinguishment of $7.5 million for the three months ended September 30, 2024, was calculated as the difference between the repayment and the net carrying value of the extinguished principal less unamortized issuance costs of C$1.2 million ($0.9 million) (refer to Note 9 of our Interim Condensed Consolidated Financial Statements for additional information).
Interest expense increased by $0.3 million from $1.2 million in the quarter ended September 30, 2023, to $1.5 million in the quarter ended September 30, 2024. During the three months ended September 30, 2024, $0.9 million of unamortized issuance costs related to Debentures were expensed as a result of the repurchase and cancellation of such debt, offset by lower interest expense due to repayment of debt during the period.
Net income after tax for the third quarter of 2024 was $7.1 million compared to a $6.3 million net loss after tax for the same period of 2023. The increase in net income is primarily the result of a $7.5 million decrease in operating expenses (operating expenses in the third quarter of 2023 included an $8.0 million impairment charge on the Rock Hill facility which was not repeated in the third quarter of 2024), $7.5 million gain on extinguishment of debt relating to the private repurchase of convertible debentures and the normal course issuer bid, and a $0.2 million increase in interest income, offset by a $1.2 million increase in foreign exchange loss, a $0.3 million increase in interest expense, and a $0.3 million decrease in gross profit.
Adjusted EBITDA (see "Non-GAAP Financial Measures") for the third quarter of 2024 was $4.1 million, or 9.4% of revenue, a decrease of $1.2 million from $5.3 million, or 10.6% of revenue, for the third quarter of 2023. Lower Adjusted EBITDA was mainly driven by the decrease in gross profit and an increase in operating expenses due to the above noted reasons.
Outlook
This quarter we continued on our Journey to Excellence, reporting net profit after tax of $7.1 million and 9.4% Adjusted EBITDA Margin. At September 30, 2024, we held $23.6 million in cash on hand with total liquidity (inclusive of borrowing availability) of $34.3 million. Improved operational results have also led to positive cash flow in the last six quarters. We have strengthened our balance sheet through the repurchase and cancellation of a significant portion of our debt. Our debt at September 30, 2024 is $23.9 million, down from $56.1 million at December 31, 2023. We expect to be in a position to pay off or refinance the remaining Debentures when they come due.
Construction is a multi-billion-dollar industry and growing. Increasing challenges, such as rising costs, labor shortages and environmental impact are leaving end users in search of a better alternative, which increases the business case to build with DIRTT. We believe that we stand apart from competition with project certainty, our core focus on sustainability, adaptability, and our "custom is standard" offering.
DIRTT's executive and senior leadership team met this fall to plan for the future. We finalized our new mission, vision and values and determined four strategic priorities for the next three years: Revenue growth, continued expansion of DIRTT's proprietary ICE software, accelerated innovation, and investment in talent. New leadership in our commercial organization is driving forward a commercial strategy focusing on our core principles as stated in our mission, vision and values. Our vision is to "Transform how the world builds," which comes to life through what we view as our key differentiators:
Product Design: DIRTT's reconfigurable system offers a paradigm shift in how end users interact with their spaces. Our design offers a compelling alternative to conventional construction and our drywall alternative installs significantly faster and requires fewer trades
Speed: Our industry-leading 10-business-day lead time is among the fastest in our peer group. We have delivered on that commitment more than 99% of the time year-to-date
Quality: Our comprehensive 10-year warranty which typically exceeds conventional alternatives
Innovation: Our 20-year ethos of "custom is standard" allows us to serve a diversity of clientele and respond to their needs
Customer Service: Our sales representatives, project managers and internal teams are available to our customers to deliver on "custom is standard" as well as other organizational commitments
Technology: Our ICE software (as defined below) provides an end-to-end system for customers to design and for DIRTT to manufacture a diverse mix of products at scale
As we lean into these values, we continue to focus on removing bottlenecks for our commercial team and construction partners. We also continue to focus on accelerating pipeline growth from our new, diversified sales channels such as other prefabricators that are meaningfully contributing to our commercial strategy. We are reducing administrative tasks and offering our internal teams to support the sales cycle. We also enable our construction partners to pursue an increasing share of healthcare work through unique and differentiated products, such as our applied headwall offerings and the Clinical Observation Vertical Exam (the "COVE™"), a new innovative product designed to help improve patient care in emergency rooms. Just as we have implemented best practices for operational excellence in our plants, we are doing the same in our commercial organization.
Officially launching in November, we're already seeing positive demand for the COVE with interest from over 15 major health systems. The industry also recognized the COVE with two significant product awards for "Most Innovative" and "Architect's Choice" at the 2024 Healthcare Facilities Symposium and Expo.
A critical driver of our innovative process is our proprietary design integration software, ICE ("ICE" or "ICE Software"). We have committed to an ongoing process of enhancing this software to deliver more value and drive more efficiency. In Q3, in addition to launching ICE Manager and Design Editor, DIRTT's team made updates to enable our partners to rely less on the DIRTT support team to specify their designs in ICE.
Our operations team continues to excel in its goal of zero defects, missed deliveries, and workplace injuries. For the nine months ended September 30, 2024, our total recordable incident rate (TRIF) rate was 0.63, which is 85% below the industry average. Our on-time in full (OTIF) delivery performance was 99.2% for the quarter.
We believe that DIRTT has significant untapped manufacturing capacity that can serve a multiple of our current revenue base. Improvements to our cost structure, including a materially reduced fixed cost base and incremental growth in revenue, will flow through to Adjusted EBITDA and free cash flow.
Looking at macroeconomic conditions through the third quarter of 2024, the US economy remains uncertain, but we are increasingly optimistic. On the positive side, inflation has tempered considerably from a high in 2022. Unemployment has only risen modestly during that period of disinflation. It appears that the US economy is on the path to a soft-landing scenario. With commercial office as our largest segment, factors affecting workplace investment and occupancy are closely monitored. We continue to see a slow but steady increase in Kastle Systems occupancy data as well as large employers continuing their requirement for in-person attendance. Conversely, the AIA/Deltek Architectural Billings Index continues its twentieth month of declining billings for architecture firms. Additionally, the interest rate environment has begun to ease, but the tailwinds of that reduction have yet to reach the commercial real estate market. Overall, we remain confident in our continued ability to navigate diverse economic environments through our exceptional operational excellence and continued focus on scaling our organization for profitable growth.
As we look forward, our year-over-year 12-month pipeline is 10% lower than 2023. However, this is almost exclusively driven by winning a bid for a three-year +$25 million opportunity which began production in Q2 and will continue shipping into 2026. Clients order large projects (>$1m USD) in phases due to install schedules. Our full pipeline continues to grow and reach post-COVID highs. As we analyze the integrity of our pipeline, we have more won work year-over-year which reinforces our view for revenue growth in 2025. We have maintained the 2024 and 2025 guidance numbers that were provided in our Q2 outlook:
2024 Revenue: $165-175 million
2024 Adjusted EBITDA: $12-15 million
2025 Revenue: $194-209 million
2025 Adjusted EBITDA: $18-25 million
We have minimal capital expenditure needs in the short term and with the availability of tax losses, we expect most of our Adjusted EBITDA will flow through to free cash flow. Our expected 2025 Adjusted EBITDA takes into account planned investments to achieve our strategic breakthroughs. The level of investments made will be finalized as we go through our budget process in the next quarter. We expect the Company will have approximately one turn of debt to Adjusted EBITDA financial leverage by the end of 2025 and we expect to have improved access to traditional bank lines.
DIRTT could not have achieved the past two years of organizational improvements without the support of our talented employee base. We are advancing our goal to make DIRTT an employer of choice and we will aspire to maintain this stance in our industry.
Conference Call and Webcast Details
A conference call and webcast for the investment community is scheduled for November 7, 2024 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 Fareeha Khan, chief financial officer.
The call is being webcast live on the Company's website at dirtt.com/investors. Alternatively, click here to listen to the live webcast. The webcast is listen-only.
A webcast replay of the call will be available on DIRTT's website.
Interim Condensed Consolidated Statement of Operations
(Unaudited - Stated in thousands of U.S. dollars)
For the Three Months Ended September 30,
For the Nine Months Ended September 30,
2024
2023
2024
2023
Product revenue
42,475
48,095
121,690
127,105
Service revenue
900
1,442
3,733
3,893
Total revenue
43,375
49,537
125,423
130,998
Product cost of sales
26,208
31,622
76,589
88,529
Service cost of sales
354
850
