| Shawna Mason | executive |
| Benjamin Urban | executive |
| Fareeha Khan | executive |
Good day. Thank you for standing by. This is the conference operator. Welcome to the DIRTT Environmental Solutions Third Quarter 2024 Financial Results Conference Call. [Operator Instructions] The conference is being recorded. I would now like to turn the conference over to Shawna Mason, Director of Corporate Affairs. Please go ahead.
Thank you, operator, and good morning, everyone. Welcome to today's call to discuss DIRTT's third quarter 2024 results.
Joining me on the call today will be Benjamin Urban, CEO; and Fareeha 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, excluding special items. Please reference our Form 10-Q as filed on November 6, 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 now turn the call over to Benjamin.
Thank you, Shawna, and good morning, everyone.
This quarter marks DIRTT's sixth consecutive positive adjusted EBITDA quarter.
Our financial position remains strong, and our short- and long-term pipeline is growing in line with our expectations.
As we look towards 2025, we are working on a commercial strategy designed to diversify our business and have added new senior leadership in key parts of the organization to help drive it forward.
Construction is a multibillion-dollar industry and increasing challenges such as rising costs, labor shortages and concerns regarding environmental impact are leaving end customers in search of a better alternative to mitigate such challenges.
Our key differentiators, including custom adaptable products, industry-leading delivery times and sustainability benefits continue to increase the business case to build with DIRTT.
In addition to our financial results, we will be sharing key business and operational highlights on today's call. I'll now hand it over to Fareeha to discuss the financials.
Thank you, Benjamin, and good morning to our listeners. Please note that we have issued a press release discussing our third quarter results, which is available on our website.
We have also provided additional analysis in a supplemental presentation, which is also now available on our website.
Revenues for the third quarter were $43.4 million, down 12% compared to the same period in 2023. The decrease in revenue was largely due to 3 large commercial projects and 1 large health care project that occurred in 2023 and did not repeat in 2024.
On gross profit, we continue to maintain strong margins. Compared to the third quarter of 2023, gross profit margin increased from 34.4% to 38.8% in the third quarter of 2024. Adjusted gross profit margin, which excludes the impact of depreciation and amortization, increased from 36.9% in the third quarter of 2023 to 40.7% in the third quarter of 2024. Despite the higher gross profit margin, gross profit values decreased from $17.1 million to $16.8 million in the third quarter due to lower revenues, as explained earlier. Consistent with what we have shared before, the improved margin is primarily due to improved operational efficiencies to offset the inflationary impacts of material costs.
Our 12-month forward sales pipeline, excluding leads at October 1, 2024, was $255 million, a decrease compared to $283 million at October 1, 2023. The decrease is due to phasing of a large project that we had included in our October 1, 2023 pipeline over a period of 3 years. We believe our pipeline has both higher integrity and more projects further along in the process, and therefore, we are maintaining our revenue guidance for 2025 at $194 million to $209 million.
Operating expenses for the third quarter were $15.6 million compared to $23.2 million for the same quarter last year. The prior year quarter included an impairment charge of the Rock Hill facility of $8 million.
Excluding this charge, operating expenses for the quarter were slightly higher than the previous year quarter due to additional professional fees this year related to the debenture repurchase and the special meeting of shareholders that was held this past September.
Our net income after tax for the third quarter of 2024 was $7.1 million compared to a loss of $6.3 million for the same period of 2023. Net income after tax was impacted by the gross profit decrease and operating expense increase explained earlier.
Additionally, in the third quarter of 2024, we benefited from a gain on extinguishment of convertible debt of $7.5 million and a $0.2 million increase in interest income, offset by a $1.2 million increase in foreign exchange loss and a $0.3 million increase in interest expense.
Adjusted EBITDA for the third quarter was $4.1 million, a decrease of $1.2 million from a $5.3 million adjusted EBITDA during the third quarter of 2023.
As explained earlier, this decrease is due to the decrease in gross profit due to lower revenue levels and higher operating expenses. This is now DIRTT's sixth consecutive quarter of positive adjusted EBITDA, and we are pleased with the success of operational efficiencies implemented over the past 2 years.
I will now turn to our balance sheet. The quarter finished with $23.6 million in unrestricted cash, down $1.1 million from $24.7 million at December 31, 2023, and down $15.9 million from June 30, 2024. Cash decreased from June 30, 2024, mainly due to a $16.2 million repayment of long-term debt, which I will explain later on in this call. Cash provided by operations was $1.5 million, while cash used in investing activities, mainly capital expenditures, was $0.6 million for the quarter.
Our working capital continues to improve. Net working capital at the end of the quarter was $34.1 million, up $4.4 million from December 2023, primarily due to a decrease in accounts payable and accrued liabilities of $3.6 million, a decrease in customer deposits and deferred revenue of $1.8 million, offset by a decrease in cash of $1.1 million.
Liquidity, which includes $10.7 million of availability under our ABL facility was $34.3 million as of September 30, 2024.
We have not drawn on this facility to date.
During the year, we entered into various transactions to reduce DIRTT's long-term debt.
As described in our 10-Q, we entered into a substantial issuer bid, a debenture repurchase and a normal course issuer bid through which we have reduced our long-term debt from $56.1 million at December 31, 2023, to $23.9 million at September 30, 2024. The debt was paid down at a discount, and we recognized a gain on extinguishment of debt of $10.4 million in the 9-month period to date.
With our forecasted adjusted EBITDA, we expect to have a debt leverage ratio of approximately 1x going forward into 2025.
We are evaluating options on whether to pay off or refinance the remaining debentures when they become due in 2026. This concludes the earnings and financial position report.
Looking forward, we have provided forecasted revenue and adjusted EBITDA figures for the remainder of 2024 and 2025. Details as well our cautionary advisory on our forward-looking statements can be found in our press release and 10-Q. I will now turn it back to Benjamin to discuss DIRTT's business updates.
Thank you, Fareeha. DIRTT's leadership team met in Q3 to plan for the future. We finalized our new mission, vision and value statements and determined 4 strategic priorities for the next 3 years: revenue growth, continued expansion of DIRTT's proprietary ICE software, accelerated innovation and investment in talent.
Our vision is to transform how the world builds, which comes to life through key differentiators such as our high-quality, flexible products, efficient delivery times and our end-to-end technology.
As we lean into our values, we continue to focus on removing bottlenecks for our commercial team and construction partners. Acceleration of our pipeline growth is top of mind.
Our new diversified sales channels, such as other prefabricators, are contributing to our commercial strategy. We're reducing administrative tasks and offering our internal teams to support the sales cycle. Underlying all of this is innovation, which fuels multiple aspects of the business from the products we bring to market to our commercial strategy to identifying more efficient ways to work. It's embedded in our culture and our way of thinking, and we continue to see the benefits.
In addition to welcoming 4 new partners year-to-date that will service 11 major markets, we also congratulate our tenured construction partners for their commitment and continued growth and expansion into additional geographic areas to expand DIRTT's market reach. Within our direct sales force, we've layered in a new sales representative in the Midwest and have already begun building an internal sales support team to assist our entire direct sales force to expand their business development capabilities.
We also added additional team resources in Q3 to our integrated solutions team to address growth and increase demand for upcoming projects that are new to our pipeline, delivered both through that channel as well as in coordination with our construction partners. Signals from the market continue to demonstrate demand for DIRTT solutions in the health care sector. An example of a project delivered together with a construction partner is a deal our DIRTT team secured with a major national general contractor to build and install fire-rated prefab solutions and a full suite of DIRTT products in 2 large ambulatory service centers in Florida. The client, one of the largest ambulatory networks, is using these 2 projects as test cases for speed to market and cost certainty for a planned future expansion.
AGILE INTERIORS, one of DIRTT's construction partners in Houston, will oversee procurement of DIRTT material and the design and project management of DIRTT solutions. This approach demonstrates an innovative approach to integrating our partners and external general contractors who self-perform for the benefit of the end client.
In Q3, over 800 projects were ordered, and the following is a small sampling from some of those projects: DIRTT recently shipped products to San Diego for our second One Safe Place project. One Safe Place South Bay is a family justice center designed to support victims of domestic violence, human trafficking, elder abuse and child abuse. DIRTT partnered with community organizations and law enforcement to build a safe and welcoming environment where individuals and families can access essential resources and services.
DIRTT's approach to this project emphasized flexible, modular construction that allows the space to adapt to changing needs without extensive renovations. This aligns with DIRTT's commitment to sustainable construction, reducing waste and creating spaces that evolve with the community. The facility utilizes DIRTT timber, solid walls, casework, power, networks, graphics, glass storefronts and raised access floors. The completion of the One Safe Place project demonstrates DIRTT's commitment not only to innovative construction, but also to projects that create a positive impact on communities.
Our sales volume with national account clients remains exceptionally strong, particularly within the commercial vertical, namely the financial services sector, reflecting a 22% increase in 2024.
Our trusted partnerships with major clients like JPMorgan Chase, Bank of America, Wells Fargo and Fifth Third Bank underscore our ability to deliver on large-scale complex projects. These projects showcase our diverse range of solutions, including mass timber, high-quality casework, solid walls and glass door front systems, meeting the unique requirements of each client and setting new standards in design and functionality within the financial services industry.
We're experiencing growth in the commercial office vertical as more employees continue to return to the office with clients such as TJX, Kiewit, Chick-fil-A, Cemex and CNRL.
Our government sector was quite active with orders from the County of San Diego, the Arkansas House of Representatives, the Attorney General's Office and the U.S. Court of Federal Claims. In our education vertical, University of Arkansas, LaSalle College, Goose Creek Independent School District and the University of Miami, all invested in our solutions.
Last quarter, we shared the preview of our new health care product, the COVE, an innovative solution that addresses the space challenges faced by emergency departments across the United States. Officially launching in November, we're already seeing positive demand for the COVE with over 15 major health systems interested. The industry also recognized the COVE with 2 significant product awards for Most Innovative and Architect's Choice at the 2024 Healthcare Facilities Symposium and Expo.
We recently featured the COVE at the Healthcare Design Conference in Indianapolis. Using a cutting-edge virtual reality experience, we showcased the value of DIRTT's construction method in the health care vertical. Modular medical gases, electrical, walls, casework and data all drove home the fact that the DIRTT system represents the future of health care construction.
In addition to the COVE, we continued to expand our product catalog in Q3 with the latest installment of the Spectra door product line. This version is a double pane swing door that meets acoustical and design aesthetics for higher performance requirements, and offers a wider range of value and choice to our customers.
With the barn door version planned for release in Q4, the full Spectra portfolio will have been completed in 2024. Spectra represents the fastest-growing product DIRTT has launched over the past 2 years and preparations are in place to expand manufacturing capabilities for higher demand as organic growth continues.
A critical driver of our innovation process is our design integration software, ICE.
We have committed to ongoing enhancements to the software to deliver more value and drive more efficiency for our customers. In Q3, in addition to launching ICE Manager and Design Editor, the team made updates to enable our partners to rely less on the DIRTT support team to specify their designs in ICE, including pricing for custom backpainted glass tiles, the ability to discount Inspire products directly and adding more weight data for our doors.
We are leveraging ICE to drive more operational efficiency and cost savings.
The DIRTT technology team partnered with operations to begin collecting and reporting on wood consumption across all factories in preparation for an optimization project with the potential for significant material cost savings. The team also uses pipeline data to forecast expected revenues.
This quarter, we were over 95% accurate. This helps the procurement team make informed decisions on purchasing and inventory levels.
In addition to our existing capabilities, the team continues to experiment with tools such as AI for future applications that will accelerate, automate and optimize business processes and increase productivity even further.
Our operations team continues to excel on its goal of 0 defects, missed deliveries and workplace injuries.
Our total recordable incident rate was 0.63, which is 85% below the industry average.
Our on-time and full delivery performance was 99.2% for the quarter.
In early October, DIRTT was recognized for our operational excellence by ICG, the Industrialized Construction Group.
We are awarded the Industrialized Construction Maturity Assessment, or ICMA, Platinum Medallion, a new program designed to recognize outstanding performance across key disciplines of industrialized construction. And the Platinum Medallion is the program's highest achievement. DIRTT underwent a comprehensive data-driven third-party assessment to evaluate our performance in multiple areas, and we scored in the top 1% or higher to achieve the Platinum Medallion. This reflects industry leadership, manufacturing excellence, strategic integration, design excellence and exemplary ESG standards. Not only does this reinforce our dedication to the highest quality in our industry, but it provides us with a valuable road map for continuous improvement and innovation.
We are grateful to our partner network for their role in this period of continued growth for DIRTT. Last month, we hosted Partner Camp in Calgary for our construction partners with over 400 attendees. We brought this group together in person for the first time in 5 years to share best practices, compare strategies, plan for the future and celebrate wins. The agenda reflected our commitment to innovation in our products and processes and to solving challenges for the industry.
Our people are the heart of DIRTT's business.
We have committed to developing our talent, bringing in exceptional people and creating a strong culture.
We are pleased to share that DIRTT has a new SVP of Talent, Wilhelmina Ashun-Codjiw, who joined the organization in October. She will be responsible for driving our talent strategies and initiatives and advancing our goal of making DIRTT an employer of choice. Her impressive background of more than 24 years of experience in HR operations, leadership development, compensation and benefits and organizational strategy will be key to our commitment to build and maintain a strong and dynamic workforce.
Connecting with our community is a part of DIRTT's story.
This quarter, many members of our Calgary team participated in the annual Calgary Corporate Challenge, tackling 22 of 23 eligible events during several days of camaraderie and team building. The Calgary Corporate Challenge is a local organization with a vision of unifying the Calgary business community. The DIRTT team came together for some fun competition and won a few medals in the process. It was a great opportunity to spend time together outside of the office and interact with other local businesses.
In Q3, our team also continued the recently launched volunteer initiative, dedicating time to creating and handing out comfort kits to people in need around Calgary, running a bottles and cans collection to support the Jasper wildfire relief efforts, participating in a fundraiser for the Center for Suicide Prevention and supporting the Calgary Food Bank. We're proud to have dedicated employees who not only care for each other, but also for our community.
Lastly, on the ongoing Falkbuilt litigation, we are pleased to provide a very positive update on our Canada lawsuit. Last quarter, we mentioned that in Canada, as a potential alternative to the summary judgment application on liability, DIRTT recently took advantage of a new pilot project introduced by the Alberta Court of King’'s Bench to seek a full trial on both liability and damages to expedite the matter to conclusion.
We are pleased to share that on October 25, 2024, the honorable Mr.
Justice Poelman of the Court of King's Bench of Alberta granted a court order directing the clerk of the court to schedule an 8-week trial on the first available dates after December 8, 2025, to determine all issues, including damages and liability. The exact trial date should be scheduled in approximately 2 weeks, and the trial will be completed in the first half of 2026. Once the trial date has been scheduled, DIRTT will withdraw its summary judgment application as the trial will cover all of the issues in dispute between the parties. This is a great outcome.
We have confidence in the strength of our case, and we are glad this matter will go to court in the next 18 to 24 months.
In the U.S. litigation, Falkbuilt has refused to respond to discovery. Whilst Falkbuilt also resisted the entry of a scheduling order after motion practice and an order from the magistrate judge, the court entered a scheduling order requiring discovery to be completed by February 2025. The court set a pretrial conference for October 17, 2025.
DIRTT has also retained 2 experts, briefing on Falkbuilt's motion to stay the case and renewed motion to move the case to Canada is fully briefed. DIRTT is proceeding as though the motion will be denied.
We are seeking $100 million of damages as part of the second amended complaint.
As with our Canada case, we have a strong confidence in the outcome of our case.
This is an exciting time for DIRTT, and we look forward to continued momentum. 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.