DIRTT Environmental Solutions Ltd. (TSX: DRT) Management Interview


DIRTT Environmental Solutions Ltd.

President: Scott Jenkins



WSA: Good day from Wall Street.  This is Juan Costello, Senior Analyst with the Wall Street Analyzer.  Joining us today is Scott Jenkins, the President of DIRTT Environmental Solutions Ltd.  The company trades on the Toronto Stock Exchange.  Ticker symbol DRT.  Thanks for joining us again there, Scott.

Scott Jenkins:  Well thanks, Juan.  We appreciate you having us.

WSA: Certainly. So, starting off for some of our listeners that didn’t catch our last interview back in November, can you give us a history and overview of DIRTT?

Scott Jenkins:  Sure, DIRTT is an 11-year-old company and what we’re really trying to do is change and address the challenges of conventional construction or traditional construction, if you will, in an industry that has been slow to adopt technology and the current standard involves cost delays, quality issues, and cost overruns.

DIRTT is a manufacturer of sustainable, custom, pre-fabricated interiors, we’re talking about DIRTT walls, DIRTT power, DIRTT networks, DIRTT floors, DIRTT ceilings and millwork and we do everything using our proprietary ICE 3D design software so that we can deliver offices, hospitals, universities, schools, in a rapid manner—three to four times quicker than traditional construction with cost certainty—completely custom and flexible so people can move it.  It’s modular, so it’s replacing traditional interior construction using technology and innovative solutions.

WSA: Great. And so can you bring us up to speed on some of the record results for both the year and quarter, which you just issued?

Scott Jenkins:  Yes, we’re very proud of our Q4 2015 results, it was another record year, 2014 was a record year for us as well, but in 2015 our revenues were up 26.3%. Growth margins continued to improve, and we have a lot of leverage in our business because of technology and EBITDA increased 74.3%, so we’re seeing the benefit of that leverage in our business model with revenues of just over $236 million. This was our most successful year to date, but more importantly actually for 2015 what we’ve been starting to talk to people about is we achieved all those results while at the same time actually accelerating our investment in new solutions, our technology, growing our sales and marketing efforts. 2015 and 2016 are for us really years of investment to not just sustain our growth, but in our minds accelerate our growth. We’re such a small, small portion of the potential market in conventional or traditional construction.

WSA: Certainly, and can you go over your strategic growth initiative?

Scott Jenkins:  Well, over the last couple of years we’ve really decided to focus on five key, to use your term, strategic growth initiatives—I think that’s a good way to put it.  The first for us is a focus on the North American market, so 95% of our business is in North America, the majority of which is in the United States with Canada also being a great market for us.  We’ve been focusing on our distribution partners, our sales channels, our existing clients who are coming back to us now for repeat business and larger projects, so that’s focus number one, accelerating our investments there.

Focus number two for us is really just accelerating investment in our innovative product development, our solutions, whether it’s new solutions like our Enzo approach, integrated technology in the interior space, or looking at infection control solutions for healthcare.  We’re investing and our product development team has grown in 2015 and it will grow further in 2016 and then also accelerating investment in our proprietary ICE software, with our programmers and really taking that to a next level and now pushing into virtual reality.  We’re excited about Oculus, which is a little behind schedule, but has now commercialized their virtual reality goggles.  We’ve been waiting for that because you can immerse yourself in your space using our ICE technology, and that will be strategic initiative number two.

Number three, is a continued focus on new industry verticals. When we started the company 11 years ago it was commercial space, so office space was our main business.  Six years ago we moved into healthcare, and we’re seeing a lot of momentum there with a longer sales cycle— there are more mission critical facilities now.  2015 was a great year in the education space.  Our education team is doing a fantastic job.  They’re running off their feet right now, growing that market, and now moving into residential and timber frame construction. So it’s a natural kind of leap for us using our software for rapid construction and building beautiful space, and that is our third initiative.

Number four, we’ve discussed I think previously, opening our new Green Learning Center or showroom if you will in London, England.  We now have a team in Singapore.  We’re having some discussions, so there are some strategic international opportunities now that we think is going to start to add to our topline growth here in the short to medium term.

And then the fifth initiative is really just continuing to develop strategic partnerships like our partnership with Corning for Willow Glass, which is exclusive to us in the interior construction.

So five key strategic initiatives that we’re focused on right now that we think is going to drive growth in 2016 and beyond.

WSA: Great and so what are some of the key goals and milestones that you’re hoping to accomplish over the next 6 or 12 months?

Scott Jenkins:  Well, I think for us there’s quite a few, we’re a busy company right now.  In June we will be hosting DIRTT Connect, our largest industry event for architects, designers, our sales team, our distribution partners, it’s really a coming together of everybody that’s part of the DIRTT family and it’s our largest marketing event of the year.  This year we expect to see attendance probably increase in the neighborhood of 30% to 50% if you can believe it.  The buzz already has been significant, so that’s where we’ll be unveiling even newer solutions, our latest and greatest. We’ll be showcasing to the world our ability to build out completely custom technology–integrated hospital rooms, classrooms, the office of the future, and residential solutions. That’s what I’m probably most excited about as we begin the month of April.

Second would be our international expansion.  We’re very excited to open our London, England Green Learning Center here shortly, introducing our solutions both to the UK markets and also the EU. Our London office actually ends up being a great place to showcase our solutions to our middle-eastern clients where we’ve had a lot of success, especially in Saudi Arabia, with the Ministry of Health and we’re seeing some momentum in other gulf countries right now.  Those are part of the two things that excite me the most among a long list of other developments right now.

WSA: Well, great and so are there any other trends that you’re looking at right now in this sector, primarily with education, and how is the company positioning itself with some of your solutions to continue to capitalize?

Scott Jenkins:  Well, I think that’s a great question.  We’re seeing a focus throughout North America, so both United States and Canada, in new school construction and renovation where they’re really integrating technology and rethinking the classroom—the days of that classroom with the blackboard at the front are coming to an end—and it’s really about students with wireless technology and learning in groups and common areas and meeting spaces, and that is fantastic for DIRTT. Integrating technology into our wall solution has been “putting your walls to work” and that’s one of the bedrock tenants of the DIRTT solutions, so I think that’s key and that trend is moving forward.

We’re definitely seeing a trend where residential space and commercial space is coming together, that’s a natural fit for the DIRTT solutions.  I’m happy to say I think we saw this trend probably in advance to a lot of folks and we’re ready to address that and provide great solutions for our clients right now.

One negative trend in the sector that we’re seeing right now and I think is a big positive for DIRTT is in traditional construction. There is a crisis coming and it’s labor shortage, skilled trades people are becoming harder to find.  The US construction market is doing well, residential is coming along, commercial is coming along, but it’s difficult to find these skilled carpenters and electricians. The baby boom generation is retiring and the younger generation, young women and men, aren’t entering the trade at a rate that can replace those that are retiring and leaving and that’s going to cause some significant issues and we’re a big believer that the only solution is technology, our ICE technology, and ability to provide rapid, pre-fabricated custom solutions—that’s the only solution to address this coming crisis.

WSA: Well put, and from an investment standpoint, when it comes to your key drivers, what do you wish investors better understood about the company and/or the sector?

Scott Jenkins:  Well I think what’s important for investors to look at historically is the growth in our EBITDA margins and the leverage in our business model.  So we have both leverage, what I like to say above the line, the cost of goods sold line, because one-third of our cost of goods sold, as a construction company, is labor in a factory setting, so it’s very stable as we continue to growth, so there is a lot of leverage there.

In addition, on the technology side and our ability to deliver EBITDA growth on the SG&A line because we’re growing our revenue so fast we get economies of scale there, so that’s why our EBITDA and our profit margins are actually expanding, and I think that’s important and we’ve shown that historically and over the long term we expect that to continue.  The one caveat we speak to investors about is that because we’re such a young company and at our size, quarter-to-quarter our results have been great, but the growth rates can move around a bit.

We really try to get investors to focus on our trailing 12 months results and kind of look at us over an annual basis and think a little longer term.  We’re investing for the long term.  We know what we’ve accomplished in 10.5-11 short years to get to this size, but we know we’re really just scratching the surface. I think that’s important for investors to grasp when they frame their analysis of our company.

WSA: Certainly and so once again joining us today is Scott Jenkins, the President of DIRTT Environmental Solutions Ltd.  The company trades on the Toronto Stock Exchange, ticker symbol DRT.  Currently trading at $5.42 a share Canadian, market cap is north of $450 million.  And before we conclude here, Scott, to recap some of your key points, why do you believe investors should consider the company as a good investment opportunity today?

Scott Jenkins:  I think the best succinct summary is there are a lot of challenges with traditional construction right now, including cost overruns, quality issues, and timing delays. We’re a technology company operating in construction with innovative pre-fabricated solutions that we believe address all of these challenges and we think the tide is turning. Obviously that has supported our significant growth over the past three or four years, but we still think it’s early days, so that’s probably the best way to let investors know why it’s probably worth taking a look at DIRTT.

WSA: Well, we certainly look forward to continuing to track the company’s growth and report on your upcoming progress and I would like to thank you for taking the time to join us today, Scott, and update our investor audience on DRT.  It’s always good having you on.

Scott Jenkins:  Thanks so much, Juan.  We really appreciate the time.



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