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 for DIRTT Environmental Solutions Ltd., the company trades on the Toronto Stock Exchange, ticker symbol DRT.  Thanks for joining us today there Scott.

Scott Jenkins:  Thanks for having us Juan.  We appreciate it.

WSA:  Yeah, for sure.  So, for some of our listeners that didn’t catch our last interview, which was April of this year, can you provide us with an intro?

Scott Jenkins: Sure, so DIRTT is at our core a technology company first and what we do is we’re a manufacturer of custom prefab interior construction solutions.  So walls, power, data, flooring. Everything we build for our customers in the office space, hospitals, education is completely custom and delivered on rapid lead times. So, we’re a technology enabled manufacturer of interior construction solutions.

WSA: And can you bring us up to the speed there on your most recent news including your record, Q3 revenue results?

Scott Jenkins: Yeah, so last week we were very happy to announce record revenues.  Our revenues for the third quarter surpassed $71.5 million,  the first time at that level.  That comes on the heels of a strong second quarter and our trailing 12 month revenues are now at record levels, surpassing the $250 million mark and a run rate on this quarter we’re at $284 million in revenue.  So, very happy that a lot of our investments in strategic growth are really [starting] to pay dividends and things are looking [good].  We commented on our earnings call, we’re seeing a lot of momentum as we entered Q4 and into 2017.  So, very strong results, great to announce those to the market last week.

WSA:  Sure and as far as some of your other news you also opened up a DIRTT Green Learning Center there in the UK?

Scott Jenkins:  Yeah, one of our strategic growth pillars if you will or initiatives over the past year and half has been strategic international expansion.  So, building on our success in the Middle Eastern markets of Saudi Arabia with our distribution partner there and largely healthcare works for hospitals. We opened a green learning center or showroom if you will in London really with the goal to service the UK market, specifically London where the cost of building are very high.  The costs of dealing with construction waste are very high.  Rents are extremely high and similar to what we’re seeing in the United States access to skilled labor is really becoming a challenge for construction.  The same is true in the UK, you know recently with their vote for BREXIT that actually long term may drive that challenge even more as a lot of the skilled trades from Eastern Europe leave the UK.  At the end of the day who is going to build these hospitals, these schools, these offices?

WSA:  Yeah exactly and so you mentioned one of the initiatives.  Can you describe the other four, you have five in total right?

Scott Jenkins:  Sure that’s correct.  So, I think we spoke in April a little bit about them.  The core strategic growth initiative process is really still focused on North America, which is our core markets for the United States and Canada and that’s growing our market share, which right now we estimated lower than 0.1% of the addressable market. If you think of interior construction, you know framing, drywalls—I cringe when I say the word drywalls because it’s so bad for the environment—but also power, data, flooring and ceiling.  We’re talking about a market size in the hundreds of billions of dollars, so by no means are we nearly where we want to be.

Our focus is on our existing sales channels, servicing our existing customers who are now one thing driving our goals [and are] coming back to us for second, third, fourth projects; we’re developing an account, base.  So, that’s number one, that focus on North America.  Number two innovation, we are a technology company.  Our strategic growth initiative around innovation really focuses on two pieces and one accelerating our investment and our proprietary ICE technology.

Now ICE is, you recall is our 3D designed technology that not only provides an immersive experience for our clients at the front end of design, it also feeds up a live dataset, does all of the engineering and feeds right into our manufacturing.  This quarter a further update we announced that our standard lead times for a completely custom interiors of three weeks, we actually reduced it to two weeks.  So, that was met with a lot of fanfare from our existing clients and then of course continuing innovation on the product development side.  There is a lot of intellectual property around our designs, our product development team  is always working hard.

I’m really excited,  I can’t tell you about this, I can’t tell your listeners; but I have just spent time with one of our Co-Founders Geoff Gosling about an hour ago showing me some of the new stuff they’ve cooked up in sort of his secret little skunk works that we hope to unveil later this fall or maybe earlier next year and it blew me away.  So we’re a company that is focused on accelerating our innovations that would be number two.  Number three, we talked about international expansion.  Number four, would be new verticals.

So, DIRTT is investing as we move and grow our company, move into residential aids in place type facilities, we think there is a tremendous opportunity there and then the fifth thing is it’s really briefly is there are strategic partnerships.  {We want} to partnership with other innovative companies that do great things that have products that maybe we can leverage through our technology and our own innovations.  So, those would be the five pillars.

WSA:  Right, and you have that exclusive partnership there with Corning for the interior construction set.

Scott Jenkins:  That’s right, our partnership with Corning has been building and has to do with their proprietary Willow Glass exclusive to DIRTT in the interior construction environment. We’re also working with them maybe to see what else they have.  And I always joke with my colleagues at Corning, what else do they have in their vault? They’re a smart company that has invested a lot over the years on some really unique and interesting potential products.

WSA: Great and what are the key goals and milestones that you’re looking at here over the course of the next six to twelve months?

Scott Jenkins: Well, quite a few, as you know we don’t sit on our hands around here.  It’s moving a million miles an hour and things are only getting faster.  From a financial perspective for investors, we really want to communicate to investors, potential investors the leverage, the operating leverage in our business. When we went public three years ago our gross margins were just below 40%.  Our SG&A as a percentage of revenue was about 36%, 37% and it’s been our target to demonstrate the power of the technology in our business to drive those margins higher on the gross margins and SG&A as a percentage of revenue down.

In this quarter we saw our margins in the fall,  in the 40s.  Our goal is to drive to 45% and above.  We’ve accomplished that in two quarters.  We see that on the horizon and drive our SG&A as a percentage of revenue below 30%.  At those levels we feel confident that we can demonstrate EBITDA margins in the 15% to 20% range in the future. We can’t  provide guidance on when we expect to achieve those targets, but looking back again to our IPO nearly three years ago,  we achieved all the metrics that we spoke about to investors at that point.  So, we see the path.

In terms of product development, innovation expansion, really again a big focus for us into the new year is supporting our distribution partners and growing our key North American business.  In particular we really see a lot of momentum in the healthcare and the education space.  Healthcare this quarter was about 18% of our sales, so it hit a high watermark.  Our healthcare clients are really seeing the benefits of the DIRTT solutions and that includes as I said, our ICE technology.  If you think about our ability now to work with a live construction file, but provide people with virtual reality capabilities for these mission critical facilities so that nurses, doctors, facility managers can actually really plan out the workflow of these facilities.  Whether it’s, patient rooms, palliative care ward, oncology wards, pediatrician areas, there are tremendous capabilities.  So, we see a lot of good things as we’re really getting close to 2017.  We see a lot of momentum in the business right now.

WSA:  And what are the key trends that you’re focusing on right now in this sector, I know last time we spoke you were talking about, education and you’re “putting the walls to work” initiative?

Scott Jenkins:  Yeah putting the walls to work, that’s a really good way to put it, integrating technology into the walls. There are many things to talk about.  Again our partnership with Corning for Willow Glass, that really provides us with a solution for our clients that addresses a lot of their challenges around infection control. That’s a very hard topic in the healthcare industry right now.  Education as you mentioned, embedded TV technology, collaborative workspaces there is definitely a trend, for office spaces towards more open plans.  We’ve seen this coming for a long time.

For us actually we see this is a huge opportunity because the spaces that they are building need to be integrated with technology.  They need to be flexible for the future, people need different environments to work in and connect in. They want to see higher fits and finishes, custom designed for unique spaces.  More and more companies are looking to expand into existing buildings.  Maybe not build new buildings, but the renovation of distorted buildings.  Well, the DIRTT Solutions are perfect for those scenarios.

WSA: Well, good and as far as investors and the financial community are concerned as you recently put out the record revenues, do you think that some of your key drivers there and  revenue growth is starting to resonate with them?

Scott Jenkins:  Yeah, I do believe that, with our Q3 results coming out I think we’ve demonstrated both the significant return to growth. We would like to comment to investors, that we did see some headwinds.  The energy industries so our oil and gas clients, energy pipeline clients,  they’ve had a tough time over the last few years and we’ve seen that piece of our business decrease from being over 20% of our business to now it’s 1% of our revenues.  So, those headwinds are largely behind us.  We still grew our company in spite of the decline in that industry because we’re becoming more and more diversified all the time,  education, healthcare, different commercial verticals, moving into residential.  So, for investors I think, we’re seeing a lot of momentum in our core business; but now that energy, the one headwind piece of our business is really a negligible piece of our business.  We feel that there is a strong runway ahead of us.  I guess that’s the best way to put it.

WSA: Certainly, so once again joining us today is Scott Jenkins, President for DIRTT Environmental Solutions Ltd., which trades on the Toronto Stock Exchange, ticker symbol DRT.  Currently trading at $5.91 a share Canadian, market cap is about $515 million and before we conclude here to recap some of your key points,  why do you believe investors should consider the company as a good investment opportunity today?

Scott Jenkins:  Well, one point I really want to make in the interview is that on a macro basis and some of the key trends, we’re talking about the office space.  There is no doubt every construction company I speak with in my travels contractor, architect, designer, our clients they are finding it increasingly difficult to get skilled trades to build other space and the frustrations of projects going over budget, over time, the quality not being what they hoped.  DIRTT answers all of those challenges because of our technology, both our innovative solutions and our proprietary ICE 3D design software; moving our lead times from three weeks to two weeks versus building out maybe a typical office in three to four months.  The fact is the future of construction is technology and it needs to be disrupted and we think DIRTT is at the forefront of that trend.

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

Scott Jenkins:  Thanks Juan.  I really appreciate it.

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