DIRTT Environmental Solutions Ltd.
(TSX:DRT)
President: Scott Jenkins
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INTERVIEW TRANSCRIPTS:
WSA: Good day from Wall Street this is Juan Costello, Senior Analyst with the Wall Street Analyzer. Joining us today is Scott Jenkins, President of DIRTT Environmental Solutions. The company trades on the TSX, Toronto Stock Exchange ticker symbol DRT. Thanks for joining us today there Scott.
Scott: Well thanks for having us Juan, we really appreciate it.
WSA: Great so this is an interview update from November of last year, for some of our listeners that are new to the story, can you provide us with a history and overview of DIRTT – D-I-R-T-T?
Scott: Sure well first I like to tell people and for some of your new listeners, DIRTT stands for Doing It Right This Time. And that’s our reminder that in our previous companies that we were very successful, but we also had some hiccups along the way and to try to change things around and give ourselves a little reminder to be humble as we move forward and build this great company. So DIRTT manufacturers interior construction solutions, we replace dry wall and framing and we build out what we believe are beautiful offices, beautiful hospitals, universities, schools, and now moving into new markets such as hospitality–residential in particular. But basically we are doing interior construction. We are using our proprietary technology, which we call ICE and we are doing it with speed, cost certainty, and high quality, which is exactly the challenges that our clients face in traditional construction.
WSA: And what were some of the key drivers behind your quarterly results, which were particularly strong?
Scott: Yeah we are definitely experiencing a lot of growth–top line growth. We are a growth company and we are focused on building that top line and we are starting to show our investors and people that are interested in us, a lot of leverage in our business model. What was interesting at the start of the year and in particular the last quarter, is that we didn’t have any large projects–no single project above two million dollars. Really just great projects from our clients – our growing client list that are $100,000 $200,000 $300,000, you know your typical interior renovation and construction projects. Whether that’s for a healthcare facility, a ward or maybe a clinic, a dentist office, a small office. So we are really seeing just this growing momentum for our solutions and our technology and that really drove the top line growth in Q2 and now we are demonstrating the leverage in our business and sustained profitability.
WSA: Great and so what are the key trends that you are focused on right now in this sector and how is the company’s position to capitalize?
Scott: So that’s a great question—If I may take a bit of a step back real quick. When we started the company 10 years ago – we are only a 10 year-old company, we really kind of built the company on the foundation of our ICE technologies so that we can deliver custom beautiful solutions to our clients with speed, accuracy, and cost certainty, which is unheard of in construction; but it was mostly for the commercial market. So moving on to trends, about four and a half five years ago, we took our solutions and they were just so flexible we were able to move into healthcare. Now that’s a longer sales cycle. Projects can be a little bit bigger, so we are seeing a lot of momentum in the healthcare industry where to our knowledge we are the only pre-fabricated manufacturer in North America of a full hospital room. And now year-to-date we’ve done over 150 hospital projects, and in our history we are approaching 1000 so we have a lot of credibility now in the space we are trying to build. Importantly though we are still [involved] in less than 0.1% of that market for interiors.
So healthcare is the number one trend. The second trend we are seeing on a macro basis is that we are seeing construction costs and access to construction labor go up and become a challenge. So construction costs in the United States are increasing, material, labor costs are going up but just even access to that construction labor. I was recently in Northern California meeting with some of our clients and our partners and they are really struggling to find crews to build everything that’s going on. So how do they do that? Well the answer we believe is a company like DIRTT where we can build beautiful custom at cost competitive interiors but we do it off site. It’s prefab; they get exactly what they want when they want it.
WSA: So, what are some of the factors that make the company and your solutions unique from some of the other players in the sector especially in construction?
Scott: Well, number one would be our ICE offer. So ICE is a proprietary software that we invented, proprietary, — we actually now – I’m going to muddy the investment thesis here. We do actually have some external customers of ICE, kind of testament to its capabilities. But it’s focused generally on DIRTT. ICE uses video game technology, so it’s allowing a client–somebody who is doing a big renovation or you know maybe lets use a hospital for an example turning a maternity ward into a palliative care ward to fly through their space, so 3D visualization, with exactly the same time of the exact dataset, it’s producing real time pricing, real time engineering. So ICE understands how the DIRTT solutions go together and isn’t going to allow us to build something that’s not physically possible.
It’s also providing all of the data and information right down to our factory floor on our machines. So one data set is driving the entire process. What that does is that it shrinks the time schedule, it provides cost certainty, it reduces deficiencies and it gives the client a user experience to understand what their space is actually going to look like and make real time changes up until the last minute. So that’s really our key differentiator, we are approaching almost 300 patents granted and applied for right now in our business. We’ve invested heavily in our intellectual property, we continue to increase that investment, not just maintain it. But it is definitely one of the key differentiators between us and conventional construction or other manufacturers.
WSA: Great and so what are your main initiatives and how does that fit into your goals and milestones for the next 6 to 12 months?
Scott: So I like to talk about kind of five pillars of growth strategy right now that we are concentrated on. Number one is grow our existing markets, predominantly North America. About 85% of our sales are in The United States, another 10% in Canada, 5% international. So you know obviously construction is a mass multibillion-dollar industry and we are a small piece of that right now. So focus on that in local markets, build on our brand–that’s number one.
Number two we are strategically looking at international markets. We have excellent distribution partnerships in the Middle East. We are actually opening what we call a green learning center or showroom if you will in London UK. London as you can imagine, the construction costs are extremely high, and there’s a lot going on.
Third piece is we are also looking at new verticals in residential. So where our team is taking the DIRTT solutions and we can we move into single family and multifamily developments. And we have some strategic partnerships that we are working on right now that are going very well. However, we don’t expect residential to add significant revenue for two to three years. But it will still use our existing manufacturing solutions. It’s a testament to our capabilities that we can move into residential with our product solution.
The fourth is really this new innovative product development. Over the last year we’ve rolled out our new Enzo solution, integration with technology in the walls, flooring, and data–modular power to our DIRTT power solutions custom millwork. So really doing the full interior solutions for our clients, so a lot of innovation also on the product development side.
And then the fifth, fifth kind of pillar, our strategy is — some strategic corporate partnerships and we were very excited earlier this year to announce a new partnership with Corning with respect to their Willow glass which is 0.2 millimeters thick, so very thin. It actually comes in a roll, like fabric and is exclusive to us and the interior construction industry and our product development team and the Corning product development team have been working on it and our partnership for almost a year. And we’re talking about where else can we take this.
The Corning Willow glass for us reduces our existing glass material usage potentially by up to 40%. It reduces shipping cost but it’s a robust product, very innovative, high-resolution graphics printed right on it. So I like to tell people what’s most interesting is Corning actually approached us. They saw us as an innovator. So we are really excited about that relationship and we’re in discussion with some other companies about other innovative relationships.
WSA: Sounds good and perhaps you can walk us through your background and experience Scott for some of our listeners that didn’t catch the last interview and talk about the key management team as you’ve had recent shift in your directors.
Scott: On the board side we added a new director by the name of Denise Wright. Denise has experience running public companies in property development and aerospace. So she is a well-known highly respected lady based out of Vancouver, British Columbia Canada, sits on the board of some large healthcare and not-for-profit educational institutions. So we can see the tie-in there to some of our growth industry. James Gosling who is a board member is well known, he is the inventor of the Java programming language, former CTO at Sun Microsystems. James is an original investor in the company, James is now really–I think of James as now a board member of Emirates, he is going to be an observer and a key advisor to us. But stepping officially off the board but still heavily involved I actually had a call with him just recently just a general update on some IP strategy, so very involved. So really we added Denise but James is kind of legal position as a board member just got tweaked a little bit due to time constraints with some other business interests of his.
You’re familiar with myself from the management team and your familiar with Mogens Smed (from previous interview) our CEO and Founder who has 45 years in construction and manufacturing. I’ve been with the company nine years now, became President about three years ago but prior to joining DIRTT I was actually CFO and executive of another public Canadian company that’s a technology company that has proprietary infrastructure management technology. So my background is really from technology companies and you know I view DIRTT really as a technology company operating in construction. And we think construction within an industry that has really been adverse to change and technologies over the years. We’re going to celebrate this upcoming year; we’re going to throw a big birthday party. It’s a 100th birthday of probably one of the most innovative construction advances ever and that’s the two-by-four.
100 years, that’s right there with drywall, you know, dry wall’s been around 100 years as well. So as we’re talking about an industry, it’s an industry that is massive, that is ripe for technology to take it to the next level. And I think we’ve seen that in other industries for instance, let’s look at the auto industry and what companies like Tesla are doing with technology. It’s very impressive but wow, what an antiquated old boy’s network that industry must be. Construction is the same, I think we’re trying to turn a lot of heads and you can see it in our revenue growth. We know we’re averaging year-to-date (first six months) revenue growth of about 30% and our hope is that we can maintain and accelerate that.
WSA: Well yeah that leads into my next question, what are some of the key drivers that you wish investors better understood about the company and your sector?
Scott: So some of the key drivers in terms of what we’re seeing in the industry sector, we’re seeing from our clients that they are really trying to think going forward about flexibility. So flexibility is safe, the work force is changing–I read recently that this is the first time that we really have four or five distinct generations working side by side in a work force. Whether it’s traditionalists, baby boomers, Gen Xers , Gen Yers, Millennials, and how they work together and how they operate is quite different. So companies need to be flexible, we have a work force that is young; a lot of young folks want flexibility in terms of their workspace. As long as they’re connected with Wi-Fi, and they have their multiple devices, they can be quite productive wherever they are. So we’re seeing some trends there. We’re also seeing trends in healthcare for infection control, again flexibility, don’t forget that the DIRTT system is modular, it is as some analysts have called us ‘Lego on steroids’, you wouldn’t know that looking at it, because what we built is beautiful and custom for what our clients want.
It’s really their design, like you can move it, you can make changes in the evening, it’s clean, there’s less waste on sight, it’s sustainable, but there’s definitely in terms of flexibility in healthcare because technology is changing so fast in that industry. So you’ve got some trends there. Another trend on a macro level especially in the United States, with the healthcare changes, you know Obama Care if you want to call it that, is you’re seeing more of a move from the healthcare providers to a hub and spoke system. So maybe not building as many big new hospitals but more urgent care, more community outreach, smaller clinics but putting them in the areas closer to their client base where outcomes can improve. So really getting them out into their population base that they serve and taking over existing buildings but making changes, being flexible, putting in a dialysis center here or an urgent care facility there. So there’s a lot of changes there going on, and all of this benefits DIRTT.
WSA: Certainly and so once again joining us today is Scott Jenkins the President of Dirtt Environmental Solutions. The company trades on the Toronto Stock Exchange ticker symbol DRT, currently trading at 5.76 a share, market cap is around 480 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: Well I’ll keep it pretty succinct, we’re on track and we’ve demonstrated revenue growth exceeding 25%. With that revenue growth we are growing our EBITDA and our cash flow at a higher growth rate. We’re showing the leverage in our business model now, of being based on our ICE technology and the power of our people. And I think that’s important to look at the gross margins, are improving the EBITDA margins are significantly improving. And we’re driving towards a target of growth margins of 45% and EBITDA margins of 15%, which we haven’t quite hit, but we feel confident in the short to medium term on that.
The second piece I would say is the construction industry, interior construction for us regardless of whether it’s a hospital, a school, commercial office, it is a massive opportunity but it’s highly fractured and it is an industry that has not seen significant change in decades. And we think we’re going to continue to push the limits and push that change. Now it means that we are a disruptor, we are disruptor whether it’s like Tesla, I use them on purpose because, you know, we think there is lot of similarities between our companies, whether it’s somebody like an Uber, whether it’s somebody like Nest in terms of thermostats these are all companies that we’ve actually been compared to by investors, current investors to Uber, we’ve been compared to Tree, Nest, there’s actually a book called the Resource Revolution, where each chapter is written about [a different company] and DIRTT was actually a chapter in the book written by a couple of McKenzie guys, ex-Harvard guys about disruptors in these large industries like using technology to flip these industries on their head, that’s what DIRTT is doing in construction.
WSA: Well we certainly look forward to continuing to track your company’s growth and report on your upcoming progress, and we’d like to thank you for taking the time to join us today Scott and update our audience on DRT. It’s always good to have you on.
Scott: Thanks a lot Juan we really appreciate it.
