DIRTT Announces Record Third Quarter Revenues and Welcomes New Director

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CALGARY, ALBERTA–(Marketwired – Nov. 9, 2016) – DIRTT Environmental Solutions Ltd. (“DIRTT” or the “Company”) (TSX:DRT), a leading technology-enabled designer, manufacturer and installer of fully customized, prefabricated interiors, today announced its financial results for the three and nine-month periods ended September 30, 2016. This news release contains references to Canadian dollars and United States dollars. Canadian dollars are referred to as “$” and United States dollars are referred to as “US$”.

Selected Highlights

For the three months ended September 30, 2016 the Company reported:

  • Revenue of $71.5 million in Q3, representing a 15.2% increase over what was previously a record quarter (Q3 2015);
  • Adjusted EBITDA of $11.1 million and Adjusted EBITDA % of 15.5%;
  • Gross profit % of 43.3% and adjusted gross profit % of 44.3% for the quarter;
  • Opening of DIRTT Green Learning Center in London, England to market to U.K., European and Middle East markets;
  • Announcement of a 33% reduction in manufacturing lead times from three weeks to two weeks; and
  • Subsequent to quarter end, appointment of Mr. Richard J. Haray to the Board of Directors of DIRTT.

For the nine months ended September 30, 2016 the Company reported:

  • Revenue of $188.7 million for the nine months year-to-date (“YTD”) representing an increase of $17.1 million, or 9.9% over YTD 2015;
  • Trailing 12-month revenue of $253.7 million versus $229.6 million in the prior 12-month period, an increase of 10.5%;
  • Adjusted EBITDA of $20.0 million and Adjusted EBITDA % of 10.6%;
  • Gross profit % of 43.6% and adjusted gross profit % of 44.9%;
  • Sales and marketing headcount increase of 20.4% year-over-year; and
  • Increased Distribution Partner investment in Green Learning Centers of 44.8% versus YTD 2015.

“The third quarter represents the first time we have exceeded $70 million in revenue and highlights the growing momentum we are seeing in almost all of our industry segments,” said Mogens Smed, DIRTT CEO. “Perhaps more notable is that the energy sector, which significantly reduced our growth in 2015 and 2016 was only 1% of our business in Q3. Our long-term strategies of diversifying into complementary industries such as healthcare and education and accelerating investment in new solutions and leading edge technology such as ICEreality™ are paying strong dividends.”

Scott Jenkins, President of DIRTT added, “While the energy sector has been a drag on our growth in the prior year and in 2016, we are encouraged that our other industry segments have generated growth in excess of 20% year-to-date and over the last 12 months on a consolidated basis. At the beginning of 2015, the energy sector represented approximately 28% of revenue; now that the challenges of the energy sector are largely behind us, we are confident that our overall growth will improve in 2017.”

Mogens Smed added, “As discussed previously we have increased our investment in our distribution partners along with adding strategic sales, marketing and business development resources during the year. These team members and our strategic programs focused on our partners are starting to support our growth prospects throughout North America and abroad. Conventional construction is faced with ever growing skilled labor shortages, continual quality issues, time delays and cost overruns. DIRTT on the other hand continues to set new standards for our customized, high quality solutions as the announcement of our reduction in manufacturing lead times demonstrates. Our growing list of clients understand that with DIRTT there truly is a better way to build.”

Appointment of Mr. Richard J. Haray to the Board of Directors

DIRTT would like to welcome Mr. Richard J. Haray to the Board of Directors effective November 8, 2016. Mr. Haray brings a wealth of commercial real estate, procurement, marketing and legal expertise to DIRTT’s Board and is currently Senior Vice President, Corporate Services of the Interpublic Group, one of the world’s leading organizations of advertising agencies and marketing services companies with over 50,000 employees and 450 offices in 120 countries worldwide.

Commenting on the addition of Mr. Haray to the Board of Directors, DIRTT Board Chair Steve Parry said, “Richard’s vast real estate network and experience, as well as his role as a member of one of the world’s pre-eminent marketing and advertising companies, will be tremendous assets to DIRTT. His interest in DIRTT speaks volumes as to his belief in our prospects and his ability to contribute to our goals as we move forward.”

Mr. Haray began his tenure at IPG in 1996 overseeing real estate and insurance. He played a key role in centralizing this function and getting IPG on a path to better service and significant cost savings. In October 2005, Mr. Haray took on the additional responsibility of corporate-wide global sourcing and procurement efforts. Prior to his tenure at IPG, Mr. Haray was Vice President and Lease Counsel of Rockefeller Center Management Corporation. Prior to Rockefeller Group, he held positions at both Shearman and Sterling and Willkie Farr & Gallagher as a Real Estate Associate.

He is a life-long resident of New York City and currently sits on the Board of the Bryant Park Management Corporation, Regional Plan Association and Fordham University President’s Council. Mr. Haray is a member of CoreNet, a corporate real estate professional organization and CRELC, a corporate leadership group focusing on current real estate issues and trends. Mr. Haray is also a board member of the James Lenox Association for the elderly and actively works on behalf of several New York-based charities, including the St. Francis Food Pantries, Muscular Dystrophy Association, and scholarship foundations benefiting Fordham and St. John’s Universities.

Mr. Haray received his BA from St. John’s University and his JD Degree from St. John’s University School of Law, where he served as Editor-in-Chief of the Law Review.

Summary Financial Results
Q3 Q3 Q3 YTD Q3 YTD
2016 2015 2016 2015
($ thousands, except per share amounts)
Revenue 71,531 62,070 188,706 171,637
Gross profit 30,955 27,799 82,348 73,013
Gross profit % 43.3% 44.8% 43.6% 42.5%
Adjusted gross profit (1) 31,656 28,430 84,691 75,166
Adjusted gross profit % (1) 44.3% 45.8% 44.9% 43.8%
Selling, general and administrative (“SG&A”) 25,036 21,542 75,725 64,157
SG&A % 35.0% 34.7% 40.1% 37.4%
Adjusted SG&A (1) 20,842 18,166 63,657 55,403
Adjusted SG&A % (1) 29.1% 29.3% 33.7% 32.3%
Operating income 5,919 6,257 6,623 8,856
Adjusted EBITDA (1) 11,081 11,198 20,044 22,211
Adjusted EBITDA % (1) 15.5% 18.0% 10.6% 12.9%
Income tax 2,082 1,325 3,040 1,792
Net income 4,029 5,446 2,939 8,765
Net income per share – basic and diluted 0.05 0.06 0.03 0.11
Cash flows (used in) provided by operating activities (1,236) 6,958 13,701 23,903
Cash flows provided by operating activities (1) before changes in non-cash working capital 9,088 12,529 15,575 22,905
As at Sept. 30, 2016 Dec. 31, 2015
Cash and cash equivalents 88,062 91,405
Working capital 104,332 103,858
Long-term debt 13,736 9,161
Note: (1) See “Non-IFRS Measures”.

Revenue

Revenue increased by $9.5 million, or 15.2%, for Q3 2016 compared with Q3 2015. The increase was the result of a general increase in activity from small and medium-sized projects in Q3 2016, from a diverse range of industry segments. In addition, installations revenue in Q3 2016 increased by $1.8 million to $2.1 million, compared with $0.3 million in Q3 2015. During Q3 2016, revenue from energy represented 1% of total revenue as compared to 6% in Q3 2015. The impact to the Canadian dollar value of US revenue was negligible as the average US dollar decreased from 1.3087 from Q3 2015 to 1.3046 in Q3 2016. These decreases in revenue were more than offset by increases in other segments. Below is a breakdown of percentage revenue by sector for Q3 2016 versus Q3 2015:

http://media3.marketwire.com/docs/revenue-by-sector-for-Q3-2016-versus-Q3-2015.pdf

Revenue increased by $17.1 million, or 9.9%, for YTD 2016 compared with the same period in 2015. The 2015 period included revenue of $8.4 million from the previously announced US$30.0 million US energy sector contract, compared to nil during the 2016 period. This business was partially offset by the $4.3 million contribution (2% of total revenue) from the residential market during the 2016 period. The remainder of the increase in the 2016 period was the result of a general increase in activity from small and medium-sized projects, from a diverse range of industry segments. During YTD 2016 the energy industry represented only 4% of revenue whereas in 2015 it represented 12%. This decrease in revenue has been more than offset by increases in other industry segments. The stronger average US dollar versus the comparable period in 2015 (YTD 2016 – 1.3213; YTD 2015 – 1.2598) also increased the Canadian dollar value of US revenue which contributed to the higher revenue in the 2016 period.

Below is a breakdown of percentage revenue by sector for YTD 2016 versus YTD 2015:

http://media3.marketwire.com/docs/revenue-by-sector-for-YTD-2016-versus-YTD-2015.pdf

Gross Profit / Adjusted Gross Profit / Gross Profit % / Adjusted Gross Profit %

Gross profit for Q3 2016 improved to $31.0 million from $27.8 million in Q3 2015, an increase of 11.4%. However, gross profit % slightly declined by 150 basis points to 43.3% from 44.8%. The decrease in gross profit % was due primarily to changes in product/service revenue mix, greater volatility in the timing of monthly production volumes, and a higher level of installations revenue.

Adjusted gross profit for Q3 2016 improved to $31.7 million from $28.4 million for Q3 2015, an increase of 11.3%. However, adjusted gross profit % declined by 150 basis points to 44.3% from 45.8% for the same reasons discussed above with respect to gross profit.

Gross profit for YTD 2016 improved to $82.3 million from $73.0 million for the same period in 2015, with gross profit % widening 110 basis points to 43.6% from 42.5%. Relatively steady timing of manufacturing volumes for most of the 2016 period, combined with a diverse project mix, contributed to the increase in gross profit % in 2016.

Adjusted gross profit for YTD 2016 improved to $84.7 million from $75.2 million for the same period in 2015, with adjusted gross profit % widening 110 basis points to 44.9% from 43.8% for the same reasons discussed above with respect to gross profit.

The higher US dollar to Canadian dollar average exchange rate (YTD 2016 – 1.3213; YTD 2015 – 1.2598) also contributed to increased gross profit and adjusted gross profit in YTD 2016, as the positive impact on US dollar revenue exceeded the negative impact on US dollar-based production costs. US dollar-based production costs include those costs incurred at our manufacturing facilities in Savannah, Georgia and Phoenix, Arizona. Additionally, some of our largest raw material costs incurred at all of our manufacturing facilities are also denominated in US dollars.

SG&A Expenses / Adjusted SG&A Expenses / SG&A % / Adjusted SG&A %

Selling, general and administrative (“SG&A”) % increased slightly by 30 basis points from 34.7% to 35.0% in Q3 2016 compared with Q3 2015. SG&A expenses increased by $3.5 million, or 16.2%, for Q3 2016 compared with Q3 2015. The increase reflects DIRTT’s ongoing investment in long-term growth initiatives. The most significant change can be attributed directly to sales-related efforts as salaries and commissions increased by $1.2 million. These costs reflect the addition of personnel focused on generating and supporting higher business volumes. Other increases in SG&A in Q3 2016 included depreciation and amortization expense of non-manufacturing-related assets of $0.7 million, travel and marketing costs of $0.6 million, professional fees of $0.2 million, rent expense of $0.2 million, stock-based compensation expense of $0.1 million, and $0.5 million in other operating expense items. The increase in depreciation and amortization expense of non-manufacturing-related assets correlates with the increase in our investment in leasehold improvements and software and product development.

Adjusted SG&A % decreased slightly by 20 basis points from 29.3% to 29.1% in Q3 2016 compared with Q3 2015. Adjusted SG&A expenses increased by $2.7 million, or 14.7%, for Q3 2016 compared with Q3 2015. The reason for the increase is the same as discussed above with respect to SG&A, excluding the impact from increased non-cash depreciation and amortization of non-manufacturing-related assets and stock-based compensation expense incurred in the period.

SG&A % increased by 270 basis points from 37.4% to 40.1% in YTD 2016 compared with the same period in 2015. SG&A expenses increased by $11.6 million, or 18.0%, for YTD 2016 compared with the same period in 2015. The increase reflects DIRTT’s ongoing investment in long-term growth. The most significant changes can be attributed directly to marketing-related efforts as travel, marketing and trade show costs increased by $3.4 million, of which $1.2 million was related to DIRTT Connext™, DIRTT’s largest and most important sales, marketing and training initiative which occurs every June in Chicago. The other significant change can be attributed directly to sales-related efforts as salaries and commissions increased by $1.6 million. These costs reflect adding personnel focused on generating and supporting higher business volumes. We expect the additional sales and marketing resources to support growth in 2017 and beyond. Other increases in SG&A in YTD 2016 included depreciation and amortization expense of non-manufacturing-related assets of $2.1 million, stock-based compensation expense of $1.2 million, software licenses and computer supplies of $0.8 million, rent expense of $0.7 million, professional service fees of $0.5 million, and $1.3 million in other operating expense items.

Adjusted SG&A % increased by 140 basis points from 32.3% to 33.7% in YTD 2016 compared with the same period in 2015. Adjusted SG&A expenses increased by $8.3 million, or 14.9%, for YTD 2016 compared with the same period in 2015. The reason for the increase is the same as discussed above with respect to SG&A, excluding the impact from increased non-cash depreciation and amortization of non-manufacturing-related assets and stock-based compensation expense in the year.

The higher US dollar to Canadian dollar average exchange rate (YTD 2016 – 1.3213; YTD 2015 – 1.2598) also contributed to the overall increase in SG&A and adjusted SG&A expenses across the organization for YTD 2016, as certain of these expenditures are denominated in US dollars.

Adjusted EBITDA / Adjusted EBITDA %

Adjusted EBITDA decreased slightly by $0.1 million for Q3 2016 compared with Q3 2015. Adjusted EBITDA % for Q3 2016 declined by 250 basis points from 18.0% in Q3 2015 to 15.5%.

Adjusted EBITDA decreased by $2.2 million, or 9.8%, for YTD 2016 compared with the same period in 2015. Adjusted EBITDA % for YTD 2016 weakened by 230 basis points from 12.9% in YTD 2015 to 10.6%. The decrease in YTD 2016 was mainly due to the increase in foreign exchange loss of $3.5 million and higher adjusted SG&A expenses of $8.3 million, partially offset by higher adjusted gross profit of $9.5 million.

Gains or losses in foreign exchange (“FX”) are primarily the result of the period end revaluation of monetary assets and liabilities held within our Canadian companies. The largest component of these assets and liabilities is our holdings of US dollar cash and cash equivalents. The increase in foreign exchange loss of $3.5 million is the result of significant fluctuations in the CAD-US exchange rate in the year-over-year periods. During YTD 2015, the US dollar increased by $0.17 compared to year-end 2014, resulting in a $2.5 million gain on the revaluation of these monetary assets and liabilities. Conversely, during YTD 2016, the US dollar depreciated by $0.07 compared to year-end 2015, resulting in a $1.0 million loss being recognized.

These amounts exclude any gains or losses resulting from the revaluation of our US dollar-denominated long-term debt, as these amounts have been added back in the determination of Adjusted EBITDA as per reconciliation below.

Q3 Q3 Q3 YTD Q3 YTD
2016 2015 Variance 2016 2015 Variance
($ thousands)
FX (gain) loss as reported (138 ) (519 ) 381 868 (1,735 ) 2,602
FX loss (gain) on debt revaluation 138 415 (277 ) (168 ) 714 (882 )
FX (gain) loss included in Adjusted EBITDA (276 ) (934 ) 658 1,036 (2,448 ) 3,484

Outlook

Our growth strategy consists of five key initiatives: (1) increasing penetration of existing markets by providing continued support and increased investment to our existing DPs throughout North America; (2) expanding into new geographies, such as the Middle East and United Kingdom, by capitalizing on recent and continued investment alongside new international DPs; (3) penetrating new vertical markets such as the healthcare, education and residential sectors; (4) continuing to invest in ICE® and new innovative interior construction solutions such as the Enzo Approach, residential interiors and timber frame construction; and (5) partnering with industry leaders to monetize innovative solutions.

Our previously announced programs to support our top-tier and next tier Distribution Partners, such as the DIRTT Movers Program, DIRTT Green Learning Center loan program, increasing investment in product development and ICE development are contributing to the momentum we are seeing as we start the fourth quarter of the year. Our unveiling of ICEreality™, bringing augmented reality to the construction industry, will change, we believe, the way people design, create, collaborate and build interiors. We believe the increasing investment our Distribution Partners are making in our business, with the addition of staff, increased investment in Green Learning Centers and their increased investment in DIRTT Connext, where their attendance was up 55%, is a strong indication of the long-term prospects for our business.

We believe DIRTT Solutions and the resulting more efficient and cost-effective construction experience are a superior alternative to conventional construction across all sectors of the construction industry, and that a continued increase in global construction activity can be expected to result in an ongoing improvement to our revenue. We plan to invest additional resources, including continuing to develop and expand ICE and new DIRTT Solutions and test projects, to pursue further opportunities in the healthcare, education, government, corporate and residential sectors of the construction industry.

Liquidity and Capital Resources

At September 30, 2016, we had $88.1 million in cash and cash equivalents compared with $91.4 million at December 31, 2015.

At September 30, 2016, we also had access to an undrawn US$18.0 million revolving credit facility. In March 2016, we signed a fourth amendment to the amended and restated loan agreement with our lenders which, among other things, provided us with an additional capital financing facility of US$10.0 million, of which $7.8 million (US$6.0 million) was drawn as at September 30, 2016. We expect to draw on the remainder of this facility by December 31, 2016.

Non-IFRS Measures

Adjusted gross profit, Adjusted gross profit %, Adjusted SG&A, Adjusted SG&A %, Adjusted EBITDA, Adjusted EBITDA % and cash provided by operating activities before changes in non-cash working capital are non-IFRS measures. Non-IFRS measures do not have a standard meaning as prescribed by IFRS, and are therefore unlikely to be comparable to similar measures presented and calculated by other companies. DIRTT believes the non-IFRS measures are useful supplemental measures that may assist investors in assessing DIRTT’s business. The non-IFRS measures should not be considered as the sole measure of the Company’s performance and should not be considered in isolation from, or as a substitute for, analysis of its financial statements. For a reconciliation of these non-IFRS measures as well as the rationale for management’s use of such measures, see the Company’s management’s discussion and analysis for the three and nine-month periods ended September 30, 2016, available at http://www.sedar.com.

Conference Call Details

DIRTT will host a conference call and webcast on Thursday, November 10, 2016 at 9 a.m. ET, 7 a.m. MT to discuss its third quarter results in greater detail. President Scott Jenkins and CFO Derek Payne will host the call.

To access the conference call by telephone dial +1 844.413.7152 (toll-free in North America). Please call 10 minutes prior to the start of the call. In addition, a live webcast (listen only mode) of the conference call will be available at:
http://edge.media-server.com/m/p/uie5r3uq

Investors are invited to submit questions by email before and during the conference call. Please send them to [email protected].

A replay of the conference call will be available at 1.855.859.2056 by entering the passcode 2058996, from noon (ET) Thursday, November 10, 2016 to midnight (ET) Thursday, November 17, 2016 or through the webcast archives at http://edge.media-server.com/m/p/uie5r3uq or on DIRTT’s website at www.dirtt.net/company/investor.

About DIRTT

DIRTT Environmental Solutions (Doing it Right This Time) uses its proprietary 3D software to design, manufacture and install fully customized prefabricated interiors. The Company’s customers in the corporate, government, education and healthcare sectors benefit from DIRTT’s precise design and costing; rapid lead times with the highest levels of customization and flexibility; and faster, cleaner construction.

DIRTT’s manufacturing facilities are in Phoenix, Savannah, Kelowna and Calgary. DIRTT’s team supports nearly 100 Distribution Partners throughout North America, the Middle East and Asia. DIRTT trades on the Toronto Stock Exchange under the symbol “DRT.” For more information visit www.dirtt.net.

Forward-Looking Statements

Certain information and statements contained in this news release constitute “forward-looking information” and “forward-looking statements” (collectively, “Forward-Looking Information”) as defined under applicable Canadian securities laws and the Company hereby cautions investors about important factors that could cause the Company’s actual results or outcomes to differ materially from those projected in any Forward-Looking Information contained in this news release. Any statements that express, or involve discussions as to, expectations, beliefs, plans, objectives, assumptions or future events or performance (often, but not always, through the use of words or phrases such as “will likely result”, “are expected to”, “will continue”, “is anticipated”, “believes”, “estimated”, “intends”, “plans”, “projection” and “outlook”), are not historical facts and may be forward-looking and may involve estimates, assumptions and uncertainties which could cause actual results or outcomes to differ materially from those expressed in such Forward-Looking Information.

In particular and without limitation, this news release contains Forward-Looking Information pertaining to the following: comments with respect to the Company’s revenue, objectives and priorities for 2016 and beyond; comments with respect to shipping trends, order entry momentum and revenue growth expectations for the fourth quarter of 2016; project timetables; the benefits of the DIRTT Movers Program; the anticipated use of its credit facilities, comments with respect to the new GLC in London, United Kingdom; its growth strategies and opportunities; its ability to meet working capital requirements and financial obligations; use and deployment of the Company’s capital; and its outlook for its operations and the Canadian, US and international economies, and in particular, the US and Canadian construction industry.

With respect to Forward-Looking Information contained in this news release, assumptions have been made regarding the Company, among other things:

  • its ability to manage its growth;
  • competition in its industry;
  • its ability to enhance current products and develop and introduce new products;
  • its ability to obtain components and products from suppliers on a timely basis and on favorable terms;
  • its ability to obtain qualified staff and equipment in a timely and cost-efficient manner;
  • the regulatory framework governing taxes in Canada and the US and any other jurisdictions in which the Company currently or may conduct its business in the future;
  • future development plans for its assets unfolding as currently envisioned;
  • future capital expenditures to be made by the Company;
  • future sources of funding for its capital program;
  • the impact of increasing competition on the Company; and
  • its success in identifying risks to its business and managing the risks mentioned below.

The Company’s actual results or outcomes could differ materially from those expressed in the Forward-Looking Information as a result of the risks normally encountered in its industry such as:

  • maintaining and managing growth;
  • history of losses;
  • risks related to new technology;
  • competition risks;
  • operating results and financial condition fluctuations on a quarterly and annual basis;
  • risks related to intellectual property;
  • risks related to additional capital requirements;
  • customer base and market acceptance;
  • software and product defects and design risks;
  • availability of key supplies;
  • dependence on key personnel;
  • commodity price risk;
  • credit risk;
  • the effect of government regulation;
  • risks related to international expansion;
  • risks related to physical facilities;
  • legal risks;
  • foreign currency and fiscal matters;
  • risks related to future acquisitions;
  • risks related to Forward-Looking Information;
  • reliance on third parties; and
  • conflicts of interest.

Since actual results or outcomes could differ materially from those expressed in the Forward-Looking Information provided by or on behalf of the Company, investors and others should not place undue reliance on any such Forward- Looking Information.

DIRTT cautions that the foregoing lists of factors are not exhaustive. Further, Forward-Looking Information is made as of the date hereof, and the Company undertakes no obligation to update Forward-Looking Information to reflect events or circumstances after the date on which such statement is made or to reflect the occurrence of unanticipated events, except as required by applicable Canadian securities laws. New factors emerge from time to time, and it is not possible for DIRTT’s management to predict all of these factors and to assess in advance the impact of each such factor on the Company’s business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in Forward-Looking Information. No assurance can be given that these expectations will prove to be correct and such Forward-Looking Information contained in this news release should not be unduly relied upon. In addition, this news release may contain Forward-Looking Information attributed to third party industry sources.

For a detailed description of the risks and uncertainties facing the Company and its business and affairs, readers should refer to the Company’s annual financial statements, management’s discussion and analysis and annual information form for the year ended December 31, 2015, all of which are available at http://www.sedar.com.

Market and Industry Data

Certain market and industry data contained in this news release is based upon information from government or other third party publications, reports and websites or based on estimates derived from such publications, reports and websites. Government and other third party publications and reports do not guarantee the accuracy or completeness of their information. While the Company believes this data to be reliable, market and industry data is subject to variations and cannot be verified with complete certainty due to limits on the availability and reliability of raw data, the voluntary nature of the data-gathering process and other limitations and uncertainties inherent in any statistical survey.

DIRTT Environmental Solutions
Scott Jenkins
President
403.723.5009
[email protected]

Derek Payne
Chief Financial Officer
403.313.9879
[email protected]
www.dirtt.net