DIRTT Environmental Solutions Ltd., a leading technology-enabled designer, manufacturer and installer of fully customized, prefabricated interiors, today announced its financial results for the three- and 12-month periods ended December 31, 2015. This news release contains references to Canadian dollars and United States dollars. Canadian dollars are referred to as "$" and United States dollars are referred to as "US$".
For the three-and 12-month periods ended December 31, 2015 the Company reported:
Revenue for the quarter increased by $7.0 million, or 12.2%, over Q4 2014, to $65.0 million, and increased by $49.3 million, or 26.3%, to $236.6 million for 2015, compared with fiscal 2014; Adjusted gross profit as a percentage of revenue (see "Non-IFRS Measures") for the three and 12 months ended December 31, 2015 increased to 45.1% and 44.2%, compared with 44.4% and 42.9% in the prior year periods, respectively; Adjusted EBITDA (see "Non-IFRS Measures") in the fourth quarter decreased slightly over the prior year period from $9.8 million to $9.6 million, but increased from $19.9 million in 2014 to $34.7 million in 2015, an increase of 74.3%; Net cash flows provided by operating activities before changes in non-cash working capital (see "Non-IFRS Measures") were $37.2 million, an increase of $17.2 million over 2014; Entry into an exclusive strategic collaboration with Corning Incorporated to bring Corning® Willow® Glass to DIRTT's suite of interior construction solutions; Accelerating investment in innovative new solutions for key industry verticals such as healthcare, education, assisted living and the commercial sector; Launch of new residential interior and timber frame construction offerings at DIRTT's annual sales, marketing and training initiative in Chicago (called DIRTT Connext™); and International sales expansion through planned opening of London, United Kingdom Green Learning Center in early 2016.
"DIRTT continues to demonstrate to our valued clients, partners and the broader construction industry the benefits of our innovative solutions and technology," said Mogens Smed, CEO of DIRTT. "The quality, speed, customization, future flexibility and sustainability of DIRTT is being recognized by Fortune 500 companies, small businesses, hospitals and schools throughout North America, the Middle East and soon the United Kingdom. Furthermore, 2015 demonstrated the leverage and future potential of our business model as we continue to grow revenues." DIRTT President Scott Jenkins added, "DIRTT continued to demonstrate very strong year-over-year growth in 2015. Our solutions continued to gain traction as we invested heavily in growth through a combination of sales and marketing initiatives, hiring, technology and product development. In the fourth quarter, we generated record quarterly revenue and solid growth over a strong prior year as our small and medium-sized contracts replaced revenue from larger contracts and from the challenged energy sector."
"The second half of the year was particularly strong as we saw reduced business volatility, evidenced by consistent order entry, steady manufacturing volumes and favorable product mix, which all contributed to improved margins," said Derek Payne, CFO of DIRTT. "In 2015 we took the opportunity to strengthen our balance sheet, providing us with maximum flexibility to act on a range of growth initiatives in 2016 and beyond."
Revenue
Revenue increased by $7.0 million, or 12.2%, for Q4 2015 compared with Q4 2014. Q4 2014 revenue included $5.0 million from the previously announced US$30.0 million US energy sector project compared to $0.1 million in Q4 2015. During Q4 2015, the Company received notification that the contract is on hold until further notice. This business was offset by a general increase in activity from small and medium-sized projects. While total volume increased modestly quarter over quarter, the strengthening US dollar increased the Canadian dollar value of US revenue. Sales to the energy sector accounted for 7% of total revenue in Q4 2015, down from 24% of total revenue in Q4 2014. The reduction reflects the absence of contribution from the previously announced US$30.0 million contract and a general decline in activity in this sector as a result of falling energy prices. This decline was more than offset by increases in revenue from the financial, insurance and real estate and management, professional and scientific services sectors.
Revenue increased by $49.3 million, or 26.3%, for the year ended December 31, 2015 compared with the same period in 2014. The increase was due to the contribution of $8.6 million from the previously announced US$30.0 million contract (2014 - $5.4 million), continued momentum throughout North American markets, and the strengthening US dollar. During the year ended December 31, 2015, the energy sector accounted for 10% of total revenue, down from 20% of total revenue in 2014. This decline was more than offset by increases in revenue from the financial, insurance and real estate; technology and retail trade sectors. These results demonstrate the overall strength in the North American construction market, and the diversity of DIRTT's network, reach and unique offerings.
Adjusted Gross Profit
Adjusted gross profit for the year ended December 31, 2015 improved to $104.5 million from $80.3 million for the year ended December 31, 2014 with adjusted gross profit percentage widening 1.3% to 44.2% from 42.9%. The increase was due primarily to significantly higher revenue and favorable product mix resulting in reduced material and direct labor costs in 2015 compared with 2014. Higher overall production volumes in 2015 allowed DIRTT to more effectively leverage the fixed component of cost of goods sold, which also contributed to the higher adjusted gross profit percentage. During the year ended December 31, 2015, material costs and direct labor costs as a percentage of revenue improved by 0.4% and 1.0%, respectively, compared with 2014, partially due to product mix and leverage from higher revenue levels. Higher production volumes enable better absorption of fixed costs included in cost of goods sold, such as facilities costs and indirect labor costs. During the year ended December 31, 2015, indirect labor and product costs, which are mostly fixed costs, improved by 0.2% as a percentage of revenue compared with 2014.
The stronger US dollar also contributed to higher adjusted gross profit in the three months and year ended December 31, 2015, as the positive impact on US dollar revenue exceeded the negative impact on US dollar-based production costs.
Adjusted SG&A Expenses
Adjusted selling, general and administrative expenses ("Adjusted SG&A") is SG&A before deductions for non-cash depreciation and amortization of non-manufacturing-related assets, stock-based compensation expense and non-cash one-time commission adjustment. See "Non-IFRS Measures". Adjusted SG&A as a percentage of revenue increased by 2.5%, from 28.5%, to 31.0% in Q4 2015 compared with Q4 2014. Adjusted SG&A expenses increased by $3.6 million, or 22.1%, for Q4 2015 compared with Q4 2014. The increase reflects DIRTT's ongoing investment in long-term growth. The most significant changes can be attributed directly to sales-related efforts as salaries and benefits increased by $2.0 million. These costs reflect adding personnel focused on generating and supporting higher business volumes. Other increases in adjusted SG&A in Q4 2015 included non-cash marketing promotional items of $0.9 million and travel and marketing costs of $0.4 million. Non-cash marketing activities are used to showcase DIRTT's latest innovations and provide our partners with real-life examples of how best to position DIRTT's value proposition.
Adjusted SG&A as a percentage of revenue decreased by 2.0%, from 32.7%, to 30.7% in the year ended December 31, 2015 compared with the same period in 2014. Adjusted SG&A expenses increased by $11.4 million, or 18.7%, for the year ended December 31, 2015 compared with 2014. The change was largely due to increases in salaries and benefits of $4.9 million, travel and marketing costs of $3.0 million, non-cash marketing promotional items of $1.2 million, and $1.2 million in other operating expense items. The increase in salaries and benefits are for the same reasons discussed above. The increase in travel and marketing costs in 2015 was due largely to DIRTT Connext, the previously discussed annual sales, marketing and training initiative held in Chicago in June. The total cost for DIRTT Connext in 2015 was $2.3 million, compared with $1.3 million in the prior year.
The stronger US dollar contributed to the overall increase in adjusted SG&A expenses across the organization for the three months and year ended December 31, 2015, as certain of these expenditures are denominated in US dollars.
Adjusted EBITDA
Adjusted EBITDA decreased by $0.2 million, or 2.2%, for Q4 2015 compared with Q4 2014. Adjusted EBITDA as a percentage of revenue for Q4 2015 weakened by 2.2%, from 16.9%, to 14.7% over Q4 2014. The decrease was mainly due to higher adjusted SG&A expenses of $3.6 million for the reasons discussed above. This amount was partially offset by the $7.0 million increase in revenue and the resulting improvement in adjusted gross profit of $3.6 million.
Adjusted EBITDA grew by $14.8 million, or 74.3%, for the year ended December 31, 2015 compared with 2014. Adjusted EBITDA as a percentage of revenue for the year ended December 31, 2015 improved by 4.1%, from 10.6%, to 14.7% over the same period in 2014. The change was mainly due to the $49.3 million improvement in revenue and the resulting increase in adjusted gross profit of $24.2 million. These amounts were partially offset by higher adjusted SG&A expenses of $11.4 million for the reasons discussed above.
Outlook
Construction is a major global industry and consists of building new structures, making additions and modifications to existing structures, as well as conducting maintenance, repair and leasehold improvements on existing structures. The total US construction market was US$1.1 trillion in 2015, of which US$674 billion was attributable to non-residential building and US$423 billion was attributable to residential building [Source: US Census Bureau]. This includes both new building and renovation projects. Total US non-residential and residential construction spending is forecast to grow to US$796 billion and US$512 billion, respectively, in 2019 [Source: FMI US Markets Construction Overview 2016]. DIRTT believes conventional construction activities are fraught with challenges including cost overruns, quality issues, labor shortages and time delays and increasingly organizations are looking for a better way to build out their interior spaces, whether for new buildings or renovations.
DIRTT's growth strategy consists of five key initiatives: (1) increasing penetration of existing markets by providing continued support and increased investment to existing distribution partners ("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 - a recent example of which is the Corning® Willow® Glass initiative signed in February 2015.
With the recent launch of DIRTT's residential and timber frame solutions at DIRTT Connext, the Company officially entered into these markets. DIRTT does not expect to see meaningful revenue from these markets in the near term.
DIRTT believes its Solutions are a superior alternative to conventional construction in all sectors of the construction industry, and that a continued increase in construction activity can be expected to result in an ongoing improvement in revenue. The Company plans to invest additional resources on a range of initiatives including the further development of ICE and the development of new DIRTT Solutions and test projects, pursuing further opportunities in healthcare, education and government, and identifying new opportunities in the hospitality and residential sectors of the construction industry. The Company's product development team has been and, is expected to continue to be, expanded to address industry-specific challenges and opportunities.
The American Institute of Architects' (AIA) Architecture Billings Index (ABI) can be a useful leading economic indicator of how non-residential billing activity could trend. In its review of the January 2016 numbers, the AIA suggested that falling energy prices and growing international economic concerns contributed to a very slight decline in billings growth. However, the volume of inquiries continued to increase, albeit at a slightly lower pace sequentially, following a generally positive performance in 2015. Both DIRTT and the AIA believe these overall numbers still point to solid fundamentals that could support growth across all segments of the building industry for the next nine to 12 months.
DIRTT believes that extended softness in global commodity pricing could result in continued weakness for the energy sector in 2016. The gross US$30.0 million contract announced in mid-2014 remains deferred until further notice. Growth in non-energy related sectors is more than offsetting the current weakness in the energy sector, which represented approximately 10% of DIRTT's revenue in 2015. DIRTT anticipates some benefits from reduced input costs for raw materials and transportation charges as a result of softness in global commodity pricing for the first half and potentially the remainder of 2016.
Liquidity and Capital Resources
At December 31, 2015, DIRTT had $91.4 million in cash and cash equivalents compared with $39.8 million at December 31, 2014. At December 31, 2015, we also had access to an undrawn US$18.0 million revolving credit facility.