DIRTT Environmental Solutions Ltd. (DRT) Earnings Call Transcript & Summary

Good morning, everyone. My name is Steve Parry, and I'm the Chair of the Board of Directors of DIRTT Environmental Solutions, and I will act as the Chair for today's meeting. Participating with me today are DIRTT's President and CEO, Kevin O'Meara; CFO, Geoff Krause; and General Counsel and Corporate Secretary, Chuck Krause. On behalf of DIRTT, I welcome you to DIRTT's 2020 Annual and Special Meeting of Shareholders. Although we are disappointed that we can't see each of you today, our thoughts are with you and your families during this time. We appreciate your patience as we navigate through this unprecedented situation and hold our first ever virtual meeting as a result of the pandemic. Instructions on how to ask questions during the meeting and the voting procedure will appear on your screens. As with any new technology, unexpected glitches may occur, but our service providers for this platform are very experienced at running this kind of meeting, a virtual meeting, and are here to help us out. Following completion of the meeting, we will have a management presentation and question-answer session. I will ask that this meeting now come to order. I appoint Chuck Kraus to act as Secretary for today's meeting, and the representatives of Computershare Trust Company to act as the scrutineers. The meeting materials, including the notice of meeting, management information circular and proxy statement and form of proxy were mailed to shareholders on or about April 27, 2020, and made available electronically. The declaration of mailing is available for inspection by any shareholder upon request, and I would ask that the secretary file a copy of such with the minutes of today's meeting. I've been advised by the scrutineers that quorum has been met for the meeting. The scrutineers' report is available for inspection by any shareholder, and I would ask that the secretary file a copy of such with the minutes of today's meeting. Registered shareholders and proxyholders may participate when there is a call to discuss a motion. Should you wish to address the chair on any motion, please type in your question or comment in the message section once it opens during the discussion period. If there is a relevant discussion or question on a motion, the secretary will read it aloud. To facilitate the timely completion of the formal business, arrangements have been made with certain shareholders to move and second the motions to be considered. We will conduct the votes on all matters before us by online ballot. The online ballot is open now for all resolutions. You can choose to vote on each resolution now or to wait until the conclusion of the discussion on each resolution prior to voting. If you have already completed and returned your form of proxy or voting instruction form, it is not necessary for you to do anything. However, if you wish to change your vote and are permitted to do so, you may do so by voting online now. With that said, I declare today's meeting regularly called and properly constituted for the transaction of business. The first item of business is the presentation of the 2019 audited financial statements of DIRTT, together with the auditors' report thereon. Shareholders are not required to approve the financial statements. However, management is available to answer any questions concerning the financial statements and the auditor's report during the Q&A session following the meeting. The next item of business is the election of the directors of DIRTT. As disclosed in the management information circular and proxy statement, each director will be elected individually and not as a slate. Seven individuals are to be nominated, each to hold office until the next meeting of shareholders or until such person's successor is duly elected or appointed. The Director nominees are: Wayne Boulais; John Elliott; Denise Karkkainen; Todd Lillibridge; Christine McGinley; Kevin O'Meara; and Steve Parry. May I have a motion for such business?

Mr. Chair, my name is Nandini Somayaji, I move that the company's director nominees be elected as directors of the company to hold office until the close of the next annual meeting or until their successors are duly elected or appointed.

Thank you. Is there a seconder?

Mr. Chair, my name is Kim MacEachern, and I second the motion.

Thank you. Is there any discussion on this motion?

Mr. Chair, we have no questions at this time.

As there is no discussion, I now call for a vote on the motion before the meeting. Will all voting delegates that have not previously voted on this motion or that wish to change their previously submitted vote, please enter your vote. [Voting]

The next item of business is the appointment of the company's independent registered public accounting firm. May I have a motion for such business?

Mr. Chair, I move that PricewaterhouseCoopers be appointed as the company's independent registered public accounting firm to hold office until the close of the next annual meeting at such remuneration as may be determined by the Board of Directors.

Thank you. Is there a seconder?

Mr. Chair, I second the motion.

Thank you. Is there any discussion of this motion?

Mr. Chair, we have no questions at this time.

As there is no discussion, I now call for a vote on the motion before the meeting. Will all voting delegates that have not previously voted on this motion or that wish to change their previously submitted vote, please enter your votes. [Voting]

The next item of business is the confirmation and ratification of an amendment to the quorum provisions of the company's amended and restated bylaws. This amendment, which increases the quorum threshold for shareholder meetings from 25% to 33.33% of common shares, is required in connection with the listing of the company's common shares on the NASDAQ global market. This amendment was approved by the Board of Directors on February 20 -- sorry, February 25, 2020. May I have a motion for such business?

Mr. Chair, I move that the resolution on Page 19 of the management information circular and proxy statement, with respect to the amendment of the amended and restated bylaws of the company to increase the quorum threshold, be approved.

Thank you. Is there a seconder?

Mr. Chair, I second the motion.

Thank you. Is there any discussion of this motion?

Mr. Chair, we have no questions at this time.

As there is no discussion, I now call for a vote on the motion before the meeting. Will all voting delegates that have not previously voted on this motion or that wish to change their previously submitted votes, please enter your votes. [Voting]

The final item of business is the approval of the company's long-term incentive plan and the reservation for issuance of 5.8 million common shares thereunder. If approved, this will replace the company's current stock option and performance share unit plans, and will provide increased flexibility to grant share-based awards to our employees, consultants, officers and directors. The long-term incentive plan was approved by the Board of Directors on April 17, 2020. May I have a motion for such business?

Mr. Chair, I move that the resolution on Page 33 of the management information circular and proxy statement, with respect to the adoption of the long-term incentive plan and reservation for issuance of commentaries thereunder, be approved.

Thank you. Is there a seconder?

Mr. Chair, I second the motion.

Thank you. Is there any discussion of this motion?

Mr. Chair, we have no questions at this time.

As there is no discussion, I now call for a vote on the motion before the meeting. Would all voting delegates that have not previously voted on this motion or that wish to change their previously submitted vote, please enter your votes. We will pause for a moment to allow all votes to be entered. [Voting]

I'm advised by the scrutineers that all motions are passed by the requisite approval threshold. Accordingly, each of the motions at this meeting is carried. The final voting results will be available on the company's website and on SEDAR and EDGAR following the meeting. That now concludes the meeting. I thank you all for attending. Now Kevin O'Meara will provide an update on the company's operations, and he and Geoff Krause will be available to answer questions.

Thank you, Steve, and thank you to everyone who has joined us today. What I'd like to cover is 2019, our year-end review, spending specific emphasis on our leadership team and the strategic plan that we've put in place. And then moving towards 2020, which clearly has recently been impacted by the onset of the COVID-19 virus. And we'll talk about the implications for us as a company, and we'll wrap up with what it means for the future. 2019 was clearly a transformational year for DIRTT. Our objective was to take a relatively small company with an absolutely brilliant idea and transform it into one that is incredibly well positioned to drive growth as well as improve profitability. The key parts of that are making sure that we have the right people in place, the right plan, and we're positioned to do the right execution. In 2019, we're able to put the best team in place, articulate a compelling strategic plan and position the company to focus on executing the plan. We're able to achieve a number of milestones in 2019. Starting in January, we made several key promotions of people who've been at DIRTT for an extended period of time into new roles as well as added people with key experience from the outside. In the spring, we kicked off our strategic planning process with a comprehensive go-to-market analysis we did in conjunction with an internationally recognized consulting firm. In July, we announced a new state-of-the-art wall tile and millwork facility that we're going to be building in South Carolina. September, Jennifer Warawa joined us as Chief Commercial Officer, and Brandon Jones joined us as Vice President of Strategy. In October, we announced 2 new low profile wall solutions, the Inspire and Reflect, and we began trading on NASDAQ. And finally, in November, we're able to present our strategic plan publicly at an Investor Day in New York and host a reception after work at our newly renovated DIRTT Experience Center. Our leadership team is complete, and it's a good mix of people who have been with DIRTT, several of them, since the beginning and have a tremendous amount of experience as well as people that we've brought in from the outside with unique skill sets we think will be very helpful in transforming the company. We're complete. We have the right team in place to complete the transformation to DIRTT 2.0. Our strategic plan is comprised of 3 key pillars. The first is innovation. We think of that as both product development as well as software technology. And our goal there is to build on our 15-year track record of creativity as a company and continue our industry leadership. From a manufacturing standpoint, our emphasis first starts with instilling a culture of safety. I note that at the end of 2018, our injury experience rate was well over 10, and we announced during our first quarter earnings release that our experience rate was below 1. So we made incredible strides in that regard. We also need our operations to be in place to facilitate the innovation that comes about from our product development teams and continue to utilize lean manufacturing to ensure that we produce outstanding quality and customer service for our customers and work at the highest level efficiency cost. The third pillar is our commercial side, where we want to build a world-class sales and marketing organization. That's comprised of people, processes and systems, all that are built to drive market penetration and sales. The ultimate goal of our strategic plan is to create shareholder value by leveraging our heritage of innovation, build high-quality interiors at the lowest possible cost to drive growth and profitability. As we move into 2020, obviously, we had to face the COVID-19 virus. We look at it 2 ways: One was internally as a company for our people and our operations; and the other was externally, and how we could serve the unique needs of our clients and our distribution partners. The very first thing we did, consistent with our culture of safety, was to make sure that our people were safe. Our office people were moved to work-from-home status. In our operations, we were deemed an essential service. Our plants have continued to operate. However, we had to put in place several specialized protocols to make sure that our people in our plants operated safely. We also significantly increased our planning and communications, both internally and externally, with our supply chain as well as our distribution partners. From a business continuity standpoint, we're very focused on being financially conservative in making sure that we had adequate liquidity to manage our way through the crisis. We were able, in the first quarter, to secure capital lease financing as well as modify the terms of our revolver, which has given us additional liquidity. And then finally, exterior, facing our clients, will ultimately meet the market need with a tradition of highly customized solutions as well as out-of-the-box solutions that are especially tailored to meet specific needs. The post-COVID world gives us several opportunities. One is offices are going to become less dense. Of course, part of what will be offsetting that is that there will be a stronger emphasis towards work from home. The health care infrastructure will be challenged and might need additional improving, and fewer people will be allowed on job sites with social distancing. We have several unique capabilities that position us to meet this need. We work on a shorter construction schedule, which lets us convert open offices to offices with private offices very, very quickly. Our solutions are modular. So even if a company does that, they're able to tailor them over time as their needs change and do it on a very effective, clean and safe basis. And because the majority of the labor required to build our solutions happens in our plant, installation requires much less labor on the job site. Now that being said, there are challenges that we have to face as part of COVID-19. We clearly are in an economic recession. We're experiencing record unemployment, and it's likely the overall commercial construction market will experience meaningful contraction. Our reaction strategically is severalfold. On the innovation side, we will continue to prudently pursue innovation. Manufacturing, we've decided to move forward with our South Carolina plant that we announced in July. And also, we will continue implementing our various lean initiatives in our existing plants. And on the commercial side, we're going to match the pace of hiring with the business conditions, and also found ways to reduce the costs of the commercial systems we're installing. Our goal in this uncertain time is to control the costs of implementing our strategic plan while ensuring we capture the majority of the benefit. In conclusion, 2019 was a pivotal year for DIRTT when we put the building blocks in place to start on our transformational journey. As we think about 2020 and executing our strategic plan, we're balancing getting the impact in the marketplace from the strategic plan with being financially conservative, building on our technology, continuing to move our operations to a continuous improvement stage and being very thoughtful about our investments in the commercial organization. We're confident that when we're able to deploy the unique aspects of our business model to maximize the opportunities presented to us. With that, that concludes my formal remarks, and now I'll introduce -- or ask Geoff Krause, our Chief Financial Officer, to join me for questions.

There are no questions at this time, guys. So I think that will conclude the management presentation, and close the meeting. Thank you, everyone, for attending.