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Edited Transcript of DRT.TO earnings conference call or presentation 31-Jul-19 2:00pm GMT

Q2 2019 DIRTT Environmental Solutions Ltd Earnings Call

CALGARY Aug 6, 2019 (Thomson StreetEvents) -- Edited Transcript of DIRTT Environmental Solutions Ltd earnings conference call or presentation Wednesday, July 31, 2019 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Geoffrey D. Krause

DIRTT Environmental Solutions Ltd. - CFO

* Kevin P. O'Meara

DIRTT Environmental Solutions Ltd. - CEO & Director

* Kim MacEachern

DIRTT Environmental Solutions Ltd. - Director of IR

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Conference Call Participants

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* David Quezada

Raymond James Ltd., Research Division - Equity Analyst

* Elizabeth Johnston

Laurentian Bank Securities, Inc., Research Division - Analyst

* Neil Linsdell

Industrial Alliance Securities Inc., Research Division - Head of Research and Equity Research Analyst of Consumer Products & Special Situations

* Rupert M. Merer

National Bank Financial, Inc., Research Division - MD and Research Analyst

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Presentation

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Operator [1]

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Good morning, and thank you for standing by. I'm the operator on today's call. Welcome to the DIRTT Environmental Solutions 2019 Second Quarter Financial Results Conference Call. (Operator Instructions)

I'll now turn the call over to Ms. Kim MacEachern, Director of Investor Relations for DIRTT. Ms. MacEachern, please go ahead.

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Kim MacEachern, DIRTT Environmental Solutions Ltd. - Director of IR [2]

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Thank you, operator. Good morning, everyone, and welcome to today's call to discuss DIRTT's Q2 results. Joining me on the call are DIRTT's Chief Executive Officer, Kevin O'Meara; and Chief Financial Officer, Geoff Krause. Management's prepared remarks today are accompanied by presentation slides. To access the slides, please view them from the web page of this webcast or go to the Investors section of DIRTT's website. The earnings press release that was issued yesterday afternoon can also be found on our website. We will begin with opening remarks from Kevin on Slide 4, followed by Jeff providing a review of our results and our current outlook. We will then move to the Q&A portion of the call.

Today's call will include forward-looking statements. And because these statements are based on the company's current intent, expectations and projections, they are not guarantees of future performance, and a variety of factors could cause actual results to differ materially. In addition, as this call will include references to non-IFRS results, excluding special items, please reference the company's management discussion and analysis available in the Investors section of dirtt.net or on sedar.com for further information regarding forward-looking statements and reconciliations of non-IFRS results to IFRS results. I will also remind you that this webcast is being recorded, and a replay will be available today at approximately 1 p.m. Eastern Time.

I now turn the call over to Kevin.

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Kevin P. O'Meara, DIRTT Environmental Solutions Ltd. - CEO & Director [3]

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Thank you, Kim. We are pleased to review the results of our second quarter with you today and update you on DIRTT's continued progress. We've been very active during our second quarter, driving DIRTT's transformation into a scalable and sustainable growth company. As a result, I have several exciting milestones to discuss with you today. These include: the appointment of a Chief Commercial Officer; the conclusion of our sales and marketing consulting project; the building of a new tile and millwork facility in the Southeastern United States; a resolution to the humidity-related tile warping; and the promotion of 2 long-time DIRTT executives.

We created a Chief Commercial Officer role to establish and champion a highly strategic sales and marketing transformation that will link those 2 functions to drive aggressive revenue growth via targeted customer segmentation, marketing communication tailored to each segment, programs that motivate our distribution partners and robust lead-generation and qualification capability. I'm delighted to announce that after a comprehensive search, we've hired a very capable and talented individual for this role with an expected start date late in the third quarter. We're allowing her former company time to manage the transition of her responsibilities, and for that reason, we'll be in a position to share her name with you in the coming weeks. Our new CCO has most recently served as Executive Vice President at a global multibillion dollar publicly traded enterprise software company that goes to market via a value-added distribution partner network, with an offering that has long sales cycles, both similar to DIRTT. In that role, she will have the sales and marketing functions, including product management and product marketing. She's a highly accomplished executive with a proven track record of driving business-to-business sales and marketing programs, and she'll add a great deal of expertise and fresh ideas to our existing DIRTT team.

The sales and marketing consulting engagement, which we announced during our first quarter call, concluded yesterday with the consultant's final presentation to our Board of Directors. The mandate of the engagement was to provide the analytical background to support the commercial aspects of DIRTT's long-term strategic plan, including specific tactics to implement the strategy. We're now finalizing our evaluation of their recommendations and completing our comprehensive plan, which we look forward to sharing with you this autumn.

In another significant step forward, we're announcing plans to add a new tile and millwork facility in the Southeast United States, with commitments to purchase equipment beginning in the third quarter of this year and commissioning during the first quarter of 2021. By way of background, earlier this year, we concluded an evaluation of our aluminum, tile and millwork capabilities under various growth scenarios. We concluded that while sufficient capacity and redundancy exists with our aluminum plant -- aluminum frame plants to support future growth, the longer lead time for tile and millwork manufacturing equipment, combined with the lack of redundancy, results in the need to start construction of a new combined tile and millwork facility. Given the importance of a 2-week lead time to DIRTT's overall value proposition to clients, planning additional capacity at this time will allow us to preserve that high standard.

In addition, we are currently producing tiles and millwork only within our Calgary, Alberta plant. A new facility located outside of Calgary mitigates the risk associated with having production isolated to a single facility. After an extensive study of potential locations, which included looking at local labor markets, proximity to our customer base, logistics cost, availability of MDF and local economic incentives, we have narrowed down our search to 2 locations in the Southeast U.S. We expect to select the final location later this year. With our existing Calgary plant located relatively far north and west in North America, a southeast U.S. location will help provide efficient coverage of the entire North American market. The U.S. plant will also reduce currency-driven variability in our financial results by matching our U.S. dollar-denominated sales revenue with U.S. dollar production cost. We expect total capital cost of the plant to be USD 18.5 million, which will be funded with current cash on hand. This is an exciting development for DIRTT as we lay the foundation for our future growth. Once this plant is commissioned, we believe we'll have sufficient capacity to double the sales of our business.

Next, I'm very pleased to announce that DIRTT has developed and is implementing a permanent solution to the incidence of MDF tile warping. The warping was caused by a regulatory-driven change to the MDF substrate we use and it affected a small portion of our tiles, primarily in locations that experience high humidity or significant variability in humidity and temperature. The solution is being implemented in 2 phases and involves applying a primer coat on both sides of the MDF. This results in significantly less moisture absorption than unprimed MDF. DIRTT has begun using the primed MDF sourced from a third party while we acquire and install the equipment necessary to apply the primer to the MDF in our own factories. That will encompass Phase 2. We have ordered the necessary equipment and expect to bring this process in-house by the end of the year. Geoff will discuss the financial details with you later in today's call.

I'm also pleased to announce that we have named David Brown as our Director of Strategic Accounts to strengthen and improve how we approach and manage clients with national footprints. David is a deeply experienced sales executive and has proven to be a very effective champion of DIRTT since joining the company in 2015. He will work closely with our VP of Sales, Kingsley Koch, on this important strategic initiative as well as with our new CCO.

It's also my pleasure to announce that Mark Greffen, previously our Senior VP of Software Development, has been named as our Chief Technology Officer, in recognition of his tremendous leadership within the business and the scope of his mandate.

With that, I'll now turn the call over to Geoff to discuss this quarter's results and the financial impacts of these recent developments.

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Geoffrey D. Krause, DIRTT Environmental Solutions Ltd. - CFO [4]

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Thank you, Kevin, and good morning. Looking at Slide 5. Revenue for the second quarter was up $4.9 million or 6% over the second quarter of 2018. Product and freight revenue increased by $3.6 million or 4.6% over the comparable quarter of 2018. Installation revenue increased by $1.2 million to $3.4 million. Revenue was buoyed by a stronger U.S. dollar compared to Q2 2018, which contributed approximately $3.3 million to the quarter. As a percentage of product and transportation revenue, healthcare was 17% in the quarter versus 20% in the same period of 2018 due to the timing of various large projects. I will note that for the first half of 2019, healthcare sales increased by 12%. The timing of projects for government and education also accounted for variances in these segments' contributions.

Turning to Slide 6. Adjusted gross profit as a percentage of revenue for the quarter was 43.1% versus 43% in Q2 of 2018. We are encouraged to see that operational efficiencies, led by our Chief Operating Officer and his team, are beginning to materialize. During the second quarter, we benefited from reductions in material costs as a result of operational improvements in the factory as well as the impacts of product mix. We expect these benefits to continue through the remainder of 2019 and beyond.

In the second quarter, however, these benefits were offset by a combination of factors. First, we incurred $1.3 million in costs versus Q2 of 2018. These costs were related to headcount additions made in the second half of last year in response to higher volumes. Second, we recognized $700,000 of costs associated with remediating the incidence of tile warping. Lastly, we incurred a $900,000 reduction in adjusted gross profit or 1% on installations. Prior DIRTT management had committed to fixed-price installation contracts in 2018, which could not be delivered economically in 2019. The projects in question are largely complete. In general, it is our intention not to provide installation services in the normal course of business, as these are typically the responsibility of the distribution partner.

As Kevin discussed in his opening remarks, we have identified a solution for the instance of tile warping, and I'd like to discuss the go-forward effects on gross profit. During Phase 1, which involves having a third party apply the primer, we expect our MDF cost structure to remain comparable to that of the low-pressure laminate MDF we started using in late 2018 and into the beginning of 2019. Going forward, the increased cost relative to raw MDF is expected to be offset by operational efficiencies and the elimination of costs associated to rework the deficient tiles.

For Phase 2, when we bring the priming process in-house, which we expect will be in the first quarter of 2020, we anticipate a $1.6 million annual cost reduction relative to 2019 costs based on current run rates of tile production. The capital cost of bringing the process in-house is estimated at $2.6 million, so the payback is about 18 months.

We'll now turn to Slide 7 and the breakdown of operating expenses. Total operating expenses for the quarter were 6% lower in the current quarter than the same quarter in 2018. On an adjusted basis, which excludes the impact of reorganization costs, stock-based compensation and depreciation and amortization, expenses were 2% higher than the comparable quarter in 2018.

Breaking down the operating expenses. Sales and marketing expenses decreased slightly by $300,000. This decrease reflects ongoing and targeted reductions of nonrevenue-generating costs, including a $1.3 million reduction in travel, meals and entertainment costs and reductions related to specific trade shows. This was offset by $1.7 million in fees for the sales and marketing consulting engagement that we've previously discussed. For clarity, in the first half of 2019 we recognized $1.7 million of the total estimated $2.6 million expense for this engagement. Excluding these consulting costs, sales and marketing expenses would have been $11.1 million this quarter or down 14.6% compared to the same quarter of last year.

General and administrative expenses for the quarter were $8.9 million, a decrease of $1.1 million from the second quarter of 2018. As a reminder, Q2 of 2018 included $1.2 million in proxy defense costs that did not recur in 2019. This reduction was partially offset by $500,000 in nonrecurring costs relating to our previously announced U.S. common stock listing. In the first half of 2019, we've recognized $1.4 million of the total estimated $2 million expense for that U.S. listing. These nonrecurring costs are comprised of audit and legal fees relating to converting our financial statements to U.S. GAAP and U.S. presentation currency, modifying our Corporate Governance documents to be compliant with U.S. securities law and the preparation of the necessary listing forms and applications.

Operations support expenses increased by $1.3 million for the quarter and included $900,000 in consulting costs incurred in the evaluation of current operations and the rectification of the tile warping issue as well as increased salary and related personnel costs attributable to higher headcount in this function. Technology and development expenses increased by $1.7 million to $3.6 million for the second quarter of 2019. This is due to a $700,000 decrease in capitalized salaries, a $400,000 higher provision for variable compensation and a reallocation of $500,000 in costs that were previously classified as cost of sales in 2018.

Now looking at Slide 8 and adjusted EBITDA. I will remind you of the impact of the new lease accounting standard adopted in 2019 without restatement of prior year numbers. This standard increased depreciation and interest expense in place of rent expense, of which $1.4 million and $300,000 related to the second quarter respectively. This change was discussed in our last call.

For the current quarter, adjusted EBITDA increased to $9.1 million or 10.7% of revenue from $8.2 million or 10.1% of revenue in Q2 of 2018. This reflects the $2.1 million increase in adjusted gross profit, offset by a modest $500,000 increase in adjusted operating expenses and $400,000 increase in foreign exchange losses. Of note, adjusted EBITDA in 2019 includes nonrecurring costs of $2.2 million for the quarter and $3.1 million year-to-date related to the sales and marketing consulting work and U.S. listing cost.

Turning to Slide 9. Net income increased to $3 million or $0.03 per share in the second quarter of 2019 compared to $800,000 or $0.01 per share in 2018 driven largely by reduced depreciation and stock-based compensation recoveries in the period.

Turning to the balance sheet. Working capital decreased to $86.1 million at June 30, 2019 from $96 million at December 31, 2018. This was a result of repaying $4.3 million in long-term debt during the quarter and a $3.7 million increase in the current liability for cash-settled stock options.

During the first 6 months, $4.5 million of stock options were surrendered in cash. Cash and cash equivalents increased to $76.9 million at June 30, 2019 as a result of $22.2 million in cash generated by operating activities, offset by $6.6 million of capital expenditures and $11.3 million used in financing activities.

From a debt facility perspective, our undrawn $18 million U.S. revolving credit facility expired on June 30, 2019. On July 19, we replaced that with a $50 million senior secured credit facility with the Royal Bank of Canada. The company currently has an available limit of $40 million under the facility until certain post-closing conditions are met. The facility has a 3-year term and can be extended for up to 2 additional years at the company's option. No amounts were drawn on either facility, and combined with cash on hand and expected operating cash flow, we believe we have sufficient financial capacity to fund foreseeable future cash and capital needs.

Looking at capital expenditures. With the inclusion of deposits on equipment for the new facility and the new primer finishing line, we expect to increase capital spending over last year by approximately $5 million to $7 million.

I'll speak now about our progress towards DIRTT's NASDAQ listing. I am pleased to report that we have completed an in-depth assessment of our Corporate Governance policies and related documentation to comply with U.S. security standards. In preparation for the listing, we have also converted our financial statements to U.S. GAAP with a U.S. dollar presentation currency, and we will begin reporting under the new framework post-listing. We anticipate listing to occur this fall.

As previously noted, 2019 is a transition year for DIRTT as we work to enhance our go-to-market functions and the supporting operation delivery, resulting in a lower revenue growth rate for this year. With that said, we are strongly focused on building out the platforms necessary for aggressive growth in the future.

Year-to-date revenue growth of 6.5% is within our annual guidance range of 5% to 10% over 2018. And based on current visibility, we expect to be at the lower end of the range for the full year as we are experiencing timing delays on some projects now expected to deliver in early 2020. I will point out that the growth rate has been supported somewhat by a strong U.S. dollar exchange rate. We are using a 1.33% foreign exchange rate in our internal forecast.

With that, I'll turn it back to Kevin for our closing remarks.

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Kevin P. O'Meara, DIRTT Environmental Solutions Ltd. - CEO & Director [5]

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Thank you, Geoff. We have said that 2019 would be a year of transformation for DIRTT, and we're making strong progress in that transition. As a result of this progress, we are confident that our emerging commercial strategy under the leadership of our new CCO will position us for long-term sales growth. This confidence is tangibly manifested in our decision to expand our tile capacity in anticipation of future growth. The effectiveness of our new approach to manufacturing, led by our COO Jeff Calkins and his team, has been demonstrated by the swift resolution of the tile issue and by the early financial returns on their initiatives for improved materials management. We expect Jeff and his team to continue building on their emerging track record of success.

Our entire management team is energized with the progress to date and the opportunities ahead. We look forward to updating you after the third quarter and again this autumn, when we discuss our strategic plan.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of David Quezada with Raymond James.

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David Quezada, Raymond James Ltd., Research Division - Equity Analyst [2]

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My first question here, just on how things are going with the implementation of the lean manufacturing. I'm just wondering how far along are you in terms of implementing that kind of process.

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Kevin P. O'Meara, DIRTT Environmental Solutions Ltd. - CEO & Director [3]

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Early days. We put in place the initial measurements, some of the initial tools. The team that we're assembling in each facility in order to do continuous improvement in quality is largely in place. We have 1 or 2 people to add. But we really are in early days in terms of executing a full lean program.

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David Quezada, Raymond James Ltd., Research Division - Equity Analyst [4]

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Okay. Fair enough. And then just on your new facility that you'll be building, the new production facility, will all that be new incremental capacity, or will there be -- will you take a reduced capacity, I guess, a little bit at any of your other facilities once that new plant comes online?

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Kevin P. O'Meara, DIRTT Environmental Solutions Ltd. - CEO & Director [5]

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It will all be new incremental capacity.

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David Quezada, Raymond James Ltd., Research Division - Equity Analyst [6]

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Okay. Great. And then just my last question here, just in terms of what you saw in the healthcare market during the quarter, it sounds though it was clearly timing that resulted in it being a little bit slower. Could you just talk about how that market is looking today, the bidding activity? Any color you could provide on what you're seeing there.

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Kevin P. O'Meara, DIRTT Environmental Solutions Ltd. - CEO & Director [7]

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There's really no change in the environment. The bidding is strong. The interest in what we do is strong. As we've talked before, because of the project nature of what we do, our actual revenue can be lumpy over time, but our enthusiasm remains unchanged for that as a sector, given really 2 things: our customer value-added proposition in that area as well as some of the secular changes going on with the more localized delivery method for the providers, which means that they have additional real estate needs.

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Operator [8]

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Our next question comes from the line of Rupert Merer with National Bank.

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Rupert M. Merer, National Bank Financial, Inc., Research Division - MD and Research Analyst [9]

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Can you remind us what's your total production capacity today and give us a sense of how much production capacity you'll be adding with the new facility?

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Kevin P. O'Meara, DIRTT Environmental Solutions Ltd. - CEO & Director [10]

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That's a variable answer in terms of -- it really depends on a couple of things, including product mix of the tiles going through the facility. By way of background, the way that we manage our capacity is we really start to get nervous if our capacity utilization is hitting 65% to 70%. And it's really for 2 reasons. It's the product mix that goes through the facilities, it's also that the project nature of what we do, we really need to leave adequate capacity on a daily scheduling basis for services to get projects finished and to accommodate clients sometimes from time to time when they need to move things forward. And so what an engineer would tell you our capacity is, is higher than where we are comfortable operating the facility. And so we're kind of bumping into, on a one-shift basis, where we really are comfortable. And that was the reason why we're opening the second facility, along with the long lead time. It will be a significant increase in capacity and as we said, will position us to double our sales from where we are today.

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Rupert M. Merer, National Bank Financial, Inc., Research Division - MD and Research Analyst [11]

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Okay. Is it going to be a doubling of capacity? Or are you coming up with that potential to double your sales because you have excess capacity with your existing facilities?

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Kevin P. O'Meara, DIRTT Environmental Solutions Ltd. - CEO & Director [12]

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It's a little bit less than a total doubling of the capacity.

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Rupert M. Merer, National Bank Financial, Inc., Research Division - MD and Research Analyst [13]

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And when you build that plant, can you give us a sense of what it will do to your operating costs or the fixed costs that you'll carry while that plant ramps up?

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Geoffrey D. Krause, DIRTT Environmental Solutions Ltd. - CFO [14]

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The overall -- Rupert, the structure of the overall fixed costs, assuming if the plant were unutilized, is around $2 million to $3 million. We expect utilization to ramp up off of that. We are looking to implement a facility that is efficient and effective and continue with the overall lean manufacturing approach that we are driving forward, and that would be $2 million to $3 million per year.

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Rupert M. Merer, National Bank Financial, Inc., Research Division - MD and Research Analyst [15]

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Okay. Great. And then just finally, I -- so I understand the costs that you've had to prepare for listing on NASDAQ. But what do you anticipate will be the ongoing cost of that listing once you go public in the U.S.?

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Geoffrey D. Krause, DIRTT Environmental Solutions Ltd. - CFO [16]

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Sure. So I think the actual compliance costs are going to be about $0.5 million to $1 million higher, and that's the incremental listing fees, of course higher legal costs, et cetera. The one part that we are working our way through right now is the insurance cost on the D&O side, and we're working our way through quotes. Our expectations is those costs will be substantially higher than what we are today. And -- but it could be in the $1 million to $2 million range. We're just working our way through that right now.

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Operator [17]

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Our next question comes from the line of Neil Linsdell from Industrial Alliance.

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Neil Linsdell, Industrial Alliance Securities Inc., Research Division - Head of Research and Equity Research Analyst of Consumer Products & Special Situations [18]

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Just on the new facility, Rupert asked some of my questions, what's the staffing going to look like? Is that going to ramp up over a period of time? I'm trying to figure out how you get to full capacity and what time it's going to take to get that doubling of revenue capability.

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Kevin P. O'Meara, DIRTT Environmental Solutions Ltd. - CEO & Director [19]

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Our current estimate is that it will take probably a quarter after the initial commissioning to be able to go at full capacity.

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Neil Linsdell, Industrial Alliance Securities Inc., Research Division - Head of Research and Equity Research Analyst of Consumer Products & Special Situations [20]

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So by Q2, you'll be at full capabilities to be able to support double the revenues that you have now?

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Kevin P. O'Meara, DIRTT Environmental Solutions Ltd. - CEO & Director [21]

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Yes.

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Neil Linsdell, Industrial Alliance Securities Inc., Research Division - Head of Research and Equity Research Analyst of Consumer Products & Special Situations [22]

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And how many employees? Or what -- and what kind of footprint are we talking about?

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Kevin P. O'Meara, DIRTT Environmental Solutions Ltd. - CEO & Director [23]

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From an employee standpoint, I think that's something, for competitive reasons, we're probably inclined to keep confidential. The footprint of the plant, square footage-wise, is just a little over 120,000 square feet. The site itself will support an expansion of the physical building. It's -- either location that we go to is going to be a build-to-suit, and so we can have the building configured exactly as we want it, with future expansion capability that we want as well.

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Neil Linsdell, Industrial Alliance Securities Inc., Research Division - Head of Research and Equity Research Analyst of Consumer Products & Special Situations [24]

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Okay. And on the tile manufacturing fix, the new processes that you're talking about with the priming, is that going to be on every single tile or only tiles that are going to certain locations? And is that going to be in the new facility as well?

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Kevin P. O'Meara, DIRTT Environmental Solutions Ltd. - CEO & Director [25]

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It's every single tile, and the current expectation is it will be in the new facility.

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Operator [26]

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(Operator Instructions) Our next question comes from the line of Elizabeth Johnston with Laurentian Bank.

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Elizabeth Johnston, Laurentian Bank Securities, Inc., Research Division - Analyst [27]

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Just in terms of the new plant again, you mentioned greater coverage in terms of region. Could this therefore be a benefit to your gross margin if you're theoretically shipping product at shorter distances?

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Kevin P. O'Meara, DIRTT Environmental Solutions Ltd. - CEO & Director [28]

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Yes.

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Elizabeth Johnston, Laurentian Bank Securities, Inc., Research Division - Analyst [29]

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And are you able to quantify over the longer-, medium-term, perhaps, what kind of improvement that might be?

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Kevin P. O'Meara, DIRTT Environmental Solutions Ltd. - CEO & Director [30]

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We have a sense. It's a little early for us to talk about it publicly. But obviously, in the numbers that we prepared in order to get it approved by the Board, we have a pretty good sense as to what could be possible. But I think until we really get it up and running and commissioned and are confident with what we'll be able to deliver, we're probably inclined to hold off quoting numbers.

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Elizabeth Johnston, Laurentian Bank Securities, Inc., Research Division - Analyst [31]

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And in terms of -- I assume it's coming from mostly reduced transportation cost, I guess, would you say that in the last couple of years, let's say, have you seen increased transportation cost? We know that's something that we've seen in the U.S. in other industries. So there's been a headwind.

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Kevin P. O'Meara, DIRTT Environmental Solutions Ltd. - CEO & Director [32]

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Yes. No, we've seen that as well.

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Elizabeth Johnston, Laurentian Bank Securities, Inc., Research Division - Analyst [33]

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Okay. Great. And in terms of capital expenditure, excluding the new plant and excluding the new equipment for the tile priming, what kind of level for the rest of the ongoing investments, such as the GLCs, et cetera, how much do you think those will be for the balance of this year and potentially into next year?

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Geoffrey D. Krause, DIRTT Environmental Solutions Ltd. - CFO [34]

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So as we look at the remainder of this year I think, and as we've talked previously, we've targeted expenditures consistent with last year. The question really will be at the overall timing of that. A chunk of those expenditures relates to refreshes of our GLCs as well as extension of our GLCs into some different markets. And so it really depends upon when we complete the design of those and get those up and running. But that's what we're expecting right now.

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Elizabeth Johnston, Laurentian Bank Securities, Inc., Research Division - Analyst [35]

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And when it comes to the new plant, is it reasonable to think that the total USD 18.5 million would be roughly spread over, let's say, 5 quarters beginning Q4 this year?

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Geoffrey D. Krause, DIRTT Environmental Solutions Ltd. - CFO [36]

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No, I don't think so. I think there is -- the first part will be coming in, in third quarter of this year, which is the equipment deposits. Those typically run about 1/3 -- 1/4 to 1/3 of the cost of the overall equipment. So you'll see a large chunk happen there, which is why we bumped up our numbers accordingly. Then we will have the next payment when that equipment gets delivered, which is a year from now, and then the overall commissioning costs, incentive costs associated with the software, that sort of stuff. So it's going to be a little bit lumpy.

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Elizabeth Johnston, Laurentian Bank Securities, Inc., Research Division - Analyst [37]

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Okay. So some this year, and then the bulk will be second half of next year then?

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Geoffrey D. Krause, DIRTT Environmental Solutions Ltd. - CFO [38]

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Yes. It will probably be late second quarter, early third quarter next year.

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Elizabeth Johnston, Laurentian Bank Securities, Inc., Research Division - Analyst [39]

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Okay. And just a final question for me. When it comes to increasing your penetration in the markets where you operate right now, and I know your -- overall, your penetration is fairly low in terms of addressable markets, is there a strategy? Or has there been a change in strategy to increase this depth in specific markets? It would seem to me that if you could build density in a few markets, that would help build awareness, which then could translate into higher rates of growth.

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Kevin P. O'Meara, DIRTT Environmental Solutions Ltd. - CEO & Director [40]

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Potentially. That's something that we're looking at very closely as part of the recent sales and marketing work that we've done. And when we discuss our strategic plan, it's entirely possible that, that will be an element of it that we'll share with you.

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Operator [41]

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There are no further questions at this time. I'll turn the call back over to Kevin.

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Kevin P. O'Meara, DIRTT Environmental Solutions Ltd. - CEO & Director [42]

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Thank you for joining us. We look forward to speaking to you again during our third quarter earnings call as well as hopefully meeting you in person at our Analyst Day later on in the fall.

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Operator [43]

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This concludes today's conference call, and you may now disconnect.