Good afternoon, everyone. Thanks for joining us today. My name's Benjamin Urban. I am the CEO at DIRTT. I am also joined by our Chief Transformation Officer, Adrian Zarate, who will also be presenting on some of the quant. For those of you who aren't familiar with us, DIRTT manufactures prefabricated interior solutions that are designed for disassembly and for automated manufacturing through technology. We are just roughly over 20 years old. We have offices across the U.S. and Canada, with manufacturing footprints in Calgary as well as Savannah, Georgia. We have roughly 750,000 sq ft of manufacturing under roof, as well as just shy of about 750 employees currently. We effectively have pre-manufactured solutions for everything within an interior envelope.
Our proprietary software is a design editor. It allows for configuration, visualization, pricing, as well as engineering for automated manufacturing, which that then allows us for mass customization at scale while delivering a 2-week lead time. Our proprietary software is also a software that we sell to and provide to other manufacturers. Most notably, Armstrong World Industries is the largest customer that we have for that SaaS platform. This unique approach to industrialized construction allows us to span across multiple verticals, including commercial workplace, healthcare, education, and government. You'll recognize many familiar names on this slide here. Many of our customers, in fact, more than half of the Fortune 500, are existing DIRTT clients.
While workplace continues to still be our largest vertical, the verticals that benefit the greatest from our accelerated construction schedules as well as price certainty are typically those that are delivering services such as healthcare or with fixed timelines as you would find in education. Unsurprisingly, these are also the verticals that are growing the fastest for us and also have the greatest growth potential. While there's a lot going on in the slide, this diagram effectively demonstrates how we deliver or a construction project moves throughout our manufacturing process currently. A client or opportunity in the left is identified either through our direct sales force or our distribution partners' teams' sales forces. We have roughly 40 individuals in our direct commercial organization. We have another 60 distribution partners across North America as well as with representation in Western Europe as well as in the Middle East.
Once that client is identified, we then proceed through either of two paths, or sales channels, if you will. Either direct through our internal organization of construction services or through our distribution partners. Using that ICE software technology to shepherd it through the factory. Once the prefabricated systems are delivered from the factory, they then arrive on site and are installed by DIRTT-certified installers. You'll also notice there's a note here regarding our new operating model, which we'll touch on a bit more when Adrian's presenting his portion of the presentation. Ultimately, all of this allows us to deliver accelerated construction schedules, cost certainty, as well as end product that contributes 100% to the circular economy. With that said, Adrian, do you want to chime in here on the addressable market?
Presume you guys can hear me. Excuse me. This is the SAM. I view this as more of a SAM as opposed to a TAM. We've taken the total market and adjusted for product market fit, for geography, for business model scale, et cetera. You can view this a couple different ways. You could view it from the top down, which is what we've done here, or from the bottom up. Happy to walk you guys through the alternative approach during Q&A or the one-on-ones. From a top-down perspective, you look at the end markets DIRTT services, those would be healthcare, commercial, and education. Then you aggregate the projected construction spend across those subverticals over the next, say, five years, and you get to $1.7 trillion.
Within that, you look at the percentage that's comprised of build of works, which is close to 40%, 37% on the slide. Within that, the portion comprised of interior walls, partitions and doors. Of total construction spend, which is at $1.7 trillion, 3%-4% is comprised of walls, one to two of doors. You do the math there, take the lower bound of each, three plus one is four, times $1.7 trillion, you get the $68 billion. Within that, how much can DIRTT occupy or penetrate? Not every door, wall, partition is comprised of a system, which DIRTT obviously sells. Of all the interior walls, doors, and partitions, about 8%-9% could be satisfied by existing or future DIRTT products, heavy on the existing.
That's how you get to a $7 billion TAM across that five-year projected period or on an annualized basis, $1.4 billion. I compare that to what we did in product revenue last year of $164 million, and you see that we've only penetrated about 12% of the SAM or market. We remain sanguine on the future. I mean, that $1.7 trillion clearly has structural tailwinds. The 8%-9% could clearly augment. On top of that, the 12% should materially step up. There's no reason a market leader can't comprise a quarter to a third of a mature industry. Again, that's not guidance, but that's how we think about it. Great. This is the strategic transformation framework Benjamin alluded to earlier, and I'll pass it over to him after I make a few comments.
I just want to inculcate in you all the notion that this was not a simple cost optimization exercise. This transformation that we're effectuating spans the full gamut of DIRTT. Everything from the operating model that Benjamin talked about, which previously had been focused on complexity at all costs, shifting now to a more standardized complexity ranking approach, has obviously freed up resources internally, let's improve division of labor, allocation of capital, et cetera. We've taken out superfluous or excess costs within the OpEx line item. Clearly, the company was running at too high in OpEx prior to our advent, we've taken discipline measures there to get that down. I would also add on the commercial side, we revisited the way we go to market. We have a new distribution channel. It's not two competing businesses.
It's just a new channel through which to distribute the same product that was previously inaccessible to us. We've obviously gotten better at pricing our product suite, and also become more data informed. Pipeline integrity, fidelity, et cetera, has been a paramount focus of ours. All of those changes we hope will result in a better business quality, right? The quality of top line and earnings should materially improve, once we get past a certain level of revenue, and then the conversion to free cash from EBITDA should be quite high because we have material NOLs in both Canada and the U.S., so cash taxes should be low, moving forward.
Obviously, those are subject to utilization limits, but 80% is pretty good. We've done a good job lowering our cost of capital on the debt component of the cap stack. Cash interest is low. On top of that, the business isn't very CapEx intensive nor working capital intensive due to us getting 50% cash up front when an order is placed, right? We get that hard deposit. Turn it over to Benjamin.
To add some further commentary to what Adrian was touching on there regarding our new operating model and the transformation. Since I presented at this event last year, we have been working in earnest, and to Adrian's comment, it hasn't simply just been restructuring, right? It required a significant heavy lift and really part of what identified the need for us to undergo an entire transformation across the full enterprise was once we diversified the channel. The one thing we haven't touched on is right now, we're still operating at around a $400 million capacity. As we began to ramp up this new diversified channel, as we were watching the resource and the OpEx increase, it was diminishing that fixed cost leverage that we've been pursuing.
If anything was a bit of an obvious, Okay, we need to pause for a moment, collapse that team within the organization. As we built forward, what does this new operating model look like to solve for complexity in lieu of quantity? What I mean by that, just to give you an example of the previous operating model, regardless of complexity, if it was a commercial office like a conference room, or it was an entire hospital, it required the same amount of eyeballs and people to process it through the system.
By creating the new operating model, we have now also executed on transforming the organizational structure to support that. It's still early days to Adrian's comment, but we are starting to see some of the benefit of all that effort we've put in over the last year to ensure that as we grow, the OpEx doesn't grow, at the same cost or at the same quantity.
I won't spend a lot of time here because you guys have seen these numbers. These are the 1Q 2026 results, that we printed a while ago at this point. We had margin pressures, both gross margin and adjusted EBITDA margin. On the gross margin side, obviously, you had aluminum prices climbing to all-time highs or recent highs, I should say. Excuse me. We had some tariff headwinds, we had a lower than anticipated install margin. We think those days are behind us, we remain sanguine on both the gross and adjusted EBITDA margin fronts moving forward. That is what it is. If you want to go to the next slide, Benjamin. Sorry, one more. One more. Perfect. I do want to touch upon one thing.
The business, I don't know how many of you guys are familiar with the story, has been recapitalized about, say, twice over the last five and a half years. In January of 2021, they went to market with a convertible debenture offering, about CAD 40 million with the green shoe. In December of that year, they went to market with another CAD 35 million. These are CAD numbers. The exchange rate was closer to parity then. That was about $65 million of net proceeds that came into the company in 2021. That wasn't enough to allow the company to turn the corner. In early 2024, January, they effectuated a common equity rights offering backstop by 22NW and another entity that furnished the company about $21 million of net proceeds. Historically, capital allocation hasn't been the most prudent in our view.
We think we've taken necessary measures to address that and think that we're on solid footing moving forward. I'd just add that the capital structure has been improved. Those debenture offerings were converted. There was a call option, right? Very expensive money on a blended basis. We put in place a BDC facility at the beginning of the year at a sub six-point interest rate. Right?
We still have the Decembers coming due in December of this year, but we'll either retire those with existing cash on the balance sheet and future cash generation or find another capital market solution that's benign to equity. We feel a lot better about the capital allocation and structure frameworks moving forward. In case it comes up to the extent we do generate excess cash, we'd probably use that to offset stock-based comp dilution and then also delever, depending upon the rate, right? If the money's basically free, what's the rush to pay down debt early? Yeah. That's it.
Yeah, go ahead.
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Yeah.
This is kind of a general question, please correct me if I'm wrong in saying that perhaps the biggest reason your stock price has not increased dramatically recently is because your revenue has not increased dramatically recently. Do you think that that is going to change?
Clearly, it's impacting it. We retained guidance in our last earnings call. Some of my commentary on the verticals that we're pursuing, as well as that new diversified sales channel all lead towards top-line growth. Clearly that is what we are actively pursuing is growing top line and at the same time, frankly, fixing the OpEx such that those two things can actually track appropriately.
I wouldn't undersell the latter point. Historically the business has grown, right, in spurts, but it's never really earned anything. Right? If we can get earnings power up structurally and marry that with top-line inflection, ideally the stock should work. Your observation's noted.
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Yeah.
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Yeah, no worries.
Can you give us some sort of idea of this recent restructuring with the second, as you said?
That wasn't my board choice, but kidding. Go ahead.
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Yeah. I'm just giving a hard time.
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Yeah. Yeah.
Here and also for my own, can you maybe give us a little bit of an idea of [audio distortion].
Yeah.
In the business. Then maybe give us an idea of where a top-line revenue inflection point will occur, versus [audio distortion].
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No, that's a good question. In terms of the excess cost that was rationalized, we don't disclose everything, but the OpEx was very high. To Benjamin's point, more focused on OpEx than COGS. On OpEx, on the professional fees front, that was too high. We were carrying too much headcount, right? We've eliminated certain roles, and this is all in the transcript, and filings. To give you a number is tough, but I would say materially, and to your latter question, regarding when you start seeing the incrementals improve, i.e., the inflection point has been exceeded, I would say, that's hard to know, yeah, roughly half our capacity, you should start seeing material improvements to earnings power.
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Yes. Timing's another issue. As you all are familiar with, there are costs to achieve certain cost synergies, right? You incur one-time costs, and then you benefit on a recurring basis from the cost reductions. The accounting will be noisy for the next couple of periods, and I would think the latter end of this year into 2027, you start seeing a cleaner P&L. Does that make sense?
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Any other questions?
Yeah, please, Jeff.
To Sam or Cam or whoever.
Yeah
I understand. Recently, I think one of your partners did a whole government office conversion in Wayne, if I am not mistaken. I saw something on LinkedIn. Is the office conversion, which, what I understand, broadly speaking, is becoming more of a viable growth space to bring office communities, residential units? Was that included with the prospect of doing any business in that slide, that busy slide there?
Yes.
No, go ahead.
Okay, yeah. The $1.7 trillion was the three verticals, so healthcare, office/commercial, and education, which would be K- 12, and higher ed as well. You'd see that in the R&R. I gross it up 20% in the bottom of the slide, right? You get to, I think 5.7, 5.8, excuse me, and you gross it up 20% for the R&R to get to the $7 billion. To answer your question, it's not really captured in the 122 up top. It's more captured in the bottom. These are conservative assumptions. We could come out with a slide saying our TAM is $12 billion, the idea was to be conservative, right, and try to make the math. That was the calculus. To answer your question, it's picked up in the bottom gross up, not the top figure.
Yeah, kind of to further to that, Jeff, as far as the verticals and how they're growing, that can kind of be its own in effect. We still are seeing about 60% of our overall revenue coming from commercial, 25% coming from healthcare, 10% coming from education, and 5% from government. The reason I mention that in my opening comments around those certain industries and the adaptable or the adaptive reuse would fall into that as potential growth potentials for us, is that anything that can accelerate seems to be growing, or accelerate construction schedules is growing faster than commercial office. Even within healthcare, year-over-year, I think that's up almost 8%.
Just to drive this home, because to Jeff's point, I didn't do a very good job of distilling the key points. The $1.7 trillion isn't really what matters. What matters is the 8%-9% penetration, right? Of demountable systems, right, which DIRTT makes. If you can increase that materially, and on top of that, the 12% share, right? We don't really need the sector to grow GDP times three, right? If we can just take more of the share, and we're a market leader. If we have the best product, why wouldn't we sell 25% of the industry's volume? Again, purely hypothetical, it makes intuitive sense.
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Especially to General Contractors. Solves all kinds of issues, finding cost, like cost certainty, labor availability. It begs the question, when will you see construction services When your sales team, maybe you want to talk about that, is going to be able to get-
Yeah
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Yeah.
I am biased, I know you guys are as well, I think if you look at the facts, I think it's pretty-
Yeah
It's pretty clear.
Yeah. To your point, I think that is the primary question, Jeff, is when is that inflection going to happen? For those of you that aren't aware, many of our projects typically have a 12-18 month cycle of lead time. Some longer if it's a massive medical campus or something similar to that nature. That being said, where we have been seeing success in, albeit in pockets with construction services, has been through a handful of our direct sales force, that are quite good at selling that messaging to general contractors and particular clients, such that now we've run a few different pilots for general contractors. I think I commented on it last year, aviation, we're seeing some adoption there. We've also seen some adoption in healthcare with a few pilot projects now under our belt, to see those grow faster.
Ultimately, also now we have a commercial workspace construction services account as well that is running pilots as we speak. I think that will give us better visibility into how much and when and what does that show up like. Clearly, a lot of the, maybe not a lot, but the guidance that we put forth was extremely conservative around what is the potentiality around construction services and what can we actually see show up in the next 12 months.
Yeah, I would just add, I don't think people appreciate, it's a totally different market you're accessing, right? If you sell through a traditional distributor, they have to make their margin. They mark the product up 20, 30 points, right? That makes your product less cost competitive to the end client. If you can eliminate that 20%, 30% markup, all of a sudden you become more competitive, as a substitute.
The other thing I'll add to that, Jeff, that's been interesting over the last six months or so is that a lot of those general contractors that we've been educating, that have come to visit us to see how the product's manufactured, what is the process, how does it install, how do they become certified, we're building offices in their own offices out of DIRTT. They're effectively living it. It is another, I'll call it form of pilot, but now we have multiple GCs across the U.S. that now have DIRTT that never would have without these construction services conversations. They're in, bringing us in early, and that really is the critical piece of all of this, is we have to be engaged at a point in time where nothing's been drawn. They're running capital planning for large customers, and then they use DIRTT as a construction methodology.
When we come in that early, the path goes that way, which has been the challenge with our traditional distribution partners being able to grow, is they typically come in way past that after drawings are out and it's been designed as something different, so there's an inability to convert there. Whereas now, as we're in way early, that's the benefit of it. The challenge is you have long lead times for some of these projects to actually materialize into our forward pipeline.
Do you want to speak to how important timing is, right? If you're selling a system, get specced in early. They won't even entertain it, right?
Correct. Yeah. It's nearly impossible to get a customer to convert a traditionally designed and engineered project into a prefabricated, industrialized manufacturing project. It's just for them to do that, the cost is too much in that they've already headed down that path. When we come in and nothing's been drawn yet, that's when we have our highest success rates and the highest conversion rates. Now to Adrian's point of us being able to drop 20%-25% of that cost burden off of the project, now we're starting to see greater conversion of those opportunities, even if they're further out. All right. I think he's given me the time. Anyhow, Adrian and I look forward to talking with some of you on our one-on-ones. Feel free to