BuildDirect.com Technologies Inc

XTSX:BILD

Earnings Call Transcript

[Prit Singh]

Hi, everyone. Welcome to BuildDirect's Q3 fiscal 2023 Earnings Conference Call. For those that are unfamiliar, BuildDirect trade on the TSXV under the ticker BILD. My name is Prit Singh and I will be the moderator for today's conference call.

Before we begin, I would like to note that some of the comments today will contain forward-looking information and statements under applicable securities laws that reflect management's current views with respect to future events. Any such information and statements are subject to risks, uncertainties and assumptions that could cause actual results to differ materially from those projected in the forwarding information and statements.

Please refer to the various materials the company has filed with Canadian securities regulators for a broader description of operational and risk factors that could affect the company's performance.

Please note that all dollar amounts mentioned in this presentation are in U.S. dollars, unless otherwise stated.

On today's call, we will be covering BuildDirect's Q3 fiscal 2023 financial and operational highlights as well as its growth outlook for the remainder of 2023 and into 2024. Following BuildDirect management's comments, the call will be opened for a Q&A session. [Operator Instructions]

Our presenters today will be the CEO of BuildDirect, Shawn Wilson; and CFO, BuildDirect, Matthew Alexander. I will now turn the conference over to Shawn Wilson, CEO of BuildDirect.

[Shawn Wilson, executive]

Thank you, Prit. For first-time viewers, BuildDirect operates e-commerce and brick-and-mortar stores that provide flooring products and services to home improvement professionals. Our aim is simple, to become the leading provider of flooring to the pro-customer in North America.

Here's a quick glance at our financial highlights for Q3 fiscal 2023, which will be covered in better detailed by Matt during today's call. For the 3 months ending September 30, 2023, we generated $18.4 million in total revenue, while producing a gross margin of roughly 39.8%. Lastly, we generated a record total adjusted EBITDA of roughly $1.4 million. We continue to demonstrate strong growth in scaling our operations to improve our profitability while also enhancing our e-commerce platform.

So as a reminder, BuildDirect is currently focused on the U.S. flooring industry, which is worth roughly $70 billion and consists mainly of independent retailers. It's a fragmented market with only a limited number of large competitors. And therefore, we believe there is a significant market opportunity for us to capture, given our omni-channel strategy, which includes both e-commerce and brick-and-mortar stores.

Before we go into more detail about our financial results, I want to quickly provide more insight into how our business model works and who our customers are. First, we source products directly from manufacturers throughout the world. Next, our products are shipped to our brick-and-mortar locations, we call our Pro Centers in the U.S. and Canada. From there, our Pro Centers sell products and supporting services to local professional customers.

So what's professional customer? It's pretty simple, general contractors, commercial developers, property investors and flooring contractors are amongst our most common repeat customers. Professional customers serve all segments of the building and remodeling industries. We also have an established e-commerce site at BuildDirect.com that helps Pros place and manage their orders. Homeowners who want to shop like a Pro and buy new flooring a wholesale for their home project can also make the purchase on BuildDirect.com.

I'll now turn the call over to Matt, who will discuss our third quarter financial results in greater detail.

[Matthew Alexander, executive]

Great. Thank you, Shawn. I'm excited about the progress we've made this quarter. I will now speak on the key financial highlights for the 3 months ended September 30, 2023.

Total revenue was $18.4 million for the third quarter, as expected, this was a decrease of $3.6 million or 16.3% year-over-year. This is also a decrease of roughly $690,000 or 3.6% sequentially quarter-over-quarter. The year-over-year decrease in revenue is -- as a result of the temporary scale down of our e-commerce operation, which was done to correct the unit economics of the business and to facilitate our e-commerce platform enhancement initiatives, which lowered our fixed cost for the e-commerce segment. The sequential decrease in revenue is partially result of lower demand and due to a onetime revenue reduction associated with their e-commerce platform enhancement initiatives.

Subsequent to this enhancement initiative, we are -- which was completed early September 2023, management has been able to refocus efforts on growth initiatives for the e-commerce segment and to date, management is optimistic that this strategy will have a positive impact on both the top line growth and overall improvement of the segment profitability.

As noted by Shawn, I'm pleased to report that we achieved another quarter of positive adjusted EBITDA, which reach $1.4 million, an increase of roughly $1.1 million year-over-year and roughly $300,000 sequentially quarter-over-quarter. This is our seventh consecutive quarter of positive adjusted EBITDA results and is the third quarter of positive adjusted EBITDA results in excess of $1 million.

Looking at the right-hand graph, I'm happy to report that our continued focus on the Pro customer can be seen in our revenue results. Pro revenue presented 91.6% of our total revenue in Q3, an increase of 280 basis points sequentially quarter-over-quarter. As mentioned in previous calls, we expect our focus on Pros to generate predictable revenue with lower customer acquisition costs.

Moving down the P&L. Our gross margin percentage in Q3 was 39.8% and an increase of 840 basis points year-over-year and 10 basis points sequentially quarter-over-quarter. Both the year-over-year and quarter-over-quarter change is driven by: firstly, the improvements to the BuildDirect e-commerce product margin with a shift in pricing strategy from every day low pricing to a high low pricing strategy.

Secondly, the improvement to our independent retailer product margin as we source more product directly through BuildDirect's direct-to-manufacture procurement model; and lastly, there has been a reduction in our inbound freight costs as shipping expenses normalize post-COVID.

Moving to expenses. In Q3, our expenses decreased by $570,000 or 7.3% compared to the same period in 2022. The decrease can be attributed to the reduction in fulfillment costs and R&D spend. The drop in fulfillment is due to lower e-commerce revenue, which has higher fulfillment costs and we have lowered our third-party warehousing expenses by consolidating existing leased space operated by our independent retailers. For the R&D spend, we migrated our e-commerce site, which has allowed us to reduce our R&D staffing expenses.

Moving over to the balance sheet. I am very pleased with the significant positive changes to balance sheet this quarter. As at September 30, 2023, our current assets would primarily consisted of cash, cash equivalents, receivables and inventory totaled approximately $15.8 million. Our current liabilities, which primarily consist of accounts payable, accrued liabilities, loans payable, promissory notes and deferred consideration totaled approximately $13.2 million. This gives us a current ratio of 1.2 as our current assets exceed our current liabilities by $2.6 million. This is a $7.1 million improvement from Q2 2023 where our current assets were lower than our current liabilities by $4.5 million.

The change is due to the restructuring of our debt obligations, namely the 2018 and 2022 secured notes, which have been extended to September 2025 and April 2026 respectably. In addition to extending the maturity date, we have reduced the interest rate on both notes from 15% to 12%. Given the current interest rate environment, we feel as drop in a rate is a strong show of support from our existing debt holders.

Along with the restructuring of the debt in the quarter, we have paid down the following principal debt amount, $311,000 of the promissory note, $1.2 million of the loans payable. In addition to these loans principal payments, we have made approximately $218,000 interest payments.

To close, I want to highlight that our focus on profitability has allowed us to make approximately $3.2 million of principal debt and deferred consideration repayments so far in 2023. This has created stability and deleveraged our balance sheet so that we're in a better position to refocus on growth.

Moving forward, we will continue to maintain an improved profitability as well as looking for opportunities to scale our e-commerce and brick-and-mortar operations.

Now I'll turn the call back over to Shawn, who will go over the operational highlights for the company.

[Shawn Wilson, executive]

All right. Great. I appreciate that. I appreciate that, Matt. So during the third quarter, BuildDirect completed its e-commerce platform migration enhancements, delivering the following results. First off, we expect to achieve a combined total around USD 850,000 in cost savings, which include software and fulfillment expenses. We've integrated our enhanced ERP for more efficient management of finance, inventory and order fulfillment, and then third, we've upgraded our e-commerce site from merchandising and marketing to enable potential revenue growth and scalability.

Furthermore, as Matt noted, we restructured our debt obligations, namely the 2018 and '22 secured notes, which led to the following results: maturity date of both notes have been extended from September 2025 and April 2026 respectively. Approximately $1.5 million was paid towards outstanding principal and the interest was decreased, as Matt mentioned, 12%, which will create quite a bit of interest savings, about $350,000 annually.

In addition to our third quarter operational highlights, I'm also pleased to share the following developments that took place post Q3 2023. October 1st, we launched a new service offerings that are designed for Pro customers, including customized e-commerce sites, white label branded flooring products, free flooring samples and fulfillment services that meet Pro needs. These offerings both open the path to BuildDirect to build potential recurring revenue stream as well as increased Pro services.

We also launched our sixth brick-and-mortar Pro center via an existing company facility in Richmond, British Columbia, which aims to service flooring professionals throughout the Greater Vancouver market as well as Seattle and Spokane.

We aim to use the Richmond facility as a template for future potential Pro Centers across the United States and Canada. By starting with a solid foundation of sales, the establishment of Pro Centers is intended to help elevate BuildDirect's impact on Pros in an East local market.

Regarding growth, our growth model strategy is pretty straightforward. We intend to increase our slice of the $70 billion North American flooring market by providing an omni-channel model for Pros and homeowners. Our omni-channel model will include a nationwide e-commerce business and numerous Pro Centers, which we intend to serve a number of major North American markets.

As a result, we try to implement the following initiatives. First, we'll pursue growth of our e-commerce business. Currently, our e-commerce business is concentrated. It's roughly 20% of the U.S. market. So our antenna strategy is to grow marketing and sales in other major North American markets to fulfillment model can support.

So we'll continue to scope out and open new Pro Centers. We currently have 5 Pro Centers in the states that are all located in the Greater Detroit market. These Pro Centers required in 2020 and 2021 and comprised approximately $55 million in revenue on an annualized basis. With each acquired Pro Center, there are substantial marketing and procurement synergies that present opportunities to increase EBITDA. Our team has developed an integration process and a track record unlocking these opportunities and integrating the businesses.

As noted above, we recently opened our sixth Pro Center, first organic, located in Richmond, BC, New York Corporate Headquarters. It's our first organically created Pro Center and will provide a potential template for future organic Pro Centers. When you examine our Pro Center revenue, you model in other top North American markets, Detroit being ranked somewhere around 14, which markets that potential support Pro Centers, we provide a substantial runway for growth.

To achieve this growth, our team will stay focused on growing our e-commerce business and opening incremental Pro Centers organically and/or through acquisitions. Future is quite bright and we'll remain focused on this goal.

I'll now turn the call over to Prit, who will moderate the Q&A session.

[Prit Singh]

[Operator Instructions] So first question. Given higher interest rates and the global macro uncertainty, how do you think various economic conditions will impact demand in the housing market for Pros?

[Shawn Wilson, executive]

Yes. So I'll take that one, Matt. So first off, housings in are built, whether it be in the U.S. or in Canada, kind of start there. Second, though, which is kind of interesting, the majority, north of around 70% of the flooring industry is actually from remodeling versus new construction and our business is heavily focused on the Pro, which in turn is very much focused on remodeling whether it be residential or commercial. And so that's an interesting [indiscernible].

Third flooring is a renovation project that's really shown to further increase the value of properties. So not only does it make it more desirable to live in short term, you're also adding value kind of for the long term, which is great.

And really with the TAM that's north of $70 billion has less of an impact on a company our size with our growth model. So we have quite a few opportunities there to grow kind of zooming out $55 million, as I mentioned of our TPM comes from only 5 Pro Centers located in Michigan. We have quite a few markets to take advantage of us here from here.

[Prit Singh]

Great. It appears that Pro customers now contribute to 92% of the company's total revenue. Does the company plan to solely focus on Pro customers moving forward? Or are there plans to drive both Pros and homeowners in the customer base?

[Shawn Wilson, executive]

Yes. So I would say the line between a Pro and the homeowner can sometimes be a bit blurry. But for us, it's pretty straightforward. We've successfully pivoted our business to focus on Pro customers, Pro customer segments. Our marketing, product offering and services are all really there. So I would say we've done a great job collectively refocusing the business on the Pro. However, look, we do have customers who like to shop like a Pro, whether they're using a Pro Center or leveraging our e-commerce site. That's also an option, but is not really a focus for us. We remain very much focused on the Pro customer and then they enable others to shop like a Pro when it makes sense.

[Prit Singh]

Just a follow-up to that. With the launch of your sixth Pro Center, what are other regional markets that BuildDirect plans to target moving forward?

[Shawn Wilson, executive]

Yes. So I won't provide any other specifics around what markets outside of just North America. So in the U.S. and Canada, we have an ongoing pipeline locations that we're evaluating. I would though add this color to it.

So in some cases, we have concentration of our e-commerce business that provides a natural starting point for building out a Pro Center, and those tend to be just major newest markets, but also kind of along with that, looking at opportunities to potentially pick up Pro Centers just based on organic and/or M&A activity. So pretty wide open. Our model travels very well. And for the most part, we have a lot of prospects there to pursue.

[Prit Singh]

Earlier this year, the company paid down debt and appeared to refinance the remaining debt. Can you please elaborate on this topic?

[Matthew Alexander, executive]

I can jump in here. Really an exciting topic to answer because I think there's a lot of good news that happened throughout the quarter, throughout the year.

So -- just to reiterate what I said earlier is we've paid down $3.2 million of debt and deferred consideration year-to-date. So I think that's one important component. So we are reducing our liabilities and our debt obligations. So then there are 2 other items that happen. Really, we refinanced $7.5 million worth of debt and with that refinancing, we effectively extended the maturity date from 2023 and pushed it out to 2025 and 2026 respectively. And along with that extension and maturity date, we've also reduced our interest rates.

I think might cause some confusion to hear that people were actually reducing our interest rate. That's what's happened as we had 15% rate and we've been able to go back and say, because of the ability we've been able to show that we should get that down or less risky, and so we moved that down to 12%. So there's kind of 3 things that happened, paid down, extended and reduced the rate.

[Prit Singh]

Can you expand on how you plan to advance your e-commerce operations now that the overhaul is complete?

[Shawn Wilson, executive]

Yes, I'll take that one. So for the most part on the overhaul, it was really geared towards pinning out the tech stack and also adding flexibility on like the product and product marketing side. At this point, that specific business on the e-commerce side is just about pulling up, right? So -- we're focused on scaling and marketing, focused on scaling up the subsequent sales function that goes along with that. This is not an everyday purchase for customers having support for their transaction makes a lot of sense. And along with that, also being very much connected with the scale of inventory and then order outbound shipping, kind of things like that.

So when we got into this business and looked at where we've been held up historically, it was mostly on that tech stack side and the ability to have a lean tech stack that was flexible enough to meet customer and market needs, but also cost effective in the fulfillment of orders. So at this point, that's really where the focus is.

Could there potentially be other areas a lot cost savings and/or other EBITDA improvements? Sure. There's always opportunities there, but our focus is not really that anymore. Our focus has shifted to just really growing sales based on that model through enhanced marketing, sales, activities and order fulfillment.

[Prit Singh]

[Operator Instructions] So next question. In 2021, you acquired Superb Flooring & Design, which makes up part of BuildDirect's brick-and-mortar operations. Can you expand on Superb deferred consideration payment?

[Shawn Wilson, executive]

Matt?

[Matthew Alexander, executive]

Yes. I can jump in here. So I think as part of our acquisition strategy, we have -- there's -- we have a component of the consideration that is deferred. So I think I'm assuming this question is coming from a subsequent event note in our financials. I think there's a limited amount that we can discuss on this other than that we're expecting our liabilities to drop in Q4 by roughly $1.5 million related to reduction in deferred consideration.

[Prit Singh]

What is the -- you've alluded to previous plans to be acquisitive, what are the plans to -- for future acquisitions?

[Shawn Wilson, executive]

Yes. So I'd say simply there gives you kind of [indiscernible] our model. So we have an e-commerce business that is supported by our Pro Centers. And we look at our Pro Centers, I mean, I mentioned before, we've acquired 5 of them. We built one up in Richmond, BC and there's obviously we're scouting out areas to open up additional ones. When it comes to the M&A activity, we're interested in layering on Pro Centers across the country to help, of course, drive local sales and also support our e-commerce business, makes them more competitive each and everyone we add and doing that through either a build or buy strategies where our mindset and focus is.

And so when you're thinking about us and M&A for us in organic, it's the same play. We're layering on Pro Centers in a few different ways. That's our intent, intent strategy and those Pro Centers, both support our e-commerce business and work well with it.

[Prit Singh]

Next question, what are the company's plans to produce a net income for its overall business?

[Matthew Alexander, executive]

Yes. So I can take this one. I guess a good question. So as we pursue an acquisition strategy, EBITDA and operating cash flow are more important profitability metrics to us. So to reiterate, we have a positive adjusted EBITDA, but we're currently in a net loss position. The reason this is happening is because of the amortization of the noncash intangible assets associated with those acquisitions.

So we feel those acquisitions are likely going to generate cash flow beyond that amortization period. So it's less of an important metric to us. So I guess as the acquisition strategy plays out and as we pass forward 2, 3 years down the road, when all those intangibles are fully amortized, we should be able to get in a position where our net income starts to match up closer to our EBITDA and operating cash flow. But at this point, as we grow that acquisition strategy, it's really less of an important metric to us because of a lot of the I would call it, accounting noise that happens with that amortization of that noncash intangible assets.

[Shawn Wilson, executive]

Yes. One thing I picture that Matt -- one thing I would also just add for those unfamiliar with the business specifically around like the Pro Centers and those acquisitions, these acquisitions and the Pro Center set up, they age well. When it comes to investment and ideation innovation, all the kind of stuff that requires is required to operate, a lot of that stuff is either already built or relatively easy to then set up and these things age well without like heavy reinvestment as they're managed and inventory flows through kind of things like that.

And so with Matt's comment about the life outside of that amortization, as he was referring to. So it's not like when you acquire a Pro Center or if you build a Pro Center, there's not -- not typically at least consistent or kind of also reinvestments that we made. It's more of a -- it's an operating business that you keep fresh and runs smooth indefinitely.

[Matthew Alexander, executive]

Yes, that's a great addition. I think maybe just the last little piece is effectively, we're amortizing those assets -- those intangible assets over about a 5-year period. As Shawn mentioned, these companies age well. They've been in business for sometimes over 20 years already. So we really expect them to continue to generate profit and net income past that 5-year period that we're amortizing them off of. So it's -- I think a benefit for us in the future as those things are fully -- as the intangibles start to come off our books.

[Prit Singh]

[Operator Instructions] Next question, for both Shawn and Matt, what are some catalysts investors can expect in the next 6 to 12 months?

[Shawn Wilson, executive]

Yes. So I would say on the Matt takes one first, and you can follow probably later on. I would think kind of first and foremost, I would have to catalyst really focused on Pro Centers and what we're doing with our Pro Centers whether it be new build or organically build or acquired, that's probably the main thing I would do.

Matt, how about on your...

[Matthew Alexander, executive]

Yes, maybe broken record on this one a little bit. But again, $3.2 million out of our current liabilities, we also expect to pull off more significant portion of liabilities off our balance sheet in Q4 as well. So with that deleveraged balance sheet and now a lower cost of capital going from 15% to 12%, consistent profitability. We're now in a position where we can really focus on that growth. We've got a lower cost of capital to actually move forward and we do have more of the balance sheet to grow those acquisitions with additional debt coming on with those acquisitions.

[Prit Singh]

Okay. I think that's it for questions. So with that out of the way, Shawn, any last words before we end the call?

[Shawn Wilson, executive]

No. Well, I thank everyone for attending. Feel free to reach out to our IR box, any other follow-ups you might have missed and appreciate everyone joined today.

[Prit Singh]

And for our viewers today, there will be a recording of the earnings call, which we will upload on the BuildDirect's Investor Relations site within the next 24 hours. If you do have other questions that were not addressed, just email us at irbuilddirect.com.

Matt and Shawn, thank you very much.

[Matthew Alexander, executive]

Yes. Thanks a lot.