BuildDirect.com Technologies Inc. (BILD) Earnings Call Transcript & Summary

Okay. Let's get started. Hi, everyone. Thank you for joining the BuildDirect investor webinar today. For first-time viewers, BuildDirect is a leading omnichannel building material retailer that connects North American home improvement B2B and B2C organizations and homeowners with quality building materials and services through its robust global supply chain network. Today, BuildDirect is listed on the TSXV under the ticker symbol BILD, B-I-L-D. My name is Chris Sing, and I will be the moderator for today's presentation. Our presenters today will be the CEO of BuildDirect, Shawn Wilson; and the CFO of BuildDirect, Matthew Alexander. Before we begin, just some housekeeping rules. Please remain muted throughout the presentation. The investor presentation will take approximately 20 minutes, followed by a Q&A period. [Operator Instructions] If you were calling in to listen to this webinar today, please e-mail your questions directly to ir@builddirect.com, again, that's ir@builddirect.com. With that out of the way, I will turn the call over to BuildDirect's management team.

Perfect. Thanks a lot, Chris. Before we jump into the material, a quick background for those who have been following the story, BuildDirect was founded over 20 years ago in Vancouver. The initial goal was to be the Amazon of building material. I'll call that BuildDirect 1.0. There's significant investment to achieve that goal. However, the strategy wasn't successful for timing for execution, lack of some recurring revenue results of that with CCAA in 2017, 2018. The existing investors at the time recognized there was a ton of remaining assets that still existed like relationships with manufacturers that allowed us to source directly from manufacturers around the globe. Our logistics network that still allowed us to service virtually all the U.S. states, domain authority for websites and a tech platform that we could leverage. So from that BuildDirect 2.0 I'll call it, using those assets and narrowing the focus to just flooring, our best category and focusing on our profitable segment, which is the Pro segment which provided a recurring revenue stream for us. The company shifted from -- out of that 1.0 to 2.0 and used that story to go public on the TSXV on August 13, 2021. With that raise, we raised CAD 20 million to help fund the company's growth strategy, and we acquired a company -- another company in the U.S. called Superb. The company today, just a quick hit in terms of stats for you. We're around USD 90 million in terms of revenue annually. So also a note information here going forward will be presented in U.S. dollars. So USD 90 million revenue per year, positive adjusted EBITDA for 2022, expecting that to improve going forward into 2023, and new leadership is in place. So -- which feels like they can use the assets that we have as a company and the revenue base and the stable financial footing we have to drive growth in the future. So with that, I'll pass it over to Shawn Wilson, the new CEO at BuildDirect. He joined BuildDirect 4 months ago. He's a seasoned home and proven executive with cross-functional experience throughout the building material industry, including e-commerce, big-box retail, manufacturing, installation services. He is a proven leader, skilled developing teams and effectively expected strategies to deliver profitable growth. So yes, as BuildDirect, we're thrilled to have him on board, and I'll pass it over to Shawn.

Right, Matt, I appreciate. Let's go ahead and move forward here. All right guys. So BuildDirect has definitely a pretty great foundation to build off of the U.S. flooring industry and also Canadian -- really is a great industry in that. It's construction base, it's needs driven. And also in good times, you have new construction and big projects and in tougher times, you have people dig in and refurbish their homes. And so with BuildDirect, you have a really interesting omnichannel platform that today consists of our e-commerce business that serves some homeowners but mostly Pros and then also our brick-and-mortar -- initial brick-and-mortar locations that serve Pros. I think about BuildDirect, it's pretty straightforward. We are providing the platform for the Pro segment in the flooring industry to be able to build their own businesses on and facilitate projects. And with that, we have a really tremendous value opportunity where we're able to provide that platform for Pros, the product services, which we'll get into here in a little bit and cutting out a tremendous amount of costs while also delivering a better experience for their specific need. With that as well, when you look at our M&A program, it's very intuitive. It makes a lot of sense. So we have capabilities that were built over the years based on Matt's comments with BuildDirect 1.0 that, frankly, when I came into the organization, I was just incredibly impressed by the supply chain, the efficiency in the flooring industry, shipping big, heavy things across long distances can be a challenge for those things to arrive undamaged, upscaling at the right time and to facilitate a building project. And really, when I saw what BuildDirect had built over the years, it's incredibly impressive for the industry. Along with that, when you think about really what the pros need more specifically for the flooring category because of how bulky heavy things are and how important it is to time materials of installation, the model really fits. And so 1 thing I would say, BuildDirect didn't choose the Pro customer really intentionally, the Pro customer found and chose BuildDirect. We look at really who shows up every day in shops and facilitate projects. It's our Pro customer, and we're just now really starting to dig in there and provide more and more services along with products and also really build out that marketing funnel more targeted perspective. So that, plus with a lot of industry experience, we come to the team with some deep e-commerce experience, financial experience and also flooring experience both with the team at BuildDirect. Myself has an addition as well as our leaders in our brick-and-mortar locations who've been in the industry for many years successfully, profitably I would say, just at a high level, our stats are pretty great. Our gross margin is -- has dramatically improved as we've got some things squared away, but there's also a lot of growth opportunity there as well. And when it comes to EBITDA, we have a great story there that we'll get into here a little bit. That's going to go. When you think about the flooring industry, it's kind of an interesting industry. For the most part, the share hasn't changed much in a very long time. It's mostly fragmented 65% the industry is the small mom hop and the local community, you'll find a handful of these players. But when you think about kind of why a big portion of that reason is tied back to the installation component for floor covering and also having the right quantities, the right places to facilitate projects. So when you look at the business, there's definitely a tremendous amount of market share to go after, but we get most excited about is a huge market that is actually Pro driven through referrals. 80-plus percent of all flooring projects are sold through a referral. And what's typically being referred isn't so much the product, but rather the installation experience and not so much even the company facilitating the installation, but rather the installer that professional contractor was out there. And when you think about that, it's kind of interesting, you have a $71 billion industry, 80% driven by the -- those were actually facilitating the work -- completing the projects but are the farthest removed from the customer at the time of sale. And so for us, we get really excited about taking a big step back and saying, okay, flooring contractors drive this industry. They drive referrals, they drive excitement, they drive projects how can we effectively help them develop a platform to be able to facilitate their own business. So how can we provide them intuitive easy access to products at true wholesale, direct manufacturer? How can we provide other things they might need in order to facilitate those sales with their end consumers. And in so doing intuitively, from our perspective, we leverage our capabilities we're able to step away from heavy customer acquisition costs because you're really starting to lean into that referral or filled network. We think about our current model today. So we have 3 kind of distinct divisions. BuildDirect is our initial e-commerce platform. And there, the capabilities pretty deep both on the customer act side, the funnel, transitioning those customers through the process and also delivering directly to the job site and the experience is great. The reviews are great, and the claims on that model are from an industry perspective, incredibly low. Now our brick-and-mortar locations are in -- we have 2 brands. The first 1 is FloorSource and FloorSource for the most part, kind of looks and feels a lot like BuildDirect, but with the physical location and they also carry carpet as well, which is difficult to ship at least today, we have some things in the works across the large distances. And so the FloorSource operations have products they have merchandising programs, but they're effectively the local resource for the trade, the supply shops, so on and so forth. And we do a lot to help those -- the Pros at areas really transact their business. Superb is a division of ours that we acquired last year that effectively runs large specs, commercial specs, provide installation services. And traditionally, has relied on large manufacturer specs from the industry's leading manufacturers. But with our build direct sourcing model, we're starting to integrate the capabilities on the sourcing side into the other businesses. And we'll find that we have a lot of opportunity to leverage the supply chain fulfillment so on and so forth from the BuildDirect side into the other divisions. And also we're finding some backflow as well with capabilities that were developed in highly valuable at FloorSource and Superb that kind of flow back through. So although our model is pretty much a roll-up model, as we're evaluating companies, we're very much focused on pro-focused organizations, less homeowner or retail-oriented and all 3 brands here fit in that portfolio. The revenue streams for us today consist of product intuitively through our e-commerce and also through our brick-and-mortar locations warehousing of freight kind of interesting. When you think about the Pro, the trade, there's 2 problems they have when trying to facilitate their own projects, aside from just having access to product to wholesale. So if I'm a large contractor or even a small contractor, I'm trying to go out and set projects, unless I'm going to like a floor decor, where I'm paying retail or maybe I get a 10% discount or something for being a Pro, I know where to put things. And so when you think about even single customers flooring to their downstairs or their for a few rooms, space becomes a real problem. So our model book on e-commerce and brick-and-mortar provides warehousing services, direct-to-home, freight services for large projects. And with that also, that enables us to service very large projects very seamlessly. On the product side, that's definitely a huge advantage, but we're also exploring services as well, and we're finding that the feedback as we're learning more and more about our Pro customers and the services that they actually need to grow their businesses are things that we believe we can monetize both as a software solution, but as well as from a product pull-through perspective. On the installation side, we do offer installation services for our spec work for large-scale projects in the Midwest. But that's something for the most part, we are going to continue to leverage our Pro-focused Model 4 versus opening up a lot of new inflation work rooms. For the most part, BuildDirect can be focused on helping the contractor, the Pro develop their business, which is intuitively the installation for the projects versus focusing on the insulation model ourselves. The -- organic perspective, it's pretty interesting. When you think about what we've done today, I mentioned before, the Proly found BuildDirect with our model. We intentionally at first went out and advertise heavily with homeowners, and we developed an e-commerce experience that was more oriented towards that and we found that our model really fits with the Pro customer pretty well as the marketing team has started shifting over to developing Pro-based funnels branding, so on and so forth, value props will be pretty interesting to see here how we can really organically the business our customer acquisition cost model, even today on the homeowner side is pretty attractive. So as we come into the company, we're getting leadership established. We'll be able to effectively scale back up on the e-commerce side as well as interesting programs for brick-and-mortar operations. Matt is going to progress to the next slide. On the Pro side, you can see our story here kind of told pretty straightforward in 2020, all the way to 2022. The Pro categories that we really focus on the builder side, it's both Stockholm builders and also large track homes. But with that also, we have a lot of reallocate customers, a lot of property investors, foreign contractors referring to everything from individual trades all the way to multi crews to large installation shops. And along with that, on the multifamily and commercial side, we're finding a lot of traction on specifications to go back to apartment complex that are being built or condos. In the flooring industry that's been relatively kind of locked from a manufacturing perspective, we're able to come in and provide tremendous cost structure opportunities, value engineering on those projects. And with that, we're finding a lot of traction, a lot of growth opportunities. All these Pro customers effectively have a recurring model for us and the projects really, when you're not geographically kind of constrained becomes a real advantage because you'll find that they move from city to city, state to state kind of so on and so forth. And for us, moving product around the country is definitely an expertise and a core competency. For the future, when you think about services and kind of our road map. So today, we have a fantastic wholesale product offering for Pros where housing and shipping is been a core competency, the company invested and developed as well. And also on the spec services side, we have capabilities there where we can turn around large specs and respond to proposals and execute large orders. When you think about what's next? When I think about how can you really enable a Pro to build their own business and leverage our capabilities the types of things that we're working on are listed here. So from an e-commerce perspective, being able to white label what we've built and allow them to put their brand on there and have a digital real estate piece when they don't have that physical location is a huge thing based on our Pro feedback. So instead of opening up and going down the road, they open up a shop, have a warehouse, have a showroom, incur all these costs, we have the installation, we have a logistics, we have the ability to ship product, we have the ability to also provide them with the digital experience for their customers to help really provide great legitimacy for them and also product pull-through for us. Warranty programs is definitely something that we have that's pretty far along in the works. And also on things like payment and financing programs, so often, things like this just get overlooked for -- from a contractor's perspective, when you ask contractors, hey, what do you actually need to sell more projects basic things like this, like digital real estate on the e-commerce side or the ability to process and offer payment terms for their customers is so often a limiting factor. And then I couldn't resist here, BuildDirect is a e-commerce lead generating machine. We can scale up and scale down pretty great. And from a lead perspective, our waste stream on leads for our e-commerce business that effectively, we don't even need to get close to our [indiscernible] goals because our machine works very well there. There's high value for those leads that are out there. All right. And so with that, when we think through kind of the future, we have some organic stories we've talked about on the e-commerce side. Now when it comes to adding additional footprints, additional locations, we definitely have a pretty good strategy to pick up additional to the trade-focused locations that really help us build out our omnichannel strategy, but then also help us invest more in the Pro base in key areas. When you think about kind of the why there, we could do a lot more for Pros from a digital perspective. We argue you a lot there that perspective. But that ultimate local location, where we also have inventory that's house, we have retail sell associates that are able there to help them kind of real time and also provide carpet, which I mentioned before, is a bit of a challenge through standard e-commerce models. It's a pretty great strategy. So for us, we'll be working through additional acquisitions that really have that specific kind of footprint and focus on the Pro customer, not really interested in retailers who are more focused on homeowners, but rather on the Pro. And then from there being able to plug-in our capabilities we have from the combined group into those operations to help performance more and more and provide that true omnichannel experience for our customers. With that, the -- when you think about the targets for the most part for the most part, the consolidation will be major city growth areas -- but with that, we find on the acquisition side that a lot of great targets that are well run, well structured. But for the most part, they're kind of beholden to major manufacturers, large distribution, struggle with technology. And then on the integration side, are highly, highly fragmented. So when we think through the overall customer -- so on and so forth. There are a lot of different parts of the industry that are interesting that provide services, high service retailers. But for us, for the most part, we found is the ability to come in plugging these capabilities and then from there, execute a pretty effective roll up on that. Okay. And then on the pipeline, this actually was started a couple of years ago. We have a pretty healthy pipeline identified what that target looks like. And then from an acquisition perspective, we don't believe that the number of viable candidates will be a limiting factor. But rather as we're working through making sure that we integrate, provide value service and also just find the right types of acquisition partners with the right types of systems in place, leadership teams in place, kind of things like that. So we don't feel like it will be really limited by having to kind of take what's out there, but rather be able to go in and buy kind of the best that's out there. But with that, still being able to layer in some capabilities to increase gross margins -- we kind of think about just at a really high level for most midsized retailers out there in the flooring industry, when they're buying through major manufacturers, or distribution. And when you shift into our direct model, for the most part, you can pick up anywhere from 10% to 15% gross margin improvement just from that switch. And so for us, we're really focused on finding well-run companies, and we've done a great job so far with the pipeline development, and we'll continue progressing this 1 forward on that. Okay. And then with that, when you think about where we're at kind of today from a capability perspective and strength and kind of put through, we do believe for the most part, when you add in that local component post acquisitions, the -- really the grid gets pulled out. I do want to kind of call out when you think about Home Depot or Floor Decor, more specifically -- for the most part, they're more retail oriented, targeting the targeting the consumer pros can shop because inventory is their local. But I do want to just kind of call out when you think about BuildDirect and you put our e-commerce platform together with our brick-and-mortar is more focused, much more focused on actually having a platform for the Pro versus a retail operation that can also service a Pro.

I can take over around the financial highlights here. So I think with the numbers we can show kind of the strategy playing out. So I think in 2022, I think 2 big things that happened is we shifted our focus away from some of the homeowner and we dropped our marketing spend, and we dropped some of the fixed costs related to that homeowner spend. So we've been able to maintain our revenue year-over-year, which is a positive sign. We're backfilling a lot of that revenue that was lost on the homeowner side with new Pro revenue that's recurring and can continue going forward. And you can see on the profitability side from an adjusted EBITDA perspective. we're seeing a significant increase in our EBITDA, and we expect that to continue going forward into 2023. So touching on the leadership team again. I think Shawn is coming in with a new perspective around flooring and able to kind of understand the opportunity that we have. We also have strong COO, myself, Director -- Senior Director of Technology to help our platform and expand that throughout the different acquisitions and a very strong category manager that helps ensure that we get top product from -- directly from manufacturers, and we can take advantage of that cost benefit by going directly to the manufacturers. Think quickly on the board side. We also have strong institutional investors supporting the story. So Tim Howley from Pelecanus is one of the major shareholders. Milan Roy of Lyra Growth is one of the major shareholders as well. And as an observer on this, you also have BD Capital. So maybe in terms of the cost structure -- or sorry, the ownership structure, over 65% of BuildDirect is owned by those 3 solid inside investors, Lyra, Pelecanus and Beedie Capital. We've also added some more board experience with Henry and Peg that have an ability to understand the M&A story and help us expand that part of the business going forward. Moving forward, just looking at the comparables. We've got several comparables that we've looked at through the RTO process and we feel like when we look at BuildDirect, there's an opportunity for us where we feel like we're stacking up below the expectations from other comparables from a revenue and EBITDA perspective. I think last, I just wanted to look at the capital structure. So outline what our outstanding shares are, what our enterprise value is and outline what that multiple would be versus our revenue expectations and EBITDA expectations. So again, I think there's a lot of value with where our short part is today versus what our expectations are for revenue and EBITDA going forward. So with that, I think I'll pass it back over to Chris to open up for questions.

[Operator Instructions] So going through some of the questions here. First question. Can you elaborate a little bit more on your revenue sources.

Yes. So our revenue sources today are 20% coming from homeowners who show up on our website, go through our sample funnel process and find a floor and usually work with the Pro install. But the bulk, 80% are coming from large projects, things like apartment buildings being built or condos being converted from that, some new construction, but we're not overly exposed in new construction along with a substantial amount of to the trade. So when you think about it, it's a floor covering installer who is actively selling their own projects, using a variety of lead gen sources or referrals to actually use our e-commerce platform or a brick-and-mortar location as their back in back room to buy products at wholesale and in to install them. And there's a tremendous difference between what a wholesale means compared to at retail. And so that's where our revenues are coming from today, those large projects, but also a tremendous amount of just day in and day out projects where the trade is selling jobs and using us as their supply partner for their foreign business.

Okay. Great. In an inflationary environment, and recent recession concerns, what impact are you seeing on projects?

Yes. So this 1 is interesting. So a couple of thoughts. The first thing I would say is from a pricing perspective, we really haven't seen an inability to pass inflation along. For the most part, projects are -- I mean it's forthcoming, right? So it's a construction material, but it's a decorative material, so it's more aspirational kind of in nature. And we find that price sensitivity is really not really not there. Now is there a kind of a range or band definitely, but we haven't really seen a slow-- slowdown. And I don't want to say yet because we don't really forecast a slowdown with ourselves. We're relatively a good-sized business, but in a pretty big ocean of opportunity. We have ability to grow. We find that consumers are still working or working through projects or renovating. And then we based on industry experience and just past the ups and downs, know that when things get a bit tougher, the projects really shift. And so you can find new construction might soften up renovations of existing homes could often do go up or kind of a flip to commercial. For the most part, the biggest challenge we're finding on the inflation side is just making sure we take things up as we need. And then on the opposite side, as supply comes a bit heavy, making sure that we are able to adjust costing and pricing back down to follow. So that's kind of what we're seeing today.

Okay. Great. In terms of differentiation, what do you think does differentiate your company's business model compared to your competitors?

Yes. So this 1 is actually pretty -- it's pretty clear. We're focused on building a platform for Pros to build their business. So product services, locations, things like that are rifle focus. So when you walk into 1 of our brick-and-mortar showrooms, for example, the sales team who's there is not a sales team that's highly trained on selling a homeowner or a project or trying to help that customer pick out just the perfect color or that long tail, although we do use services, it's a team that's there that knows how to help Pros develop their business. So things like how to scope out projects, had a bid projects potentially working with them on solving issues on installation, things like that. We're very much an expert in the space, and we're rifle focused on that component. So whether you're calling one of our e-commerce sales team members or your in one of our brick-and-mortar locations, that team is very much focused on the trade and what the trade needs to be successful in the products and services that we focus on we get excited when there's new products that are easier to install or have lower claim warranty issues, things like that, really because that's what's best for the pro, that's what's best for the trade. And so that's our focus versus -- from a competitive perspective, although the word pro gets used a lot, for the most part, the industry is focused on the end consumer versus the trade.

I think maybe just to add to that, I think some of the assets from previously BuildDirect 1.0, the direct to manufacturer help support the story. So I think a lot of our competitors are using manufacturer are going through a distributor. So our ability to go directly with the manufacturer gives us a pricing advantage for products to bring in. And then also the supply chain network and logistics systems, we have built out to service all 50 or virtually all the U.S. states is something that our competitors haven't figured out with the heavyweight products that we're delivering. So those are some of the other pieces that are helping start.

Okay. Great. Can you elaborate just on speaking on the Pro strategy here. Can you elaborate on what the gross margins look like for services provided in Pro customers. And you touched on them at the start of the call.

Yes. So when you -- on the product side, your gross margins in the mid-30s to 40s will be the norm. On the service side, that one, a lot of those services are in the works. What I would say kind of early on is it definitely will follow kind of SaaS norms. And so we should find service margins in the 70-plus percent range because for the most part, if not the -- for the most part, it's not the -- like the novelty of the service is just the utility of it. So when you think about things like providing a white label e-commerce website, the cost of being able to execute that strategy is relatively low, but the value both to the Pro also to the Pro customers is very high. And so for us, we believe taking key services and then running them to our channel for our customers and the way that's intuitive and to help them grow their business to also be extremely profitable for us, but also, candidly, very profitable for them. The inability to accept a credit card as a Pro customer, which is a real problem that they face every day, causes them, for example, to have to discount their projects heavily or just lose on the opportunity altogether, which is even more expensive. So in the space that's underserved from a service perspective, we believe profitability on services is going to be very high based on our initial studies.

Okay. Great. Are there other ways BuildDirect can monetize the Pro customers besides product sales and some of the aforementioned services?

Yes. So from a service perspective, we believe product pull-through will come along with that as well. And so when you think about kind of the monetization of it you have the initial products being sold through. You have services that will also then pull products through even more, and then also potentially some waste stream items like being able to sell back leads to our Pro customers. Interestingly, a lot of our Pro customers today by leads from places like Angie's List or Home Advisor report, so on and so forth. But they're buying the leads and then from their buying products from us to service the projects. But even with our current model, we're a lead generation machine. And today, we don't -- we'll take advantage of that. So there's other ways like that, that we're going to be exploring. And for the most part, we're taking a very kind of open-minded view of what we have, what the opportunities are and then getting a ton of direct feedback from our customers on -- the value could be. So that's kind of where I see it kind of initially, but we'll be eyes wide open for traditional ideas.

Okay. Great. Are there any types of Pro customers that were not covered in the presentation that you think would be a good fit for BuildDirect target market?

Yes. So the biggest segment that we -- but potentially could be a fit. We're finding that there are a lot of small kind of independent retailers throughout the country who are under serviced by major manufacturers. And then you can insert in kind of a variety of reasons there. But for the most part, it's -- is that Pro that maybe took that next step, gotten office building, has a warehouse, now has a showroom but kind of too small to hit the radar for a major manufacturer. We actually find an interesting number of those to actually come to us and buy through us. We don't have -- it's really a direct play on that 1 quite yet, but it's a pretty sizable opportunity as well potentially.

Okay. Great. Just again, talking more on the Pro segment here and the pricing. How are you competing on pricing versus, for example, a Home Depot or a Wayfair?

Yes. So when it comes to flooring, really any category that's more -- like more aspirational, more decorative. The first thing I would say is visuals and quality can be assessed in a variety of ways. If you were to just take like an apples-to-apples and compare we find very often we're pretty cost competitive. Our Pros report back that they're 10% to 15% lower than what they can find elsewhere. But I would say, for the most part, it's a bit tricky when you're trying to compare apples to apples because you can have different ways and strategies of manufacturing products. So I'm going to answer the question kind of in a different way. Our product offering is very much geared towards the Pro customer, the Pro customer that has to warranty the project after it's been installed. And so we err on the side of high quality at a very aggressive cost. And so our products are as easily installed and homeowners house as they are in a large commercial application. And so for us, it's really a focus on quality and relative value versus like a race to the bottom on trying to figure out cheaper ways to drive down costs while sacrificing quality. So having that Pro focus on the products we source is a really important part.