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

Hello, everyone. Welcome to BuildDirect's Q2 Fiscal 2023 Earnings Conference Call. For those that are unfamiliar, BuildDirect trades on the TSXV under the ticker BILD, B-I-L-D. My name is Prit Singh, and I will be the moderator for today's 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 law 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 forward-looking statements and information. 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 the presentation today are in U.S. dollars. On today's call, we will be covering BuildDirect's Q2 fiscal 2023 financial and operational highlights as well as its growth outlook for the remainder of 2023. Following BuildDirect management's comments, the call will be open for questions. [Operator Instructions] Our presenters today will be the CEO of BuildDirect, Shawn Wilson; and CFO of BuildDirect, Matthew Alexander. I will now turn the conference call over to Shawn Wilson, CEO of BuildDirect.

Thank you, Prit. For first-time viewers, BuildDirect operates e-commerce and brick-and-motor stores that provide foreign products and services to home improvement professionals. Our aim is simple to become a leading provider of flooring to the Pro customer in North America. Here's a quick glance at our financial highlights for Q2 fiscal 2023, which will be covered in greater detail by Matt during today's call. For the 3 months ending June 30, 2023, we generated $19.1 million in total revenue, while producing a gross margin of roughly 39.7%. Lastly, we generated a total adjusted EBITDA of roughly $1.06 million. We have now achieved our second consecutive quarter of adjusted EBITDA results in excess of $1 million in 2023, which highlights our ongoing efforts to improve our profitability, while driving growth across our e-commerce platform and brick-and-mortar operations. I'll now turn the call over to Matt, who will discuss our second quarter financial results in greater detail.

Thank you, Shawn. I'll now speak to the key financial highlights for the 3 months ended June 30, 2023. Total revenue was $19.1 million for the second quarter. As expected, this was a decrease of $4.9 million or 20.6% year-over-year. However, total revenue increased sequentially quarter-over-quarter by $1.3 million or 7.1%. The drop in year-over-year revenue is due to the shift in strategy. Historically, BuildDirect's e-commerce business had produced negative EBITDA, which was offset by strong positive EBITDA from its independent or brick-and-mortar businesses. In Q2 2023, BuildDirect scaled back its e-commerce business and began implementing efficiency initiatives to improve the profitability of the e-commerce model. The increase in revenue quarter-over-quarter is due to the increase in demand from our independent retailers or brick-and-mortar businesses. and the reduction in deferred revenue from our e-commerce business as less product was in transit at the end of Q2 compared to Q1 2023. At this point, BuildDirect believes it's close to completing its efficiency initiatives and will soon be ready to grow its e-commerce business more aggressively. Looking to the right-hand graph, I'm happy to report that our continued focus on the Pro customer segment can be seen in our Pro revenue results, which reached $17.4 million in Q2 2023. Pro revenue as a percentage of the company's total revenue in the second quarter increased by 2.5% sequentially quarter-over-quarter and now represents 88.8% of our total revenue in Q2 2023. Moving down the P&L. Our gross margin percentage in Q2 was 39.7%, an increase of 470 basis points year-over-year and 50 basis points sequentially quarter-over-quarter. Both the year-over-year and quarter-over-quarter changes are driven by: firstly, improvement to the BuildDirect's e-commerce product margin with a shift in pricing strategy from everyday low pricing to a high-low pricing strategy. Secondly, improvements in our independent retailer product margin as we source more product directly through BuildDirect's direct-to-manufacturing procurement model. And lastly, we're seeing benefits from the reduction in the inbound freight costs. Moving to the expenses. In prior calls, we have discussed scaling back the expenses in our e-commerce business, which started at the end of Q2 2022. The results can be seen in our Q2 2023 results as expenses for the 3 months ended decreased by $1.3 million or 14.6% compared to the same period in 2022. As noted in prior calls, the cost reductions at the end of Q2 2022 have allowed the company to recognize over $2 million in annualized operating expense savings primarily focused within the BuildDirect e-commerce business. One second here. As noted, I'm pleased to report we have achieved total adjusted EBITDA of $1.06 million for the 3 months ended June 30, 2023, an increase of $445,000 year-over-year and $22,000 sequentially quarter-over-quarter. This is our sixth consecutive quarter of positive adjusted EBITDA results and is the second quarter of a positive adjusted EBITDA result in excess of $1 million. I'm happy to report this is our highest adjusted EBITDA since becoming a public company. Moving over to our balance sheet. As at June 30, 2023, our current assets primarily consisted of cash, cash equivalents, receivables and inventory totaling approximately $17 million. Our current liabilities primarily consisted of accounts payables, accrued liabilities and loans payables, promissory notes and deferred consideration totaling $21.6 million. A couple of other notes on the balance sheet. Our inventory continues to decrease as at March 30 -- as at June 30, 2023, it was a total of $6.5 million, a decrease of $200,000 compared to December 31, 2022. For our financing activities in the quarter, we have paid down the following principal payments, paid down $311,000 of promissory notes, $189,000 of loans payable. In addition to these principal debt payments, we have made approximately $261,000 in interest payments during the quarter. Due to the financing outflows, the company has a cash balance of $3.8 million as at June 30, 2023, as compared to $4.1 million as at December 31, 2022. Overall, I'm happy to see another quarter of positive adjusted EBITDA with predictable profitability, we'll be turning our attention to refinancing the outstanding debt and improving interest rates. Now I'll turn the call back over to Shawn, who will go over the operational highlights for the company.

Thanks, Matt. As a reminder, BuildDirect is currently focused on the U.S. flooring industry, which is worth roughly $70 billion and consists of mainly independent retailers. It's a fragmented market with only a limited number of large competitors. Therefore, we believe there is a significant market opportunity for us to capture, given our omnichannel strategy, which includes both e-commerce and brick-and-mortar. BuildDirect completed in-sourcing warehousing operations for our Midwest and Northeast business, improving both service, inventory positioning and substantially reducing cost. The team has made substantial progress in reducing the company's cost-heavy technology stack and updating its systems and website to better serve as Pro-focused business needs. In addition, the team is piloting initial value-added e-commerce services with select customers. Long term, BuildDirect intends to expand its product suite to offer value-add services to its Pro customer base, which could represent opportunities for the company to generate annual recurring revenues. Regarding growth, the team is in a strong position. We have completed most of the operational overhaul projects and made substantial improvements across the board. The company has a clear focus to become a leading provider of flooring products and services to Pro customer in North America leveraging our omnichannel approach. We understand who the Pro customer is and how to better serve them in a way that's uniquely different from our small and large competitors. With the total addressable market of $70 billion, we have substantial opportunity to seize. However, we're going about it the right way. We're doing that by pursuing organic growth opportunities. Second, targeting potential M&A opportunities, including Canadian as well as U.S. companies. And lastly, maintaining a disciplined approach to capital allocation all around. I'll now turn the call over to Prit, who will moderate the Q&A session.

Thanks, Shawn. Thanks, Matt. [Operator Instructions] First question, I really like this company as I think it is undervalued. Can you give us a breakdown of where your operations are based? I know the U.S. is the Hawk Spot, but are there plans to expand into Canada?

Sure. I'll handle that one, Matt. So our operations for e-commerce business, which primarily sells into the U.S. are based out of Vancouver, British Columbia. We have the remainder of our teams located in the States. In regards to sales, the vast majority, over 95% today are coming from the United States. However, as mentioned previously, we are looking at opportunities in Canada as well. Part of that is going to be enabled by our e-commerce platform changes as well as looking for the right types of fit and businesses to layer in, in both Canada and also the U.S.

Okay. Great. Next question. You did touch on this a bit, but can you tell us what your plans are on paying off the debt obligations? Based on what I have read, there's only one small portion of debt that is a concern. The rest is vendor take back loans and insider friendly. Matt, I think it's a question for you.

Yes. I can jump in here. So yes, I think now that we've produced, again, sixth consecutive quarter of positive adjusted EBITDA, we feel like we're in a good position to refinance the debt that's of concern. So we're looking to do that throughout the remainder of this quarter. So I hope to have some more news on that shortly, but we're looking -- we're comfortable that we'll be able to deal with that debt before it becomes due at the end of this year.

It looks like you may not have enough cash on hand. How will you be able to do future M&A with today's high interest rates?

Matt, do you want to handle that one or should I handle that?

Yes, I think -- I mean I can start off. I think a lot of our acquisition strategy looks at distributing cash payments, who are not making the payments upfront. So you use a series of vendor take-back loans and deferred consideration. So I think that's a major component to the strategy is that we're not needing a 100% of the cash upfront to make these acquisitions and that we can spread the cash payments and use the earnings from the businesses that we're looking to acquire. So I think that's how I'd answer that. Shawn. I think you might have something to add there, too.

Yes. So what to add there is we have -- in an industry that's highly fragmented. We have a unique level of expertise in operating. And so in structures where they are more like vendor take back in nature, a key requisite of that is having operational discipline and expertise in this space to be able to work those deals. In environments like that, they can't leave the rates don't -- it's not nearly as much of an issue or a concern because there's a broader issue and considerations for those players. So when I think about M&A, and we're saying we're going about expanding the business in the right way, that's what I'm referring to, not being reckless, but rather increasing shareholder value through the right types of deals. And then also would add, as we've demonstrated in the past, when you pull in our operational synergies from what we have today on both the import, logistics, e-commerce and existing brick-and-mortar, we layer in substantial opportunities very, very quickly. And we demonstrated that now a couple of times. So that's how I'd address that. Just augment that, what you said.

Okay. Perfect. [Operator Instructions] Next question. As the business finishes up on enhancing the e-commerce business, what level do you expect the gross margins to reach past completion?

Arguably over 40% is probably kind of good estimate. Well there definitely is a substantial upside on the gross margin side.

Okay. Great. And just as a quick follow-up to that. Following the completion of streamlining the e-commerce operations, how do you expect the split in revenues between independent retailers and BuildDirect.com to look?

Yes. So short term, probably a 70-30 split. That's probably the best guess out give. Long term, it's interesting. Our e-commerce platform, the regearing restructuring we've done has effectively been able -- so to enable growth that doesn't require candidly, much investment as it scales. This scales up, it's always a goal. So our e-commerce platform is based off marketing strategies, continuing to staff up, sales teams deploying product through can very easily reach north of $100 million and of itself. And so our intent has been to initially pull back that business, regear it, enable it to be able to been scaled up without requiring much more from there. So as far as some kind of future number there, we're not providing that guidance intuitively because that business, there's really no constraints once the remaining system, a new platform projects are complete. Pretty excited about that one. That one is definitely our legacy business, kind of where the company started and getting that business really operating well and humming is going to be quite exciting.

Do you plan to continue cost reductions in future quarters? On a yearly basis, what percentage of sales do you expect the larger expense items such as administration, sales and marketing to be?

Yes. So Matt, maybe I'll just on a couple of these, and you can touch as well. So look, we have a discipline that we've put in place with the company to really always look for ways to optimize the business, having a culture that's very much focused on lean operations, intelligent capital allocation, expense management, things like that, so that we can invest in the right places. We do expect R&D administration as a percent of revenue to decrease, especially as we complete our ERP integration and really from there, just continue on -- down the train addressing some remaining third-party logistics operations. And for the most part, sales and marketing expense as a percent of revenue should stay pretty consistent as that business scales up. But I would mention that the team is definitely very much geared towards looking at ways of being very efficient, really in all that we do. And so as you're working through projects. There's always opportunity, the kinds that pop up, and if they're meaningful, we take advantage of them kind of on the spot. Matt, anything to add to that?

Yes. I think maybe just an easy way to look at this as well is we're looking to have double-digit EBITDA percentages. So we're looking to pull and optimize on the R&D and administration side and get ourselves in a position where we're posting north of 10% EBITDA margins from a revenue perspective. So I think that's probably an easy way to kind of just gauge how the profit should grow as the revenue moves up.

[Operator Instructions] Can you explain the strategy for growing your e-commerce businesses profitably. What tactics will be used that were not used previously?

So it's a pretty big question, so I'm going to kind of break up into components. So first and foremost, having a tech stack that scales well is really what's at the root of all the technology, ERP, other projects that we've been working through. So when you think about efficiently being able to operate in e-commerce store, you have, of course, the front side part of that and also the back-end logistics, shipping and things like that. And so if you look at that model, kind of historically, it was based on a lot of -- like custom tech and very heavy tech. And a lot of innovation has happened in that space really since then. So first and foremost, we've absolutely shifted to leveraging tools platforms out there that it really fit our e-commerce needs, and that's a very big change from the past. The second I mentioned when it comes to pricing strategy, so flooring is -- it's not an everyday purchase, right? Like you don't buy your allotment of flooring each and every day, each and every week. It's an inspirational or some of those aspirational purchase that consumers are making. I believe that the team, including myself, is uniquely positioned to understand based on our past experience, what the category is all about and how to leverage pricing strategies to really optimize, a, the shopping experience and also return great pay margins, whereas in the past, mentality in a lot of businesses like based on e-commerce is more of an EDLP, everyday low price type of mentality, which doesn't really meet -- like meet the -- way the products are bought. So I'll probably start up with that. On the fulfillment logistics side, so historically, the company has leveraged third-party logistic providers, which I won't get into the detail on the call, but I got to careful on how those scale. And so recently, we -- as I mentioned before, we have in-sourced operations for the Midwest and Northeast, which was a substantial part of our U.S. sales. And what that means is we don't use a 3PL for those areas. We provide those services ourselves. And then also, of course, intuitively have inventory in our control, customer service, our fulfillment, quality has intuitively also improved. We have opportunities locally to sell that product as well. And so when you think about how we're viewing even with the logistics part of it, we're also building something to last. So we take those components and kind of pull them together. That's really a major difference for how BuildDirect's e-commerce business goes to market. And that's also what's been showing up in our financials the improvements we've had really over the last several quarters has been kind of a result of that. We -- as far as working through those projects, as we mentioned, we're relatively close to wrapping those up and we'll be sure to PR any updates there as they come out.

[Operator Instructions] Now that earnings are released is a blackout period over for insiders?

Matt, you want to grab that one?

Yes. Our trading policy is that we've got -- I believe it's 2 full days after earnings release I might need to confirm with our legal counsel on that, but my understanding it's -- it's 2 days after the earnings release that the blackout is clear for insiders and employees.

Okay. Great. So just as a follow-up to an earlier question, now that the efficiencies initiatives are complete, and this was such a large focus over the past year. Are you planning on providing a longer-term strategy moving forward to 2025, 2026?

Yes. So I would say the thing about growth. So our e-commerce and brick-and-motor operations really in themselves have organic growth plans to increase both revenue and profitability without much additional in the investment. In addition, we're reviewing potential opportunities to expand the acquisition through M&A versus organic. Really where the conditions make the most sense. So when you think about our business. Each of our e-commerce and also brick-and-mortar in two ways they can grow, you can have our e-commerce business scale up post all the system and tech stack improvements and then on the brick-and-mortar side, that can grow through a combination of Halo converting our 3PL locations into more of a store warehouse kind of format. Servicing e-commerce are also signed locally, as one example of how that business can grow organically. Also, as I mentioned, where it makes sense, picking up businesses that have strong local Pro relationships, where we can add significant kind of synergies. Regarding modeling, so that's the best way to think about us. I mean personally, my focus is on really maximizing shareholder value, making sure we run lean operations and produce create EBITDA, as Matt mentioned, getting into the double digits. That's how, candidly, we think about things here, which is perhaps a departure from other companies and/or even maybe ourselves in the past, looking to march to a beat and model things further out. So I'm very opportunistic in nature, look for effective way to keep the company in great shape, healthy at any point, able to just go run when the opportunity presents itself. And so that's the best way you could think about us kind of moving forward on the growth side.

Do you have any financial institutions that cover BuildDirect? I think the question is referencing analyst coverage.

No, we don't have any analyst coverage at this point.

[Operator Instructions] Okay. It's last question. What are some catalysts investors can expect in the next 6 to 12 months? This is both for Shawn and Matt?

Yes, I'll start off. Yes, we reiterate what I've been saying throughout the cast here today, but with predictable EBITDA, we'll be turning our attention to options to refinance that outstanding loans payable. So we're really looking to extend those terms and improve our cost of capital. And I think with that those short-term liabilities moving into a long-term position and showing a clear path to being able to pay those off. I think that's going to improve our balance sheet and really help improve our focus on those growth strategies going forward. So I think, yes, that's really the #1 catalyst in my mind.

Go ahead, sorry, Shawn.

Nothing to add. That's good at this point.

Yes. quick note there, yes, it's 2 full trading days after earnings release that the blackout comes off on the insider. So I just want -- I've got confirmation on that question.

Okay. And that was in reference to a question on whether -- when insiders ran out of blackout. So thanks for that, Matt. Okay. Well, if there's no further questions, that is all for the Q&A session today. I would like to thank everyone for joining us today. Shawn and Matt, thank you. Just as a reminder to those who are unfamiliar with BuildDirect, the company does trade on the TSXV under the ticker BILD, B-I-L-D. And in terms of the earnings call today, it will be uploaded on to BuildDirect's Investor Relations site within 24 hours. If you do have any additional questions that were not addressed during the call today, please do e-mail us at [email protected] that's [email protected]. Shawn, Matt, thank you, and thank you for everyone for attending today.

Very good.

Thank you.