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

Hello, everyone. Welcome to BuildDirect's Q2 2024 Earnings Conference Call. For those of you who aren't familiar, BuildDirect trades on the TSXV under the ticker BILD. My name is Rory Wizbicki, and I'll be moderator for today's call. Before we begin, I'd 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 the forward-looking information 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. In addition, please note that all dollar amounts mentioned in this presentation are in U.S. dollars unless otherwise stated. On today's call, we'll be covering BuildDirect's Q2 2024 financial and operational highlights as well as its growth outlook for the remainder of 2024. Following comments from BuildDirect management, the call will be an for questions. [Operator Instructions] Our presenters today will be CEO of BuildDirect, Shawn Wilson; and CFO of BuildDirect, Kerry Biggs. I'll now turn the conference over to Shawn.

Thank you, Rory. For first-time viewers, BuildDirect operates e-commerce and brick-and-mortar stores that provide flooring products and services to the home improvement professionals. Our aim is simple to become the leading provider of flooring to the Pro customer in North America, including through building and acquiring locations, which we refer to as Pro centers and expanding our e-commerce business. Here's a quick glance of our financial highlights for Q2 2024 and which will be covered in greater detail by Kerry during today's call. For the 3 months ended June 30, 2024, we generated $16.2 million in total revenue while producing a gross margin of roughly 38.2%. Lastly, we generated a total adjusted EBITDA of $0.6 million. As a reminder, BuildDirect primarily targets the U.S. flooring industry, a market worth around $70 billion that is largely made up of local and regional retailers. This industry is highly fragmented with only a few dominant companies and this fragmentation highlights a promise niche with substantial opportunities for BuildDirect. Before discussing our financial performance, let's look at our business model and customers to understand what BuildDirect is. We procure products directly from manufacturers worldwide and ship them to our network of brick-and-mortar establishments known as our Pro centers located in the United States and Canada. At these Pro centers, our dedicated teams serve local professional clients, including general contractors, commercial developers, property investors and flooring specialists. These professionals are crucial players in various sectors of construction and renovation industries. By addressing the specific needs of professional clients, BuildDirect Pro centers offer a customized alternative to traditional retailers, providing a streamlined and professional-grade service that enhances productivity and efficiency in the construction and renovation industries. BuildDirect has developed a strategic model for entering new markets, leveraging our extensive experience and robust infrastructure. With over 20 years in operation, we've honed our expertise and built a strong reputation in the flooring industry. We offer thousands of products, ensuring a wide selection for our customers to meet their diverse needs. Currently, our orders are fulfilled by a combination of company Pro centers and third-party warehouses. We are in the process of transitioning away from certain third-party warehouses to company Pro centers to streamline our operations and enhance efficiency. During the 2022, '23 rebuilding project, our e-commerce revenue was reduced by 50%. This strategic decision was made to reduce cash burn and position the company for sustainable growth while we improve the e-commerce model. Now we believe we are in a better position to scale more profitably, leveraging our improved operational model and strategic market entry planning. With this context in mind, I'll now hand it over to Kerry, who will provide a detailed view of our Q2 2024 financial results.

Great. Thanks, Shawn. It's great being here for my first call. And I am pleased with the progress realized in Q2 here. So looking at Q2 2024 financial performance, so 3 months ending June 30, 2024. Some of the key highlights are summarized here on the slide, which I'll quickly go over now. I will provide further details and color below on some of these specific highlights. Revenue, as Shawn noted, $16.2 million for the quarter ended June 30, 2024, compared to $19.1 million for the same quarter of the prior year. Gross profit was $6.2 million with a 38.2% gross margin for the quarter ended June 30 compared to $7.6 million and a 39.7% million gross margin in the same quarter last year. So down $1.4 million in gross profit. Operating expenses were $6.4 million for the quarter ended June 30, 2024 compared to $7.7 million in the same quarter last year. So operating expenses are down $1.3 million, and adjusted EBITDA was $578,000 for the quarter ended June 30 and compared to $1.06 million in the same quarter last year, so down $486,000. Working capital was $2.91 million for the quarter ended June 30. This was in line with year-end December 31, 2023, and slightly higher than quarter ended March 31, 2024. And then finally, during Q2 2024, we received a new incremental USD 1 million loan to support increased inventory levels with the ultimate outcome driving sales growth. In terms of the incremental note are the same as the current 2022 loan with the same lenders, 12% interest rate and a maturity of April 2026. So just moving on to the next slide, which shows the quarterly trends of the income statement. Again, focus here will be on Q2 of 2024, Q1 of 2024 and with comparisons to the prior year Q2 2023 on the slide. So just on the revenue front, maybe in a little more detail. Our revenue amounted to $16.2 million. And as we anticipated, this reflected a year-over-year decrease of $2.9 million or 15.3% from the quarter ended June 30, 2023 or Q2 2023. On the positive side, there was a sequential increase of $593,000 in revenue or close to 4% quarter-over-quarter growth from the quarter ended March 31, 2024. So we'll refer to that as Q1 2024. The year-over-year decline in revenue stems from the deliberate scaling down of our e-commerce operations in our BuildDirect segment, which Shawn noted. We implemented a strategy to streamline and shift our e-commerce product mix to specific higher gross margin direct source products which resulted in timing issues around building stronger inventory levels to support this strategic shift. While a shortage of this high turnover inventory impacted our Q2 results, we expect this strategic shift to higher gross margin inventory, coupled with stronger inventory levels will support revenue and profitability moving forward. This e-commerce platform enhancement initiative was instrumental in rectifying the unit economics of our business, which has led to a material reduction in operating costs for the segment. In addition to the BuildDirect segment, the year-over-year sequential decrease in revenue can also be attributed to a lesser extent to lower demand in our acquired retailer segment due to an overall softness in the housing market. So looking forward, given the BuildDirect segment enhancement initiative, was effectively finalized in early '24, management has redirected its focus towards growth initiatives for the e-commerce segment. Thus far, we remain optimistic about the prospects of the strategy and the potential positive impact on both top line growth and overall segment profitability when further revenue is realized. Turning to gross profit. Moving down the income statement. Our gross profit in Q2 '24 was $6.18 million versus $7.3 million prior year for Q2 2023, representing a decrease of $1.4 million, mainly driven by the lower revenue noted above. Q2 '24 gross profit was higher than Q1 '24 gross profit with an increase of $94,000 sequentially quarter-over-quarter. So moving to operating expenses, in Q2, 2024, as I noted, operating expenses were $6.4 million, representing a reduction of $1.26 million or 16.4% year-over-year decline largely through reductions in fulfillment, selling, admin and amortization costs. I think the team has done a great job managing and lowering operating costs, both as part of the BuildDirect e-commerce enhancement initiative and in response to softening revenue in our acquired retailer segment. Sequentially, quarter-over-quarter operating expenses were in line with prior quarter. Moving to other income and expense on the income statement. Other expenses were $205,000 or $482,000 lower year-over-year due to a greater noncash FX gain in this period versus prior periods. I think more importantly, interest expense for Q2 2024 was $322,000 down from $519,000 from the prior year quarter, Q2 '23, reflecting the reduction in loan and debt balances and the lower effective interest rates negotiated as part of last year's debt restructuring. These gains were offset by minor reductions in interest income, rental income and finance fees. Finally, on the income statement, adjusted EBITDA, as noted by Shawn, I am pleased to report that we achieved another quarter of positive adjusted EBITDA, even in the face of the softer year-over-year revenue, again, year-over-year revenue decline of $2.9 million, we still posted a positive $578,000 of adjusted EBITDA. And a decrease of only $486,000 year-over-year in the face of that revenue decline. In addition, Q2 '24 adjusted EBITDA was slightly higher than Q1 2024 and with an increase of $74,000 or approximately 15% sequentially quarter-over-quarter. Moving on to the next slide on to the balance sheet. I am pleased to report we are in a strong position currently and as at June 30, 2024, our current assets, which primarily consist of cash, receivables, inventory and prepaid items totaled $13.6 million at the end of the quarter. Our current liabilities, which consist primarily of AP, accrued liabilities, current portion of lease loan and prom note payable totaled $10.7 million, so this gives us a current ratio of 1.27x at June 30 as our current assets exceed our current liabilities by $2.9 million. The $2.9 million of current assets less current liabilities, is often referred to as working capital, and it has increased $604,000 from $2.3 million on March 31, 2024. On the cash position at June 30, we had $2.3 million of cash in line with our prior quarter of $2.15 million and year-end cash of $2.6 million. And then finally, looking at our cash flow statement, while not specifically summarizing the slide here, I do want to highlight a couple of points on the cash flow slide. The statement cash generated by operating activities in Q2 2024 was $579,000 as compared to $726,000 in Q2 of the prior year resulting in a net decline of $148,000 year-over-year. However, if you include changes in noncash operating working capital, cash from operating activities for the quarter Q2 of '24 was $89,000 versus $35,000 in Q2 of '23. Cash provided by investing activities in Q2 '24 was $53,000 versus $49,000 in Q2 of '23 and cash received in financing activities was net positive $36,000 inflow in Q2 of 2024 at $1.15 million positive variance versus the $1.12 million of cash used for financing activities in Q2 of 2023. Again, this increase is mainly attributable to prom note, loan, interest and principal payments of $987,000 in Q2 of 2024, offset by the new $1 million of loan proceeds previously noted. So that concludes my overview of the financials for Q2 of '24. I think moving forward, we look to improve profitability across all our business groups focused on opportunities to scale our e-commerce platform while also driving operational enhancements and growth in our bricks-and-mortar operations. With that, I'll turn the call back over to Shawn. Over to you, Shawn.

Thanks, Kerry. I'd like to provide an update on our strategic initiatives and current market conditions. We're currently honing our build prototype in Richmond and BC. This involves fine-tuning our processes and ensuring we have the most efficient and effective model to serve our professional clients. Additionally, we're evaluating the next market to further pilot our build model with a strong focus on the financial aspects to validate investment requirements and cash payback periods for scalability. As we mentioned, our goal is to explore opportunities to expand across markets in North America and testing our financial model is a key focus for 2024. Moving on to e-commerce. We are working diligently to boost our inventory to support the increasing demand signals we are observing. This initiative aims to ensure we can meet our customer expectations promptly and maintain our competitive position in the market. Additionally, we see notable upside potential due to our access of new markets, which could help drive further growth. We're also transitioning from certain third-party warehouses to BuildDirect facilities to streamline our operations and improve efficiency. On our brick-and-mortar side, we're currently experiencing softer industry conditions with headwinds primarily impacting residential remodeling and new home construction. However, we anticipate a rebound with expected interest rate reductions, which should positively influence market dynamics and growth. The softer organic performance in brick-and-mortar compared to e-commerce is simply due to our strong local market penetration and the geographic constraints of physical locations. In terms of corporate development, we're pleased to welcome Kerry Biggs, as our new CFO, who brings extensive experience and expertise to our leadership team. Furthermore, we are engaging in an ongoing evaluation of strategic investment opportunities to help fuel growth, including both building and buying new Pro centers across North America. As part of our growth strategy, we continue to pursue 2 key models build and buy. Let me walk you through each. First is the build model, we enter new markets by starting with e-commerce, fulfilling orders from the nearest Pro center. We then bring in a local sales team to grow in the market and as we scale establish a new Pro center locally. This allows us to ship fulfillment closer to the customer, reduce costs and expand sales by offering local products and services. The beauty of this approach is that it significantly subsidizes the cost of opening a new location, thanks to the efficiencies of starting with e-commerce. On the other hand, our buy model focuses on strategic acquisitions of B2B distributors. We use a balanced mix of debt and equity financing depending on the specifics of each deal. We look for solid businesses and teams that want to continue managing their operations with the support from our parent group. Both of these models build and buy are key pillars in our overall strategy to expand our footprint, optimize operational efficiency and deliver long-term value to our stakeholders. With that, Rory, I'll turn it over to you.

Thanks, Shawn. So we'll now begin the Q&A session. [Operator Instructions] So the first question, how does BuildDirect Pro Center model differ from traditional big box retailer?

Yes. So I'll take that first one. So our Pro Centers, they are specifically designed to meet the needs of professional clients unlike traditional retailers that are primarily set up for homeowners. It ensures a more effective experience for pros. Second, by procuring products directly from manufacturers we can offer high-quality materials at extremely competitive prices. Third, our Pro teams, I mean they're really trained to understand the unique requirement of professional clients and also installation services. So they're a true partner for our Pro customers. Things as simple as having high docks and low docks for efficient loading and unloading for a Pro customer for a fast turnaround is pretty important along with local quick delivery. Lastly, pros like general contractors, developers and flooring retailers, they benefit from the specialized knowledge or resources which are all geared towards the complexity of Pro projects.

Next question. What are your thoughts around the current interest rate environment and its impact on BuildDirect's business?

I can take that one if you want, Shawn.

Yes, go for it.

Yes, I think as we noted here, there is a general softness in the building and flooring industry in general across U.S. and Canada. I think, again, this has driven overall what we call housing turnover to be weaker than normal, so new building, people moving, driving rentals. So -- as I said, I think our team has done a good job nonetheless in the face of this organic growth year-over-year declines. Again, while I don't want to attempt to predict the future, we generally view lower interest rates as positive for housing turnover, driving new build and rentals from home sales. So I think we've seen a couple of rate cuts in Canada from the bank. And while the housing market is optimistic, it seems that at least consumers here in Canada are still cautious at this point. I suspect further rate stimulus will support further optimism. And I think a similar situation in the U.S. While we haven't seen any rate cuts to date, I think the data and economists are pointing to the potential of interest rate cuts in the near term. So I think we're of the view that this will undoubtedly support our business and demand moving forward. I think it's just a matter of around timing, that's a little bit unclear at this point. But overall, extremely supportive with rates declining in the future here.

All right. Thanks, Kerry. Next one. Do you have an update on your acquisition pipeline, the company's acquisition pipeline?

Yes. So as we covered, we have a build and buy model. And I would say we really focused this last year on what that -- what that looks like, especially on the buy side. So our pipeline has been refined, really targeting the right partners, as we mentioned, that have even more of an inventory focused business who are serving professional customers, along with the right teams that would be complementary to our own. And so I would say our pipeline there is pretty healthy. And then really, for us, bringing on board, carry, putting in the right facilities for long-term scalability is pretty important. So I definitely say stay tuned there.

Great. Thanks. That appears to cover the Q&A. So that's all for Q&A session. Before we end the conference, Shawn or Kerry, do you have any other closing comments you'd like to share?

So thank everyone for following the story. Looking forward to having Kerry and expanded team here, and we're pretty excited about the future. So thank you very much.

Yes. Thanks, everyone.

Great. Thanks. So just as a reminder, for those who aren't familiar with BuildDirect, the company trades on the TSXV under the ticker BILD. The recording of today's call will be uploaded onto BuildDirect's Investor Relations website. If you have any additional questions that were not addressed during the call, please send them to [email protected]. And we'd just like to thank everyone for joining us today and take care. Thanks.