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

Hello, everyone. Welcome to BuildDirect's Q3 Fiscal 2024 Earnings Conference Call. For those who 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 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 forward-looking information and statements. Please refer to the various materials the company has filed with the 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 will be covering BuildDirect's Q3 2024 financial and operational highlights as well as any growth outlook for the remainder of 2024. Following comments from BuildDirect management, the call will be open for questions. [Operator Instructions] Our presenters today will be the CEO of BuildDirect, Shawn Wilson; and CFO of BuildDirect, Kerry Biggs. I will now turn the conference over to Shawn.

Thank you, Prit. For first-time viewers, BuildDirect is focused on growing its presence in the North American flooring market for the organic development and acquisition of profitable brick-and-mortar locations known as Pro Centers. By consolidating a portion of the $90 billion North America flooring market, BuildDirect aims to establish a solid foundation for future product expansion with the potential to explore adjacent markets representing a combined TAM of over $200 billion. Here's a quick glance at our financial highlights for Q3 2024, which will be covered in better detail by Kerry during today's call. For the 3 months ended September 30, 2024, we generated roughly $17 million in total revenue, while producing a gross margin of roughly 38.3%. Lastly, we generated a total adjusted EBITDA of $786,000. The $90 billion North America flooring market represents a significant opportunity for consolidation, particularly within the 73% dominated by floor covering stores and contractors. Many of these are smaller locally run businesses facing challenges like succession planning and high operating costs. This creates opportunities for strategic acquisitions to drive growth and market share. Additionally, the growing online segment and partnerships with home improvement retailers offers future avenues for potential expansion and innovation. Let's start with a quick overview of our Pro Centers. Our Pro Centers are the cornerstone of our strategy and serve professional contractors and simplify their workflow. They operate under a Pro focused model that's designed to maximize the efficiency, reduce costs and deliver value directly to our customers. Each Pro Center sources inventory directly from manufacturers, which helps us maintain quality and keep pricing competitive. We leased light industrial spaces to house these centers strategically located to support contractors with easy access to materials and services. The experience we provides is key from fast expert sales service at order desk to the convenience of local delivery. Plus, each Pro Center also supports our e-commerce strategy by lowering 3PL and shipping expenses. With integrated functions like warehousing, showrooms and home delivery, our Pro Centers are not just locations, they are intended to be complete solutions for flooring professionals such as flooring contractors designed to help them succeed and keep coming back to us. With over 20 years of experience, our e-commerce platform provides access to thousands of products supported by a strategic fulfillment network. Initially, fulfillment relied on a combination of company-operated Pro Centers and third-party warehouses. However, we are now actively replacing third-party warehouses with Pro Centers, allowing for greater efficiency and cost savings. This model is designed to meet the needs of modern customers, offering key features like a dedicated call center for expert support, free samples to simplify decision-making, and home delivery for ultimate convenience. By leveraging this model, we established a strong foothold in new markets, ensuring a seamless experience for customers and laying the groundwork for opening a Pro Center as we scale. Next, let's dive into our growth plans. This is a focus on a dual strategy, build and buy. First, the build model, this involves opening new Pro Centers in strategic markets across North America. We target areas that are already supported by our e-commerce footprint and cluster facilities in key metro regions like Los Angeles, Dallas and Atlanta. This allows us to leverage inventory and marketing effectively while keeping operating expenses low, all aimed at driving a strong IRR. Next, the buy model. This focuses on acquiring established B2B flooring retailers in North America. By doing this, we can accelerate client acquisition and transform its locations to align with BuildDirect's operating model. This model focuses on acquisition opportunities that are capital efficient, primarily inventory base with minimal goodwill, and generate a strong return. We also aim to optimize these businesses through shared procurement, product and marketing synergies. Both approaches are supported by shared services across procurement, marketing, e-commerce, operations, IT and expense management aimed at ensuring scalability and efficiency as we grow. With this context in mind, I'll hand over to Kerry who will provide a detailed overview of our Q3 2024 financial results.

Great. Thank you, Shawn. I'm pleased with the progress realized in Q3. So looking at Q3 2024 financial performance, again, 3 months ending September 30, 2024. Some of the key highlights are summarized here on Slide 10, which I will quickly go over now. I will provide further detail and color below on these specific highlights. Revenue, as Shawn noted, was approximately $17 million for the quarter ended September 30, '24, compared to $18.4 million in the same quarter last year. Gross profit was $6.5 million with a 38.3% gross margin for the quarter ended September 30, 2024, compared to $7.3 million and a 39.8% gross margin for the same quarter last year, so down to $800,000 in gross profit. However, operating expenses were $6.5 million for the quarter ended September 30, 2024, compared to $7.2 million in the same quarter last year, down approximately $700,000 from last year. Adjusted EBITDA was roughly $786,000 for the quarter ended September 30, '24, compared to approximately $1.4 million in the same quarter last year, so down roughly $584,000. And again, working capital for the quarter was $2.7 million. So moving on to Slide 11 here. On the revenue front, in Q3 2024, again, revenue was approximately $17 million. As we anticipated, this reflected a year-over-year decrease of roughly $1.4 million or 7.8% from the quarter ended September 30, 2023, again, or Q3 2023. So on the positive side, there was a sequential increase of roughly $786,000 in revenue or 4.9% quarter-over-quarter from the prior quarter June 30, 2024, and we'll refer to that as Q2 2024. So the decrease in revenue can be attributed to the company's strategy to shift its e-commerce product mix to a higher gross margin, direct source product mix, and the timing as well around building the stronger inventory levels to support this strategic shift. The e-commerce platform enhancement initiative was instrumental in rectifying the unit economics of our business, which has led to a material reduction in our operating costs for the builddirect.com segment. Additionally, this revenue decrease can be attributed to weaker housing remodeling and new construction activities, generally driven by the higher mortgage interest rates that we've seen across North America. Looking forward, given the BuildDirect e-com segment enhancement initiative was effectively finalized in early 2024, management has redirected its focus towards growth initiatives for both the e-commerce and Pro Centers segments. Thus far, we remain optimistic about the prospects of the strategy and potential positive impact on both top line growth and overall company profitability. So turning to gross profit. Moving down the income statement. Our gross profit in Q3 2024 was $6.5 million versus $7.3 million in the prior year Q3 2023, representing a decrease of $818,000, mainly driven by the lower revenue noted above. Q3 2024 gross profit was higher than Q2 2024 with an increase of $309,000 sequentially quarter-over-quarter. Likewise, our gross profit margin in Q3 of '24 was 38.3% for a decrease of 150 basis points year-over-year, but an increase of 10 basis points sequentially quarter-over-quarter. So moving to operating expenses. In Q3 '24, operating expenses were $6.5 million, representing a reduction of approximately $721,000, or 10% year-over-year, largely through reductions in fulfillment, admin costs and other amortization costs. I think the team has done a great job managing and lowering operating costs, both as part of the BuildDirect e-com segment as well as in response to the softening revenue that our Acquired Retailers saw. Both groups did a great job managing operating costs. So moving to other income. Other expenses were $306,000 or $333,000 lower year-over-year, mainly due to interest expense versus the prior period in Q3 of 2023. The interest expense for Q3 2024 was $332,000, down from $618,000 from the prior quarter Q3 2023. Reflecting the reduction in loan and debt balances and the lower effective interest rates negotiated as part of last year's debt restructuring. This gain was offset by a minor reduction in interest income and rental income. So on to adjusted EBITDA. As Shawn noted earlier, I am pleased to report that we achieved another quarter of positive adjusted EBITDA. Again, even in the face of softer year-over-year revenue. Again, a quarterly decline year-over-year of $1.4 million. We still posted a positive adjusted EBITDA of $786,000. In addition, Q3 2024 adjusted EBITDA was higher than Q2 2024 adjusted EBITDA with an increase of $208,000 or approximately 36% sequentially quarter-over-quarter. Moving to the next slide on the balance sheet. I think we'll focus on working capital here. Our current assets, primarily consisting of cash, cash equivalents, AR and inventory totaled $17.1 million as at September 30, '24. Our current liabilities, again, consisting of AP, accrued liabilities, lease liabilities, loan payable, prom note payable, et cetera, totaled approximately $14.4 million. So this gives us a current ratio of about 1.2x at September 30, as our current assets exceeded our current liabilities by approximately $2.7 million. And you can see that on the slide, this $2.7 million of current assets less current liabilities is referred to as working capital. So our cash position at September 30 was $3.1 million, and that includes short-term investments, and that's higher than the prior quarter of $2.8 million and the year-end '23 cash balance of $3 million. So we are in a good spot as we stand. So just -- I'll quickly talk about the cash flow statement. We don't have a specific slide here on that. But I think we had a fairly strong quarter on cash flow. So cash generated by operating activities was $788,000 as compared to $1.2 million in Q3 of '23, resulting in a net decline of $395,000. However, including changes in non-cash working capital, cash from operations in Q3 of '24 was $1.1 million, a small decrease of $104,000 compared to Q3 of the prior year. Cash provided in investing activities was negative $211,000. Cash used in financing activities was $748,000 in Q3 of 2024, or $1.3 million positive variance versus the $2.1 million of cash used for financing in Q3 of 2023. So this positive increase can mainly be attributed to interest paid was $63,576 in Q3 of 2024 or $154,000 lower compared to the $218,000 in the prior period, Q3 2023. And I will note that actual cash interest paid in each quarter is much less than the interest expense reported on our P&L. Again, this is because the majority of the secured debt as disclosed in Note 11 of our financials as the 2022 Notes are referred to as PIK or payment-in-kind. So where the principal and interest is accrued and not paid. So again, this debt is in friendly hands with our three largest shareholders as Lenders. Finally, our principal lease payments, prom note payments and loan payments were $718,000, or $1.1 million lower compared to the prior period, prior quarter 2023, which was $1.8 million of principal lease payments and prom note payments. So that concludes my overview of the financials for Q3 2024. Moving forward, we will look to improve profitability across all our business groups focused on opportunities to grow our bricks-and-mortar operations and to scale our e-commerce platform, while continuing to drive operational enhancements. So with that, I'll now turn the call back over to Shawn who will go over some of our operational highlights for the company. Shawn?

Thanks, Kerry. I'd like to provide an update on our strategic initiatives and current market conditions. First off, in Q3, we expanded our inventory levels substantially. This investment was made to support growing sales and meet customer demand. Additionally, we started scaling our marketing efforts and growing our sales team to further expand our Pro Customer network. Moving on to our Pro Centers growth model. We continue refining our pilot build prototype in Richmond, BC, with the focus on enhancing business processes to better serve Pro Customers. At the same time, we're actively evaluating target markets for future expansion across North America. On the buy front, we're exploring several new opportunities in our M&A pipeline alongside these efforts for developing robust integration frameworks to transform acquired B2B flooring retailers into BuildDirect Pro Centers. To support this strategy, we are evaluating financing solutions consistent with our disciplined investment approach. From a corporate development perspective, we've established a dedicated M&A team and streamlined workflows to evaluate acquisition opportunities across North America. In addition, we're implementing improved integration models designed to achieve cost savings while maintaining scalability.

Thanks, Shawn. Thank you, everyone. We're going to turn the call over to the Q&A session portion of the presentation. [Operator Instructions] So the first question, can you discuss your new store that's coming soon in Brighton?

Okay. Kerry, I can take that one. So in Brighton, that's a facility that we're opening up that will be a Pro Center serving both homeowners as well as Pro Customers. That allocation will be under the BuildDirect brand, and we'll service our same existing mix of customers in product categories, hard surface, including soft surface and supplies.

Okay. Thank you. Next question, who is leading the M&A team other than the executives on this call?

So on the M&A front, the executives, myself and also Kerry and Jay Allen have intimate experience within our industry as well as an advisory team as well. So we collaborate and work through the opportunities with a strong focus on, as Kerry mentioned, working capital, to understand what's entailed in the model and the business we're buying. We are more prone towards looking for quality working capital than we are intangibles.

Thank you. Next question. With potential interest rate cuts on the horizon, how do you view the housing market over the next few years?

Kerry?

Yes, I can take that. So I think we talked about this last quarter, and I think I'll kind of say the same thing I said last quarter is I don't think I like being in the prediction game related to the housing market in North America, especially Vancouver. But I guess, generally, what I would say is we, as a business, see a declining rate environment as positive as you would expect. Our expectation is consumers and businesses will begin to renovate, people become more confident and move to further support renovations and new construction build, we expect that to increase as well. So all in all, we see the interest rate environment and declining as positive for our business.

Great. Thank you. [Operator Instructions] Next questions. How would you describe BuildDirect's competitive advantage over its peers?

So I would say -- kind of zooming out a bit intuitively, we have a very direct procurement model for our products. And so we tend to come to market very cost competitively with larger quantities that you find in the comparables like a big box retailer or a standard specialty retailer. But when you kind of like step back from that, like for us, we're leveraging our flywheel, where we start off with e-commerce in the market, build a presence and then either open up a Pro Center organically and/or make an acquisition where there's existing customer relationships and a durable -- a really durable presence there and being able to then take our direct model and improve the economics of that. I would say, that's really where we kind of stand out, especially with the e-commerce first approach as we're demonstrating now in a few markets and looking forward to keeping that going. So when we look at us, it's all about being able to scale locations, but in a way that's capital efficient. And so that's a big part of our methodology.

Thank you. Just follow-up on growth. Which regions in North America offer potential expansion opportunities?

Yes. So for us, like I just said, on the approach leveraging e-commerce, they tend to be major market areas where e-commerce activities using digital demand gen strategies, have high efficacy. And so the examples I gave on the call, for example, like Los Angeles, Vancouver, Toronto, New York, New Jersey, in the South Dallas, Atlanta. These major markets tend to be great markets for e-commerce. And then, therefore, allow us an easier mode for entry when we look at adding a Pro Center in those areas with a much faster payback than would be otherwise realized if you're just starting out cold. When it comes to regional retailers that are not in those target markets for building, those are pretty open to throughout the Midwest, throughout the West Coast, and we are finding quite a good amount of potential targets who are a good fit for us to integrate into our business. As I mentioned, the industry definitely has challenges on [indiscernible] side and scalability side with high operating cost and difficulties winding things onto the next buyer. So if it comes to building, I would say, look towards larger markets to have a higher efficacy on our e-com side when it comes to acquiring more about what's out there and the right fit for our model but very flexible on location. We're not geographically bound on that front.

Okay. Great. And just a follow-up, what's the product category you're seeing exceptional growth in at the moment?

Kerry, I can get that one also. So for us, with our e-commerce business, primarily wood and also synthetic wood like vinyl plank, laminate, those categories, stepwell, carpet tiles, we do a bit of. But in our Pro Centers, we also do quite a lot of carpet in other category, supplies, trim, things like that. To date, we have a very light tile presence. We started piloting tile online a few months ago. It's gone very well. And tile is a category that would fit in very well in our brick-and-mortar Pro Centers and definitely a very large opportunity, both from a sales perspective and also a margin perspective. But our approach to tile is very similar to our other categories where we're more focused on a tight core assortment and going deep on that from an inventory perspective versus what you find other retailers that have a broader -- kind of broader assortment that's more homeowner focused. And so as we look at new categories to expand into, it's a good sample of a great category, but our go-to-market approach will be very different than what's out there today from the big box perspective.

Thank you. [Operator Instructions] Next question. How does the company intend to finance its M&A and Pro Center growth initiatives?

Kerry?

Yes. I can take that. Yes, I think, it all depends ultimately on the size of the opportunity, right? So I think it will go from operating cash flow. Some of the opportunities we're seeing right now are extremely attractive. And we can literally come in and look at businesses for working capital only, take over a space and our ability to do that ultimately is done in-house with operating cash, right? So lots of opportunities on that front to do tuck-ins without adding any incremental debt or equity. Obviously, for a larger, more strategic positions, whether it's a new business or it's a larger Pro Center build. We'll fund that over time with a prudent mix of debt and equity as needed. I think we have opportunities for external debt if required as well, our insiders that fund our current balance sheet would be supportive as well. So again, no specifics here, but over time, we want to limit dilution, but we will fund accretive M&A with a prudent mix of debt and equity.

Thank you. There's no further questions. Thank you, Shawn, and Kerry. That's all for the Q&A session. But before we end our conference call, Shawn, do you have any closing comments you would like to share with our audience?

Yes, I just want to thank everyone for joining and following the story. It's been a pretty exciting journey across my 2-year mark, very recently with the company and really the first year and also part of the second year was about getting the house in order, in operations, geared towards really the play that we have a lot of passion for, which is becoming leading provider of flooring products and services in North America. I love the strategy. The team has done a great job and really come together. I appreciate the new team members we've added like Kerry, for example, and a few others on the accounting and sales side as well, building out a pretty great foundation for what we're going to be doing. So I definitely appreciate everyone, and looking forward to the journey.

Perfect. Thank you, Shawn and Kerry. For our listeners today, the recording of today's earnings call will be uploaded onto BuildDirect's Investor Relations part of their website. If you have any additional questions that were not addressed during the call, please do send them in to [email protected]. Again, that's [email protected]. I would like to thank everyone for joining us today. Take care.