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

All right. Let's begin. Hello, everyone. Welcome to BuildDirect's Q1 2025 Financial Results Conference call. For those who aren't familiar, BuildDirect trades on the TSXV under the ticker BILD, that's B-I-L-D, BILD. My name is Bob Chen, 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 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 affect the company's performance. In addition, please note that all dollar amounts mentioned in the presentation are in U.S. dollars unless otherwise stated. Here's a disclaimer in case if anybody wants to take a screenshot. So on today's call, we'll be covering BuildDirect's Q1 2025 financial and operational highlights as well as growth outlook for the remainder of 2025. Following comments from BuildDirect management, the call will be open for questions. [Operator Instructions]. If you're calling in to listen to this webinar, please email your questions directly to [email protected]. Our presenters today will be the CEO of BuildDirect Shawn Wilson, and CFO of BuildDirect, Kerry Biggs. I'll now turn the conference call over to Shawn.

All right. Great. Thanks, Bob, and for those joining the first time, welcome to our story. BuildDirect is a leading North American flooring retailer, and we're expanding our footprint through a combination of organic and also M&A brick-and-mortar locations. Our strategy is focused on consolidating a highly fragmented $90 billion flooring industry, while also building a platform that supports future product expansion, and entry into adjacent home improvement categories, also targeting a total addressable market of over $200 billion. Before I hand it over to Kerry for a detailed look at the financials, a few top line highlights in Q1. Over the 3 months ended March 31, '25, we generated $15.1 million in revenue, with a gross margin of 41.3%. Adjusted EBITDA came in approximately at $650,000 reflecting continued progress on both growth and operational efficiency. And with that, I'll turn it over to Kerry to walk through the financials in more detail.

Thank you, Shawn. I think we're on Slide 11 now, Bob. Great. Okay. So looking at the Q1 2025 financial performance. Again, that's 3 months ended March 31, 2025. The key highlights are summarized here on Slide 11, which I'll quickly go through now, and I'll provide further context and details on these shortly. So revenue, as Shawn noted, was $15.1 million for the quarter, compared to $15.6 million in the same quarter last year, so Q1 of 2024. Gross profit was $6.2 million with a 41.3% gross margin for Q1 2025 compared to $6.1 million and a 39.1% gross margin in the same quarter last year. So again, Q1 of 2024. So it's an increase of $100,000 or so of gross profit. OpEx, operating expenses were $6.4 million for the quarter, a slight decrease year-over-year as compared to Q1 '24, and adjusted EBITDA, as noted, was approximately $650,000 for the 3 months ended March 31, '25 compared to just over $500,000 in the same quarter last year. Working capital was $2.5 million at March 31, '25 compared to $2.7 million in the prior year, down slightly around $200,000. So on to Slide 12, which will outline the quarterly income statement trends. Again, I'll focus on Q1 '25 with comparisons to the same period prior year Q1 of 2024. Revenue was $15.1 million compared to $15.6 million, a decrease of around $500,000 or 3.2%. If we break that down by segment, revenue in Q1 for the BuildDirect E-Comm segment was $4.2 million for Q1 '25, and compared to $4.3 million for the same period the prior year. So a slight decrease of around $44,000 or 1%. Q1 '25 revenue for the Pro Center was $10.8 million compared to $11.3 million for the same period in the prior year. So a decrease of $450,000 or 4%. Sales overall for the period were negatively impacted by some adverse weather conditions in some of our key markets in Michigan early in January and February, which reduced customer traffic and delayed some project time lines. On to gross profit. As I noted, strong gross profit in the face of the slightly lower sales. We had $6.2 million gross profit, compared to $6.1 million in the same period prior year. So an increase of $133,000 or 2.2%. Increase is mainly attributable to sales of higher-margin core inventory across our businesses. Given this gross profit percent increased 220 basis points to 41.3% in Q1 of '25 versus Q1 of '24. Onto OpEx, operating expenses in Q1 2025 decreased $28,000 to $6.4 million in Q1 of '25. So fairly consistent with Q1 of 2024. Fulfillment costs in Q1 decreased $102,000 or just over 10% to nearly $900,000 from $1 million in Q1 of 2024. The decrease is attributed to slightly lower E-Commerce revenues in Q1 of '25 and some negotiated cost savings with key fulfillment vendors versus the prior period. Selling and marketing costs were approximately $1.4 million in Q1 of '25, slight increase of $53,000 or 3.9% versus Q1 of 2024. And finally, admin costs in Q1 of 2025 increased nominally by 0.3% to $3.2 million. The company completed certain cost-cutting initiatives. I think which were press released earlier in the year in Q1 of '25, which will support operational cost savings moving forward, which should positively impact admin costs. Moving to other income and expense on the income statement. Probably just point out the key highlights in Q1 of '25, interest expense increased nominally $19,000 to $349,000 compared to $330,000 in Q1 of '24. Increases related primarily to the higher accrued balances on the insider loans, and some incremental interest on our new Royal Bank revolving credit facility. I'll also point out on the income statement, a fair value warrant adjustment. So the fair value of our warrant liability on the company's balance sheet increased to $195,000 as at March 31, '25. So this resulted in a fair value loss on the income statement of $131,000 in Q1 of '25 which compared to a fair value gain of $3,000 in the same period the prior year. Again, I'll note that this is loss and reflects an accounting expense only driven by the company's higher share price quarter-over-quarter. Company also incurred restructuring costs, which you'll see on the P&L of approximately $120,000 in Q1 of '25 and this was compared to nil, no restructuring costs in the same period the prior quarter. These costs relate primarily to severance related to some of our head count reductions that were realized in Q1. On the adjusted EBITDA side, Shawn noted earlier, we achieved another positive quarter of adjusted EBITDA in Q1 reporting $650,000, up nearly $150,000 from the prior quarter, reflecting strong gross margins, as I've noted, as well add-back of certain onetime nonrecurring restructuring costs. Moving on to the balance sheet. I'll quickly summarize here. We are in a strong position still as of March 31, '25. Looking into the total asset number, within that is our current assets, which consist primarily of cash, receivables, inventory and prepaid and that totaled $16.6 million as at March 31, 2025. Our current liabilities, which primarily consist of AP, accrued liabilities, deferred revenue, a great portion of lease liabilities and loan and prom notes payable, totaled approximately $14 million. I will note, of that $14 million current liabilities, $2.4 million relates to debt outstanding from our bank line of credit. This facility is classified as current debt for accounting purposes as it's a demand loan. Practically speaking, though, this loan is not due within 12 months, as we expect our Tier 1 bank partner, Royal Bank will not require repayment within the next year. So this gives us a 1.2x current ratio as at March 31, as our current assets exceed our current liabilities by approximately $2.5 million. And as I've noted, this $2.5 million is referred to as working capital, as I've noted on the slide. Cash position at March 31 was $3.5 million. So $1.2 million higher than the prior quarter year-over-year. Next slide, I'll quickly discuss the cash flow statement. On the operating activity side, for the 3 months ended March 31, 2025, total cash from operations provided was $768,000 compared to $1.2 million in the prior period, Q1 of '24. So a decrease of $400,000 year-over-year. The decrease is mainly attributable to noncash working capital. Non-cash working capital contributed $313,000 positive cash in Q1 of '25. compared to $665,000 positive in Q1 of '24. So that is the majority of the $400,000 decrease year-over-year. On the investing activity side, for the 3 months ended March 31. Cash from investing activities used $101,000 compared to $41,000 positive cash in the prior period Q1 of '24, net decrease of $142,000. The decrease is attributed to higher purchases of PP&E, $101,000 versus $29,000 in the prior period. Those were Pro Center CapEx and capital additions and less cash received under certain subleases which matured in 2024. We are no longer collecting sublease income as those subleases matured in '24. On the financing activity side, cash provided by financing activities was $476,000 compared to $1.7 million used in the prior period, Q1 of '24. So this is a $2.1 million difference, primarily related to advances on the company's credit facility in Q1 '25 was $1.2 million, compared to nil the prior period. Majority of that was used to fund the assets of the Florida Pro Center. Deferred consideration repayment was $675,000 in the prior period compared to nil in the current period, and loan repayments also impacted the financing activities year-over-year. This concludes my overview of the financials. I will say, as we look into the future, our focus remains on strengthening profitability across all areas of the business, including continuing to realize savings on newly launched cost reduction initiatives and maintaining strict cost control. We are prioritizing growth through the expansion of our physical store network that Shawn will talk about, accelerating our high-margin E-Commerce operations where feasible and pursuing operational efficiencies that will drive sustainable growth and create long-term value for our shareholders. I'll turn the call back over to Shawn, over to you. Thank you.

I want to share an update on a few operational highlights. We made great progress in Q1. First off, on the Pro Center expansion side, in March, we completed acquisition of key assets from Anchor and Yorkshore Flooring and we'll establish distributor in Orlando, Florida. The USD 593,000 transaction to expand our footprint in Southeast U.S. It's a strategically important growth region for us, for sure. We'll provide more detail here in a bit. In addition, we opened up a new Pro Center in Southern California, and we transitioned out of a third-party logistics provider to our own fully owned and operated facility. This shift enhances our direct to Pro service and strengthens our presence also but in the West Coast. And lastly, we advanced several operational streamlining initiatives designed to improve organizational efficiency and our cost structure. These were expected to generate approximately $900,000 annualized savings, as we've mentioned previously. Okay. Turning to subsequent events. After the first quarter, we executed 2 initiatives. First off, on April 23, we signed a supply agreement worth up to USD 200 million with a North America customer, a large one in the sports, entertainment and rec sector. A high-performance flooring will be used in their facilities, reinforcing our position in high-spec commercial applications. Our model is a great fit for customers in their home projects and also Pros in their very large projects. It's good to see. We also completed a loan -- secured loan with their growth partners, a long-term insider for our senior management team on a share purchase, which we're pretty excited about. Okay. Moving on to its M&A. So let me first briefly walk through our framework behind our strategy. We focus on underutilized or underperforming locations that could be quickly converted into Pro Centers. These are high ROI opportunities generate meaningful returns with minimal disruption. We also emphasized validated book value, ensuring that inventory and assets can be independently verified by us. This helps protect downside risk and gives us confidence in the numbers. From there, we assess upside, we target businesses with a clear and achievable path to positive EBITDA, but more so payback on the investment in 12 to 24 months using a conservative operations-based plan. Alignment is important, and we have prioritized targets that expand our geographic footprint, in some cases, increased density, but overall, enhancing logistics for our network. We focus on synergy-ready businesses. Where we can quickly apply our centralized procurement, marketing and distribution capabilities to drive margin improvements and also, of course, improve customer service. And together, this framework ensures that each acquisition will be accretive, low risk and aligned with the long-term platform that we're building. Okay. So as noted on the acquisition of Anchor and Yorkshore. It was valued at $590,000, it's approximately 1x EBITDA. It is a great acquisition for our footprint. So with this kind of acquisition, we gained established relationships, local builders, contractors and opening inventory footprint and also, more importantly, proven operational expertise with the team. The revenue they reported un-audit was $5.8 million and EBITDA of around $661,000, which is a good starting point. And then this really aligns our strategy for improving penetration in the Southeast. As we look ahead in 2025, our focus remains on disciplined expansion specifically through the continued growth of our Pro Center network, and we're committed to scaling this network across key regions ensuring we consistently meet the evolving needs of our Pro customers, and really focus on driving EBITDA along with it by optimizing our operations, things like gross margin improvement and operating expense management is going to be important for us related to this entire journey. So with that I'll turn the call back over to Bob to begin the Q&A session.

[Operator Instructions] So first question we have here is, could you provide more detail on the timeline for the planned new Pro Center openings in key U.S. markets?

So I'd say on the build side, we have a couple of mind potentially. On the buy side, as I mentioned before, these kind of things, they happen when they happen. We're thrilled if we acquired $15 million or $20 million in revenue this year with Anchor and Yorkshore that took out about $6 million. And so from a timing perspective, I would say, look for the balance of that ideally, for us in Q3 be ideal for integration in Q4, but we also don't force the deals. They have to make sense and we've done in the right -- on the right way. So I would say, for those kind of watching our pipeline, the pipeline is healthy, looking for -- I mean we're really now looking for new ones to add. But with that, it has to be the right structure. So nothing more to add on that one.

Now second question is given your dual strategy of building new Pro Centers organically and acquiring existing flooring retailers, could you elaborate on why BuildDirect often prefers to acquire established locations?

Yes. It's a lot easier, a lot faster payback. You get into a market with an established team. That's really the most important part on our pipeline, for example, we look for businesses that are not being operated by the owners ideally, because then post-transaction, you have an operational challenge. And so really, it's having a team in place that's already used to operating. They have relationships. Those are staying with the with the business, and we're able to quickly plug in procurement and marketing synergies for really the rapid improvement. And we've seen that, for example, with Anchor and Yorkshore. It's been fantastic. Great team, very committed, great relationships, and they were able to take our product offerings and marketing services and really run with it. So I would say that's kind of first and foremost. And we've mentioned before, it's the massive industry over 12,000 independent operators, highly fragmented, no shortage at all of targets out there for a good fit. But here again, it has to be the right kind of deal, right structure, right area for us to prioritize a specific opportunity.

Now our next question will be on the recent acquisition in Florida, which was done at approximately 1x EBITDA. Can you discuss how you plan to integrate this asset's operationally and commercially as well as the synergies do you expect to realize and on what timeline?

Yes. This one goes both ways. Anchor and Yorkshore is a really interesting business. They have a really strong presence in the Southeast, but also in some large contract sectors like around like the medical field that and hospitality that we are -- as a broader group, we are a bit weaker in. And so there's some interesting synergies there going both ways. On the integration, that was pretty fast. It's already done with a pretty good process and team and structure there. And so at this point now, it's just a matter as far as our current road map where we're loading out the extra -- the incremental products that they don't sell today. So inventory is there, samples are being loaded in, they'll go out to their customers and then it's a rolling -- kind of a rolling change. And so I look to see improvements in that business really in Q3, Q4, keep on going from there. And then as mentioned before, potentially, there's also some synergies that could flow back penetrating into some new segments for us, which we've seen and been participating in some line reviews for, which has been great.

And the next question here is, given the expansion into the South Eastern U.S., how does this acquisition fit into your overall regional growth strategy?

Yes. So we definitely want -- we prefer opening up Pro Centers in markets that are intuitively growing. So the Southeast Sunbelt, a good example of that. And for our E-Commerce business, we had a pretty good foothold in the Southeast. And so we had a substantial freight savings from acquiring that business and then being able to ship out of there, which is great. And then really along with that also opens up nearby states going into Texas, so on and so forth. So it's a good entry point. It won't be the only location in Florida. It's just the first one. And then in the Southeast, those comments kind of hold. So building out a bigger base of Pro Centers throughout the Southeast is definitely a priority.

BuildDirect has been reducing reliance on third-party warehouses in favor of Pro Centers. How is this transition progressing? And what impact has it had on fulfillment costs and customer delivery times?

Yes. So this one is a pretty big deal. So it's done. First off, we don't use 3PLs any longer. In some cases, we offer 3PL services, which is kind of interesting flip of narrative there. And so yes, we're out of that altogether. It's brought down fulfillment costs remarkably. And so when you think about a 3PL, these giant warehouses, they're set up for light products, think of like shoes or other things you can ship on Amazon kind of thing. And they're very cost ineffective. So like you're very often you get to a spot where you can reverse scale. cost perspective, if you have slow-moving inventory, you just rack up the cost like crazy and then on the fulfillment side, it's not great. So customer service has definitely gone up quite a bit as we've gotten out of those -- our claim rate is super low on shipping now, things like that. But then just the sheer fulfillment cost over the past couple of years has come down progressively, really from getting out of those facilities, which is now done.

Can you elaborate on the recent management loans secured by senior leadership? How do these loans align with the company's incentive structure and shareholder interest?

Simply stated, the management team owns a lot more equity. That aligns the interest.

Yes, I can maybe comment just from the debt side perspective. So Lyra alone, BuildDirect $775,000, so an insider and those funds were went to senior executives to purchase shares in a private transaction. So from a company's perspective, Build has a loan payable to Lyra and a loan receivable from management. So from a company's perspective, net-net, there's no incremental leverage. But again, as Shawn said, management now owns a larger portion of the company. So we're sharing risk and reward of share ownership, which I think aligns with everyone who are also shareholders. So...

Sounds good. And now a few questions on the market opportunity here. So the $90-plus billion flooring market is largely fragmented. What are your plans to deepen penetration in the commercial segment? And how does this segment's margin profile compare with your residential business?

So on the commercial, I'm assuming you're referring to like large projects, condo renovations, things like that. So I would say we're in that space today, like I mentioned with the Anchor acquisition, we got a bit deeper into kind of subsegments with that. And it's interesting like when it's like the -- there's an acquisition that Lowe's did recently for Artisan Design Group. It was a pretty big roll-up in the industry, very much focused on builder and commercial, but fully installed. The margins are a lot lower. The side of the business that we're more focused on is just the product fulfillment where we direct source from factories and send them straight to those projects and the margins are fantastic. They're really good. Now on the installation of that, like the general contractor typically taking care of the work, the margins aren't great for installing, but that's not -- that's a huge advantage, I think, for us. So yes, we're definitely very much geared towards and why we announced the large contract we won recently. It's just got quite a few of them, but that was a good one to put out there. And so yes, that's definitely something that we're doing more and more of, have a good expertise around it. And because we're able to go straight from factory to the -- essentially the project side, the margins are very healthy.

A question here from the audience. Will you be releasing guidance for 2025? Can you speak to seasonality?

Yes. No, guidance, no. Yes. So don't provide guidance. And that's mainly around the like the M&A strategy we have. And so I mentioned this quite a few times, like we're interested in insanely accretive deals. That's what drives like everything like the take capital allocation very, very seriously. And when you look at the business and you look at -- perhaps if you're checking out a few different examples and you use the Artisan Design Group as an example of a flooring roll-up that was done a while back in some -- in a different but probably close enough segment, you could see how these businesses are valued like very reasonably, and there's a tremendous amount of upside even when we're sitting today, which is great. But then with that, like doing deals that are highly accretive, like so for me, that means the company takes ideally double-digit arbitrage on the deal plus fast payback. And so with that kind of strategy, it's all about timing and when those things hit. I have been pretty good, though, I think, about saying like what success looks like for those deals yearly. But when it comes to much more than that, I would say, look, I'd be thrilled if we acquired $15 million to $20 million in those models I mentioned before this year, take that number, subtract out what we've already done, the $6 million annualized that leaves the balance. And so that's how I would look at that. Bob, what was the second part of the question? Or did I answer it all?

It was -- what is the sort of -- can you speak to the seasonality.

Seasonality. Yes. So for the most part, the back half of Q4 and Q1 is a bit softer for us. And so if you look at the full year and just sign equal weights quarter-to-quarter, you could probably discount 20% and put it into Q2 through Q3. The -- so like this year, we had -- because we have a large presence in Michigan, specifically in Michigan, which we're continuing to diversify around, that was really 2 things this year in Q1. One, the weather was terrible, like you can just ChatGPT, it was pretty bad, very, very bad. And then second, we also had a lot of fun noise around the auto industry and all the stuff that happened with the macro side as well, and that hit a few areas a bit harder. Thankfully, that's unwound and it's gotten better. But I would say that's the one thing I would say. So as you look at our business, that comment around seasonality wouldn't be like that in other markets like in the Southeast or Southwest, you really have like weather patterns, seasonality is very, very mild. And so for us, right now, because we have a large concentration in Michigan, Q1, for example, got hit with those 2 things. But otherwise, it's relatively smooth.

Perfect. That's all the questions we have for today. If you haven't addressed your question during the call, please feel free to submit your questions directly to [email protected]. Thank you, Shawn. And before we end the conference call, do you have any closing comments that you would like to share with our audience?

No. Thanks for joining. Keep following the story. I really appreciate it and reach out at any time. Thanks, guys. Take care.

All right. Thank you, Shawn and Kerry. Just as a reminder to those who are unfamiliar with BuildDirect, the company trades on the TSXV under the ticker BILD, that's B-I-L-D. The recording of today's conference call will be uploaded on to BuildDirect's Investor Relations website. And like I said earlier, if you have any additional questions that were not addressed during the call, please send them to [email protected]. Now I would like to thank everyone for joining us today. Take care.