BuildDirect.com Technologies Inc. (BILD) Earnings Call Transcript
May 17, 2023
Earnings Call Speaker Segments
Okay. Let's get started. Hello, everyone. Welcome to BuildDirect's Q1 Fiscal 2023 Earnings Conference Call. For those that are unfamiliar, BuildDirect trades in 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 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. Please note that all dollar amounts mentioned in this presentation are in U.S. dollars. On today's call, we will be covering BuildDirect's Q1 fiscal 2023 financial and operational highlights as well as its growth outlook for the remainder of 2023. Following BuildDirect's management's comments and the presentation, the call will be open for Q&A. [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-mortar stores that provide flooring products and services to home improvement professionals. Our aim is simple: to become the leading provider of flooring to the Pro customer in North America, and we're well on our way. Here's a quick glance at our financial highlights for Q1, which will be covered in greater detail by Matt during today's call. For the 3 months ending March 31, 2023, we generated $17.85 million in total revenue while producing a gross margin of roughly 39.2%. Lastly, we generated a total adjusted EBITDA of roughly $1 million. I am quite pleased to announce the results of our continued focus on profitability, which will enable future plans to scale the business. I'll now turn the call over to Matt, who will discuss our first quarter results in greater detail.
Thank you, Shawn. I'll speak to our key financial highlights for the 3 months ended March 31, 2023. Total revenue was $17.8 million for the first quarter. As expected, this was a decrease of $6.6 million or 26.8% year-over-year and $3.9 million or 21.6% sequentially quarter-over-quarter. The year-over-year changes are a result of the business substantially scaling down our e-commerce operations, which accounted for roughly 44% of our total revenue. This change reduced our revenue, however, improves the businesses' overall bottom line. The sequential quarter-over-quarter change is a result of a larger portion of in-transit e-commerce sales at quarter end and the timing of installation projects moving into Q2. Now that we have the e-commerce go-to-market strategy and cost structures rightsized, we believe we are poised to scale revenues back up with positive adjusted EBITDA margins. Looking on the right-hand graph, I'm happy to report our focus on the Pro customer can be seen in our Pro revenue results, which reached $15.4 million. Pro revenue now represents 86% of our total revenue, which is a 9.6% year-over-year increase. Moving down the P&L. Our gross margin percentage in Q1 was 39.2%, an increase of 340 basis points year-over-year and 280 basis points sequentially quarter-over-quarter. Both the year-over-year and quarter-over-quarter changes are driven by: firstly, the improvement to BuildDirect's e-commerce product margin with the shift in pricing strategy from everyday low pricing strategy to a high-low pricing strategy; secondly, improvements to our independent retail product margin as we source more product directly through BuildDirect's manufacturing -- direct-to-manufacturing procurement model; finally, our inbound freight costs have come down as supply chain costs start to normalize. Moving to expenses. In prior calls, we've discussed scaling back the expenses in our e-commerce business, which started at the end of Q2 2022. The results of this change can be seen in our Q1 2023 as expenses for the 3 months ended March 31, 2023, decreased by $3 million or 30% compared to the same period in 2022. The decrease in expense can be attributed to a renewed focus on our core customer, focusing resources and reorganizing our staff model to better align with driving value. As noted by Shawn, I'm pleased to report that we achieved total adjusted EBITDA of $1.04 million for the 3 months ended March 31, 2023, an increase of $1 million year-over-year or $600,000 quarter-over-quarter. This is the fifth consecutive quarter of positive adjusted EBITDA results and is the highest EBITDA quarter since becoming a public company. The change is straightforward. As mentioned above, we made substantial changes to the e-commerce cost structure last year, and we are starting to see the benefits in our adjusted EBITDA results now. Moving to the balance sheet. As at March 31, 2023, our current assets primarily consisted of cash, cash equivalents, receivables and inventory totaling $17.5 million. Our current liabilities primarily consisted of accounts payable, accrued liabilities, loans payable, promissory notes and deferred consideration totaling $16.1 million. Overall, we ended the quarter with a positive working capital balance of $1.35 million, which represents a $6.2 million improvement since Q1 2022. A couple of notes on the balance sheet. The company's inventory continues to decrease and, as at March 31, 2023, was $6.5 million, a decrease of $200,000 compared to December 31, 2022. The change was a result of actively reducing our inventory values as supply chain delays are resolved. We believe the current level of inventory is a better reflection of what's required for the business moving forward. As mentioned, we also had a lot of sales in transit at the end of Q1. This resulted in the company's deferred revenue increasing to $2.6 million as at March 31, 2023, up from $1.8 million as at December 31, 2022. We expect the deferred revenue to come back down in Q2 and beyond. For our financing activities in the quarter, we have paid down the following principal debt and deferred consideration amounts. There's $311,000 paid for the promissory note; $227,000 paid for loan payables to Deans Knight; $675,000 of deferred consideration related to the FloorSource acquisition; as well as the principal deferred consideration payments, we also made $236,000 payments of interest. Even with all these financing outflows, the company increased its cash balance from $4.8 million as -- up to $4.8 million as of March 31, 2023, as compared to $4.1 million as of December 31, 2022. To reiterate, BuildDirect generated positive cash flows from its operation, which exceeded the total outflows in connection with its financing activities. Now I'll turn the back -- the call back over to Shawn, who will go through the operational highlights for the company.
All right. Thanks, Matt. As a reminder, BuildDirect is currently focused on the U.S. flooring industry, which is worth roughly $70 billion and consists mainly of independent retailers. It's a fragmented market with only a limited number of large competitors, and therefore, we believe there is a significant opportunity for us to capture, given our omnichannel strategy, which includes both e-commerce and brick-and-mortar stores. During the first quarter, we continued the overhaul of our e-commerce operations. First, we focus our marketing efforts on Pros in the flooring industry. Second, we made significant progress simplifying our legacy technology stack that was costly and inefficient. Lastly, we're making improvements to our fulfillment and logistic programs. The team has made substantial progress addressing these 3 areas, the benefits of which have already started to show up in our financials with much more to come. Regarding growth, our focus has not changed. We aim to become the leading provider of flooring materials to the Pro customer in North America. As a result, we are looking to scale our e-commerce and brick-and-mortar operations and potentially expand our product suite to include value-added services that are specifically designed to serve Pros in growing their respective businesses. In addition, we intend to continue identifying the areas in our business where we can achieve more operational efficiencies. Most notably, we aim to integrate the fulfillment of our e-commerce business into our existing brick-and-mortar locations, which reduces fulfillment cost and increases inventory utilization by sharing inventory between our e-commerce and brick-and-mortar locations. We remain optimistic on our growth and profitability outlook for the remainder of the year. I'll now turn the call over to Prit, who will moderate the Q&A session.
[Operator Instructions] First question, with the current macroeconomic condition, what is your outlook on the current housing market? And do you expect that there will continue to be high demand for flooring products?
Matt, do you want to take that one?
Yes, I can start off. So I think first off, the total addressable market is $70 billion, which means we have a lot of room to grow regardless of the macro conditions. Further, the company is segment-agnostic, which means we can shift customer focus from customers that are focused on new builds to customers that are focused on renovation and remodel. So we're starting to see the housing stabilize quarter-over-quarter, and we're not expecting those -- we're expecting -- we aren't seeing the current economic conditions impacting our revenue and growth expectations.
Yes. And just to kind of further that point, when we look at how we target the market, we are very Pro-focused and, as Matt mentioned, segment-agnostic. So we specifically design our marketing programs and our offering to serve new build construction, commercial renovation. Retail renovation is definitely the biggest segment for the flooring industry. And so those products and services are agnostic in a specific segment. And so we have seen some penetration shift from new build to commercial and kind of vice versa amongst the different operations, but it's an important part of our -- kind of our growth story and our modeling for the future.
What is the percentage of the inventory cost affected from high freight? Are you planning to reduce the prices? If you do, how will affect -- how will it affect the balance sheet?
Yes. Matt, you want to take that one or you want me to grab that one?
Yes, I can touch on that one. So we anticipate -- so as inbound costs come down, our cost of goods come down with it. We anticipate passing some of those along to customers as it goes through, but we feel like there's still an opportunity for us to grab margin while we shift. So I think that's part of it. I don't know, Shawn, if you have anything else on that end.
Yes. Now I would say the flooring industry, especially with a lot of the supply chain disruptions, different companies responded in different ways, on inventory flow, what they kind of built up. And so I would congratulate the BuildDirect team. They did an amazing job really controlling inventory and not getting kind of over the skis on inventory that was paid at higher fulfillment costs. I'd also mention that our fulfillment model, we'll get into the details on this call, but it's very lean. There's a lot of touch points. And so there's not as many opportunities for inflation kind of along the way, and that's very different with other companies who have funkier or more touch points in their import model, where they're buying through distribution, so on and so forth. Regarding the industry, I would say kind of, first and foremost, it's about -- not about really anything aside from delivering quality products and services for the Pro, the Pro is much more time-sensitive. It's more important to have what you need, the right quality when you need it for the job site than it is a pricing gain, if that makes sense. So we anticipate, if anything, our margins continuing to improve and continue to build out products and services that really help kind of drive that segment.
Can you elaborate on what makes BuildDirect's products and services unique to Pro customers as compared to its competitors?
Yes. So I'll take that one. When you look at the Pro customer, the remodeler, the A&D firm, even the flooring contractor who's completing projects and has a business kind of in their own right, generating their own customer leads and then really providing installation services on their end, not on ours, when you think about what they need, it's much more than just products at a price. They need products that are specifically tailored for smooth installation and very few -- very, very few problems. And so our claim ratio rate of the company is extraordinarily low, which I can kind of just reference my history in the flooring industry to help support that. But then in addition, like when you go to our brick-and-mortar locations, they're set up for the Pro. So you think about what that means, practically speaking, instead of going into a big parking lot where you have this giant store and all these other categories that are available for homeowners or Pros across all these different segments, plumbing, electrical and so on and so forth, our facilities are just geared for the flooring Pro. So we have the right docs that allow them to back right up. We have extremely fast loadout times. We have marketing programs that are preset. And so when you think about kind of everything we do, we don't start off with really anything besides what does the Pro need to actually build their business and be successful, enable them to stay focused on that. And with that kind of focus, it allows us to make a lot of decisions that look and feel different than what you might see out there with different types of brick-and-mortar locations or even e-commerce experiences. And so our internal e-commerce team, for example, are highly skilled, but the conversations that we have with Pros are far beyond, hey, can you help me find what aisle that product is on. They're much more -- they're actively working with our customers to ensure they're successful.
In the near future, does BuildDirect plan to focus more on either its e-commerce platform or brick-and-mortar locations or both?
Yes. So I would say both. When you kind of zoom out, you think through the kind of history of the company and the opportunity for continued growth. Our e-commerce operation was overhauled, yes, as we talked about. But now that we have most of that work done, the intent is to continue using e-commerce to enter into a market. It's a very effective kind of tip of the spear where we can generate interest and really drive an initial base of volume. And then from there, as far as fulfillment, we have a different -- a handful of different options that we use. And then as we're building up interest in the customer base, that's when we put in brick-and-mortar locations. And so it's a really interesting model to build interest and then be able to backfill. And once those locations go in a market, they both fulfill e-commerce as well as they sell locally. And so if you look at our past acquisitions, actually what it was all about, we had a lot of volume in certain areas. And so when we're focusing on the overall business, e-commerce is absolutely our tip of the spear and we'll scale back up. And our belief, we intend to scale that back up quite a bit but then also, along with that, selectively also build out locations. A couple of things I should mention. When it comes to locations, we're effectively adding extra services locally, things that we -- that are really kind of geared towards that local relationship. And in addition, all of our brick-and-mortar locations also carried carpet, rolled carpet, which is still about 48% of the overall flooring industry. That's a category that's a bit clunky to sell online, but it's a massive category that we add at our brick-and-mortar locations.
[Operator Instructions] Next question. What are your thoughts on the do-it-yourself trend and its significance as compared to the Pro segment?
Yes. So when you kind of think about when a Pro gets involved and also how even on the kind of the big-box retail side because there's obviously Pro customers that shop there as well. So when you think about the Pro customer, typically, they're coming in to do larger projects. So look, I've tiled and also done other hard surface flooring in small spaces personally in the past, albeit probably not very well. But when you're DIY-ing a bathroom renovation and you're pulling out, in some cases, carpet actually, in other cases might be some of the kind of old flooring and doing that small little confined area, that's much more kind of DIY. A Pro is called in when you're redoing your downstairs. And you have all of a sudden break points and you have transitions, kind of things like that. And so our business is very much focused on the Pro and the types of projects that the Pro gets pulled into, not nearly as much as kind of DIY. Do we have customers that buy products to install themselves? Sure, we do. But we find that those orders are typically on the smaller side compared to the types of projects that the Pros handle.
Next question. You commented earlier that supply chain issues were resolved. Can you tell us more about BuildDirect's strategy of ensuring an efficient supply chain?
Sure. So when you think about our kind of legacy e-commerce operation, the first real key asset that was created was a very lean supply chain model. And the -- I'm saying lean supply chain model. I'm referring to working directly with factories and skipping all the potential points kind of in between and then, along with that, driving specs. So it's very normal for us to work with factories on creating very specific specifications to make sure products are geared towards the Pro and are also a good fit for us. We put that work in versus going to trade shows and looking at samples and buying what's off the shelf. So there's kind of more due diligence there. Now along with that, as we look at our brick-and-mortar operations as well, there's a lot of opportunity to further integrate that more direct model into those businesses that may or may not have historically kind of gone that route. It's pretty unusual for independent retailers to kind of go that direct route. But for us, we try to keep things extremely lean as few touch points really in between and kind of fashion ourselves as having one of the leanest supply chains in the industry, but we get thereby, of course, putting in the work and staying focused on that as a key advantage.
Yes. I think just to add to that quickly, I think it was a kudos to the team for surviving COVID and some of the supply chain issues that we had at that time. I think a lot of the competitors that we saw had real challenges with the supply chain problems. And I think it was -- our ability to weather that storm has been -- was great to see. And I think now that things are returning, it adds an additional kind of benefit for us going forward. So...
What are some catalysts investors can expect in the next 6 to 12 months?
So Matt, we have kind of 2 parts there. So I'll start with the operational if you want to get into the finance after.
Yes.
So one of the main projects for us is to integrate our e-commerce operation for fulfillment into existing brick-and-mortar locations. And so we're working through that. That's a massive kind of alignment with our operation. And so I'd be on the lookout for that. There's other examples kind of like that where we're talking through operational efficiencies. And when we put those out there, they're not -- they're -- they tend to be very substantial and effectively align more and more to that, the model of a store warehouse kind of format, supporting e-commerce and then also having local -- kind of local programs. In addition to that, on the technology side, as we wrap up the overhaul of e-commerce, we'll talk more about kind of what we're doing there in scaling that business back up and very kind of straightforward and ways that are fairly easy to model. Matt, do you want to touch on the finance side?
Yes. I think I probably said this 5 times already, but I think profitability -- and I've been able to prove that and show that in our results. It's going to be hugely helpful as we move forward, and we're making some improvements to that -- to our balance sheet, and we continue to expect to clean up our balance sheet to get ourselves the stability, the financial stability so that we can execute on these growth strategies. I think as we look into the past, I think without that profitability, we weren't able to necessarily have a stable footing to execute on some of the growth strategies. So really excited that we've now turned that corner. We're showing those positive adjusted EBITDA results and now have a solid financial foundation to start growing responsibly.
That's all the questions we have. Any parting words, Shawn?
No. I just want to thank everyone for tuning in and for following our story. We're very excited on where we're at, what we have really in front of us, and it's going to be a lot of fun. So I just want to say thanks to the team. Thanks to everyone on the call. And as Prit mentioned, if you have any follow-up questions, by all means, feel free to reach out to our IR department.
Yes. And just as Shawn mentioned, if you do have any additional questions that we didn't address or any follow-ups, you can e-mail us at ir@builddirect.com, ir@builddirect.com. Thanks, everyone, for attending, and have a good day.
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