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

Hello, everyone. Welcome to BuildDirect's Q1 Fiscal 2024 Earnings Conference Call. For those who aren't familiar, BuildDirect trades on the TSXV under the ticker BILD. My name is Rory Wizbicki, and I'll be the 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 and applicable securities law to 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 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 USD unless otherwise stated. On today's call, we'll be covering BuildDirect's Q1 2024 financial and operational highlights as well as its growth outlook for 2024. Following BuildDirect management's comments, the call will be open to questions. [Operator Instructions] Our presenters today will be CEO of BuildDirect, Shawn Wilson; and Interim CFO of BuildDirect, Marshall Rosichuk. I will now turn the conference over to Shawn.

Thank you, Rory. For our 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 a leading provider of flooring to the Pro customer in North America 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 Q1 2024, which will be covered in greater detail by Marshall during today's call. For the 3 months ended March 31, 2024, we generated $15.6 million in total revenue producing a gross margin of roughly 39.1%. Lastly, we generated a total adjusted EBITDA of $0.504 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 competitors. This fragmentation highlights a promising niche with substantial opportunities for BuildDirect. Before discussing our recent financial performance, let's first explore the facets of our business model and the range of our customers. We procure products solely for manufacturers worldwide and ship them to our network of brick-and-mortar establishments known as our Pro Centers located in the United States and in Canada. At these Pro Centers, our dedicated teams serve local professional clients including general contractors, commercial developers, property investors and flooring specialist. These professionals are crucial players in various sectors of the construction and renovation industries. In addition to our physical presence, we run an established e-commerce platform at builddirect.com. This platform offers an efficient way for professionals to place and manage their orders, homeowners who want to take professional approach to their flooring projects and also access wholesale product options on our website, enabling them to shop like a pro. With this context in mind, I'll now hand over to Marshall, who will provide a detailed overview of our Q1 2024 financial results.

Thank you, Shawn. I am pleased with our progress in Q1 2024. In Q1 2024, our total revenue amounted to $15.6 million. As anticipated, this reflected a year-over-year decrease of $2.1 million or 12% from the quarter ended March 31, 2023, or Q1 2023. Additionally, there was a sequential decrease of $1.3 million or 7.8% quarter-over-quarter or from the quarter ended December 31, 2023, and referred to as Q4 2023. The year-over-year decline in revenue stems from the deliberate scaling down of our e-commerce operations in our BuildDirect segment. This decision was instrumental in rectifying the unit economics of our business and scaling our e-commerce platform enhancements initiative, which in turn led to a reduction in operating cost for this segment. Meanwhile, the sequential decrease in revenue can be attributed to lower demand in our Acquired Retailers segment due to unseasonably colder weather and project delays. Following the completion of our enhancement initiative in September 2023, management redirected its focus toward growth initiatives for our e-commerce segment. Thus far, we remain optimistic about the prospects of this strategy, potential positive impact on both top line growth and overall segment profitability. Moving down the interim statement of operations. Our gross profit in Q1 was $6.1 million, representing a decrease of $901,000 year-over-year, although it represents an increase of $133,000 sequentially quarter-over-quarter. Likewise, our gross profit percentage in Q1 2024 was 39.1% for a slight decrease of 10 basis points year-over-year, although an increase, 390 basis points sequentially quarter-over-quarter. The sequential quarter-over-quarter increase was largely driven by an improvement in revenue, a reduction in cost of goods sold for our BuildDirect segment. Moving to operating expenses in Q1 2024. These were $6.4 million, representing a reduction of $564,000 or 8.1% year-over-year, largely through reductions in fulfillment, administration and amortization costs. Regarding sequentially quarter-over-quarter, these were $304,000 or 4.5% lower, largely through reductions in fulfillment and amortization costs. Moving to other expenses. These were $205,000 or $36,000 higher year-over-year, largely due to a lower foreign exchange gain that was offset by lower interest costs through a reduction in loan or debt balances and lower effective interest rates. Similarly, sequentially, quarter-over-quarter, these were $1.05 million lower mainly due to the impairment loss on intangible assets and goodwill, restructuring costs and extinguishing of debt, net of forgiveness or deferred consideration that was recorded in Q4 2023. As noted earlier by Shawn and to close our comments regarding the interim statement of operations, I'm pleased to report that we achieved another quarter of positive adjusted EBITDA which was $0.504 million or $504,000, a decrease of approximately $538,000 year-over-year, although it represents an increase of $431,000 or approximately 600% sequentially quarter-over-quarter. Further, it's worth noting that this is our ninth consecutive quarter of positive adjusted EBITDA results. Moving to our interim statement of financial position. I'm pleased to report we continued our program of debt and loan reduction, which I will cover in further detail shortly. Please note, as at March 31, 2024, our current assets, which primarily consist of cash and cash equivalents, receivables, inventory and prepaid items totaled approximately $14 million. Our current liabilities, which primarily consist of accounts payable, accrued liabilities, deferred revenue and current portion of lease liabilities, loan payable, promissory note and deferred consideration payable totaled approximately $11.7 million. This gives us a current ratio of 1.2x at March 31, 2024, as our current assets exceed our current liabilities by $2.3 million. This is often referred to as working capital, and it decreased $500,000 from $2.8 million on December 31, 2023. The decrease is largely due to a reduction in cash and cash equivalents of $500,000 from $2.6 million at December 31, 2023, to $2.1 million at March 31, 2024. Looking to our interim statement of cash flows. Cash generated by operating activities in Q1 fiscal 2024 was $1.17 million versus $2.14 million for a use of cash of $968,000. The use of reduction can be attributed mainly to a reduction of $791,000 in cash from operating activities excluding income taxes paid and changes in noncash working capital, plus a reduction in deferred revenue of $812,000. These were offset by an increase in accounts payable and accrued liabilities of $574,000. Cash provided by investing activities in Q1 2024 was $41,000 or $16,000 lower versus $57,000 in Q1 2023. Cash used in financing activities was $1.67 million versus $1.49 million or an increase of $180,000. The increase can largely be attributed to proceeds for private placement being $302,000 lower, net of interest paid being $136,000 lower. During this period, principal lease payments and repayment of promissory note, loan and deferred consideration totaled $1.57 million, which was comparable to Q1 2023. To recap, in September 2023, we restructured our debt obligations, namely the 2018 and 2022 secured notes, which have been extended to September 2025 and April 2026, respectively. In addition to extending the maturity date, we reduced the interest rate on both notes from 15% to 12%. Under the current interest rate environment, we believe the reduction in the interest rate is a strong show of support from our existing debt holders. Along with the restructuring of debt, since March 31, 2023, or over the last 12 months, we paid down the following principal debt amounts related to: principal lease payments of $1.43 million, promissory note of $1.24 million, loan repayment of $1.574 million and deferred consideration of $675,000. Overall, for the 12-month period ended March 31, 2024, these payments of principal totaled approximately $4.9 million. In addition to these principal debt payments, during the 12-month period ended March 31, 2024, we made approximately $1 million in interest payments. To close, I want to highlight that our focus on profitability has allowed us to make approximately $5.9 million of principal debt and interest payments in the 12-month period ended March 31, 2024, we noted earlier. Overall, this has created stability and deleveraged our balance sheet, so we are in a better position to refocus on growth. Moving forward, we will continue to maintain and improve profitability as well as looking for opportunities to scale our e-commerce and bricks-and-mortar opportunities. Now I'll turn the call back to Shawn, who will go over our operational highlights for the company.

In 2023, we revamped our e-commerce platform, overcoming historical challenges stemming from legacy tech stack issues and fulfillment constraints. We have some work left to do here to support our e-commerce organic growth and value-added service initiatives, building up our customer service teams and continuing to optimize our inventory and warehouse network. While our revenue declined, I know it was primarily concentrated in the e-commerce and tied to what we fully anticipate as short-term constraints as we now look to leverage the revamped e-commerce platform to optimize inventory and customer service teams to the marketing efforts and ensure tight execution along the way. Our growth strategy is simple. We have 6 flooring Pro Centers today, in addition to our e-commerce business, and we aim to explore opportunities to progress our Pro Center growth to other markets in North America through building and buying locations and to see our e-commerce business progress and thrive. We believe we're well positioned for this strategy due to our competitive advantages in the flooring industry, along with our deep industry expertise. Our primary focus is around how to achieve this vision with the appropriate capital structure and staying focused on execution. I'll now turn the call over to Rory, who will moderate our Q&A session.

Thanks, Shawn. We'll now begin the Q&A session. [Operator Instructions] So first question, what are the markets that BuildDirect is looking at for Pro Center growth?

So on the Pro Center side, the markets are primarily tied to our penetration with our e-commerce business. And so as we are building out key markets with e-commerce there are natural markets for expansion with a brick-and-mortar facility. The 2 strategies worked very well together. And I was, for the most part, mentioned, that's going to be focused in major markets throughout the U.S.

Right. Next one is, if and how are U.S. interest rates impacting BuildDirect's business?

So for the most part, the flooring industry is primarily tied to renovation, like remodeling. The new construction segment is much, much smaller, unlike other building material categories for example, like roofing, siding that are more heavily concentrated in new construction. We do have segments that are tied to builder, but they're not nearly as dominant as other categories. So for the most part, we've been able to navigate that fairly well.