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spk00: Good morning. My name is Pam, and I will be your conference operator today. At this time, I'd like to welcome everyone to the BuildDirects third quarter conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you'd like to ask a question during this time, simply press star, then the number one on your telephone keypad. If you would like to withdraw your question, please press star, then the number two. Thank you. I'd now like to turn the conference over to Ms. Ashley Newell. You may begin your conference.
spk01: Thank you and good morning, everyone. Welcome to BuildDirect's first conference call as a public company to present the company's third quarter 2021 earnings. Joining us on the call today is Dan Park, Chief Executive Officer, and Ethan Rudin, Chief Financial Officer of BuildDirect. Following their prepared remarks, the call will be open for questions from the analyst community. If we're unable to get to your questions during the call, please email investorrelations at ir at builddirect.com. Before we begin, I would like to note that some of our 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 and statements. Please refer to the various materials we have 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. Finally, I wanted to highlight that our discussion this morning will align with our earnings presentation for the third quarter 2021, and this presentation will be available on our website. Now, let me turn the call over to Dan.
spk02: Thank you, Ashley, and good morning, everyone. We appreciate your participation in our call this morning. Today, I will cover the key highlights of our third quarter 2021 earnings results and the strategy, strength, and catalysts driving them. Ethan will go through our financial performance in more detail and speak about what we can expect for the full year 2021. As Ashley mentioned, we will then open the call for your questions. For those of you who are new to Build Rec, I'd like to kick off our inaugural earnings call by briefly running through our key investment highlights. Our unique digital platform and heavyweight supply chain infrastructure is positioning us as a new omni-channel leader in the North American home improvement market. Given the highly fragmented competitive landscape, we are well positioned to acquire high-quality independent retailers and their pro-relationships through immediately accretive acquisitions, like the superb acquisition we announced yesterday. Between acquisitions and acceleration of organic growth through our digital and physical platform, or DiFi, we will grow and scale rapidly in this total addressable market that is ripe for consolidation and disruption. Thanks to our team's hard work and dedication, BuildDirect delivered a solid third quarter performance. We delivered strong growth across key metrics, including revenue growth, pro-revenue growth, and gross profit. Our strategy is paying off, and we continue to serve our pros and homeowners with superior customer service and end-to-end flooring solutions. Despite supply chain and inflationary challenges, through our digital platform and heavyweight supply chain. Our strategic execution paid off as year-over-year revenues increased by 51%, pro revenues grew by 216%, and gross profit rose by 47% for Q3 2021. This growth can largely be attributed to floor source, as well as continued strong customer demand for building supplies. Like the rest of the industry, we experienced supply chain pressure on a gross margin, which decreased by 60 basis points year-over-year, which our team is working hard to mitigate. Due to strategic investments in sales, marketing, and technology, and receiving lower tax credits, adjusted EBITDA decreased to a loss of minus 0.6 million. A solid Q3 performance combined with our continuing ability to execute positions bill direct to drive growth, and we expect to deliver on our full-year revenue guidance. As investment in the home continued, we remain committed to delivering on our strategy. As we announced just yesterday, our acquisition of Michigan-based superb flooring and design aligns directly with our strategy to acquire B2B-focused targets. The deal allows us to serve a network of pro builder customers across the US Midwest. This segment of the market tends to be more concentrated and larger in both size and scale in terms of order size, which plays to our advantage as a national heavyweight delivery retailer. We're also partnering with Dolly, a heavyweight same day delivery specialist. This partnership extends our last mile footprint and improves the delivery experience for our customers even more through improved on-time delivery, order tracking, damage rates, and white glove delivery services. And as you may already know, I'll be transitioning from the role of CEO to chairperson of the board. Boarding Canada, a leading executive search firm, is in the process of identifying a new, highly experienced CEO to drive our heavyweight omni-channel strategy. We're also pleased to welcome seasoned home improvement executives, Peg Hunter, and Henry Lee Buckley, who are board of directors. They bring deep industry knowledge and experience to support our aggressive growth objective, and we're thrilled with their involvement to date. Build Direct continues to execute on the growth strategy we originally laid out at our RTO in August. Our strategy focuses on four key pillars to deliver long-term value creation. First, we will leverage our leading position as a first-to-market and fully dedicated digital and heavyweight delivery platform focused on the flooring space. Second, we will acquire independent retailers to grow our local presence and acquire pro revenues with very high repeat rates. Third, we will leverage the best of our digital platform and physical presence to deliver a differentiated, omni-channel experience to increase our share of the pro customer market segment. And finally, we will continue to invest in new capabilities such as digital B2B payments, seamless quoting and reordering, and digital marketing services for the pros. I've discussed this before, but the heavy goods e-commerce model is known for its inherent challenges, which is why the penetration has traditionally been low online. Specifically, the extreme weight and bulk of these products result in very expensive supply chain costs, high damage rates, and often disappointed customers. In addition, the high transaction price and complicated nature of the product results in a longer buying cycle. For these reasons, the online penetration has been low in flooring and building materials generally. However, online has been growing already and saw unprecedented growth last year. Due to the pandemic, we view building materials after groceries as the last frontier of low online penetration within a very large market segment poised to grow very fast. Initially, we are focused on the US foreign market segment with a total addressable market of 71 billion. While just 4% of that market is online, online sales are growing at 11% annually, which is nearly three times the rate of the total growth rate. The other thing that's interesting is that independent retailers make up nearly half of the $71 billion market segment. These independent retailers, as I've described before, like e-commerce capability or any digital expertise for that matter, and do not have any obvious partners to help them bridge that gap, although they're very successful at what they do today in their lane. So the complicated nature of the flooring e-commerce journey, low online penetration of the flooring market segment, and the low digital know-how of these independent retailers provides BuildDirect with an immense opportunity to drive consolidation and disruption in this fragmented, traditionally brick-and-mortar-led market segment. BuildDirect was first to market with key investments to become the leading online flooring supplier in North America. Our competitive advantages include our best in industry assortment breadth and hard surface flooring, our proprietary gateway supply chain solution that can deliver flooring to 90% of the country, in three days or less, with half the industry's damage rates. Our best in industry sample program, where we mail free samples within 24 hours, our great brand recognition and SEO, leading to high traffic, and industry-leading customer service and support. I'd now like to hand the call over to Ethan, who will take you through our financial performance and the drivers behind the numbers a bit more in detail.
spk03: Thanks, Dan. I also want to say how happy I am with our Q3 operating and financial performance. We've been successful in maneuvering through industry-wide supply chain volatility and delivering a year-to-date revenue increase of 51%. Product availability and timely delivery have been the key to growing market share this year. As Dan mentioned earlier, we're excited to announce yesterday we've closed the acquisition of Michigan-based full-service flooring retailer Superb for a total purchase price of $10 million. with the initial payment of $8.5 million fully funded with cash on hand from our RTO. For the last 12 months ended September 30th, 2021, Superb generated unaudited revenue of over $18 million and greater than $2 million in EBITDA. Superb is an established brand name serving pro customers such as home builders, condominium developers, and commercial and residential contractors across Michigan. When you compare the builder segment with other pro segments, you'll find it's more concentrated, larger in size and scale, and brings a larger basket size than some of the other segments we serve. Our teams are excited to leverage a number of synergies available through BuildDirect's digital, global supplier base, and supply chain capabilities to advance Superb's ability to serve its existing pro customers and provides the potential to grow our combined market share in Michigan and the surrounding states. As our second acquisition in Michigan, we welcome the opportunity to work with the expert teams at both Superb and FloorSource to rapidly expand our combined share of the Midwest U.S. pro market. Since acquiring Michigan-based FloorSource last December, they've flourished despite the operating in a challenging supply chain and labor environment. The market resiliency can be attributed to FloorSource's terrific employee-focused culture, outstanding customer service, and great execution and focus. To date, we have realized key synergies, including leveraging BuildDirect's platform to improve product cost, expanded assortment, and product availability. In the future, we anticipate further synergies, including digitizing FloorSource's current pro experience, expanding marketing support to acquire new customers, direct-to-job site deliveries to save pros time and money, and expanding into new pro segments such as wholesale and multifamily. We continue to maintain a robust acquisition pipeline filled with attractive opportunities at various stages of development. We currently have line of sight to opportunities in excess of $200 million of revenue. BuildDirect provides a very attractive partner for these independent retailers due to our complementary capabilities such as e-commerce, global sourcing, and heavyweight delivery, as well as an opportunity for the owners of these companies to reduce their financial risk by selling to a strategic buyer while ensuring a brighter future and expanded career opportunities for their employees. The successful and efficient close of our second U.S. acquisition, Superb, demonstrates that our M&A team has found its groove, and we expect to replicate the success moving forward. BuildDirect's business performance has accelerated over the past year as a result of continued execution by the team in the midst of continuing growth in the home improvement industry. This resulted in driving our revenue up 51% year over year to $22.4 million for Q3 2021. The increase was primarily driven by the December 2020 acquisition of FloorSource, as well as increasing customer demand favorable market conditions continued on pace. As a result, gross profit increased 47% to $8.1 million compared to $5.5 million in Q3 2020. On the flip side, gross margin declined by 60 basis points to 36.4% compared to Q3 2020, due primarily to higher supply chain costs in 2021. Adjusted EBITDA was a loss of $600,000, decreasing from due to investments in sales and marketing and technology to accelerate your sales growth, as well as lower government tax credits received to offset our research and development expenses. Our revenue guidance remains unchanged with a range of 90 to 98 million, representing significant year-over-year growth, but does not include any benefit from the superb acquisition recently announced. In line with the industry, BuildDirect experienced near-term challenges with our supply chain and products due to short-term headwinds. However, thanks to the hard work of our team and support of our partners, we were able to minimize the impact and continue to provide great products and service to our customers. Moving forward, we intend to drive gross margin improvements through the further alignment of unit economics and profitability while growing revenue through our omnichannel platform synergies and acquisition pipeline. Simultaneously, will remain flexible and agile. This means continuously monitoring evolving customer patterns and adjusting our strategic tactics accordingly to drive maximum value. Let me close by saying I'm incredibly proud of what they've achieved in 2021 so far. We are still early in our journey as a public company, and I'm more bullish than ever given the strength of the remodeling tailwinds our strategy to consolidate and drive synergies in a fragmented and massive market segment poised for disruption, and the resilience of our talent and team. I'd like to turn the call back over to the operator as we're ready to open it up for Q&A.
spk00: Thank you. Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press star followed by one on your touchtone phone. You will hear a three-tone prompt acknowledging your request, and your questions will be polled in the order they are received. Should you wish to decline from the polling process, please press star followed by two. And if you're using a speakerphone, please lift your handset before pressing any keys. One moment for your first question. Your first question comes from Hamir Patel with CIBC. Please go ahead.
spk04: Hi. Good morning. Dan, I was wondering if you could comment on what organic growth might have been if you had had a floor source in there a year ago.
spk02: Yeah, absolutely. Good morning, Hamir. So just to clarify, organic growth without floor source, correct?
spk04: Well, ideally, maybe it's a good comment on how that business might have compared versus what it did under its prior owner as well.
spk02: Yeah, Floor Source had a very strong past year, as Ethan described. Despite kind of supply chain challenges, product availability, labor availability, they did very, very well. We don't specifically, I think, break out the performance because we didn't have prior years, but It was very, very strong. It was more than single-digit performance in terms of comps.
spk04: Okay, great. And just turning to the superb acquisition, I know it's not included in the annual revenue guidance, but what sort of revenue contribution – would you expect there for the last six weeks of the year? I know you guys gave a trailing 12 months number, but just given seasonality, what kind of contribution could we expect?
spk02: Yeah, so go ahead, Ethan.
spk03: Yeah, I was going to say, you know, if we just ignore a bit of the seasonality that they experience, you know, they should post north of a million dollars for the month. You know, we have it at 18 right now. as a placeholder based on the work that we did. But look, it closed two days ago, so we're trying to figure that out. We also announced that they're going to contribute well north of $2 million of EBITDA, which arguably the profitability is really, really important for us. But ultimately, let's not forget that it's 100% pro-customers and brings us into an entirely new channel in the Michigan space with construction. So that's something we're really, really excited about in America.
spk04: Great. Thanks. Thanks, Ethan. And are you able to quantify, you know, maybe the level of synergies you'd expect to realize from Superb and kind of the timing to get there?
spk03: You know what? I would really hate to lay that out for you right now without any sort of specificity, given that it closed yesterday. We're actually got a meeting planned to go out there to Michigan and have actually floor source and Superb revamp exactly what we were thinking we could expect in 2022. So we'll follow up with you later after that trip.
spk04: Fair enough. And just the last question for me, you know, now post pro forma superb, what do you think that your current flexibility is to do additional acquisitions based on, you know, the current balance sheet? Or do you think we're kind of in a bit of a digestion phase as you integrate superb for the next little while?
spk03: Yeah, I mean, I think we'll continue to be opportunistic. One of the really good things is that, you know, obviously post RTO, you know, Dan and I have long communicated. We're generally agnostic as to how we finance these acquisitions. But what we are acquiring are inherently financeable on their own. And so obviously the combination of what we bring to the table gives us a lot of opportunities in the debt markets right now. we obviously are not terribly interested in going back to the market given what valuation looks like with our equity. So we've got a lot of active dialogue going on in the debt capital markets and a lot of enthusiasm around what we're after.
spk04: Great. Thanks, Ethan. That's all I had. I'll turn it over.
spk03: Thanks so much for the question, Samir. I appreciate your participation.
spk00: There are no further questions at this time. I'd now like to turn the call back to Mr. Park for any closing comments.
spk02: Thank you. Again, our inaugural conference call. Thank you very much for those of you who are joining. I am more bullish than ever, even though we've had really great track results in the past few years to even get us to this point. Even though we're a new public company, relatively new as a public company, very, very excited about the future, strength of our team, the market positioning, and our strategy and business model. to disrupt and innovate and continue to grow and make a big difference with our customers. So very excited for those of you taking the journey with us, and thanks to everyone for joining us on this call today.
spk00: Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines. Have a great day.
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