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spk02: Hi everyone, this is Prit Singh, your moderator for today. We will begin momentarily, just waiting for a few more attendees to arrive. Okay, let's begin. Hi, everyone. Welcome to BuildDirect's fourth quarter and full year 2022 earnings conference call. For those that are unfamiliar, BuildDirect trades on the TSX Venture Exchange under the ticker BUILD, 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 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 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 U.S. dollars. On today's call, we will be covering BuildDirect's Q4 and full year 2022 operational and financial highlights, as well as its growth outlook for the remainder of 2023. Following BuildDirect management's comments, the call will be opened for a Q&A session. Questions can be sent using the Zoom Q&A function at the bottom of your Zoom screen. Alternatively, if you are calling in to listen to this webinar today, please email your questions directly to ir at builddirect.com. Again, that is ir at builddirect.com. Our presenters today will be the CEO of BuildDirect, Sean Wilson, and CFO of BuildDirect, Matthew Alexander. With that out of the way, I will now turn the conference call over to Sean Wilson, CEO of BuildDirect.
spk00: Thank you, Brett. For first-time viewers, BuildDirect is a leading North American omni-channel building material retailer that delivers a full assortment of quality flooring materials and services to homeowners and home improvement professionals in North America. Here's a quick glance at our key financial highlights for the year ended 2022, which will be covered in greater detail by Matt Alexander, CFO of Bill Direct, during today's call. We generated $92.2 million in total revenue while producing a gross margin of roughly 34.7%, and our total adjusted EBITDA was $1.3 million. With that, Matt, would you go through the detailed loop?
spk01: Thanks, Sean. I'll now speak to the key financial highlights for the year-ended December 31, 2022. As noted by Sean, I'm pleased to report that we achieved full-year revenue of $92 million, an increase of 1.6% year-over-year. Driving this growth was the full-year revenue impact of our superb Florian acquisition, which occurred in November of 2021. and was partially offset by the reduction of our e-commerce revenue as the company adjusts its strategy away from the consumer segment and focuses more on the profitable pro segment. This change in strategy can be seen in our pro revenue results, which reached 77 million in 2022, an increase of 35% year-over-year, and now represents 84% of our total revenue at the year-end. Moving down the P&L, full year 2022 gross margins dropped slightly by 40 basis points year over year, from 35.1% to 34.7%. The decrease in margins can be attributed to the acquisition of Superb Flooring, which is focused on lower margin but healthy EBITDA contracts. This shift diluted the company's overall margin but improved the bottom line or adjusted EBITDA. The Q4 gross margin which is indicative of our expected margins moving forward, increased 500 basis points from 31.4% to 36.4% year over year. The change in margins are due to the following. Focus on the profitable pro customer, the improvement in our e-commerce product margin as we shift our pricing strategy from an everyday low price strategy to a high low pricing strategy. Finally, A reduction in supply chain costs have reduced our COGS. We expect our Q4 margin to be more in line with the future margin results going forward. In prior calls, we've mentioned that the company has made cost reductions primarily focused within the BuildDirect e-commerce business as the company continues to shift its focus onto the profitable pro-market segment and away from the higher-cost consumer segment. This has allowed us to reduce our digital marketing spend and reduce our fixed costs. In Q4, we continue to see the results of this shift. Q4 adjusted EBITDA was 0.4 million, a positive 0.4 million, an increase of 3.6 million year over year. And this is our fourth consecutive quarter of positive adjusted EBITDA results. On a full year basis, our adjusted EBITDA was 1.3 million, an increase of 5.3 million year over year. Our intended strategy is to continue to focus on profitability and to continue to deliver positive adjusted EBITDA quarters. Shifting to our balance sheet, we've extended the terms on our loans payable. This has flipped our working capital balance, which is now showing positive working capital of $1.5 million, an increase of $4.9 million year-over-year. In that working capital balance, our current cash and short-term investment balance as at December 31st was $4.4 million. With our improved profitability, we expect to be able to further extend our loans payable at a more favorable interest rate. Our intended strategy is to generate cash flow to service our outstanding loans payable without any further dilution to our shareholders. Highlighting again the strides we've made on profitability, we're showing a $5.3 million year-over-year change in our adjusted EBITDA. Further to this change, many of our initiatives to reduce overhead and improve profitability were enacted in Q3 and Q4 of 2022. We did not see the full annualized benefit of these changes. Looking forward into 2023, we expect to see the annualized benefits of the changes we've made, and we have further initiatives to improve profitability. By focusing on the profitable pro customer, we intend to maintain the improved adjusted EBITDA, results, and positive cash flow from operations. Now I'll turn it back over to Sean Wilson, who will go over the operational highlights of the company.
spk00: Thanks, Matt. As a reminder to our audience, Build Direct aims to capitalize on the U.S. flooring industry, which is roughly a $71 billion TAM. It consists mainly of independent retailers. It's a fragmented market, with a limited number of large competitors. Therefore, we believe there's significant market opportunity for us to capture this industry, given our omnichannel strategy, which includes both e-commerce and brick-and-mortar operations. Since my appointment as CEO in late September of 2022, I've developed several initiatives with a focus on four key areas. The first, increasing gross margins. The second, reducing overhead costs. The third, enhancing organic growth. And lastly, reallocating our resources more efficiently. As for increasing gross margins, we first redesigned our retail pricing strategy. Next, we leveraged a freight consolidation model and achieved substantial annualized cost savings. We've also started leveraging a core product assortment throughout our operating divisions, which will provide a path to additional cost reductions and improve inventory turnover. In terms of reducing overhead costs, we reduced $2 million in annualized e-commerce fixed costs, identified roughly $900,000 in additional cost savings related to technology spend to be actioned in 2023. For instance, we implemented a new enterprise resource planning system for our superb acquisition. We'll continue implementing our simplified technology roadmap over 2023, and we'll experience our full annualized cost savings starting in 2024. Additionally, we continued to enhance organic growth by focusing on previous acquisitions on the pro segment, resulting in 4 million in new contracts, many of which were driven by synergies between BuildDirect, FloorSource, and Superb. We also developed a clear view for profitable organic growth and identified a new leader, Jay Allen, to scale BuildDirect's e-commerce business. Lastly, we ensured a greater focus on capital allocation to maximize cost efficiencies and We've also designed a cost-effective M&A roadmap in which any potential acquisitions will be financed with less cash upfront. In 2023, we'll continue to focus on the profitable pro customer, which includes a greater focus on brick and mortar operations and potentially providing additional value added services that are designed specifically for pros, as well as streamlining operations by unlocking operational synergies across all business units to improve overall profitability. Furthermore, we intend to assess opportunities for creative acquisitions of more pro-focused independent retailers to grow our distribution channels and gain access to a larger network of pro customers. Through our M&A strategy, we've already established a track record with two successful acquisitions in which we were able to unlock business synergies and expand our market reach. As a result, we'd like to replicate the previous successes by capitalizing on new M&A opportunities. Overall, we are very optimistic on our growth outlook as we have laid the groundwork to improve our profitability significantly. I will now turn the call over to Prit, who will moderate the Q&A session.
spk02: Thanks, Sean. As a reminder to our viewers, if you do have any questions, you can submit them to the Q&A function at the bottom of your screen. Alternatively, if you're calling in today, you can email us at ir at builddirect.com. Again, that is ir at builddirect.com. We'll just wait momentarily for questions. First question, can you please expand on how the company plans to accelerate its revenue growth and ultimately drive towards profitability?
spk00: Sure, I'll take that one. You know, we first intend on expanding our brick and mortar operations. We have different different models that we'll be evaluating and pursuing. In addition to that, with our e-commerce business, we've been working through improving the unit economics and have improved drastically. And then from there, we'll be ramping that business up as well. We look at our e-commerce business in terms of geographic. Targeting and also adjacent categories, increasing digital spend are all possibilities that can continue to grow that business.
spk02: So it seems like a large part of the Q4 numbers were on driving efficiencies. Are there any other efficiencies that BuildDirect has identified?
spk00: The short answer is yes. We look at our model. We have a direct manufacturing procurement model that the team has built over many years and really refined and perfected. Using that model to drive through our brick and mortar locations is something that we started to do and really started to benefit from. mid last year, but we have a long road there to go in potential synergies to unlock along with providing services and things like that as well. So we have a pretty robust roadmap for additional synergies that unlock both gross margin opportunity as well as net new business opportunities across the network.
spk02: Okay, thank you. As a reminder to the audience, if you do have any questions, you can submit them to the Q&A function at the bottom of your screen. Alternatively, you can email us at ir at builddirect.com. Again, that's ir at builddirect.com. So the next question, can you please explain why BuildDirected tends to focus more on pro customers?
spk00: Sure. First off, the flooring industry – you know, it's really driven by the pro customer, the pro installer who's providing the installation. And when you think about the average foreign project, typically the product is coming with the installation and not the other way around. So first and foremost, it's a huge segment. There's repeat revenue, which requires, of course, less marketing spend as you really conserve that pro and provide to their specific needs, which our model definitely does. It's also a very underserved segment, in our opinion, where it's very difficult to compete for traditional retailers that are geared towards the homeowner customer. Things like our shipping programs, product availability and the quantities, even the products who carry themselves are all geared towards that pro customer and the contract work, as well as additional services that we provide to help them build out their businesses.
spk02: Thank you. Next audience question. What would you describe as BuildDirect's competitive advantage as compared to your competitors?
spk00: Yeah, our primary advantage is really our product and service profile that's built for serving the pro customers. When you think about what the pro needs when they're completing a large project, let's say, for example, 6,000 feet for a condo renovation project somewhere in the Midwest. traditionally with retail you have a model that's geared towards homeowners where they go into a store kind of you know choose product for a specific end use and then product gets shipped in for that one project to maybe the store that gets picked up so on so forth it's a very high touch homeowner centric individual centric model whereas our model is geared towards the pro so they have portals for free samples. We have materials direct shipped to the job site. We have very high touch shipping programs to make sure the materials are on site the day and the hour they actually need it. And also high service in the back end as well. Also along that process, there's other services that we provide help to the pro customer to drive that project. That's very difficult to provide when you're leveraging your standard retail associate kind of model from a big box store. So our main competitive advantage is we just focus and obsess on the pro customer and everything from our products we select to services to fulfillment, everything is geared towards them, which they do have unique needs outside of what a homeowner typically is looking for needs. Yep.
spk01: One quick add there, Sean, is I'd say our direct-to-manufacturing product sourcing is an advantage. I think a lot of our competitors have distributors that they're sourcing from within North America. We're sourcing directly from the manufacturers, usually outside of North America. So that gives us an advantage, a cost advantage, when bringing in products. So our margins increase. We do have margin gain with that direct-to-manufacturing model.
spk02: Thank you. As a reminder to our viewers, if you do have any questions, you can submit them to the Q&A function at the bottom of your screen. Alternatively, if you are calling in today, you can email us at ir at builddirect.com. Again, that is ir at builddirect.com. Changing, I guess, to the macro outlook, do you see any inflationary pressures heading into 2023? If so, are you able to pass on those costs?
spk00: Matt, your turn.
spk01: Yeah, I would say everything that we've seen so far through 2022, we've been able to pass the costs on to the customers. So to an extent, we've seen some benefit from that. increased costs as we are improving our margins and actually able to kind of generate more net income off of fewer sold units. So at this point, all of the inflation has been able to be passed on to the customer without impacting our overall sales.
spk00: Yeah, I would say in addition to that, I mean, there's two other factors. You know, the first one is the U.S. still has a housing shortage. And also with that, an aging housing stock that is still ripe for renovation. Along with that, we operate really serving the pro customer, which means we're not tied to a specific consumer segment. For example, home renovation or restoration or commercial, we serve all segments. And so as the market kind of ebbs and flows, there's a lot of opportunity there. And also in any given market, a lot of opportunity even outside of our current book of business as well. So we feel like we're in a good position to grow even through tougher times. But as to the inflationary pressure, as Matt mentioned, we also mitigate a good portion of that from our more aggressive direct procurement programs as well. we're not as exposed to as many fluctuations that happen when you're sourcing from North American based distributors as you are when you have a different buying model that's leaner and more direct.
spk02: Okay, thank you. Next question. Do you expect any challenges from competitors?
spk00: You know, I would say not really. And the main thought process there, when you're gearing a business, you have to have a customer intuitively in mind. And having a mixed bag of customers or a mixed focus creates dilution of strategy, dilution of offering, and potentially even dilution of efficacy. And for us, we have a very very rifle focus on, on the pro customer. And with that, so, you know, with everything we've done and everything we're doing, everything we plan to do is all geared towards that, that one segment. And with that, you know, the competition serves great other segments. There's a big industry, a lot of places you can kind of go and grow your business models, but we really feel like our model is the best for serving the pro customer. Anomaly channel is, type of experience is huge, especially when you're completing projects or outside of an immediate geographical area. And also every additional kind of brick we add to the wall here for our business, we're in a unique position to be able to make sure we tailor to that segment. So really don't see, although there's pieces, maybe pro type programs, at other retailers that offer some kind of incentive or something. For us, it's everything, even in locations we choose, how easy they are to get in and out of for a customer. And then on the e-commerce experience, the level of service is at the pro level, so the conversations you'll have are not typically – The style will come in only more in-depth conversations about the problem, the job site, local concerns, things like that. So there's a lot of depth there to that service.
spk02: Okay. Thank you. Next audience question. Can you tell us more about how BuildDirect's previous acquisitions have contributed to the growth of BuildDirect?
spk00: Sure. Sure. Matt, you want to go first?
spk01: Yeah. I think two acquisitions that we've made to date, FloorSource and Superb Flooring, I think benefit so far is we've seen increased revenues for both those acquisitions. And I think on the FloorSource side, the acquisition has improved profitability dramatically since the acquisition date. So I think we're seeing the benefit of the synergies, the direct sourcing that we – product sourcing that we have. And then so we're able to improve their revenues and improve their profitability. So I think those are positive signs on the two acquisitions we've made so far today.
spk00: Yeah, I'd add to that as well. As we're building out the – you know, that book of business – there's also been kind of synergies kind of across the, you know, across the network. So there's a lot of contracts that we were able to win by literally leveraging, you know, components from the different acquisitions together in order to provide a value offering that was pretty compelling, you know, whether it be a shipping model or whether it be a, you know, direct sourcing model, or in the case of, you know, of Superb, we do, you know, some, some large scale installation work. So, definitely it's been a great experience, but still a ton of opportunity to unlock, whether it be leveraging the brick and mortar locations for fulfillment services, for e-commerce, or just growing that footprint in a few other different ways. And so for us, though, when you look at potential M&A targets in the industry, we're here again, though, very much focused on You know, companies that have more of a long legacy, deep pro network relationships and things like that. And really from the two acquisitions, I would say the vision of really what the pro customer is and what they need became incredibly clear. Both businesses have very healthy relationships. amount of pro relationships and programs and focus. And that's really helped the overall vision company team focus on that holistically. Okay, thank you.
spk02: Next audience question, which US states does BuildDirect plan to expand its physical footprint and
spk00: At this point, we're not disclosing what states. I would say there's really not a state or an area that's not serviceable by our e-commerce business, and therefore it could be integrated in with the brick-and-mortar location. But at this point, there's no specific target list that we're disclosing.
spk02: Okay, thank you. For our audience, if you do have any questions, you can submit them to the Q&A function at the bottom of your Zoom screen. Alternatively, if you were calling in today, you can email us at ir at builddirect.com. Again, that's ir at builddirect.com. Okay, if there are no further questions, Sean, Matt, any last words before we end the call?
spk00: just want to say thanks for everyone for tuning in and following our story. And we're, yeah, we're going to have a, a lot of, you know, a lot of, you know, great things kind of coming through. So looking forward to our focus on the pro and profitability and on, you know, very clear direction and really enjoy working with the team every day. Appreciate everyone's hard work and, you know, for you guys following the company.
spk01: Yeah. Thanks. Thank you. Last comments would be just stay tuned. I think we've made a lot of big strides over the past six months and especially with Sean coming on board. And I think there's lots of activity we have in our pipeline as well. And I think from results so far, we've been able to kind of play out what we've expected in terms of profitability changes for the business and excited to see what happens going forward here.
spk02: Thank you, Sean and Matt. Thank you for your time today. For our viewers, thank you for tuning in to the Build Direct Q4 and full year 2022 earnings call. This call has been recorded. We will be sending out a recording for those in attendance today. Again, thank you, Sean. Thank you, Matt. And thank you to our viewers.
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