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 BILD, B-I-L-D. My name is Prit Singh. 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 US 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@builddirect.com. Again, that is ir@builddirect.com. Our presenters today will be the CEO of BuildDirect, Shawn Wilson, and CFO of BuildDirect, Matt Alexander. With that out of the way, I will now turn the conference call over to Shawn Wilson, CEO of BuildDirect.
Thank you, Prit. For first-time viewers, BuildDirect is a leading North American omnichannel 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 BuildDirect, 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?
Thanks, Shawn. I'll now speak to the key financial highlights for the year ended December 31st, 2022. As noted by Shawn, I'm pleased to report that we achieved full year revenue of $92 million, an increase of 1.3% or 1.6% year-over-year. Driving this growth was a full year revenue impact of our Superb Flooring acquisition, which occurred in October or 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 positive $0.4 million, an increase of $3.6 million year-over-year. 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 Shawn Wilson, who will go over the operational highlights of the company.
Thanks, Matt. As a reminder to our audience, BuildDirect 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. We believe there's significant market opportunity for us to capture in this industry given our omnichannel strategy, which includes both e-commerce and brick-and-mortar operations. Since my employment as CEO in late September 2022, I developed several initiatives with a focus on four key areas. The first, increasing gross margins, the second, reducing overhead cost, the third, enhancing organic growth, and lastly, reallocating our resources more efficiently. As for increasing gross margins, we first redesigned our retail pricing strategy. 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 the 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 continue 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. We have 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.
Thanks, Shawn. 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@builddirect.com. Again, that is ir@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?
Sure, I'll take that one. You know, we first intend on expanding our brick-and-mortar operations. We have 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. 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.
It seems like a large part of the Q4 numbers were on driving efficiencies. Are there any other efficiencies that BuildDirect has identified?
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. We have a long road there to go and potential synergies to unlock along with providing services and things like that as well. 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.
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@BuildDirect.com. Again, that's ir@BuildDirect.com. The next question, can you please explain why BuildDirect tends to focus more on pro customers?
Sure. You know, first off, the flooring industry, you know, is really driven by the pro customer or the pro installer who's providing the installation. When you think about the average flooring project, you know, typically the product is coming with the installation and not the other way around. First and foremost, it's a huge segment. There's repeat revenue, which requires, of course, less marketing spend as you really can serve that pro and provide to their specific needs, which our model, it 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 we carry themselves are all geared towards that pro customer and that contract work, as well as additional services that we provide to help them build out their businesses.
Thank you. next audience question: What would you describe as BuildDirect's, competitive advantage as compared to your competitors?
Our primary advantage is our really our product and service profile that's built for serving the pro customer. When you think about what the you know, 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 and so forth. It's a very high touch, homeowner-centric, individual-centric model, whereas our model is geared towards the pro. They have portals for free samples. We have materials direct shipped to the job site.
We have very high touch, shipping programs, 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, you know, 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. 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 or needs.
Yeah. One quick add there, Shawn, 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. That gives us an advantage, a cost advantage when bringing in products or our margins. We do have margin gain with that direct to manufacturing model.
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@builddirect.com. Again, that is ir@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?
Matt, you wanna go?
I would say everything that we've seen so far through 2022, we've been able to pass the costs on to the customers. To an extent, we've seen some benefit from increased costs as we are improving our margins and then actually able to kind of generate more net income off a few fewer sold units. At this point, all of the inflation has been able to be passed on to the customer without impacting our overall sales.
Yeah. I'd say in addition to that, I mean, there's other, you know, two other factors. you know, the first one is, you know, the US still has a housing shortage. Also with that, an aging housing stock that is still, you know, ripe for renovation. Along with that, we, you know, we operate really serving the pro customer, which means we're not tied to a specific consumer segment. For example, you know, home renovation or restoration or commercial. We serve all segments. As the market kind of ebbs and flows, there's a lot of opportunity. Also in any given market, a lot of opportunity even outside of our current book of business as well.
We feel like we're in a good position to grow even through tougher times. You know, 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, 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.
Okay, thank you. Next question. Do you expect any challenges from competitors?
You know, I would say not really. The main thought process there, when you're gearing a business, you have to have a customer intuitively in mind. Having a mixed bag of customers or a mixed focus creates dilution of strategy, dilution of offering, and potentially even dilution of efficacy. For us, we have a very, very rightful focus on the pro customer, and with that, so, you know, with that everything we've done and everything we're doing, everything we plan to do is all geared towards that one segment. With that, you know, the competition serves great other segments. There's a, you know, big industry, a lot of places you can kind of go and grow your business models.
We really feel like our model is the best for serving the pro customer. An omnichannel type of experience is huge, especially when you're completing projects or outside of an immediate geographical area. Every additional kind of, you know, brick we add to the wall here for, you know, for our business, we're in a unique position to be able to make sure we tailor to that segment. Really don't see, although there's bit pieces, you know, maybe pro type programs at other retailers that offer, you know, some kind of incentive or something. You know, for us, it's everything. Even in locations we choose, how easy they are to get in and out of, pro customer.
On the commerce experience, the level of service is at the pro level, so the conversations you'll have are not typically the colors, the style come in only be more in-depth conversations about the problem, the job site, local concerns, things like that. There's a lot of, a lot of depth there to that service.
Okay. Thank you. Next audience question: Can you tell us more about how BuildDirect's previous acquisitions have contributed to the growth of BuildDirect?
Sure. Matt, you wanna grab that one first?
Yeah. I think, two acquisitions that we've made to date, FloorSource and Superb Flooring, I think benefits so far is we've seen increased revenues from both those acquisitions. I think on the FloorSource side, the acquisition has been improved profitability dramatically since the acquisition date. I think we're seeing the benefit of the synergies, the direct sourcing that we product sourcing that we have. We're able to improve their revenues and improve their profitability. I think those are positive signs on the two acquisitions we've made so far to date.
Yeah. No, I'd add to that as well. As we're building out the kind of, you know, that book of business, there's also been kind of synergies kind of across the, you know, across the network. 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 large scale installation work.
You know, definitely has been great experience, but still a ton of opportunity to, you know, to unlock, you know, whether it be leveraging the brick-and-mortar locations for fulfillment services, for e-commerce, or, you know, just growing that footprint in a few other different ways. For us, though, when you look at, you know, potential M&A targets in the industry, we're here again, though, you know, very much focused on, you know, companies that have, you know, more of a long legacy, deep pro network relationships and things like that. 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 amount of relationships and programs and focus, and that's really helped the overall vision company team focus on that holistically.
Okay. Thank you. Next audience question: Which U.S. states does BuildDirect plan to expand its physical footprint in?
You know, at this point, we're not disclosing what states. I would say there's really not, you know, there's really not a state or an area that's not serviceable by our e-commerce business, and therefore could be integrated in with the brick-and-mortar location. At this point, there's no specific target list that we're disclosing.
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 are calling in today, you can email us at ir@BuildDirect.com. Again, that's ir@BuildDirect.com. Okay, if there are no other further questions, Shawn, Matt, any last words, before we end the call?
Just wanna say thanks, everyone, for tuning in and following our story. We're, yeah, we're gonna have 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.
Yeah. Thanks. I think 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 Shawn coming on board. I think there's lots of activity we have in our pipeline as well. 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.
Thank you. Shawn and Matt, thank you for your time today. For our viewers, thank you for tuning in to the BuildDirect 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, Shawn, thank you, Matt, and thank you to our viewers.