Emerge Commerce Ltd

XTSX:ECOM

Earnings Call Transcript 2022-Q1

[Operator]

Good morning, and welcome to the EMERGE Commerce First Quarter 2022 Results Conference Call. [Operator Instructions] This call is being recorded on Monday, May 30, 2022. Your host today are Ghassan Halazon, Founder and Chief Executive Officer; and Jonathan Leong, Chief Financial Officer.

Before we begin, I am required to provide the following statement respecting forward-looking information, which is made on behalf of EMERGE and all of its representatives on this call. Certain statements made on this call will contain forward-looking information. These forward-looking statements generally can be identified by the use of words such as intend, believe, could, expect, estimate, forecast, may and other words of similar meaning.

This forward-looking information is based on our opinions, estimates and assumptions in light of our experience and perception of historical trends, current conditions and expected future developments as well as other factors that we currently believe are appropriate and reasonable in these circumstances. Actual results could differ materially from a conclusion, forecast, expectations, beliefs or projections in the forward-looking information. Certain material factors and assumptions were applied in drawing any conclusion or making a forecast or projection as reflected in the forward-looking information.

We caution investors not to rely on the forward-looking information. Additional information about the material factors that could cause actual results to differ materially from the conclusions, forecasts or projections in the forward-looking information and material factors or assumptions that were applied in drawing a conclusion or making a forecast or projection as reflected in the forward-looking information are contained in the EMERGE's filings with Canadian provincial securities regulators. During today's call, all figures in Canadian dollars unless otherwise stated.

And with that, I'd like to turn the call over to Mr. Ghassan Halazon, Founder and CEO.

[Ghassan Halazon, executive]

Thank you very much. Good morning, everyone. We appreciate you taking the time to participate on our first quarter results conference call. Joining me today is Jonathan Leong, our CFO.

This morning, I'll walk through EMERGE's first full quarter with all brands included and share some insights on our business as well as our key priorities for the balance of 2022. Following my remarks, Jonathan will provide further details on our financial results, and we will conclude by opening up the call to analysts for questions.

This morning, we reported record Q1 results. For the first time in company history, gross merchandise sales, or GMS, eclipsed $30 million this quarter, an increase of 166% from $11.4 million in Q1 2021. Q1 revenue grew to a record $15.8 million compared to $7.1 million, an increase of 123%.

Prior to this quarter, our previous record revenue was $14.9 million established in Q4 2021. Q1 adjusted EBITDA grew to $1.1 million from $0.27 million, an increase of 297%. This marks our second consecutive quarter with adjusted EBITDA exceeding $1 million.

Q1 2022 marks the company's first full quarter with the BattlBox Group and WholesalePet under EMERGE ownership and demonstrates the power and resilience of our platform even as Q1 is a seasonal quarter for some of our verticals. During the first quarter, the business benefited from a diversified e-commerce portfolio and a multifaceted customer acquisition strategy in the face of the volatile digital advertising landscape.

Q1 is traditionally a seasonal month for a number of EMERGE's verticals following the peak holiday shopping season in Q4. Notwithstanding, the company was once again able to achieve excellent overall growth. Based on Q1 results, revenue run rate would be around $63 million.

Moving on to M&A. The current pipeline of M&A opportunities is broader and deeper than at any point in our history, with multiple signed letters of intent, including tuck-in acquisitions that offer a deeper level of potential synergies as well as some potential anchor businesses in new verticals.

Driving profitability by extracting synergies and unlocking savings is management's top operational focus for the balance of 2022, and we are keen to drive upside across the portfolio. The company anticipates the recent market climate could result in more attractive acquisition opportunities and pricing as entrepreneurs are looking for alternatives to scale in a cost-effective manner, which aligns with EMERGE's disciplined acquisition strategy.

As an indication, at least 2 of our signed LOIs have been secured at reduced upfront cash to EBITDA multiples compared to our historic averages. While the capital markets have placed downward pressure on valuations across most stocks, particularly technology and e-commerce stocks, we believe EMERGE remains well positioned to continue to leverage our proven acquisition formula and plan to only close acquisitions that can immediately be accretive and ultimately cash flow positive.

To date, the company has successfully leveraged its existing $25 million debt facility to finance acquisitions. In March 2022, EMERGE entered into an amendment with its existing lender, providing the company with an option to extend its debt facility to June 2023. EMERGE is currently advancing its plans to refinance its current debt facility to provide additional capital for upcoming acquisitions, working capital and improved pricing. The company anticipates refinancing and upsizing the debt facility, paving the way for additional acquisitions, while minimizing dilution to shareholders.

With accretive acquisition opportunities at attractive valuations, having received multiple acquisition financing proposals and coupled with our diversified portfolio of high-quality brands, we believe EMERGE is well positioned to thrive during these ever-changing times and unlock our next phase of profitable growth.

Since our go public in December 2020, we have continued to seek out world-class talent across our team, Board and advisers, adding the necessary bench strength to take EMERGE to the next level. Veteran management and Board members from top Canadian companies, such as Dye & Durham and Well Health, have joined the mission to make EMERGE the preeminent portfolio in e-commerce.

Earlier in Q1, we announced the addition of Harish Consul from Ocgrow Ventures as our strategic adviser. Ocgrow is a world-class long-term e-commerce investor counting global juggernauts like Amazon, Shopify and Coupang as some of their early investments. Today, we are pleased to share that the EMERGE Board of Directors has nominated Ian McKinnon to EMERGE as Board pending election at the company's upcoming AGM on June 28.

Ian has a long-standing track record as a director and operator of numerous public and private technology companies since 2002, perhaps none more relevant to EMERGE than his 12 years on the Board of Constellation Software, one of the world's most successful growth by acquisition businesses and one of Canada's most valuable companies. Ian served on the Board of Constellation Software from 2006 to 2018 during a time of enormous growth and prosperity.

We welcome his partnership and strongly believe it to be in the best interest of shareholders to have him join the Board as our third independent director. Moving to the remainder of the year. EMERGE's outlook for 2022 remains resilient despite continued headwinds facing businesses globally today. In the wake of challenging macro environment, management's operational priority for the balance of the year is to optimize for profitability and cash flow, including through synergies and cost savings where applicable.

To wrap up, I would like to sincerely thank and congratulate our team, Board and trusted partners across Canada and the U.S. on a tremendous first full quarter under one roof and in the process driving these record results and rising to the challenge in the face of these unusual times.

I will now turn the call over to Jonathan for a review of our financial results.

[Jonathan Leong, executive]

Thanks, Ghassan. Good morning, everyone. Q1 is generally a slower quarter for a number of our verticals. However, this is -- this one marks our first full quarter with BattlBox and WholesalePet under EMERGE. So our gross merchandise sales, or GMS, for the first quarter increased 166% to a record $30.2 million, up from $11.4 million in Q1 2021.

GMS is a non-GAAP measure and represents the total dollar value of customer purchases of goods and services through our brands, excluding applicable taxes and net of discounts and refunds.

As a recap for our newer acquisitions, we report revenue on a gross basis for BattlBox and CarnivoreClub, but on a net basis for WholesalePet. For the first quarter, our revenue increased to $15.8 million, up 123% from $7.1 million in Q1 2021. This was driven by the acquisition of BattlBox and WholesalePet.

Gross profit for the quarter increased to $6.3 million compared to $3.1 million in the comparative period, an increase of 101% with gross margins at around 40%. The net loss for the quarter was $2.8 million compared to a net loss of $2 million for the same quarter in the prior year.

The increased net loss for the period is primarily due to higher amortization and depreciation expense of intangible assets valued as part of our acquisition of truLOCAL, BattlBox and WholesalePet as well as the remeasurement on contingent consideration recorded in 2022 compared to our first quarter in 2021.

The company reported adjusted EBITDA for the first quarter of $1.1 million compared to $0.3 million in Q1 2021. As Ghassan mentioned, this marks the second straight quarter of adjusted EBITDA greater than $1 million, and it also is our eighth quarter of positive adjusted EBITDA in our last 9 quarters.

We are pleased with the results this quarter, which demonstrate the impact of our latest acquisitions and look forward to continuing to execute on our business and acquisition strategy in 2022.

I will now pass it back to Ghassan for some closing comments.

[Ghassan Halazon, executive]

Thanks, Jonathan. In closing, we continue to make tremendous strides in scaling our business and graduating it from a marginally profitable business to a meaningfully profitable one, with a diversified portfolio of category-defining e-commerce brands.

Further to that, we are off to an excellent start in 2022 and plan to operate with operational rigor through 2022 and beyond. We believe a disciplined capital allocation approach and an inherently bottom line-focused playbook will come handy during this macro climate.

Our aspiration remains unchanged, for EMERGE to rise as North America's preeminent acquirer of high-performing niche e-commerce brands, allowing acquired companies to take advantage of the benefits that come with our collective scale unavailable to any individual bootstrap e-commerce company with limited resources.

This concludes our prepared remarks. Operator, please open the line for questions.

[Operator]

[Operator Instructions] Your first question comes from Aravinda Galappatthige with Canaccord Genuity.

[Aravinda Galappatthige, analyst]

I guess, given the sort of the current conditions, I was wondering if you can just talk to most of your businesses as a subscription, sort of how, in particular, some of the newer businesses you acquired in terms of BattlBox and CarnivoreClub and also WSP holding up in terms of sort of the recurring revenue components.

What sort of changes are you seeing in that business? And secondly, I guess, for Jonathan, just to kind of go back to, I know that this is a back half of the year. We're going to see some of these deferred considerations hit. It looks like it might be a little over $3 million in deferred considerations.

But I wanted to get an update in terms of the contingent earn-outs because obviously, expectations have changed and the amounts could have changed a little bit. So I just wanted some additional color on that.

[Ghassan Halazon, executive]

Aravinda appreciate the questions there. So I would comment here just to kind of give you a quick glimpse of what we're seeing across some of these recent acquisitions as you've requested. Starting with our most recent one, WholesalePet, no secret, we're quite, quite pleased with the way that's going.

As I've mentioned in prior calls and through other announcements that we've made, the performance through its first full quarter, including through here, if you look at Q1 as well, and obviously, still through -- not done with Q2, we're quite pleased with WholesalePet. It's been on plan.

I think we've seen that level of stickiness that really sort of attracted us to the asset to begin with the long-term customer tenures, in some cases, 10-year tenures on some of these members. And of course, WholesalePet, as a marketplace, does not carry any inventory, does not have any risk, so to speak, it's sitting in the middle between long-standing merchants and vendors.

So that business has continued to grow very, very well and continued to be extremely cash flow positive and consistent. The prior acquisition with BattlBox, as we've mentioned, was a big reason why we saw the successful results that we did in Q4 from a profitability perspective. The business continues to be strong and profitable, I think from a revenue perspective.

They do have certain exposure to supply chains, China and so forth. Now that being said, the team has been extremely agile and creative with ensuring margin improvements and enhancements through everything from price increases to logistical savings, to win back campaigns. So they've done a tremendous job of protecting the bottom line.

I think from a revenue perspective, they had a tough comp year heading in with, if you recall, the Netflix boost of -- influx of members that came through their Netflix show late 2020 and into '21 that supported '21. So we're expecting sort of a neutral to very moderate growth from a top line perspective, but we're expecting profitability, it is still very much our goal to achieve the levels of profitability that we had planned for BattlBox. And again, this is a year where profitability is king and cash flow is king. So that's BattlBox.

I think truLOCAL, as we've said, is a multifaceted asset. We've jumped into different areas. We still feel confident in that the overall picture is after having stabilized that $20 million-plus last year, i.e. captured most of the pandemic lift and gains. We've been able to capture it last year. This year, we're looking at some sort of organic growth, as we said, low double digit is the goal.

We still think that's plausible, but there's obviously a number of macro factors, but it had a very good overall Q1 from a pure revenue versus last year. So those are some background -- that some background on our sort of 3 assets that we've acquired. Jonathan, do you want to touch on the deferred revenue? Deferred consideration?

[Jonathan Leong, executive]

Deferred, yes? So yes, in terms of deferred consideration, as you noted, it's just over $3 million for 2021, with truLOCAL being at $1.5 million for 2022 as well as BattlBox at USD 0.5 million in 2022 and WholesalePet at USD 1 million in 2022. In terms of the earn-out side, kind of touching on what Ghassan was mentioning, what we're looking for at truLOCAL and BattlBox and WholesalePet, they're all coming off pretty high growth over the last pandemic years.

And so it's a tough comparable for them. And the way we structure our earn-outs is essentially we look to have the targets grow 10% to 15%, both on the revenue and EBITDA growth side. So generally speaking, if we look back at truLOCAL, we're actually finding that we're looking to maintain our revenue and protecting our EBITDA there.

It's not looking like that 15% growth may be there. So generally speaking, from a truLOCAL perspective, we don't see at this point them hitting their earn-outs. But from a BattlBox and WholesalePet perspective, again, it's a little bit early to tell for them.

We've seen some good growth there. But with these challenging times, we're definitely awaiting and seeing and watching.

[Ghassan Halazon, executive]

And also just to add, wanted a bit of color on truLOCAL, part of sort of the I suppose explosive growth that they saw from in and around $8 million back in 2019 all the way to $20 million. The way these earn-outs were structured, for example, for year 2, Aravinda, as you might recall, specifically for truLOCAL, there was an expectation or sort of a high marker at $30 million being the main earn-out level in revenue that they would achieve. So that's what Jonathan is referring to.

We don't expect $30 million out of truLOCAL at this point, but we still do expect decent organic growth in and around 10% was the target, I brought up on last call that we're loosely looking at. And I say loosely partly because there are multiple divisions on the B2B side, the corporate gifting, the trading, some of these things that are starting to move.

So generally, that's kind of the focus. But obviously, our primary attention is zoomed in on sort of the profitability side. That's our priority right now.

[Operator]

Your next question comes from Andy Nguyen with Raymond James.

[Andy Nguyen, analyst]

Congratulations on a great quarter. First off, just wanted to touch on you mentioned there is some headwind with the e-commerce vertical. Can you give us some more color on which vertical was mainly impacting the quarter?

[Ghassan Halazon, executive]

Yes. Thank you, Andy, for the question. We mentioned that as a sort of a macro headwind that e-commerce companies typically are going through. I think generally, as it pertains to EMERGE, the diversified nature of our portfolio has allowed us to zig and zag, if you will.

There's certainly -- we've talked a bit about, as I said, WholesalePet is going really excellent. And just as a reminder and maybe just to connect some dots with, for folks perhaps listening for the first time, WholesalePet last year or give or take, let's call it, is sort of a $50 million plus gross sales business out of approximately the $120 million or so in run rate, if you look at Q1.

So there's a sizable portion of the business, and it's going pretty much exactly as planned. Again, despite a bit of turbulence when it comes to their suppliers or their merchant partners with regards to supply chain, but that's not there immediate.

I guess, focus given they sit in the middle as a platform. So that's going quite well. As I said, I mentioned BattlBox does have some supply chain aspects to deal with, for example, prices of containers, things of that nature have gone up. And of course, they've been very balanced with it.

Same thing with truLOCAL. We talked a bit about the increase in the price of meat. Again, truLOCAL being a preeminent brand and the market leader in meat subscriptions in Canada. They've been able to increase prices, and with really no effect on churn. So that's an example of them fending off higher prices.

And then you go back to UnderPar in the golf side of the business, which actually -- again, arguably the most impacted has been golf end and experiences at EMERGE. And we'll note that what we're seeing from golf in Q2 here in Canada, which is about half of our business, is sort of a recovery of sorts where merchants, given the higher inflation, given the travel has opened up and a lot of consumers are traveling, we are seeing quite big gains in Q2, for example, in Canada.

For the first time, we saw really good signs in Q4. Q1 is very quiet for golf because of the snow season here, obviously. But Q2, we're starting to see merchants coming back to the platform in a very interesting way. But I'll note that the comp isn't very fair because last Q2, there was a lot of lockdowns in golf in Canada, and so that business was really light. So -- but we are seeing traction from merchants coming back on the platform's standpoint, but that's...

So collectively, maybe I've summed up the different types of headwinds as you know, in this business environment, there's headwinds everywhere for everyone almost. But we feel like we've fended them off quite nicely and the diversified portfolio really gives us that room.

And then lastly, I'll also say on truLOCAL side, again that regional and local supply chain defends us from the concept of being held captive by the issues coming from supply chain in China.

[Andy Nguyen, analyst]

Good. And my second question I want to touch on the organic growth, which one of the holding company -- portfolio company was the strongest in terms of organic growth for the quarter. And what's over-go-positive in the quarter as well?

[Ghassan Halazon, executive]

Yes. So we don't officially break out our units vis-a-vis organic growth. Of course, our goal is to collectively have decent organic growth for the overall portfolio. As we said, there's different quarters, different brands rise to the occasion. And again, different macro circumstances also impact these verticals.

I will highlight that, as I said, WholesalePet has been going great. I'll highlight actually, interestingly enough, again, with truLOCAL with the different initiatives that we've had, also had a decent quarter from an organic growth perspective. And for example, with WagJag, which is a business we don't talk about a lot, which was hit hard to, given its experiences business, Q1 is actually a strong quarter there given some of the Omicron impact.

Ultimately, we were able to sell a vast array of essentials and masks again back in Q1, which was helpful there as well. So different parts of the equation UnderPar as we say, Q1 isn't all that relevant especially in Canada, where sort of its snow season. And then as I said, BattlBox was more moderate on the revenue side, but more focused on the profit side.

So this is a bit of a glimpse as much as I can give you right now without us officially breaking anything out.

[Operator]

Your next question comes from Martin Toner with ATB Capital Markets.

[Martin Toner, analyst]

Congrats on the good quarter. You mentioned the changing advertising lineup, the changing advertising environment. Can you talk -- so I mean, and we heard that, these changes are particularly challenging for smaller merchants.

Can you talk a little bit about the impact that's having on your brands? What you're doing about it and how this -- how your ability to help small brands in this environment kind of plays to your strategy?

[Ghassan Halazon, executive]

Excellent question, Martin. Yes, absolutely, it's something we spend a lot of time on. And I think a lot of e-commerce companies have to be very careful and crafty with their customer acquisition strategies.

Now let me first point out just so we're also clear and detail oriented on what we mean when we say the changing landscape in advertising, specifically digital advertising. No secret, Apple's iOS privacy changes were really the instigator here, that ultimately wiped out hundreds of billions of dollars' worth of Facebook or Meta, the parent company's market cap back in Q1, when those changes pretty much made Facebook and Instagram a much more challenging environment for customer acquisition.

Because of the lack of visibility that came with these privacy settings as consumers or as many consumers opted to no longer be targeted in certain ways, suddenly e-commerce companies and other advertisers were no longer able to reach exactly who they wanted to reach as efficiently as they had in the past.

So interestingly enough, the big thing for us and all of our -- certainly, this was some sort of headwind we've had to navigate and we continue to navigate. Importantly, though, to highlight is that EMERGE has had a diversified customer acquisition strategy that spanned way beyond Facebook and Instagram. And I think that's something that the team prides itself on having seen early and ensured we do have various funnels.

So first and foremost, let's recognize the e-mail program that we have. We have a couple of million subscribers overall. And some are more active than others, obviously. But that's something that allows us to reach our customers directly. So that was a big win, having such a strong focus on e-mail, contrary to popular belief e-mail is far from dead than, in fact, incredibly effective as a channel for us and for our brands.

Second, we also chose to acquire WholesalePet in Q4, in part because we view that B2B platform and the nature of their setup, which is to say, lacks marketing need. This is a business that has not spent any dollars, almost any dollars, I should say, on Facebook or Google or the like.

So they are pretty much immune what's happening. And that's approximately, as I mentioned, $50 million out of the $120 million sort of run rate. So almost, call it, 40% plus of our sales do not require the traditional -- is not susceptible to the traditional consumer marketing changing environment.

And then I'll say we have initiatives and approaches like with, for example, BattlBox, which has made great waves on TikTok, which is viewed as the emerging social network these days. And the ad program is still light there or still new rather, but they have almost 3 million likes on TikTok. They started early. They have a great brand and enthusiast propensity there.

And truLOCAL has been doing a lot of gym partnerships and influencers and things like that. So it's been -- truthfully, it's been one of those exercises that, I think, has tested us and other e-commerce companies. And thankfully, we were ready for it from a diversification perspective. And as you saw in Q1, our revenues held up quite nicely in this environment.

[Operator]

There are no further questions at this time. Mr. Halazon, you may proceed.

[Ghassan Halazon, executive]

Great. Thank you very much for joining us today and for your continued interest in EMERGE Commerce. We look forward to reporting on our progress throughout 2022 and beyond. Have a good day, everyone. Thank you.

[Operator]

Ladies and gentlemen, this concludes your conference call for today. We thank you for participating, and ask that you please disconnect your lines.