Emerge Commerce Ltd

XTSX:ECOM

Earnings Call Transcript 2024-Q1

[Operator]

Good morning, and welcome to the Emerge Commerce First Quarter 2024 Results Conference Call. [Operator Instructions] This call is being recorded on May 28, 2024. Your hosts today are Ghassan Halazon, Founder and Chief Executive Officer; and Kyle Burt-Gerrans, 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 the circumstances.

Actual results could differ materially from a conclusion, forecast, expectations, belief or projection and the forward-looking information. Certain material factors and assumptions were applied in drawing a 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 conclusion, forecast or projection 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 Emerge's filings with Canadian provincial securities regulators.

During today's call, all figures are 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 join our Q1 2024 results conference call. Joining me today is Kyle Burt-Gerrans, our CFO. This is our first earnings call since reporting Q3 last year as we were undergoing a CFO transition in Q4. We are excited to resume our quarterly conference call and hope you find it informative. This morning, I will first walk through Emerge's Q1 results and share some insights on our business as well as our key priorities for the balance of 2024. Following my remarks, Kyle will provide further details on our financial results before we open up the call to analysts for questions.

Q1 2024 is our first quarter reporting based on our streamlined go-forward business, which includes our Grocery & Golf verticals, following the sale of various non-core businesses to pay down debt during most of 2023 and early 2024. In many ways, Q1 was a crucial setup quarter for our now more focused business.

Let's dive in. First, we are pleased to report that our gross merchandise sales, or GMS, for short, which captures the actual sales volume being transacted across our sites was in line with Q1 2023 GMS at approximately $7.6 million, following a multiyear decline from the artificially high peak pandemic levels. We view GMS as a key figure that informs us on our ability to capture consumer market share or wallet.

GMS is also a leading indicator of future deferred revenue in certain instances where revenue is recognized at time of shipment or voucher redemption, which may occur in later quarters. Worth noting, GMS is trending upwards through Q2 to date, forming the basis for our return to growth plan in 2024, which remains a top priority this year. Second, revenue. We recorded revenue of $5 million in Q1 '24 compared to $5.3 million in Q1 2023, down approximately 6%. Excluding Carnivore Club, our smallest brand and a business that is actively eliminating loss-making revenue to optimize profitability, Emerge's revenue was in line with Q1 2023 revenue.

While flat year-over-year revenue would be a meaningful improvement over our negative organic growth trend in recent years, we remain extremely focused and optimistic that we can drive positive organic growth results for the overall business in 2024. Much like with GMS, we are seeing strong revenue trends in Q2, in part because of the deferred revenue from GMS that occurred in Q1. Given Q1 is our first quarter with a go-forward business of Grocery & Golf verticals only, investors can now extrapolate a directional annual revenue run rate baseline for the business. Noting the seasonal nature of our businesses at different times of the year.

Beyond the top line, the team's efforts in Q1 translated into clear year-over-year gains across gross profit, gross margin, adjusted EBITDA, net income and cash flow from continuing operations. We drove more gross profit in dollar terms as well as a higher gross margin. Gross profit increased by more than 10% to $2.1 million versus $2 million in Q1 '23. These gross margin improvements reflect--gross margin improved to 43% compared to 38% in Q1 '23. These gross margin improvements reflect a series of initiatives across our businesses, including price increases, renegotiated vendor costs, and increased service fees among other items.

Next, we saw a drastic improvement in adjusted EBITDA, which was minus $99,000 in Q1 versus minus $526,000 in the prior period. We can attribute this improvement to both the aforementioned progress on gross margin as well as reduced overheads and more efficient marketing efforts. With respect to overhead expenses, we are making measurable progress on reducing expenses given our more streamlined operations that are now exclusively centered on Grocery & Golf verticals. These cost reductions were partly reflected in our much improved profitability in Q1, with additional savings being actioned in Q2 as well. The team's operational improvements ultimately culminated in Emerge recording positive net income from continuing operations of $9,000 compared to a net loss of minus $2.4 million.

Next up, I will offer some commentary at the brand level. To recap, for any first-time attendees, Emerge currently owns 4 brands across 2 main verticals, Grocery & Golf in Canada and the U.S., namely truLOCAL, Carnivore Club, UnderPar and JustGolfStuff. truLOCAL, our premium meat subscription service and Emerge's largest business by revenue, continues to see strong net customer inflows, a leading indicator of future deferred revenue, increased average order value, coupled with reduced overhead expenses. The direct-to-consumer subscription business is showing encouraging signs, including in Q2 to date, with new initiative revenue lines in the works as well to accelerate organic growth.

We believe truLOCAL presents an outsized strategic opportunity for Emerge, and we view it as an anchor asset that we can build around in the food tech space at large, where we have big ambitions. We take inspiration from the $500 million market leader in the U.S. and believe the truLOCAL opportunity is one worth doubling down on. Our Golf business includes UnderPar, our golf experiences brand and JustGolfStuff, our golf products brand.

The Golf division exceeded expectations in Q1, driving meaningfully improved top line, margins and more efficient marketing spend. We believe our discount centric golf business is beginning to gain from the weakening macro climate as more golf vendors return to the platform and offer more enticing offers to bring customers through the door. While supply is not yet back to peak levels, we are encouraged by the division's progress, including year-over-year organic growth in Q1.

Carnivore Club, our artisanal meat brand and Emerge's smallest business by revenue, is being optimized for profitability, which includes active elimination of loss-making revenue. At this time, we believe these revenue cleanup efforts are mostly complete, and we can expect Carnivore Club to have a less pronounced impact on revenue discrepancies for the balance of the year. As mentioned earlier, Emerge's Q1 2024 revenue would have been approximately in line with Q1 '23 once Carnivore Club revenue is excluded. All in all, we are making terrific progress from top line to bottom line, notably including positive net income in Q1.

To sum up, we have a valuable e-commerce brand portfolio, including multiple profitable businesses that deserve more attention and we believe our recent streamlining efforts will help us focus on our most compelling opportunities.

Now for some strategic and debt-related updates. In January '24, Emerge completed the sale of WSP or WholesalePet, the tiny fund for aggregate gross cash proceeds of USD 9.25 million or approximately CAD 12.5 million, subject to certain closing adjustments and obligations. The sale of WSP enabled us to make our biggest dent to date with our debt reduction efforts as we utilized $10 million of the transaction proceeds towards debt pay down. Our senior debt facility now sits at $5.85 million, down from $25 million a year ago. In addition, we entered into an amended facility with our existing lender, offering us an up to 24-month term, inclusive of a 6-month extension, which would bring the maturity to January 31, 2026.

We remain in good standing with our existing lender, which we have worked with since November 2019. In recent years, the rising interest rate climate has resulted in significant cash flow drain to Emerge. Our major debt reduction efforts, coupled with the widely anticipated interest rate cuts in 2024 and 2025 are expected to result in substantial interest savings. In turn, we expect a material positive impact on our cash flows.

In another important step during Q2 2024, Emerge managed to successfully amend the convertible note, receiving 100% support from debenture note holders, present in person or by proxy at the meeting of the debenture holders. The completion of the redemption under the amended terms effectively immediately reduced our debt by $1.4 million, with approximately 50% of the debentures converting to equity on the redemption date at the agreed $0.135 conversion price per share. The amendment, the redemption and the conversion of interest are also expected to save emerge approximately $140,000 in annualized interest expense during the extended term of the debentures, with the debentures now being due in November '26 instead of November '25. The debentures now have an adjusted conversion price of $0.135 in turn, increasing the possibility of further debt reduction down the line.

We appreciate the strong vote of confidence and unwavering support displayed by our holders in agreeing to restructure the debenture in a manner that we believe is in the best long-term interest of all stakeholders. Inclusive of the reduced senior credit facility and the reduced convertible note, Emerge's net debt position after subtracting approximate cash on hand is now effectively $4.7 million, down from $27.8 million combined originally at their peak.

Finally, the company's top priorities in the near term are to drive organic growth, extract further operational efficiencies given our streamlined operations and opportunistically explore avenues to further pay down debt and reduce interest expense.

To wrap up, I would like to sincerely thank our team, board and trusted partners across North America for everyone's hard work as we execute on our plan to pave the way for our next chapter together.

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

[Kyle Burt-Gerrans, executive]

Thanks, Ghassan. Good morning, everyone. With respect to WholesalePet, please note that it has been reflected as discontinued operations in our financial savings for this quarter, as prior periods also reclassified to account for this. Our gross merchandise sales or GMS for the quarter was just under $7.65 million, slightly ahead of prior year at $7.61 million. As a reminder, GMS is a non-GAAP measure and represents the total dollar value of customer purchases of goods and services through our brands, excluding affordable taxes and net of discounts and refunds. Q1 revenue was $5 million versus $5.3 million in Q1 2023. Gross profit for the quarter increased to $2.1 million versus $2 million in the prior year. Additionally, gross margins increased to 42.9% from 37.6% as we continue to review and execute on a variety of initiatives, aimed at maintaining or increasing gross margins.

Net income from continuing operations for Q1 was $9,000 compared to a loss of $2.4 million for the same period in the prior year. The positive net income this year over last year is mainly due to lower amortization and depreciation, lower finance costs and favorable foreign exchange. Net income overall was $0.5 million compared to a loss of $2.1 million last year. Positive net income was largely influenced by positive income from discontinued operations related to the sale of WholesalePet. Adjusted EBITDA losses were $99,000 versus $526,000 in 2023, this decrease is mainly attributable to stronger gross margin performance as previously noted, coupled with reductions to SG&A through efficiencies realized during the quarter and a continued focus on improving profitability and cash flow.

Lastly, cash outflows from continuing operations were $0.38 million compared to outflows of $0.75 million in the prior year. Q1 outflows are generally seasonal timing following our Q4 peak season activities. Cash balance at the end of Q1 was $2.6 million.

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

[Ghassan Halazon, executive]

Thanks, Kyle. In closing, Q1 represented a critical refresh juncture for Emerge with streamlined operations, significant debt paydown and a renewed up to 24-month deal with our supportive lender. We believe our streamlined operations and focused approach are starting to pay off, and we can see that in our Q1 results from our strengthening top line to our much improved gross margin, adjusted EBITDA and positive net income. In '23 and early 2024, Emerge has taken multiple key steps to strengthen the company's balance sheet, and we declared that to be our #1 priority then.

We hope investors feel that we have delivered on our promise thus far here to relentlessly pay down debt. While there is still some work remaining on this front, our #1 priority has now shifted to driving excellent operational results and ultimately delivering on a return to positive organic growth year for the business overall in 2024, along with much improved profitability, both of which we believe will be critical to unlock shareholder value and offer the company new optionality to reignite our business to new heights. This concludes our prepared remarks.

Operator, please open the line for questions.

[Operator]

[Operator Instructions] There are no questions at this time. Please proceed.

[Ghassan Halazon, executive]

Thank you very much, everyone, for joining us today and for your continued interest in Emerge Commerce. We look forward to reporting on our progress throughout the balance of the year and beyond. Have a good day.

[Operator]

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