Emerge Commerce Ltd

XTSX:ECOM

Earnings Call Transcript 2022-Q4

[Operator]

Good morning, and welcome to the Emerge Cormmerce Fourth Quarter 2022 Results Conference Call. At this time [indiscernible] following the presentation, we will conduct a question-and-answer session for analysts. If at any time during this call you require immediate assistance [Operator Instructions]. This call is being record on Thursday, April 27, 2023. Your host 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 office 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 the 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 offer surgical 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, beliefs or projections in the forward-looking information. Certain material factors and assumptions were applied in drawing a conclusion or making the 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 major factors or assumptions that were applied in doing any conclusion or making forecast or projection as reflected in the forward-looking information are contained in AMR'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, Tandang CEO. Please go ahead, sir.

[Ghassan Halazon, executive]

Thank you very much. Good morning, everyone. We appreciate you taking the time to participate in our fourth quarter and full year 2022 results conference call. Joining me today is Jonathan Leong, our CFO. This morning, I'll walk you through Merge's results and share some insights on our business as well as our key priorities for the balance of 2023. 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. Despite the persisting macro climate challenges in the e-commerce space and the technology sector at large, 2022 was a year of growth and progress for Emerge Commerce. For the full year 2022, gross merchandise sales, or GMS, for short, which represents the total dollar value of purchases on our platform grew to a record $117.8 million compared to $58.3 million in 2021, an increase of 102%. Revenue increased to a record $58.2 million in 2022 compared to $34.8 million in 2021, an increase of 67%. Adjusted EBITDA tripled to a record $3.6 million in 2022 compared to $1.2 million in 2021. Cash flow from operations increased to $1.1 million in 2022 compared to negative $3.4 million in 2021. As previously stated, one of our main priorities in 2022 and even more so in 2023 is to drive stronger cash flow from operations. So we are particularly pleased with this positive $4.5 million swing in cash flow from operations in 2022 versus 2021. Despite this, we continue to believe that our EBITDA to cash flow conversion remains subpar primarily due to the interest expense related with our debt. We will discuss the steps we are taking to improve EBITDA to cash flow conversion a little later on. Turning to our results from Q4 2022. Typically, our strongest quarter of the year for our discount centric and retail brands, driven by the holiday shopping season. Q4 GMS increased 25% year-over-year to a record $32.8 million. Q4 revenue grew to $15.2 million from $14.9 million in the prior year. Q4 adjusted EBITDA was $0.7 million compared to $1.4 million in 2022. We would like to highlight that adjusted EBITDA in Q4 does not account for the majority of the recently announced cost-saving measures and synergies that were executed during and after the quarter. Irrespective, this marks our fifth consecutive quarter of positive adjusted EBITDA and 11th out of the 12 quarters. Cash flow from operations in Q4 increased to a quarterly record of $3 million in 2022 and compared to $2 million in 2021, a terrific result. I will now provide a brief update on some of our progress subsequent to quarter end. First, an update on Battlebox. On March 31, 2023, Emerge announced the pending sale of Battlbox expected to close shortly. Pursuant to the sale, Emerge will receive cash consideration of approximately USD 6 million on closing of the transaction, subject to certain distribution and debt adjustments. The buyer will assume an aggregate of approximately USD 1.2 million in outstanding liabilities. Upon closing, Emerge will no longer have any deferred payment obligations owed to former Battlbox Group shareholders. While Battlebox remains a terrific brand, we factored in the increasingly complex supply chain dynamics in today's volatile macro climate, necessitating large investments in inventory. Our decision here signifies that we plan to generally favor asset-like businesses with strong EBITDA to cash flow conversion for this next phase, while doubling down on what we characterize as recession-resilient verticals. The go-forward Emerge portfolio, particularly our Canadian-based businesses also has the inherent geographical advantage of shared resources, facilities and audiences. Emerge originally acquired Battlbox Group in October 2021, which included both the Battlbox and Carnivore Club brands. Carnivore Club is not included in this transaction and will remain an Emerge brand, working closely with truLOCAL under the meat and grocery vertical. Carnivore Club has developed a reputable brand in the artisanal meat subscription space that we view as adjacent to truLOCAL premium meat subscription service. Historically, Carnivore Club was managed under Battlbox leadership. Moving forward, it will be housed under truLOCAL, where we anticipate more impactful synergies. Following the transaction, Emerge retains 7 brands across 4 main verticals: Pets, meat and grocery, golf and experiences in Canada and in the U.S., namely WholesalePet, truLOCAL, Carnivore Club, UnderPar, Just Golf Stuff, WagJag and BeRightBack. Emerge's go-forward e-commerce portfolio is expected to approach $100 million in gross merchandise sales annually and remain profitable on an adjusted EBITDA basis. Second, an update on the debt front. In March and April 2023, the company entered an amendment of its credit facility with its existing lender pursuant to which the company has agreed to repay CAD 7 million of its senior credit facility from the proceeds of the sale of Battlbox, with the lender agreeing to relax certain financial covenants to offer the company additional flexibility. Interest expense savings from debt repayment are expected to be $1 million annually, slightly exceeding cash flow from Battlbox Group in 2022. Emerge continues to explore various options for debt refinancing and/or further debt paydown in 2023 with the goal of doing so sooner rather than later. The company remains in good standing with its existing lender, which it has worked with since November 2019. Emerge, has proven it can be adjusted EBITDA positive consistently with 11 out of the last 12 quarters being positive. Despite this, the rising interest rate environment has us reconsidering the level of debt we are comfortable operating with. As such, we are exploring various options to continue to reduce our senior debt with the ultimate goal of improving EBITDA to cash flow conversion. Third, an update on our cost optimization and synergies measures. Further to the anticipated savings previously announced in late '22, we announced additional savings and cost reductions of $1 million for a combined annualized total of $2 million in anticipated savings implemented under this initiative. As part of overall efforts to drive additional cash flow, the initiative includes reducing overhead expenses, improving margins, maximizing cross-functional synergies and eliminating unprofitable revenue streams. A large portion of these cost reductions and synergies occurred in late 2022 and in Q1 2023. As such, a meaningful number of these savings were not captured in Q4. Our top priorities. Finally, the company's top priorities in the near term remain to continue to pay down debt and reduce interest expense; two, drive organic growth; three, extract further operational efficiencies; and four, enhance EBITDA to cash flow conversion. To wrap up, I would like to sincerely thank and congratulate our team, Board and trusted partners across North America on another strong quarter and a stronger full year with some key milestones achieved to pave the way for our next chapter together. I will now turn the call over to Jonathan, for a review of our financial results.

[Jonathan Leong, executive]

Thanks, Ghassan. Good morning, everyone. Our fiscal 2022 results include our first full year with both Battlbox Group and WholesalePet compared to 2021. Our gross merchandise sales, or GMS, grew 102% to $117.8 million in 2022, while the fourth quarter increased 25% to $32.8 million, up from $26.2 million in the comparative period last year. 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 applicable taxes and net of discounts and refunds. Revenue for the year grew 67% to $58.2 million in 2022. For the fourth quarter, our revenue increased to $15.2 million, up 2% from $14.9 million in Q4 2021. Gross profit for the year increased to $23.8 million versus $15.1 million in the prior year. For the quarter, gross profit decreased slightly to $6.1 million compared to $6.4 million in the comparative period. Similar to the broader economy, we have noticed some inflationary pressures, which we continue to monitor and continue to review and implement various measures aimed at increasing this gross margin. The net loss for the year was $17.4 million and for the fourth quarter was $15.5 million. This is compared to a net loss of $6.6 million and $1.2 million for the same period in the prior year. The increase in net loss is mainly attributable to a goodwill impairment charge of $14.2 million. The goodwill impairment charge is a noncash charge recorded after updating assumptions to reflect current macroeconomic conditions. Excluding the impairment charge, the net loss for the fourth quarter would have been $1.3 million. Overall, for the year, adjusted EBITDA increased significantly to $3.6 million from $1.2 million in 2021. The company reported adjusted EBITDA for the fourth quarter of $0.7 million compared to $1.4 million in Q4 2021. This decrease for the quarter is mainly attributable to the lower performance of Battle box compared to the prior year. However, as Ghassan mentioned, this marks the fifth straight quarter of positive adjusted EBITDA, and we continue to focus on improving operating efficiencies and ultimately, cash flow. With respect to Battlbox and its sales subsequent to year-end, please note that it will be reflected as discontinued operations in our financial statements beginning in Q1 2023. With that, I will now pass it back to Ghassan for some closing comments.

[Ghassan Halazon, executive]

Thanks, Jonathan. In closing, 2022 continued to be a challenging year for Emerge as it has proven to be for most businesses. Notwithstanding, we are pleased with our brand portfolio's resilience and ability to generate robust revenue growth, positive adjusted EBITDA and enhanced cash flow from operations, demonstrated by our results. emerges taking key steps to strengthen the company's balance sheet, and we believe both the cost reductions and synergies implemented recently as well as the sale of Battlbox are two big steps in the right direction. With a diversified portfolio of quality brands and largely recession resilient verticals, we plan to operate with the rigor through the balance of 2023 and beyond. We believe a disciplined capital allocation approach and an inherently bottom line-focused playbook will come handy during this macro climate. This concludes our prepared remarks. Operator, please open the line for questions.

[Operator]

Thank you, sir. Ladies and gentlemen, we will now begin the question-and-answer session for analysts. [Operator Instructions]. There are no questions at this time, Mr. Halazon. Apologies about that. Your first question comes from Andy Nguyen, with Raymond James.

[Andy Nguyen, analyst]

So going forward, given the company portfolios you have under the corporate holding, what would be your main sort of the star player there for 2023? And what would you be focusing on in terms of driving organic growth in your portfolio?

[Ghassan Halazon, executive]

Yes. Thanks for the question, Andy. So as you know and as we've spoken about quite often, if I were to sort of segment our businesses right now and sort of give you a sense of how we're looking at them and their respective opportunities. I have to start with WholesalePet. As you know, it is our largest business by gross sales at this point, almost north of half of our overall gross sales comes from the B2B pet marketplace WholesalePet -- but more than its top line, it's obviously an extremely profitable and consistent business. And of course, not only is it profitable, but it has incredible EBITDA to cash flow conversion. So I would start there and say that pet business and of course, the pet sector at large are extremely lucrative and appear to be generally recession-resilient as is covered in the media quite a bit these days. So we're extremely bullish and positive on that business, which remains quite ahead of its pre-pandemic days, slightly below its peak pandemic. But of course, most of e-commerce has pretty much all of e-commerce as far as I can see, has come down somewhat from the peak, but wholesale pet remains a very, very robust profitable cash flowing business. Next up is sort of the meat subscription and grocery business, which now includes truLOCAL and Canivore Club. Of course, truLOCAL is the larger brand that we've covered extensively truLOCAL, the main thing to note there is that this business continues to be, again, while below its peak pandemic, it continues to be in and around the 2x pre-pandemic phase. And I think the big thing for 2023 right now is the fact that we've really zoned in on gross margins and on overhead reductions that have actually really started to show in truLOCAL year-over-year here in 2023 versus 2022. And so we're quite bullish that truLOCAL can turn a meaningful profit in 2023. And we believe that revenue has the potential to start growing nicely again this year and in the coming years. Now of course, adding Carnivore Club to the mix with truLOCAL, that's now a segment that has further synergies and improvements. Lastly, I'll say the sort of golf and experiences, as we normally talk about, the main thing to bring up there is just Golf stuff continues to be an explosive brand for us. It's still smaller, but it has a lot of potential, and it's growing. UnderPar, continues to be challenged, although we are seeing certain signs as we've indicated, for example, Canada was up last year over the prior year. But it is still slower than our liking. So we don't think that business has yet to exhibit the comeback that we're looking for, but that's sort of the golf side. And then the experiences side, even if it's small, I'd like to point out, much like Just Golf Stuff, we're seeing both that discount business WagJag. We're seeing some really strong results that are probably due to the model being lending itself well to a recessionary environment. As you know, discounting and the voucher model online was created last recession in 2008 and '09. So we are seeing a nice early comeback from WagJag, Same with the explosive growth that we're seeing from Just Golf Stuff. And that maybe gives you a bit of an overall picture of the go-forward portfolio.

[Andy Nguyen, analyst]

Perfect. And my just follow-up question. So how is Canivore going to be brought into enhanced the existing offering that truLOCAL has -- and what area are you looking for? Like is it a synergy between the two?

[Ghassan Halazon, executive]

Yes, it's an interesting one, actually. I know it's a smaller brand and we don't talk much about Carnivore separately. But in fact, just to give you a sense, Carnivore did see some explosive growth as well in '22 versus 2021 and mainly due to a big partnership in the U.S. with a major shopping channel or the largest shopping channel there. So we did see like really nice gains, but obviously, Carnivore is also very active in Canada. The main thing I'd like to point out is, number one, on the sales side, truLOCAL has had early successes with acute rebox and artisanal meats as add-on offerings on truLOCAL. So we do have some early results there and a bit of cross-sell that we started off with. On the sort of gross profit side, sharing under the truLOCAL warehouse, which is currently sort of in play. We're moving Carnivore down to the truLOCAL warehouse. We do expect some shipping and logistics savings, obviously, adding flyers in both boxes and reducing the customer acquisition cost potentially is something we're going to be testing out. And then naturally, from a resourcing perspective, kind of where now gets more support, which is the support of the truLOCAL team, a much bigger team than Carnivore type team here. So there's some good synergy and some good upside. But I think our main focus with Carnivore as it has been lately with TruLOCAL and all our other brands is to make sure more important than just the revenue side is making sure that we strengthen EBITDA and improve cash flow as we've started to show with other businesses and as we hope you'll see in 2023.

[Andy Nguyen, analyst]

Perfect. Pass that way. Thank you.

[Operator]

There are no further questions at this time. Mr. Halazon, back over to you.

[Ghassan Halazon, executive]

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 the balance of the year and beyond. Thank you, everyone.

[Operator]

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.