EMERGE Commerce Ltd. (ECOM) Earnings Call Transcript & Summary

Ghassan, how are you?

Good, Martin. Good to be here with you. Thanks for having us. We're super excited.

It's a pleasure. Good morning, everyone, and welcome to Stifel GMP's conference, discussing the online grocery industry. My name is Martin Landry. I'm a Managing Director in the Equity Research Department here at Stifel GMP. Our next presenter is Ghassan Halazon, the Founder and CEO of EMERGE Commerce. EMERGE Commerce operates niche e-commerce brands across North America, including the recently acquired truLOCAL, which is a subscription-based premium meat delivery service. And EMERGE is relatively new to public markets. The company completely -- completed a successful RTO in the fall. It started to trade on the TSX Venture roughly 2 months ago. And EMERGE's shares have performed extremely well. They're up more than 100% from their RTO pricing. So well done, Ghassan, and I have a feeling, it's just the beginning. [Operator Instructions] So Ghassan, up to you.

Martin, thank you so much. It's a pleasure to be here, and thank you, everyone, for your time this morning, wherever you're tuning in from. As Martin said, my name is Ghassan Halazon. I am the CEO and Founder of EMERGE, TSXV: ECOM. Today, I'm going to tell you a bit about us, but before that, I'm going to tell you a bit about me. I am a veteran technology e-commerce entrepreneur, with over a decade-plus in experience scaling, bootstrapping, acquiring, selling, restructuring e-commerce companies. My original background is in investment banking, which is where this consolidation play and the thesis behind it started formulating. But more or less, it's been a journey of really learning and seeing e-commerce transform and partaking in that, frankly, here in Canada and now in North America with EMERGE. Obviously, the pandemic changed a lot with regards to acceleration. We've all seen some variation of that slide or that article that says, "E-commerce has been accelerated in the last 2, 3 quarters more than it has in the prior 10 years." We're seeing that firsthand and participating in it. With that, I'm going to jump right into the presentation and give you a sense of the business today, where we're at and where we're looking to take this. So EMERGE has 2 million members today that connect to about 12,000 merchant partners across North America. We're a diversified acquirer and operator of what we call direct-to-consumer, or D2C, brands in North America, right? So we have a wide-ranging category list that we focus on. But at the heart of it is currently with our groceries and our meat subscriptions being our sort of largest vertical. We additionally have some golf and family offers and so forth. truLOCAL, as Martin mentioned in the introduction, is our most recent, our largest and our most profitable business right now. truLOCAL is a meat subscription business that connects local farmers and suppliers with health-conscious members that are looking to shop online and receive these beautiful black boxes of meat, whether that's chicken, beef, bacon or fish or [indiscernible], frankly, delivered to their doorsteps. We have other brands much like WagJag, which we acquired from Torstar a while back and has a really solid and growing triple-digit grocery business as well in it, including frozen meats. And then we have some golf businesses like UnderPar and some staycation businesses like BeRightBack. So zooming in on truLOCAL, and again, our biggest segment of the business and also really a starting point for what we think is going to be a much more consolidation for us in the broader grocery and food tech space. Wanted to give you a sense of our marketplace model at large as it exists to date. So again, this is illustrative of our broader portfolio, but really assume an example on the specifics around truLOCAL. So we connect local farmers and suppliers and producers to our members that sign up for a monthly subscription box. So on average, the consumers are paying about $234 a month. Their cards are on file. They're paying this monthly, and they're receiving locally sourced grass-fed meat. And frankly, another thing not on here that we all know is a much bigger trend and a good trend is supporting local, which, in many ways, is at the heart of truLOCAL. It's in the name after all. But that's something our members really view highly. And I encourage you, if you have a minute today, you do anything on Google, which you will, I would ask you to check out truLOCAL reviews and see their 4.9 star ratings from over 300-plus members that shows that really what we were attracted to in this really cult-like brand that's being built. On the farmers' side, essentially, obviously, what they're getting is technology, they're getting support, they're getting logistics and fulfillment, all driven by truLOCAL's proprietary platform. And of course, EMERGE, us, sitting in the middle through truLOCAL. We take on about a 35% cut or gross profit margin, which is lucrative. I do want to announce, and we shared this morning that truLOCAL is now live in Québec as of today. Our PR went out earlier this morning. Now that puts us in 5 key markets, with Ontario, now Québec, the second largest market in Canada, BC, Alberta and Illinois in the U.S., with more market expansion plans on the horizon. Quick snapshot of where the business is at overall as of pro forma Q3 2020, last 12 months. EMERGE drove $48 million in gross merchandise sales, or GMS, as we call it, $29 million of that is booked as revenue on an IFRS basis. The majority -- the vast majority now of our business is subscription revenue, driven by truLOCAL's subscription program. We're looking at 69%. truLOCAL is our fifth acquisition to date. So this is a team and a business with a track record of accretively acquiring, integrating and accelerating a series of market-leading assets, 2 million members plus. And of course, EMERGE has been named the fastest-growing e-commerce company in the country based on the start-up in 2019. More recently, we were named one of the fastest -- or top ranking companies in all of Canada in all sectors on the Globe and Mail 2020. More importantly, or at least at the heart of how we run our business, we're already adjusted EBITDA positive as of today, we have been for a couple of years now, overall. And from our perspective, if you look at the operating businesses, excluding our HQ investments in M&A, in technology, you really start seeing that EBITDA [ shine ] in businesses like truLOCAL, which approached sub-$2 million EBITDA levels as of last year, same thing with UnderPar, a multiyear track record of profitability as well. So zooming in, again, as we think through this business, truLOCAL, which, again, a starting point for our future plans in food tech, first of all, my graphics designer asked me if this slide was too plain, and we needed any graphics. And I looked at it and I said, "There's nothing to add." Like the slide tells the story we need to tell. This business has grown from $1.5 million in 2017 to $4.5 million in '18, $8.9 million in '19 to $19.8 million in 2020. And most impressive for this team that's joined us and this brand that's going to continue on is that this business was scaled with $1 million in equity raise. So almost a $20 million business on the back of $1 million only in equity. This is the definition of a scrappy -- bootstrapy team that will lead the charge here and continue to partner with EMERGE. One of the things I wanted to mention as well about truLOCAL, it's really our first foray into recurring subscription offering with regards to sort of it being, not only a highly strategic food tech platform, but really sort of our foray into the membership model that, I think, is going to play a key role as we look into future acquisitions and just really the overall ecosystem of the EMERGE e-commerce network. Couple of quick updates that we announced previously, but for a lot of the newcomers, perhaps on this call. We did share, so far this year, truLOCAL is up organically 117% year-over-year, no M&A. We also shared other brands, as you know, with e-commerce exploding now, our golf equipment and golf balls and apparel brands, JustGolfStuff.ca, which is a Shopify based brand, grew 515% in January, even surpassing the Black Friday and Cyber Monday craze last year. So we are seeing still a propensity for consumers to spend top wallet online for things like grocery and golf -- our 2 big verticals. We've already given guidance that we expect this triple-digit growth to continue. Obviously, it's M&A-driven, but our organic growth is healthy, as I've shared here on the left side as well. So it's an equation of 2 things: buying great businesses that are sticky and growing and then layering on incredibly accretive and market-leading acquisitions as well. So you might ask, "Well, what do we really do with these businesses once we acquire them?" And the truth is it's twofold. From the moment we choose these businesses and partner with these founders on a multiyear earn-out, when they come in, we basically open up our ecosystem of integration and, ultimately, a full suite of shared services for them to pull on and save from. Things like sending e-mails, making sure the site is secure, making sure fraud prevention mechanisms are in place, the way we spend marketing, the way we track analytics, all of these things need not to be invested in by each small- to medium-sized e-commerce company. So EMERGE, basically, at the HQ level here in Toronto, basically consolidates all of that, streamlines, it has created this package now that our portfolio companies can choose from and, ultimately, integrate into saving them money and time to focus on conquering their respective niche, in truLOCAL's case, food tech subscription for meat. The second part of the value add, if you will, that EMERGE brings is more what we call the accelerate side of the formula. So you got acquire, integrate and now accelerate. So it's things like truLOCAL has 8,000 to 10,000 monthly members paying $234. Well, guess what, you just joined EMERGE now, and we have 2 million members. I'm not saying all of them eat premium meat. I'm not saying all of them will want to join the program. But I am saying that, certainly, some of them will. And when you have such a broad network to draw from, we certainly think that free marketing through our database is something very appealing, and we've become better and better with the data getting richer and richer with every acquisition to start driving better cross-selling opportunities. Not too dissimilar from that, because we have this virtual mall and walk-in traffic of very active and engaged customers in the hundreds of thousands in any given period, basically, we've been able to attract groups like Procter & Gamble, McDonalds, Starbucks and others to pay to access our users, whether that's through -- to convince them to download an app, let's say, McDonald's case or for a sample or for otherwise. There's a lot of rich data that we get to package up and sell at premium dollars to these top notch grocery, food and other advertisers, including banks as well. And in terms of our collective leverage, our ability to expand markets, for example, truLOCAL, as I said, was in 4 markets, now it's in its fifth one as of today. We look to launch other markets. Same thing with UnderPar, our golf business. When we acquired UnderPar 2 years ago, it was in 2 active markets. Today, it's in about 9 active markets, including in the U.S., where 60% of our business lies for UnderPar, the golf business. M&A, that's another thing. A lot of these bootstrap founders are heads down building their business with no capital. And frankly, no focus or insights into the world of consolidation and M&A, which myself from a banking background, we have people like John Kim from Well Health Technologies joined the Board; our VP of M&A just came from Dye and Durham in senior leadership team, George Marouchos. So we have a veteran group of M&A folks driving the consolidation opportunity. And of course, as we grow, we bring in Star founders like Marc Lafleur from truLOCAL. Those founders just add more value to our founder network of operators. Just in terms of M&A, if I can touch on sort of our approach. Yes, we look for really solid footing in their niche or in their domain. We like to see that's healthy organic growth. To be honest, with truLOCAL, it's more like super healthy organic growth. The business has been doubling every year. Of course, pandemic helped with that quite a bit, I must say. And then just in terms of sort of the EBITDA range, right? Typically looking at $1 million to $5 million in EBITDA and a lot of people ask, why that range. And the way I like to explain it is, the Amazons of the world are busy buying the Whole Foods of the world, the $10 billion-plus type businesses. The private equity folks are quite busy buying the $5 million, $10 million, $20 million EBITDA businesses. So a lot of our focus tends to be in the small- to-medium-sized founder-owned and operated, clean [ cap table ], no debt type business, where we come in, and for a very fair multiple for both sides, 4 to 6x EBITDA is what we've been able to show we can do these deals at and find a win-win and a mix of some upfront cash to reward the founder and the team for their great work in addition to some performance-based and some equity in a growing company like EMERGE. I might add that one of the things we're starting to see, and we've done this with truLOCAL, and we've done this with UnderPar, our last 2 and biggest acquisitions, is we're starting to use quite a bit of debt. So we're deploying about 50% approximately of the upfront cash fees in debt to minimize dilution. And frankly, with our cash flow generative nature, as it grows, we're starting to see those incredible facilities be offered to us at prime plus 2 or thereabouts, where we start seeing really an opportunity to build out a landmark debt facility that we can go out and consolidate assets in a much bigger way as the years go by. Snapshot of our pipeline, not really the topic of today, but just wanted to inform everyone, as a consolidation play, we're really sort of at the starting point. We have about $35 million in live EBITDA pipeline opportunity of companies that have confirmed their interest to engage with EMERGE. Of course, at any given time, we have signed LOIs, but we also have NDAs and early-stage discussions all the way through very advanced discussion. We closed truLOCAL on December 31, so pretty much within 15 days of going public. We expect to normally make 2 to 3 deals in any given year. And here now, as a public company, with currency, with access to capital, we feel very good about that. And I think these illustrative deals, as my lawyer would remind me, these are just illustrative in nature, and there's no guarantee any of them happen. But there is a guarantee that all of these are the types of companies we are speaking to and the types of levels we're looking at. Of course, it's easy to see how a portfolio like this can start gaining synergy, not only in the integration side, but the acceleration side because there's a lot of shared technology, there's a lot of shared users that can be gained out of a network of food tech and subscriptions and D2C brands all under one roof. So this slide is actually a very interesting one. I like to -- internally, I kind of look at it as our sort of a secret sauce, if you will. We acquired WagJag, which you might have heard me say at the earlier stage of the presentation. And it's really sort of this mid-market family deals, has some grocery, has some golf, has some travel, has a bunch of different categories. And to be honest, even though the business has proven to be a great investment, we recouped our capital back within 6 months from the acquisition we made to Torstar, what's more interesting about WagJag is what the purpose it serves in being sort of our internal data hub or analytics tool, if you will, that drives and informs our decisions on what to buy next. So if we rewind back to March of 2020, when the pandemic really hits Canada, at least, we saw a spike in grocery and meats, and of course, essential and masks, as you can imagine. We saw that very quickly. By early March before I took most people till end of March to really see certain trends probably, if you recall. And from our perspective, that was an eye opener, and we said, "Well, if this frozen meat segment is this lucrative, like who's #1 in meats." And it turned out to be truLOCAL. We screened the entire space. We spoke to 8 or 9 groups in the space and truLOCAL just turned out to be the market leader by a landslide, and so we acquired it pretty quickly thereafter. Same logic applies with UnderPar, and we saw in WagJag that the golf business was super sticky. Members didn't unsubscribe or refund as much. Merchants kept coming back. All of these trends led us to say, "well, who's #1 in golf in Canada," and turned out to be UnderPar. And alongside it, Just Golf Stuff equipment business, obviously, grew through the pandemic, and we leveraged the existing user base from UnderPar to launch Just Golf Stuff via Shopify. So it shows you the agility of the model and really the unfair advantage we have with this analytical framework we've built out of WagJag, not for growth purposes for WagJag, but really to inform our decisions on where to go next. And just to sum up here as we wrap up, a lot of people say, "Well, where is EMERGE? What's your positioning, right? in Amazon and now in a Shopify world, which, again, we're all very proud of and, hopefully, shareholders [indiscernible]. Amazon is the undeniable retail empire. It's $1 trillion beast. It's here to stay in many ways. And it's -- that's a fact, right? Then you have Shopify coming along and saying, "You know what, we're going to arm the rebels. We're going to power these digital hidden gems that are going to create these new "lifestyle" businesses and build these $1 million, $2 million, $3 million, $5 million EBITDA businesses. We're going to have them run their brands better than a bigger group would. We're going to have them [ really ] for their heart, blood and sweat and tears into it, and we're going to create this movement of thousands of great e-commerce businesses, of which a good chunk of them happen to be innovating in the direct-to-consumer space, which we're focused on." In a nutshell EMERGE, what we do -- at the core of what we do is we go out and we acquire these direct-to-consumer e-commerce rebels. A lot of them are powered by Shopify and the likes, other technologies apply as well. But truLOCAL is a D2C champion in subscription for premium meats. We love that business, and we want to do a lot more in this space and put them all under a unified front, where they can share in the broader team network, member base and, ultimately, technology and partnership community that we have in EMERGE. Real quick, Martin mentioned it, more or less. We IPO'd at around $0.75, which was, at that time, a $60 million market cap. So things have gone quite well. We have a clean structure. We have a very long-term insider base that drives this. But we also have other believers that have seen what we've done, not only in the last 2 months with the acquisition of truLOCAL and the triple-digit growth that we've announced, but also really over a 4-year period where we've really -- I know a lot of people are talking consolidation, and I know a lot of people are talking e-commerce, but no one was talking it 4 years ago. I mean I don't want to show you some of my early videos at conferences and how few people attended in 2016. Now everyone's talking e-commerce, everyone's talking consolidation. But guess what, we're walking it. We're showing you we're closing these deals. We're showing you we're growing. We're showing you we're doing it with adjusted EBITDA positive from the outset. So that, for us, is a big deal. There's some incredible folks on board. I've already mentioned a few and feel free to jump in but really sort of world-class organizations at play here in terms of the team, the management team. We're also growing that. George, as I mentioned, from Dye & Durham is our most recent, join-in at the M&A level. And then we have terrific folks at the Board and advisory level. Indochino's CEO, Drew Green, is our Chairman. Obviously, the Gravitas network has been partners in this from early days. I mentioned John Kim; Michele Romanow from Clearbanc and Dragons’ Den is a shareholder and adviser. We acquired her early business, Buytopia, and rolled it in at an early stage with their team and employees. So we have really sort of who's who of technology, e-commerce, M&A and capital markets, and we're growing. We're still growing. This is an early stage. But we have currency, we have a healthy balance sheet. We have a terrific pipeline and, frankly, we have a terrific space to tackle and an opportunity to be a go-to consolidator in food tech and largely in direct-to-consumer e-commerce. With that, I'll pass it on back to Martin, and appreciate everyone's time.

Very interesting, Ghassan. Thank you very much. [Operator Instructions] Perhaps Ghassan, one question that came in earlier on was, you have a vertical in golf, you have a vertical in food with the premium meats. It may create some confusion as to what you're trying to achieve on a bigger scale and on long term. So if you could help us understand a little bit what's your vision? What could EMERGE look like in the next 2, 3 years? You're going to be a platform with a lot of niche businesses? But help us understand a little bit how that all fits together, and how that creates value for shareholders?

Absolutely. And I think it's a fair question because we're a company that is embarking on this 10-year mission. And so it's easy to look at sort of that first year as a public company and really sort of try to figure out what these moving parts really mean to us. So I think it's fair. The spirit of all of this, Martin, and I say this humbly, is to really build out one of the preeminent e-commerce consolidators in North America and maybe beyond down the line. We're not looking at international. And I think our focus -- there's too much to go around in Canada and in the U.S. right now. For us, every vertical we enter, we need to see a $100 million opportunity in the near term, i.e., over the next 24 to 32 months give or take and [indiscernible] 30 months. And so from our perspective, with something like truLOCAL, which is $20 million in revenue, we need to see both organically and inorganically an opportunity to scale that new subscription business to $100 million, to be clear. Now that doesn't count the adjacent grocery segments we might enter, which might include nutrition, might include supplements, it might include wellness, there's a lot of areas in there. But really, just as we look at every acquisition or anchor acquisition, one, I see that in truLOCAL's case 5x over a 3-year period. Where this goes as time goes is a broader portfolio with -- and not too dissimilar, we get the comparison sometimes, again, humbly to what is sort of the constellation software of e-commerce -- of D2C e-commerce. And so that would mean your groceries and your meats and your nutritions, my golf we like because it's a sticky space. We like that athletes also like to be healthy. We like that supplements might tie into folks that already eat meat and so forth and nutrition and smoothies. And it's really an endless space of where we can take this and how far we can stretch out. I do want to be clear though that we're buying very similar companies in the background from as it pertains to the way they're run, as it pertains to their profile, their organic growth, their EBITDA growth, their stickiness is a very key part here. There's a lot of verticals that are not sticky. We would never go buy, for example, a shoe company, right? Shoes is a difficult business. It's very high refund, et cetera, right? So we're really trying to build out a very profitable, high-quality, cash flow generative portfolio in the e-commerce space. I do think that food tech marks -- it plays probably the biggest opportunity for us in D2C. It's a huge consolidation opportunity. The food tech space is a $250 billion plus market as far as I last saw. Companies like truLOCAL are innovating around different subsets of it. And of course, the pandemic has brought this new world towards grocery, in particular, that we think we're going to be playing very deeply in. Will it preclude us from playing elsewhere? Not at all. But we do believe we're going to have one of the preeminent even grocery sub portfolios within our overall.

One thing, Ghassan, that I really like in your business model is that direct relationship that you have with consumers, with shoppers or your members. And I'd love to hear you talk a little bit about how that helps you differentiate versus traditional retailers sometimes that don't have that detailed database on their clients.

Yes. I think that's fair. And frankly, I think they're playing catch up. Remember, I -- we talked a bit about the world of very specific direct relationships. We think the more specific your relationship with the customer, i.e., the more niche you are, the more you can own it. In a world where the big boys are so broad, the only way to really win is to own very direct relationships on very specific products, in this case, locally sourced premium meat, right? And owning that world, for us, is very plausible through already what is a market leader in Canada with truLOCAL, but also expansion into other markets, including in the U.S. Your point about owning the customer base, I mean, we obviously have, as I mentioned, a broader network of 2 million members that subscribe, not necessarily all our customers, of course, a certain segment of those are very active customers. And so -- but when you look at that ecosystem, to own that relationship, to press that button and reach 2 million consumers on special offers, subscriptions, savings, partnerships is really invaluable. I don't need to tell you how valuable that is, especially in a world now where the big boys like Google and Facebook, every other day, it seems like you're risking potentially relying too much on their networks and potentially being disrupted by whether it's new algorithm changes, whether it's new privacy laws. Anytime you put that third-party in front of you or in between you and the members, you're at risk. And the good thing that we view at EMERGE, we own our network, we own our ecosystem. When we bought WagJag, we bought a million members that came along with it. When we bought truLOCAL, we bought a certain amount of monthly recurring members that have their cards on file with us and receive our daily e-mails in their inbox as well as push notifications through some of our apps. So I think it's an invaluable piece, but even more so, at a time like this, where the lines are blurry between what you own and what you don't. And so when you own those members, not only can you reach them directly, but you can analyze them ongoing. You can see how they open, how they click, how they share, how they buy, of course. And owning that data, not having to rely on anyone and continuously getting it to become richer with every added acquisition and database and sharing marketing resources in the portfolio, obviously, makes for what will be a smarter targeting experience.