Aterian, Inc. (ATER) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen, and welcome to the Mohawk, Healing Solutions M&A call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference call over to your host, Mr. Ilya Grozovsky, Director of Investor Relations and Corporate Development.

Thank you for joining us today to discuss Mohawk's latest acquisition. On today's call are Yaniv Sarig, Co-Founder and CEO; and Fabrice Hamaide, Chief Financial Officer. A copy of today's press release announcing the transaction is available on the Investor Relations section of Mohawk's website at mohawkgp.com. I would like to remind you that certain statements we will make in this presentation are forward-looking statements, and these forward-looking statement reflect Mohawk's judgment and analysis only as of today. And actual results may differ materially from current expectations based on a number of factors affecting Mohawk's business. Accordingly, you should not place undue reliance on these forward-looking statements. For a more thorough discussion of the risks and uncertainties associated with the forward-looking statements to be made in this conference call and webcast, we refer you to the disclaimer regarding forward-looking statements that was included in our press release issued this morning as well as our filings with the SEC. We do not undertake any obligation to update or alter any forward-looking statements, whether as a result of new information, future events or otherwise. In addition, the company may refer to certain non-GAAP metrics on this call. Explanation of these metrics can be found in the release filed today. With that, I will turn the call over to Yaniv.

Good morning, everyone. Thank you, Ilya, and thank you for joining us today. I'm excited to announce that today, we closed another significant accretive acquisition that furthers our M&A strategy and continue to accelerate our growth. We acquired a leading essential oils and wellness e-commerce brand, Healing Solutions, which adds over 3,000 new essential oils products to our portfolio. Healing Solutions unaudited trailing 12-month revenue and operating income, excluding inventory liquidations, as of October 31, 2020, were approximately $65.2 million and $12.7 million, respectively. Our M&A strategy consists of primarily of acquiring the assets of online e-commerce brands, including the product listings, trademarks, inventory, manufacturer relationships. Under this model, we generally don't have any meaningfully increased fixed costs, and we rely on the strength of our technology and supply chain automation platform, AIMEE, to assist our existing team in driving value for the online listings going forward. The addition of Healing Solutions will be highly accretive to our earnings and furthers our goal of building the consumer product platform of the future. I'm very happy to see us entering the consumables category with its repeat purchases and subscription revenues. We've interesting opportunities to cross-sell and to promote the Healing Solutions product with our existing hard goods products like humidifiers and diffusers. Our core strength continues to be our ability to launch new products, and we intend to launch more products under the Healing Solutions brand. In addition, we also intend to expand this business to international markets and to additional domestic channels. The e-commerce product industry is in the early stages of a consolidation movement, and we are at the forefront of that movement. There are many add-on sellers today who have built incredibly successful small consumer brands that are prime targets for our M&A strategy. We remain confident that we can continue to acquire high-quality targets at accretive multiples. And that thanks to our economies of scale created by our tech, our supply chain platform, we can efficiently manage those existing online brands as we did with the other recent acquisitions. Today, we also announced an incremental debt financing in the form of a new senior secured note. The aggregate face amount is $16.5 million and has a 2-year bullet maturity. This financing allows us to maintain a strong balance sheet while continuing to execute on our M&A strategy. With this acquisition, we've increased our full year 2021 guidance to $340 million to $370 million from $290 million to $320 million. We're also unveiling our 2021 adjusted EBITDA guidance. We expect adjusted EBITDA for full year 2021 to be in the range of $28 million to $32 million. With that, I will turn it over to the operator for questions. Thank you.

[Operator Instructions] Your first response is from Brian Nagel of Oppenheimer.

Congrats on the latest acquisition. So I got a couple of questions here. First question, with business like -- as you mentioned even in your prepared comments, this is a new category for Mohawk. Is there anything different -- as you bring this essential oils category onto your platform, is there anything different from a -- just an operational standpoint versus the product, the hard goods-type products you've had historically?

So it's interesting. From a perspective of the marketing and the management of the forward e-commerce part, right, on Amazon, part of the entire strategy is that there's a certain kind of like algorithm, if you will, to managing products online. And from our platform perspective, whether the products are essential oils or humidifiers or air dryers for that matter, it doesn't matter as much, right? If the data shows strength and the ability to manage the products very efficiently going forward, that's the power of what we've built, right, is that we took the common denominator of managing this type of consumer products online and optimizes us as well as possible through our platform. When it comes to the supply chain, there's definitely some interesting moving parts here. This company is actually running its own bottling operation here in the U.S. And we structured the deal in a way where we haven't bought the manufacturing or bottling operation. But we have aligned interest with that group, obviously, as they're taking some of the selling of the brand equity at Mohawk. And we have a plan with them to further improve that operation, which we hope can result in even further margin expansion as we potentially improve that piece of the business, right? So other than the supply chain itself with the bottling operation in the United States, really, again, it's what the strategy is all about, right? If the data shows us that a particular category, a set of consumer products is well in trend and that we can manage it through our platform, the category doesn't matter as much. And that's the power of what we've built.

Got it. That's great. And then some of your response was the perfect segue to my second question. But as we look at the numbers you gave us in the press release, roughly $65 million, if I recall, $13 million of sales and EBITDA. I mean how should we think about -- clearly, Mohawk is capitalizing well upon just the overall growth in online commerce, and that's a driver here. But how should we think about the growth within this category specifically?

Great question. So right now, when you look at our M&A strategy, right, there are a lot of targets out there, very exciting to see the size of the opportunity. And we're focusing today really on category leaders, right? We're really prioritizing companies that have built a moat and have a very strong position in the category that we can continue to defend and see grow kind of with the pace of the growth of e-commerce, right? So when it comes to the United States, right, we expect to see healthy growth here, but not necessarily trying to make this a rocket, right? It's already doing quite well. Where there is significant growth in our opinion is potentially over time as we continue to expand internationally deploying this portfolio of brands and products to Europe and to other countries is going to be an exciting source of growth for the brand as well as launching more products. We continue to use data in our platform and our agile supply chain to find opportunities within the category and within -- across categories where it makes sense to add more products to the brand, and we'll see that here as well.

Your next response is from Brian Kinstlinger of Alliance Global Partners.

Congrats as well from myself. Can you comment on how Health Solutions has performed during the pandemic? Said another way, did the business see a surge similar to the rest of e-commerce? And can you tell us maybe the year-over-year comparison for that 12 months ended in October?

Sure. The year-over-year growth was approximately 40%. And just like any other e-commerce brand, I think 2020 and COVID have been a blessing and a curse, right? On one hand, obviously, e-commerce has seen a surge in demand, which obviously affecting the numbers to some extent here. But at the same time, just like the demand was increasing supply chain issues, especially around last-mile shipping, were also affecting the company. So if you remember, as COVID was raging, the warehouses of Amazon and other e-commerce platforms out there were suffering from such demand that they couldn't really handle the load and oftentimes caused delays in shipping that affected consumers' demand for these type of products that are not considered essential to the pandemic, right? So overall, there's some effect here. But at the same time, just like any other e-commerce business, there were challenges as well.

Great. And then when you look at the category on Amazon, are you able to quantify what percentage of the category Health Solutions owns?

It's a fluid number, but it's really one of the top brands in the category. There are a couple of others. Overall, what I'd like to see is really the stability, right? There's been -- Healing Solutions has been in this category for many years now and has kind of set a very stable control of the market share that they own. They started this in 2014 and, again, have grown to be a category leader in [indiscernible] is really difficult to enter at this point, right, between them and a couple of other brands that are strong in the categories. It's almost like there's already a status quo there. And that's what attracted us to this, right? If you remember, our approach is use data, find opportunities in categories that are disruptable. And when they're not, look for the opportunity to potentially acquire one of the leading brand. And that's exactly what happened here.

Great. One last question. Your revenue guidance is up $50 million from the previous range despite 11 months' worth of the $65 million business. Has the category started to pull back? Or is it broader conservatism on consumer spending in 2021 or maybe a change in product launches? Just maybe give us a sense for what seems to be a little bit of conservatism based on the size of the acquisition?

Want to take that one?

Yes, sure. Well, I -- thanks, Brian, for the question. And I think nobody can blame us for conservatism in general, especially since last year. If I remember correctly, we raised our guidance 3x. But that said, remember that we're going to recognize only 11 out of 12 months period, right? So that is actually one element of it. And as you said, I mean, there is -- the pandemic is still here, unfortunately. And we have -- again, I mean it goes back to the entire conversation we have throughout 2020. You have on one side, strong move to e-commerce. On the other side, we don't know when stores are going to reopen and what will be the exact behavior of consumers from the peak of 2020. And finally, consumer spending is also unclear, right, going forward. So -- and you mix that as well with another element which is plaguing us and essentially every product and brand on Earth, which is a significant strain on the entire supply chain, as you know, coming from manufacturing to international shipping, where getting your containers and boats has been never as difficult as it is today, last-mile shipping, as Yaniv was saying. So I think it's prudent to actually take that view of a mix of potential negative factors affecting us. And in due course, if none of those negative factors play out and it's the exact opposite, it will be time to actually change guidance if need be.

Your next response is from Thomas Forte of D.A. Davidson.

I have 4 questions. I joined late, so I apologize if one of these was asked and I apologize if some of these are minutiae. So the first question is, Yaniv, how should we think about the total addressable market opportunity to buy strong brands on marketplaces? Should I look at the fact that north of 50% of items sold on Amazon are sold by third parties? How should I think about just the opportunity set in general for you to keep finding these attractive opportunities?

Thanks, Tom, for the question. So you're right. You're looking at an ecosystem that is on the marketplaces transforming rapidly and through the years, as you mentioned, on Amazon, right, north of 60% we believe is now are sold through third-party sellers. That represents approximately $200 billion of GMV just on Amazon. So a very large pie. So looking -- obviously not everything there is a good acquisition target. But another exciting number is the fact Amazon itself adds approximately 3,000 new sellers every day, right? So the opportunity is a very -- has been very attractive for smaller brands and kind of more agile direct-to-consumer brands in the last 10 years. And there's a very vibrant, live ecosystem of companies that have kind of like leverage the vacuum that was created with traditional consumer brands, not responding quickly and after the [indiscernible]. And most of these companies have built themselves mainly for cash flows of call them almost lifestyle businesses. But just like Healing Solutions and the other ones that we acquired, they've done a phenomenal job. They've really built great brands that resonate with consumers and show metrics that are exceptional, right? And so for us, it's about continuing to use data to pick and do the diligence on these brands and make sure that we select the right ones. But again, we're talking about a very, very large market that's continuously evolving with new players coming in. So I really see our opportunity to continue to acquire these companies to be very, very large. And also international as well. We haven't yet started to look at companies internationally, but those exist too, right? So we're, again, just at the beginning of this movement, and we're excited to be one of the leaders in the consolidation that's happening today.

Good. And then my second question of my 4 questions. So when I think about your logistics skills, how should I think about small-format items, meaning things shipped in little packages versus large-format products? I think of your ability, for example, to get mini-fridges on -- make them prime-eligible. So how should I think just about small format, large-format in your logistics efforts? And are smaller-format items more profitable? Do you still get the benefits of your logistics efforts for smaller products?

Yes. Thanks, Tom. So as you know, right, I think you're referring to our fulfillment by merchant platform. To remind everyone on the call, we have our own fulfillment platform that relies on 9 3PL warehouses that are connected to our software and allow us to reach 93% of the U.S. within a day. As you mentioned, Tom, that platform is mainly used for oversized items. So as you know, a lot of our products are in oversized categories such as appliances and furniture. And those definitely benefit from that platform in terms of cost effectiveness and optimization of last-mile shipping. For the smaller items like Healing Solutions, we're going to continue to rely on Amazon FBA, where the -- obviously, those volumes that Amazon is moving and in those smaller categories does give them still an advantage, right? So as opposed to -- with oversized items, we're not expecting here, through this acquisition, to improve the margin because of the last-mile shipping. But we're quite happy with the contribution margin of the business today. And again, as I said, there might be some optimization that we're looking to do with the manufacturing side that we're now partnering with to potentially fund some increased margin there, right? So yes, so really, this business is going to rely on FBA.

Right. So the next question is, when I think of your data set and I think of your product set, does adding an adjacent product do more to improve the quality of your data? Or does adding a product in an area you don't already have do more to improve your data?

Yes. Absolutely, that's a great question. The more we put on a platform, the better our data becomes, right? And the more -- the way to think about it is our data is using statistical data that we have -- that we're getting from the different platforms and all sorts of like observation in the data as we gather it from public domain and we model kind of like the missing piece, right? The more we have products that we own in a particular category where we have -- where the data is perfect because we know exactly how much is each product selling through each consumer path to purchase, right? The more we have beta that is sales from our own products across different categories, the better our data becomes in the category because we have more correlation data points that we can use, right? Of course, this is definitely going to help us in terms of improving data within those categories that Healing Solutions operates in.

Great. So last question, what's your current thought on tails, meaning when you make an acquisition, securing the opportunity for future rights to products created by the same team?

Yes. With this -- as you remember, with the previous acquisition, that is something that we negotiated and we're very happy with. With this particular group, there was less of that intent from them to be necessarily active going forward with continuing to create products and brands. And that's okay, right? At the same time, for me, one of the best things about this deal, we highly respect the team that's there. They've built a great business. They understand the world we live in and the fact that they have chosen to -- again, the equity shareholders in Mohawk and not just take all cash on the deal is just, again, another great pointer to the fact that those who really understand this business and understand the magnitude of what we're trying to build are huge believers in it and want to be part of it. And that's an exciting thing for us to see, right? But in this particular case, we don't have that necessarily tail, although we will look for it with teams that are interested in continuing to launch products and have that relationship that we built with the previous group as well.

And next response is from Oliver Chen of Cowen.

Regarding the AIMEE engine and artificial intelligence, what do you see as the biggest synergies with this deal in terms of what your AI engine will do? And also, as you think about the training sets and altering or tailoring the training sets for consumables, what might be the bigger challenges/opportunities?

Oliver, one of those things that might go a little bit unnoticed in these remarks, right, is the amount of products that we're adding here. I mean, we're adding 3,000 products immediately to our set. And again, we're excited about that, right? Part of the automation that we're building and our ability to automatically forecast, automatically manage things like [ PPE ] and pricing are going to be extremely important here, right? Again, the whole premise of the investment in technology, in machine learning and automation is that as we acquire or build more of these products, as our portfolio becomes larger and larger, we can continue to empower our team with automation tools, machine learning and data sets that are going to allow them to just be a lot more effective, right? If we hadn't made that investment, obviously, the fixed cost that we would have to kind of incur with every one of these acquisitions would skyrocket, right, because you need a lot of people to manage these products. The entire goal of our investment in machine learning is to turn our employees into superheroes that give them the ability to go and manage an exponential amount of more products than they would have to if they had to do it manually, right? And this is a great example where we're adding all these products, and we're feeling confident in our ability to manage them very well going forward and continue to add more products, right? That's really, again, what you'll see over time as we continue to expand. As we've seen already in the past, right, our head count has stayed quite flat, although our revenues have increased dramatically. That ratio is what the investment in technology is all about.

Okay. And why was the essential oil screening like an attractive opportunity? And why was this the right time to do this deal? What do you think...

Oh sorry, sorry. I thought what...