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

Thank you for standing by, and welcome to the Mohawk Group Holdings, Inc. Quarter 4 Earnings Report Conference Call. [Operator Instructions] I would now like to hand the conference over to your speaker today, Mr. Ilya Grozovsky, Director of Investor Relations. Please go ahead.

Thank you for joining us today to discuss Mohawk's Fourth Quarter 2020 Earnings Results. On today's call are Yaniv Sarig, Co-Founder and CEO; and Fabrice Hamaide, our outgoing Chief Financial Officer; and Arturo Rodriguez, our incoming Chief Financial Officer. A copy of today's press release 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 statements 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 Mohawk 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 is included in our fourth quarter earnings release 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 earnings release filed earlier today. With that, I will turn the call over to Yaniv.

Thanks, Ilya, and good afternoon, everyone. I'd like to start this call by taking a minute to acknowledge our team's perseverance and grit through a very challenging year. 2020 was our first full year as a public company, and it was marked, of course, by the tragedy of the global COVID-19 pandemic. While the pandemic led to a strong year for e-commerce, it was not without significant challenges. Despite the difficulties with the pandemic restrictions, the need for remote work and severe supply chain disruption, we grew our net revenue 62% year-over-year. We also achieved adjusted EBITDA profitability earlier than we had expected. And for the first time, we're profitable on a full year basis. This, despite our investment in long-term growth. We accelerated our M&A strategy and acquired 5 leading e-commerce brands. We also refinanced our outstanding debt and began our international expansion. Finally, we launched a record 37 new products and expanded our total SKU count to over 300 as of December 31, 2020. We now have over 3,000 SKUs, thanks to our M&A strategy. In my last few communications with the investment community, I've made it clear that one of our strongest assets as a company is our culture of adaptability. As I discussed previously, the online CPG industry is continuing to experience an accelerated consolidation effort. We've seen over $3 billion of fresh capital injected into early-stage companies looking to build the CPG platforms of the future to consolidate the fragmented ecosystem of online brands through M&A. Mohawk is really well positioned to take the leading role in this fast paced industry consolidation given the investment we made in our team as well as the technology and in our supply chain platform, AIMEE. Looking back at our last few M&A transactions, I'm very happy with our ability to integrate the assets of the business that we acquired. We continue to reap the benefits of our platform after years of investment in infrastructure and e-commerce expertise as we integrate every asset that we acquire faster and more efficiently. Since the start of 2021, we've added e-commerce businesses with a total of $80.2 million and $16.7 million in trailing 12 months revenue and adjusted EBITDA, respectively. Our M&A pipeline, meaning deals that we are currently looking at is a very robust. The universe of Amazon third-party sellers has an aggregate GMV of approximately $300 billion. We are currently looking at businesses and assets with an aggregate unaudited and annualized net revenue of $522 million and $97 million of adjusted EBITDA. The significant growth we're experiencing also comes from an important set of strategic investments that we're making to emerge as a global leader in this online CPG industry. With that in mind, I'm super excited to share some changes to our organization that will help us drive the vision of Mohawk's platform going forward. I'll start with our CFO, Fabrice Hamaide, who has played an instrumental role over the years in driving the financial strategy of the company. Recently, Fabrice has been an important driving force in our M&A execution and has been the architect of several of our recent transactions, working closely with Joe Risico, our General Counsel. This will be Fabrice's last call as CFO, and we're excited to see him execute on his new role as General Manager and Head of Corporate Development in Europe, reporting directly to me. As we described in our press release earlier today, Fabrice has already secured our first European M&A transaction with Paper Direct, a printing supplies brand based in the U.K. Mohawk Group is a company that loves promoting from within. And therefore, I'm extremely pleased to announce Arturo Rodriguez as our new CFO. Through his 3.5 years of tenure at Mohawk, Arturo has exhibited excellence in every mission he pursues. He has a remarkable worth ethics and strong sense of integrity. I'm honored to have Arty by my side as we tackle the challenges of becoming a dominant global enterprise. Of course, Fabrice in his new role will be available to help Arty with his transition. I would like to know that Arty and Fabrice have worked closely together and supported each other for over 10 years across multiple companies. With M&A playing such an important role in our growth story, I'm also thrilled to announce that our General Counsel, Joe Risico, is effective immediately promoted to Chief Legal Officer and Head of Corporate Development, North America. Joe has been at the forefront of our M&A strategy since day 1 alongside with Fabrice and has a strong brand of scale to drive this critical function for us. Before he joined Mohawk Group, Joe has substantial M&A strategy and other deal experiences through his various business and legal roles at 3M's Corporate Venture, Citigroup, Goldman Sachs and in other roles at earlier-stage VC backed tech companies. He started his Career as an associate at the corporate department at Cravath, Swaine & Moore, and he also has a CPA, which he obtained while he's working at Ernst & Young and prior to attending Colombia Law School. I'm very confident in the future of our M&A strategy will Joe leading the way. Finally, I want to take this opportunity to also welcome Sascha Lewis to our team. Sascha joined us in January this year as our new Chief Marketing Officer. Before joining Mohawk, Sascha was the Co-Founder and CEO of Flavorpill, a publisher and experiential marketing agency, which he sold to Bustle Media in 2018. Adding Sascha brings more entrepreneurial firepower to our already strong executive team. In his role, he will drive the next evolution of our corporate and consumer brand marketing strategy. I'm looking forward to sharpening our storytelling and reaching larger audiences together as we communicate our vision to consumers and the investment community worldwide. I could not hope for a better way to start this year, and I continue to be amazed of the drive and enthusiasm of our team as we work hard to make 2021 a landmark year for our company. With that, I'll turn it over to Fabrice for more details on the fourth quarter.

Thanks, Yaniv, and good afternoon, everyone. Here are the operational performance details of our fourth quarter. For the fourth quarter of 2020, net revenue increased 61.9% to $41.5 million from $25.6 million in the year ago quarter. The strong gain was primarily attributable to direct sales volume of new products launched in the second half of 2019, net of vertical expansions as we launched competing products to our own sustained products. This increased net revenue by $4.8 million. Wholesale revenue of PPE products, which contributed $0.7 million and historical products plus recently acquired products. We suffered from inventory shorts in the quarter which we estimate to be an impact of approximately $6 million against our normal sales levels. Gross margin for the fourth quarter increased to 45.2% from 35.4% in the year ago quarter and decreased from 47.8% in Q3 2020. The year-over-year improvement in gross margin was due to both favorable product mix, including new products acquired pursuant to M&A, pricing from vendors and higher product pricing, while being partially offset by wholesale PPE sales, which carry much lower gross margin. The quarter-over-quarter decrease in gross margin was driven by mix in our sustained portfolio as well as a higher percentage of liquidated sales as we cleaned up some of our inventory balance. Additionally, sales and distribution was negatively impacted by ship-again impact, which drove higher cost in last-mile fulfillment, given the carrier tightness in the quarter. Our overall Q4 2020 contribution margin was 11.2% as a result of the previously mentioned factors, which improved compared to the prior year, which was negative 6.6%. This year-over-year improvement was driven by significantly improved product unit economics coming from mix and pricing related to inventory shorts of our sustained products, which had a CM of 15.2%. Adjusted EBITDA, which excludes stock-based compensation and changes in fair market value of warrant and earn-out liabilities for the fourth quarter of 2020 improved to $0.5 million from a loss of $7.6 million in the fourth quarter of 2019. I would highlight that our adjusted EBITDA profitability is a result of the growth in our business, from both our existing products and new product launches, combined with our fixed operating expense leverage, which benefits from the automation in our business model and continued improvements in our unit economics. Turning to the balance sheet. At December 31, 2020, we had cash of $26.7 million, compared with $37.4 million at the end of September 30, 2020. This sequential decrease in cash stems primarily from a $2.5 million decrease in cash used in operations, approximately $25 million from the Smash acquisition, offset by $19.9 million in net debt issuance and other financing activities. The cash used in operations as compared to the previous quarter is driven by working capital as a result of planned seasonal inventory buildup. New products -- in terms of new products in the fourth quarter 2020, we launched 5 new products as some products slipped into the first quarter of 2021, and we expect to launch 18 to 20 new products in the current quarter. To conclude, the key takeaways of the quarter are revenue is growing fast, profitability continues to improve and the platform model continues to show its strength. And now I'm going to turn it over to Arty to discuss the going forward items.

Thank you, Fabrice. Mohawk today announced that it signed a binding term sheet to acquire Photo Paper Direct, specialized in the printing supplies category. Based out of the U.K., it marks our first of many international acquisitions to come in the future. The unaudited trailing 12-month revenue and adjusted EBITDA as of December 31, 2020, are $15 million and $4 million, respectively. The transaction is expected to close by mid-April. We also announced today our intent to refinance all of our current debt outstanding, which includes the December 2020 senior secured note and the existing February 2021 senior secured note totaling $53.9 million as of today. And our $30 million revolving credit facility with a $110 million senior secured note to an institutional lender. The senior secured note has an 8% annual interest rate payable in cash on a quarterly basis with a 3-year maturity. In connection with the senior secured note, the company will issue to the institutional lender, warrants, to be determined at the closing of the refinancing, and we expect this refinancing to close in the first half of April. Full year 2020 revenue guidance, the company now expects net revenue to be in the range of $350 million to $380 million, up from $340 million to $370 million, reflecting the addition of Photo Paper Direct. For the full year 2021 adjusted EBITDA guidance, the company now expects adjusted EBITDA to be in the range of $30 million to $34 million, up from $28 million to $32 million. Finally, I want to mention with the vesting scheduled employee stocks, we are anticipating that certain members of the executive management team will need to sell some of their Mohawk stock, primarily accessed by tax liabilities associated with invested shares. This will be done primarily as part of 10b5-1 plans, and they've implemented and will be fully disclosed in the SEC filings as the sales are made. With that, I'll turn it back to the operator to open the call for questions.

[Operator Instructions] Your first question comes from the line of Brian Nagel from Oppenheimer.

Nice quarter, nice year. Congratulations to all the new appointments in the organization. So I have a few questions. I thought I'd run through here. I mean first off, with regard to the, I guess, potential acquisition targets you called out in the press release, the $522 million. Within that, are there any LOIs signed at this point?

Brian, Yaniv here. Thanks for the question. The answer is yes, although they're not binding. And obviously, this pipeline is all subject to due diligence and all the efforts that we got to put to get those to the finish line. But there are some nonbinding LOIs already in place as part of the due diligence process.

Got it. And the second question I have, just with regard to the guidance, focusing, I guess, particularly on the top line. So the $350 million -- the updated guidance of $350 million to $380 million today, it implies substantial growth off the I think $185 million or so you did this year. I mean can you help us just understand maybe what are the key assumptions behind that? And also, I want to make sure I'm clear that there are no -- within that $350 million to $380 million you are not assuming further acquisitions, correct?

Maybe I'll let Arty answer that one.

Yes. Thanks, Yaniv. Yes. No, the guidance that includes there, obviously, we closed Smash at the end of December, and we closed Healing Solutions at the end of February. So those items are included in that guidance number. The only uptick that we have from acquisitions is the Photo Direct, which we said, on an annual basis would do about $15 million in net revenue, $4 million in adjusted EBITDA.

So that's -- I guess, the first part of my question was just what are some of the -- besides that? I mean what are some of the real key assumptions there -- what are the key drivers of the expected revenue growth here in 2021.

Brian, I think maybe if I can jump in here, it's Yaniv, again, the main drivers are just again, the launch of new products that we are looking to continue to put out there with our core business model as well as the sustained growth of the products that we either launched through our own brands or acquired, right? Those are currently the driving forces of that guidance. And there are no -- it doesn't include any additional M&A that is in the pipeline or anything like that, if that makes sense?

That makes sense. I got it. Then I'm just going to ask one more and then I'll turn it over. But with regard to the contribution margin, Fabrice, you talked about this in your prepared comments. But I think what I heard you say is, there's some pressure there from -- it sounds like transportation costs. But if you look at the contribution margin, particularly in the sustained category in the fourth quarter, it's still up nicely year-on-year, but the rate of increase in Q4 had diminished somewhat from that of Q3 and Q2. How should we think about -- I guess I want to make sure -- a couple of questions. One, I want to make sure that it is transportation costs that weighed upon that? And then how should we think about that dynamic as we push into '21?

Fabrice?

I'll respond to the past, yes. So yes, I mean, it's all -- in Q4, you always have an increase in shipping rates. That actually happens every year, right? It's the seasonal increase because of the Christmas shipping season, which applies to all of the local carriers. UPS, FedEx and so on, right, as well as Amazon actually on their PSI, right? So this is always the case that you're going to have a sequential drop in Q4 versus Q2, Q3. And it's also linked to the fact that the product mix changes and we have more products on Amazon than we have on FBM from that perspective where on FBM, we have a shipping advantage, cost advantage, which we do not have on the Amazon side, right? So you'll have that all the time. As to the ship-again, maybe, Arty, you can pick up that question on a go-forward basis?

Yes. Thanks, Fabrice. Yes, there'll be a little bit of pressure in Q1 and Q2. I think it's a pressure that everyone's feeling, right? It's a global phenomenon. It's not just a Mohawk thing. But that's been factored in our guidance and our updated guidance there. We think as we get into the summer months, we'll see that kind of go away and continue to -- we'll see that go away and then less pressure there on profitability.

Your next question comes from the line of Matt Koranda from ROTH Capital.

Just on the pipeline that you guys delineated, I know you sort of partially answered a question on, just a bit ago, but wanted to be sure, what percentage of the pipeline is sort of under LOI versus sort of just earlier stage kicking the tires? Maybe you could just bracket it out for us so we can understand kind of how early stage some of the pipeline is versus late stage?

Yes. Matt, this is Yaniv. At this point, we just wanted to give a sense of how much looking at. But as I mentioned, we -- we'll leave it at that for now. Yes, we're just working on a lot of deals in parallel, but we don't want to necessarily go into too many details into how many of them are already in LOI.

Okay. Fair enough. I guess the gist of the question, though, was basically just to understand, what's the threshold under what you would put it into that pipeline, I guess, maybe that's more of a fair question because I know it's hard to answer the LOI part.

Yes. Well, that's a great question. The way our due diligence process works is we have several layers of the diligence and the first layer is one where we see if it can even make it to the pipeline. This is where we use AIMEE very quickly to understand the core metrics that we're seeing, literally without even getting the internal data of that company, right? Before we even get that company under LOI and NDA and ask them to give us all the data. We use our analytics and what AIMEE tells us about the market to see if it's even hitting the threshold by which it would get into the pipeline. And that's really what that means, right? So what we describe in the pipeline is at least from an external perspective with the data that we have on the sales and on the moats and certain other aspects is good enough for us to have a deeper look.

Okay. Got it. So it's already cleared a hurdle, if you will, to get into the pipeline there. Okay. And then just maybe attacking the 2021 guidance from a little bit of a different angle. The acquisition that you're doing, Photo Paper, I understand that it's probably not going to be -- obviously, it's definitely not going to be a full year of contribution in terms of revenue and EBITDA. But if I do the math, just at the midpoint of the guidance raise, it seems like it implies that maybe we're not fully factoring that in or maybe we're just sort of -- we're seeing some headwinds in the core business, so we're fully factoring in the acquisition, but seeing some headwind maybe just talk about the assumptions embedded there so we can understand exactly why we're raising the guidance by $10 million on revenue and $2 million on EBITDA.

Yes. Let me take the first stab at it and then maybe Arty wants to add more to it. But on general math, we look at this as a couple of capital factors. As you mentioned, we're not going to benefit from the full year of the business. That's one. Second, we're giving a wide range still because the world is still not entirely stable, especially around supply chain, right? So we're still observing very closely, everything that's happening with COVID and the kind of like downward effect of the pandemic on supply chain. So we give some room there, right, to -- for the unknown. And then finally, we're looking to reinvest a lot of the contribution margin that these assets that we're acquiring or bringing in. Our goal is to become a very large company with a global footprint and that investment is pouring right now, especially as we continue to make forays in getting into Europe, and beyond that, our ambition is to become, as I said, a global enterprise, right? So we always factor that in as well into our plan.

Okay. Got you. That's helpful. And then just last one, I'll just sneak one more in here. Could you maybe just speak to the performance of some of the brands that you've tucked in over the last 6 to 8 months or so. I'm curious maybe anything qualitative you can share on the performance or maybe quantitative just in terms of sales ranking? How some of these have performed relative to your expectations? Have you been able to improve some with AIMEE? I'm just curious about the track record there.