Solo Brands, Inc. (SBDS) Earnings Call Transcript & Summary

Our roadshow presentation that we went through in the fall, but with some updated content. So excited to share some of these things with you today. You're going to be hearing from myself and Sam Simmons, our CFO, a little bit later, but we're excited to be with you. When we talk about good moments that become lasting memories, this is a little bit more than a tagline. I know all brands are supposed to have acute mission statement that they kind of stand behind. But for us, creating good moments and lasting memories is a lot more than just words on paper. I hope that by the end of the presentation, you get a sense that we execute differently around this mission than a lot of other brands around the way and the things that they think that they're focused on. We believe -- and the reason we're starting with this, in particular, in this presentation is because -- we believe that the execution around creating good moments and lasting memories for our customers is a big driver to our long-term sustainable growth and why this particular topic should matter to any of you that are joining us today. In terms of the company introduction, we thought we'd start with a timeline. Right in the middle of that time line, you'll see that I joined as the CEO in 2018. There's a lot here on the page. There's also a lot of things that happened between each of these dots. It's really hard to sum up here your company on a timeline. But the thing that I specifically would like to call out are 2 particular bullets on the page. The first in 2015 and then the second in 2018 just after I joined, where there's a focus around in-sourcing our execution. This is a big differentiator for Solo brands. Some of you may be wondering what's different about this platform of products, this digitally native brand or this group of brands or family of brands that D2C has to offer. One of the big differentiators for us is that we have in-sourced our execution. We do all of our own marketing in-house. We're not relying on agencies. We do all of our own supply chain execution outside of some contract manufacturing. We've built direct relationships with ocean freight carriers with small parcel carriers like FedEx and UPS, and the list goes on. And so our ability to deliver for our customers is much higher than you might see in other digitally native brands, and this creates a really unique company profile. The numbers on this page are pretty staggering. You're probably going to be especially focused on the top left hand and bottom left-hand side of this page, I'd actually like to start and hopefully, you can gravitate your eyes towards the top right-hand side of this slide. The big differentiator in this model is that 84% of our business is being generated through sales on our own site. And when you can do that much of your business through your own websites, it allows you to create a very strong, loyal customer base that you can build relationships with that create a feedback loop, not only for product innovation, but also for customer experience execution. And if you worked your way clockwise around this list of metrics, you'll see that we have a very strong and fast-growing installed customer base, a high social media following. When you're direct-to-consumer more than your direct through wholesale you end up generating much higher free cash flow conversion, which you see in the bottom middle, at 97% pro forma free cash flow conversion, and you operate much more profitably because you're cutting out that wholesale margin that exists when you sell through retail in large part, 30% plus adjusted EBITDA margins for '21, $120 million of actual EBITDA dollars on $400 million of GAAP net sales for 2021 estimated. If you go to the top middle, you're looking at 130% pro forma 2021 net sales growth -- And one of the metrics coming out of our Q3 call that many of you were asking for was to see the Solo Stove organic growth rate on a year-over-year basis. We've included that in this deck. You can see 170% year-over-year organic growth for just Solo Stove from 2020 to 2021. So ahead of our 5-year CAGR, really great results for Q4. The platform is made up of 4 distinct brands, as Bruce mentioned in the intro, Solo Stove, Oru Kayak, ISLE and Chubbies. You're probably familiar with these brands by now. But one of the things that I'll specifically point out that are exciting about a couple of these brands, the Solo Stove brand has a 45% plus word-of-mouth rate for new customer acquisition. 45%-plus of our sales are coming through word-of-mouth referrals. And Oru Kayak, an interesting metric around the passion of that customer base, 40% of their customers have Kayak less than 3x. This is a category-creating brand. All of the brands inside of the platform, including ISLE and Chubbies, all have passionate followings with their customers. They're all digitally native with a vast majority of the business coming through direct-to-consumer. Looking at it from a snapshot basis, again, you can see this is a metric we had released in the past over on the right-hand side. Solo Stove's 5-year CAGR was 132% through the 6 months of '21. And you can see the full year 2021 growth just organic. This is excluding acquisitions, 170%. So trending at a faster growth rate than it was even going into our IPO process in the middle of fall. And then for the rest of the brands combined, they went into the process at a 44% CAGR for the last 8 years. And for fiscal year 2021, an estimated 60% growth. So again, we've accelerated in '21 the growth rates across all areas of the business. These brands together have a lot of passion. We announced to our customers that we were bringing these brands together into one family of brands. And the feedback was tremendous. There's lots of cross-pollination opportunities that Chubbies customers tend to be on a younger demographic. There's an opportunity. Those customers are really the Solo Stove and Oru and ISLE customers of tomorrow. So the cross-pollination and cross-marketing opportunities that exist within the platform have largely been untapped, but we see big opportunities. And then doing this business model, executing this business model in a direct-to-consumer fashion creates lots of advantages for our business. And you can see those advantages on the right-hand side from curating brand experiences and direct interactions with the customers, to then leveraging that to accelerate our product innovation timeline by taking the feedback from customers and then iterating on it. Also just delivering a better financial model, which we talked about a couple of slides ago, this direct-to-consumer model is highly differentiated. And just to call out the distinction between the 84% number that I keep mentioning, which is on our own sites and the 92% direct-to-consumer, that's if you were to include as well a marketplace business. So that's where the 92% online business comes from and the historical 8% through wholesale. When 84% of your business is being driven through your own sites, you can create lots of momentum and competitive advantages and competitive moats around your business. If you start in the middle on the right-hand side from collecting data to acquiring new customers, driving loyalty and repeat purchases to increase customer engagement, ultimately, that leads to a combination of just improved marketing efficiency. I know there have been many questions around what's going on with privacy changes and the effectiveness of marketing on social media channels, especially platforms like Facebook. Our model has lended to us being able to deliver very efficient marketing, very similar efficiency to what we were pre-changes to privacy, all because of this direct-to-consumer model that we operate on. And then ultimately, the top right-hand side, this incorporation of consumer insights for customer innovation or for product innovation, excuse me, that leads us to being able to differentiate around IP and really differentiated product sets that drive loyalty and also create this competitive moat that we believe we've created around our business, not just through the Solo Stove product, but across the rest of the brands, including, as you can see on the bottom right-hand side here, the innovation around the Origami Kayak and the Oru Kayak brand and all that we're able to offer through this very innovative kayak that falls into the size of a briefcase and you can put into a closet. I mentioned earlier when I was talking about the timeline and one of the big differentiators for our business, this idea of in-sourcing, one huge differentiator for us is the in-sourcing of warehousing and fulfillment execution. Most direct-to-consumer businesses are digitally native brands are utilizing 3PLs for fulfillment purposes. We are doing all of our own fulfillment in-house. We have not only launched a world-class fulfillment center here in North Texas, where we're headquartered, but also opened up in Pennsylvania and Salt Lake City. That gives us access [ today ] ground to 99.7% of the U.S. in our customer base, which drives, again, a better customer experience, but we also have been expanded this last year into the Rotterdam Netherlands area to launch Europe and execute on the same model that we have here in the U.S. One of the call outs that I'll make is that we made this move to in-source all to deliver a better customer experience. Again, we have about a 45% referral rate to our customers, 45% of our business coming through referrals. And this execution has allowed us to continue to drive customer loyalty and customer passion around our brand. What was the fascinating unlock was that we were able to do this and actually drive significant EBITDA margin gain by executing the fulfillment in-house, which I guess on paper kind of makes sense, 3PLs are operating for free. They don't operate at a loss. They're trying to make a profit. We just believe that we could do it as efficiently as those 3PL partners were. And fortunately, we were right and we were able to drive significant profitability while increasing this customer experience or enhancing the customer experience. One of the things that we love about our platform is that there are a lot of levers to pull to drive success and to drive long-term growth. I will call out that the first 2 on this page are really focused around the immediacy of our model and budgeting. Those are the things that our budget requires us to go and execute on. Numbers 3, 4 and 5 are all additive and extra if you think about our guidance and the way that we thought about the future of the business. I cannot understate or overstate, excuse me, I cannot overstate the earliness of our story and the TAM opportunity that exist with all of our brands. On the left-hand side, you'll see that we've taken U.S. households. We've discounted that number significantly from the $120 million range down to $76 million to exclude customers that really aren't in our wheelhouse or in our demographic and we just crossed our 1 millionth customer in November of 2021. We're very early in our story. I continue to say and will continue to say that the biggest opportunity in the platform for all of the brands, including Solo Stove, is the organic opportunity. And we saw more of that in Q4 of this year, with no significant impacts by international in terms of our execution or new products that had just launched prior to the quarter, but really more execution of our -- within our existing product mix, within our existing markets to just go and drive additional market penetration. I still think that it's one of the greatest things which happens to me almost on a daily basis, but certainly weekly. When I run into somebody that has no idea who Solo Stove is. They ask me what I do, and then they look at me like I own like a backyard landscaping business. It's just phenomenal to understand and know where we are in our story and how much runway we have out in front of us. On the right-hand side of this page, Oru Kayak operating in this $1 billion water recreation space. And then, of course, Chubbies in this outdoor lifestyle at leisure space from an apparel standpoint that's ever growing. And again, all of these brands, very passionate customer followings. All of the brands in addition, have very strong track records of product innovation. And I'll specifically call-out again referencing our direct-to-consumer model is -- having this one-to-one relationship with customers online on our website, informs our product feedback loop. It allows us to innovate faster within product development, because we've outperformed from a revenue and EBITDA perspective as of late, but even historically, what we have a track record of doing is accelerating those roadmaps and doing this faster. And again, we're not waiting on retailers to provide feedback on how products are selling, which is allowing us to go out and accelerate this product roadmap that we're executing on to deliver new products faster for our customers. And then lastly, to round out those first 2 points that are really kind of what our model is built off of is the efficiency of the platform. We're already seeing it with the brands we acquired in 2021, but there is a massive opportunity for efficiency gains and marketing. And there's a massive opportunity for efficiency gains in supply chain. We've been able to aggregate our spend. For instance, on ocean freight rates, with container costs and things like that to help reduce costs drastically for the brands that have come into the platform. And we've been able to aggregate our spend on the marketing side to make our CPMs more efficient than they were pre coming together. So this is truly a case of better together with the brands that we have inside the platform. Now the 3 additive areas of the business that are opportunities for upside that aren't baked into our guidance are, first, the M&A opportunity. You saw us go out and acquire 3 brands in 2021. They are incredible brands that have strong passionate followings. They're early in their story with large TAMs, and we were able to buy them at a good value. We have a good healthy pipeline right now of opportunities for M&A with other founder-run outdoor businesses that are direct-to-consumer, early in their story, large TAMs, profitable with passionate customer followings. We're going to lean into this. You're going to see us continue to look for opportunities down the fairway for us to bring additional brands. One of the things that we've loved about the acquisitions we've already made is the seasonal rounding out that we get to see from bringing on 3 brands that have more of a Q2, Q3 seasonality. Fire pits aren't as popular to sit around in July in Texas as they are in November and December. But Chubbies swimwear and Oru Kayaks and ISLE paddleboards are fantastic products for July and August. So great opportunities to kind of round out the business and to continue to drive good moments and lasting memories for our customers. Fourth is the international opportunity. We mentioned this on our last call. We launched Canada in a localized fashion in August. And we launched Europe in October. We're going to continue to lean into those 2 markets in 2022 and beyond. And in addition to that, looking to expand into Australia, the latter part of this year. We see big opportunities in international. The early signs are positive. We're seeing good momentum and very similar reaction from customers going online, posting about sitting around the Solo Stove with their friends and family members. And man, I just -- I've never seen anything like it. I have to have it and going out and buying one themselves. So the referral rate is strong. And we're continuing to lean in to what we believe will be a big opportunity on the international side. And then finally, the lever -- the retail lever that we have to pull, as you saw in an earlier slide, our historical retail to D2C through our own channels mix has been about 92%, 8%. We see an opportunity to expand into retail. We've had lots of demand coming through from our existing partners like DICK'S Sporting Goods, Academy, REI, Ace Hardware. We're going to continue to lean into those and believe that over time, that will be a mix that probably levels out somewhere between 15% to 20% retail and 80% to 85% direct-to-consumer, but big opportunity for growth there. And then lastly, on the right-hand side of the page, the corporate opportunity. Just to help everyone understand what we mean by corporate is we're talking about companies coming to us and wanting us to brand the products with their logos, to give out to either key customers or to employees and the like. This has been a fast-growing part of our business. And it opens up a completely new channel of customers that are unaware of our brand that are really being driven by the corporate customers. So big unlock for us, and we'll continue to lean into as we continue to grow. So with that, I'll turn it to Sam and have him go through the numbers in a little bit more detail.

Awesome. Thank you, John. Hello, everyone. Thank you for taking some time with us today. John, we can go and move to the next slide. I wanted to start off by just hitting with the key overarching message that help you take away, which is that we have a really unique combination of growth, margins, profitability and cash flow. This starts with growth, which I think John has covered pretty well in depth. In terms of growing organically, 130%, led by Solo Stove growing at 170% for 2021 over 2020. Let me just add to that, from a macro standpoint, like John mentioned, we're early stage. We have massive TAMs, a ton of whitespace ahead of us. And we're adding fantastic secular tailwinds of folks wanting to get away from the Zoom effect, being on video all day, getting the real tangible experiences, especially post pandemic. Folks being forced to become comfortable with purchasing online and purchasing higher average order value items online. It's way more convenient when you trust a brand to just purchase it offline. And when your friends are referring it, and when your friends love it, that obviously helps growth and just allows us to ride those strong secular tailwinds as well as our beloved products. Moving into gross margin. We have a really disciplined approach. We're very purposeful about profit. The whole way we design, package, build, everything is designed to drive that high 60% gross margin. And we're also cutting out the retailer for the bulk of our transaction. What that does is it allows us to not only price well, but also to real-time price. And just as needed, change our discount or launch a new product, we're not beholding to the retailer for our gross margin or for launching new products. We also have a very passionate following of customers that allows our demand -- price demand to be inelastic. This isn't a commodity sale. And then on the cost side of the gross margin equation, we've taken supply chain in-house that actually not only helps cost but also helps timing, which then helps your costs. So you're not paying to have to expedite. Also on the manufacturing side, because of our growth, we've been able to negotiate at better volumes. So lower rates because of those volumes. So have really managed gross margin very well. Really proud of the team on that front. From an OpEx standpoint, John's covered how we've taken fulfillment in-house and not just delivered better cost but delivered a better customer experience. We've taken marketing in-house, again, delivered messaging that we know for sure matches the product. And then we've maintained that data infrastructure in-house for more effective marketing from a profitability standpoint on a go-forward basis, again, to the betterment of the customer. That has allowed us to, in 2021, deliver 30%-plus EBITDA margin -- adjusted EBITDA margin, which we're very proud of, and it was a tremendous performance by the team. From a CapEx standpoint, our business model requires very little in terms of CapEx for growth, forklifts, conveyor belts, racking equipment. We're talking hundreds of thousands of dollars, not millions, which allows us to drive high free cash flow conversion over time. John, let's move to the next slide. From a growth standpoint, looking at the left, one of the interesting things coming out of 2020 was a lot of folks, ourselves included being conservative about growth is, hey, there was a COVID, there's pandemic like who knows what exactly that did. Like let's make sure we're careful about growth. And as you can see, I mean, that concerns completely alleviated where organically, Solo Stove is growing 170%. If you include our acquisitions are growing 200%. And this is a scenario where we've done it while bringing -- it's not growth at all costs, but we're also growing profit as well. And because success was breeding success and because we're CapEx-light, we're able to reinvest into things like international expansion, product innovation, inorganic innovation right via acquisition. And so this is something we're really excited about to be able to rent and repeat and continue to grow with and again, grow both sales and profitability together. If we move to the next slide, John, just to touch on our long-term growth algorithm. One of the points that maybe we haven't hit on is that the team being able to pair real-time data on the website with new market avenues for growth, whether it's TikTok or linear TV or Facebook or Google or whatever it is, really gives us confidence in our ability to drive our own traffic. We don't need COVID traffic. We drive our own traffic to continue to grow long term. That's where we have confidence in being able to grow 20% plus on a long-term basis. Do it with profit, we're not leaving profit behind and do it while generating high free cash flow. What's not included in that growth algorithm are additional product innovation and launches such as Solo Stove [ height ] which we launched, our heat deflectors, which we launched, international expansion, which we're learning about in general, our model is, until we know the data until we have a really chance to prove it out we're not going to include it in our long-term growth numbers. Just to make sure that for you, we're being conservative and accurate. And then, of course, we're also not including future M&A. We're going to be opportunistic. We're not going to force our hands there. We're going to make sure that we're really finding accretive acquisitions on every level of growth, profitability, a customer base where we want brands that customers are passionate about, that our existing customer base and new customer base will really appreciate that we've added to our portfolio. With that, I'll turn it back over to John, if there's anything you want to add or we can move to questions.

Appreciate it, Sam. I think that brings us to time. It's fantastic. Invite all of you to join us this afternoon for a breakout. We do have a breakout session. And we will be taking questions there and doing some Q&A. So appreciate you taking the time. I know you have a busy schedule. And I'm glad you spend some of that time with us. And have a great day.