Aterian Q2 2024 Earnings Call Transcript

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August 8, 2024

There are 5 speakers on the call.

Operator

Thank you for standing by.

Operator

My name is Kath, and I will be your conference operator today. At this time, I would like to welcome everyone to the Athyrian, Inc. 2nd Quarter Earnings Report. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session.

Operator

I would now like to turn the call over to Ilya Grzozowski, Vice President, Investor Relations and Corporate Development. Thank you. Please go ahead.

Speaker 1

Thank you for joining us today to discuss Atterion's Q2 2024 earnings results. On today's call are Arturo Rodriguez, our CEO and Josh Feldman, our CFO. A copy of today's press release is available on the Investor Relations section of Ityrium's website at ityrium. Io. Before we get started, I want to remind everyone that the remarks on this call may contain forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 that are based on current management expectations.

Speaker 1

These may include, without limitation, preconditions, expectations, targets or estimates, including regarding our anticipated financial performance, business plans and objectives, future events and developments, and actual results could differ materially from those mentioned. Results could differ materially from those mentioned. These forward looking statements also involve substantial risks and uncertainties, some of which may be outside of our control and that could cause actual results to differ materially from those expressed or implied by such statements. These risks and uncertainties, among others, are discussed in our filings with the SEC. We encourage you to review these filings for a discussion of these risks, including our annual report on Form 10 ks filed on March 19, 2024, and our quarterly report on Form 10 Q when it is available on the Investors portion of our website ataterion.

Speaker 1

Io. You should not place undue reliance on these forward looking statements. These statements are made only as of today, and we undertake no obligation to update or revise them for any new information, except as required by law. This call will also contain certain non GAAP financial measures, including adjusted EBITDA and adjusted EBITDA margin, which we believe are useful supplemental measures that assist in evaluating our ability to generate earnings, provide consistency and comparability with our past performance and facilitate period to period comparisons of our core operating results. Reconciliation of these non GAAP measures to most comparable GAAP measures and definitions of these indicators are included in our earnings release, which is available on the Investors portion of our website at attirion.

Speaker 1

Io. Please note that our definition of these measures may differ from similarly titled metrics presented by other companies. We are unable to provide a reconciliation of non GAAP adjusted EBITDA margin to net income margin, the most directly comparable GAAP financial measure on a forward looking basis without unreasonable efforts because items that impact GAAP financial measures are not within the company's control and or cannot be reasonably predicted. With that, I will turn the call over to Arty.

Speaker 2

Thank you, Ilya, and thank you everyone for joining us today. Just 1 year ago, I spoke to you as your CFO and Co CEO, and now I speak to you as Atirion's CEO. I'm very honored and humbled to have the opportunity to continue to lead Atirion into its future. I want to thank our Board of Directors and the Atirion team for their trust and confidence as we embark on this chapter together. Today, I'm going to discuss, 1, our Q2 results and the actions that led us to our successful results and 2, an initial discussion for growth for Tyrian beyond 2024.

Speaker 2

Josh, our new CFO, will then cover in-depth our financial results for the Q2 and will provide our outlook for Q3. For those of you joining us for the first time, I'll start with a quick introduction to Atirion. Atirion owns and operates its own brands, marketing and selling consumer products across multiple categories, primarily on e commerce marketplaces. We sell our products primarily in the U. S.

Speaker 2

And today we derive most of our revenues from Amazon dotcom. Since 2014, we have either organically launched or purchased brands and today our focus is on operating 6 amazing brands. They are Home Labs, which currently focuses on dehumidification and refrigeration, a best selling leader in dehumidifiers on Amazon. PureSteam, another best selling brand on Amazon, which leverages the natural power of steam to clean your home with its steam mops or reduce wrinkles in your clothes with steam irons. Healing Solution, our collection of essential oil brands continues to have momentum with some of its recent rebrandings and continues to provide consumers a great essential oil experience.

Speaker 2

Photo Paper Direct, our DIY or do it yourself iron on transfer paper provides joy and fulfillment to all consumers who love making their own T shirts, arts and crafts. Mueller Living, which focuses on innovative quality products for your kitchen, has multiple top selling products on Amazon. And finally, Squatty Potty, the original toilet stool and the leader in the category. Quadi continues to help people daily around the world poop easier and better. With these 6 foundational brands, Oterian is well positioned to grow over time and consistently deliver high quality affordable products to consumers.

Speaker 2

Now to our Q2 performance. We delivered on our Q2 2024 net revenue and adjusted EBITDA goals, beating our June 2024 guidance. This performance was driven by a combination of our success in dehumidifiers during the period and the impact of cost cutting measures we implemented previously in Q1 of 2024. We delivered adjusted EBITDA profitability for the first time in 10 quarters since Q3 of 2021. When compared to the same period last year, our adjusted EBITDA performance for Q2 is an improvement of over 100% on even lower revenue.

Speaker 2

1st and foremost, I want to congratulate our hardworking people worldwide for their continued dedication and belief in what we are doing to make Atirean a profitable consumer products company. This is another indicator that we continue to execute on our mission to focus, simplify and stabilize Tyrian. Specifically to our net revenue performance, the weather always plays in seasonal product performance. However, our improved sales performance started in early May. And even though we believe we benefited from June's hot and humid weather, we do believe that our primary driver of our success was driven by our focus and simplification mission and our outside in approach.

Speaker 2

With the simplification across our business, such as selling within a reduced seller account footprint, this is allowing us to simplify how we go to market and naturally narrows our daily focus. With our shift to 3rd party best in class software, not only are we seeing improvements on direct marketplace performance, but we're also more nimble allowing us to keep up with ever changing rules and tactics on Amazon. For example, we are seeing better than expected results in driving outside traffic to Amazon via various marketing initiatives, which benefits our product listing rankings. Now as we look at Q3 and Q4 twenty towards our second half adjusted EBITDA profitability goals. For Q3 and Q4 twenty twenty four, we expect our gross margin to remain strong due to pricing and product mix.

Speaker 2

We do expect our overall contribution margin percentage to remain primarily in line with year to date results. And in combination with our continued expected realization of our fixed cost savings, we believe we are well positioned to achieve adjusted EBITDA profitability for the second half of twenty twenty four. However, delivering results is never easy. It requires a lot of work and effort, which I'm very confident our team will continue to deliver on. We continue to see consumer space as volatile and that consumers continue to be very wise with their spending, especially with the current inflationary environment.

Speaker 2

We expect container costs to be high when compared to last year for the rest of 2024 and we are always watching Amazon and their requirements. The recent seller fulfilled Prime program changes continue to be burdensome considering the reliance on last mile providers and volatile summer weather impacting on time delivery. We have also sold out on a few of our dehumidifier SKUs at the beginning of July, but expect to be fully in stock again by mid August. Even with those challenges, we still feel confident that we are tracking on our goal of second half adjusted EBITDA profitability. Looking beyond 2024, as we anticipate delivering second half adjusted EBITDA profitability, part of the mission will move from stabilization to growth.

Speaker 2

Growth will become one of our primary goals in 2025, which will allow us to drive over time a more robust adjusted EBITDA profitability. As we previously said, we still believe growth will be coming from 2 key pillars. 1 is omni channel expansion, including continued improvements of our existing listings to bring them in best in class levels. We've already launched our MercadoLibre, body potty and Walmart retail store continues to do well and we continue to plan on our expansion into other channels. Target Plus is our next in our roadmap and we hope to have that channel live before Black Friday this year.

Speaker 2

Organic product launches will also play. We feel really bullish that we can very opportunistically continue to launch new variations to grow our business, but also launch new products in both existing and new categories. We still believe M and A can have an impact on Atirean's growth. As we have stated previously, we will continue to look at M and A opportunistically. However, we believe it will not be the primary driver of our growth strategy.

Speaker 2

Today, we believe organic will be the primary driver of Tierian's future growth. We expect to discuss more of our growth strategies when we deliver our Q4 results. In closing, before I hand it off to Josh, just about a year ago, we set on a mission to focus, stabilize and simplify tiering in order to drive it to adjusted EBITDA profitability and to deliver long term shareholder value. Back in late 2023, we announced key initiatives to drive towards profitability and we believe we have delivered on all of them. First was a rationalized SKU portfolio, which allowed us to focus on our best and most profitable brands and SKUs.

Speaker 2

Duplication on our Amazon account structure allowing us to increase our focus and simplify how we go to market The shift towards best in class third party tools allowing us to be more nimble in upgrading many of our marketing strategy. An outside in thinking approach, which challenged our previous ideology and allowed us to execute on new initiatives in line with today's marketplace tactics and fixed cost rationalization, an always tough decision to align our fixed costs to our expected revenue, but we delivered those. And today, we announced through these initiatives our first adjusted EBITDA profitable quarter, earlier than we had promised. We believe this is just another indicator of our continued focus on delivering our stated goals. I want to again recognize and congratulate our team on their continued dedication, excitement and hard work and our shareholders for their patience and continued support.

Speaker 2

But we are not done. We have high expectations and exciting beliefs on what Atirion can do and become, ultimately driving profitable growth and maximizing shareholder value. Thank you for your time and unwavering support. Now I'll pass it along to Josh. Thanks, Aarti.

Speaker 2

Good evening, everyone. We continue to make progress on our path of focusing, simplifying and stabilizing Athyrian. We are starting to see results from these efforts as our key metrics are improving and we've reported adjusted EBITDA profitability for the Q2. Our Q2 results were well above our original revenue and profitability guidance and even exceeded our updated sales guidance range of $23,000,000 to $26,000,000 and adjusted EBITDA loss of negative $1,000,000 to breakeven. Our gross margin improved year over year by over 18 basis points to 60.4 percent and our overall Centimeters exceeded 17%, primarily as a result of our SKU rationalization.

Speaker 2

Although the SKU rationalization impacted our top line revenue, it significantly improved our core business metrics. Our 2nd quarter net loss improved by 89.6 percent year over year and after sentiment and acknowledge the whole Atirion team on this impressive effort and achieving this milestone. Now moving on to the detailed results for the quarter. Net revenue for the Q2 of 2024 declined 20.6 percent to 28,000,000 dollars from $35,300,000 in the year ago quarter. Including the impact of the SKU rationalization efforts into the comparable prior year, net revenue would have been essentially flat.

Speaker 2

Our sustained net revenue of $26,300,000 decreased as expected by 15.2 percent or $4,700,000 from $31,000,000 primarily as a result of our SKU rationalization efforts. Our launch revenue was $500,000 during Q2 2024 compared to $42,000 in Q2 2023. As planned, we had no new product category launches in the Q2. However, we did launch variations of existing products in our Healing Solutions and Squatty Potty brands. We expect to continue with launching predominantly variations in the second half of the year.

Speaker 2

As we strive to stay focused, we continue to be thoughtful on the timing of our product launches. Overall gross margin for the 2nd quarter increased to 60 0.4% from 42.2% in the year ago quarter, a decrease from 65.1% in Q1 2024. The year over year improvement was driven by the positive impact of our SKU rationalization efforts, product mix and less liquidation of high cost inventory compared to the prior period. Our overall Q2 2024 contribution margin as defined in our earnings release was 17.4%, which improved compared to the prior year's negative 3.6%, an increase compared to Q1 20 24 Centimeters of 14.1%. The year over year increase in contribution margin was driven by the positive impact of our SKU rationalization efforts and less liquidation of higher cost inventory compared to the prior period.

Speaker 2

Q2 2024 saw our sustained products contribution margin improve year over year to 19.8% versus 2.1% in Q2 2023. The increase in contribution margin was driven by our focus on more profitable SKUs as part of our SKU rationalization efforts. Looking deeper into our contribution margin for Q2 2024, our variable sales and distribution expenses as a percentage of net revenue decreased to 43% as compared to 45.8% in the year ago quarter. This decrease in sales and distribution expenses as a percentage of revenue is primarily due to product mix, with a higher proportion of dehumidifier sales during the 3 months ended June 30, 2024, compared to the year ago quarter. These products incurred lower last mile costs as a percentage of revenue.

Speaker 2

Our operating loss of negative $3,200,000 in the Q2 of 2024 improved from a loss of negative $36,400,000 in the year ago quarter, an improvement of approximately 91.2%, primarily driven by the improvement in Centimeters, the reduction of fixed costs due to our cost cutting initiatives and no impact of intangible write offs in the current period. Our Q2 2024 operating loss includes $2,900,000 of non cash stock compensation expense, while our 2nd quarter 2023 operating loss included $3,200,000 of non cash stock compensation, a non cash loss on impairment of intangibles of $22,800,000 and restructuring costs of $1,200,000 Our net loss for the Q2 of 2024 of $3,600,000 improved from a loss of $34,800,000 in the year ago quarter, an improvement of approximately 89.6 percent, primarily driven by the improvement in Centimeters and the reduction of fixed costs and the impact of intangible write offs in the prior year. Our adjusted EBITDA gain of $200,000 as defined in our earnings release improved by 102% from an adjusted EBITDA loss of $8,000,000 in the Q2 of 2023, primarily driven by the improvement in Centimeters and the reduction of fixed costs. Moving on to the balance sheet. At June 30, 2024, we had cash of approximately $20,300,000 compared with $17,500,000 at March 31, 2024.

Speaker 2

The increase in cash is predominantly driven by positive impacts of working capital, partially offset by our net loss in the period and repayments on our credit facility. At June 30, our inventory level was at $18,400,000 down from $18,500,000 at the end of the Q1 of 2024 and down from $36,700,000 in the year ago quarter end. Our credit facility balance at the end of the Q2 2024 was $9,600,000 up from $9,400,000 at the end of the first quarter of 2024 and down from $11,100,000 in the prior year period. As we look at Q3 2024, considering our strategic SKU rationalization and the continued challenging consumer environment, we believe that net revenue will be between 25,000,000 dollars 27,000,000 Using the middle of the range, this would be an approximately 35% decrease from last year's Q3 revenue of $39,700,000 primarily driven by our reduction in SKUs from our strategic SKU rationalization. Including the impact of the SKU rationalization efforts into the comparable prior year, the revenue is expected to decrease only by 12%.

Speaker 2

As we have previously discussed, our decrease in net revenue versus prior year is expected as we continue to focus our go forward business on our best brands and products. Our primary focus today continues to be consistent adjusted EBITDA profitability. For Q3 2024, we expect adjusted EBITDA loss to be in the range of breakeven to 600,000 dollars The middle of this range represents a significant improvement compared to Q3 2023 loss of 4,400,000 dollars We also believe based on our current forecast that we have sufficient cash above our covenant to achieve our goal of consistent adjusted EBITDA profitability without raising additional equity. As previously stated, if we pursue additional financing, it will be predominantly for accretive M and A. In closing, we are confident that with our products, strong balance sheet, dedicated and hardworking teams and our principles of focus, simplification and stabilization, we are turning the corner.

Speaker 2

We look forward continue our journey towards consistent adjusted EBITDA profitability and ultimate aim to maximize long term shareholder value. With that, I'll turn it back to you, operator, to open up the call for questions.

Speaker 3

Thank you. We will now begin the question and answer session. And your first question comes from the line of Brian Kinstlinger with AJP. Thank you. Please go ahead.

Speaker 1

Can you quantify how many new SKUs you introduced during the first half of the year? And then what are your plans for the next 6 to 12 months?

Speaker 2

Hey, Brian, it's Josh. So for the first half of the year, we really didn't introduce any new product categories. There's only variations of existing categories. So it was probably about 20 in total, including mostly our Healing Solutions business and our Squatty Potty brands.

Speaker 1

Great. Thank you. And then how should we think about seasonality for the second half of the year?

Speaker 2

As far as so as Arty said in his prepared remarks, we expect gross margin and contribution margin to be consistent going forward. From a sales perspective, I think historically Q3 has been a higher sales quarter than Q4 and we think that that will be reflective for the second half of this year.

Speaker 1

Great. Thank you.

Speaker 3

Thank you. And your next question comes from the line of Alex Fuhrman with Craig Hallum Capital Group. Thank you. Please ask your question.

Speaker 4

Hey guys, thanks very much for taking my question and congratulations on achieving EBITDA profitability sooner than expected. Arty, you mentioned that at some point it sounds like over the next couple of quarters, you'd like to be pivoting from stabilizing the business to trying to get back to growth. I'm curious of the 6 brands that are really now the cornerstone of your portfolio, which of those brands would you say really have the most potential for growth over the next couple of years? And to what extent will M and A be a part of the growth strategy?

Speaker 2

Hey, Alex, thank you. Good question. Not to sound like a father with his kids, I think all the brands can really perform well. I think that the roadmaps we're considering really have a lot of potential, especially if we think about how we're rounding our variation strategy on some of our existing listings. At the same time, I think we feel very bullish that there's a lot of opportunities across multiple categories, new categories, let's say, across multiple brands.

Speaker 2

And even that also includes some thoughts about potentially even revitalizing some previously rationalized SKUs. And so I think they all can. Now they're all different, right, in fairness, right? Like launching new paper products is probably a lot more around variations, where I would say there's a lot more opportunities in new categories when you think about both pure steam, home labs and even Mueller Living and even Squatty Potty to some extent. So I do think that it's really all the brands can definitely all grow.

Speaker 2

We're very confident with the GMs that we have in place and the brand management teams that we have placed under them. And I think there's going to be a lot of opportunities across all brands. I think we got a strong enough base of people to really be looking at each of them and growing them each. Though we'll be very cautious in how we launch products and very patient. I want to make sure that people understand the 6 brands we chose to stay with after rationalization do really have the potential to grow.

Speaker 2

As to M and A, which was your second part of the question, I think in my prepared remarks I covered that. Listen, we think M and A can play. We're going to be very opportunistic about it. But at the same time, I really want to emphasize that I don't think it's our primary driver for growth. I think there's a lot more opportunities, especially in organic growth, which requires less investment, takes a little bit more time, but requires less investment.

Speaker 2

And I think we're very bullish about that. At the same time, us looking at M and A, I think, again, I'll mention opportunistic, but I'll just say we're being very thoughtful, strategic and patient. And I think in this current environment, it's a very strong trait to be.

Speaker 3

Thank you. And there are no questions. I will now turn the conference back over to Ilya Grozovsky, Vice President, Investor Relations and Corporate Development for closing remarks.

Speaker 1

Thanks. As part of our shareholder PERKS program, which as a reminder, investors can sign up for itterion. Ioperks. Participants have the ability to ask management questions on our earnings calls. I wanted to thank all of the shareholder Perks participants for their loyalty and their participation in the program and for their questions.

Speaker 1

I've picked a few of the most popular questions that have been submitted. First question is, does Etirion have the capability to reenter product lines that were exited or rationalized if the dynamic in the category change?

Speaker 2

Thanks, Ilya. I always love these questions. Yes, we're very excited about the growth plans for Tyrian. We hope to provide more color. As we said in the prepared remarks, we're going to provide more colors towards the end of the year.

Speaker 2

But yes, ultimately, as far as those plans, we are looking at rationalized SKUs where we think there's opportunity to relaunch, especially when they can be meaningful. So we're definitely looking at it.

Speaker 1

Great. Next question. What role does AI play in the Ityrian of today and in the Ityrian of the future?

Speaker 2

Another great question. Look, I believe our teams are doing a great job exploring all the new wonderful tools out there. And honestly, we find more tools every month that we keep looking. We're using various tools today. I think Josh and I laugh a lot.

Speaker 2

We use ChatCPT a lot. Almost every day, we're in there asking questions and learning from it. And so I think we're currently using a lot of that to support and be efficient in our day to day lives. Our view today is that AI tools are going to be providing scalability for our future growth and not replacing our people. We believe we are at the base headcount operate.

Speaker 2

And as part of that, where we spend a lot of time today where the team is looking at a lot of these tools that are out there, it's very focused on content generation side, which should be a supplemental to our creative team and some of the product initiatives that we're working on. I think as we look in the future, I think if I think about next year, maybe beyond, there are a lot of AI tools that are coming out there that really could help us with product research, customer service and customer insights, which I think will be really helpful as we kind of reignite the organic launch strategies.

Speaker 1

Great. Thanks, Aarti and Josh. This concludes the Q and A portion of the call. We look forward to speaking with you all on future calls. This ends our call and you may now disconnect.

Speaker 1

Thank you.

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Aterian Q2 2024
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