Better Choice Company Inc.

Good day and welcome to the Better Choice Company, Inc. Second Quarter 2022 Earnings Conference Call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one. Please note that this event is being recorded. I would now like to turn the conference over to Rob Towerman, COO. Please go ahead, sir.

Thank you, Operator. Welcome, everyone, to Better Choice's second quarter earnings conference call. This morning, we issued our Q2 2022 financial results press release and posted our updated earnings presentation under the IR section of our website, which we will be discussing today. I'm joined by Scott Lerner, our CEO, Sharla Cook, our CFO, and Donald Young, our Chief Sales Officer. Before we begin, please remember that during the course of this call, we may make forward-looking statements within the meaning of the federal securities laws. These statements are based on management's current expectations and beliefs and involves risks and uncertainties that could cause actual results to differ materially from those described in these forward-looking statements. Please refer to the company's annual report on Form 10-K filed with the Securities and Exchange Commission and the company's press release issued Tuesday, March 29, 2022, for a detailed discussion of the risks that could cause actual results to differ materially from those expressed or implied in any forward-looking statements made today. Please note that on today's call, management will refer to certain non-GAAP financial measures such as gross revenue, adjusted gross margin, EBITDA, and adjusted EBITDA. Although the company believes these non-GAAP financial measures provide useful information for investors, The presentation of this information is not intended to be considered in isolation or is a substitute for the financial information presented in accordance with GAAP. Please refer to our press release and presentation issued August 11, 2022, for a reconciliation of the non-GAAP financial measures to the most comparable measures prepared in accordance with GAAP. With that, let me hand it over to Scott.

Thank you, Rob, and welcome everyone to our 2022 second quarter financial results conference call. I'm excited to share that for the second quarter in a row, we've delivered record sales growth while simultaneously improving gross margin. In the second quarter, we generated gross sales of 19.8 million, bringing total gross sales for the first half of 2022 to approximately $40 million. On a net basis, this translates to $33.5 million of revenue, a 50% increase relative to the same period last year. In addition to driving incremental revenue growth, we also realized meaningful sequential gross margin improvement. We achieved an adjusted gross margin of 31% during the second quarter, representing a three percentage point increase relative to Q1. This adjustment takes into account one-time pet specialty launch expenses associated with the seasonal wall placement at Petco, which enabled us to launch Halo Elevate in May rather than waiting for full store resets in July. Today, Halo Elevate can be purchased in more than 1,500 pet specialty stores, which includes more than 1,000 Petco locations and 600 Pet Supplies Plus locations. Although it has only been three months since we launched at Pet Supplies Plus and less than one month since we moved from the seasonal wall at Petco to permanent placement in the dog aisle, we have observed consistent week-over-week point-of-sales growth. This has been supported by strong repeat consumer purchase rates at multiple retailers, which we've been able to track via customer loyalty program data, suggesting that the product is being well-received by pet parents. In aggregate, this has resulted in 133% year over year growth of our brick and mortar business. This growth has been driven primarily by $3.7 million of Elevate growth sales in Q2, bringing total Elevate sales to 6.2 million for the first half of 2022. Although we don't expect that Q3 Elevate sales will be as high as Q2, Since Q2 Elevate sales represent a mix of initial stocking orders and repeat customer purchases, current POS data is in line with our expectations as we continue to ramp. Internationally, we generated $7.1 million in sales in Q2, representing 75% year-over-year growth and another quarterly record. Most importantly, we saw continued end consumer sales growth during the June 18th promotional event in China, despite all the noise around COVID-associated lockdowns, demonstrating the strength of our business and the importance of high-quality pet food to consumers around the world. A portion of the sales made in June were also in preparation for 11-11, Normally, international sales are highest in Q3 as they represent the inventory buildup ahead of November promotions. But given some of the recent challenges associated with the global supply chain, we worked with our partners to bring some production forward and ensure that we'd be in stock to meet end consumer demand. While we still expect that second half international sales will be strong, it is likely that Q2 will be the largest international quarter this year. unlike Q3 in years past. Offsetting our growth internationally and in pet specialty, e-commerce delivered lower than expected sales growth. Although e-commerce sales increased 28% in the second quarter relative to the same period last year, year-to-date e-commerce growth was only 8%, which we believe is driven in large part by changes in working capital management by our customers. With that in mind, our point-of-sale sales growth for e-commerce, particularly on Amazon, materially exceeds our sales growth, indicating that our e-commerce partners are holding less inventory on hand, a response that has been seen cross-category amidst the current economic environment. While we've seen this trend persistent in early Q3, we are optimistic that e-commerce sales will more closely align with point-of-sales growth in the future. In addition, as we noted on our last call, rebranded Halo Holistic is estimated to be in production in the third quarter, in time for a late Q3, early Q4 launch, which should further bolster our e-commerce business. With regards to our direct-to-consumer platform, the integration of the True Dog brand underneath the broader Halo umbrella occurred on schedule in early July, with no disruptions in our ability to supply loyal TrueDog customers and subscribers. The transition of the TrueDog brand to Halo couldn't come at a better time, as it allows our direct-to-consumer platform to benefit fully from the launch of our multi-million dollar media campaign, a newly revamped consumer-facing website. In addition, we are exploring the opportunity to expand the Halo Freeze-Dried Raw offering into other channels, including pet specialty, and international now that they are sold underneath the broader Halo brand. Although our sales growth is very exciting, I'm most proud that we have been able to realize meaningful sequential gross margin improvement despite the challenging macroeconomic environment. When possible, we've looked to take preventative rather than reactionary measures to address raw material price increases, worldwide supply disruptions, and inflationary pressures. These measures, coupled with the implementation of domestic and international price increases in mid-April, helped us deliver an increase of approximately 300 basis points in Q2, with further improvements expected in the back half of this year. This improvement in Q2 2022 was driven by several key factors, which included the shift of domestic kibble production to a new co-manufacturer in January 2022, which resulted in an 8 to 10 percentage point increase in skew gross margin for new production, offsetting raw material price increases, consolidating and in some cases pre-preying production runs to capture gross margin, reducing contracted inbound freight per pound, and finally optimizing ingredient procurement where possible to mitigate supply chain challenges. As we look to the second half of 2022, we expect to realize continued gross margin improvements, driven primarily by the transition of our international dry kibble diets to a new coal manufacturer. This transition was completed in mid-June and resulted in an immediate 1,500 to 2,000 basis point improvement to gross margins. Prior to the transition, these diets represented approximately $10 million of net sales in the first half of 2022. If we had been able to make this change at the beginning of Q2 rather than at the end, we'd be looking at a 35% gross margin for Q2. While we are very excited by our sales growth in the first half of this year, we remain laser focused on driving continued margin improvements across our portfolio. As we continue to scale our business, launch margin-accretive innovation, and realize further cost improvements, we believe we have sufficient liquidity to reach profitability and are well-positioned to succeed in the current economic environment. The good news is that despite these challenges, the pet food industry remains one of the most recession-resistant categories within CPG. And while prices have risen, consumer demand has remained strong. In addition, we've also picked great retail partners that are growing rapidly and continuing to invest in premium consumers, our target demographic. Before turning it over to Donald, I wanted to highlight how some of our channel partners have publicly responded to recent inflationary trends, since our channel strategy is a fundamental key to our success. In March, Petco announced their 14th consecutive growth quarter, and called out their commitment to maintaining strategic investment levels and remained confident in their mid- to long-term guidance, specifically because their customers are typically higher spending. In June, Chewy delivered double-digit sales growth, calling out that their results were driven by resilient consumer demand and pricing strength in consumables and healthcare, the categories we play. while seeing continued pressure in discretionary categories such as hard goods. In August, Pet Supplies Plus announced eight new store openings and 20 new franchise agreements on top of 7% sales growth in Q2 at their existing franchise locations. With that in mind, let me turn it over to Donald to cover some of our key channel partnerships in detail.