Better Choice Company Inc.

Good morning. I will be your conference operator today. At this time, I would like to welcome everyone to the Better Choice Company third quarter 2022 earnings conference call. Today's call is being recorded. I'd now like to turn it over to Rob Sauerman, Chief Operating Officer. You may begin.

Thank you, operator. Welcome everyone to Better Choice's third quarter earnings conference call. This morning, we issued our Q3 2022 financial results press release and posted our updated earnings presentation under the IR section of our website, which we'll be discussing today. I'm joined by Lionel Conacher, our interim 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 involve 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 on 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 the substitute for the financial information presented in a course of GAAP. Please refer to our press release and presentation issued on November 10th, 2022 for reconciliation of the non-GAAP financial measures, the most comparable measures prepared in accordance with GAAP. With that, let me hand it over to Lionel.

Thank you, Rob, and good morning, everyone. I'm excited to be speaking with you today for the first time as both a director and the interim CEO of Better Choice. It's only been a few months, but I've already learned a tremendous amount about this company and the passion our team has for engaging with pet parents. Before we move into a discussion of our third quarter results, I wanted to take time to share a bit more about myself, what attracted me to join the Better Choice Board, and ultimately what led me to serve as interim CEO. Over the course of my 30-plus year career, I've had the opportunity to hold a number of senior positions in public companies and have helped many businesses realize their growth potential through the lens of operating, investment banking, private equity, and venture capital. Since 2020, I've served as the chairman of DXL Group, where I've partnered with a great board and management team as we've navigated the COVID-19 pandemic and delivered strong operating results, which has directly translated to meaningful shareholder value creation. As I look at Better Choice and the trajectory of the Halo brand, I see a lot of opportunity to build upon an already strong foundation. For the last two years, we've focused on assembling the building blocks for growth across every aspect of our multi-channel business. Our team, with a track record of success in PET, has driven a number of these initiatives, which include the development and launch of new products like Halo Elevate, the rebrand of our core product, Halo Holistic, and the transformation of the TrueDry brand under the Halo umbrella. Simultaneously, we've established several new co-manufacturing partnerships, meaningfully expanded our brick-and-mortar presence in PET specialty, and invested behind our rapidly growing international online business. Despite having dealt with significant macro challenges this past year, Better Choice is well positioned to continue on its growth trajectory as the strategic decisions we have made begin to pay off. Although the pet food industry has been and still is one of the most recession-resistant categories within CPG, inflation has negatively affected the supply side of the business industry-wide. September prices are up 14% year-over-year, driven by significant increases in raw material costs material costs in late 2021 and early 2022. On the whole, our industry continues to grow meaningfully, but price, particularly in the premium sector among more affluent customers, will likely be the primary driver of overall growth. In addition, rising interest rates have fundamentally changed how many of our channel partners approach their working capital position, as larger partners like Amazon, Chewy, and Petco all utilize credit facilities to purchase inventory. As these partners look to reduce interest expense, they've chosen to materially reduce weeks on hand in their distribution centers across the board. This had a material negative effect on our net sales in Q3, and we anticipate that it's likely this trend will continue into Q4. In contrast, sell-through, particularly for Elevate and Pet Specialty and Holistic internationally, remains strong and growing, which bodes well for the growth of our brand. In aggregate, we've generated 45.3 million of net sales in the first nine months of 2022, representing more than 30% year-on-year growth and well exceeding industry averages. Although the launch of Halo Elevate and Pet Specialty remains a core focus, it's worth noting that almost 70% of all Halo customers today purchase our products online, especially when you consider that more than 75% of our international consumers are online shoppers. While we've demonstrated exceedingly strong growth internationally, which Rob will get into in more detail later, our domestic e-commerce and direct-to-consumer channels have struggled on a relative basis. This has been driven by out-of-stocks in the first half of 2022 and the delayed launch of new Halo Holistic from Q2 into Q4. In addition, Amazon has been the most aggressive of all our customers in reducing supply on hand as they continue to pull down inventory levels in their fulfillment centers across the board. That said, our POS sales on Amazon continue to improve, reflecting a year-to-date increase of 15% over the prior year and a 20% increase in the month of September. Turning to Chewy, our year-to-date sales are roughly flat, prior year driven by softer than expected POS volume, but we've begun to see improved consumer purchases late in the third quarter. Successfully executing the launch of the new holistic and Q4 will be a key driver of our e-commerce performance in 2023. The year-over-year decline in our DTC channel has been driven primarily by a planned reduction to customer acquisition spent ahead of the brand migration that we successfully completed early in the third quarter. While this strategic shift has resulted in an expected short-term decline in sales, we are executing market strategies focused on both consumer retention and and acquisition of high-value customers. While both our e-commerce and direct-to-consumer channels have experienced recent challenges exacerbated by supply chain dynamics beyond our control, delivering successful online growth remains a core strategic focus. Online pet food subscribers are highly valuable consumers, and it's worth noting that more than 50% of domestic online revenue is derived from recurring subscription, a number that we hope to build upon in the future. Switching to gross profit, we've delivered a third consecutive quarter of gross margin improvement, driven by increasing profitability for both our domestic and international lines of business. In Q3 2022, our adjusted gross margin was 37% and $11.9 million of net sales, translating to $4.4 million of adjusted gross profit and getting us back to near pre-pandemic levels. This represents a six percentage point improvement from Q2 and a 12 percentage point improvement from Q4 of 2021. Most importantly, we are seeing signs that this gross margin profile is generally here to stay as raw material costs seem to have stabilized and in some cases have retreated relative to the highs we saw earlier in the year. In addition to our improved gross margin profile, we continue to aggressively manage costs across all of our business lines without sacrificing future growth potential. As we turn to our balance sheet, I wanted to highlight our new $13.5 million revolving credit facility, which we closed in October. This facility extends our debt maturity through October 2024, materially reduces cash amortization payments, and increases our total borrowing capacity, offset by less than one percentage point increase in rate. I'll let Charlotte get into more detail, but it's worth noting that this refinance, coupled with positive trends we are seeing on the working capital side of our business, allows us to eliminate going concern risk from our Q3 quarterly filing. Taking a step back and looking at the broader picture, we're at an interesting point in our journey. To date, we've invested a significant amount of time, capital, and resources building a brand and product platform designed to be successful across multiple sales channels. We've shifted our focus to execution across every aspect of our business, from sales and marketing to finance and operations, as we push towards profitability, and ultimately look to deliver a return on the strategic investments we've made. Speaking now in my capacity as a board member, I want to provide an update on our search for a permanent CEO to replace me. We have officially engaged the search firm to lead this process and have already begun interviewing candidates to find an experienced CEO with strong leadership and operational skills, as well as an established background in multi-channel marketing. We plan to complete this process as quickly as practicable. With that, Let me hand it over to Rob to discuss our progress in the international channel in more detail.