Better Choice Company Inc.

Thank you and welcome to the Better Choice Company's second quarter 2024 earnings call. Today's call is being recorded. Joining me today are Kent Cunningham, our chief executive officer, and Nina Martinez, our chief financial officer. Our earnings release will be posted to the investor relations section of our website, betterchoicecompany.com, this evening, and will be followed by our Form 10-Q to be filed with the SEC tomorrow, on August 14, 2024. Please note that remarks made today may include forward-looking statements subject to various assumptions, risks, and uncertainties. The company's actual results may differ materially from those contemplated by such statements. For a more detailed discussion, please refer to the note regarding forward-looking statements in the company's earnings release and SEC filings. Also during today's call, we will discuss certain non-GAAP financial measures. Reconciliations of these non-GAAP items to the most directly comparable GAAP financial measures will be provided on the company's earnings release and made available on the investor section of the company's website. Please note, this event is being recorded. I will now turn the call over to Kent Cunningham, Chief Executive Officer of Better Choice Company.

Thanks, Operator. And thank you all for joining us on the call today. Before we cover our second quarter and mid-year 2024 results, I'm excited to introduce Nina Martinez, who joined us last August as our Chief Financial Officer. Nina is a key addition to our leadership team, and I look forward to having many of you engage with her going forward. Today, I'll provide an overview of our financial performance to date and company highlights, followed by some perspectives on the pet industry and our strategic priorities as we head into the back half of 2024. Then Nina will discuss our financial results in greater detail. Now, let's review our results. For the second quarter of 2024, we achieved an average fill rate of 95%. That's roughly 24 percentage point improvement from the 78% average fill rates we incurred in Q2 of last year. And for the second quarter, we also reduced finished goods inventory by 57% year over year. That's a testament to the team's operational discipline. Second quarter adjusted EBITDA improved 98% year-over-year as a result of the strategic pivots we've made. This performance demonstrates that our efforts to stabilize operations, revamp channel strategy, and instill greater financial governance are taking shape. We've shifted our marketing investment focus and increased allocation on the two major online pet food platforms, Chewy and Amazon, in our domestic market, and China and Taiwan internationally, while we've maintained investment levels in our brick-and-mortar accounts at independent pet retailers, distributors, and PetSmart Canada. Strengthening our relationships and deepening our collaboration with key customers is ongoing and showcasing early results. We successfully partnered with Chewy to launch Halo Elevate online earlier this year, and the line now holds the hero spot for premium natural on the site. We migrated our customers that shopped on halopets.com, our unprofitable D2C channel, to our profitable digital channel, where roughly $12 billion in annual pet food sales occur across the Chewy and Amazon platforms. Our subscription-based revenue is increased on both platforms with more Halo consumers joining Chewy Autoship and Amazon Subscribe and Save. This is a proverbial win-win for us, our customers, and pet parents as we smooth out revenue, increase share of wallet, and provide greater service to Halo consumers. We believe there is significant runway for increased Halo growth at both Chewy and Amazon as we continue to shift our investments, move to full funnel activation, and improve our storytelling and share a voice. We see increased opportunity for the Halo brand across the roughly $50 billion U.S. and Canada pet food markets and the $30 billion represented across the Asia-Pacific region. Halo sits at the intersection of the two megatrends fueling market growth, humanization and premiumization. Pet parents increasingly view their pets as babies or children. And that dovetails naturally into premiumization because they want to feed their pets like they feed themselves. Whether they are a clean food consumer seeking all-natural nutrition that is minimally processed and responsibly sourced, or seeking a dietary solution to address allergies, skin and coat issues, digestive, or other health concerns, Halo provides products that deliver visible results. With that, I'll turn it over to Nina Martinez, our Chief Financial Officer, to take you through our second quarter financial results in more detail. Nina?

Thanks, Kent, and good afternoon, everyone. For the second quarter of 2024, we generated top-line growth of 8% from the first quarter and total net sales of $8.5 million. Looking at the channel level, International generated 27% top-line growth from the first quarter and 7% year-to-date growth year-over-year. Our digital channel, comprising of our e-commerce platforms and legacy direct-to-consumer channel, generated 11% top-line growth as the Halo brand gained momentum domestically as well. Second quarter growth resulted in net sales of $16.5 million for the first half of 2024, compared to $19.8 million last year. There were a number of contributing factors to the sales decline as we expected internally, due to strategic exits of several unprofitable brick-and-mortar customers as well as the closing of our legacy Halo Pets direct-to-consumer channel that was trending as a double-digit negative EBITDA channel. While these actions negatively impacted our year-over-year top line, the positive impact to our bottom line was critical as we significantly improved the financial shape of the business. As a result of channel strategy shifts and other profit levers pulled across the P&L, our second quarter gross margin reached 38%, representing a 400 basis point improvement year-over-year, bringing the year-to-date gross margin to 36%, a 100 basis point improvement year-over-year. In addition to the company's strong operational performance marked by the second quarter's 72% improvement in operating loss year-over-year, we recorded a $3.6 million gain as a result of our outstanding term loan that was forgiven and retired in the second quarter. I am pleased to report that this gain drove a positive GAAP net income of $2.7 million and EPS of $2.98 per share. Second quarter adjusted EBITDA improved 98% to a mere $30,000 loss for the quarter. As a result of the strategic pivots we have made, we now have immense operating leverage that will continue to be realized as we rapidly scale. Highlighted by year-to-date adjusted EBITDA margin accretion of 950 basis points to negative 9%, this is a single-digit loss achievement marking the company's turning point. A table reconciling gap net income to adjusted EBITDA can be found in our earnings release and our 10Q to be filed with the SEC. Free cash flow for the second quarter also turned a corner at approximately $100,000, a significant improvement and a direct reflection of our continued focus on financial discipline and operating leverage in the business. Importantly, we now sit with $5.5 million of less debt and plan to retire another approximate $5 million in of accounts payable at a significant discount in the third quarter. Additionally, and subsequent to the second quarter, we raised approximately $4.5 million in net proceeds in connection with a public offering after deducting unready discounts, commissions, and other offering expenses. We remain bullish on the substantial flexibility that this improved working capital will afford us amidst an inflection of our financial profile. We are incredibly proud of our ability to improve profitability over the past 12 months. Exiting unprofitable customers and channels, tightening operating expenses, as well as the organizational redesign completed in the first quarter of this year will continue to positively impact profitability throughout the end of this year. We expect to continue to improve profitability and deliver continued adjusted EBITDA margin expansion in the remainder of 2024 and beyond. The company's positive financial results are a testament to the strong underlying performance we are seeing in the business. Our ability to improve working capital, improve margins, and accelerate free cash flow provide evidence that our strategic pivots are working. We are confident in our ability to deliver on our near and long-term goals and continue our upward trajectory in the second half of this year and beyond. With that, I'll now turn it back over to Kent for closing remarks.

Thanks, Neha. We're now on the cusp of this company's turnaround, and we're excited about our strategic growth priorities. Our channel strategy shifts will continue to provide improved margins, and our renewed focus on brand building and full funnel activation are expected to accelerate top line sales. We're focused on a more efficient use of marketing investments, optimizing our organizational design, and implementing data-driven management techniques. We're incredibly excited about the opportunities ahead for this business. And we believe that our strategic initiatives are taking hold and that we are just beginning to tap into the potential of the Halo brand domestically and internationally. We aim to be brilliant at the basics while we focus on building the Halo brand, delivering on our long-term growth plan, and creating value for shareholders. In summary, we're very pleased with our results for the second quarter and for the exciting opportunities that lie ahead for Halo and Better Choice Companies. I want to express my gratitude to all of our colleagues across the organization for their ongoing perseverance in an evolving environment and their tireless dedication to this company's turnaround.

That concludes our formal remarks, and we'll now take questions. Operator?

We will now begin the question and answer session. To ask a question, you may press star then one on your touch-tone phone. If you're using a speakerphone, please pick up your handset before dialing the keys. If at any time your question has been addressed and you would like to redraw it, please press star, then two. We will pause momentarily to assemble our roster.

As a reminder, if you'd like to ask a question, please press star, then one.

Since there are no questions at this time, I'll pass things back over to Mr. Cunningham for any final remarks.

Thanks, operator. That concludes our call. Thanks very much for joining the call. We look forward to touching base again in the next quarter. Thanks so much.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.