Else Nutrition Holdings Inc.

Good day and welcome to the ELS Nutrition second quarter 2022 update conference call. I would like to turn the call over to Ben Shamsian with Whistle Partners. Please go ahead.

Thank you for joining us today for ELS Nutrition's second quarter 2022 conference call. With us on the call representing the company today is Hamotali Scott, ELS Nutrition's CEO. Hello. At the conclusion of today's prepared remarks, Hamilta will answer some questions that were sent to us by investors and other questions we think are relevant to investors as well. Before we begin with prepared remarks, just a couple of comments. Today's call will contain forward-looking statements that are based on current assumptions and subject to risks and uncertainties that could cause actual results to differ materially from those projected, and the company undertakes no obligation to update these statements except as required by law. Information about these risks and uncertainties are included in the company's filings, as well as periodic filings with regulators in Canada and the United States, which you can find on CDAR and Else Nutrition's website. Today's discussion will include adjusted financial measures, which are non-IFRS measures. These should be considered as a supplement to and not a substitute for IFRS financial measures. Finally, today's event is being recorded and will be available for replay through the webcast information provided on the press release. With that said, let me now turn over the call to Hamatal Yitzhak, CEO of Else Nutrition. Hamatal, please proceed.

Thank you, Ben, and good morning to all of you. We're excited to speak with you today regarding our Q2 2022 results. So today I'm going to provide an overview of our achievements for the second quarter 2022 and update you on the opportunities that we believe will drive the growth in ELS going forward. The hard work of our entire team has positioned ELS nutrition well for growth in 2022 and beyond. Before I begin my remarks about the second quarter, I wanted to take a step back and and provide everyone with a bit of an overview on our business. ELS has developed the first 100% whole plant dairy and soy-free baby formula. ELS meets the global regulatory nutritional composition standards for infants and is modeled after the human milk nutritional composition like any other standard dairy formula. Today, the only two options for infant formula are cow's milk-based or soy-based. We have a unique and exclusive IP protected alternative in this $80 billion market. Our formula is a blend of almonds, buckwheat, and tapioca. It is produced from clean, whole food ingredients as opposed to the rest of our industry who uses highly processed ingredients. We have built and keep building out a portfolio of products for infants, toddlers, kids, and adults. centered on this novel nutrition formula. Today we have solid scientific evidence that ELF's novel whole food clean formula is well tolerated with high acceptance. The product has been shown to improve gastric symptoms and support weight gain in children that have gastric symptoms and poor weight gain prior to switching to ELF. Our team of infant nutrition industry veterans led global brands operations in Israel and have developed and patented the world's first dairy and soy-free 100% plant-based infant formula. ELS began selling in the U.S. market late in 2020. In 2021, we scaled our business and created a robust platform for growth in 2022 and onwards. We have developed a proprietary and groundbreaking product line. We have proven the product's viability and superiority over existing and potential competitors. We have built an entire ecosystem to support billions of dollars in potential sales and massive distribution infrastructure in North America. We're taking off now across all our channels, and we're building the science, advocacy, and communication of the scientific evidence that links plant-based nutrition to to healthy growth and development of infants, children, and later down the road also for healthy well-being of adults. Our financial results, and now I'll review the second quarter financial results in detail. Revenue. Our revenues in the second quarter increased 44% quarter over quarter to $2.3 million. The robust... were due to the expansion of our toddler products across all channels and the introduction of the new toddler Omega product. I want to begin with our Amazon.com sales, which were particularly strong, increasing an incredible 84% versus the first quarter of this year. On our first quarter call, we said that we were confident that Amazon sales would hit the 1 million quarterly run rate, by the end of the second quarter. We're excited to report that we have delivered on that goal. Sales goals on Amazon is coming from existing and new customers and from subscribers. In August, the number of L subscribers on Amazon is almost touching 2,000, doubling from the 1,000 subscribers in April. High subscription rates demonstrate customers' loyalty to Ls, provides continuous recurring revenues, and increases the lifetime value of each customer. Amazon's data shows that products on the subscribe and save program can achieve 6x growth compared to the non-subscribe and save products. We're also seeing a great reception of our recent product launches, and customers have already started subscribing to them as well, which again tells us that ELSI is gaining brand equity. Finally, we're excited that our success with Amazon in the U.S. has convinced Amazon to take ELF to Europe. I will speak about our entry into Europe a bit later. Now I want to speak regarding the retail channel. As of the end of July, ELF products were listed in over 3,000 brick-and-mortar stores, and most locations will be actively selling ELF during Q3. We began our retail rollout in early 2021 and have made significant progress thus far. Last quarter, we indicated that we expect to get to roughly 4,000 stores by the end of 2022. And we are excited to be well on our way at this point in the year. Our retailers are experiencing solid and growing sales velocity of our products. and we are seeing growing reorders with most of those retailers. As a result of the success they are seeing, many retailers are expanding the shelf space and SKU range for health nutrition. Besides the physical doors that we have entered, distributed by Unify and KE, we are now selling on some of the most well-known online platforms, such as Walmart.com, Kroger.com, Thrive Market, and iHerb. Results in these channels have been very strong. As an example, in the second quarter, UNFI orders have doubled and sale on Walmart.com have tripled. Our balance sheet. We ended the second quarter with $22 million in cash, including restricted cash and short-term bank deposits. On June 29, the company executed on a fundraising round in the amount of $7.3 million. further blustering our balance sheet. Growth catalysts. Now I'd like to spend a few minutes to lay out our growth initiatives for 2022 and beyond. Some of this I touched upon earlier. Retail expansion. Our products are currently selling in over 3,000 store locations. We recently announced our entry into over 130 buy-by-baby stores, Importantly, we are now selling on some of the most well-known online retailers such as Walmart.com and Kroger.com. We expect to roughly triple our door count in 2022 to over 4,000 doors, including well-known drugstore chains. Importantly, given the success of the many pilot programs with various retailers that began in 2021, We expect these retailers will begin and continue to increase the shelf space and SKU count allotted to ELS products. International expansion. International expansion would be a large focus for ELS in 2022. We recently announced our coming entry into Canada, where we will be selling and distributing all of our products online and in drug and grocery retail chains right upon launch. We also announced our entry into the Chinese market with an agreement with Baozun, a leading e-commerce distributor. Through Baozun, ELF would be helping to fulfill the increasing demand in China for a dairy and soy-free pediatric nutrition alternative. In addition, in Q4, we expect to enter the first country in Europe via Amazon, which would be UK. The population in Western Europe is roughly 300 million, similar to the size of the U.S. However, research and polling has shown that Europeans are even more conscious of healthy eating habits. Product extension. In 2022, we expect the product range to grow over 10 products and over 20 SKUs. In 2020, we launched our toddler product. In 2021, we added our kids' powder mix in four flavors line, and also two new lines, Toddler Omega and our Super Cereal line for babies from six months in four flavors. We view the success of additional products as important to the brand equity of ELF. FDA. Now I would like to provide some updates on our FDA approval process. As a reminder, our formulation is not yet FDA approved, and thus we do not offer an infant formula yet. We are working through the FDA approval process. We already completed the commercial development of our infant formula, and in Q421, we concluded a successful preclinical safety study of our plant-based infant formula as part of the pathway to bring it to market. The study results demonstrated proper growth similar to dairy-based infant formula in a neonatal preclinical model, which is a key first step on the approval path with the US Food and Drug Administration as well as with other regulatory authorities to demonstrate safety and nutrient bioavailability of the infant formula and its ingredients. The results of the study have been presented in two key scientific meetings focused on pediatric nutrition and were also recently published in scientific peer-reviewed journals. ELS is in close communication with the FDA. sharing its plans and results to receive their guidance throughout the process of ELF infant formula development. In Q222, ELF conducted a second preclinical study demonstrating the quality of the infant formula protein as part of the FDA requirements from new infant formula to be marketed in the U.S. ELF started the first clinical study to demonstrate ELF started the first clinical, not preclinical, clinical study to demonstrate the tolerance of its products in a specific intolerant children population. This is on top of all the preclinical studies. A second clinical study to be conducted in a healthy toddler population has been approved by the Ethical Committee and is about to start very, very soon in Q3 2022. ELSI is working on final preparations for the infant growth clinical study for the FDA and European permits, plan to start by end of 2022. In 2023, the company plans to continue research activity demonstrating the safety and tolerability of the infant formula, as well as provide scientific support for ELS products, including preparation for additional clinical studies. Now for some concluding remarks. While Else Nutrition has achieved a lot in its short time as a public company, we are very excited about the growth prospects ahead of us. Our patent-protected unique product formulation is resonating with customers as well as healthcare professionals. We're heavily focused on execution in order to maximize the massive growth opportunities ahead of us. I want to thank all of our employees for their hard work and dedication. as well as our investors who have supported us. With that said, I will answer some of our investors' questions and some questions that have come to us from investors.

Thank you, Amitav. We have some questions for you. First, you began selling on Walmart.com and Kroger.com a few months ago. Can you talk about what you're seeing so far in those channels?

So, We continue to see growing sales on these new channels. Walmart.com just expanded our offering by adding cereal, and we will soon have our toddler Omega product available there. The Kroger.com launch included Vitacost, which is a natural e-com platform. Both are growing, but Vitacost is outperforming Kroger.com so far. The main thing to know about these channels is that they are different from a pure plate e-com platform like Amazon as they also offer ship-to-store ability. So the majority of the purchases online are also products available in stores. As we grow our distribution to get into both Walmart and Kroger stores, there will be a synergistic effect between online and in-store sales.

Thank you. Can you provide some more color on your new relationship with Bazoon and your entry into China? How do you see the ramp in that region?

With Bazoon's e-commerce end-to-end solutions, the company would have direct access to retail buyers in China. Started in Q4 2022 through a wide range of online shopping platforms such as Tmall, JD, Kuaishu, and many others. This is a key milestone in the company's strategic plan to become a player in the global infant nutrition market. We are happy to help fulfill the increasing demand in China for a dairy and soy-free pediatric nutrition alternative, especially considering the very high rate of lactose intolerant population in China and the proportion of infants and toddlers under two who claim to experience allergic symptoms which is as high as 40.9%. It's about 3.7 million infants and toddlers. Another indicator of the need for plant-based alternatives in Chinese consumers' rising awareness of health and sustainability, which has led to the increasing consumption of plant-based milks, especially among Gen Z and Gen Y consumers. The Average annual growth rate of the Chinese plant-based milk industry is expected to remain about 20% in the next few years.

Okay. Can you speak about some of the grassroots works that you're doing with pediatricians and other groups to educate them on ELS?

So we know that 9 out of 10 parents talk to their pediatricians about nutrition for their babies and kids. So we have a variety of programs to ensure pediatricians know who ELS is and how to recommend us to their patients. We have sales reps in Southern California who engage with pediatricians in their offices every day, along with phone sales reps who focus on metro areas around the country. They share product information and clinical support, and when the pediatrician sees the value of ELS, We provide them with samples and coupons for their patients. In addition to sales, we have marketing programs via medical journal ads, conferences support, emails, and a website just for providers where they can learn more and order samples. To date, we have already sampled our products with over 30% of our target PEED offices. It's about 700. We also speak directly to moms through all social channels and parenting and plant-based influencers and constantly grow the awareness and interest of new customers in this very unique benefits of ELF.

Okay, thank you. Let's talk about the FDA process. What is the timing on approval and what would an approval mean to the company?

The process to get an approval for a new infant formula in the U.S. is a multi-step one, where the safety of the ingredients and the formula must be demonstrated in a series of studies, including an infant growth safety study, which is something that we are starting to do right away. We already completed successfully two preclinical studies, and we are moving forward in the process of creating the data for submission to FDA review. Once all data is submitted, the FDA review may take a few months. If everything goes smoothly and the clinical study ends by the end of 2023, which this is what we are anticipating, we may estimate that by early 24, we will have an answer from FDA. Once the FDA reviews our new infant formula notification and has no objections, we may market the infant formula.

Okay, thank you. With the acceleration of sales that you're seeing, how can you make sure that you have the product available to supply to your customers?

Well, we are very cognizant of our growing capacity needs. The measures we take with respect to that are numerous. We're constantly improving our manufacturing efficiency in the current sites. We have partnered with others to invest in our own capacity and have them operate it for us, like, for example, in the Oregon facility where we invested to produce our proprietary processed buckwheat ingredient, which is crucial for the infant formula. Recently, our North American production partner increased its capacity and staffing to meet the growing demand for infant formula in the U.S., We're now starting to manufacture with a new production partner in Europe, shifting some of our production of our non-U.S. products aimed for China and European countries to that site. We're also working diligently with another North American facility to adjust one of their sites to our specific manufacturing requirements in the very near future.

Okay. Many thanks to everyone for participating on today's call. We look forward to hopefully speaking with you all shortly. Thank you.