Else Nutrition Holdings Inc.

Thank you for joining us today for Else Nutrition's first quarter 2023 conference call. With us on the call representing the company today is Hamotali Stock, Else Nutrition's CEO. At the end of today's call, Hamotali 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 subjects to risks and uncertainties that could cause actual results to differ 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 on 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 in the press release. With that said, let me now turn over the call to Hamotal Ishak, CEO of Else Nutrition. Hamotal, please proceed.

Thank you, Ben, and good morning to all of you. We're excited to speak with you today regarding our first quarter 2023 results. Today I'm going to provide an overview of our recent achievements and update you on the opportunities that we believe will drive the growth in 2023 and beyond. From a big picture standpoint, the first quarter was another step forward in our mission to become a global leader in the plant-based nutrition arena. Demand for our products continues to grow across e-commerce as well as brick-and-mortar store channels in the United States and now in Canada. Importantly, ELSA is no longer just one product for a small segment of the population. Rather, we have now become a national brand in North America, and our consumers who began with our toddler formula are now moving up to our other products including our kids and super cereal lines. Prominent retailers, including Walmart and CVS, have increased their SKU count and shelf space allocated to else production, and others like Loblo's and Sobeys in Canada onboarded our entire range from day one. And while the current pace of growth is exciting, we view the potential FDA approval to become the first and only dairy and soy-free infant formula as transformational for the company. Focusing on the first quarter revenues, we returned to strong sequential growth after two quarters in which we experienced severe product shortages. As we have explained on our prior calls, during the summer of 2022, our producer suffered an unforeseeable mechanical issue. A pump broke, setting back our production by some months. That led to out-of-stock and inventory shortages as our production facility was either down or very slow to recover from these equipment malfunctions. To remedy the situation, in February of 2023, we secured two additional manufacturing facilities, one in the US and another in Europe. The two new facilities have more than tripled our current production capacity, mitigating the risk of future out-of-stock situations. Although our manufacturing facilities are fully operational, out-of-stock and product shortages were still a limiting factor for our sales growth in early part of the first quarter. Limited inventory continued to force us to prioritize retailers' orders over Amazon and our e-store orders. As such, sales to brick-and-mortar stores in the first quarter increased 105% versus the fourth quarter of 2022. while sales on Amazon and else's e-commerce store decreased 38% in the first quarter versus the fourth quarter of 2022. We estimate the revenue impact due to the product shortage to be roughly $1 million in the first quarter of 2023, mostly in January and February. In March and April, we have begun to see a rebound in our e-commerce sales as we have been building inventory to meet the growing demand. With those points said, this morning I want to speak about our four pillars of growth and value creation. These four pillars are product development, expanding distribution, including retail and geographic distribution, targeted marketing and sales support, and our FDA process. I will touch upon our recent achievements regarding each of these pillars and what we expect going forward. Retail expansion. I want to begin with our retail distribution in North America. We expanded our North American retail presence by about 10 times, from roughly 1,200 stores in the first quarter of 22 to nearly 12,000 stores listed today, including the recent U.S. launches in over 750 Walmart stores, 7,000 CVS stores, Giant Foods, and Winn-Dixie, and Canadian launch in London Drugs, Metro Ontario, Loblos, Sobeys, and many others. We expect to reach 20,000 listed stores and overall of 50,000 points of distribution by the end of 2023. Our retailers' sales velocity is growing fast as their reorders continue. As a result, many retailers are expanding the shelf space and SKU range for ELF nutrition. Most will be selling several ELF products. Two great examples are CVS, which added our cereal range, and Walmart, which added three SKUs, ELF Toddler, Toddler Omega, and cereal range. Now I want to speak about geographic expansion. In the third quarter of 2022, we officially launched in Canada on Amazon.ca. And in a few leading retailers, including Loblos, Sobeys, London Drugs, and Metro Ontario as well. The reception for our products has been very strong, which we believe is the result of our U.S. success. During the first quarter, our sales in Canada increased over 240% versus the fourth quarter of 2022. We're currently selling in more than 1,000 stores in Canada and expect to reach 3,000 listed stores by the end of 2023, thus garnering significant revenues. We are planning to enter Western Europe in the second half of 2023. The initial launch will be in the UK via Amazon and local distributors, with other countries to follow. The population in Western Europe is roughly 300 million. similar to the size of the U.S. However, research has shown that Europeans are even more conscious of healthy eating habits. In U.K., we are seeing increasing demand from parents for infant and children plant-based nutrition, as many children are exhibiting increasing sensitivities and intolerances to existing formulas. U.K.' 's consumption of vegan food and drink is the highest in Europe. and flexitarians are set to make up half of all UK consumers by 2025. Furthermore, there is an increasing prevalence of dairy, soy, and pea protein allergies, with one in 40 children in the UK reported incidents of cow's milk allergy or other issues. In the second half of 2023, we also plan to launch in Australia, for local sales as well as another gateway to China with a unique and new product line from six months up. Now I want to touch upon our product line expansion. We view the success of additional products and SKUs as important to gain further shelf space at retailers and to enhance ELS brand equity. While our toddler formula is our entry into many retailers, having a well-rounded suite of products makes for stronger relationship with our retailers and our end consumers. In 22, we expanded our product range to over 10 products and over 20 SKUs, adding the Toddler Omega product and the Super Cereal product line for babies from six months up in four flavors. Our super cereal line is the first and only U.S. cereal brand certified by the Clean Label Purity Award, hence safe from heavy metals. Within a few months of its launch, the product reached the status of bestseller in its category on Amazon.com. In an overall view, our best-selling products are Tuller Organic and Tuller Omega, with cereal growing steadily. In 23, we intend... to introduce kids ready to drink products in the US and Canada, and to complete the development of our first adult ready to drink products. I'd like to speak about our marketing and sales efforts. As a consumer products company, consumer marketing is very important for our success. Over the past years, our focus has been on grassroots marketing to mothers. We had to build brand awareness from scratch through influential marketing, celebrity partnership, which was boosted in social channels, focusing on growth more than on cost efficiency. Since then, we have made significant progress in improving our marketing efforts by implementing a robust measurement system to accurately determine the return on investment and the return on ad spend of our marketing activities, seizing any efforts that were not resulting in positive returns. We have rebuilt our marketing tech stack to include only the best of breed technology and focus all marketing efforts on attracting new customers, providing them with exceptional customer experience and increasing customer lifetime value through product knowledge and depth of use. We've also mapped out our ideal customer journeys and are rebuilding all communication and funnels to support those journeys. We have established retention benchmarks to understand our customer life cycles better and create programs that maximize these to increase customer lifetime value over time. We are committed to using our customers' user-generated content and word of mouth activities to recruit new customers organically and through incentivized programs. These efforts are part of our larger plan to scale our business and improve our customer acquisition and retention strategies while significantly decreasing our customer acquisition costs and allowing customer experience and satisfaction to drive acquisition rather than relying solely on performance marketing. Now, I'd like to provide some updates on our FDA approval process. As a reminder, our formulation is on its path to get an FDA approval. We believe that becoming the first non-dairy and non-soy FDA-approved infant formula will be transformational for the valuation of the company. We have already completed the commercial development of our infant formula as part of the pathway to bring its infant formulation to market under FDA and other authorities' approvals. We concluded during 2021 and 2022 two successful preclinical safety studies on our plant-based infant formula. The results demonstrated proper growth, similar to dairy-based infant formulas in a neonatal preclinical model, as well as demonstrated the quality of the infant formula protein, which is a key step out of three on that path to demonstrate safety and nutrient bioavailability of the infant formula and its ingredients. In February 2023, the company announced that the Institutional Review Board, the Ethical Committee, approved the Infant Growth Study Protocol for the testing of the ELS infant formula. As a final step before initiating the study, the company has now submitted the Infant Growth Study Protocol to the FDA for review, and is awaiting FTA response, as well as a comparator formula availability, currently unavailable due to the continuous shortage. Now we'll briefly review the first quarter financial results. Revenues in the first quarter were at $2.9 million and 82% year-over-year growth versus the first quarter of 2022, and a 25% growth sequentially versus the fourth quarter of 2022. Revenue growth continued to be hampered by product shortages caused by a malfunction at our U.S. manufacturing facility. Demand for our products accelerated in the first quarter, far outstripping the available supply. We estimate that the revenue loss during the first quarter was roughly $1 million. As I mentioned earlier, we believe that these supply issues are now largely behind as we have secured two new facilities, which tripled our manufacturing capacity. Just a quick recap on our balance sheet. We ended the first quarter of 23 with $10.1 million in cash, including restricted cash and short-term bank deposits. 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. Before I wrap up with my prepared remarks and answer some questions, I wanted to provide a bit of an overview on ELS for the benefit of those who may be new to the story. ELS has developed the first 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 and benefits like any other standard dairy formula. Today, the only two options for infant formula are dairy-based or soy-based formulas. We have a unique and exclusive IP-protected alternative in this $80 billion market. Our formula is a unique patented blend of almonds, buckwheat, and tapioca, and some other vitamins, minerals, and trace elements. It is produced from clean, minimally-processed, whole food ingredients in proprietary all-natural process as opposed to the rest of our industry who uses highly processed ingredients. We have built and continue building a portfolio of products for infants, toddlers, kids, and adults based on this novel nutrition formula. Today, we have solid evidence that Else Novel Whole Food Clean Formula is well tolerated with a high acceptance level. The product has been shown to improve gastric symptoms and support weight gain in children that have gastrointestinal symptoms and poor weight gain prior to switching to ELS. 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% whole plant infant formula. ELS began selling in the U.S. market late in 2020. In 21, we scaled our business and created a robust platform for growth, which started in 22 and now rapidly expands. We have developed a proprietary and groundbreaking product line. We have proven the product's viability and superiority over existing 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 healthy growth and development of infants, children, and later down the road also for healthy well-being of adults. Our success in the U.S. has propelled us to launch in Canada and China, with expected launches in Western Europe and Australia in 2023. 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.

All right. Thank you, Hamilcal. We have some questions for you. First, it looks like there were still some inventory constraints in the first quarter. When can we expect to get back to normal levels in terms of supplying the strong demand that you're seeing?

Well, I can say that since mid-April, we're already back in stock for almost all our products, and we're now growing our safety stock. It's been a lot of work in the past few months to get to this stage, and we are happy once again to be in a growth mode going forward.

Thank you. With regards to product expansion, you mentioned that in 23 you intend to introduce the kids ready to drink products in the US and Canada and to complete the development of your adult ready to drink products. Can you speak more about these products, the timing on them, and which stores will they likely go into initially?

Sure. We have completed the development of the Kids Ready to Drink for the U.S. and now testing the products in a new facility this quarter. With that product, we will also test a version that fits the Canadian regulation. We plan to start selling Kids Vanilla and Chocolate Ready to Drink products in the U.S. and possibly also in Canada if that will be successful towards the end of the third quarter. It will sell online first, then in natural food chains, and finally in major retail chains, which long-term will be the main channel for these products. With regards to the adult ready-to-drink, we will start testing the new formulations in July this year, and we plan to complete the development this year and start selling in the first quarter of 2024. We plan two flavors for the U.S. and Canada. All our ready-to-drink products at this stage are planned in eight fluid ounces tetra packs in four pack units.

Okay, thank you. Your launch in Canada was very strong in the third quarter and demand is still continuing. What are you seeing there and why is the demand so strong in this region?

So the Canadian market was ready and in many ways waiting on ELS Nutrition's launch and availability. In Canada, we see a higher propensity for consumers to be seeking out better-for-you alternatives on the shelf. We see this progression across various categories, and it is no difference in our own. The major accounts, including several to be announced shortly, recognized early the value that ELS brings to their planograms as demand continues to grow for both plant-based and clean label products. It's essential that ELS fills this gap, and we are addressing this head-on. It's fair to say that it's understood that ELS brings change and real innovation to their shelves and will be a leader in this sphere in Canada. Additionally, we chose a distribution partner that, in our opinion, was the best fit for ELS and for our products. and they, together with our team, succeeded to attract major retail chains across the country. As the market is more concentrated, it went faster. Many consumers also know us already as we are a Canadian company and as they already ordered us online from the U.S., so the starting point was better.

Okay. You're continuing to add retail doors in a very nice pace. Can you speak about the doors you've been in for quite some time, maybe over six months? How has the reorder been and are you seeing increased shelf space in some of the older stores that you've been in?

Well, I think one of the best examples is Sprouts Farmer's Market, which was the first retailer we onboarded. We started in February 21 with Toddler Organic, a single skew. and soon got to over half a unit per store per week. That was the pace. A couple of months later, a couple of years later, I mean two years later, we are at 1.4 units per store per week, way over the expected sales velocity of one in that category. And what is even more important, We almost tripled our annual revenue per store during this period as we added additional products and increased our sales velocity. We expect to see even better results when the new grocery stores mature as they typically sell more baby products than a natural food chain like Sprouts.

Let's move to the FDA approval process. Catch us up on the timing on the approval and sort of big picture, what would this approval mean to the company?

Okay, so as mentioned, in February 23, the IRB, the Ethical Committee, approved the Infant Growth Study Protocol for the testing of the Else Infant Formula. Next step was already done. We submitted the Infant Growth Study Protocol and the Statistical Analysis Plan to the FDA for review. And we're also awaiting a control formula availability, which was not available so far due to the shortage. We're waiting on those two things to happen, the approval of the protocol and the control formula availability. We hope to finalize the studies needed in about 18 months, followed by submission to the FDA review. The FDA review process may take months and even more. We don't know. If the review is successful and the FDA does not object, we will be able to market the infant formula. And the completion and submission of the Healthy Newborn Growth Study to the FDA will be the holy grail of the company's achievements, and it is not far from us. We're looking forward to that major achievement as a game changer in the infant formula world, as well as for the company and its stakeholders and investors.

Okay, it looks like we are out of time. Many thanks to everyone for participating on today's call, and we look forward to hopefully speaking with you all shortly. Thanks, everybody.