Else Nutrition Holdings Inc.

Thank you, everyone, for joining us today for Else Nutrition's second quarter 2023 conference call. With us on the call representing the company today is Hamatali Skak, Else's CEO. Today, at the conclusion of today's prepared remarks, Hamatali 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 risk 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 websites. Today's discussion will include adjusted financial measures, which are non-IFRS measures. These should be considered as a supplement to and not as a substitute for IFRS financial measures. Finally, today's call is being recorded and will be available for replay through the webcast information provided in the press release. With that said, let me turn the call over to Hamotal Yusak, 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 second quarter of 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 growth in 2023 and beyond. In the second quarter, we continued our progress across all areas of our business. We're continuing our expansion efforts across various channels and geographies. Our products are now sold in over 13,000 retail locations in North America, and we expect to get to roughly 15,000 locations by the end of the year. As we have mentioned before, ELF is no longer just one product for a small segment of 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. As an example, we initially entered Walmart stores at the end of last year with our Kid Shake product in approximately 400 locations. Subsequently, Walmart increased our store count with additional 495 stores and added our toddler organic and toddler omega and cereal SKUs to its shelf. The products are now sold in over 1,100 Walmart stores. I will touch on our retail progress in more detail a bit later. Our two new manufacturing facilities in the U.S. and Europe are now operational, more than tripling our historic production capacity, allowing us to properly meet our customers' growing demands and mitigating the risk of future out-of-stock situations. In addition, our new facilities have made our production more efficient and cost-effective, and we expect to realize lower production costs leading to higher margins in upcoming quarters. While we have now right-sized our production and inventory levels, there is still work to do to remedy the effects caused by our production issues. After about nine months of diverting inventory from e-commerce channels, in favor of our brick and mortar customers. We're now rebuilding our sales velocity in our e-commerce channels and expect to return to historic growth in the second half of 23. I will touch on that a bit later. Our growth objectives in 23 and beyond remain intact. However, given the challenging capital markets environment, we're now even more focused on expense management, capital efficiency, and being good stewards of capital. In recent months, we have reduced expenses across all areas of our business and implemented significant efficiencies. We believe that our revised expense structure, combined with our anticipated top line growth and margin expansion, will allow us to reach cash flow break even sooner than previously planned, actually at the second half of 2024. With those points said, this morning, I want to speak about four areas of growth and value creation. These four areas are expanding retail distribution in North America and beyond, product development, expense management and capital preservation, and our FDA process. I will touch upon our recent achievements regarding each of these areas and what we expect going forward. I want to begin with our retail distribution in North America. We expanded our North American retail presence by more than 10 times, from roughly 1,200 stores in the first quarter of 22 to nearly 13,000 stores listed today, including the recent U.S. launches in over 1,100 Walmart stores, 7,000 CVS stores, 160 Giant Foods, and 400 Winn-Dixie, and Canadian launch in 900 Shoppers drug mart locations, London Drive, Metro Ontario, Loblo, Sobeys, and many others. We expect to reach over 15,000 listed stores and over 40,000 points of distribution by the end of 23. Given a strong pace of store expansion, our sales in retail stores can be lumpy from quarter to quarter, depending on timing of deliveries, especially as we perform initial stock fills. Such lumpiness should smooth out over time. Towards the end of Q1-23, we shipped a lot of products to stock, the many new doors added in Q1 and Q2. And as expected, we saw a temporary decrease in orders as the new store built sales velocity and the deplete, the initial order fill. We're starting to see reorders come and expect orders to increase over the coming months. Entering so many stores also means an increased level of sales and cost of goods expenditures. The feedback from our retailers continues to be very positive. As a result, many retailers are expanding the shelf space and SKU range for ELF nutrition. Most will be selling several ELF products. Now I want to speak about our geographic expansion. In Q3 22, we officially launched in Canada on Amazon.ca, and in a few leading retailers, including Loblo, Sobeys, London Drugs, and Metro Ontario. As I mentioned earlier, in May, we announced our expansion in Shoppers Drug Marts, Canada's largest pharmacy. Health products went on Shoppers Drug Marts shelves in over 900 locations across 11 provinces and territories. The reception for our products remains strong. which we believe is the result of our U.S. success. We are currently selling in more than 2,500 stores in Canada and expect to reach 3,000 listed stores by the end of 2023. We're planning to enter Western Europe in the second half of 2023. The initial launch will be in the U.K. via Amazon and local distributors with other countries to follow. In UK, we're seeing increasing demand from parents for infant and children plant-based nutrition, as many children are exhibiting increasing sensitivities and intolerances to existing formulas. UK'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 milk allergy. In the second half of 23, 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 extension. We view the success of additional products and SKUs as important to gain further shelf space at retailers and to enhance else brand equity. While our target follows our entry to 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 flavors. These numbers were doubled again during 23. 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 being best seller in its category on Amazon.com. In Q3 of 23, we intend to introduce kids' ready-to-drink products in the U.S. and Canada. We already secured a production facility and are in the last preparation stages for the first commercial production. This release marks a significant expansion from our successful powdered product range into the larger, fast-growing ready-to-drink market. Today's parents are worried about their children's eating habits, especially working parents. Globally, there's a rapid increase in the number of working moms. This may result in an unbalanced diet for their child. They may not get an adequate amount of nutrients. This is a serious issue that many parents are facing. The kids' nutrition market revenues were estimated at $52 billion in 2022 and are anticipated to grow at a KER of 5.5% from 2023 to 2022. in a decade, according to recently published persistent market research reports. By the end of 2033, the market is expected to reach a valuation of $94.5 billion. North America accounts for 31.6% of the kids' nutrition-registering global market. In 2024, We plan to enter the huge North American adult nutritional drinks market with our first adult ready-to-drink product. Now, I would like to speak about our expense management and capital preservation initiatives. While our growth objectives in 23 and beyond remain intact, given the challenging capital markets environment, we are now even more focused on expense management, capital efficiency, and being good stewards of capital. In recent months, we have reduced expenses across all areas of our business and implemented significant efficiencies. During the first half of 23, total operating expenses have decreased 70% year-over-year, despite our revenues increasing 35% year-over-year. We believe that our revised expense structure combined with our anticipated top-line growth and margin expansion will allow us to reach cash flow break-even sooner than previously planned, and as I said, hopefully at the second half of 24. One of the largest areas of expense reduction has been and continues to be advertising and marketing. As a consumer products company, consumer marketing is typically a high expense area. In the second quarter of 23, we have decreased our advertising expenses by 18% comparing to the second quarter of 22. This past quarter, we enhanced our collaboration with affiliates and partners, expanding Health Nutrition's reach. Alongside, we're preparing for our ambassador program in Q3 launch, aiming to build a solid community of brand supporters. We revamped our loyalty program to boost both average order value and customer lifetime value. Additionally, our subscription model underwent modifications to appeal more to our customers. Recognizing past challenges, we reached out to subscribers affected by stock shortages, inviting them to benefit from our renewed offerings. On the Amazon platform, we analyzed our performance over the last 18 months. The findings from these analogies will be applied in the next quarter to enhance our platform presence. Looking ahead, we plan to increase our digital marketing spend, channeling more potential customers into our refined funnel. We're also anticipating launches in Australia and the UK markets, aiming for efficient market entry. A key focus for the next quarter will be implementing strategies to reduce customer churn. In summary, this quarter revolves around growth, customer engagement, and planning for the future. With regards to employee expenses, we have reduced our costs by 18% in the second quarter of 23, comparing to the second quarter of 22, again, despite the strong growth in our sales. I would now 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-variant, non-soy FDA approved infant formula will be transformational for 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' approval. ELS conducted two successful preclinical safety studies during 21 and 22 on its plant-based infant formula to demonstrate safety and nutrient bioavailability of the infant formula and its ingredients. The results demonstrated proper growth, similar to dairy-based infant formula, in a neonatal preclinical model, as well as the infant formula protein efficiency and quality. Those are the key two steps out of three on the path to obtaining the FDA and other regulatory permits to bring the product to market. In February 23, the company announced that the Institutional Review Board, the Ethical Committee, approved the infant growth study protocol for the testing of the ELF infant formula. As a final step before initiating the study, the company has now submitted the preclinical studies results as well as the infant growth study protocol to the FDA for review and is in discussion with the FDA for the infant formula optimization prior to the clinical study initiation. in parallel to continuously seeking for a comparator formula, which is currently unavailable due to the continuous infant formula shortage, followed by several recent product recalls in the U.S. Now I'll briefly review the second quarter financial results. Revenues in the second quarter were $2.4 million, a 3% year-over-year growth versus the second quarter of 22. From a six-month standpoint, sales in the first half of 23, increased 35% year-over-year versus the first half of 22. Sales to brick-and-mortar retailers in the US and Canada during the second quarter of 23 increased by 157% year-over-year versus the second quarter of 22. As I mentioned earlier, due to our strong pace of store expansion, our sales in retail stores can be lumpy from quarter to quarter, depending on timing of delivery. Such lumpiness should smooth out over time. In the first quarter 23, we shipped a lot of products to stock, the many new doors added in Q1 and Q2. And as expected, we saw a temporary decrease in orders, while the new stores build up sales velocity and consume the initial store fill. We already see reorders come and expect them to intensify over the coming months. Entering so many stores also means an increased level of sales and cost expenditure. Total e-commerce sales, meaning sales from Amazon, as well as our own e-commerce store during the second quarter of 23, decreased by 42% year over year versus the second quarter of 22. As you recall, due to the product shortage we faced in the last three quarters, we made the strategic decision to divert inventory away from e-commerce channels in favor of brick-and-mortar retailers. As a result, our e-commerce customers experience out-of-stock on occasion. We are now amid rebuilding our sales velocity on Amazon and our e-commerce store and expect these channels to accelerate growth in the second half of the year. Our Q2 23 Amazon sales grew by 51% compared to the first quarter of 23. While ELS 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. ELF meets the global regulatory nutritional composition standard 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 ELF's novel whole food clean formula is well tolerated with 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 ELF. Our team of infant nutrition industry veterans led global brand operations in Israel and have developed and patented the world's first dairy and soy-free 100% whole plant infant formula. ELF began selling in the U.S. market late in 2020. In 2021, we scaled our business and created a robust platform for growth, which started in 2022 and now rapidly expands. We have developed a proprietary and groundbreaking product line. We've proven the product's viability and superiority over existing potential competitors. We've built an entire ecosystem to support our growth and strong distribution infrastructure in North America. Our success in the US has propelled us to launch in Canada. We've expected launches in Western Europe and Australia in 23. 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 the investors' questions and some questions that have come to us from investors that we think that investors are interested to learn more about.

All right. Thank you, Hamatal. We have some questions for you. First, I want to speak about your retail store growth and the revenues that you were seeing. The store bases up over 1,000% year-over-year, but revenue growth from stores are up about 157%. Can you help us understand the disconnect here?

Sure. These are early days. We must bear that in mind. We just filled most of these stores in the last few months. We paid slotting fees through discounted prices on initial orders. So the new retailers are happy with initial sales and are looking to reorder. but we should bear in mind that it takes time to build sales velocity. More so, following the initial store field, there is normally a period of slower sales until the stores start reordering en masse. We can see the growth with the old retailers that we started with, like Sprout Farmer's Market, which built an amazing growth trajectory during the past two or two and a half years. And this is going to happen the same way to all those new stores or new retailers. It's just a matter of time and a little bit more patience.

Got it. Thank you. Turning to your e-commerce channels, in the last three quarters, while you were experiencing production problems, you made the strategic decision to prioritize the brick-and-mortar channel with the available product at the expense of the e-commerce channel. Can you explain why you made that decision and now that production issues are corrected, how you're planning to build up the e-commerce channel once again?

Well, building relationships with retailers is a difficult and long process. And if you fail to deliver, you can lose your shelf space for a long time. In comparison, losing online customers and revenues is costly and painful and but it can be overcome in a shorter time period, months compared to years. Therefore, we decided to prioritize retailers, but we did our best to supply to our own subscribers during this period. We are now refilling our online channels and intensifying our marketing efforts to climb back to the sales volume that we experienced a year ago and beyond.

Thank you. You spoke about expense management, return on investment, and capital preservation. As a growth company with many areas of growth ahead of you, how do you prioritize where to and how much to spend?

We first defined our strategic priorities, North America, retail first. All other areas are either secondary or halted for a time period. We decided to prioritize expenditures that are expected to generate revenue in the short term over that have long-term promises. And we established a management monitoring process where senior management is involved in all expense aspects of the business and expects to see justification for every significant expenditure. We worked the hardest, and we continue to do so, on reducing our costs. It does not show yet, but it will in the coming quarters by reducing raw material procurement costs and, most importantly, the manufacturing costs, which we anticipate to see very soon, logistics costs as well as general and administrative costs. We plan to increase our operating margins significantly and try to become cash flow positive in, let's say, in the second half of 2024.

Okay, thank you. You'll be entering Western Europe and Australia in the second half of 23. Can you speak about why you're excited about these markets and what steps you've taken thus far to set the stage?

Well, Western Europe is a huge market. We're not in the UK, but this is the first country. It's a huge market that's looking for innovative products such as ours, and there's no options. in that market besides ours in terms of plant-based soy-free products. It is not a simple market to enter, but it is very fragmented and competitive. So we're making a slow and careful entry, first in the UK, later in other countries. But we will definitely strive to do that with distributors that will be with strategic partnerships with the minimal spend on marketing. That's our goal. The Australian market, while also interesting by itself, is also a major launch point to cross-border China. So its potential over time is huge. And there is a specific product that is very unique with regards to our product portfolio that will be launched in Australia. So stay tuned for news on that.

All right. It looks like we are out of time. Many thanks to everyone for participating in today's call, and we look forward to hopefully speaking with you all shortly.