Else Nutrition Holdings Inc.

Thank you for joining us today for Else Nutrition's third quarter 2022-2023 conference call. With us on the call representing the company today is Hamil Tal Ishak, Else Nutrition's CEO. At the conclusion of today's prepared remarks, Hamil Tal 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 materially from those projected, and the company undertakes no obligation to update these statements except as provided 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, and you can find it 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 in the press release. With that said, let me now turn the call over to Hamotal Isghat, CEO of Else Nutrition. Hamotal, please proceed.

Thank you, Ben, and good morning to all of you. We're happy to speak with you today regarding our third 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 growth in 2023 and beyond. To begin, Sales results in the third quarter were disappointing. We anticipated that sales may slow in the second and third quarters as a result of the large initial orders for new stores during the first quarter. However, the pace of reorders from the many new stores took longer than anticipated and some sales fell out of Q3 and into Q4. But we are now seeing strong accelerations in sales in the last six weeks, which led us to provide revenue guidance of $2.7 million to $3 million for the fourth quarter, representing a 58% to something around 75% growth compared to the third quarter of 2023. I will speak about the specifics of the quarter as well as guidance later in the call. In the third quarter, we continued our progress across all areas of our business, We are advancing 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 20,000 locations and about 70,000 points of distribution by end of 2024. We are excited about the next phase of our relationship with our retailers post our initial launches into their stores. These retailers are beginning to send us reorders as they have successfully sold through their initial shipments. As such, we're seeing strong order levels from retailers in recent weeks, which led us to provide the guidance for the fourth quarter. We further expect sales to retailers to accelerate meaningfully in the coming quarters. Our new manufacturing facilities in the U.S. and Europe are now operational, more than tripling our historic production capacity, allowing us to properly properly meet our customers' growing demands, and mitigating the risk of future out-of-stock situations. Importantly, our new facilities have substantially improved our production efficiency and cost effectiveness. We now expect our manufacturing costs to decline 50-60% beginning Q4 and beyond, which should lead to increased gross margins in 2024. 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 one year 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 the historic growth in 2024. I will touch on that a bit later. Yesterday, we announced a binding letter of intent for a multi-stage collaboration with Danone, a worldwide leading company specializing in fresh dairy products, plant-based water, and specialized nutrition. At the initial stage of the collaboration, Danone will license ELS products in Europe and include them in its specialized nutrition portfolio. This is a monumental event for ELS as it not only opens many doors for our products with Denon's strong muscle and robust marketing and distribution infrastructures, but is also a strong vote of confidence in ELF's unique whole plant-based formulation, know-how, and IP by a global market leader. This agreement comes after long months of extensive diligence by Denon. Our growth objectives in 2023 and beyond remain intact. However, 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. 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. With those points said, this morning I want to speak about five areas of importance for ELF. These five areas are expanding distribution in North America and beyond, production management, 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 today, including 10,000 stores in the U.S. in chains such as Walmart stores, CVS stores, Giant Foods, and Winn-Dixie. We're also in 3,000 Canadian stores such as Choppers Drug Mart, Location, London Drugs, Metro Ontario, Loblo's, and Sobeys. We expect to reach 20,000 listed stores and over 70,000 points of distribution at the end of 24 in North America. Given our strong pace of store expansion, our sales in retail stores can be uneven from quarter to quarter, depending on the timing of deliveries, especially as we perform initial stock fills. Such unevenness should smooth out over time. In the first quarter of 23, we shipped a lot of product to stock online, and to stock the many new doors that were added in the previous quarters. As expected, we saw a temporary decrease in orders in Q2 and Q3, while the new stores build up sales velocity and consume the initial store fill. Furthermore, as is common practice with the consumer products industry, the initial orders were heavily discounted and or laden with various shelving and shipping charges. These discounts and charges dissipate upon reorders. We're now at the exciting juncture where these retailers who have successfully sold through their initial shipments are placing reorders. Many of them have expanded shelf space and skew counts for else products. As mentioned earlier, we are seeing strong order levels from retailers in the fourth quarter and expect revenues in the fourth quarter to increase 58 to 75%. compared to the third quarter of 2023. Now I want to speak about our geographic expansion. In the third quarter of 22, we launched in Canada on Amazon.ca and in a few leading retailers including Loblos, Sobeys, London Drugs, and Metro Ontario. We are currently selling in 3,000 stores in Canada and expect to reach roughly 5,000 by the end of 2024. Just a few days ago, we announced our launch into Western Europe. The initial launch was in the UK via Amazon, as well as two large distributors, with other countries to follow through the Denon Agreement. According to Statista, the European baby food market amounts to $17.4 billion in revenue in 2023 and is expected to show a volume growth of 3.9% in 2024. The United Kingdom baby food market is valued at 1.2 billion in revenue and forecasted to increase between 2023 and 2028 by 19%. The UK's consumption of vegan food and drinks is the highest in Europe, with flexitarians slated to make up half of the UK consumers by 2025. In the coming weeks, we also plan to launch in Australia for local sales as well as another gateway to China and other Southeast Asian markets. Now I want to touch on our production management. For those who are relatively new to the L story, historically, we worked with only one manufacturing facility. That changed in February of 2023, when we secured two additional facilities, two in the US and other in Europe. I'm happy to say that our three new facilities are now operational, more than tripling our production capacity, allowing us to properly meet our customers' growing demands and mitigating the risk of future out-of-stock situations. Importantly, our new facilities have made our production more efficient and cost-effective, and now expect our manufacturing costs to decline by 50% to 60% beginning of the fourth quarter of 2023 and beyond, which should lead to increased gross margin in 2024. 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 else brand equity. While our toddler formula is our entry into many retailers, having a well-rounded suit of products makes for stronger relationship with our retailers and our end consumers. In 2022, 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. These numbers were doubled again during 2023. 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 the category on Amazon.com. In October, we soft-launched our Kids Ready to Drink products in major trade shows in the U.S. and Canada. The reception was fantastic, with many applauding the product's taste and texture. Several large retailers in the U.S. and Canada have already agreed to list the products, and others have asked us to submit it for reviews. This launch marks a significant expansion from our successful powder 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 is a rapid increase in the number of working moms. This may result in an unbalanced diet for their child. They may not get the adequate amount of nutrients, And this is a serious issue that many parents are facing. So the kids' nutrition global market revenues were estimated at $52 billion, no less than that, in 2022, and are anticipated to grow at a carryover of 5.5% from 23 to 33, according to a recently published persistence market research report. By the end of 33... The market is expected to reach a valuation of $94.5 billion. North America accounts for 43% of the kids' nutrition ready-to-drink global market. That's $22 billion. And that category is four times larger than the infant nutrition category in the U.S. So this launch also sets the stage for 2024 when we plan to enter the large North American adults' nutrition drinks market with our first adult ready-to-drink product. Now I'd like to speak about our expense management and capital preservation initiatives. While our growth objectives in 23 and beyond remain intact, 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. During the first three quarters of 23, total operating expenses have decreased 22% year-over-year, despite our revenues increasing 14% 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 a cash flow break even sooner than previously planned. 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. The investment we have made in our brand over the last four and a half years are beginning to pay off as we are now an accessible nationwide brand in North America to hundreds of thousands of parents with minimal advertising. In 2022, we decreased our advertising expense only by 8% year over year. And thus far in 23 advertising expenses has decreased 28% year over year despite our revenue growth of 14% year over year. The significant progress is making our marketing efforts more efficient was made by implementing a robust measurement system to accurately determine the return on investment and return on spend of our marketing activities seizing any efforts that were not resulting in positive returns. With regard to employee expenses, we have reduced our headcount and costs by 14%, again, despite the strong growth in our sales. 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-darian, non-soy FDA-approved infant formula will be transformational for the valuation of the company. We've 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. ELS concluded 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 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 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, continuous discussion, 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 the several recent product recalls in the US. Now I'll briefly review the third quarter financial results. Revenues in the third quarter were 1.7 million, a 23% year-over-year decline versus the third quarter of 22. Sales to brick-and-mortar retailers in the U.S. and Canada during the third quarter of 2023 increased by 8% year-over-year versus the third quarter of 2022. As mentioned earlier, in the first quarter of 2023, we shipped a lot of product to stock and many new doors added in the previous quarters. As expected, we saw a temporary decrease in orders in Q2 and Q3 this while the new stores build up sales velocity and consume the initial store fill. Furthermore, as is common practice with the consumer products industry, the initial fill in orders are heavily discounted and are laden with various shelving and shipping charges. These discounts and charges dissipate upon reorders. We are now at an exciting juncture where these retailers who have successfully sold through their initial shipments are placing reorders Many of them have expanded shelf space and SKU counts for ELSE products. While it is not our usual practice to provide guidance, given the strong pace of orders we are seeing from our retail customers in the last few weeks, we are comfortable providing a revenue guidance range of $2.7 million to $3 million for the fourth quarter of 2023. Total e-commerce sales, meaning sales from Amazon as well as our own e-commerce stores during the third quarter of 2023, decreased by 40% year-over-year. versus the third quarter of 22. The very strong sales in the third quarter of 22 were driven by the formula shortage crisis of 22. E-commerce sales were essentially flat versus the second quarter of 23. The e-commerce channel continues to underperform on the backdrop of our decision in the first quarter of 23 to divert product from its e-commerce channels in favor of brick-and-mortar retailers. As you recall, due to the product shortage we faced in the beginning of the year, we made the strategic decision to divert inventory away from e-commerce channels in favor of the brick and mortar retailers. As a result, our e-commerce customers experienced out of stock on occasions. We are now in the midst of rebuilding our sales velocity on Amazon and our e-commerce store and expect these channels to accelerate growth in 2024. While ELF's nutrition has achieved a lot in its short time as a public company, we're very excited about the growth perspectives 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 ELF for the benefit of those who may be new to the story. ELF has developed the world's 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 $100 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 or natural process, as opposed to the rest of our industry, who use 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 health-level 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. ELS 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 have proven the product's viability and superiority over existing potential competitors. We have 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, with current 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 other channels.

All right. Thank you, Hamotal. We have some questions for you. First, can you provide more detail on the orders you're seeing from retailers in the fourth quarter? Are these orders mainly refills or new stores? And secondly, what is the feedback you're getting from retailers?

So thus far in the fourth quarter, we are seeing a significant acceleration in orders. I would say about 50% above the third quarter. As we expected, these are mostly fill-in orders as retailers have now depleted their inventories from their initial orders.

Can you provide some more details on the non-collaboration? Is there a sense of timing here?

Well, the agreement signed is a multi-stage binding collaboration agreement. The intention is to collaborate in many areas starting from a licensing and commercialization of the ELF toddler products in Europe. This is the binding part of the signed agreement. We look forward to continuous collaboration with Danone in other areas.

Okay, thank you. You spoke about your new manufacturing facilities being more cost-efficient. Can you provide some details on this?

Well, our new manufacturing sites have enough free capacity to support our North American growth in the next two to three years. The European manufacturing site can support other parts of the world, such as UK and Australia and many other countries that we intend to step into in the future. The manufacturing cost in our U.S. side is significantly lower, and we expect to see the effect of that on our P&L and gross profitability starting the first quarter of 2024. Okay, thank you.

With the Garcia ready-to-drink products, why is this product so important to ELF, and what has the retailer response been thus far?

Well, the importance of the ready-to-drink is very significant for several reasons. First, it opens many product categories for health. Kids, adult medical, adult strength, and other food categories in the future that we are not playing in at this point. We are starting with kids ready-to-drink, which is over four times larger than the U.S. infant nutrition market. It's a $22 billion category in North America alone. So the potential is much larger. Secondly, the ready-to-drink has a faster turn by nature compared to our current powder products. It's a fast mover. Now, according to many retailers who already tasted and tested our product, it has a great taste and texture, and they love it. Some said that it's the best tasting product in the industry. That's why we experience great acceptance by big box and mid-size retailers, both in the U.S. and Canada. The listings in some of them will not be immediate and will take a few months, as usual, but we expect this to grow fast and generate significant revenues in 2024 and beyond. On top of that, we already are in the final stages of the adult product development and intend to launch it probably in the second quarter of 2024. This is another huge untapped market opportunity for us.

Okay, thank you. Can you speak about your entry into the UK and what gets you so excited about this market?

Well, the enthusiasm from Amazon, who invited us into the European market, supporting our listing and onboarding is very strong. The enthusiasm from our distributors, one of which is the largest nationwide natural products distributor in the UK, is also very strong. And that is based on their conversations with retailers reflecting the high demand coming from the market to such an alternative. All this coupled with all the market data that we have about the vegan and plant-based high demand products in the UK, which is, as I said, has the highest demand for vegan and plant-based products in the entire European continent, make us very optimistic about the prospects of this new market entry.

All right. Thank you. And it looks like we are out of time. Many thanks to everyone for participating on today's call. We look forward to speaking with everyone shortly. Thank you.

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