Else Nutrition Holdings Inc.

Greetings, and welcome to the ELF Nutrition's second quarter 2024 earnings conference call. At this time, all participants are in a listen-only mode. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Alexander Schultz, Vice President of Crescendo Communications, the company's IR firm. Thank you. You may begin.

Good morning, and thank you for joining ELF Nutrition's 2024 Second Quarter Financial Results and Business Update Conference Call. On the call with us today is Hamit Al Yitzhak, Chief Executive Officer of ELF Nutrition. The company issued a press release today, August 14, 2024, containing its 2024 Second Quarter Financial Results, which is also posted on the company's website. If you have any questions after the call or would like any additional information about the company, please contact Crescendo Communications at 212-671-1020. The company's management will now provide prepared remarks reviewing the financial and operational results for the three months ended June 30, 2024. Before we get started, we would like to remind everyone that 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 ELF Nutrition's website. With that, we will now turn the call over to Hamital Yitzhak, Chief Executive Officer. Please go ahead, Hamital.

Thank you, Alexandra, and thanks to everyone for joining us today. Before I discuss our progress during the quarter, I'd like to start by addressing shareholders' concerns over our stock price. Unfortunately, and as many may know, we have no control over the stock price or day-to-day trading activities. And while we share our stockholders' frustration, we're quite hopeful that our share price will be more reflective of the company's intrinsic value as we continue to execute on our growth strategy and achieve key upcoming milestones. I'd now like to discuss those milestones we intend to achieve today. as well as the progress we've made during the second quarter of 2024. Our established product lines continue to grow in the North American market, with the onboarding of several new key retailers, such as Wegmans, AGB, and Mayer, and the added stores and SKUs in existing customers, such as Walmart, Loblaws, Giant, Metro, Big Y, London Drugs, and many more. Our retail sales increased 88% and 111% sequentially in the U.S. and Canada, respectively. Walmart added our products to an additional 600 stores nationwide. We are now selling in a total of 1,400 Walmart stores in the U.S. Canada is demonstrating similar traction. We already shipped ready-to-drink products to 850 Loblo stores as well as to Metro and London Drugs, and onboarded Walmart.ca, Walmart's online arm in Canada. We believe that entering Walmart.ca will lead to entry into Walmart's brick-and-mortar stores in Canada, which would mirror our successful strategy in the U.S. Furthermore, we announced a listing with the Navy Exchange Service Command, or NEXCOM, that offers a variety of goods and services to active military personnel, retirees and certain civilians on Navy installations in the United States, overseas Navy bases, and aboard Navy ships. This enables us to reach an extensive and diverse community, ensuring that those who serve and their families have access to high-quality, nutritious options. We're pleased to report that we have delivered the first shipment of our full range of products to Nexcom's retail stores. Additionally, We believe this relationship can lead the way to additional contracts with other military channels, including the Air Force, which could significantly impact our revenue and reach. The success of our ready-to-drink products in the market has been marked by significant traction underscoring its appeal and effectiveness. Since its launch, we have observed an increase in adoption resulting in increased sales, reflecting strong consumer demand, and positive reception. Positive reviews and testimonials further attest to its quality and reliability, enhancing our brand's reputation. In fact, our RTD products earned the prestigious Mom's Choice Award. This impressive market performance positions us favorably for future growth and expansion. Our RTD products already entered six U.S. retailers and four Canadian retailers. We have begun a consumer sampling campaign across North America in an effort to increase our reach and find new customers. We shipped more than 2,300 kids' RTDs and toddler full-size samples in the U.S. and 2,700 in Canada, achieving an impressive new customer acquisition cost as low as only $7. We also started an aggressive social media marketing campaign combining organic and paid-for content. We created over 250 new content assets during the quarter, and as a result, saw a 49% increase in our U.S. e-store sales in Q2 versus Q1. We also grew our targeted media campaign to further build brand awareness. We are also seeing an increase in deliverables such as SMS, emails, etc., improving our loyalty and referral programs, obtaining premium placement of products and advertising materials, and adding new influencers, all together resulting in millions of impressions. Our efforts already increased conversion rates and online sales, demonstrating that our marketing efforts are effective. And I'd like to highlight that we only began our aggressive marketing during the first quarter of this year. Therefore, we believe we can achieve accelerated growth with further implementation of our strategy, increasing revenue and creating broader recognition of our brand. We've also made significant progress in improving our cost of goods while improving our product quality. Specifically, with our new U.S. powder plant and packaging partner, we significantly reduced production costs and improved product shelf life. We also plan to add a powder production and packaging facility in Europe still in 2024, which will offer additional cost savings and quality improvements. In addition, following the successful launch of our Kids RTD products in the U.S. and Canada and the completion of the development of our new RTD products for adults, we plan to produce the first commercial run of this product for Canada in Q3 2024. This is a very large category in North America, and we will offer a very competitive, better-for-you product line with lower sugar levels, high level of protein, clean and natural, delicious and price-competitive products We are convinced that this new product line will open new retail channels for us and will contribute significantly to the company's revenue and profits in the coming years. And lastly, we had the first commercial launch of our groundbreaking plant-based infant formula in Australia. Australia was strategically selected due to its location in the Asia-Pacific region, serving as the initial market for the planned expansion of our entire product line across the area. Both the infant formula and the toddler drink are currently available on Amazon in Australia and on the Healthy Life eStore, which is the online arm of Woolworths, Australia's largest retailer. And we plan to expand distribution through other online retailers and brick-and-mortar stores. We're very proud that our infant formula is free of antibiotics, hormones, pesticides, GMOs, and heavy metals. which are increasing concerns among parents. The core ingredients, almonds, buckwheat, and tapioca, have a 65% lower carbon footprint and require zero chemical processing, keeping proteins intact. We believe this first commercial launch is a critical stepping stone for launching our infant formula in other major markets, including the United States. And while we previously received approval from the IRB and submitted the preclinical study results to the FDA in the first quarter of 2023, we were in continuous discussions with the agency regarding study protocols, preclinical studies, and formula composition, but have still not received confirmation from the FDA, nor did they provide critical replies to some pivotal questions regarding the preclinical study, leaving the company with no guidance as to how to proceed This is, as you may understand, limiting us from moving forward. In the meantime, we have decided to explore additional avenues to advance our discussions, including lobbying and legal activity. We also are now exploring a pathway to progress with infant formula clinical approval in Europe. Unfortunately, I cannot provide a timeline to which this will be completed, but I'd like to highlight that we believe our formula meets the FDA standards. and the company is ready to commence the clinical trial for our formula. However, this is a new category of formula. And while we believe it will address a very important unmet need, the regulatory agency will appropriately provide caution to novel formulations, especially for infants, a very vulnerable population. And before I briefly discuss our financial results, I would like to touch on our previously announced letter of intent with Danone. As some may know, our lead over intent has expired. Danone is a very large organization, and furthering discussions to adopt any products, including ours, is a lengthy process. Additionally, macro political events may also be delaying any inclusion of new products. We intend to progress discussions as appropriate. However, we are also exploring additional opportunities where we can partner with strategic and recognizable companies to provide access to additional markets and families around the world. Now let me discuss our financials for the second quarter of 2024. Revenue for the 2024 second quarter was $2.6 million compared to $2.12 million for the first quarter of 2024. a significant sequential increase of 23% as a result of strong growth within our U.S. and Canadian retailers, which increased 88% and 111% sequentially, respectively. The company continues to execute on its plans to increase gross profitability. The gross profit in Q2 of 2024 increased to 10% compared to minus two gross loss in Q2 of 23%. The company decreased its operating expenses in Q2 24 to 3.4 million compared to 4.2 million in Q2 of 2023 by becoming more efficient while increasing revenues. Finally, we remain diligent in managing our expenses and are confident that adhering to our business strategy will enable us to accelerate growth, improve margins, and attain sustained profitability. Overall, we're optimistic about the future of our business, and we continue to execute on our growth strategy by enhancing product awareness, expanding retail distribution, focusing on online sales, and launching the adult RTD product line. To support these initiatives, we have established robust partnerships with manufacturing partners who possess the capacity to support our growth. At this point, I'd like to address questions that come in from investors. Alexandra, please lead the Q&A session.

Thank you, Hamital. Our first question is, given the traction with retailers, who are the top-performing stores?

Well, historically, we have not disclosed results on specific retail stores. In addition, this answer can vary given the timing and number of shipments as a result of the unique needs of each location. So while I cannot specifically comment on top-performing stores, I'd like to highlight again that revenue from the U.S. and Canadian retailers have increased 88% and 111% sequentially, demonstrating our strong performance in the North American market. I can also add that the most significant customers at this point are Walmart, KEHI, and UNIFI.

Thank you, Hamital. Our next question is, when do you expect to be cash flow positive?

We are working aggressively to be cash flow positive and believe we can obtain this within 18 to 24 months.

Thank you. And when will the adult ready-to-drink product be launched?

The first commercial production is planned for the third quarter of 2024. followed by a soft launch in Canada in Q4 of 24. We expect to commercially launch the product line in the U.S. and Canada in early 2025, and believe we will witness significant sales from this product similar to our kids' RTD line.

Well, thank you, Hametal. That does conclude our Q&A session, so I will pass it back to you for closing remarks.

Thank you, Alexandra. We are proud of this strong quarter and are confident that we are establishing a new benchmark in infant, toddler, kids, and soon adult nutrition. The traction we are gaining in the market highlights the growing demand for dairy and soy-free alternatives. Additionally, our products are increasingly being accepted by retailers for both their shelves and online platforms, allowing us to reach millions of families globally. We are excited about the opportunities that lie ahead in 2024, including the launch of our adult RTD products and the expansion of market penetration for our kids' RTD products introduced late last year. Overall, we believe we are well positioned for continued success and are committed to delivering value to our shareholders. I would also like to extend my gratitude to our dedicated team of employees and advisors whose efforts are instrumental in guiding us towards that promises to be a remarkable success. Thank you all for joining the call today.

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.