Better Choice Company Inc. (BTTR) on Q1 2021 Results - Earnings Call Transcript
Operator: Good morning, I will be your conference operator today. At this time, I would like to welcome everyone to the Better Choice Company First Quarter 2021 Earnings Conference Call. Today’s call is being recorded. I will now turn the call over to Rob Sauermann, Executive Vice President, Strategy.
Rob Sauermann: Thank you, operator and welcome everyone to Better Choice’s first quarter earnings conference call. By now, you should have received a copy of our earnings release and the earnings presentation which we will be discussing today. If you have not received both documents, they are available on our investor website, betterchoicecompany.com. The earnings presentation is also available in the webcast window for those joining us online.
Scott Lerner: Thank you, Rob and thank you again everyone for joining our call. It has been a busy 3 months since my official start date. And since our last call, I have only become more excited about the opportunity that lies ahead and the progress that we have made. As we noted in March, our collective goal is to become the most innovative premium pet food company in the world, with high-quality brands poised for rapid growth, led by a team of subject matter experts who have been there and done that. For those of you that are new to the Better Choice story and before we move into discussion of our first quarter results, I wanted to take the time to share a bit more about myself and what fundamentally attracted me to Better Choice. Prior to joining Better Choice, I spent the last 20 years of my career in the food and beverage industry, where I manage iconic brands such as Naked Juice, Quaker Oats, Scott Tissue and Parkay Margarine at companies like PepsiCo, ConAgra Foods and Kimberly-Clark. In 2008, I identified a market opportunity, left PepsiCo and founded my own beverage company called Solixir, which I sold in 2014 after several years of successful growth. After that exit, I partnered with VMG Partners, a San Francisco-based private equity firm that specializes in building consumer brands and became the CEO of Kernel Season’s. At Kernel Season’s, I saw an opportunity to dramatically increase profitability, while simultaneously growing our product offering in a relatively short period of time, which ultimately led to the sale of the company to another private equity firm, Highlander Partners.
Donald Young: Thanks for the introduction, Scott and thanks again to everyone for joining today. As I mentioned on our prior call, I spent the last 30 years of my career in premium pet. And I played a major role in the transformation and growth of two iconic brands: Nutro, which we took from roughly $20 million of sales in the 1990s to over $800 million of sales when it was sold to Mars. At Merrick, I was brought in by Swander Pace, way more than quadrupled sales, ultimately leading to the sale of the business, Nestle Purina and approximately $500 million in annual sales. With the brands that we have and the opportunity in front of us, I think Better Choice has even a greater chance to achieve similar success. In my experience, every great growth story in the premium pet food industry, whether that’s Nutro, Merrick, WellPet or Blue Buffalo has been driven by recommendation and a big part of that still happens in-store, even during the pandemic. Today, there are more pet owners than ever and pets are increasingly humanized as members of the family. With demographic changes in Millennials and Gen Z ownership provides a long-term opportunity for growth that’s only accelerated as a result of COVID-19. When I think about how to acquire new pet parents, I drew buyers into three categories: a third have done research and know what’s best for their pets; another third have heard some information and they know there is something better for their pet, but they are counting on the store to make a recommendation; the final third just got a new pet and they don’t have any education yet about what products might be best for them. Better Choice’s job is to go after that concerned and uncertain pet food buyer. This consumer has a high willingness to pay for products that they know and trust and they want to learn more about what’s best for her pet and that includes a high level engagement with a brand online.
Scott Lerner: Thanks, Donald for walking us through the market opportunity and the consumer journey. As you can see, our approach is laser-focused and specifically targeted to reach the most attractive high growth consumers in a cost effective way. When I take a step back and looked at the entirety of Better Choice through that lens, it presented an opportunity to simplify our business to drive success, rather than operating two independent businesses Halo and TruDog in isolation. After incorporating learnings from consumer research, this took the form as one Halo brand, with channel specific points of difference rooted in one master brand personality with clear differentiation versus the competitive set. Our plan is to gradually introduce and incorporate this messaging over the course of 2021, with early 2022 representing our targeted re-launch date with key brick-and-mortar accounts. We strongly believe that one Halo brand that spans across all channels domestically and internationally creates a smarter approach. This allows for a strong Halo marketing effect across all sub-brands to get the most out of the working advertising dollars we spend, while talking to the consumer at an efficient higher master brand and emotional level. We also believe this will help us realize economies of scale in our supply chain and help optimize how we allocate capital across the organization, fundamentally aligning the interests across all of Better Choice to drive success. What really sets us apart from the competition is that we can leverage our differentiated omni-channel strategy to design and sell products purpose built for success in specific channels, while maintaining our ability to leverage marketing and sales resources across channel. We believe that this allows us to deliver on core consumer needs and respond to changing channel dynamics that have only accelerated because of the COVID-19 pandemic. For example, we can take learnings from the online environment which represented 59% of our Q1 2021 and full year 2020 net sales to the offline environment, which we see is poised for growth at pet specialty stores in 2022. People who come online are feasting on information to understand what it is they are buying and what it is they are feeding their pets and it helps us understand what the key triggers are motivating them to purchase. With that information in hand, we can give Donald another tool to drive in-store purchases that he didn’t have at Nutro or Merrick. Overall, we grouped these channels into four distinct categories; ecommerce, which includes the sale of products to online retailers, such as Amazon and Chewy, the vast majority of which are made under the Halo brands. In Q1 this was our largest channel trade and represented 37% of our total net sales. Going forward, we anticipate that our ecommerce business will grow at 20% on an annual basis, with an average customer subscription rate of 55%, providing a solid foundation for growth. Direct-to-consumer or DTC, which includes the sale of products through our online web platform, in Q1 2021, and full year 2020, DTC accounted for 25% and 22% of our total net sales respectively. Today, our DTC sales correspond to sales under the TruDog brand, representing an opportunity for us to expand the Halo brand’s customer base. We anticipate that our online DTC business will have a similar growth profile to our ecommerce business. Brick and mortar, which includes the sale of products with pet specialty chains such as Petco, select grocery chains and neighborhood pet stores. In Q1 2021, and full year 2020 brick and mortar accounted for 18% and 21% of our total net sales respectively, and our products were sold in about 3,000 stores. We are focusing most of our efforts on growth in the pet specialty channel in 2022, which we view as the potential to be a hockey stick year for us via the launch of new product innovation. And international, which includes the sale of products to foreign distribution partners and to select international resellers under the Halo brand. In Q1 2021 and full year 2020, international accounted for 23% and 20% of our total net sales, respectively, with growth in Asia, most notably China, driving a 95% year-on-year increase in sales made under the Halo brand. We view this as a particularly compelling opportunity for future growth, which I will let Rob take us through in more detail.
Rob Sauermann: Thanks, Scott. I think it’s clear to everyone that follows Better Choice, how excited we are about the growth we have been able to achieve internationally. It’s taken us time, but we have built strong distribution partnerships in China, Korea, Taiwan, and Japan, all of which played a major role in the growth we were able to achieve in 2020, which is only continued in Q1 of 2021. Although our go-to-market strategy in Asia is a bit different than in the United States, our commitment to delivering real whole meat, certified proteins and no antibiotics has resonated strongly with Asian pet parents who have the same, if not heightened product quality concerns of their American counterparts. Looking forward to the rest of 2021, we have been able to secure as at minimum purchases with our Asian distribution partners, totaling $25.6 million over the next 2 years. We believe that this figure represents more of a floor rather than a ceiling. And we are currently developing freeze dried products for key international markets, adding to our strong line of products that are already sold to Asian consumers under the Halo brand. While ambitious, we believe it’s reasonable to see growth that’s in line with our historical performance going forward. As we look to the future, we believe China represents the largest macro growth opportunity in the global pet food industry. It’s a market where we already have a strong foothold with roughly half of our international sales coming from China. And there are several structural considerations that we believe give us an early mover advantage relative to the competition. We have secured approval from the Chinese Ministry of Agriculture to sell 15 dry diet to Mainland China, it’s very few Western manufacturer brands have achieved. We have a strong multi-year distribution partner, Penefit with a dedicated team of more than 20 individuals in country that are solely focused on selling the Halo brand. Lastly, we have established supply chain partners with whitelisted approval to import products. Just like our approach in United States, our target consumer is a young, educated urban dwelling professional, but instead of living in LA, they live in Shanghai. To put it in perspective, more than 50% of Chinese consumers that purchased Halo were born after 1990 and roughly 80% purchase our products. Demographics are also working in our favor as the number of households that own a pet has doubled in the last 5 years, with younger pet owners leading that growth. Even with the absolute number of households that own a pet in China, we recently surpassed the same figure of that in the United States. Only 20% of households in China own a pet compared to 67% in the U.S. That’s translated to a 28% annual growth rate in the premium dry cat food market and a 20% annual growth rate in the dry dog food market. Clearly it’s a market worth going after and one that we will continue to update the investor community as we work to grow.
Scott Lerner: Thanks, Rob. I think that’s a good segue to discuss how we plan to maximize shareholder value before handing it over to Sharla to walk through our first quarter financial performance. As we have covered in detail our omni-channel strategy is designed to be complimentary with ecommerce, DTC, brick and mortar and international, all working together to create a Halo effect. We believe that this is an attractive proposition for both financial and strategic investors going forward and creates clearly defined lanes for growth. COVID-19 has also had a permanent impact on the pet food industry, which is once again proved to be recession resistance. Dog and cat ownership has continued to grow and we believe the increasing rates of millennial and Gen Z pet ownership during the pandemic will continue to drive long-term tailwinds. We are also very encouraged by recent transactions in both the public and private markets. Not only has this reaffirmed the financial investor community’s interest in the pet sector, but valuation multiples continued to remain robust. A few notable highlights includes, Petco’s IPO in January 2021, which priced above the target range and valued the retailer at almost $4 billion. Fresh Pet’s follow-on offering in February 2021, which raised $300 million and valued the company north of $5 billion, roughly 20x 2020 sales, the sale of Solid Gold, one of Halos closest competitors in China in November 2020 to an Asian strategic buyer for $163 million. Clearly Capital Group’s $1 billion plus acquisition of WellPet in November 2020 and lastly, the completion of a merger between two prominent contract manufacturers, C.J. Foods and American Nutrition in June 2020 creating Alphia. In addition to these transactions, we will continue to highlight the attractiveness of Better Choice versus our only publicly traded direct competitor FreshPet, which trades at north of 20x revenue today. The overall takeaway is that there is a clear roadmap for Better Choice to create meaningful shareholder value in the public markets, and an exciting opportunity for investors to participate in the next growth play in pet. We have spent the majority of our time this morning discussing our organic growth strategy. But I do want to remind investors that we remain committed to locating the right assets that meet our investment criteria. Our strong industry contacts increase our ability to source transactions internally and avoid highly competitive auctions. We prefer asset light models that are complimentary to our existing brands. And our public company structure has historically enabled Better Choice to offer transaction consideration in the form of cash and stock. Beyond structuring benefits, smaller private acquisitions, they also represent opportunities for us to benefit from a potential dislocation between public and private valuation multiples. With that, I will now turn it over to Sharla to provide an overview of our financials.
Sharla Cook: Thanks, Scott and good morning, everyone. We are excited to discuss our first quarter with the investor community today. As you will see, we prepared a detailed reconciliation of our income statement to adjusted EBITDA and pro forma adjusted EBITDA in order to provide a clear picture of our revenue base and cash flow profile at Better Choice. In addition to our detailed financial statements, which you can review on our 10-Q published this morning. I want to touch on several key components of our first quarter 2021 results. In the first quarter, we generated approximately $13.4 million of gross sales, $10.8 million of net sales and $4.3 million of gross profits, all of which exceeded our run rate performance relative to the full year 2020. After adjusting for non-cash and non-recurring charges, we achieved negative $1.1 million of adjusted EBITDA, reflecting incremental investment in upfront marketing costs ahead of our 2022 brand re-launch. We have realized significant operational synergies, and have set long-term profitability targets to more concretely define the internal financial requirements that must be met prior to launching new products. Our long-term gross margin target is 40% to 45%. Our long-term contribution margin target is 20% to 25%. And our long-term EBITDA margin target is 10% to 15%. For reference our adjusted gross profit margin was 40% in 2020, and we believe that realizing economies of scale via top line growth will only increase our profitability. As we have previously disclosed we are currently planning to up-list two major U.S. exchange such as the NASDAQ or New York Stock Exchange in the summer of 2021. In Q4 of 2020, we raised more than $20 million of equity to complete the refinancing of our bridge loan, which we viewed as a key gating item prior to an up-list transaction. We have made significant progress behind the scenes in the first quarter of 2021 and believe we are well on track to uplifting within the next 2 to 3 months. Slide 19 and 20 provide a detailed reconciliation of our first quarter EBITDA, adjusted EBITDA and pro forma adjusted EBITDA on a consolidated basis. For reference, pro forma adjusted EBITDA for Q1 2020 includes annualized cost savings, resulting from the outsourcing of warehouse operations to a third-party logistics facility in Q4 of 2020. We can make the following conclusion. First quarter adjusted EBITDA of negative $1.1 million is in line with internal forecasts and includes $3.3 million of non-cash expenses and $0.8 million of non-recurring items. I would remind individuals that are reviewing our full year 2020 EBITDA of negative $48 million, but this includes over $43 million of non-cash expenses and over $3 million of non-recurring items. Of these non-cash expenses in 2020, $23 million was the result of a change to the fair value of our warrant liabilities, which we were required to classify as a liability as they included certain anti-dilutive features. Further $19 million can be attributed to non-cash expenses related to equity awards and dividends, with the majority of this charge relating to a non-cash contract termination of a third-party consulting agreement. Before we turn it back to Scott for closing remarks, I also want to highlight several key events that positively impacted our balance sheet in Q1. In January, we completed the refinancing of the original loan and concurrently closed a $12 million 3-year credit facility with Wintrust Financial at LIBOR plus 250. In addition to extending our debt maturities, distributed our annual cash interest expense by approximately $2 million and our senior leverage by $2 million. In January and February respectively, we also closed the $4.1 million equity investment, and received $1.3 million in warrant proceeds, which we used to replenish our cash cushion post the refinance of our bridge loan and to accelerate future innovation opportunities. As of March 31, 2021, we had $5.4 million in total liquidity, consisting of $4.3 million of cash on our balance sheet, and $1.1 million of excess availability on our revolving credit facility. As we look forward to a potential uplift this summer, I also want to point out two liabilities, the convertible notes, the majority of which were issued to the sellers of Halo, and the Series F Warrant derivative liabilities that should either automatically convert or be reclassified to equity upon an up-list. We have already discussed the Series F Warrants when we touched on our non-cash adjustments to the P&L, but taken together with the automatic conversion of the seller notes, this represents a potential reduction in our total liabilities, and a potential increase to our total shareholders equity of nearly $66 million, assuming the 3/31 balances remain static. Now, I would like to turn the call over to Scott before we open the line up to Q&A.
Scott Lerner: Thank you, Sharla and thank you again to everyone that has joined our earnings call today. Before we open the line to Q&A, I would like to also thank my team for successfully navigating the first and hopefully the last year the COVID-19 pandemic, while continuing to deliver high-quality food to pets and their pet parents around the world. We have the tremendous amount of confidence that our new Halo brand strategy will drive meaningful growth in the next 24 to 36 months. It’s relatively easy to execute in market. It creates a halo effect that the consumer experience while leveraging internal scale and it allows for selective M&A opportunities over time. Ultimately, you are betting on a proven team that has a history of successful exits, knows the sector cold and is purpose-built to capitalize on opportunities for growth worldwide. Now, I would like to open the call for questions. Operator, please?
Operator: Thank you. The first question comes from Steve Silver with Argus Research. Please go ahead.
Steve Silver: Good morning, everybody and congratulations on all the progress. I think it’s been tremendous the integration and the expansion of the leadership team. It’s at a short time. So, congratulations on that progress. I was intrigued by the recent announcement you guys made in terms of the partnership with the baseball player, Justin Turner. I think your prepared remarks mentioned a strategy for the penetrating the retail channel. But I was curious as to whether its part of the long-term marketing plan for the company to expand relationships with other social media influencers and the type to connect with consumers at would potentially be lower capital costs and greater cost effectiveness than traditional marketing activities? So I’d love to hear your thoughts on that.
Scott Lerner: Yes, thank you, Steve for the question. It’s a great one. We are preparing right now for a big marketing push coming later in the year into 2022. And part of that strategy is to utilize influencers in both a paid and sort of non-paid arrangement. Within pet, recommendation drives most of the purchase for consumers and it’s really important to show that our food works and that people love giving it to their pets. So, it’s definitely part of our strategy going forward to utilize influencers on the social media platform. And I’d say both from a celebrity standpoint, as you would define the Justin Turner as well as an everyday pet owner, getting the Halo brand in a sort of viral slipstream, if you will, with consumers is the goal for the brand and something that will definitely execute on. So to answer your question, yes, it will be part of a big portion of what we are going to do from a marketing perspective.
Steve Silver: Great. Congratulations again on all the progress.
Scott Lerner: Thank you for your support.
Operator: The next question comes from Kelvin Seetoh with Slingshot Capital. Please go ahead.
Kelvin Seetoh: Hey, Scott and the rest of the team. Kelvin here calling from Singapore. Before my questions, I’d like to say that it is not common where we see a company below $100 million market capitalization providing such useful commentaries for his shareholders. So for that, I appreciate all of you a lot and the efforts you have placed in preparing your respective remarks. So, my question is this right, increasingly, brand awareness plays an important part to drive online sales and it’s actually nice to see that our online sales have represent above 59% of our sales. So, could you speak about what are some of the market learnings that we have this quarter and how are we expanding our reach online? Is it primarily through Facebook targeting? And do we have a healthy returns on ad spend ratio? Thanks, Scott.
Scott Lerner: Yes, just to clarify, are you referring in general or in the Asian market?
Kelvin Seetoh: In general.
Scott Lerner: Right, right. So one of the things that we have done, since we’ve come in as a team is really evaluate our metrics online and strive to attract a more profitable lifetime value consumer. And one of the measures that we use is we call it, CAC to LTV or cost of acquisition to lifetime value and getting it either at par or above the market standard, which would be roughly 3. So, we look at our cost for advertising, whether it be on Facebook, Instagram, and the return we get in terms of sales and utilize that ROI, to then identify opportunities to fund marketing. So, it’s definitely something that we do and we will continue to do in terms of paid social, if that’s where the question is sort of going, but really make sure that it’s efficient in terms of who we are spending against and attracting the consumer that we want. That’s profitable for us in the long-term. Because I think a lot of times companies can go out and just spend and look at return on ad spend as the measure. And that isn’t really a true measure for long-term growth and profitability. And so our focus is to track that lifetime value consumer that’s going to stick with us for the lifetime of their pet and really become efficient in terms of our marketing spend.
Kelvin Seetoh: Thanks so much for the answer. Sales sounds like is a very sensible and this team may know spending. I have a second question. You are adding a number of high-quality talents into company over the past two quarters. So, could you speak about the specific capabilities that you are hoping to build over time? And also, what are some of the low hanging fruits or opportunities where Better Choice is very well equipped to pursue sort of in the next few quarters?
Scott Lerner: Sure. So I am a big believer in people, quality, talent drives success. My main job as a CEO is to recruit, attract, retain, quality talent. And so my background comes from big consumer packaged goods companies. I have spent 12 plus years with companies like PepsiCo and ConAgra and Kimberly-Clark and also have an entrepreneurial experience. And I like to bring in folks that have some big company experience, but also passion to be an entrepreneur, because I think it’s the best of both worlds. And then you take a lot of the learnings and training that they received at the big company and let them go and you see a lot of success. So, that’s the type of profile that we are bringing into the company is someone that’s been trained understands sort of standard operating procedures, how to do planning and then can really use their energy to help us grow very quickly. I think in terms of low hanging fruit, it’s really going back into the pet specialty channel, which we define as stores like Petco and Pet Supplies Plus independent pet stores. And reestablishing Halo as a brand that store associates will recommend to consumers. And that’s really what we are working on for our 2022 launch. Donald Young, he is well equipped to do that with his team. He has done it before two times over with Nutro and Merrick and that’s really I would say the low hanging fruit out there for us is to reestablish ourselves within those channels. And I call it low hanging fruit because of the relationships that Donald and his team has with the retailers and our ability to go back into those stores in a quick fashion in 2022 and drive growth.
Kelvin Seetoh: Alright. That’s great commentary. I do have one last question. I think in previous earnings call and in today’s earnings call you have mentioned about the valuations of our comparables Petco, I think is valued at a price of 1.2x on next guidance, we are in 20%. You have Freshpet, you have Zoopla, you have Chewy as well. I think Chewy on the next 12 months guidance is about 3.2 price of sales. So I was just curious, what’s your take on why these companies have such wide range of price multiples, we have Chewy, we have Petco, Freshpet and even Zoopla, which are European platform player as well. Do you – could you share with us maybe some of your take on that?
Scott Lerner: Sure. Rob, do you want to take this one?
Rob Sauermann: Yes, definitely. So, I think what’s really important, when you are thinking about different companies in the pet space, right, is to identify kind of how those different businesses play. I think of Petco and Chewy as more of a broker-type relationships that are maintaining a strong customer relationship, but selling through existing brands, products that they have developed and services that they have developed. When I look at Freshpet and I think about that transaction multiple or excuse me that public market valuation multiple and then I think about Better Choice, we line up a lot more closely in terms of what we do as a business to a Freshpet. We produce a branded premium pet food product. And I think that when you look at private multiple transactions in terms of where folks are raising capital, you tend to see that same sort of shift. So, I would kind of guide folks to look at sort of what the actual service that those businesses are providing within the pet landscape, but thanks for all your questions, Kelvin.
Kelvin Seetoh: Okay. So just one last commentary, lastly, I’d like to share that if you are still looking for independent directors for up-listing purpose, does this gentleman called Ryan Cohen, which previously founded Chewy, I believe he will be excellent addition, he kind of built Chewy and in the pet category successfully. So once again, I think you guys built a wonderful team. And I think you guys are really incredible talent to this company, so looking forward for nicer quarters. Thank you so much.
Scott Lerner: Thank you.
Operator: The next question comes from Richard Robinson, a Private Investor. Please go ahead.
Richard Robinson: Good morning. Why does the current share count fully diluted? Do you expect the share count to go up this year and when do you expect to be cash flow positive? Thank you.
Scott Lerner: Sharla, do you want to take that?
Sharla Cook: Sure. Thanks for your question. Yes. So, on a fully diluted basis, it did. I don’t want to give it a specific number, we do have some fairly, some different convertibles outstanding as you know, warrants, some convertible notes, which will convert upon an uplift that denotes well. I believe we are at about $150 million or so fully diluted. Regarding your question on cash flow positivity and I do want to just point out, we got a similar question on the webcast. So I am going address those at the same time. We mentioned in the call some investments we are making this year specifically around some marketing investments as well as a new brand re-launch and so we really expect to see the benefits of those starting early in 2022. So, while we do expect to see a cash burn this year, we do expect to reach profitability and cash flow positivity in 2022 and continue to see that grow in ‘23 and beyond.
Operator: Richard Robinson, your line is still open.
Richard Robinson: Yes, thank you. Thank you. Thank you very much.
Operator: There are currently no more questions in the phone lines. I would like to turn the call back over to Better Choice management for any webcast question.
Sharla Cook: Thank you, operator. We actually don’t have any further questions on the webcast either. I mentioned I addressed the question on cash burn just now. So, that wraps up our questions on the webcast as well.
Operator: This concludes the question-and-answer session. And then this also concludes today’s conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.
