Better Choice Company Inc. (BTTR) on Q2 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 Second Quarter 2021 Earnings Conference Call. Today’s call is being recorded. I will now turn the call over to Rob Sauermann, Executive Vice President of Strategy. Please go ahead.
Rob Sauermann: Thank you, Operator. And welcome everyone to Better Choice’s second quarter earnings conference call. Right now you should have received a copy of our earnings release and the earnings presentation, which we will be discussing today. If you’ve 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. I’m joined today by Scott Lerner, our CEO; Sharla Cook, our CFO; and Donald Young, our Executive Vice President of Sales. Before we begin, please remember that during the course of this call, we may make forward-looking statements within the meaning of the federal securities laws. These statements are based on management’s current expectations and beliefs, and involve risks and uncertainties that could cause actual results to differ materially from those described in these forward-looking statements. Please refer to the company’s quarterly report on Form 10-Q filed with the Securities and Exchange Commission and the company’s press release issued on Thursday, August 12, 2021, for a detailed discussion of the risks that could cause actual results to differ materially from those expressed or implied in any forward-looking statements made today. Please note that on today’s call management will refer to certain non-GAAP financial measures such as gross revenue, EBITDA and adjusted EBITDA. Although, the company believes these non-GAAP financial measures provide useful information for investors, the presentation of this information is not intended to be considered in isolation or the substitute for the financial information presented in accordance with GAAP. Please refer to our press release and presentation issued on August 12, 2021, for a reconciliation of the non-GAAP financial measures to the most comparable measures prepared in accordance. With that, let me hand it over to Scott.
Scott Lerner: Thank you, Rob, and thank you, again, to everyone for joining our call. It’s been a busy seven months since my official start date and since our last call, I’ve only become more excited about the opportunity that lies ahead and the progress that we have made. As we have noted on our first quarter call our collective goals 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. Before we discuss our second quarter results in detail, which were in line with expectations and represented 11% year-over-year growth, I wanted to take the time to highlight some of the key accomplishments that our team has been able to deliver in the last six months as we successfully laid the groundwork to realize rapid growth in 2022. First and foremost, I believe that the ultimate success of Better Choice begins and ends with our ability to quickly bring innovative products to market at scale. In the first half of this year, we’ve invested significantly behind incremental innovation and then developed a three-year pipeline of new offerings to drive organic growth. We’ve also invested in our human capital and brought in industry-leading formulation experts and veterinarians to ensure our products are of the highest quality and outperform the competition. Core to the strategy is the 2022 launch of Halo Elevate with several new brick-and-mortar retailer partners. Led by Donald and his team, we recently reached an agreement with Pet Supplies Plus, the third largest pet specialty retailer in the United States with over 560 stores to launch Halo Elevate in 2022 concurrent with their annual store reset. In addition to Pet Supplies Plus we have a high level of confidence that we’ll be able to bring on incremental pet specialty partners, such as Petco, and ultimately, gain aggregate distribution of Halo Elevate in more than 1,500 stores. Our online business remains strong and we’ve continued to maintain subscription rates and deliver upon recurring revenue. Across all our online platforms such as Amazon, Chewy and our direct-to-consumer website, we have a blended subscription rate of approximately 50%. In addition, now that we’ve left Q1 and Q2 of 2020, which were major stockpiling quarters’ industry-wide, I’m excited by our ability to drive incremental sales growth in the second half of this year relative to last year. In addition to our Domestic business, we have secured more than $100 million in contracted minimum revenues from our International distribution partners over the next five years. We are already seeing the effects of these contracts and are making upfront investments in growing these partnerships. In the first half of this year, we realized $6.5 million in International sales, representing 48% year-over-year growth. Lastly, we successfully completed an uplist to the NYSE American Exchange raising $40 million of gross proceeds at approximately 3 times 2020 net sales and automatically converting $23 million in debt into common equity upon listing. With this capital in hand, we have the ability to execute our aggressive organic growth strategy without a need to raise incremental funds, a cash position in excess of $35 million and our only debt of $10 million credit facility at LIBOR plus 250. Beyond our product offering, what I think sets us apart from the competition is our true omnichannel approach. We can leverage our differentiated omnichannel strategy to design and sell products purpose built for success in certain markets without creating channel conflict. This allows us to simultaneously deliver on core consumer needs, while increasing our operating leverage. For a business with $50 million of gross sales today, we think this will lead to a rapid acceleration of topline growth. Overall, we grouped these channels into four distinct category, e-commerce, which includes sales to online retailers, such as Amazon and Chewy, the vast majority of which are made under the Halo brand. In Q2, this was our largest channel trade and represented approximately 26% of our total net sales. In addition, we anticipate our average customer subscription rate of 50% will provide a solid foundation for growth. Brick-and-mortar which we identify as sales made the pet specialty chains such as Petco, select grocery chains and neighborhood pet stores. In Q2 2021, brick-and-mortar counted for 16% of our total net sales. As we’ve discussed, we are focusing on growth in the pet specialty channel in 2022, which we view as the potential to be a hockey stick here for us to be the launch of new product innovation. Donald will take us through this in more detail regarding the Halo Elevate launch status later in the presentation. Direct-to-consumer or DTC represents sales through our online web platform. In Q2 2020 DTC accounted for 21% of our total net sales. Today, all DTC sales correspond to sales under the TruDog brand, representing an opportunity for us to expand the Halo brands customer base. We anticipate that our online DTC business will have a similar growth profile to our e-commerce business. At International which includes sales to foreign distribution partners and select International retailers under the Halo brand. In Q2 2021, International accounted for 37% of our total net sales, respectively, with growth in Asia, most notably China, driving a 48% year-over-year increase in sales for the first half of 2021, relative to the first half of 2020. We view this as a particularly compelling opportunity for future growth, which I’ll let Rob take us through in more detail later. No matter how robust our strategy might be, establishing a strong company culture is the foundation of our ability to achieve our overall corporate mission and that starts with our team. We believe that we’ve already have these building blocks in place and have assembled a world class team of individuals that are passionate about their pets and serving the broader pet parent community. In addition to our human capital, we are an asset-light business work with some of the best suppliers in industry, all of whom manufacture product in the United States. We have the infrastructure in place to support the high growth environment and have identified the right marketing partners to support many of our exciting new initiatives. For those of you that are new to the Better Choice story, 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 plus 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 PepsiCo, ConAgra Foods and Kimberly-Clark. Following these experiences I founded my own beverage company called Solixir, which I sold in 2014 after several years of successful growth. After that exit, I became the CEO of several private equity backed CPG businesses partnering with groups such as VMG partners, a San Francisco based private equity firm and 301 INC, General Mills venture arm. I like to think of myself and by extension, Better Choice as a corporate ready product with an entrepreneurial mindset. With my approach to leadership rooted in the five years I served as an officer in the United States Marine Corps. These experiences taught me that successful brands have a clearly defined go-to-market strategy deliver growth, a margin profile built for success in specific channels and a leadership team empowered to quickly and decisively make informed decisions. I knew that for us to win I needed to surround myself with A plus talent that understood existing pet industry dynamics and already had the relationships we needed to be successful. You’ll be hearing from Donald Young, our Executive Vice President of Sales in a bit, but I’d be remiss to not mention how excited we are to have him on Board. Donald has more than 29 years of experience leading the sales organizations of several prominent premium pet food brands, including the Nutro Company and Merrick Pet Care, which were ultimately sold to Mars and Nestlé, respectively. At Merrick Donald was responsible for growing the company from a niche brand to the number three natural player in the pet specialty retail channel. During that time, Merrick more than quadrupled sales achieving approximately $500 million in sales and was acquired by Nestlé Purina. While at Merrick, Donald also worked with Jenny Condon, our new Executive Vice President of Digital Sales; and Ryan Wilson, our new Vice President of Marketing. Rob and Sharla are overseeing a tremendous amount of transformation at Better Choice and were responsible for leading us through the recently completed IPO process and capital raise. I’m counting on them to continue to give us a strategic advantage as we look to efficiently deploy capital, optimize our balance sheet, realize cost savings and evaluate potential M&A transactions. Beyond our management team, we have a tremendous amount of support from our Board of Directors, and taken as collective group insiders and management own approximately 25% of Better Choice. As a reminder, Better Choice is comprised of two animal health and wellness brands with a long history of success, Halo and TruDog, with approximately $50 million in annual gross sales on a consolidated basis, we think we’re at a true inflection point to become an innovation and growth engine in the industry. We also think our size is an advantage. We are asset-light and able to quickly bring new products to market, but large enough to benefit from established economies of scale and strong existing customer relationships. We have already touched on the strength of our management team and the advantages of our omnichannel approach, but what also gives me confidence in our ability to succeed is our strong base of recurring revenue, which sets the floor that we can grow from. Roughly 50% of online sales was translates to approximately 30% of total sales correlate to monthly subscriptions. In addition, we have secured $100 million in contracted International sales over the next five years, which will only add to the size of our platform. With that in mind, I’d like to hand it over to Sharla to provide some additional financial context before discussing our go-forward brand strategy and the Halo Elevate launch in more detail.
Sharla Cook: Thanks, Scott. As we mentioned earlier, we deliver net sales of $11 million this quarter, which was in line with our expectations and represented 11% growth relative to the second quarter of last year. A large percentage of this growth was driven by our strength internationally, which grew 48% in the first half of this year relative to last year. We are excited for future growth in Domestic revenue and recently entered into an agreement with Pet Supplies Plus, the number three pet specialty retailer in the United States to launch Halo Elevate nationally in 2022. With regards to gross margin, overall, we are seeing broad scale inflation that is no different than what you were hearing in reports from other CPG and pet food companies. In Q2, we announced to our customers that we will be taking price increases in Q3 and Q4 designed to cover the inflation we are seeing today and we are actively working with our co-manufacturing and freight partners to generate cost savings. Even with some of these headwinds, our gross margin of 37.5% in the first half of 2021 was slightly higher than the first half of 2020, prior to any non-cash purchase accounting adjustments. We anticipate that some of these trends will continue during 2021, but we continue to have confidence to deliver a long-term growth margin of 40% to 45%. In addition, you’ll note that we posted a positive net income of $24.8 million for the quarter and $11.9 million for the first half of 2021, which reflects the automatic conversion of several meaningful liabilities into equities concurrent with the completion of the uplist. We expect that we will deliver positive net income for the full year 2021 as a result. I’ll touch on this in more detail later in the presentation, but with that, I’ll hand it back over to Scott.
Scott Lerner: Thanks, Sharla. Although, COVID-19 has presented challenges to logistics and the supply chain, it has also accelerated industry growth. As a result of the pandemic, roughly 11 million new pets are housed on top of the existing 130 million pet population in the United States. On the back of this growth, analysts expect the U.S. pet care market to double value over the next 10 years reaching 275 billion. During the pandemic, the millennial and Gen Z generations became new pet parents at historic levels and tend to embrace the humanization of pets more readily than older generations. This feedback is pervasive, with 95% of millennials considering their pet as part of their immediate family and 50% stating that they are as concerned about their pets well being as their own. With that in mind, we have tailored our Halo brand strategy to target concerned and uncertain millennial pet parents. Many of have a different set of priorities and purchasing behaviors than their Gen X or baby boomer counterparts. As we execute our Domestic re-launch in 2022, we want Halo to be a brand for this new generation of pet parents. Today, the Halo brand consists of a diversified premium natural dog and cat portfolio with products derived from real home meat, no rendered meat meal and non-GMO fruits and vegetables, unlike many other kibble and canned products currently in the marketplace. In addition to its dry kibble and canned wet food offerings, Halo also has a successful line of freeze dried treats for dogs and cats, and a growing line of award winning Vegan products for dogs. The TruDog brand, which we plan to eventually bring under the Halo brand umbrella offers ultra premium Freeze Dried Raw Dog Food, Toppers, Treats and supplements sold predominantly on its DTC website. Freeze Dried Raw Dog Food is one of the fastest growing subcategories of the premium pet food market, with packaged facts reporting 39% year-over-year growth in the subcategory in 2019. We strongly believe that both brands are well positioned to take advantage of pet parents increasing desire to feed only the highest quality ingredients to their pets and that will continue to be innovative opportunities for brand consolidation over time. You’ll also notice that both the Halo Holistic and Halo Elevate sub-brands have a different look than the products that are currently in the market today. Given so much of our excitement is driven by what we’re doing in 2022 and beyond, we wanted to give the investor community a first look at some of the brand positioning work we’ve already completed. In the first half of 2021, we’ve spent considerable time refining our long-term strategy and are focused on building long-term brand equity that directly translates to customer growth across the entire Better Choice platform. In rough figures, our goal is to double our consumer base and achieve $100 million in annual gross sales within the next three years, driven in part by the launch of Halo Elevate in the pet specialty channel in early 2022. With that in mind, I’d like to hand it over to Donald to provide an update on our launch progress and walk through how this proven playbook for past success in the premium pet food market can be applied to the industry landscape today.
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 29 years of my career at prominent pet, that played a major role of transformation and growth of two iconic brands, Nutro, which we took from roughly $20 million of sales the 1990s to over $800 million of sales when it was sold to Mars and Merrick, where I was brought in by and more than quadrupled sales, ultimately leading to the sale of the business to Nestle Purina at approximately $500 million in annual sales. In my experience, every great growth story in the premium pet food industry, whether that’s Nutro, Mars, Merrick, WellPet or Blue Buffalo has been driven by recommendations. And a big part of that still happens in store even during the pandemic. With the brands that we have, and the opportunity that’s in front of us, I think Better Choice has an even greater chance to achieve similar success. And I can honestly say, I’ve never been more excited about a new product launch in my career. We’ve spent a considerable amount of time developing and designing new products for the launch in early 2022 that are tailor made to convert concerned and uncertain pet parents and formulated with strong gross margins for both Better Choice and our retail partners. As Scott noted, our goal is to launch Halo Elevate in more than 1,500 stores nationwide. Although, it’s only August 2021, we have made significant progress towards achieving this goal and recently announced that Pet Supplies Plus, the third largest pet specialty retailer in the United States will be one of Halo Elevate’s premier national launch partners. With more than 560 stores and counting, we’re excited to work with them on delivering some of the highest quality products available to pet parents. In addition to securing shelve space at Pet Supplies Plus for 2022, we’re also looking to expand our partnership with Petco, with more than 1,500 locations in North America and a focus on engaging with younger pet parents. I feel represented ideal and likely launch partner for Halo Elevate when they conduct store resets in 2022. In addition to Petco and Pet Supplies Plus, we’re also in conversations with a number of large independent chains that we are partnering to launch with alongside Petco and Pet Supplies Plus. For me, Halo Elevate’s product performance is the key. Although, we’re not planning to provide more details regarding specific product claims and performance until we are in market. Halo Elevate is uniquely formulated to address five key areas of a pet health. The first is digestive health, two, hip and joint support, three, strength and energy, four, heart and immunity support, and five, a healthy skin and coat. As we gear up for our 2020 launch, we have already run test runs with our co-manufacturing partner and I’m proud to share that we’re able to deliver product level gross margins that exceed our current gross margin, without any compromises to product quality. The size of the price is large, so that we get consumers to buy three bags of food in three months. The loyalty rate and the likelihood they will stick with us and the long-term is about 80% in my experience.
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. With that in mind, I wanted to share with you what I think are five keys to future growth and ultimately to hitting the $100 million gross revenue target in the medium-term. There are as follows, consolidating our product offering around the halo brand, delivering our strong innovation pipeline, leveraging our multi-channel approach, capitalizing on the opportunity in China, and finally, pursuing complimentary strategic acquisitions that enhance brand equity. When I took a step back and looked at the entirety of Better Choice to the lens of a consumer, it presented an opportunity to simplify our business to drive success. After incorporating learnings from consumer research, this took the form of One Halo brand with channel specific points of difference rooted in one master brand personality with clear differentiation versus the competitive set. 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 interest across all of Better Choice to drive success. Executing on game changing innovation has been a theme of this call today with the launch of Halo Elevate central to our efforts. That said, this isn’t the only project we are working on and we’re excited to announce that we’re also updating the messaging and positioning of Halo Holistic, our current offering to more clearly targeted consumers focused on product quality, ingredient sourcing and sustainability. In addition, we are also analyzing opportunities to expand our Vegan and Treat offerings, introduce a Freeze Dried product line under the Halo Elevate sub-brand, and explore new kibble technologies and leaning into sustainability and regenerative agriculture. Getting all this innovation to market is where I think we will really excel. As I mentioned earlier on this call, our multi-channel approach enables the simultaneous launch of innovative new products where I would use channel conflict, and is both a key competitive advantage and growth accelerant. For example, we can take learnings from the online environment where we are already successful to the offline environment, which we see as a poised for growth at pet specialty stores in 2022. With that information in hand, we can give Donald another tool to drive in-store purchases that he didn’t have at Nutro and Merrick. Keep this in mind as you look at the graph on slide 19, which we have presented to illustratively show the medium-term opportunities for growth in each of our key channels. Now I’d like to hand it over to Rob to discuss our growth internationally 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’ve been able to achieve internationally. It’s taken us time, but we 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 and now the first half of 2021. Although, our go-to-market strategy in Asia is a bit different than the United States, our commitment to delivering real home meat, certified protein and no antibiotics has resonated strongly with Asian pet parents that have the same, if not heightened product quality concerns as their American counterparts. In the first half of 2021, we were able to generate $6.5 million in net sales, representing almost 50% growth over the first half of 2020. In addition, and perhaps more significantly, we were able to secure contracts with our Asian distribution partners totaling more than $100 million of revenue over the next five years. These contracts contemplate incremental investment in sales and marketing to support growth and structured increases in margin over the life of the contract. If we’re able to successfully execute upon these contracts, we believe we can build an annually recurring International business that is north of $25 million in sales. In addition, we believe these figures represent more of a floor rather than a ceiling. We are currently developing Freeze Dried products for key International markets and are also looking to introduce Halo Elevate to our International product offering. 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 and with roughly half of our International sales coming from China, there are several structural considerations that we believe gives us a first mover advantage relative to the competition. In 2020, we secured approval from the Chinese Ministry of Agriculture to sell 15 dried diets in Mainland China, which very few western manufacturer brands have achieved. We have a strong multiyear distribution partner and benefit with a dedicated team of more than 20 individuals and countries that are solely focused on selling the Halo brands. We’ve established supply chain partners with whitelisted approval to import products. Just like our approach in the United States, our target consumer is a young, educated urban dwelling consumer, but instead of living in LA, they live in Shanghai. To put it in perspective, more than 50% of Chinese consumers that purchase Halo were born after 1990, roughly 80% purchase our products online. Demographics are also working in our favor as the number of households that own a pet has doubled in the last five years, with younger pet owners leading growth. Even of the absolute number of Chinese households that own a pet recently surpassed the same figure in the United States. Only 20% of these households own a pet compared to 67% of the US. That’s translates to a 28% annual growth rate in the premium dry cat food market and a 20% annual growth rates in the dry dog food market. Clearly, it’s an opportunity worth going after and one that we’ll continue to update the investor community on as we grow. Although we spent the majority of our time this morning discussing our organic growth strategy, I do want to remind investors that we remain committed to locating the right assets that meet our investment criteria. Our strong industry contracts increased our ability to source transactions internally and avoid highly competitive auctions. We also prefer asset-light models that are complementary 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 may also represent opportunities for us to benefit from a potential dislocation between public and private valuation multiples. We believe our acquisition pipeline is robust, and we are currently under NDA with multiple opportunities, the majority of which are either preprocessed or direct conversations with founders. Our clearly defined profile allows us to approach businesses that are complementary to our existing platform and can be folded underneath the master Halo brand that Scott mentioned earlier. For example, this might take the form of a treats business that’s successful in one channel but would massively benefit from sitting underneath a larger platform. As we mentioned on prior investor calls, successfully completing an uplift to a major North American exchange with a catalyzing event for our business and a key prerequisite for the successful execution of the Halo Elevate launch in 2022, and on July 1 this year, we achieved this milestone. This transaction also provides us with substantial dry power to execute our M&A strategy without needing to access the capital markets. In addition to raising $40 million in primary proceeds at roughly 3x net revenue, we automatically converted more than $23 million of debt into common equity, completed a 1:6 reverse split and eliminated the Series F Preferred from our balance sheet. With that, I’ll hand it over to Sharla to walk through this in more detail, as there are a few nuances to the transaction we’re discussing.
Sharla Cook: Thanks, Rob. As Rob mentioned, although we officially listed on the NYSE American on June 29, squarely in Q2, we closed the transaction on July 1, a Q3 event. Per the terms of the convertible notes, Steve automatically converted into equity upon listing effective in Q2, but we did not receive the approximately $36 million of net proceeds until July 1. In order to provide a clearer picture to our investors, we have provided a pro forma balance sheet, which reflects the following, the issuance of 8 million shares of common stock for estimated net proceeds of $36.2 million and a pro forma share count of $29.6 million, the conversion of all Series F convertible preferred stock into an aggregate of 5.7 million shares of common stock and the reclassification of the Series F warrant liability to equity, pro forma for the transaction and as of June 30, we had approximately $39 million of cash on our balance sheet and approximately $10 million of debt, consisting of a term loan and revolving credit facility at LIBOR plus 250. Turning to the income statement. In the second quarter of 2021, we generated approximately $11 million of net sales and $3.9 million of gross profit, which exceeded our run rate performance relative to the full year 2020. After adjusting for noncash and nonrecurring charges, we achieved negative $1.8 million of adjusted EBITDA, reflecting incremental investment in upfront marketing costs ahead of our 2022 brand re-launch, incremental investments in our International business and the addition of new team members to support growth. Although we have realized significant operational synergies over the course of the past year, we are seeing broad scale inflation that is no different than what you’re hearing in reports from other CPG and pet food companies. Even with some of these headwinds, our gross margin of 37.5% in the first half of 2021 was slightly higher than the first half of 2020, prior to any noncash purchase accounting adjustments. We anticipate that some of these trends will continue during 2021, but we continue to have confidence to deliver a long-term gross margin of 40% to 45% and a long-term EBITDA margin target of 10% to 15%. In addition, you’ll note that we posted a positive net income of $24.8 million for the quarter and $11.9 million for the first half of 2021, which reflects the automatic conversion of several meaningful liabilities into equity, concurrent with the completion of the uplift. We expect that we will deliver positive net income for the full year 2021 as a result. As referenced, Slide 26 provides a detailed reconciliation of EBITDA and adjusted EBITDA. With that, I will turn it back over to Scott for closing remarks.
Scott Lerner: Thank you, Sharla, thank you, again, everyone that has joined our earnings call today. I have a tremendous amount of confidence that our new Halo brand strategy will drive meaningful growth in the medium term. 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’re 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’d like to open up the call for questions. Operator, please.
Operator: The first question comes from George Kelly with ROTH Capital Partners. Please go ahead.
George Kelly: Hey, everybody. Thanks for taking my questions. And congrats on all the progress you’re making. I have a few questions for you, mostly around the pet specialty launch. Just to start with, could you help me understand better just the time line of when -- I guess, starting with this first win, but when are you going to start to recognize revenue? And when do you expect to see the product start to hit the shelf?
Scott Lerner: Yes. Thanks, George. Donald, why don’t you take this question?
Donald Young: Absolutely, Scott. Yes. So when we look at the first product into the marketplace, again, with our Pet Supplies PIus’ first launch will be in March. So you’ll start to see product really be on their shelf starting in March 1, and the reset goes on the way to the end of June. We’ll have -- right now, we’re also working with unique and especially independent pet retailers. The same way that we’ll be looking for our right distributor partners, distribution on that. And we could be as early in the market throughout the United States has started in January and February.
George Kelly: And just to -- does that mean that you’ll start shipping some product and recognizing revenue this year?
Scott Lerner: There’s a potential, George. Most likely, we’re looking at 2022 to recognize the incremental volume from the Halo Elevate launch.
George Kelly: Okay. Great. And then a few more questions just about that launch. I’m curious if -- I guess there’s two or three different issues, A, what is the marketing plan? And how aggressive are you going to be advertising around that launch? And then two, maybe this is best for Donald, but you mentioned some innovation you’re really excited about. And so, I was wondering if there’s anything you’re comfortable sharing on this call, just about one or two of those things that you’re bringing that you think are going to really resonate and stand out.
Scott Lerner: Yes. Donald, why don’t you take this one in terms of the support plan and a little bit about the product.
Donald Young: Yes. Absolutely. Again, yes, I would say -- again, as far as marketing spend, in my 29 years, I’ve never had the amount of support that we’re looking to launch a brand with. So I’m extremely excited when we’ve shared a little bit again with our marketing going forward campaign with both Petco and Pet Supplies Plus. Both are extremely excited about what we’re bringing into market. The campaign is substantial. We’re looking again to make sure that we do stand out. As far as -- like I said earlier in my statement, we won’t share too much on product going forward in this call. What I can say is, there’s some very five pillars of success, which I talked about, where there’s digestibility, skin and coat. Again, we’ll get into hip and joint. Those things we’re going to really stand out as category leaders. We’ll be able to tell a story that really resonates with pet parents and truly does make a difference in the dogs’ health when they see the performance of the product.
George Kelly: Okay. Great. And then last question for me. Scott, I appreciate you sharing the $100 million 3-year goal that you talked about. Just curious if you could break that down by channel. I’m trying to better understand how much of that do you expect to be pet specialty? And then anything else you can fill in, International etc.
Scott Lerner: Yes. No problem. Rob, would you like to take this one?
Rob Sauermann: Sure. Definitely. So I think -- and this is something we’ve walked through, and we hope that, that chart on the -- on the multichannel slide is a good example of that breakdown. But the way that I tend to think about this is, if we’re building a pet specialty business, that can really has the opportunity to add incremental revenue today. It’s not one of our biggest channels. But if we’re thinking about $100 million in gross revenue, it could represent $30 million in gross sales. I think that e-commerce could grow up to $30 million. And then D2C and International, kind of sharing the remaining $40 million. There’s a chance that International outpaces D2C. And there’s a chance that D2C outpaces International. But I think fundamentally when you think about the incremental long-term upside of our business, I see that occurring in pet specialty and then also internationally in terms of beating that $100 million revenue target.
George Kelly: Okay. That’s helps. Thanks again, Rob.
Operator: Next question comes from Mike Baker with D.A. Davidson. Please go ahead.
Mike Baker: I’ll follow-up on that $100 million breakdown question by asking, rather than channel, can you help us with progression by year? You did about $51 million in gross sales last year. It sounds like there’ll be maybe some growth in the back half this year, but really, it starts to hockey stick in your words in 2022. And then by the end of -- by 2023, it’s going to be $100 million. So, that is a pretty big hockey stick. So, any breakdown by year, how we should expect to get to that $100 million.
Rob Sauermann: Sure. I’ll just keep going on. Yes, this is Rob. So, I think what -- and just to remind investors, right, we have gross sales and then we also have net sales and net sales is what shows up on our P&L that we publicly filed in the Qs and the Ks. So, we think this year that we’ll be delivering somewhere in the range of 15% to 20% growth. A lot of that is going to be in the back half of this year, but that’s intentional with some of the new team members that we’ve brought on. And going forward, we do think that 2022 is going to be a big year for us. And I would say if we’re at $100 million of gross sale by 2023, that implies sort of an $80 million to $85 million net sales number, depending on the channel mix. And I would say that, that growth -- if you think about 20% on top of, call it, $43 million being roughly $50 million in net sales, that growth being spread relatively evenly between 2022 and 2023. Is that a helpful answer?
Mike Baker: Yes. Very helpful. So 20% -- that 15% to 20% you referred to at the beginning of the answer, that’s a net sales number and then split the difference.
Rob Sauermann: Correct.
Mike Baker: Okay. Yes. Very helpful. Similar type question. You talked about 10% to 15% EBITDA margins. I assume that, that’s on that same $100 million number. And can you break down the path to get there if you could, by year? But -- and then also what line items do we see the most leverage? I mean, that’s about 1,500 basis points at least of margin improvement from what you did last year.
Rob Sauermann: Got for it, Scott.
Scott Lerner: In terms of the line items, Mike, one of the things that we did right away when we came in here was take a look at our pricing structure, both to our retail partners, as well as in market and really looked at it on a strategic level to align our products in the category with price points that make sense. So by doing that, that has helped to increase our margin behind our products and our new products in Halo Elevate. We’ve kept our gross margin target of 45% in line, and our partners in helping us create those products have allowed us to make fantastic product but also hit those margin levels. So, it’s a little bit of a combination of pricing and then maintaining our cost of goods at appropriate levels to hit the margins moving forward. And I’d lastly say that what’s exciting to me is, we’re building formulas in a time where, obviously, as you know, there’s inflationary pressures, and we’re building that formula with margins that are hitting our goals for the future. And as those prices come down over time, commodity prices come down over time, we’ll reap those rewards into the future. And Rob, if you want to tackle the rest of the question.
Rob Sauermann: Yes. I was just going to add too that we think that Q2 and Q3 of this year will probably be our lower gross margin quarters, just call it, at any point, sort of with this new team. And that’s just the result of -- as we’re seeing the inflationary pressures, and there’s always inherently a lag that it takes to pass-through those costs in the market that a number of similar pet food businesses are seeing in CPG -- food businesses are seeing. So, we’re not as far away from that 40% to 45% in a normal state business as it might appear.
Mike Baker: Okay. And again, just to follow-up, any color on the timing, how we see that progression. And maybe just asked simply, when do we break even or gain profitability on the EBITDA line towards that 10% to 15% goal?
Rob Sauermann: Sharla, you should hop in on that one.
Sharla Cook: Yes. Sure. So we expect with the growth that we have planned that we should hit that about Q3, Q4 of next year far as Q3. Once we get the incremental upside from our launches .
Mike Baker: Can you hear me now?
Rob Sauermann: Yes, we can hear you, Mike.
Mike Baker: Okay. Sorry. So, you said -- I thought you said 3Q to 4Q next year is when you start to break even.
Sharla Cook: Yes. That’s right.
Mike Baker: Okay. Great. Understood. One more while I have you. One more just bigger picture question. I guess we see it in the results here or more specifically in the back half guidance. But last year, there was a big bump in this pet business from the pandemic puppies. Is there any slowdown, broadly speaking, in the pet business as you cycle up against those big numbers? Or are we continuing from your data -- from industry data seeing growth upon growth?
Scott Lerner: Yes. I think we continue to see the number out there, 8% CAGR over the next few years. The industry only is increasing. And what’s exciting about our business, Mike, is our International side of things is growing most likely at an even faster rate, specifically in Asia. So, the combination of the U.S. market growing at a fast pace as well as our Asian business is really helping us grow faster into the future.
Mike Baker: Yes. That actually makes perfect sense. One more quick one. Just to follow-up and confirm, the $100 million net -- sorry, gross sales number, $80 million to $85 million net sales by 2023. How are acquisitions contemplated in that? Does that require some acquisitions? Or would acquisitions be upside?
Scott Lerner: Our -- the way we’re structuring our plan is all about organic growth, both around the Halo brand. M&A would be most likely incremental to that number. We’re building towards that number with our internal business.
Mike Baker: Excellent. That makes perfect sense. Appreciate the time. Thank you.
Operator: The next question comes from Jim Mcllree with Dawson James. Please go ahead.
Jim Mcllree: Thank you. Good morning. You talked about a gross margin goal of 40% to 45%. Can you tell us what channel mix that implies? Or what channel mix would be to hit the -- you would need in order to hit that goal?
Scott Lerner: Sure. The way we look at our channels of business and really harnessing our omnichannel approach is optionality around the margin profiles of the different channels. So, it’s really the way I look at it, Jim, is on a blended basis in taking all the different go-to-market channels and blending it up to that 40%, 45%. Obviously, some channels are going to be more expensive than others in terms of acquiring customers as well as getting goods to them. So, generally, from a profitability standpoint, our DTC channel is going to have a higher gross margin profile than our brick-and-mortar, just because we’re not using distributors, and we’re capturing some of that margin that would go away in that equation. So, that’s the way I look at it is on a blended basis with some of the channels being higher-margin and others being lower. Does that make sense?
Jim Mcllree: Yes. Let me try it a little bit differently then. In order to hit that 40% to 45% gross margin target, do you need to have a channel mix that’s appreciably different than what you have right now?
Scott Lerner: No. I wouldn’t say we need to have that. One of the advantages that is coming into our favor is with the launch of Halo Elevate into pet specialty because we built those formulas from scratch with that gross margin requirement embedded in the process. As that comes on, that’s 100% incremental to our business. So, that’s adding a high-margin product to our mix. So, the mix of volume will change a little bit going forward as we launch into pet specialty, but we’re not doing wholesale changes in our go-to-market strategy to hit the gross margin. It’s just being smarter about operating our business.
Jim Mcllree: Okay. Understood. And relative to the Halo Elevate launch, I think you’ve mentioned 1,500 outlets. That’s by the end of next year. Is that correct? And so the way that paces out is you have the specialty retailers -- I’m just going to do sort of. So, sort of around the beginning of the year, Pet Supply Plus sort of around end of Q1, give or take. And then you have other stores rolling in, in the rest of the year. Is that how you think about it?
Scott Lerner: More so Q -- I would think about it as being in those outlets by the end of Q2 at the latest, is the way we look at the time frame. So, the 1,500 stores that you referenced, I would think about that as being on shelf selling by the end of Q2.
Jim Mcllree: Okay. Very good. Great. And then lastly, just to clarify, I think in a prior question, somebody mentioned gross margins. And I was -- and EBITDA margins. And I was a little bit confused if you’re using net sales or gross sales as the denominator in those margin targets. I would assume it’s net sales, but I just want to make sure.
Rob Sauermann: That’s confirmed.
Sharla Cook: Yes. This is Sharla. It is net sales.
Jim Mcllree: Fantastic. Okay. Fantastic. Great. Thanks a lot. Good luck with everything.
Operator: The next question comes from Steve Silver with Argus Research. Please go ahead.
Steve Silver: Thank you, and good morning, everybody, and congratulations on the uplift and all the progress as well. One quick question for me, I noticed in the presentation this morning there was a discussion about the consolidation of SKUs as you move towards the Halo brand consolidation. My question is, your big picture thoughts in terms of the 3-year innovation pipeline and how that would factor into managing the number of SKUs in the portfolio going forward in order to maintain your gross margin targets over time.
Scott Lerner: Yes. Thank you for the question. One of the exciting opportunities we have here at Better Choice is our ability to leverage innovation across brand as well as across channels. So, when we look at it moving forward, our SKU count will most likely increase just by the nature of our expansion into the different channels. But if you really think about it from a product basis, we’re going to be leveraging our technology and basically re-skinning it from brand to brand. So it’s not a situation where we’re adding on a tremendous amount of SKUs to try to get to the sales and margin goals that we’re looking to accomplish. It’s more being efficient in creating great products that we can use across channel and really proliferate in that way. So I hope that answers your question in terms of the way we’re looking at our business. It’s sort of less is more and really putting as much volume through a minimal amount of SKUs through our channels than having a lot of SKUs that deliver a little bit of volume.
Operator: The next question comes from Mike Baker with D.A. Davidson. Please go ahead.
Mike Baker: Thanks. Yes. And I guess, I’ll ask one more before the hours up. I was just curious, you talk about the key, Donald, being in-store recommendation. Can you just maybe educate us a little bit of exactly how that happens? How do you get store associates to -- if I come in and say, hey, I have a new dog, what should I -- what kind of food should I get?, how do you guys get that associate to say, oh, you should try Halo Elevate. How do you literally just go in and educate the associate to tell them to recommend our stuff? Or how exactly mechanically does that work?
Donald Young: You got it, Mike. Thanks so much for the question. Yes, that’s a question that excites me. It’s something I’ve done for 29 years and absolutely believe in. The first thing that starts with is having a great product. You’ve got to have that story to tell the retailer, why your products are unique and different. There’s a lot of sea of sameness in this space. There’s a lot of good manufacturers doing somethings great, but not everything great. We have a great story to tell, which I’m excited to share with everybody as we get further down the road here. What comes to mind is our sales team. So, our sales teams will definitely calling on of our targeted high hitter accounts. So, we do two things. Number one, we’ll do is a feeding program. Because at the end of the day, it’s about when an associate feeds your food, and they see the benefits they become your advocate of your brand. Nothing stronger when someone walks in the store and they said to you, what do you currently feed him, they say, I’m feeding Halo Elevate. And here’s the reasons why. That’s how we do it. So, we do -- again, a varied product education seminar. We’ll spend anywhere, dependent upon the time of the store, it could be a 10-minute education, or we’ll be doing large formats where we do one hour, and we strictly talk about our products and the product differentiation of it and why it’s unique and different. That’s the excitement you build store-by-store when they see the efficacy, and they see the change in their pet. That’s what this is all about. When you feed the food, you should definitely see digestibility, you should see again the firmer stool. You should see a better skin and coat. You should see changes again, whether it’s hip and joint, and you see a pet getting up with not so much stress. That’s what creates the excitement of a brand, and that’s exactly what we’re building.
Operator: This concludes the question-and-answer session. I would like to turn the conference back over to the presenters for any closing remarks.
Scott Lerner: I’d like to thank everyone for joining us this morning. We’re extremely excited about the future of Better Choice, and we appreciate your support going forward. Thank you.
Operator: This concludes today’s conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.
