Else Nutrition Holdings Inc. (BABYF) Q4 2022 Earnings Call Transcript

Else Nutrition Holdings Inc. (OTCQX:BABYF) Q4 2022 Earnings Conference Call March 31, 2023 10:00 AM ET

Company Participants

Ben Shamsian - Lytham Partners, LLC

Hamutal Yitzhak - Chief Executive Officer

Conference Call Participants

Ben Shamsian

Thank you for joining us today for Else Nutrition’s Fourth Quarter and Fiscal Year 2022 Conference Call. With us on the call representing the company today is Hamutal Yitzhak, CEO -- Else Nutrition’s CEO. At the conclusion of today’s prepared remarks, Hamutal will answer some questions that were sent to us by investors and other questions we think are relevant to investors as well.

Before we begin with prepared remarks, just a couple of comments. Today’s call will contain forward-looking statements that are based on current assumptions and subject to 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 SEDAR and Else Nutrition’s website. Today’s discussion will include adjusted financial measures, which are non-IFRS measures. These should be considered as a supplement to and not a substitute for IFRS financial measures.

Finally, today’s event is being recorded and will be available for replay through the webcast information provided on the press release.

With that said, let me turn the call over to Hamutal Yitzhak, CEO of Else Nutrition. Hamutal, please proceed.

Hamutal Yitzhak

Thank you, Ben, and good morning to all of you. We’re excited to speak with you today regarding our fourth quarter and fiscal year 2020 results. Today, I’m going to provide an overview of our recent achievements and update you on the opportunities that we believe will drive the growth in 2023 and beyond.

This morning, I want to speak about our four pillars of growth and value creation. These four pillars are product development; expanding distribution, including retail and geographic distribution; targeted marketing and sales support and our FDA process. I will touch upon our recent achievements regarding each of these pillars and what we expect going forward.

Retail expansion, I want to begin with our retail distribution in North America. We expanded our North American retail presence from 1,200 stores in January 2022 to more than 11,000 stores listed today, including the recent U.S. launches in over 750 Walmart stores, 6,000 CVS stores, Giant Food’s and Winn Dixie, and Canadian launch in London Drugs, Metro Ontario and many others. We expect 2023 to be another year of strong retail expansion and anticipate our store base to increase to 20,000 and our points of distribution to over 50,000.

Our retail sales velocity is growing fast with our -- the reorders. As a result, we -- many retailers are expanding the shelf space and SKU range for Else Nutrition. Most will be selling several Else products.

Two great examples are CVS, which added our cereal range and Walmart, which added three SKUs, Else Toddlers, Else Omega and our cereal range. This brings me to the supply constraints that we experienced in the last several months.

As we explained on our third quarter call, during the summer, our producers suffered on an unforeseeable mechanical issue, a pump broke, setting back our production by some months. That led to out-of-stock and inventory shortages as our production facility was either down or very slow to recover from these equipment malfunctions.

We made the decision to prioritize retail orders over Amazon and our e-store orders except for subscriber support, which created out-of-stock on these online platforms mainly for our toddler organic best seller products. As such, Amazon sales in the fourth quarter declined 24%, while sales at other retailers increased 71%.

Needless to say, we were disappointed by this equipment failure, especially given the growing demand and we estimate that the order backlog and revenue loss was roughly C$2 million in the second half of 2022 or roughly more than 15% over full year revenues.

However, I’m now pleased to announce that these product shortages are essentially behind us. We have worked diligently to secure two additional manufacturing facilities, one in the U.S. and another in Europe, and have been manufacturing from our new U.S. facility for weeks now.

Until the end of 2022, Else Nutrition had a single powder manufacturing plant that supported its sales in North America and globally. The two new facilities have more than tripled our current production capacity, mitigating the risk of future out-of-stock situations. Our inventory replenishment efforts are starting to show results, which started to be reflected in Q1 and will be fully reflected in Q2.

In January and February, we performed two commercial production campaigns in the U.S., resolving many out-of-stock issues. March, we performed three additional production campaigns, two in the U.S. and one in Europe, resolving most remaining out-of-stock issues. We plan to continue our accelerated manufacturing plan throughout 2023 to support the growing demand and to establish a higher level of available inventory.

Geographic expansion, now I want to speak about our geographic expansion. 2022 was a monumental year for Else with regards to our geographic expansion. We announced our entry into the Chinese market via an agreement with Baozun, one of the leading e-commerce distributors in China. And in September, we launched our first flagship Chinese store on Tmall Global. In November 2022, we launched with JD.com, China’s largest online retailer.

China is the world’s largest infant formula market valued at roughly $33 billion. Although, we are yet at the very beginning of our journey, once awareness and consumer brand experience is built, we see a great opportunity in this market, especially considering the high levels of milk intolerance and allergies in China. We anticipate to generate significant revenues in this market by the end of 2023 or early next year.

In the third quarter, we officially launched in Canada on Amazon.ca and in a few leading retailers, including London Drugs and Metro Ontario. The reception for our products has been very strong, which we believe is the result of our U.S. success.

Canadian sales reached 10% of our total formula sales within a few months. During the fourth quarter, our sales in Canada increased over 100% versus the third quarter of 2022. We’re currently selling in more than 1,000 stores in Canada and expect to reach 3,000 listed stores by the end of 2023, that garnering significant revenues.

We’re planning to enter Western Europe in the second half of 2023. The initial launch will be in the U.K. via Amazon and local distributors with other countries in Europe to follow. The population in Western Europe is roughly $300 million, similar to the size of the U.S.

However, research has shown that Europeans are even more conscious of healthy eating habits. In the second half of 2023, we also plan to launch in Australia for local sales, as well as for cross-border China sales.

Product development, now I want to touch upon our product line expansion. We view the success of additional products and SKUs as important to gain further shelf space at retailers and to enhance Else brand equity, while our toddler formularies are entry into many retailers having a well-rounded suite of products makes for stronger relationships with our retailers and their end consumers.

In 2022, we expanded our product range to over 10 products and over 20 SKUs, adding the Toddler Omega product range and the Super Cereal product line for babies from six months in four flavors.

Our Super Cereal line is the first and only U.S. cereal brand certified by the Clean Label Purity Award, hence safe from heavy metals. Within a few months of its launch, the product reached the status of best seller in its category on amazon.com.

In an overview, our best-selling products are Toddler Organic and Tender Omega with cereal growing steadily. In 2023, we intend to introduce kids ready-to-drink products in the U.S. and Canada, and to complete the development of our first adult ready-to-drink products.

Marketing and sales support, now I’d like to speak about our marketing and sales efforts. As a consumer products company, consumer marketing is very important for our success. Over the past years, our focus has been on grassroots marketing to mothers.

We had to build brand awareness from scratch through influential marketing, celebrity partnerships, which was boosted in social channels, focusing on growth more than on cost efficiency.

Since then, we’ve made significant progress in improving our marketing efforts by implementing a robust measurement system to accurate -- to accurately determine the return on investment and the return on ad spend of our marketing activities seizing any efforts that were not resulting in positive returns.

We have rebuilt our marketing tech stack to include only the best-of-breed technology and focus all marketing efforts on attracting new customers, providing them with exceptional customer experience and increasing customer lifetime value through product knowledge and depth of use.

We’ve also mapped out our ideal customer journeys and are rebuilding all communication and channels to support those journeys. We’ve established retention benchmarks to understand our customer life cycle better and create programs that maximize these to increase customer lifetime value over time.

We are committed to using our customers user generated content and word-of-mouth activities to recruit new customers organically and through incentivized programs. These efforts are part of our larger plan to scale our business and improve our customer acquisition and retention strategies, while significantly decreasing our customer acquisition costs and allowing customer experience and satisfaction to drive acquisition rather than relying solely on performance marketing.

The FDA process, I would now like to provide some updates on our FDA approval process. As a reminder, our formulation is on its path to get an FDA approval. We believe that becoming the first non-dairy and non-soy FDA-approved infant formula will be transformational for the valuation of the company. We have already completed the commercial development of our infant formula as part of the pathway to bring its infant formulation to market under FDA and other authorities approvals.

Else concluded during 2021 and 2022, two successful preclinical safety studies on its plant-based infant formula. The results demonstrated proper growth similar to dairy-based infant formula in a neonatal preclinical model, as well as resulted to demonstrate the quality of the infant formula protein, which is a key to key two steps, those, sorry, those are two key steps out of three on that path to demonstrate safety and nutrient bioavailability of the infant formula and its ingredients.

In February 2023, the company announced that the Institutional Review Board, the ethical committee approved the infant growth study protocol for the testing of the Else Infant Formula. As the final step before initiating the study, the company has now submitted the infant growth study protocol to the FDA for review and is awaiting FDA response, as well as a comparator formula availability, currently unavailable due to the continued shortage.

Regarding additional clinical studies, in 2023, a second clinical study on healthy toddler population has been approved by the ethical committee and is in recruitment stage. This is part of the company’s plans to continue research activity, demonstrating the safety, tolerability and the efficacy of the product range.

Financial results, now briefly review the fourth quarter financial results. Revenues, revenues in the fourth quarter were $2.4 million and 86% year-over-year growth versus the fourth quarter of 2021 and a 5% growth sequentially versus the third quarter in 2022. Revenue growth continued to be hampered by product shortages caused by a malfunctions at our U.S. manufacturing facility.

Demand for our products accelerated in the fourth quarter, far outstripping the available supply, estimate that the revenue loss during the fourth quarter was roughly $1.5 million. As I mentioned earlier, we believe that these supply issues are now largely behind as have -- as we have secured two new facilities.

Balance sheet, just a quick recap on our balance sheet, we ended 2022 with $16.6 million in cash, including restricted cash and short-term bank deposits.

Now for some concluding remarks. While Else Nutrition has achieved a lot in a short time as a public company, we’re very excited about the growth prospects ahead of us. Before I wrap up with my prepared remarks and answer some questions, I wanted to provide a bit of an overview on Else for the benefit of those who may be new to the story.

Else has developed the first whole plant dairy and soy free baby formula. Else meets the global regulatory nutritional composition standards for infants and is modeled after the human milk nutrition composition and benefits like any other standard dairy formula.

Today, the only two options for infant formula are cow’s milk and soy based formulas. We have a unique and exclusive IP protected alternative in this $80 billion market. Our formula is a blend of almonds, buckwheat and tapioca. It is produced from clean, minimally processed whole food ingredients as opposed to the rest of our industry who use highly processed ingredients.

We have built and continue building a portfolio of products for infants, toddlers, kids and adults based on this novel nutrition formula. Today we have solid evidence that Else’s novel whole foods clean formula is well tolerated with a high acceptance level. The product has been shown to improve gastric symptoms and support weight gain in children that have gastrointestinal symptoms and poor weight gain prior to switching to Else.

Our team of infant nutrition industry veterans led global brands operations in Israel and had developed and patented the world’s first dairy and soy free 100% co-plant based infant formula. Else began selling in the U.S. late in 2020. In 2021, we scaled our business and created a robust platform for growth which started in 2022 and are rapidly expands.

We have developed a proprietary and groundbreaking product line. We have proven the product viability and superiority over existing potential competitors. We’ve built an entire ecosystem to support billions of dollars in potential sales and massive distribution infrastructure in North America.

We’re taking off now across all our channels and we’re building the Science, Advocacy and Communication of scientific evidence that links plant-based nutrition to have a healthy growth and development of infants, children and later down the road also for healthy well-being of adults. Our success in the U.S. has propelled us to launch in Canada and China, with expected launches in Western Europe and Australia in 2023.

I want to thank all of our employees for their hard work and dedication, as well as our investors who have supported us.

With that said, I will answer some of our investors question and some questions that have come to us from investors as well.

Question-and-Answer Session

A - Ben Shamsian

Thank you, Hamutal. We have some questions for you. First, can you speak in more detail about the new manufacturing plants? What are -- what has your experience been so far and are you satisfied with the work that they are doing?

Hamutal Yitzhak

Sure. Well, until the end of 2022, Else Nutrition had a single powder manufacturing plant that supported its sales in North America and globally. The addition of the two new production facilities will allow Else to satisfy the fast-growing retail demand from brick-and-mortar retailers and online sales from Amazon and Else e-store. We add -- the additional production will reduce the risk of future out-of-stock dramatically.

In January and February, Else performed two commercial production campaigns in the U.S. resolving many out-of-stock issues, during March, Else successfully performed three additional production campaigns, two in the U.S. and one in Europe, resolving all remaining out-of-stock issues.

We’re very satisfied from our new production partners and plan to continue our accelerated manufacturing plan throughout 2023 to stabilize our production capacity and support the growing demand and to establish a higher level of available inventory at any point in time.

Ben Shamsian

Thank you. So with these new facilities, you’ve tripled your capacity, given the strong demand that you’re seeing, is this enough in the near-term and what is the long-term plan for your manufacturing?

Hamutal Yitzhak

Yeah. The new production facilities that we have secured triple our current production and will support us for the coming two years, three years, for sure. These suppliers have the potential to grow further and support future growth as well and they are ready to make investments and become long-term partners of Else.

Ben Shamsian

Okay. Thank you. Let’s talk about Canada. Your launch in Canada was very strong and the demand is continuing. What are you seeing there? Why is the demand -- and why is the demand so strong in that region?

Hamutal Yitzhak

Well, the Canadian market was ready and in many ways waiting for else nutrition launch and availability. In Canada, we see a high propensity for consumers to be seeking out better-for-you alternatives on the shelf. We see this progression across various categories and it is no difference in our own.

The major accounts, including several to be announced shortly, recognized early the value of Else -- that Else brings to their planograms as demand continues to grow for both plant-based and clean-label products. It’s essential that Else fill this gap and we are addressing this head on. It’s fair to say that it’s understood that Else brings change and its real innovation to their shelf and will be a leader in this spare in Canada.

We soon will also launch our e-store and this too will enable consumers who prefer to shop online or those with less or access to find Else with ease and affordability. We hear from them regularly and anticipate that the e-store will indeed play an important draw in the brand’s growth in Canada.

Ben Shamsian

Thank you. With regards to retail door growth, you spoke about reaching 20,000 doors by the end of 2023. Can you provide some details about these retailers? Are they new ones or existing customers that are adding more doors?

Hamutal Yitzhak

Well, we expect it to be a mix of existing retailers that will grow their door count and also of new ones. We have ongoing discussions with several major nationwide grocery and drug store retailers, and we expect them to contribute to the major -- to contribute the major part of the growth.

Ben Shamsian

Okay. You very recently entered China. What are your early learnings and what are the plans there beyond Tmall and JD.com?

Hamutal Yitzhak

Well, we see a great opportunity to become leaders in the plant-based infant and toddler formula space, especially considering the high levels of milk intolerance and allergies, as mentioned. We have learned that Chinese consumers, especially moms are sophisticated when it comes to product research, prioritized nutrition and are actively seeking better alternatives for their children. Therefore, we are targeting customers who will benefit the most from our products and build long-term relationship by providing education, deep product use and demonstrated results.

Our aim is to establish ourselves as a trusted brand for Chinese families through multichannel efforts and expand our reach beyond JD.com and Tmall. The size of the market, the world’s largest infant nutrition market and the lack of any other plant-based options available, we expect to see significant revenues by the end of the year or early next year.

Ben Shamsian

Okay. Let’s talk about the FDA. With regards to the FDA approval process, what is the timing on approval and what would be -- what would approval mean to Else Nutrition?

Hamutal Yitzhak

Well, as mentioned earlier, in February 2023, the ethical committee approved the infant growth study protocol for the testing of the Else Infant Formula. Next step was already done. We submitted the infant growth study protocol to the FDA for review.

We are also waiting a control formula availability, which was not available so far due to the shortage. We hope to finalize the studies needed in about 18 months, sold by submission to the FDA of the results, the FDA review process may take months and even more.

In the review, in -- sorry, if the review is successful and the FDA does not object, we will be able to market the infant formula. The completion and submission of the healthy newborn growth study to the FDA will be the Holy Grail of the company’s achievements and it is not far from us. We’re looking forward to that major achievement as a game changer in the infant formal world, as well as for the company and its stakeholders and investors. My thanks to everyone for…

Ben Shamsian

All right.

Hamutal Yitzhak

…for participation -- sorry. Yeah.

Ben Shamsian

No. Thank you, Hamutal. Thanks everyone for participating in today’s call. We look forward to hopefully speaking with you shortly. Have a good day everybody.