Else Nutrition Holdings Inc. (BABYF) Q1 2023 Earnings Call Transcript

Else Nutrition Holdings Inc. (OTCQX:BABYF) Q1 2023 Results Conference Call May 15, 2023 10:00 AM ET

Company Participants

Hamutal Yitzhak - CEO

Unidentified Company Representative

Thank you for joining us today for Else Nutrition's First Quarter 2023 Conference Call. With us on the call representing the company today is Hamutal Yitzhak, Else Nutrition's CEO. At the end of today's call, 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 on Else Nutrition's Web site. Today's discussion will include adjusted financial measures, which are non-IFRS measures. These should be considered as a supplement to and not a substitute for IFRS financial measures. Finally, today's event is being recorded and will be available for replay through the webcast information provided in the press release.

With that said, let me now turn over the call 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 first quarter 2023 results. Today, I'm going to provide an overview of our recent achievements and update you on the opportunities that we believe will drive the growth in 2023 and beyond. From a big picture standpoint, the first quarter was another step forward in our mission to become a global leader in the plant based nutrition arena. Demand for our products continues to grow across e-commerce as well as brick and mortar store channels, in the United States and now in Canada. Importantly, Else is no longer just one product for a small segment of the population. Rather, we have now become a national brand in North America and our consumers who begin with our toddler formula are now moving up to our other products, including our kids and super cereal lines. Prominent retailers, including Walmart and CVS have increased their SKU count and shelf space allocated to Else production and others like Loblaws and Sobeys in Canada, on boarded our entire range from day one. And while the current pace of growth is exciting, we view the potential FDA approval to become the first and only dairy and soy free infant formula as transformational for the company.

Focusing on the first quarter revenues. We returned to strong sequential growth after two quarters in which we experienced severe product shortages. As we have explained on our prior calls, during the summer of 2022, our producer suffered 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. To remedy the situation in February of 2023, we secured two additional manufacturing facilities, one in the US and another in Europe. The two new facilities have more than tripled our current production capacity, mitigating the risk of future out of stock situations. Although our manufacturing facilities are fully operational, out of stock and product shortages were still a limiting factor for our sales growth in early part of the first quarter. Limited inventory continued to force us to prioritize retailers’ orders over Amazon and our e-store orders, and such sales to brick and mortar stores in the first quarter increased 105% versus the fourth quarter of 2022. While sales on Amazon and Else’s e-commerce store decreased 38% in the first quarter versus the fourth quarter of 2022. We estimate the revenue impact due to the product shortage to be roughly $1 million in the first quarter of 2023, mostly in January and February. In March and April, we have began to see a rebound in our e-commerce sales as we have been building inventory to meet the growing demand.

With those points said, 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 by about 10 times from roughly 1,200 stores in the first quarter of '22 to nearly 12,000 stores listed today, including the recent US launches in over 750 Walmart stores, 7,000 CVS stores, giant foods and Winn-Dixie and Canadian launch in LondonDrugs, Metro Ontario, Loblaws, Sobeys and many others. We expect to reach 20,000 listed stores, and overall have a 50,000 points of distribution by the end of '23. Our retailers’ sales velocity is growing fast as they reorder. As a result, 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, Toddler Omega and cereal range.

Now I want to speak about geographic expansion. In the third quarter of 2022, we officially launched in Canada on amazon.ca, and in a few leading retailers, including Loblaws, Sobey’s, LondonDrugs and Metro Ontario as well. The reception for our products has been very strong, which we believe is the result of our US success. During the first quarter, our sales in Canada increased over 240% versus the fourth quarter of '22. We're currently selling in more than 1,000 stores in Canada and expect to reach 3,000 listed stores by the end of '23, thus, garnering significant revenues. We are planning to enter Western Europe in the second half of '23. The initial launch will be in the UK via Amazon and local distributors with other countries to follow. The population in Western Europe is roughly 300 million, similar to the size of the US. However, research has shown that Europeans are even more conscious of healthy eating habits. In UK, we're seeing increasing demand from parents for infant and children plant based nutrition, as many children are exhibiting increasing sensitivities and intolerances to existing formulas. UK’s consumption of vegan food and drink is the highest in Europe and flexitarians are set to make up half of all UK consumers by 2025. Furthermore, there is an increasing prevalence of dairy, soy and pea protein allergies with one in 40 children in the UK reported incidence of cow's milk allergy or cow -- or other issues. In the second half of '23, we also plan to launch in Australia for local sales as well as another gateway to China with a unique and new product line from six months up.

Now I want to touch upon our product line extension. We view the success of additional products and SKUs as important to gain further shelf space at retailers and to enhance Else brand equity. While our toddler formula is our entry into many retailers, having a well rounded suit of products makes for stronger relationship with our retailers and our end consumers. In '22, we expanded our product range to over 10 products and over 20 SKUs, adding the Toddler Omega product and the Super Cereal product line for babies from six months up in four flavors. Our Super Cereal line is the first and only US 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 -- in overall view, our best selling products are Toddler Organic and Toddler Omega with cereal growing steadily. In '23, we intend to introduce kids ready to drink products in the US and Canada and to complete the development of our first adult ready to drink products.

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 few years, our focus has been on grassroots marketing to mothers. We had to build brand awareness from scratch through influential marketing, celebrity partnership with -- which was boosted in social channels focusing on growth more than on cost efficiency. Since then, we have made significant progress in improving our marketing efforts by implementing a robust measurement system 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 funnels to support those journeys. We have established retention benchmarks to understand our customer lifecycles 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.

Now, I'd like to provide some updates on our FDA approval process. As a reminder, our formulation is on its path to get an FDA approval. We believe that becoming the first non-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. We concluded during 2021 and 2022 two successful preclinical safety studies on its -- on our plant based infant formula, the results demonstrated proper growth similar to dairy based infant formulas in a neonatal preclinical model, as well as demonstrated the quality of the infant formula protein, which is a key step 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 a 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 continuous shortage.

Now we'll briefly review the first quarter financial results. Revenues in the first quarter were $2.9 million, an 82% year-over-year growth versus the first quarter of '22 and a 25% growth sequentially versus the fourth quarter of '22. Revenue growth continued to be hampered by product shortages caused by a malfunction at our US manufacturing facility. Demand for our products accelerated in the first quarter, far outstripping the available supply. We estimate that the revenue lost during the first quarter was roughly $1 million. As I mentioned earlier, we believe that these supply issues are now largely behind as we have secured two new facilities, which tripled our manufacturing capacity. Just a quick recap on our balance sheet. We ended the first quarter of '23 with $10.1 million in cash, including restricted cash and short term bank deposits. While Else Nutrition has achieved a lot in its short time as a public company, we are 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 nutritional composition and benefits like any other standard dairy formula. Today, the only two options for infant formula are dairy based or soy based formulas. We have a unique and exclusive IP protected alternative in this $80 billion market. Our formula is a unique patented blend of almonds, buckwheat and tapioca, and some other vitamins, minerals and trace elements. It is produced from clean minimally processed wholefood ingredients in proprietary all natural process as opposed to the rest of our industry who uses 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 novel wholefood clean formula is well tolerated with 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 have developed -- and patented the world's first dairy and soy free 100% whole plant infant formula. Else began selling in the US market late in 2020. In '21, we scaled our business and created a robust platform for growth, which started in '22 and now rapidly expands. We have developed a proprietary and groundbreaking product line. We have proven the product’s viability and superiority over existing potential competitors.

We'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 the scientific evidence that links plant based nutrition to healthy growth and development of infants, children and later down the road also for healthy well being of adults. Our success in the US has propelled us to launch in Canada and China with expected launches in Western Europe and Australia in '23. I want to thank all of our employees for their hard work and dedication, as well as our investors who have supported us. With that said, I will answer some of our investors’ questions and some questions that have come to us from investors.

Question-and-Answer Session

A - Unidentified Company Representative

All right. Thank you, Hamutal. We have some questions for you. First, it looks like there was still some inventory constraints in the first quarter. When can we expect to get back to normal levels in terms of supplying the strong demand that you're seeing?

Hamutal Yitzhak

Well, I can say that since mid-April, we're already back in stock for almost all our products. And we're not growing our safety stock. It's been a lot of work in the past few months to get to this stage and we are happy once again to be in a growth mode going forward.

Unidentified Company Representative

With regards to product expansion, you mentioned that in '23 you intend to introduce the kids ready to drink products in the US and Canada, and to complete the development of your adult ready to drink products. Can you speak more about these products, the timing on them and which stores will they likely go into initially?

Hamutal Yitzhak

We have completed the development of the kids ready to drink for the US and now and testing the products in a new facility this quarter. With that product, we will also test them a version that fits the Canadian regulation. We plan to start selling kids vanilla and chocolate ready to drink products in the US and possibly also in candidate if that will be successful towards the end of the third quarter. It will sell online first, then in natural food chains and finally, in major retail chains, which long term will be the main channel for these products. With regards to the adult ready to drink, we will start testing the new formulations in July this year and we plan to complete the development this year and start selling in the first quarter of '24. We blend two flavors for the US and Canada. All our ready to drink products at this stage are planned in eight fluid ounce tetra packs in four pack units.

Unidentified Company Representative

Okay, thank you. Your launch in Canada was very strong in the third quarter and demand is still continuing. What are you seeing there and why is the demand so strong in this region?

Hamutal Yitzhak

So the Canadian market was ready and in many ways waiting on Else Nutrition's 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 counts, including several to be announced shortly, recognized early the value 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 real innovation to their shelf and will be a leader in this fare in Canada. Additionally, we chose a distribution partner that, in our opinion, was the best fit for Else and for our products. And they, together with our teams, succeeded to attract major retail chains across the country. As the market is more concentrated, it went faster. Many consumers also know us already as we are a Canadian company and as they already ordered us online from the US. So the starting point was better.

Unidentified Company Representative

You’re continuing to add retail doors in a very nice pace. Can you speak about the doors you've been in for quite some time maybe over six months, how is the reorder been and are you seeing increased shelf space in some of the older stores that you've been in?

Hamutal Yitzhak

Well, I think one of the best examples is Sprouts Farmers Market, which was the first retailer we will be on boarded. We started in February 21, with toddler organic, a single SKU and soon got to over half units per store per week, that was the base. A couple of months later -- a couple a couple of years later, I mean, two years later, we are at 1.4 units per store per week, way over the expected sales velocity of one in that category. And what is even more important, we almost tripled our annual revenue per store during this period as we added additional products and increased our sales velocity. We expect to see even better results when the new grocery doors mature as they typically sell more baby products than a natural food chain like Sprouts.

Unidentified Company Representative

Let's move to the FDA approval process. Catches up on the timing on the approval and sort of big picture what would this approval mean to the company?

Hamutal Yitzhak

So as mentioned in February '23, the IRB, 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 and the statistical analysis plan to the FDA for review. And we're also waiting at control formula availability, which was not available so far due to the shortage. We're waiting on those two things to happen, the approval from -- of the protocol and the control and formula availability. We hope to finalize the studies needed in about 18 months followed by submission to the FDA review. The FDA review process may take months and even more, we don't know. If the review is successful and the FDA does not object, we will be able to market the infant formula. And 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 formula world as well as for the company and its stakeholders and investors.

Unidentified Company Representative

Okay. It looks like we are out of time. Many thanks to everyone for participating on today's call, and we look forward to hopefully speaking with you all shortly. Thanks everybody.