Better Choice Company Inc. (NYSE:BTTR) Q2 2022 Earnings Conference Call August 11, 2022 8:30 AM ET
Scott Lerner - Chief Executive Officer
Sharla Cook - Chief Financial Officer
Donald Young - Chief Sales Officer
Rob Sauermann - Chief Operating Officer
Conference Call Participants
Jim McIlree - Dawson James
Good day and welcome to the Better Choice Company Inc., Second Quarter 2022 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions]. Please note that this event is being recorded.
I would now like to turn the conference over to Rob Sauermann, COO. Please go ahead, sir.
Thank you, operator. Welcome everyone to Better Choice’s Second Quarter Earnings Conference Call. This morning we issued our Q2, 2022 financial results press release and posted our updated earnings presentation under the IR Section of our website, which we will be discussing today.
I'm joined by Scott Lerner, our CEO; Sharla Cook, our CFO and Donald Young, our Chief Sales Officer. 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 Annual Report on Form 10-K, filed with the Securities and Exchange Commission and the company's press release issued Tuesday March 29, 2022 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, adjusted gross margin, EBITDA and adjusted EBITDA. Although the company believes these non-GAAP financial measures provide useful information for our investors, the presentation of this information is not intended to be considered in isolation or as a substitute for the financial information presented in accordance with GAAP.
Please refer to our Press Release and Presentation issued August 11, 2022 for a reconciliation of the non-GAAP financial measures to the most compatible measures prepared in accordance with GAAP.
With that, let me hand it over to Scott.
Thank you, Rob and welcome everyone to our 2022 second quarter financial results conference call. I'm excited to share that for the second quarter in a row we delivered record sales growth, while simultaneously improving gross margin. In the second quarter we generated gross sales of $19.8 million, bringing total gross sales for the first half of 2022 to approximately $40 million. On a net basis this translates to $33.5 million of revenue a, 50% increase relative to the same period last year.
In addition to driving an incremental revenue growth, we also realized meaningful sequential gross margin improvement. We achieved an adjusted gross margin of 31% during the second quarter, representing a 3 percentage point increase relative to Q1. This adjustment takes into account one-time pet specialty launch expenses associated with the seasonal wall placement at Petco, which enabled us to launch Halo Elevate in May, rather than waiting for full store reset in July.
Today Halo Elevate can be purchased at more than 1,500 pet specialty stores, which includes more than 1,000 Petco locations and 600 Pet Supplies Plus locations. Although it has only been three months since we launched at Pet Supplies Plus and less than one month since we moved from the seasonal wall at Petco to a permanent placement in the dog aisle, we have observed consistent week-over-week point of sales growth.
This has been supported by strong repeat consumer purchase rates at multiple retailers, which we've been able to track via Customer Loyalty Program data, suggesting that the product is being well received by pet parent. In aggregate, this has resulted in 133% year-over-year growth of our brick-and-mortar business.
This growth has been driven primarily by $3.7 million of elevated gross sales in Q2, bringing total elevated sales to $6.2 million for the first half of 2022. Although we don't expect that Q3 elevated sales will be as high as Q2, since Q2 elevated sales represent a mix of initial stocking orders and repeat customer purchases, current POS data is in line with our expectations as we continue to ramp.
Internationally we generated $7.1 million in sales in Q2, representing 75% year-over-year growth and another quarterly record. Most importantly, we saw continued end consumer sales growth during the June 18 promotional event in China, despite all the noise around COVID associated lockdowns, demonstrating the strength of our business and the importance of high quality pet food to consumers around the world.
A portion of the sales made in June were also in preparation for 11/11. Normally international sales are highest in Q3, as they represent the inventory buildup ahead of November promotions, but given some of the recent challenges associated with the global supply chain, we worked with our partners to bring some production forward and ensure that we be in stock to meet end consumer demand. While we still expect that second half international sales will be strong, it is likely that Q2 will be the largest international quarter this year, unlike Q3 in years past.
Offsetting our growth internationally and in Pet Specialty, e-commerce delivered lower than expected sales growth. Although e-commerce sales increased 28% in the second quarter relative to the same period last year, year-to-date e-commerce growth was only 8%, which we believe is driven in large part by changes in working capital management by our customers.
With that in mind, our point of sale sales growth for e-commerce particularly on Amazon, materially exceeds our sales growth, indicating that our e-commerce partners are holding less inventory on hand, a response that has been seen across category amidst the current economic environment.
While we've seen this trend persistent in early Q3, we are optimistic that e-commerce sales will more closely align with point of sales growth in the future. In addition, as we noted on our last call, rebranded Halo Holistic is estimated to be in production in the third quarter, in time for our late Q3 early Q4 launch, which should further bolster our e-commerce business.
With regards to our direct-to-consumer platform, the integration of the TruDog Brand underneath the broader Halo umbrella occurred on schedule in early July, with no disruptions in ability to supply loyal TruDog customers and subscribers. The transition of the TruDog brand to Halo couldn't come at a better time, as it allows our direct-to-consumer platform to benefit fully from the launch of our multimillion dollar media campaign the newly revamped consumer facing website.
In addition, we are exploring the opportunity to expand the Halo freeze dried raw offering into other channels including Pet Specialty and international, now that they are sold underneath the broader Halo Brand. Although our sales growth is very exciting, I'm most proud that we have been able to realize meaningful sequential gross margin improvement despite a challenging macroeconomic environment.
When possible, we’ve looked to take preventative rather than reactionary measures to address raw material price increases, worldwide supply disruptions and inflationary pressures. These measures, coupled with the implementation of domestic and international price increases in mid-April helped us deliver an increase of approximately 300 basis points in Q2, with further improvements expected in the back half of this year.
This improvement in Q2, 2022 was driven by several key factors which included the shift of domestic kibble production to a new co-manufacturer in January 2022, which resulted in an 8 to 10 parentage point increase in SKUs gross margin for new production, offsetting raw material price increases. Consolidating and in some cases prepaying production runs to capture gross margin, reducing contracted inbound freight per pound, and finally optimizing ingredient procurement were possible to mitigate supply chain challenges.
As we look to the second half of 2022, we expect to realize continued gross margin improvements, driven primarily by the transition of our international dry kibble diet to a new co-manufacturer. This transition was completed in mid-June and resulted in an immediate 1,500 to 2,000 basis point improvement in gross margin. Prior to the transition these diets represented approximately $10 million of net sales in the first half of 2022. If we had been able to make this change at the beginning of Q2 rather than at the end, we'd be looking at a 35% gross margin for Q2.
While we are very excited by our sales growth in the first half of this year, we remain laser focused on driving continued margin improvements across our portfolio. As we continue to scale our business, launch margin accretive innovation and realized further cost improvements, we believe we have sufficient liquidity to reach profitability and are well positioned to succeed in the current economic environment.
The good news is that despite these challenges, the pet food industry remains one of the most recession resistant categories within CPG, and while prices have risen, consumer demand has remained strong. In addition, we've also picked great retail partners that are growing rapidly and continuing to invest in premium consumers, our target demographic.
Before turning it over to Donald, I wanted to highlight how some of our channel partners have publicly responded to recent inflationary trends, since our channel strategy is a fundamental key to our success. In March Petco announced their 14th consecutive growth quarter and called out their commitment to maintaining strategic investment levels and remain confident in their mid to long term guidance, specifically because their customers are typically higher spending.
In June, Chewy delivered double digit sales growth, calling out that the results were driven by resilient consumer demand and pricing strength to consumables and healthcare, the categories we play, while seeing continued pressure in discretionary categories such as hard goods. In August Pet Suppliers Plus announced eight new store openings in 20 new franchise agreements, on top of 7% sales growth in Q2 at their existing franchise locations.
With that in mind, let me turn it over to Donald to cover some of our key channel partnerships in detail. Donald.
Thanks Scott. In addition to getting product on shelf in more than 1,500 locations, one of the most exciting events this quarter for me was scaling up the sale teams. Although we began the year with only three team members, we've now grown to 10 individuals, all who have proven track records working with me in the past. It's very easy for these new team members to get up to speed and we've been able to hit the ground running.
And Scott just mentioned Pet Supplies Plus. We completed our April launch in more than 600 Pet Supplies Plus stores as a preferred brand. We would like to emphasize again that we really picked a great partner here as their franchise and corporate own store model drives significant new store openings each year, which is a delta girl driver for Halo Elevate.
As a result of our time in the field working with managers and store associates, we've been able to partner closely with PSP's merchandising team to promote Halo Elevate as a premium option, alongside of their three core private brands, which has helped us nearly double our weekly payer sales within the last month. It's a strong growth of a relatively small base, but their early trends are looking very positive.
Turning to Petco, we officially moved as planned from the seasonal wall, 900 store set beginning in May, to the permanent dog aisle in July where we are now in more than 1,000 locations. While the seasonal wall was ideal for retail store associates education and brand awareness, moving to the permit dog aisle is the key step as this were consumers shop every day.
Even those July represent a new location for us in the store, like Pet Supplies Plus we’ve observed a nearly doubling of weekly payer sales within the last month. Since our lunch on this seasonal wall in May we’ve observed 14 consecutive weeks of incremental sales growth. This is then coupled with a 43% repeat consumer purchase rate at Petco, which we are able to track via the Customer Loyalty Data.
With that, I’d like to turn the call over to Rob to discuss us through marketing updates and our progress in the international channel in more detail.
Thanks, Donald. At the same time that we brought on new sales team members and launched in Petco, we also kicked off a global marketing campaign in June. Although we are only six weeks, in our campaign is resonating with Millennial and Gen Z pet parents in the way that we had hoped. In these first six, we already generated more than 42 million impressions and 22 million video views, but by a high level of engagement on social and extremely strong results versus other pet brands.
On TikTok alone our video content had been viewed more than 9 million, with the video completion rate roughly 4x higher than benchmark metrics. Most importantly, our message is resonating with our target demographic and we are seeing significant increases in landing page visits and followers. As we look to the third quarter, we're planning to ramp our marketing spend and use our initial learning to drive efficiencies. So far we are pleased with initial results and are excited to see what the future holds.
Turning to international, it was another record quarter of sales as we generated $7.1 million of gross sales in Q2, representing 75% year-over-year growth and another quarterly record. In Q2 a significant portion of the sales were attributable to selling ahead of the 618 promotional event, which takes place in Asia every June. Historically 618 is the second largest sales event of the end of the year, surpassed only by Singles Day which takes place in November.
This year end consumers purchasing equivalent of $4.5 million of Halo product may in May and June alone, representing an approximate 3x increase relative to last years’ sales during the same period. On our flagship store, halo branded sales were roughly in line with last year's 11/11 promotion, a significant achievement given 11/11 sales are typically twice June 18 sales.
These results demonstrate the strength of our business, the strengths of our partnerships and the importance of high quality pet food to consumers around the world. As Scott did mention earlier in our call, international sales typically are highest for us in Q3, as they represent the build-up ahead of November promotions. But given some of the recent challenges associated with the global supply chain, we did work with our partners to bring some production forward and ensure that we would be in stock to meet end consumer demand for the November 11 promotions.
While we still expect that second half international sales will be strong and in line with the $25 million run rate we discussed in our Q1 call, it is likely that Q2 will be the largest international quarter this year, unlike Q3 in prior years.
Although there's been significant global uncertainty in recent months, we’ve been able to deliver record international sales growth in our core geographies, and consistently work with our distribution partners to mitigate potential risks. In addition to the strong dry kibble business we built up in Asia, which makes up a significant majority the $100 million in aggregate contract with minimum sales from 2021 to 2025, we remain focused on high margin incremental expansion opportunities.
In the second half of this year, we are prioritizing expansion to Latin America and have made significant strides to make – on the regulatory side to make this a reality. With regards to gross margin, we begin to capture significant international margin expansion, which I’ll let Sharla touch on in more detail in our section. Sharla?
Thanks Rob. In the second quarter of 2022 we delivered record growth sales of $19.8 million and net sales of $16.5 million, representing an increase of $5.5 million or 50% compared to the second quarter of 2021, while simultaneously improving gross margin to 29% or 31% on an adjusted basis as compared to 28% in Q1 of 2022.
The increase in net sales was driven by yet another strong quarter for international, which grew $3.1 million or 75% versus Q2 of last year. Brick and motor contributed $2.3 million to the increase driven by Elevate sales ahead of the July store reset at Petco and e-com grew roughly 28% or $0.8 million versus the prior year quarter.
Partially offsetting the strong growth for the quarter was $0.6 million in decrease in DTC, driven by a planned reduction to customer acquisition spend ahead of the brand migration that we successfully completed in early July. We anticipate that net sales as a percent of gross sales to decrease slightly into Q3 and Q4 as we ramp up promotional activity within the Pet Specialty Channel.
Gross profit for the second quarter totaled $4.7 million, yielding a gross margin of 29%. On an adjusted basis excluding the impact of 1x launch costs for Elevate, gross margin was 31%, reflecting an improvement of almost 3 percentage points from Q1 of 2022 and a 6 percentage point improvement from Q4 of 2021.
As we mentioned on our first quarter call, we are on target to complete the transition of our China production through our new co-manufacture and I'm pleased to report that we completed the transition in mid-June, resulting in a doubling of gross margin on the skews.
To provide context as to how this transition will impact gross margin going forward, international gross margin would have been 37% in Q2 versus actual gross margin of 27% for that channel, assuming we had completed the transition at the beginning of the quarter. This would have resulted in an adjusted consolidated Better Choice gross margin of 35% for the quarter.
Gross margin improvement continues to be one of our highest priorities and we expect the back half of 2022 to benefit from the improved international margins, pricing action in the e-com channel that will be effective at the beginning of Q4, and the relaunch of Halo Holistic planned for late Q3 early Q4 with recipes reformulated to simplify even higher levels of nutrition, while also providing margin upside, even after taking into account the potential for further raw material cost increases. We also continue to focus on margin accretive innovation as we plan for 2023 and beyond.
Turning to our balance sheet, we ended the second quarter with $17.8 million in cash and cash equivalents and restricted cash compared to $23.4 million at the end of Q1. The change in our cash balance during the quarter reflect a few non-recurring working capital items related to our gross margin improvement initiatives, including prepaying our international production prior to the co-man transition in June, which allowed us to realize the 1.5% margin improvement on those shipments. Additionally, we offer temporary extended payment terms to one of our key international partners, while we switched co-manufacturing partners and to coincide with the material price increase that was effective at the beginning of Q2.
Lastly, our inventory balance reflects the return to near normal levels on our Holistic Web production, as well as the final build of our Elevate inventory, which will allow us to continue to guarantee 100% fill rates and provide margin protection in an environment which continues to be impacted by inflation. While working capital could continue to fluctuate a bit more than historical levels, we expect to see a benefit to cash flow in the back half of the year.
Net loss for the second quarter was $4.4 million. After adjusting for non-cash and non-recurring charges, adjusted EBITDA for the second quarter was negative $2.1 million, which is consistent with our prior estimates for quarterly cash burn. Although we are not looking to provide guidance at this time, based on where we sit today, we continue to believe that we have sufficient cash-on-hand to achieve profitability. As referenced, we've also provided a detailed reconciliation of Q2 EBITDA and adjusted EBITDA and Q2 net sales and gross profit and adjusted net sales and gross profit.
With that, I will turn it back over to Scott.
Thanks, Sharla, and thank you again to everyone that joined the call today. Although we have a lot to be proud of, $40 million of gross sales in the first half, a 1,500 plus store launch of Halo Elevate, a rapidly growing international business, solid subscriber base on our online platforms, there's still more work to do. As I hope you can tell, we are focused on driving continued margin improvement over the back half of 2022 and into 2023 as we push towards profitability.
While we still are investing meaningfully behind the launch of Elevate, particularly in Q3, we both of our current position is sufficient to support our growth plan, particularly since we expect to benefit from positive changes to networking capital beginning in the second half of 2022. Our entire team remains extremely excited and we look forward to our third quarter results.
Now, I'd like to open it up for questions. Operator, please.
[Operator Instructions]. And our first question will come from Jim McIlree with Dawson James. Please go ahead.
Yeah, thank you and good morning. I just want to understand the gross margin impacts from the international manufacturing. When you talked about total gross margins being 35%, assuming that you had moved the manufacturing for the full quarter, is that total gross margin excluding the launch costs or did that include the launch costs?
Rob, do you want to take that one or Sharla?
Yeah, I can take out one Scott. Hi, hey thanks for the question. That is an adjusted view of the margin. You can do this amass, as far as the points that it would have added, but that does include the exclusion of the launch cost and the incremental pick up that we would have gotten if we had switched it April 1.
Right, thank you. And then looking at gross margin for the second half, are there any special launches or any other issues that we should be aware of, that would impact gross margins on a one-timer or one-time-ish basis for the second hand.
There's a couple things that I would think about, I think the adjusted gross margin that we showed kind of gives a good idea of where we're trending, what will impact that in the second half of the couple of things. First, we do have a price increase on the e-com side effective at the beginning of Q4, but we'll also see some timing of trade spend within the Pet Specialty channel. So trade spend in that channel has been pretty light the first half, just as we get into the store and on shelf. You'll really see the promotional activity kicking up in the second half, that will kind of – I mentioned in my prepared remarks that you're net sales as a percent of growth can decrease slightly, so that will have an impact to margin in the back half.
And so is second half gross margin likely to be close to that 35% or higher or lower?
I expect it to be close. I think you could have a little bit of lumpiness in Q3 and Q4, just depending on how that promotion spend hits. But I think that same kind of, that same kind of sequential improvement that you're seeing, we'll see in Q3 and into Q4. So on a total second half basis, yes I do expect it to be closer to the adjusted margin you're seeing in the presentation.
Okay, great. And I just want to also understand, the sales trajectory for Q3, it sounds like you’ve brought some sales in, from what you would have normally expected for Q3, you brought it into Q2. So it sounds like Q2 is a little bit higher than normal, Q3 is a little bit lower than normal. Is that a fair way to look at it?
Yes, that's a fair way to look at it. Exactly right.
Okay. Yeah, that's it for me. Thanks a lot.
[Operator Instructions]. And this will conclude our question-and-answer session. I'd like to turn the conference back over to Scott Lerner for any closing remarks.
Thank you everyone for joining our Q2 earnings call today. The whole team at Better Choice Company is excited about the future growth of the Halo brand, and we look forward to continuing in the journey with you. Thank you.
The conference is now concluded. Thank you for attending today's presentation. You might now disconnect your lines at this time.