Else Nutrition Holdings Inc. (OTCQX:BABYF) Q3 2022 Earnings Conference Call November 14, 2022 10:00 AM ET
Company Participants
Ben Shamsian – Lytham Partners, LLC
Hamutal Yitzhak – CEO
Conference Call Participants
Ben Shamsian
Hello everyone, and thank you for joining us today for Else Nutrition’s Third Quarter 2022 Conference Call. With us today on the call presenting the company is Hamutal Yitzhak, CEO of Else Nutrition. 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 third quarter 2022 results. Today, I’m going to provide an overview of our achievements for the third quarter 2022 and update you on the opportunities that we believe will drive the growth in Else going forward. The hard work of our entire team has positioned Else Nutrition well for growth.
Else Nutrition are on a mission to transform and revolutionize not only the $80 billion infants formula market, but also the larger baby food and kids nutritional drink market. Our patent protected formula of clean nutrition minimally processed whole plant is unique and highly differentiated in the marketplace.
Our goals of — and focus remains on developing clean label nutritional plant based tasty and easy-to-use products for infants, babies, kids, and soon also adults, expanding our points of distribution in North America and entering additional geographies, investing in targeted marketing to support our sales and increased shelf velocity, working through the FDA process to officially become the first non-dairy and non-fully FDA approved infant formula, covering the EU jurisdiction in the same process.
Over the past four to five months, we made tremendous progress towards those goals. We launched our super cereal line, 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.
We expanded our U.S. retail presence from 1200 stores in January 2022 to more than 3500 stores listed today, including the recent launches in Walmart stores, CVS stores, Giant Food’s, and Winn Dixie.
In the third quarter, we entered Canadian market where the initial reception of our product has been much above our expectations. We already launched on [amazon.nfca] in London Drugs and in Metro Ontario stores. We expect to reach 1500 listed stores in Canada by year-end and to garner significant revenues.
And we entered China, the world’s largest infant formula market, valued at $33 billion. We already launched on Tmall Global and anticipate to launch on other leading e-commerce platforms in the very near future.
On the FDA front, we concluded successfully two of the three steps in the pathway to FDA approval. We’re awaiting the final approval of a clinical study designed by the ethical committee and the FDA, which is expected in the next couple of months. We plan to start the actual clinical trial after the above approval is received, pending on the supply of a commercial infant formula to serve as a control product in the study.
Financial results. Now I will review the third quarter financial results in detail. Revenue. Revenues in the third quarter were $2.2 million following the 26% increase in the first quarter, and the 44% increase in the second quarter. Fortunately, these results do not represent a decline in the demand for our products, which remained very high, but a temporary out-of-stock situation that was created by combination of the unexpectedly high sales volume in the second quarter that depleted our inventory reserves in unfortunate mechanical issues in our main production site that prevented us from replenishing our inventories needed.
Without getting into too many details, during the summer we incurred an unforeseeable mechanical issue at our at our facility. A pump broke, setting back our production by about six weeks. That led to out of stock and inventory shortages and our spray dry production facility was either down or very slow due to 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 further organic best seller products.
Needless to say, we are disappointed from that equipment failure, especially given the high demand and we estimate that the revenue lost during the third quarter was between $300,000 to $500,000. We and our manufacturer are constantly working to resolve the issues and we plan to fully replenish our inventory by the end of the first quarter. Long term, we are working on securing three additional manufacturing facilities in North America and in Europe in order to better diversify our production capabilities and reduce future supply chain risks.
In Q3, we launched in Canada on amazon.ca and in a few leading retailers, including London Drugs and Metro Ontario. As I mentioned above, the reception of our products received in Canada by retailers was very positive, which we believe is the result of our U.S. market success.
In the third quarter we saw initial revenue from Canada and we expect to see significant revenue in the fourth quarter. In June, we announced our entry into the Chinese market via an agreement with Baozun, a leading ecommerce distributor in China, and in September, we launched our first flagship Chinese store on Tmall Global. We will be selling our Toddler Formula’s and Baby Cereal products and also soon our Kids nutrition products directly to Chinese consumers through these store and on several other leading platforms.
China is the world’s largest infant formula market valued at roughly $33 billion. I’m happy to inform you that we just received the request to increase our shipments and inventory levels in China due to the first sales and the high expectations of our Chinese partners. We’re planning to enter Western Europe and the first half of 2023. The initial launch will be in the U.K. via Amazon with other countries 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 addition, we expect to launch in Australia in the second quarter of 2023.
The main future growth in North America will come from retail sales, and mainly from brick-and-mortar, grocery, drug, mass and natural food stores. We began our retail rollout in the U.S. in February of 2021 and we started 2022 with 1200 mostly natural food retail stores. We expect to end 2022 listed in 3500 U.S. stores and 1200 Canadian stores already filling in most of them. Our retailers are experiencing solid and growing sales velocity of our products and we are seeing growing great reorders with most of them, which we did our best to fulfil in the third quarter.
As a result many retailers are expanding the shelf space and ski-range where else nutrition. Most will be selling several else products but a few will sell our entire range. Besides the physical stores that we have entered, distributed by unifying KV and selling direct we are also selling on several well-known online retail platforms walmart.com, kroger.com, Thrive Market and iHood showing strong results.
As an example because of the success that walmart.com has seen with our product, Walmart started selling health nutrition chocolate and vanilla flavored kids shakes in its brick-and-mortar stores in 35 states, including California, Florida, and Texas.
Regarding product expansion, in 2022 we expanded our product range to over 10 products and over 20 SKU. In 2020, we launched our toddler organic products. In 2021 we added our kids powder mix line in four flavors; and in 2022 we added the toddler [Oh my God] product and the super cereal product line for babies from six months up in four flavors. We view the success of additional products as important to Else brand equity.
Balance sheet. Just a quick recap on our balance sheet. We ended this third quarter with $17.3 million in cash, including restricted cash and short term bank deposits. The company has no debt or loans liability.
Regarding FDA. Now I’d like to provide some updates on our FDA approval process. As a reminder, our formulations not yet FDA approved and thus we do not offer an infant formula yet. We are working through the FDA approval process. We already completed the commercial development of our infant formula. And in Q4 2021, we concluded a successful preclinical safety study of our plant based infant formula is part of the pathway to bring it to market. The study results demonstrated proper growth similar to dairy based infant formula in a neonatal preclinical model, which is a key first step on the approval path with the U.S. Food and Drug Administration, as well as with other regulatory authorities to demonstrate safety and nutrient bioavailability of the infant formula and its ingredients.
The results of the study have been presented in two key scientific meetings focused on pediatric nutrition, and were also recently published in Scientific peer-reviewed journals. Else is in close communication with the FDA, sharing its plans and results to receive their guidance throughout the process of Else’s infant formula development.
In the second quarter of 2022, Else conducted a second preclinical study demonstrating the quality of the infant formula protein as a part of the FDA requirements for new infant formula to be marketed in the U.S. Additionally, we started the first clinical study to demonstrate the tolerance of its product in a specific intolerant children population. Second clinical study to be conducted in a healthy toddler population has been approved by the ethical committee. Else is working on final preparations for the infant growth clinical study for the FDA and European permits. Else plan to start in the first quarter of 2023, awaiting availability of a control formula, which currently is still in shortage.
In 2023, the company plans to continue research activity demonstrating the safety and tolerability of the infant formula, as well as provide scientific support for Else products including preparation for additional clinical studies.
Now for some concluding remarks. 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, remarks and answers some questions, I want 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 100% whole foods plant based dairy and soy free baby formula. Else meets the global regulatory nutritional composition standards for infants and is modelled 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 based and soy based formulas. We have a unique and exclusive IP protected alternative in this $80 billion market, formulize 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 scientific 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% plant based infant formula. Else began selling in the U.S. market late 2020. In 2021, we scaled our business and created a robust platform for growth in 2022 and onwards. 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 channels and we’re building the Science, Advocacy and Communication of 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 U.S. has propelled us to launch in Canada and China, with expected launches in Western Europe and Australia during 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.
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 manufacturing facility more specifically about the malfunction? And how can we make sure this doesn’t happen again?
Hamutal Yitzhak
Sure. So we’re very cognizant of our growing demand. And hence capacity requirements. Equipment, or other facility malfunctions, can equipment – could happen from time to time and may cause delays and out of stock temporary situations. Our goal is to minimize these events, and also to secure several manufacturing alternatives. As previously mentioned, we are working diligently to secure two to three different additional manufacturing sites, two in North America and one in Europe. We expect them to start operations for Else products in the first quarter of 2023.
Ben Shamsian
Thank you. You mentioned production getting back to normal levels in the fourth quarter. Can you get a bit more specific on that? In addition, what are the conversations with the retailers, as well as your other some other customers that you’re having so far.
Hamutal Yitzhak
We’re working very hard to rebuild our inventory levels back to normal. This takes time and a lot of efforts. Also in with regard to supply chain, as already mentioned we hardly harmed the retailer supply, since we made the decision to prioritize retail orders over Amazon and over our e-store orders, except for our subscribers support which we did not want to harm. And that created an out-of-stock situation on these online platforms mainly for our toddler organic best seller products.
So the conversations with retailers are not about being out-of-stock. And we have no issues with that because we secured the inventory specifically for those retailers. We didn’t want to harm our relationship with them.
Ben Shamsian
Got it. Thank you. Let’s talk about Canada. You said your entry into Canada was better than expectations. Can you elaborate a bit on that?
Hamutal Yitzhak
Yes, the acceptance by the Canadian retailers was way beyond our expectations. We already launched on Amazon, Canada, in London Drugs and Metro Ontario. We expect to reach 1500 listed stores in Canada by the year-end and to generate significant revenues as I just said. By the end of the next year, we expect to be an additional 1500 stores. So in total it will be 3000 and to be carried by all the big retailers in Canada very shortly.
So in total as I said it’ll be 3,000 stores by the end of the next year, which will carry our entire range of products meaning around something like 5,000 points of distribution if you calculate the number of SKUs per store. That’s very, very promising. We actually expect Canada to account for about 20% of the U.S. revenues, or whatever is coming from U.S., Canada will be 20% of it. That’s what we anticipate. We see very strong demand in Canada.
Ben Shamsian
That’s great. Thank you for that. You’ve recently entered China. What are your early learnings? What are the plans there beyond Tmall?
Hamutal Yitzhak
Yes, the Chinese market penetration is really still at its very early stages. We launched our first store on one of China’s largest e-tailers, Tmall Global and we are preparing for many additional launches in several other leading e-commerce platforms, rebuilding a massive marketing content campaigns with key opinion leaders and key opinion customers or consumers that’s how they call China and intend to invest significantly in the penetration as we see a huge opportunity in this market, which on one hand lacks any alternative to the current products, and on the other is striving for one because it’s a very high level of allergies and sensitivities to milk in that population.
So far, their response and interest level from the Chinese consumers have been extremely positive, and interest is expected to translate into significant revenues that we expect to have in 2023.
Ben Shamsian
Thank you. With regards to the FDA approval process, can you help us understand the timing on the approval and what would an approval mean to the company?
Hamutal Yitzhak
So the process of the FDA approval for a new infant formula in the U.S. is a multi-step plan where the safety of the ingredients, and the formula must be demonstrated in a series of studies, including an infant growth safety study, which is the final step. We already completed successfully the first two step which are the two preclinical studies. And we’re moving forward in the process of grading the data from the clinical study itself for submission to the FDA review.
Once all data from the clinical study is submitted, the FDA review may take a few months. If everything goes smoothly, and the clinical study ends by the end of 2023 or beginning of ’24 we may estimate that by mid-24, we will have an answer from the FDA. Once the FDA reviews our new infant formula notification and has no objections, we may market the infant formula. The meaning of that for a company like Else is huge. I mean this is our — actually our [indiscernible] or our reason of being creating a revolution in an industry or a market that had no other options but two, and one of them is really not an option any longer as it is just 5% of the market.
So this is huge. This is something that is the first time ever that a company actually has a permit to market something that is revolutionizing and game changer. It’s a game changer in the entire global market as that’s the meaning for Else. It has meaning in terms of revenues, in terms of market cap, in terms of collaborations, in terms of even exit strategy. However you look at it, it’s a completely different story for Else once we get back.
Ben Shamsian
Got it. Thank you so much. That is all the time we have for today’s call. My thanks to everyone for joining us, and we look forward to hopefully speaking with you shortly. Thank you, everyone.
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