SRx Health Solutions Inc. (SRXH) Q4 2021 Earnings Report, Transcript and Summary

Good morning. My name is Darryl, and I will be your conference operator today. At this time, I would like to welcome everyone to the Better Choice Company Fourth Quarter and Full Year 2021 Earnings Conference Call. [Operator Instructions] As a reminder, today's call is being recorded. I would now like to turn the call over to Mr. Rob Sauermann, Executive Vice President of Strategy. Thank you. You may begin.

Thank you, operator. Welcome, everyone, to Better Choice's Fourth Quarter and Full Year Earnings Conference Call. This morning, we issued our fourth quarter and full year 2021 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 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 annual report on Form 10-K filed with the Securities and Exchange Commission and the company's press release issued on 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, 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 as a substitute for the financial information presented in accordance with GAAP. Please refer to our press release and presentation issued on March 29, 2022, for a reconciliation of the non-GAAP financial measures to the most comparable measures prepared in accordance with GAAP. With that, let me hand it over to Scott.

2021 was my first full year as CEO of Better Choice, and I'm incredibly proud of the progress we have made. This past year, our focus was all about positioning us for a breakout year in 2022, and we set 3 goals to get there: building a best-in-class team; creating an industry-leading innovation pipeline; and developing a go-to-market approach anchored by leading channel partnerships. . Since I joined, we brought Halo Elevate from initial concept to the store shelf in under 12 months; developed a robust 3-year innovation pipeline, which includes the rebranding of our existing Halo Holistic products and the integration of the TruDog brand underneath the Halo umbrella; onboarded 2 new co-manufacturing partners; secured significant incremental production capacity; and raised $40 million of proceeds, with the goal of achieving $100 million of gross sales in 2023. On the sales side, we secured anchor partnerships with Petco, Pet Supplies Plus and Phillips for the national launch of Halo Elevate, which gives us distribution in more than 2,000 pet specialty stores by mid-2022. In addition, Halo Holistic has continued to see strong growth in Amazon point of sales, up 15% in Q4 2021 for reference. And we are very excited to expand our partnership with Chewy this year in a big way. Internationally, we continue to over-deliver against the $100 million in contracted minimum revenues from 2021 to 2025, and expect rapid growth in this channel to continue. I am also proud to announce the official launch of our new Halo direct-to-consumer website, which went live last Tuesday and showcases the new look and feel of the Halo brand. The fourth quarter of 2021 was strong for Better Choice and represents the last quarter before launch of Halo Elevate. Despite unprecedented supply chain disruptions felt across the consumer packaged goods industry, we were able to deliver 18% quarterly net sales growth, driven by record international sales and continued growth in our e-commerce channel. For the full year 2021, we generated approximately $56 million in gross sales, an increase of roughly 7% relative to 2020. That said, we estimate supply constraints and out-of-stock negatively impacted our full year sales figure by about $6 million, predominantly felt in e-commerce. Even with the out-of-stocks in mind, our supply chain and logistics team did a fantastic job navigating macroeconomic pressures to satisfy our growing customer demand and pivoted when needed with one goal in mind, to keep our product on the shelf for our loyal and growing end consumer base. Although safety stocks held by our customers, particularly Amazon and Chewy, were reduced in Q4 2021 and are reflected in our net sales, we were still able to satisfy most of the end consumer demand, which we view as critical to maintaining repeat purchase behavior and driving sales in 2022. All of these achievements wouldn't be possible without our incredible team. This year, we added nearly 20 new team members with a wealth of experience from both inside and outside the pet food industry, with individuals from Amazon, Crate and Barrel, Mars Petcare, Nestlé Purina, Clif Bar and Solid Gold joining our team. Not only is this evidence that our wins from anywhere culture is working, but I also think it serves as validation that we're building something special at Better Choice. With every day that passes, I grow even more excited about the opportunity we have to become the most innovative, premium pet food company in the world, with high-quality brands poised for rapid growth led by subject matter experts who can deliver results. Our business is rooted in the Halo brand, where we plan to leverage our global omnichannel strategy to achieve rapid growth and exceed $100 million of gross sales by 2023. Our target consumer is the millennial pet parent, and our goal is enabling the purchase of Halo products wherever, whenever and however they choose. This is how many consumers now shop, and it doesn't matter if they're in the United States, Asia or any other part of the world. One day, they might be in a Petco, the next day on Chewy and the next day browsing our website. So we really have to have a strong presence in our 4 main channels, pet specialty, e-commerce, direct-to-consumer and international to drive customer loyalty. On the flip side, our omnichannel strategy turns every consumer touch point into a dynamic opportunity to connect, convert and retain customers with a consistent and immersive brand experience, which we believe is a key to increasing the lifetime value of our customers. This strategy also lets us develop and sell channel-specific products designed to maximize conversion and gross margin to avoid channel conflict. One of the issues you'll find in the pet category, if you try to play in every channel at once, is that you see a lot of pricing competition. It can really affect both the brand as well as the retailer, so we're avoiding that and looking to launch products built to succeed in specific channels to prevent margin erosion across our portfolio, and most importantly, speed up growth. For example, Halo Elevate is sold exclusively within the pet specialty channel. While you won't find Elevate on Chewy or Amazon, Halo Holistic will continue to drive growth on these third-party e-commerce sites, while maintaining an existing foothold in pet specialty, particularly in the cat category. Our DTC site will carry all our Halo products from Elevate and Holistic kibble and wet food, as well as a complete line of freeze-dried raw offerings that were historically sold under the TruDog brand. Today, our international sales are driven by Halo Holistic, but we are excited to begin to introduce Halo Elevate to new geographies later this year. Last week, our sales team spent 3 days at Global Pet, one of the largest annual pet industry trade shows, and officially unveiled the new look and feel of the Halo brand to the industry. Although it is still early, the response from customers, distributors and suppliers have been overwhelming positive, which is great momentum for us as our key launch partners made significant initial purchases of Halo Elevate in Q1 2022 and are currently in the process of stocking their shelves. While these positive developments were not reflected in our 2021 financials, we've already begun to see their impact in the first quarter of 2022. We estimate that Q1 2022 gross sales will exceed 40% growth relative to Q1 2021, where we delivered $13.4 million of gross sales. To date, our growth in 2022 has been driven by initial sales of Halo Elevate as well as strong Halo Holistic sales in our e-commerce and international channels. I'll let Donald, Sharla and Rob provide a bit more information regarding the initial progress we've made, but we've certainly come out of the gate strong this year. For those of you that have been following our story since our uplift to the New York Stock Exchange back in June, I recommend you check out some of the new social and digital content now available on the Better Choice and Halo websites, as those will be dynamic sources of information as our launch progresses this year. In addition, I'd also encourage you to visit your local pet specialty store to see Halo Elevate on shelf and hear directly from a store associate about the brand we are building. So far, my goldendoodle, Leo, has only told me good things about his lunch and dinner. Please visit our store locator on halopets.com to find a location near you. With that, I'll turn it over to Donald.

Thank you, Scott. In 2021, we secured 3 critically important anchor partnerships for the national launch of Halo Elevate, Pet Supplies Plus, Petco and now Phillips Pet Food and Supplies. As Scott mentioned, this gives us distribution in more than 2,000 pet specialty stores by mid-2022, with the launch occurring slightly earlier than we expected last year. Thanks to this newly formed partnership and strong initial feedback from retailers, we anticipate that Halo Elevate will now be available in more than 1,500 pet stores by the end of April and in more than 2,000 pet specialty stores by the end of July, with incremental linear feet also secured in certain locations. Relative to the expectations that we shared in November 2021, this represents a 37% increase in the total number of on-shelf distribution points, which accounts for both the number of total pet specialty doors and the amount of linear feet secured in each location. This increase in shelf space has been driven by 4 key events. Number one, Petco's decision to increase the number of stores that carry Halo Elevate to more than 1,000 locations, with approximately 600 of these locations allocated for 8 feet of shelf space and the remaining stores with 4 feet of shelf space. In addition, Petco has classified Halo Elevate as a best choice brand. Previously, we anticipated we secured placement in 900 locations, with 450 of these locations at 8 feet of space and 450 at 4 feet of space. Number two, an increase in the total number of Pet Supplies Plus store locations from 560 in 2021 to more than 600 in 2022. As a preferred brand, we expect to secure 5 feet of shelf space in all Pet Supplies Plus locations. Solidifying our independent distribution with Phillips Pet Food & Supplies gives us access to the largest number of independent pet food stores in the United States. The size of the location serviced by Phillips can vary, but these stores often come with a fiercely loyal and dependable consumer base. And number four, securing significant dry kibble and canned wet food supply, this has allowed us to achieve a 100% fill rate for Halo Elevate. This is a huge advantage in our industry with significant out-of-stocks. As I discussed on our Q3 call, our goal remains by the end of the first launch year, June 2023, we will be generating a little over $200 in sales per store per week in over 2,000 locations currently and growing. With any new product launch, there's a significant quarter-over-quarter ramp that occurs as customers try new products, marketing efforts begin to take effect and the in-store education of retail associates start to pay off. In the first year, we will also run special promotions to incentivize consumer trial, with the goal of attracting a high-value, long-term purchaser of our product. It's simple. We created Halo Elevate to deliver best-in-class nutrition for pet parents. Our recipes are transparent and we proudly show that on the front of our bag. Our products are formulated to directly address the top 5 pet health concerns that pet parents have. Halo Elevate allows pet parents to confidently upgrade the quality of their pet food without any compromises, and our industry-leading traceability gives pet parents confidence in what they are feeding their pets. Halo Elevate includes 39 SKUs of dry and wet foods for dogs of all ages and breeds, formulated by prominent veterinarian and nutrition experts, with a variety of recipes that are available, including grain-free and healthy grain choices as well as chicken, red meat, salmon and lamb options. With regard to our canned wet products, we offer a variety of bone-in, barbecue and chunky stews, designed for the highest levels of palatability and nutrition. I've said it before and I'll say it again, in my 30 years in the pet food industry, I have never been this excited about a product and the opportunity that lies ahead of us for growth. That said, we won't stop here. Halo Elevate was the first new launch, but we will continue to innovate. Next up is our Halo Holistic line, then the expansion of Elevate into cat. And finally, filling out our portfolio in terms of treats and other products. With that, I now would like to turn the call over to Rob to discuss our international channel in more detail.

Thanks, Donald. As Scott mentioned earlier on the call, international was a key growth driver for us in 2021. Year-over-year, international revenue for 2021 totaled $14.8 million, an increase of more than 70% relative to 2020. In Q4, we generated $3.9 million, an increase of over 227% year-over-year. We saw strong performance across our existing markets, with China representing 62% of our total international sales. In part, growth in the Chinese market was driven by our ability to secure additional orders following Halo's strong performance during Singles Day for November 11, the largest online shopping event in the world. And consumer purchases of Halo products during this period increased more than fourfold relative to the prior year, driven by significant new customer acquisition. And we anticipate that we will continue to see incremental new customers join our brand in 2022. While our international go-to-market strategy is tailored for these regions, our target audience is the same as in the United States, a young, educated, urban dwelling woman, who in Asia, in particular, often owned a cat. To put that in perspective, more than 50% of our consumers that purchased Halo were born after 1990, and roughly 80% of those consumers 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 5 years, with younger pet owners leading growth. As we've discussed previously, successfully executing upon our existing customer contracts should enable us to build an annual recurring Asian business north of $25 million in Halo Holistic sales alone, with incremental upside possible as we look to introduce Elevate and other product lines in the future. In addition, we see near-term opportunities to diversify our international sales in Australia and Latin America, where we have an opportunity to introduce both Halo Holistic and Elevate offerings. Although there has been significant global uncertainty in the first quarter of 2022, we've continued to see strong international sales in our core geographies and constantly work with our distribution partners to mitigate potential risk. With that, I'll hand it over to Sharla to walk through the financials in more detail.

Thanks, Rob. Net sales for the fourth quarter were in line with expectations at $11 million, an increase of $1.7 million or 18% compared to Q4 of 2020. Gross sales for the fourth quarter of 2021 totaled $13.6 million, an increase of 20% as compared to $11.4 million for the same period last year. Consistent with what we've seen throughout the year, the increase was driven by yet another record quarter-over-quarter revenue growth in International, whose Q4 net sales more than doubled versus Q4 of last year. Additionally, e-commerce net sales were up over 5% in Q4 of 2021 versus the same period last year. Net sales for full year 2021 were $46 million, an 8% increase versus 2020. Gross sales increased 7% to $56 million for the full year 2021 compared to $52.1 million in 2020. International sales led year-over-year growth, delivering $14.8 million of gross sales in 2021, representing a more than 70% increase as compared to 2020. And despite significant out-of-stocks across our canned and wet portfolio, e-commerce gross sales grew 7% year-over-year, including double-digit growth with Amazon. As we've discussed on prior calls, our top line revenue was impacted throughout 2021 by the supply shortages and labor constraints that are still being felt globally. Production delays for our canned wet food and shortages in certain key ingredients used in our dry kibble stretched our safety stock. And while our total inventory has increased from Q3, a majority of that build is related to the launch of Halo Elevate this year. We estimate the quarter-to-date impact to revenue from out of stocks resulting from these headwinds was $4 million to $4.5 million as our fill rates in Q4 were significantly below normal. For the full year 2021, the estimated impact to gross sales is $6 million to $6.5 million. During the first few months of 2022, we've seen significant improvement in our fill rates as we begin a return-to-normal production levels on our canned and wet products, which we expect to reach by the end of Q2. Additionally, consumer demand for our products remains very strong domestically and internationally. And while we're early in the launch of Halo Elevate, we're very pleased with the results thus far and are confident we can deliver on our growth gold this year. Gross margin for the fourth quarter of 2021 was 25%, a decline from 36% in Q4 2020. The decline reflects the impact of continued broad-scale inflation which significantly burdened margins on our dry kibble portfolio, representing over half of our total gross sales volume during the year. Gross margin for full year 2021 was 33% compared to 38% in 2020. We estimate the inflation-related price increases from our co-manufacturers impacted Q4 margin by roughly 4 to 5 percentage points. To offset inflationary impacts and increase future production capacity, we completed the transition of our domestic dry kibble production to a Minnesota-based co-manufacturer in January, and have already begun to realize double-digit margin improvements on these SKUs. We are also on track to receive approval from the Chinese Ministry of Agriculture at this new facility, which will enable us to transition the manufacturing of dry kibble bound for China by the end of Q2 and realized these same margin benefits. We continue to closely [ monitor ] pricing and in addition to the pricing action we took in Q3 of last year, we have announced a second price increase that will take effect to the first week of April. As it relates to our DTC channel, fourth quarter net sales declined 13% versus Q4 of 2020, driven by declines in repeat purchasers and softer customer acquisition and retention. We've made strong progress towards the migration of our DTC brand through -- into Halo and successfully launched our new Halo DTC website last week. As we complete the brand migration, we will continue to offer the remaining TruDog inventory on the legacy DTC platform. Additionally, we continue to focus marketing investments on our longer-term DTC strategy rather than chasing short-term revenue gains. Brick-and-mortar net sales for the fourth quarter declined around 40% versus Q4 of 2020. This decline was expected and strategic as we continue to shift away from food drug mass and execute the Halo Elevate launch on a large scale within pet specialty. Net loss for the fourth quarter was $5.1 million. After adjusting for noncash and nonrecurring charges, adjusted EBITDA for the fourth quarter was negative $3 million and reflects the inflationary impacts we just discussed, along with incremental investment in upfront marketing costs to ensure a successful Halo Elevate launch, incremental investment in our international business and the addition of new team members to support growth. Net income for full year 2021 was $3.4 million, and adjusted EBITDA for 2021 was negative $7.1 million. As we closed out the first quarter of 2022, we anticipate top line sales growth will exceed 40% as compared to Q1 of 2021, well above expectations for the quarter. We have already begun to see meaningful improvement in our gross margins as we realize the benefits of our new co-manufacturer relationships and pricing strategy. The macroeconomic environment has remained volatile and could impact costs in the future. However, we will continuously monitor and adjust our pricing strategy as necessary as well as leverage our innovation pipeline for future margin expansion. As referenced, we've also provided a detailed reconciliation of Q4 and full year EBITDA and adjusted EBITDA. On the balance sheet, we ended the year with $28.9 million in cash and cash equivalents and restricted cash, reflecting an increase in inventory ahead of our pet specialty launch. With that, I will turn it back over to Scott.

Thank you, Sharla, and thank you again to everyone that has joined our earnings call today. Now that we have officially put a bow on 2021, I'm incredibly excited for what we hope will be a breakout year in 2022 for the new and improved Halo brand. Our goal remains $100 million of gross sales by 2023, and we feel strongly that we have the team, strategy and retail partnerships to get us there. Now I'd like to open up the call for questions. Operator, please?

[Operator Instructions] Our first questions come from the line of Mike Baker with D.A. Davidson.

Okay. So encouraging that you're still planning on that $100 million in gross sales by 2023 versus, I guess, $56 million this year, that's a pretty big ramp over the next 2 years. How should we think about that broken down between growth this year and then growth next year? How does that ramp from $56 million to $100 million?

Yes. First, Mike, thanks for jumping on this morning. Appreciate it. I'll quickly chime in here, and then I'd love Rob to follow up. Q1, as you've seen in the release, we're expecting growth over 40% versus a year ago. So you can imagine we're off to a good start in 2022. In terms of all the plans that we've put in place since we IPO-ed, we're hitting on all the milestones. So the strategic plan in order to get to $100 million is in full effect, and we haven't seen anything that swayed us from that path. I'll let Rob talk a little bit more in terms of how we look at 2022 versus -- bringing it into 2023.

Perfect. Thanks, Scott. So the 40% gross number that Scott just mentioned for Q1 translates -- and if you look at our -- the number we're comping against close to, call it, $19 million in Q1 2022 sales. Just run-rating that, you're looking at sort of the mid- to high mid-70s. And if you look at $56 million up to $100 million, that's sort of right in a linear progression as we grow into 2023. So we feel like we're right on track, the Elevate launch is going well and we're seeing the numbers we're excited about.

Yes. I might mention one thing, Mike, in terms of Q1, this isn't just sort of pipeline fill or pulling pipeline from Q2 into Q1. We're seeing incremental growth on our e-commerce platforms with the existing Halo Holistic brand. So -- and once we've gotten our in-stocks to a better place, we're seeing increasing sales as well.

Okay. Makes sense. And then if I could ask on the margin side, though. Margins, obviously, a tough environment out there. I think, Scott, you had said on the last call that you expect to get back to a 40% gross margin run rate by the end of 2022. Has that outlook changed at all with some of the inflation that we're seeing?

No. And I'll let Sharla add to this. As she mentioned on the call, we have a price increase taking effect on April 1, which is going to help us sort of readjust our margin profile. In addition, once we get our China production switched over to our new manufacturer, we're going to realize a pretty significant gross margin gain as well. So I'd say, overall, we feel really good about getting back to that type of gross margin level. And certainly, we're starting to realize that some of that in 2022. Sharla, if you have anything to add there.

Yes. Just real quick. I'd say, I mean, I mentioned this in my prepared remarks. Even just looking at our Q1 margins, we're already seeing the substantial improvement that we did expect. And as Scott mentioned, the last kind of piece from a cost side is getting the China production moved over to the new manufacturer. So we're seeing the improvement we expected. Of course, macroeconomic environment is still volatile, but we have done a really good job of managing that. So I think, to Scott's point, by the end of the year, we're going to be a lot closer to that 40% run rate.

Okay. Makes sense. One more, if I could. Just to clarify. So any -- well, first of all, any KPIs or any -- interested on things you can tell us about the launch in Elevate, what you're seeing from your retail partners? It sounds like it's going at least as well as expected given the increase in shelf space. And I think a specific question, Pet Supply Plus, you said 5 feet. I think last quarter you said 4 feet. So can we presume that that's an increase in base positive initial trends?

Absolutely. And I'm going to let Donald chime in here in a second. But I just want to reiterate, we came off of a Global Pet from last week and the feedback around the whole brand, not just Halo Elevate, but the redesign of Halo Holistic and our overall transition of TruDog and the Halo has been received tremendously from retailers from consumers. And I think at this time, like we can finally be super excited about what we got going into market because 2021 was really about positioning ourselves for rapid growth this year and sort of [ buoying ] us into 2023. But we've sort of increased our expectations, I would say, in terms of retail footprint and whatnot coming into this year, and I'd love Donald just to expand on that a little bit.

Thanks so much, Scott. Yes. Again, Mike, again, we go back and just talk about, again, the excitement you create when you build a new brand. And as we've started, really, our launch of Pet Supplies Plus really kicks off in April and Petco a little bit later, but we had current stores already that sold Elevate or Holistic, and we switched them over. What the exciting part of this already is it comes down to trial. So we have a partner right here in my hometown and we can very compliantly say we've given away a lot of bags already. We've not had a single bag return. So what tells you immediately is on the KPI [indiscernible]. We knew we were never in doubt. We knew it was an amazing food. We knew it was different than everything else when it comes from a nutrition point of view. So once we get that first trial, it really -- again, as customers come back, for example, we had a customer walk in that bought a 3- [indiscernible] bag. 5 days later, he walked in and bought 4 bags. That's the magic you're really seeing when you start again, when you're building a brand, your credit excitement and you gain active recommendation. We have a unique store, Scott mentioned again, becoming the most innovative premium pet food company is what we've done. We talked about those pillars over and over again. There's no one in the industry that stacks up against our nutritional profile. And as far as -- excuse me, as Pet Supplies Plus. Yet again, when we originally talked, we always know we had a pot of wet space. They've expanded again to drive from 3 to 4, so now we have 5 beta space in all of their stores and we're very excited about that.

And just one more thing to add, Mike. Obviously, Elevate is a huge growth lever for this year, but our international footprint is just really expanding quickly. And when we go to the Q1 call in a couple month or 2 here, you'll see the expansion there in terms of what we've gotten going. So the Halo Holistic brand continues to grow internationally and really match up with our mission to become the most innovative premium pet food company in the world.

Our next questions come from the line of George Kelly with ROTH Capital Partners.

So first, just to follow up on the last question. Curious -- congrats on getting more space with these key retail partners. And I was just curious like what gave them confidence before really selling a lot of product? Why did they increase the aisle space? Were they running tests in a select number of stores? Or what led them to boost your presence?

Sure. So when we first brought the proposition of Halo Elevate to our retail partners, I think they were extremely excited about the food, first and foremost, in terms of the nutritional profile, the recipes that [indiscernible] Ryan created. Once they actually saw their animals and friends -- animals start to feed the food and the results there in terms of palatability and overall performance, it got them really excited about the proposition. And when they saw those Halo Elevate bags live, George, and more importantly, saw them in their planogram and how they pop and just create a huge billboard effect, it really got them excited. Whereas they said, "Hey, let's go add it in some more stores, maybe a little bit more square footage here or there." So it really was just about getting the thing in their hands and in their stores and generating that excitement. And then lastly, just my fantastic sales team led by Donald, the partnerships that they have and the truck that our retail partners have with us from a sales team perspective, and then just our overall team, right? Like we were down in Orlando with Pet Supplies Plus with their district team leaders and all the way up to the CEO. We're constantly meeting with Petco and Phillips. And so that's just how we roll. We partner with our retailers and they want to grow with us. So it's [ not ] like magic formula, to be honest, it's just a general excitement in terms of what they're seeing and more so just sort of the proof is in the pudding now.

That's excellent. That's excellent. And then same topic but a slightly different question. You said in the press release, I believe, that you anticipate sort of boosting your initial advertising campaign or ad spending around the brand in the first half of this year. Just curious what that's going to look like? Is it mostly digital spending, in-store kind of promotions? Or like what are you going to do to really get the point out there?

Absolutely. Happy to answer that. And I also want to just make sure -- I'd just like to reiterate it, this isn't all about Halo Elevate, right? We have an existing business in Halo Holistic and then our TruDog business that we're folding into Halo that we continue to support, and now that will always be part of our growth plan moving forward. So we're going to see an acceleration in terms of our marketing efforts, call it, in the back half of the year, June, July time frame. Once the full Petco store reset happens, you'll see a really exciting campaign driven around some video executions that will be used in the digital environment, whether it be on paid social banners, connected TV. We have a full media plan that we'll be rolling out to support the launch of not only Halo Elevate, but the rebrand of Halo Holistic. So it's a combination of performance marketing on our DTC side in terms of acquiring customers and building long lifetime value with that millennial pet parent and then providing awareness in a general sense for the brand. And then really tying that back into what Donald does well, extremely well, and has done with Nutro and Merrick is to provide that in-store support not only from a marketing perspective, but education at the store associate level. I would tell you, I think my sales team is going to be on the road probably every day from now until, I don't know, now maybe 2024, educating store associates and really driving that active recommendation in-store. So that's really the plan, George, it's in-store and it's out of store. And I just would add that this isn't things that were just sort of shooting in the dark because we've done this 2x over with Nutro and Merrick, the majority of my team comes from those brands as well as other successful brands in the past here. So we have a really solid plan. We're excited about it. Our retail partners are excited. And just again, the initial feedback we've gotten on the Halo Elevate product brand, even I urge you to go check out our Halo Pets website, it's super dynamic, super exciting, and we're just going to bring a lot of energy to the industry.

Very cool. And then a few modeling-related questions. If we could go back, one of the earlier questions was about the quarterly progression and how you're going to get to that $100 million in 2023. And Rob, I think it was you that -- you've commented just about annualizing the first quarter number and that kind of getting you approximately halfway there. Why wouldn't we annualize the first quarter? I mean, shouldn't it build from first quarter? And is there any kind of -- I mean, is the DTC that's going to be a little weak this year and kind of offset some of these gains or should there be a sequential build throughout the year?

I think because we -- George, just to be clear, because we're not going to be giving guidance for 2022 and we're not really planning on giving guidance for Q2 and Q3, I really just use that as a tool to kind of show that we're expecting to see that business really expand up to $100 million. And we're starting to put real points on the board in terms of getting there. So I think you're right in that as we get -- pick up -- as our same-store is our sales increase at pet specialty locations, sure, you could see growth there. But we're just not going to be giving incremental quarter-over-quarter guidance.

Okay. Fair enough. And then last question for me back to gross margin. When is the Chinese business -- when is that manufacturing switch happening? And then secondly, how big was the pricing? Or how big is the pricing that you're taking on April 1?

Rob, are you going to take that?

Sure. I'll take that. So the switch to the -- to our new co-manufacturer for China is occurring at the end of Q2. We're going to have some simultaneous production just to meet demand, but that's very much occurring in Q2. And then with regards to the margin and the price increase magnitude, I'll pass it over to Sharla.

Sure. So across the various channels, the average price increase is roughly 7% to 10%. It kind of varies through channels, but that's the average across, say 7% to 10%. I think 8% to 9% is a good place to use.

Our next questions come from the line of Jim McIlree with Dawson James.

I'd like to understand a little bit better the inventory fill that you're going to be experiencing for the year. Is it correct to assume that the biggest impact will be in the first half? And can you kind of give us a range for how much inventory bills account for the Q1 increase or the Q1 dollar amount in sales?

Yes, absolutely. Thanks for joining us this morning. Sharla, do you want to take this one?

Sure. I guess let me just make sure I understand that question. On the Q1 quarter-over-quarter sales, your question is how much of that is kind of related to ISOs with the launch?

Yes, that's a fair way to put it, yes.

Okay. So I'm not going to kind of carve out customer-by-customer revenue. And we'll say we are -- Donald mentioned this in his prepared remarks, we are launching in Petco seasonal aisle across their locations here in Q2. So you're seeing some of those shipments in Q1. Same with Pet Supplies Plus. So there's definitely some stocking orders in Q1 that's helping that growth. That's obviously planned. And we do expect to continue to get incremental orders throughout the year with those customers and have some reset as well later in the back half of the year.

Okay. I think I got it. And secondly, on inflation overall, I'm trying to figure out if you guys are playing catch-up or you're ahead of it. So obviously, you're facing price increases, but so are the guys you're buying from. So are we just playing Hopscotch now with this?

No. And I think we've mentioned this in the past, specifically as it relates to Halo Elevate, we were building these formulations already in sort of a high inflationary period in terms of commodity costs. So we design them to hit margins that were acceptable to the business. And we've maybe seen some slight increases here or there in terms of commodities. But overall, the product line was built based on where we're at in the market. And over the summer, we took a price increase. And then we have another one coming up here April 1 as well. More so on the rest of the business is more than Halo Elevate. So I'd say between our move to our new manufacturer where we've also contracted out the majority of our commodity inputs over a longer period of time versus where we were previously, and the design of Halo Elevate in this inflationary time frame as well as the price increases, have put us in a pretty proactive place, if would add. So I don't think we're playing catch-up. I think we're in a good spot. And as any pricing comes down in the market in terms of input costs, I think that's where we're excited that we can realize even some greater margin gains. So I think we're in a good spot all things considered.

[Operator Instructions] There are no further questions at this time. I would like to turn the call back over to management for any closing comments.

Thank you. We'd like to thank everyone for joining us this morning. I think you can tell from the call that we're at an exciting point in our business journey with Better Choice. All the things that we again outlined during the IPO process back in June are coming to fruition. We're seeing strong results in market. We're seeing tremendous feedback from retail partners, consumers and investors alike. Things are looking up for the Better Choice Company. My team is extremely pumped about where we're going. And we're excited to talk to you again in a month or 2 in terms of our Q1 results.

Thank you. This does conclude today's teleconference. We appreciate your participation. You may disconnect your lines at this time. Enjoy the rest of your day.