SRx Health Solutions Inc. (SRXH) Q3 2024 Earnings Report, Transcript and Summary

Good day, and welcome to the Better Choice 2024 Third Quarter Financial Results Conference Call. All participants will be in listen-only mode. [Operator Instructions] Please note today's event is being recorded. I would now like to turn the conference over to Valter Pinto with Investor Relations. Please go ahead.

Thank you, operator, and welcome everyone, to the Better Choice Company third quarter 2024 earnings call. Today's call is being recorded. Joining me today are Kent Cunningham, our Chief Executive Officer; and Nina Martinez, our Chief Financial Officer. Our earnings release has been posted to the Investor Relations section of our website and will be followed by our Form 10-Q to be filed with the SEC. Please note that remarks made today may include forward-looking statements subject to various assumptions, risks and uncertainties. The company's actual results may differ materially from those contemplated by such statements. For a more detailed discussion, please refer to the note regarding forward-looking statements in the company's earnings release and SEC filings. Also during the call today, we will discuss certain non-GAAP financial measures. Reconciliations of these non-GAAP items to the most directly comparable GAAP financial measures will be provided on the company's earnings release and made available on the Investors section of the company's website. I would now like to turn the call over to Kent Cunningham, Chief Executive Officer of Better Choice Company.

Thank you, Valter, and good afternoon, everyone. So the main message I'd like you to take away today is that our business continues to improve, based on the strategic pivots we've made and that we're beginning to establish operational consistency and executional discipline that's enabled us to significantly improve margins, while resetting the business for sustained profitable growth. Our objective in 2024 was to step change profitability, generate cash, and create a new long-term strategy for disciplined growth. If we're successful in those endeavors, it's a win for our shareholders, our customers and ultimately, our Halo consumers. For the third quarter of 2024, we exceeded our internal projections across all key financial metrics. I want to call out a few highlights in the quarter and then Nina will provide more detail on the financial results. We generated 33% quarter-over-quarter sales growth to $11.4 million, improved gross margin for the third consecutive quarter to 40% and achieved the company's first profitable quarter in years at just north of $200,000 of adjusted EBITDA. During the quarter, we also improved average fill rates of 97% and reduced inventory by 48% year-over-year. That's a testament to the team's operational discipline and the improved S&OP process we've implemented. The most encouraging Q3 outcome for me was the double-digit year-over-year growth we saw across our primary Digital customers. We increased new-to-brand consumers by 23% since last quarter on our second largest digital platform, while delivering a 20% quarter-over-quarter increase in repeat units, past consumers coming back to the Halo brand on the largest e-commerce platform in the category. This gives us confidence that our marketing shifts are paying off by adding new consumers and that our product performance is delivering by generating more repeat consumers. In our International channel, we generated 9% year-over-year growth, with particularly strong performance across our Asia-Pacific customers. We're excited about this once-in-a-generation demographic shift that's occurring in Asia, where the pet food market is experiencing rapid growth. In China, for example, the number of pet-owning households has doubled in the last five years with younger pet owners driving much of this growth. We believe this demographic shift represents a tremendous opportunity to expand our footprint in one of the largest and fastest-growing pet food markets globally. Along with strong consumer tailwinds, increased forecast accuracy and a corresponding fill rate improvements contributed to our growth, getting the right products to the right place, at the right time. While we're pleased and encouraged by our progress, we recognize there is still work to be done and firmly believe there is significant growth upside that we can deliver in the future. We want to see continued growth in our top-line here at home domestically and across our key international markets where we drive additional operational efficiencies to fuel that growth and further improve profitability. I believe we're making good progress proving that we can consistently deliver improved operating results and we're committed to reliably delivering on future growth. Sustained profitable growth will be the result of our strengthened operational and organizational capabilities, renewed focus on key customers and markets and improved brand building efforts as we move forward. We're increasingly confident that we can continue to build on this type of performance and deliver shareholder returns. Now let me turn it over to Nina to discuss the details of our Q3 results. Nina?

Thanks, Kent, and good afternoon, everyone. For the third quarter of 2024, we generated sequential revenue growth of 33% to $11.4 million, primarily driven by sales in our Asia-Pacific region, growing 92% quarter-over-quarter. This highlights the cyclical nature of the international business with expected higher volumes in the third quarter. Most notable, our Asia-Pacific sales grew 9% organically year-over-year. On the domestic side, our two largest e-commerce platforms within our digital channel generated 10% net sales growth year-over-year, marking growth in new-to-brand consumers, total customer base and point-of-sale growth. Our number of subscription-based consumers has also shown promising double-digit growth since last quarter. Net sales for the nine-month period ended September 30th totaled $28 million, compared to $33 million in the same period last year. We expect that the year-over-year consolidated sales decline as we strategically exited unprofitable channels and customers and closed our direct-to-consumer platform in order to create operating leverage and improve the financial shape of the business. Our ability to achieve favorable terms on our co-supply agreement resulted in gross margin accretion of 600 basis points to 40% and a 165 sequential basis point growth since the second quarter. Achieving scale at this level is encouraging as we analyze where to make investments for promising growth. In addition to the company's strong operational performance marked by nearly 50% improvement in operating loss year-over-year, we generated a $2.7 million gain through their paydown of short-term obligations as we significantly shifted to a healthier working capital position. I am pleased to report the company generated $1.5 million of net income for the third quarter and earnings per share of $0.74. Year-to-date, we generated $1.4 million in net income and $1.08 of earnings per share. Third quarter adjusted EBITDA grew 255% year-over-year to just over $200,000, the first profitable quarter for the company in over four years. As a result of the strategic pivots we have made, we now have immense operating leverage that will continue to be realized as we rapidly scale, highlighted by adjusted EBITDA margin accretion to 2% for the quarter, improved free cash flow and a 700 basis point improvement in adjusted EBITDA margin year-over-year. A table reconciling GAAP net income to adjusted EBITDA can be found in our earnings release and our 10-Q to be filed with the SEC. Our $9.5 million net working capital position, compared to $3.1 million last quarter is a direct reflection of our continued focus on rightsizing the business. During the quarter, we raised just under $5 million of net proceeds in connection with a public offering that was after deducting underwriting discounts, commissions and other operating expenses. We remain bullish on the substantial flexibility that this improved working capital will continue to afford us amidst a positive inflection of our financial profile. We are incredibly proud of the work we've done in this company's turnaround and we expect to continue this growth trajectory forward. Our ability to improve working capital, improve margins and accelerate free cash flow provides evidence that our strategic pivots are working. We're confident in our ability to deliver on our near- and long-term goals and continue our upward trajectory into 2025. With that, I'll now turn it back over to Kent for closing remarks.

Thanks, Nina. As many of you know, we're in the process of completing our acquisition of SRx Health, which will position Better Choice as a leading global health and wellness company, providing better products and solutions for pets, people, and families. The combination of the two companies is expected to yield operational efficiencies and synergies, while providing near and long-term growth opportunities that will drive sustainable organic growth for each respective business. SRx Health generated approximately CAD$180 million in revenue and generated positive adjusted EBITDA in 2023. Today, SRx operates one of the largest specialty pharmacy networks in Canada with several dozen specialty pharmacies and specialty health infusion clinics, as well as clinical trial site and wholesale distribution facilities spanning the region. As one of only a few specialty pharma operators with a network that extends across Canada, SRx Health is one of the most comprehensive providers of specialty healthcare in the country. Better Choice will continue to operate its global portfolio of established premium and super premium pet products under the Halo brand. And we expect the transaction to close in early Q1 of 2025. In summary, we're very pleased with our results for the third quarter and for the exciting opportunities that lie ahead for Halo and for the Better Choice company. That concludes our formal remarks. And now we'll take questions. Operator?

This concludes our question-and-answer session. I'd like to turn the conference back over to the company for any closing remarks.

Thanks, operator. I appreciate everyone joining today. Looking forward to sharing out more news here in the near term. And have a good rest of the day. Thank you.

Thank you, sir. This concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day. Thank you.