SRx Health Solutions Inc. (SRXH) Q4 2024 Earnings Report, Transcript and Summary

Good afternoon, and welcome to the Better Choice 2024 Fourth Quarter Financial Results Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Valter Pinto, Managing Director, KCSA Strategic Communications. Please go ahead.

Thank you, operator, and welcome, everyone, to the Better Choice Company's Fourth Quarter and Full Year 2024 Financial Results Conference Call. Joining me today are Kent Cunningham, Chief Executive Officer; and Nina Martinez, Chief Financial Officer. The company's financial results press release has been posted to the Investor Relations section of the website and will be followed by a Form 10-K to be filed with the SEC on or before March 31. Please note that remarks made today may include forward-looking statements, subject to a variety of 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 by the company's financial results press release and made available on the Investors section of the company's website. I'd now like to turn the call over to Kent Cunningham, our Chief Executive Officer. Please go ahead, Kent.

Thank you, Valter. And thank you, everyone, for joining us today to discuss our fourth quarter and full year 2024 financial and operating results. I'm joined on today's call by Nina Martinez Financial Officer. I'll give a business review of 2024, and Nina will then cover our financials in more detail. I'm pleased to report that our business delivered a strong performance in 2024 as we made significant progress and our turnaround strategy to improve profitability and lay the foundation for sustained profitable growth. For the full year, we delivered gross profit margin of 37%, representing an increase of over 600 basis points and our adjusted EBITDA loss of approximately $1.9 million improved 78% year-over-year on annual net revenues of $35 million. Despite growing consumer uncertainty surrounding geopolitical and potential tariff impacts on the cost of everyday goods, the pet food category continues to show resiliency as pet ownership to increase and consumer spending continues to rise with the macro trends of pet humanization, premiumization and wellness underpinning industry growth. Halo continues to offer a unique brand position for the health-conscious consumers seeking the best nutrition for their pets. The brand's performance was highlighted by an impressive fourth quarter revenue growth of 26% year-over-year. Our growth in the quarter was driven by 32% growth across Amazon and Chewy as we increased our focus and participation and Black Friday promotions across these platforms. This sales velocity is a key building block to revenue growth, but more importantly, long-term growth as we increased the number of new-to-brand or first-time consumers of Halo. As a result, we achieved our best quarter with Amazon since the first quarter of 2023. We also successfully launched Halo on Chewy Canada in November. These results give us increased confidence that our strategic shifts are working and that we can continue to build consumer demand for the Halo brand domestically and abroad. As the pet consumer continues to shift to e-commerce channels, we've sharpened our strategy to ensure that we're top of mind when and where they're making their purchase decisions, offering the premium brand and benefits that highly engaged pet parents demand. We continued to improve adjusted EBITDA in 2024, reducing SG&A by 22% year-over-year. This was driven by consistent operational improvements throughout the year in our demand forecasting resulting in an over 40% reduction in inventory while simultaneously improving service levels above 95% and a 4% improvement in direct cost per pound as we achieved operational leverage and scale through international volumes and work with our manufacturing partners to achieve favorable supply terms. Additionally, we've made continued progress reducing our short-term obligations. This, along with the $6.2 million gain from extinguishing debt and accounts payable has positioned us to enter 2025 with a healthier balance sheet, including a working capital position of $7.9 million. We expect our financial health to fuel our continued top line momentum as an increased emphasis on e-commerce platforms is expected to continue through 2025 and beyond. The generational shift in consumer buying habits continue to migrate online and the overall expansion of e-commerce outpaces brick-and-mortar as pet parents increasingly turn to online retailers for convenience, selection and value. As a 30-year pioneer in premium natural pet nutrition, the Halo brand has become globally recognized and has got a strong consumer following, especially in the fast-growing Asia markets. Therefore, subsequent to year-end, we signed several important transactions to provide future value for our shareholders. First, we signed a definitive agreement to sell Halo Asian total includes $6.5 million in cash at closing along with a 3% royalty on sales over the next 5 years, guaranteed by a minimum royalty payment of $330,000 per year or $1.65 million in total. We also agreed in principle to a 5.5% royalty agreement in Asia with our existing partner on all sales of the Halo Elevate brand. When we close, which is expected to occur by the end of April, will retain ownership of North American and rest of world ex Asia operations. In addition, the Board of Directors has approved a royalty distribution plan of up to 55% of the annual royalties generated by the Halo brand to be distributed annually to stockholders of record as of December 31 of the given year. These unique transactions underscore our commitment to delivering long-term value to our shareholders from our Halo brand. These plans will provide a consistent return to shareholders and reward those who have invested and believe in our vision. Our momentum and optimism remains high as we enter 2025. We will continue to further explore opportunities to provide shareholder value, and we are confident in our ability to drive long-term profitable growth. Now let me turn it over to Nina to take you through our financials in more detail.

Thanks, Kent, and good afternoon, everyone. I'll begin by noting that our annual net revenues of $35 million are down 9% as we knowingly and strategically exited non-core sales channels to improve profitability and create operating leverage in the business. In the first half of the year, we continued to exit draining brick-and-mortar accounts and other distribution avenues as well as closing an unprofitable direct-to-consumer business by the second quarter. Despite the expected consolidated revenues down slightly due to these strategic pivots, annual net revenue within our key digital platforms increased 8% year-over-year as we rebalanced our brand building investment from the unprofitable DTC business to our largest and growing e-commerce customers, Chewy and Amazon. We also continue to drive increased consumer demand for the Halo brand globally, noted by 18% growth internationally. As Kent highlighted earlier, the momentum we realized in the fourth quarter was 26% net revenue growth year-over-year to $7.2 million was notably driven by a 32% growth across our key digital platforms and more than doubling our Asia Pacific volume. In the fourth quarter, we also realized significant improvement in our gross margin to 36% driven by volume discount. Full year gross margin increased over 650 basis points year-over-year to 37%. This demonstrates our ability to scale efficiently and manage trade spend and COGS effectively, particularly as we continue to invest in profitable core areas of our business and optimize our operations. We achieved scale in our current portfolio domestically through a Halo holistic plant-based diet as a leading brand in the vegan pet food sector and as well through our international volumes. We significantly reduced operating expenses in 2024 with an overall SG&A reduction of 22%. This is a result of our ability to effectuate striating initiatives to support our focus on sustainable growth. Our e-commerce efforts are dedicated to our key accounts where we achieve higher and more effective returns on our marketing investment dollars, which provide an operating leverage as compared to our historical direct-to-consumer business. Our asset-light business model and the ability to utilize our outsourced manufacturing capabilities and a fully wholesale business provides us with the scale and leverage needed to satisfy consumer demands in a profitable way. A focus on continuing to improve effective marketing and brand investments with our largest e-commerce partners, coupled with proper management of an efficient and optimized portfolio of products are the key success factors we attribute to winning as a digital native brand in the competitive landscape of the pet food industry. Our year-to-date GAAP net loss improved by 99% year-over-year breakeven at a mere $168,000 loss compared to a $23 million net loss in 2023. This positive trajectory was driven by a 10% increase in gross profit dollars and a 43% decrease in total operating expenses. Additionally, we successfully extinguished our senior term loan debt and cleaned up supplier obligation as a result of a successful litigation settlement, driving $6.2 million gain on extinguishment of debt and accounts payable. Not only has this significant event drive EPS trajectory but has also strengthened our balance sheet and enhanced our financial flexibility. Our annual performance ultimately resulted in EPS totaling $0.11 of loss per share. A significant improvement from the $32 of loss per share in 2023. Furthermore, in Q4 alone, our adjusted EBITDA loss improved by 80% year-over-year to an approximately $700,000 loss a testament to Halo's fastly positive turnaround. These improvements highlight our focus on driving operational leverage and positioning better choice for profitability in the coming quarters. The full year adjusted EBITDA loss improved 78% year-over-year to a $1.9 million loss compared to $8.4 million of adjusted EBITDA loss in 2023. A table reconciling GAAP net loss to adjusted EBITDA loss can be found in our earnings release and our 10-K to be filed on or before March 31 with the SEC. As for liquidity and capital resources, our cash and cash equivalents as of December 31, 2024, were $3 million with $2.4 million of borrowing capacity under our credit facility. Our net working capital position increased over 200% from $2.5 million in 2023 to $7.9 million in 2024. Net cash used in operations totaled $4.4 million driven by the pay down of our supplier obligations and noncash gain on extinguishment of debt, offset by the reduction of our inventory balances. Net cash used in investing activities was $2.3 million as we made investments into SRx Health Solutions prior to the anticipated merger in 2025. Net cash provided by financing activities was $5.5 million, driven by $4.7 million in net proceeds from an equity offering in the third quarter as well as net draws from our credit facility. Our improved liquidity and working capital position is a direct reflection of our continued focus on stabilizing the business and rightsizing the balance sheet to lay the foundation for a successful turnaround. Showcasing our third consecutive quarter of net loss and EPS growth and 4 consecutive quarters of gross margin expansion proves the strength and capabilities of our collaborative management team and our strategic pivots we've made to create this operational leverage in the business has far exceeded our expectations. In summary, we're pleased with the strong results for the year and in particularly the recent quarter as we enter 2025 with growing momentum with enhanced operations, a focused approach to key global markets and a strengthened brand portfolio, we are well-positioned to capitalize on emerging markets within the Pet Health and Specialty Healthcare segment. Our focus will remain on profitable revenue growth expanding margins and continuing to strengthen our working capital position to fuel growth. We remain committed to delivering strong shareholder returns by executing our disciplined growth strategy and driving lasting value. 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. Both the better choice and SRx helps shareholders unanimously approved the transaction, which we expect to close in April. Upon closing, Better Choice will emerge as a leading global health and wellness company, providing better products and solutions for pets, people and families. The combination of the 2 companies is expected to yield operational efficiencies and synergies while providing near- and long-term growth opportunities that will drive sustained growth for each respective business. We look forward to updating everyone on further details on our strategic plans after the closing of SRx. I'd now like to open the call for questions. Operator?

This concludes our question-and-answer session and the Better Choice 2024 Fourth Quarter Financial Results Conference Call. Thank you for attending today's presentation. You may now disconnect.