Release Date: August 13, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Achieved an average fill rate of 95%, a significant improvement from 78% in Q2 of last year.
- Reduced finished goods inventory by 57% year-over-year, showcasing operational discipline.
- Second quarter adjusted EBITDA improved by 98% year-over-year.
- Subscription-based revenue increased on both Chewy and Amazon platforms.
- Gross margin improved by 400 basis points year-over-year, reaching 38% in Q2.
Negative Points
- Total net sales for the first half of 2024 were $16.5 million, down from $19.8 million last year.
- Strategic exits from unprofitable brick-and-mortar customers negatively impacted year-over-year top line.
- The closing of the legacy Halo Pets direct-to-consumer channel contributed to the sales decline.
- Despite improvements, the company still reported a $30,000 adjusted EBITDA loss for the quarter.
- Operating loss, although improved by 72% year-over-year, indicates ongoing financial challenges.
Q & A Highlights
Q: Can you provide more details on the strategic pivots that led to the 98% improvement in adjusted EBITDA?
A: Kent Cunningham, CEO: The improvement in adjusted EBITDA is a result of several strategic pivots, including stabilizing operations, revamping our channel strategy, and instilling greater financial governance. We shifted our marketing investment focus to major online pet food platforms like Chewy and Amazon, both domestically and internationally, while maintaining investment levels in brick-and-mortar accounts. These efforts have started to show early results, such as the successful launch of Halo Elevate on Chewy.
Q: What were the main factors contributing to the 27% top-line growth in the international channel?
A: Carolina Martinez, CFO: The international channel's 27% top-line growth from the first quarter was driven by increased momentum in our digital channels and strategic exits from unprofitable brick-and-mortar customers. This shift allowed us to focus on more profitable channels and markets, particularly in Asia-Pacific regions like China and Taiwan.
Q: How has the shift from the direct-to-consumer channel to platforms like Chewy and Amazon impacted your revenue?
A: Kent Cunningham, CEO: Migrating our customers from the unprofitable direct-to-consumer channel to profitable digital channels like Chewy and Amazon has been beneficial. This shift has smoothed out revenue, increased our share of wallet, and provided greater service to Halo consumers. Subscription-based revenue has increased on both platforms, with more consumers joining Chewy Autoship and Amazon Subscribe and Save.
Q: Can you elaborate on the financial impact of exiting unprofitable customers and channels?
A: Carolina Martinez, CFO: Exiting unprofitable customers and channels negatively impacted our year-over-year top line but had a positive impact on our bottom line. This strategic move significantly improved the financial shape of the business, contributing to a 400 basis point improvement in gross margin year-over-year and a 72% improvement in operating loss for the second quarter.
Q: What are your expectations for profitability and adjusted EBITDA margin expansion for the remainder of 2024?
A: Carolina Martinez, CFO: We expect to continue improving profitability and delivering adjusted EBITDA margin expansion throughout the remainder of 2024 and beyond. Our strategic pivots, including exiting unprofitable channels and tightening operating expenses, will continue to positively impact profitability.
Q: How has the company's debt situation changed, and what are the plans for further debt reduction?
A: Carolina Martinez, CFO: We recorded a $3.6 million gain from the forgiveness and retirement of our outstanding term loan in the second quarter, resulting in a positive GAAP net income of $2.7 million. We now have $5.5 million less debt and plan to retire another approximately $5 million of accounts payable at a significant discount in the third quarter.
Q: What are the key growth opportunities for the Halo brand in the US and Canada pet food markets?
A: Kent Cunningham, CEO: We see significant growth opportunities for the Halo brand in the $50 billion US and Canada pet food markets. Halo sits at the intersection of two megatrends: humanization and premiumization. Pet parents increasingly view their pets as family members and seek premium, all-natural nutrition for them. Halo's products cater to these needs, providing visible results for various health concerns.
Q: How has the company's financial discipline and operating leverage improved free cash flow?
A: Carolina Martinez, CFO: Our continued focus on financial discipline and operating leverage has significantly improved free cash flow, turning it positive at approximately $100,000 for the second quarter. This improvement reflects our strategic pivots and operational efficiency.
Q: What are the company's strategic growth priorities moving forward?
A: Kent Cunningham, CEO: Our strategic growth priorities include continuing to improve margins through channel strategy shifts, focusing on brand building and full funnel activation, optimizing marketing investments, and implementing data-driven management techniques. We aim to accelerate top-line sales and create value for shareholders by tapping into the potential of the Halo brand both domestically and internationally.
Q: How does the company plan to utilize the improved working capital from the recent public offering?
A: Carolina Martinez, CFO: The approximately $4.5 million in net proceeds from the recent public offering will provide substantial flexibility for the company. This improved working capital will support our strategic initiatives, allowing us to continue our upward trajectory and achieve our near and long-term goals.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
