Srx Health Solutions Inc (SRXH) 2021 Q3 法說會逐字稿

Good morning. I will be your conference operator today. At this time, I would like to welcome everyone to the Better Choice Company third-quarter 2021 earnings conference call. Today's call is being recorded.

I would now like to turn it over to Mr. Rob Sauermann, Executive Vice President of Strategy. Please go ahead, sir. You may begin.

Thank you, Operator. Welcome, everyone, to Better Choice's third-quarter earnings conference call. This morning, we issued our third-quarter financial results press release and posted our updated earnings presentation under the IR section of our website, which we'll 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 quarterly report on Form 10-Q filed with the Securities and Exchange Commission and the company's press release issued on Wednesday, November 10, 2021, 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 November 10, 2021, 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.

Thank you, Rob, and thank you again to everyone for joining our call. I think I am starting to sound like a broken record, but I can confidently say that with the passage of each quarter, I am increasingly excited and proud of the groundwork we have laid in preparation for a successful, rapid growth stage in 2022.

Our leadership team, which we brought together at the beginning of this year, has done a tremendous job navigating one of the most challenging macro environments the CPG space has seen in recent memory. In spite of pricing increases, production delays, and container shortages, we were able to deliver a record quarter, posting an amazing 19% increase in net sales relative to Q3 last year and beating our historical high of Q1 of 2020, which included significant COVID-19 stockpiling by roughly $1 million.

It's now almost Thanksgiving, and we're only months away from the official launch of Halo Elevate. Donald will take us through the details of our launch plan in more detail, so I don't want to steal his thunder. But I am excited to announce that we have officially met our 2022 goal of sourcing distribution of Halo Elevate in 1,500 pet specialty stores, anchored by partnerships with Pet Supplies Plus and Petco.

That said, we aren't stopping here. And today, we are increasing our 2022 target store count from 1,500 to a range of 2,000 to 2,500 stores. This increase represents the addition of incremental independent pet stores and smaller regional chains, which are typically accessed through distributor partnerships.

It is going to take us some time to build the ramp and achieve targeted velocities for growth, so don't expect us to realize the full run rate value of these incremental locations for the entirety of 2022. The key takeaway here is that our innovation is resonating with retailers in a big way, giving us confidence that we are set up for success and on track to achieve our medium-term goal of $100 million in gross sales.

Although our primary focus is around driving growth in 2022, a year which will mark the beginning of a step change for Better Choice and the Halo brand, we've been able to deliver a strong quarter on the back of record quarter-over-quarter revenue growth of 43% in international and 35% in e-commerce. When isolating for the Halo brand alone, which is the master brand that we plan to support going forward, gross sales are up 24% quarter over quarter.

Jenny Condon and her team have done a tremendous job delivering growth on Amazon and Chewy with one hand tied behind their back as we've had to navigate industry-wide canned wet food capacity constraints driven by production downtimes and global supply chain challenges. Rob and our international partners have done a fantastic job driving demand in Asia, and I'm proud to announce that we are currently on track to exceed our yearly purchase minimums with our key distributors.

As a reminder, the number to remember is $100 million in aggregate gross sales in Asia from 2021 to 2025. None of this would be possible without the tireless work of Alex Vournas and his supply chain team. Although we are seeing some temporary headwinds with regards to margin pressure and customer out of stocks, even in spite of price increases that we have passed along to the consumer, our September year-to-date fill rate was approximately 85% across all our SKUs with canned wet food representing almost all of our out of stock to date.

Based on what we are seeing across the industry and observing on shelf, I can say that we are outperforming the competition, particularly when compared against other brands of our size. We will likely see some of these same trends continue into Q4 this year, but we don't anticipate that we will have issues with the supply of wet Halo Elevate products as we're using a redundant co-manufacturer and have secured incremental capacity.

For those of you that have experienced navigating a complex supply chain, new product launches, and simultaneous rebranding initiatives, I think you can agree that meeting deadlines and following a linear programmatic approach is critical to success. Thinking linearly is a phrase that our team might be tired of hearing me say when we are presented with a challenge, but it's been a cornerstone of my past successes.

In practice, success is ultimately decided by the strength and resiliency of the team from the top down, not a perfect plan drafted in a boardroom. As the CEO, it's my job to make sure that we have A-plus talent across all levels of our organization and that we are deploying our team members in a way that maximizes their potential and promotes personal growth.

Some of you may have heard this from me before, but in the past year, we've added almost 20 new team members while simultaneously cycling out approximately 15 legacy positions. Although change inherently comes with risk, these new team members bring a diversity of knowledge and experience from companies like Amazon, Crate and Barrel, Mars Petcare, Nestlé Purina, Clif Bar, and Coca-Cola, with an intentional mix of pet experience and outside industry perspectives. I'm counting on every individual in our group of almost 50 to drive our omni-channel growth strategy forward.

It's also worth noting that we filled every single position through our personal networks and haven't paid a single dollar to recruitment firms this year. Not only does this showcase our leadership team's professional network, but it also significantly de-risks each hire that we make. Our chairman always likes to say, bet on the jockey, not the horse; and I'd be hard-pressed to find a better jockey out there than the BTTR team.

With that in mind, as we lay the groundwork for the future, professionalization has been a core theme for Better Choice in 2021. Our team is an obvious callout, but this extends to the retailers and distributors that we work with, our supply chain and distribution network, the marketing and creative agencies that we hire, our Board of Directors, and even the investors that we're looking to partner with. I don't have enough time to list every change we've made in the past year, but there are a few highlights that are worth discussing this quarter.

Starting this month, we are producing our innovative dry kibble with a new co-manufacturing partner in the Midwest. Over the course of the next three to six months, we plan to shift all our dry kibble production to this partner, including our MOA-approved international diets. Not only do they produce some of the highest-quality dry kibble in the industry, securing this partnership means that we have officially locked down the incremental capacity we need to support the launch of Halo Elevate.

In addition, we anticipate that we will gain approximately 15 percentage points of margin on our Halo Holistic dry kibble line, which is the primary reason behind our temporary decline in gross margin. Sharla will touch on the financial impact in a bit more detail later, but unprecedented raw material price increases and shortages for several key ingredients, most notably dry egg and potato protein, have been the primary culprit. Once this manufacturing change is in place, I feel confident that our 2022 gross margins will be closer to 40% and increase from there as we progress through year two and year three of the Halo Elevate launch.

Led by Ryan Wilson, we've onboarded several key marketing agencies to assist us as we develop top-of-the-line creative advertising, new product packaging, and improve the online customer experience. Our partners have worked with innovative millennial-focused brands such as Bombas, Organic Valley, West Elm, and Liquid Death Mountain Water. And I can assure you that we are holding true to our mission of becoming the most innovative premium petfood company in the industry. We are looking forward to having content that speaks directly to millennial pet parents in a way that's very similar to how their own food and beverage brands and daily essential products already do.

Lastly, I'd like to extend an official welcome to two new Board members, Lionel Conacher and Arlene Dickinson. Lionel joins Better Choice with over 30 years of financial experience including several positions with public companies, investment banking firms, and private equity and venture capital funds. Mr. Conacher currently serves as Chairman of a NASDAQ-listed company, DXL Group, where he has successfully guided the retail chain through the COVID-19 pandemic.

Arlene is a well-known entrepreneur and general partner of District Ventures Capital, a venture capital fund focused on helping market, fund, and grow entrepreneurs and their companies in the food and health space. She is widely recognized for her role as a dragon and venture capitalist for over 12 seasons on the CBC television series, Dragons' Den. For those of you who aren't Canadian, think Shark Tank. Arlene has won numerous awards, including Calgary Business Owner of the Year, Profit Magazine's Top 100 Business Owners, and Canada's Most Powerful Women Top 100.

Lionel and Arlene replaced Lori Taylor and Jeff Davis, long-serving members who helped establish Better Choice as an emerging player in pet health; and in Lori's case, the founder of the TruDog brand.

Before handing the call over to Donald to talk through more details regarding the Halo Elevate launch, I wanted to quickly remind those on the call of our commitment to an omni sales channel approach rooted in a one master Halo brand. Our goal is to be there for consumers where and when they want to shop, whether that's in-store, on Amazon or Chewy, or through our own branded consumer website.

To maximize our operating leverage and deliver on this promise, we've made the strategic decision to focus on the development and growth of the Halo brand especially as we near the launch of Halo Elevate and look to fold in TruDog's existing customer base underneath this umbrella. As I touched on earlier, these decisions are reflected in our Q3 financial results, which saw Halo branded gross sales increase 24% and TruDog branded gross sales decline 11%, getting us to our overall net sales growth figure of 19%.

All in all, I'm incredibly proud of the third-quarter results and can confidently state that we are on track to achieve the ambitious plan that we presented to investors and our board concurrent with the capital raise and uplist in June. In light of the ongoing macro, inflation, and supply constraint challenges, we have pivoted when needed, ultimately with one goal in mind: keep product on the shelf and available for our loyal customer base in the short term without sacrificing growth or margin opportunity in the long term.

With that, I'll turn it over to Donald.

Thanks for the introduction, Scott. And thanks again to everyone for joining today. As I mentioned on our prior call, I spent the last 30 years of my career in premium pet and played a major role in the transformation and growth of two iconic brands: Nutro, which we took from low double digits to over $800 million of sales when it was sold to Mars; and Merrick, where I more than quadrupled sales, ultimately leading to the sale of the business to Nestlé Purina and approximately $500 million in annual sales.

In my experience, every great growth story in the premium pet food industry, whether that's Nutro, Merrick, WellPet, or Blue Buffalo has been driven by recommendation. And a big part of that still happens in-store even during the pandemic. With the brands that we have and the opportunity that's in front of us, I think Better Choice has an even greater chance to achieve similar success. And I can honestly say I have never been more excited about a new product launch in my career.

Before we talk about what makes our food unique and different, let's get into the specifics of the launch. As Scott noted, our prior target for new stores carrying Elevate in 2022 was 1,500 stores, which we have now achieved. This target was contingent on two factors.

One, securing a national launch with Pet Supplies Plus. We announced this partnership publicly in August, and we have landed 4 feet of shelf space at all their locations. We expect that the full line of Halo Elevate dog SKUs will be on shelf beginning in Q1 of 2022 with a full line of Halo Elevate cat SKUs available in Q4 2022. We will make our first sales of Halo Elevate to Pet Supplies Plus in January.

And two, securing a significant portion of Petco's current footprint. Scott alluded to this earlier on the call, but I'm officially announcing our partnership with Petco for Halo Elevate and anticipate that we will be carried in roughly 900 locations beginning in late Q2 2022. This represents the majority of their stores with a concentration on some of their highest value geographies.

With regards to the timing and shelf space, we'll be launching our full line of Halo Elevate dog and anticipate that we will have between 4 and 8 feet of shelf space. Our goal is by the end of our first launch year. So by June 2023, we will be generating a little over $200 in sales per store per week at these 1,500 large pet specialty locations.

With any new product launch, there's a significant quarter-over-quarter ramp that occurs as consumers trial new products. Marketing efforts start to kick in and take effect and in-store education of retail associates starts to pay off. In the first year, we'll also run specific and special promotions to incentivize consumer trial with the goal of attracting high-value long-term purchasers of our product. If you do the math, this represents a $15 million run rate of revenue opportunity at the end of year one or Q2 2023.

This will serve as a launching pad for incremental shelf space and revenue for launch in years two and three. Using the prior success of Merrick as a proxy, by the end of my tenure, we were able to secure over 50 feet of shelf space and generate more than $300 million of revenue in pet specialty alone. This is the opportunity that sits in front of us now.

Incremental to these bigger direct retail partnerships are the independent pet stores and regional chains. These compromise a majority of the pet specialty stores. These tend to be small to medium footprint locations that are often serviced by national and regional distributors, but they come with a very much a fierce loyalty of dependable consumers. Based on our conversations that we've had to date, we anticipate that we'll be able to secure distribution for Halo Elevate in an additional 500 to 1,000 of these locations in 2022.

In order to support our launch in pet specialty and indie pet, I'm looking forward to adding to my team in 2022. Our goal is to have a Halo rep in almost every store that carries our product once a month. This is what drives conversation and translates to revenue. I can secure all the shelf space in the world, but unless we have a great product that truly delivers superior results, we won't win.

With Halo Elevate, the product performance, which has cleared all testing and is now in the process of commercial packaging with our co-packers, is unmatched. Although we are not planning to provide more details regarding specifics of product claims and performance until we're in market, Halo Elevate is uniquely formulated to address five key areas of pet health, that is digestive health, hip and joint support, strength and energy, heart and immunity support, and a healthy skin and coat.

Not only is our product amazing, but I'm also proud to share that we are able to deliver product-level gross margins that exceed our current gross margin without any compromises to product quality. The size of the price is large, because if we can get consumers to buy three bags of food in three months, the loyalty rate and the likelihood that they will stick with us in the long-term is about 80% in my experience.

I now would like to turn the call over to Rob to discuss our international channel in more details.

Thanks, Donald. International revenue during the third quarter was a key growth driver as revenue totaled $4.3 million, an increase of 43% quarter over quarter in our largest international revenue quarter ever. Our year-to-date international revenue totaled $10.8 million, an increase of 46% year over year for the same year-to-date period, which has surpassed this channel's revenue for all of 2020, which for reference was $8.6 million.

During the quarter, we continued to deliver on contracted revenues with our Asian distribution partners, which totaled more than $100 million over the next five years. These contracts contemplate incremental investment in sales and marketing to support growth as well as structured margin increases over the life of the contract. If we're able to successfully execute upon these contracts, we believe we can build the annually recurring international business north of $25 million in sales.

In addition, we believe these figures represent more of a floor than a ceiling as we are also looking to introduce Halo Elevate to our international product offering and expand our treat offering. It's ambitious, but we believe it's reasonable to see growth that's in line with our historical performance going forward.

While our international go-to-market strategy is tailored for these regions, our target audience is the same as in the US, a young, educated, urban-dwelling woman who, in Asia in particular, often owns a cat. To put it in perspective, more than 50% of consumers that purchase Halo were born after 1990; roughly 80% purchased our products online; and roughly 80% of those sales were cat sales.

Demographics are also working in our favor as the number of households that own a pet has doubled in the last five years with younger pet owners leading growth. In China, even though the absolute number of households that own a pet recently surpassed the same figure in the US, only 20% of Chinese households own a pet compared to almost 70% in the United States. That translates to a 28% annual growth rate in the premium dry cat food market and about 20% annual growth in the dog market.

To give you an example of the sheer size and scale of what's possible in Asia, we ran an influencer campaign with a well-known local male model. For minimal marketing spend, we were able to achieve over 55 million impressions on our ads generating significantly higher ROI metrics as compared to other digital marketing campaigns. Right now, we are in the middle of 11/11, which is the highest volume online sales day in the world, and I'm happy to say that the initial results look really promising.

Before I hand over the call over to Sharla, I wanted to quickly update the investor community on our progress with regards to M&A, and this has been a component of our strategy that we previously highlighted. Like we stated in our last call, we've been focusing on identifying treat businesses that complement our existing innovation pipeline and benefit from sitting underneath the larger platform. We prefer asset-light models that are complementary to our existing brands, and our public company structure has historically enabled Better Choice to offer transaction consideration in the form of cash and stock.

Beyond structuring benefits, smaller private acquisitions may also represent opportunities for us to benefit from a potential dislocation between private and public valuation multiples. We've been in serious discussions to date, but in all candor have been cautious given how unpredictable the global supply chain has proven to be in the last six months. Priority number one remains executing on the opportunities that sit in front of us today underneath the Halo brand.

With that, I'll hand it over to Sharla to walk through the financials in more detail.

Thanks, Rob. Net sales for the third quarter were in line with expectations at $13.2 million, an increase of $2.1 million or 19% as compared to Q3 of 2020. Gross sales for the third quarter of 2021 totaled $15.9 million, an increase of 14% as compared to $13.9 million for the same period last year. This increase is primarily driven by record quarter-over-quarter revenue growth of 43% in international and 35% in e-commerce.

Our topline revenue has been impacted throughout the year by the supply chain issues being felt globally as the COVID pandemic continues to present challenges. We are navigating through short-term shortages in raw materials such as dry egg and potato protein, key ingredients in our dry kibble, as well as production delays for our canned wet food as canneries continue to face supply shortages and labor constraints.

As a result, our safety stocks have been stretched in Q3 as inventory levels have decreased by more than 30% from Q2. We estimate the quarter-to-date impact to revenue resulting from these headwinds was $1.5 million to $2 million and $2.5 million to $3 million on a year-to-date basis. We expect our canned wet production to return to normal levels by Q2 of next year. That said, I do think it's very important to note that we continue to have ample customer demand for our products, which gives us confidence in our ability to deliver future growth.

Compounding on supply chain issues, broad scale inflation across CPG and pet food companies continues to impact our gross margin. We estimate that the inflation-related price increases from our co-manufacturers impacted Q3 margin by roughly 4 to 5 percentage points with our dry kibble SKUs absorbing the majority of the impact. As Scott mentioned earlier in the call, we will transition to a new dry kibble manufacturer by the end of the year, and we'll see substantial margin improvement going forward.

As announced in Q2, we have also taken price increases to our customers effectively in the third quarter to help cover these cost increases. We will continue to refine and optimize our overall pricing strategy as we evaluate the future impact of inflation and align ourselves with the market.

While growth in our international channel, specifically Asia, continues to be very strong, COVID-19 has impacted our ability to launch into new international markets this year. Due to the resurgence of cases and concerns about the variants, launches in Australia and Latin America have been delayed, shifting $1.5 million of potential new volume from 2022 into 2023.

As it relates to our DTC channel, third-quarter net sales declined 12% versus Q3 of 2020 driven by declines in repeat purchasers and softer customer acquisition and retention. As many other DTC brands have experienced, costs to acquire valuable customers has increased due to the impact of Apple's iOS update on Facebook advertising and data capabilities.

We have begun the migration of our DTC brand TruDog into Halo and will launch an entirely new Halo DTC platform next year. In the meantime, we are being selective in our ad spend and focusing investments on our longer-term DTC strategy rather than chasing short-term revenue gains. In addition, we observed a 7% decline in brick-and-mortar net sales, which was anticipated as we reshuffle our product lineup ahead of launching Halo Elevate on a large-scale in '22.

Gross profit for the third quarter was $4.4 million or 34% compared to $4.5 million or 40% for Q3 of 2020. The quarter-over-quarter decline was driven by the inflationary pressures we just discussed. Net loss for the third quarter was $3.5 million. After adjusting for noncash and nonrecurring charges, adjusted EBITDA for the third quarter was negative $1.4 million and reflects incremental investment in upfront marketing costs ahead of our 2022 brand relaunch, incremental investment in our international business, and the addition of new team members to support growth.

As we look to the fourth quarter, we anticipate that we will see 15% to 20% quarter-over-quarter net sales growth relative to Q4 2020, consistent with our record results this quarter. Although we do expect the impact of inflation to impact Q4 margin, the incremental co-packing relationship we've onboarded and the steps we've taken to secure supply of Halo Elevate ahead of our 2022 launch give us confidence in our ability to execute next year. As referenced, we've also provided a detailed reconciliation of quarterly EBITDA and adjusted EBITDA.

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. As you can see from each of our team members, 2022 is shaping up to be an exciting and transformative growth year for Better Choice. We are pleased to see our laser-focused strategy come to fruition in Q3 into Q4 this year, and we expect new online products and significant brick-and-mortar ramp to further accelerate financial growth in 2022.

We've taken all the necessary steps needed from a capital markets perspective to ensure that we have a world-class platform as a public company to achieve all our growth initiatives in '22 and beyond. In a very short period of time, we have uplisted the company onto the NYSE, closed on an underwritten public offering of $40 million in gross proceeds, converted $23 million of outstanding debt into common equity, increased our term loan credit facility capacity to $7.5 million at LIBOR, plus 250 basis points, and repurchased approximately $1.3 million of common stock through our buyback program.

Today, we have 29.2 million common shares outstanding, $33.3 million in cash as of September 30, 2021, $5.6 million in term loan debt, and insider ownership of 27%. We are executing on all fronts, and we want to thank all our investors and our coveraging analysts for their support in our vision.

Now, I'd like to open up the call for questions. Operator, please.

(Operator Instructions) Michael Baker, DA Davidson.

Hey, guys. Thanks. A lot of interesting stuff going on. One long-term question, one short-term question. The Halo Elevate launch in the 1,500 doors, 4 feet at Pet Supplies Plus, 4 to 8 feet in Petco, how does that compare with your expectations?

And I guess if you get to a run rate of $15 million by mid-2023, is that enough to get you -- is that within your goal of getting to $100 million in gross sales by the end of 2023? I guess you'll need some help from some other areas, but I just wanted to put that outlook in context to the long-term goal of $100 million in gross sales by 2023. Thanks.

Yeah. Thanks for the question, Mike. Really appreciate it. So we've exceeded our goal in terms of distribution stores in 2022 to include PSP, Petco and then signing on a national distributor to get us into an incremental amount of independent pet food stores. In terms of the launch and linear space, if you will, in store, I'd say we're also very pleased in the fact that as a newer brand back into the channel, we're able to secure shelf space that's equivalent to established players within those retail stores.

Within Petco alone, half of our footprint will be in 8 feet of space. And I'd also mention that we're going to be in the majority of the most productive stores. So the footprint is really strong in terms of our pet specialty launch. I think as we get into market and our marketing plan, via Ryan Wilson supports the launch, we're going to expect velocities to increase and that, that run rate that we're projecting out of the $15 million mark is well within reach.

And so in terms of any guidance into 2023, we're sticking to that $100 million mark in that timeframe. And it's a combination of our omnichannel strategy as we've spoken in the past. The pet specialty channel with Donald leading it is a big part. But we have the Asian business growing at a strong rate.

Our e-commerce is going to continue to grow with the refresh of Halo Holistic, which I'll also mention is going to get a new package and also new marketing support and then our own DTC platform. All in all, I mean, we're extremely pleased with what we've been able to accomplish, and the excitement from our retail partners is extremely high.

Okay. Yeah. That makes sense. Thanks for that. And then the short-term question, understanding that the new manufacturing capabilities should turn around gross margins at some point, I guess the question is, we probably shouldn't expect that in the fourth quarter, is that right? That's more of a 2022 issue?

And so if that's the case, any way to think about the fourth-quarter gross margin relative to where it came in in the third quarter? Should we think about something similar? Or do we start to show some improvement?

Right. I'm going to turn that over to Sharla, our CFO, to answer.

Yeah. Thanks, Scott. Yeah, I think that's right. We will continue to see margin compression in Q4. As we talked about, we did take price increases to our customers late in Q3, so we will have the full-quarter benefit of that but are continuing to see margin pressures. And the transition to our co-manufacturer, we'll really start to see the full benefit of that in 2022.

Okay. Thank you.

George Kelly, ROTH Capital.

Hi, everybody. Thanks for taking my questions, and congrats on a nice quarter. Question just to continue on the same theme as the last question on gross margin. Curious if you can give us any more help just on the path throughout 2022 that you expect?

I know that there's so much uncertainty now when it comes to inflation and freight and the like. But should we -- do you expect it in the first half as you bring on this new supplier and you start to ramp up with them? I mean, will it take some time for gross margin improvements to materialize during 2022? Or is it a pretty quick snap when you transition to the new supplier?

Yes. Thanks for the question, George. Really appreciate it. We're going to see an immediate pickup on margin in 2022 as the Halo Elevate brand rolls out. That product will be fully produced at the new manufacturer as of the first of the year, and that margin is significantly better than our current Halo Holistic line. So we'll see an immediate increase in terms of gross margin as soon as we hit the new year.

I'd also say that our supply chain footprint is much improved going into 2022 as well. We're relocating our 3PL to be closer to our new manufacturing site as well, which there will be some savings. And all in all, Alex Vournas and our ops team has been doing a tremendous job in navigating this challenging supply chain market. So the short answer to your question, yes, we'll see an immediate improvement in terms of gross margin going forward in 2022.

Okay. That's great.

And I think what I'd add to that, George, too, is just what's important to also consider is this really relates to dry kibble. And when you think about our international business, which is predominantly dry kibble and that shift in manufacturing really occurring likely in Q1, there's also a laddering effect that occurs from Q1 into Q2 into Q3 as we move through inventory.

Okay. Got you. And then next question, different topic. Can you talk about expectations? And I'm not asking for specific guidance, but the international business next year. You mentioned a partnership with a celebrity, I think. I kind of missed part of that, but how do you keep moving the needle there? What's the plan to keep driving growth next year?

Yeah. I'll let Rob take that one.

Perfect. Thanks, George. So I think what's really important is we center a lot of our promotional activity around these big online days. We're literally right in the middle of that right now, and our results are very promising. And what that's doing is acquiring a new customer base and a new recurring revenue base that then promotes growth into 2022.

We posted percentage growth rates of roughly 40% for international, and it's pretty reasonable to assume that we'll be in that 30% to 40% range for growth into the future. We're obviously building off of a larger base here, too.

Okay. And then last question for me just relates to fourth-quarter guidance. I believe the expectation, I may have misheard it, but it's 15% to 20% year-over-year growth, which would show a sequential decline in net revenue, if I heard that right. So just curious, is it related to out of stocks? What's the cause of that?

Yeah. In terms of Q4, in general, our demand has been up. It's been supply issues everyone else has been suffering against, so it's something that we're continually navigating. But as we look into Q4, we see some challenges in the supply chain in terms of ingredient availability as well as some capacity.

And this is why, again, we're moving to the new manufacturer. It's going to alleviate these issues, specifically from a dry kibble standpoint in Q1 of next year. But in terms of the health of the business, the demand is there, it's really a supply issue.

I think the other point I'd note, George, is that we've intentionally -- we're not going to recognize any Halo revenue, or Halo Elevate revenue, excuse me, in Q4 of this year. We could have pulled some of that forward if we wanted to, but we really want 2022 to be all about Halo Elevate. So that's why our product is shipping out right at the beginning of January.

Okay. Thanks, and best of luck.

Jim McIlree, Dawson James.

Thank you. Good morning. I just want to clarify from the prior question. I thought I heard in the commentary that it was 15% to 20% quarter-to-quarter growth in Q4. But the prior question said year over year. Can you just clarify which is correct?

Sharla?

Yeah. When we say quarter-over-quarter, we meant quarter versus prior year quarter. So it's year-over-year.

Okay. Great. Thank you. And I think my next question has already been answered. But is there an inventory fill to be expected in Q4 for the launch of Pet Supplies Plus? Or is that really going to occur in Q1 of next year?

You're thinking about --

So is your question -- okay, go ahead, Sharla.

Sorry, Scott. You're thinking about that right. We'll probably -- you'll see pretty high inventory levels at the end of the year as we get that product in and prepare to ship in early Q1, so I think you're thinking about that correctly.

Okay. Great. And then lastly, when I'm looking at GAAP operating expenses, Q3 around $8.4 million, what does that GAAP OpEx number look like at the end of next year? So Q4 of 2022. And if you don't want to give an exact number, maybe a range would be great.

Sure. One thing I would note about our GAAP OpEx is there is a lot of noncash items in there. I would say when you back that out and look at it from an operational perspective, I'd expect next year to be generally in line knowing that we are investing significantly behind, Scott mentioned, the Halo Holistic brand renovation. So there's going to be some investment into that earlier in the year, still some investment in the Elevate launch.

We've also talked about making sure that our human capital is best-in-class and so ramping that. And so I think you'll really see a similar trajectory that heading into late 2022 into 2023 to really see scale from the topline perspective as you look at operating expenses as a percent of revenue.

So cash OpEx as a percent of revenue next year ending the year where we are right now. Did I hear that right?

I think as a percent of revenue, it will come down a little bit just because the top line will grow. I think from a dollar perspective, it should be pretty consistent.

Got it. And again, you're referring to the cash operating expenses?

Yes.

Great. Okay. Thanks a lot. Appreciate it.

Thank you.

Steve Silver, Argus Research.

Thank you. And congratulations, everybody, on navigating the supply chain environment out there. My quick question is just I know we've talked in the past about the plans to just optimize the product mix over time and managing the number of SKUs in the portfolio. Just trying to get a sense as to whether the supply chain issues going on have changed your thinking at all in terms of the number of SKUs the company will be managing just to protect the gross margin profile moving forward, or whether you think that these new suppliers coming on board next year should alleviate a good majority of the pressure that's out there right now? Thanks.

Yeah. Thanks, Steve. I mean, our plans in terms of any type of SKU rationalization are still in place, and it's really driven off of making sure we're selling the most productive SKUs at the highest margin possible. So we will be pruning some of the existing portfolio, and we've been doing that as we've been going along this year. But it's not driven anything related to the supply chain per se. It's just being proactive in managing our P&L and getting as much throughput in as possible.

I think one thing that's exciting to us as we launch the Halo Elevate brand and also the relaunch of Halo Holistic, our goal is to capture more of the large breed dog market out there, which will drive both revenue and margin for us over time. So it's a combination of both us in terms of the architecture of our portfolio from a SKU perspective and also what makes sense to sell in market. So there's perfect alignment there.

And overall, you can see we've demonstrated being proactive versus reactive. And even as we've navigated this challenging supply chain time, it's all been very aggressive and forward-thinking versus reactive.

Great. Thank you so much for the color, and congratulations again.

Thank you.

(Operator Instructions) Michael Baker, DA Davidson.

Hey. One more bigger picture follow-up just to make sure and just to reality check it. You said you're on track for all the financial plans that you laid out during the roadshow in the IPO. So that includes still, even with supply chain issues and higher costs and all that, you still think it's reasonable to expect 10% to 15% EBITDA margins against that $100 million in net sales in 2023, which is frankly, a significant ramp from where you are now. Just wanted to reality check that one one more time.

Yeah. Rob, you want to take that one?

Sure. That's right, Mike. I think there's a potential that as we look at where we are in 2023 and if we're really outperforming, honestly, with some of our launches in pet specialty, we may continue to reinvest. But that 10% to 15% range, potentially a little bit closer to 10%, is where we expect to be.

I think Scott's touched on this in the past, that we really have a benefit of formulating and really preparing for the Halo Elevate launch during all these supply chain challenges. So we've been able to think about what our gross margin looks like starting from scratch. And we can be really selective about what we're putting in our product and what we're not putting in our product to maximize our margin.

Yeah. Makes sense. That would be a great number. Thanks for the update on that.

Definitely.

Thanks, Mike.

This concludes today's question-and-answer session. I would like to turn this call back over to Mr. Scott Lerner for closing remarks.

I'd like to thank everyone for taking time out of their day to listen to our amazing growth story for the Better Choice Company. We appreciate the support from the investor community, and we look forward to continuing on our growth plan into 2022 with the launch of Halo Elevate, the rebranding of Halo Holistic, and the increased distribution in market to gain more pet parents into our portfolio over time. Thank you.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation. Enjoy the rest of your day.