Q3 2023 The Honest Co Inc Earnings Call

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Ladies and gentlemen, thank you for standing by walking through the honest company third quarter 2023 earnings call. At this time all participants are in a listen only mode. After the speaker's presentation there'll be a question and answer session. Please be advised today's conference is being recorded I would now like to hand, the conference over to Mr. Steve Boston felt vice President of Investor Relations the honest company.

Please go ahead Sir.

Good afternoon, everyone and thank you for joining our third quarter 2023 conference calls.

Joining me today are calling on our Chief Executive Officer, and Dave will read on our Chief Financial Officer.

Before we start I'd like to remind you that we'll be making certain statements today that are forward looking within the meaning of the federal securities laws.

Statements about the outlook of our business and other matters referenced in our earnings release issued today.

These forward looking statements involve a number of risks and uncertainties that could cause actual results to differ materially.

Please refer to our earnings release issued today.

Well as our SEC filings for a more detailed description of the risk factors that may affect our results.

Please also note that these forward looking statements reflect our opinions only as of the date of this call and.

And we undertake no obligation to revise or publicly release the results of any revision to these forward looking statements in light of new information or future events.

As required by law.

Also during this call, we will discuss non-GAAP financial measures, which adjust our GAAP results.

Eliminate the impact of certain items.

You'll find additional information regarding these non-GAAP financial measures and a reconciliation of these non-GAAP to GAAP measures.

On the financial results section of today's earnings release.

Well I broadcast of this call is also available on the Investor Relations section of our website at investors Dot honest dot com.

With that I'll turn the call over to Carlos.

Thanks, Steve.

Good afternoon, everyone and thank you for joining us today.

It's a pleasure to be with you to share our results for the third quarter of 2023.

This is the third consecutive quarter, we have increased our revenue outlook and the second consecutive quarter, we've improved our outlook for adjusted EBITDA.

Earlier this year, we committed to transforming the financial and consumer health of the business and I'm pleased with the meaningful progress we've made in a short period of time.

This is a result of our collaborative and hardworking honest team coming together to execute the transformation initiative.

And the strength the honest brand continues to show in market.

Our focus is always to keep the honest community of consumers at the heart of everything we do.

Even in these uncertain economic times, we see that consumers have high standards for the product they bring home for themselves and their families.

And we're committed to providing a wide array of products from sustainably designed white onesies and diapers.

Cleanly formulated Mama care beauty and household products.

Our community expects our product.

Up to the unique and rigorous honesty standard for clean effective and trustworthy.

And this year, we've done this while improving the efficiency of our business model.

Let's turn to our third quarter results to see how this intentionality comes together beginning with revenue.

This quarter, we delivered all time record revenue with third quarter revenue up 2% and our year to date revenue up 10%.

Revenue growth was led by strong track channel consumption double digit growth in the digital channel.

The positive benefits of our recent pricing actions.

Our gross margin was 32% for the quarter, which is our highest in two years.

This improved performance is an outcome of the three key pillars, we introduced as we laid out our transformation initiatives earlier this year.

Each of the three pillars.

<unk> maximization margin enhancements and operating discipline contributed to our improved performance, including successful execution of pricing actions to restore Amit to our traditional premium position across our categories.

Margin improvement through SKU rationalization.

Cost savings and the prioritization of our higher margin hero items.

And disciplined management of our working capital leading to a second consecutive quarter of positive operating cash flow.

As we enter the fourth quarter and continue to advance our transformation initiatives, we anticipate continued year over year revenue growth and margin improvement.

In addition to sharing these promising results.

Delighted to introduce Dave Loretta, who recently joined honest as our CFO.

Dave brings a robust track record of driving financial strengths.

His depth of experience. He is a strong addition to our management team and I'm confident in Dave the ability to drive our transformation forward and help build a stronger honest.

Okay.

Thank you Carla and welcome everyone.

Let me start by saying how pleased I am to be on the call with you today.

I joined honest nearly two months ago with a strong belief in the potential of the honest brand.

A significant opportunity to drive margin improvement.

Our commitment to generate positive cash flow and maintain a healthy balance sheet.

And the current dynamic consumer environment.

<unk> is well positioned to expand market presence.

Solidifying our operating discipline built.

Building on what the team has already demonstrated this year on improved financial results.

Turning to our performance this quarter.

Revenue was $86 million, an all time record for the company we.

We grew 2% on top of a record quarter last year, when we saw a high level of pipeline shipments associated with significant retail expansion.

This top line strength in the quarter reflects healthy track channel consumption trends in the retail channel, which continues to reflect more than 20% growth.

Strong results in the digital channel, including robust consumption at Amazon.

And pricing actions implemented over the course of 2023.

Looking at consumption, we continue to grow revenue through both volume and pricing with our elasticity is remaining healthy.

Having revenue exceeded expectations underscores the deep trust in appreciation that are honest community has for our clean and sustainably designed products.

Turning to key drivers by product category.

First our diapers and wipes business declined 5% due to comparisons against the year ago volume, which reflected pipeline shipments for expanded retail distribution.

While shipments were down in the quarter tracked channel consumption increased 32%.

Significantly outpacing the category growth rate of 4%.

We're pleased honest continues to lead growth in this category.

Notably our newly launched flexible wipes are already one of our top selling items on Amazon.

Next our skin and personal care business declined 4% as we scaled back low margin products in the club channel.

Consistent with our focus on margin enhancement as part of our transformation initiatives.

This club channel revenue will continue to unwind over the next two quarters, but will resort result in a significant margin improvement.

In the digital channel skin and personal care grew strong double digits.

And finally, our household and wellness business increased 68%.

Reflecting both the underlying growth and expanded retail distribution of our baby clothing business.

Now turning to results by channel.

Digital channel revenue increased 19%, while retail decreased 9%.

During the last year, our digital channel has experienced meaningful growth driven by strong performance with Amazon.

Looking at the retail channel, we continue to benefit from significantly expanded distribution.

Selected and higher ACB, which has increased from over 50% to over 80% versus the prior year.

This was offset by exiting our low margin offerings in the club channel as.

As well as lapping pipeline shipments in the year ago quarter to support expanded distribution.

Some highlights this quarter include <unk>.

Continued strong consumption that target, which saw double digit growth versus last year.

Double digit sales growth across diapers wipes skin and personal care items at Amazon.

And Walmart consumption continues to remain strong through our transition to inline shelf set.

Now turning to gross margin.

Gross margin was 32% in the third quarter compared to 30% in the third quarter of 2022.

Gross margin has improved during each quarter of the year, reflecting the discipline and focus driven by the transformation initiatives.

Gross margin versus the year ago quarter reflects approximately 425 basis points of pricing benefit and trade promotion efficiencies.

125 basis points of cost savings.

And 100 basis points of favorable mix.

Offset by roughly 450 basis points of higher input and supply chain costs.

And 75 basis points of costs related to the transformation initiatives.

Operating expenses decreased $2 million in the third quarter of 2023 compared to the third quarter of last year.

Leveraging 330 basis points overall.

Reflecting improved marketing efficiency.

Adjusted EBITDA for the third quarter of 2023 was negative $1 million.

Which included $2 million in costs related to the transformation initiatives.

Turning to the balance sheet, we ended the quarter with $23 million in cash and cash equivalents, an increase of $5 million versus last quarter.

Our cash position improved from continued discipline in managing working capital.

Including our third consecutive quarter of reducing inventory levels.

Year to date, we've reduced inventory by 31% or $36 million.

Significantly exceeding our initial goal of reducing inventory by $20 million.

While also supporting 10% year to date revenue growth.

Our balance sheet remains strong as we've been increasing our cash balance and continue to carry no debt.

This is an important consideration in today's bank loan market.

Now turning to our outlook for 2023.

Behind strong Q3 results, we are increasing our full year revenue outlook for the third consecutive quarter and our adjusted EBITDA outlook for the second consecutive quarter.

Looking solely at Q4, we now expect revenue to increase low single digits and expect adjusted EBITDA to be in a range of flat to down $3 million.

Which includes an expected $1 million to $2 million and transformation costs.

Both our revenue and adjusted EBITDA outlook are better than earlier expectations.

Reflecting the strong momentum of the business.

And with that let me turn it back to Carlos before we open it up for questions.

Thanks, Dave.

Before I wrap up my remarks, I want to set the stage for what is ahead.

In addition to strengthening our financial Foundation, our team has been engaged in the development of a long term strategic plan to carry forward into our next phase of growth.

We look forward to sharing that vision with you all this spring.

As we round the corner on the close of 2023 I remain excited about the trajectory we're on.

As evidenced by our improved revenue and adjusted EBITDA outlook.

Our transformation initiative continues to help us deliver improved business fundamentals.

And while we continue to monitor the impact of economic factors, such as sustained high interest rates and pressure on consumer spending we are optimistic about the value of the honest brand provides.

Premium purpose led brands continue to hold up well despite economic pressures.

And this has shown to be true for honest.

And as we look ahead I remain confident in our path to make a larger more vibrant and more financially sound honest.

With that.

I will turn the call over to the operator, and we look forward to answering your questions.

Thank you ladies and gentlemen, if you have a question or a comment at this time. Please press star one on your telephone I missed your question has been answered or you wish to move yourself from the queue. Please press star one again, we will pause for a moment, while we compile the Q&A roster.

Alright.

Yeah.

Our first question comes from Laura Champine with loop your line is open.

Hi, and congratulations on being able to raise the guide for the full year.

Did want a little more information about why the diaper business declined in.

In Q3, and what the outlook is for that particular segment into Q4.

Hi, Laura it's Carla so good to hear your voice on the call. Thank you for joining us.

Yes.

The diaper business continues to have strong fundamentals as you will remember from our messaging, our diapers and wipes.

Consumer movement or consumption data is up 32% in the quarter. What you are seeing is largely the impact of it.

One time impact of us lapping the launch into a new retailer at this time last year as you may recall last year at this time with our all time highest revenue quarter until this year, which we have now best in our all time revenue quarter, but we always expected this.

Quarter to have a challenging year over year outlook related to the launch into Walmart with the diapers and wipes business, we don't see that as a concern going forward.

Okay.

You've done a good job sort of pulling inventory down this year.

Ken would you expect that performance to continue in Q4.

Yes, Hi, Laura this is Dave Loretta.

Our the progress we've made on the inventory levels are certainly significant.

And.

Well, where we're at at this point of the year.

We're going to see the end of the fourth quarter be any any further significant decline Lara.

Largely claims most of that improvement so far this year so.

I wouldn't put any any further reductions by end of year.

Got it thank you and welcome Dave.

Thank you.

One moment for our next question.

Our next question comes from Andrew <unk> with Jpmorgan. Your line is open.

Thank you Ron Thanks for taking my question and good afternoon there.

Hello.

Like and obviously welcome David.

So here from you already.

I believe you mentioned strong training person comes from Shannon just now.

So the prior question even stronger in diapers.

Was wondering if you can.

Perhaps know parse out what we should expect into the fourth quarter I understand that.

<unk> pipeline fill in some of those retailers. So by the time you lap those what is your what is the set up for probably 2024 do you think that's going to clear.

<unk> will create the comps as you go into into next year, and then related to that and you are doing a tremendous job keeping their lifestyle and the ecosystem all of your brands intact why.

Also do the hard job plus keeping.

Keeping your heroes and cleaning up some of the Skus that were not as successful.

Successful.

How should we think about that timeline and how we.

We should expect that process to be complete thank you.

Andreas So wonderful to talk to you today and yes. We are glad you have an opportunity to me Dave looking forward seeing with each other in the future. Thank you I think your questions I'm going to try to take them in two parts I wanted to make sure Im really.

Answering the question as you intended.

The first question, you're asking is given that we have said our consumption remains strong and has been particularly strong in the quarter overall for the brand in the quarter tracked channel consumption was up 27% and then we kind of broke that down and indicated that diapers and wipes consumption in the quarter was.

32% that strong double digit consumption really reflects what we see.

Fundamental consumer continued consumer belief affinity alignment for the honest brand across our categories.

As we look into the future not only do we think that fundamentals remain turbulence that we will still have strong consumer driven consumption expectations in the future. While I certainly don't want to predict them in particular, because there are a lot of elements to consumer consumption that we all need.

You watch it we look at the levers in the future I am optimistic we will remain in good strong double digit territory as we look forward.

Concerns there.

And as you know that's really based on a number of levers of which we do control. We feel we remain feeling strong that while we have increased our distributions at many major retailers.

Some of those retailers, it's still a relatively small cross section of our portfolio and we are seeing that that portfolio performed well as an example, when we look at how Walmart has continued to expand from our initial launch into half of their stores to a broader footprint among R. R.

Our body care body wash and baby care portfolio, now and 100% of the stores we can.

Continue to identify growth opportunities and those will support the consumption outlook that we have going forward.

Wanted to take your second question, but I want to make sure that I understand it would you be willing to just sort of.

Raymond Let me again, so I don't Miss anything.

Thank you, Kevin or no Super helpful and I appreciate that you wanted to to make sure that we bring.

You hit the same the same ideas.

Yeah, and I was just thinking like this tremendous job that you're changing the tie is you were driving the car.

And driving all of this consumption precisely going through your hero products.

And then taking those hard decisions right.

Taking away some of the Skus at that cost to sales right that potentially you would have to basically replace with fast growing items.

So I'm just asking my question was more of the SKU rationalization time periods right are we pretty much done with that process at this point and from now on you feel like the profitability and I know you have a tremendous experiencing CPG to make sure that innovation.

Thanks.

The type of returns that you intended to do.

Thinking how the setup like how clean youre going to enter 2024. After this process are you still going to have some.

Cleaning up to do.

And so at the beginning of next year.

Wonderful can I just say thank you for recognizing what I considered to be the incredible coordinated work up. This whole team you are right. We've been doing whenever we want to say.

Fueling gum and walking at the same time, changing how you're driving cars I love. It and this team has done a great job of finding quick places to identify very clear opportunities first helped focus our work on the most important things in the highest return on effort and for us to help overtime, we don't go away.

And the things that we don't think are going to drive our long term strategy drive our long term scale. So we have done that and the SKU rationalization is a great example of that as you know this year, while we reduced the number of Skus. We are revenues are actually up 10% overall fiscal year to date, we've shown that.

That thesis statement that I love to make and I think you've been true CPG true, which is that you actually can do more with less especially if you focus on your core so with that in mind I would say that while our team will always have a healthy practice.

Value rating, which items on our shelf add enough value add enough value to be meaningful in especially in the brick and mortar context, where we are trying to grow I believe we have done made a big effort in that direction. This year and that what youll see in the coming years is we are really focused on execute.

<unk>, the best ways to bring to life, our core hero items.

With that said I think you said it better than I can which is that it is a true CPG practice, you must always have that discipline of monitoring as you execute your portfolio year after year that you've got the emphasis on the on the items that can both drive the top line growth as well as the improved mix and margin.

That is a component of our strategic imperatives.

But I would say as I look ahead, Ics dealing with stronger declarative focus about growing and winning with our winners.

Great. Thank you so much I'll pass it on.

Again, ladies and gentlemen, if you have a question or comment at this time. Please press star one on your telephone.

And I'm not showing any further questions at this time I'd like to turn the call back over to Carla.

Alright. Thank you so much for joining us today since there are no more questions I just wanted to take this opportunity first and foremost thank the incredible team of Ani.

Please at this company I want to thank the retail partners that help us have the strong results and I want to thank our honest community for how much they believe in our products and as you can see the brand continues to remain healthy. We are committed to this transformation initiative, making us a stronger and more vibrant honest I look forward to our next conversation.

With you as we come back in 2024 to give you a bigger picture of where we're going with our long term strategy.

Thanks, and we look forward to talking again soon.

Ladies and gentlemen, this does conclude today's presentation. You may now disconnect and have a wonderful day.

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