Laird Superfood, Inc. (LSF) Earnings Call Transcript & Summary

Thanks, and good afternoon, everyone. Welcome to Laird Super Foods' Third Quarter 2020 Earnings Conference Call and Webcast. With us today are Paul Hodge, our Chief Executive Officer, and Valerie Ells, our Chief Financial Officer. Everyone should now have access to the company's third quarter earnings press release, which was filed today after market close. You can find it in the Investor Relations section of Laird's Superfoods' website at www.lairdsuperfood.com. Before we get started, please be aware that all financial information presented on today's call is unaudited. Also, during this call, management may make forward-looking statements within the meaning of the federal securities laws. The following remarks reflect what management currently anticipates and believes, and they carry risks and uncertainties that might make real outcomes diverge significantly from what these forward-looking statements describe. For a thorough review of the risks that could make actual results diverge significantly from those expressed or implied in any forward-looking statements made today, please see today's press release, the company's quarterly report on Form 10-Q for the quarter ended September 30, 2020, filed with the SEC, along with other filings with the SEC. I'd now like to hand the call over to Paul Hodge, Chief Executive Officer of Laird Superfood. Paul?

Thanks, Ashley, and aloha to all of you. It's a real pleasure to be with you on this, our first earnings call since becoming a public company. During today's call, I'll give you a quick picture of who we are and how our business model works, go over a few highlights from our third quarter, and explain why we feel Laird Superfood is strongly positioned for growth over the long term. After that, Valerie Ells, our Chief Financial Officer, will walk through the third quarter financial results in greater detail, and then we'll take your questions. Laird Superfood is a high-growth manufacturer of plant-based natural foods, and we see an open-ended opportunity for growth within the $695 billion grocery industry. Here at Laird Superfood, our conviction is that superior food contributes to a superior planet, since healthier individuals who feel well tend to make wiser decisions. The energy, nutrition and hydration required by people each day to perform at their peak from dawn through dusk are supplied by our offerings, integrated into their everyday habits, beginning with our Superfood creamer and coffee. Our mission is clear-cut. We craft items delivering outstanding flavor alongside outstanding quality. Our aim is for them to be handy, easy to prepare, reasonably priced and within reach for all. We're proud to be acknowledged as an investor and to be seen as a global leader in the food industry — one that shares our vision of a world with healthy and sustainable foods and brings us tremendous expertise. Our flagship product line is our functional, more affordable food coffee creamers, and in a short time we became the #1 natural powder creamer in the United States. Every product we make is designed for everyday use, and we're building a broad-based natural food platform that reflects the authenticity of our founders. That authenticity, together with trust in our brand, is a key differentiator that drives our revenue growth. Because of our omni-channel sales strategy, we can reach customers no matter where they are. Our main channels are online and wholesale. In addition, we run a young food service division that holds great long-term promise. We are native digital, and today online sales make up roughly half of total revenue. Our online presence is a strong tool for engaging customers, and online revenue is highly recurring: about 2/3 of direct website sales come from repeat or subscription orders, even though we are adding many new customers—all of which points to a distinctive level of trust in our brand. On the wholesale side, our customer base includes big grocery chains plus Costco and CVS, and we anticipate our footprint will expand to several times the 7,200 retail doors where we're currently stocked. In wholesale this quarter, shelf turns came in above what we had projected for the beta launch of liquid creamer — hitting as many as six turns per week for a vinoly creamer. We consider that genuinely exceptional, especially considering how early that product still is in its trajectory, and it provides additional proof of how the Laird brand connects with people. Shoppers are drawn to our brand because it stands for authenticity — something associated with strong performance in healthy living — and because it offers a compelling product proposition. So it's no surprise that we continue to find confirmation of this across both online and wholesale channels. In wholesale, our Q3 figure this year was up 223% versus the same quarter in 2019, and that increase came from two sources: higher total door counts and additional SKUs placed within doors we already serve alongside our valued wholesale partners. On the online side, our rate of new customer acquisition during Q3 climbed 149% compared with a year earlier. We're genuinely happy about how much better we did year-over-year at turning first-time buyers into repeat buyers. That metric improved by 40%, and we credit several factors for it, among them effective marketing. Through our trusted brand platform, we're introducing new products and family products that target large total addressable markets, or TAM. This covers coffee — a total addressable market of $89 billion — and we've been developing a substantial pipeline of very innovative functional coffee products, which we'll keep launching over the next several quarters. We have strong data from wholesale partners as well as online sales that backs this expanded functional coffee launch, and the early read on our first blend is very strong. Functional coffee sits adjacent to the creamer presence we've already built, extending your reach to consumers who don't use whitener. So we're genuinely excited about the chance to address and innovate in the even bigger coffee market, and also in better-for-you snacks, going after the $101 billion snack category. During the opening part of Q4, we brought out Snack Rock Pili Nuts for the first time. That release was deliberately kept small, and what we saw surprised us. Inventory was gone on launch day itself, and we view those sell-through figures and the way customers took to the product as signs of how we might later grow sales of feed products and the platform as a whole. Q3 set another record for the company. Net sales rose 118% to $7.6 million compared with the prior year. We achieved substantial growth in our customer base across both online and traditional wholesale channels. Our attention has been squarely on the liquid creamer launch, and it stays there—that product brought in over $0.5 million in gross revenue during the quarter. You can now find our liquid creamers in over 1,200 retail locations, and our early take is that these highly differentiated liquid creamers fit current trends and are selling in line with what we expected. Customers tell us this product changes the game for them. What they appreciate is the extra functionality, how unique it is, and the genuinely clean label. Shelf velocity is strong here. Customers are enthusiastic. Stores are enthusiastic. During the roadshow, we discussed the supply-demand mismatch we are addressing in order to lift margins. We've also discovered that the shelf life with the packaging we currently use is simply too brief for distributors to handle well. That ultimately translates into elevated fluid rates, which hurt our gross margins during the quarter. The encouraging part is that we believe we've identified a packaging solution that extends shelf life from 45 days to 4 to 6 months, which takes care of this issue. With pilot runs underway at present, we anticipate the updated version will reach shelves by mid-2021. That much longer shelf life delivers numerous advantages. It greatly simplifies managing supply and demand. Distributors get ample time to handle the logistics, and customers benefit too, since they have a longer period to consume the product before spoilage. By making only a few minor tweaks, that same approach will let us offer the creamer in a shelf-stable form, which opens up opportunity next year in D2C and Amazon sales to further help balance margins. For Laird Superfood, this solution is truly thrilling. We keep learning, in real time, how to optimize our business, especially the liquid creamer business. That said, this quarter delivered a revenue record, and our excitement about what lies ahead is greater than we can express. We feel very confident that the Laird brand is capable of delivering world-class margins and profitability, and we're continually examining, assessing, and carrying out the route to reach that goal. To assist us along that route, I'm pleased to introduce our new Chief Operating Officer, Scott McGuire, who starts with our team next Monday and brings many years of experience in operations, manufacturing, and supply chain to Laird. Scott has held operating positions at CPG and fresh food businesses, among them Nestle, PepsiCo, and Bond Wall Fresh Americas; we're thrilled to have Scott join the Laird team; to sum up, our third quarter was record breaking. Every channel has posted higher revenue, and we've made significant progress in pinpointing exactly where further gains in operating efficiency are possible, along with an initiative now underway aimed at elevating Laird Superfood to its next stage. A heartfelt mahalos goes out to our exceptional team, whose focus and commitment to our mission never wavered. At this point I'll hand things over to Val, who will take you through the financial highlights.

Thank you, Paul, and good afternoon to all of you. It's a pleasure to be talking with you on this, our inaugural earnings call since becoming a public company. As Paul mentioned, we're quite happy with the financial results for our third quarter. Net sales rose 118% to $7.6 million compared with the third quarter of 2019, driven by gains across both online and wholesale channels — online was up 67% year-over-year, with sales through our direct website climbing 122%, while wholesale rose 223%, which reflects continued momentum with key partners along with strong performance from our liquid creamer and the sustained success of our shelf-stable business; we recorded 135% growth in our coffee creamers platform, 278% growth in coffee, tea and hot chocolate products, and 63% growth in hydration and beverage enhancing supplements. Gross margins came in at 24.7% for the third quarter. While that was a modest improvement over Q2, the sequential margin decline versus last year stemmed from the following: spoilage and waste tied to the launch of our liquid creamer and the refining of that process; higher co-packing fees connected to our liquid creamer line as that launch keeps expanding, plus costs from outsourcing a portion of our shelf-stable business while we waited for our recently installed second in-house production line to reach full operation; and the mix of elevated shipping expenses and lower shipping income in our direct online business, where we've carried on with the free shipping initiatives; and in absolute terms, outbound shipping costs also rose roughly 10% in the quarter. On liquid creamer spoilage, as Paul alluded to, we have 2 key steps that create a clear and realistic path toward a more optimized operation in which quarter-to-quarter spoilage should be less of a concern. We're planning a new package design that will substantially extend product shelf life, taking it from 45 days out to 4 to 6 months. That gives us visibility into spoilage rates consistent with industry standards in the single digits. We're also assessing a separate shelf-stable liquid option for launch at some point in 2021, which would let us sell our liquid products online and through Amazon, which, as we see with our other products, can deliver a higher blended gross margin between direct retail and wholesale. As for full packing of our shelf-stable products, our second production line is now installed and operational, though it is still ramping up toward running at full speeds. Across our 2 production lines, we're working hard to build up safety stock of finished goods on hand ahead of any potential impact from the COVID-19 resurgence. We've been very fortunate to avoid any material production impact so far due to COVID, but we don't want to take any chances for our stock or miss growth opportunities, so we'll be building our inventory on hand over the coming months. So because of that, we'll probably keep relying on co-packers going into 2021, until we believe we've got sufficient safety stock available. To sum up: at some point beyond the first half of 2021, margins should get better, since we intend to redesign our liquid creamer packaging so our shelf life is longer and spoilage rates come down, get our second production line fully ramped, and at the same time build up inventory on hand. Beyond that point, if everything works out as planned, we'd aim to cut back on outsourced work and return to fueling growth through the infrastructure we already have, capturing the fixed cost leverage that vertical integration gives us. On the shipping side, after we tested eliminating free shipping during the third quarter, we examined the data and chose to leave free shipping on for the time being; that carries a margin cost, and we think the investment makes sense given the top line at this stage of aggressive market share growth. Shipping rates, though, have gone up. In fact, in October we got a notice of a 15% additional rise in shipping costs. So this is a key focus area for us as we optimize fulfillment within our business. We can't control shipping rates, but we certainly hope that after COVID and after the holidays, with certain changes to our fulfillment process, we can find a better solution for this cost. Going further down the income statement: OpEx stays firmly under our control. And as we've done historically, we keep demonstrating very effective management of these expenses across the board; we have considerable fixed cost leverage in this business, especially in OpEx, and our teams' efficiency and effectiveness keep showing here as we move toward our long-term goal metrics as a percent of sales. With high growth in mind, of course, we expect opportunities to put capital to work, whether that's online spend or other kinds of marketing and advertising, as long as the returns justify the spend. And that will always be the biggest delta here — the sales and marketing numbers; but across the board, aside from the nonrecurring go public costs, our members are very flat, and we expect that to hold going forward. We believe we've scaled this company to be public, and this will keep being a source of leverage for us. Now on to CapEx. We want to reiterate how minimally capital-intensive our core business is as it stands right now. Our CapEx stays low even now with our second line in place. We have tremendous fixed cost leverage and excess capacity once our second line is running at full speed. As many of you know from our roadshow, we don't believe this is a business to guide quarterly. We intend to issue annual guidance in 2021, and we operate with long-term target demand. Those long-term goals we talked about during the road show remain the same. Across the coming 3 to 5 years—2023 to 2025—we think this business is capable of running at double-digit annual revenue growth, gross margins above 40%, and EBITDA margins in the mid-teens. The EBITDA margin level where we break even lines up with total revenue of $67 million. That said, at this early, high-growth stage, the business is naturally going to be choppy in both directions from quarter to quarter, as we saw with shifts in order timing and a variable cost environment. Shortly after our IPO, our sell-side analysts put out 2020 revenue consensus of $23.4 million, and we still feel comfortable with that initial revenue expectation. On gross margin, expectations ought to factor in shipping considerations, since we're working out the best balance between free shipping and rising shipping expenses for our DTC business, including higher shipping costs starting in the fourth quarter, and they should also factor in spoilage potentially through the first 6 months of 2021, after which our margin should start to drift slowly upward. We plan to talk through full year 2021 expectations when we report our fourth quarter early next year. Paul?

Thanks, Val. So, before we move on to questions, I just want to say that our top priority right now is making the most of the rapidly expanding business that sits right in front of us. We're confident in the plans we have to optimize the liquid creamer business, and we believe this work justifies the time and resources, since the consumers are out there and the brand has traction. Our customers love the Laird products, and we know we can capture a meaningful share of the multibillion-dollar creamer opportunity ahead of us. Overall, this quarter was enormous for us and for the brand, and we're hyper-focused on the market opportunities in front of us. We're absolutely delighted with the expanded team we now have in place, and with that, let's go to questions.

So my first question is about how spoilage affected gross margin. I'm just wondering whether you can pinpoint what that amounted to in basis points?

Yes, absolutely, certainly. Regarding the liquid creamer spoilage overall, I mean, across the last 2 quarters, I mean, margin has taken a hit of between 100 to 300 basis points each quarter. But once more, as we said on this call, we feel quite enthusiastic and self-assured regarding the solution now in place, and it brings substantial upside potential plus a possible e-com option later on.

All right, great. And so, I suppose, just that kind of gradual spoilage compared with what we expected, since I don't believe we've discussed this much previously. Is there any way to sort of pin down what it amounted to, in terms of how it would likely affect margins?

Yeah. So in the past, when we spoke on the Road Show and during those discussions, we really first put it down to supply and demand being out of balance. As you may remember, we had a minimum run quantity with our co-packers, and that was as we were first launching during the second quarter. I mean, that was the primary factor. And Paul, actually, I'll let you address what came after.

Yes. What we've come to understand really just over the last month is that even though that mismatch was largely fixed, we're still seeing spoilage. So when we looked into it with the distributors to figure out what was happening, what we found was that the distributors themselves simply couldn't handle the product efficiently enough, given the 45-day shelf life, to move it from where we co-pack to the stores — say, from the East Coast to the West Coast — and get it onto shelves with enough shelf life remaining to be of any use. In some cases, for instance, distributors may pick up the shipment from our factory as much as a week late after we produce it, and then by the time it reaches their West Coast warehouses, they can't accept it, since it has under a 75% shelf life capability. So it was something of a surprise when we dug in to really examine what was going on there. So with Danone's help, we found a great solution for this extended shelf life. And it's going to pretty much completely eliminate that problem. We're taking it from 45 days to 4 to 6 months. We're pretty comfortable within those ranges; and that basically eliminates this sort of logistics issue, so to speak, that exists with the distributors. And it was a bit of a surprise. So this spoilage kept happening even after we kind of corrected that mismatch, and we're making some strides in the meantime to reduce it in some ways, but it's never really going to be completely fixed until we move to this new solution; so we're already doing trial runs with the new packaging; and we're basically pushing this as fast as we possibly can without sacrificing quality.

Okay, thanks. One quick follow-up from me. You mentioned the really strong turns on your vanilla-flavored liquid creamer, and at my local stores the vanilla version looks nearly cleaned out, while the unflavored one hasn't moved the same way. I'm curious whether you're making real-time tweaks to inventory planning, since demand seemed so heavily skewed toward vanilla.

Yes, yes, definitely. We're looking at that right now and making the products as needed, but don't underestimate the — actually, the unsweetened and the original are also turning very well. That product is seeing some great turn. Absolutely — vanilla leads the pack, though the remaining two of those three flavors are also turning in solid results by the measures we use, particularly given how recently they launched. What I find encouraging is that weekly turns continue to climb, which is a strong indicator. In essence, shoppers are trying the product and returning for repeat purchases, and we're growing a loyal base within stores. Those rates are still accelerating, which is genuinely exciting, and I believe we've really found something here. We also hear directly from shoppers via our customer service portal, and the response is that they simply adore the product.

Yeah, so it feels like I had a few conversations with the checkout folks at the stores where I shop. And they said — they knew about the product, and it seemed like there was a bit of a buzz building. Good; and then I suppose, the last thing, just about online. I'm curious, you tried to turn off free shipping for a bit. I thought you all were always sort of planning to keep that running a little while longer. Was that — did the strategy change there? Or was this a test you'd been planning from the start?

We'll be continually testing the free shipping initiative. And it's difficult to gauge how effective it is unless you have those periods when you can measure the opposite. So we want to switch it off to really get — sort of get a fresh measurement of returns. And then there are also plenty of different new creative ideas we're implementing to test various different versions of it that — to really look at ways we can lower our shipping costs but also deliver that really solid customer experience and be able to, in essence, compete with Amazon, with the free shipping initiatives. And so we're really excited about a whole number of tests we're actually going to be running over the next, say, 3 to 4 months to look at how we fully optimize that initiative. So it is important to keep playing with it and to be able to measure the data, I think.

Also, you mentioned that October shipping costs rose 15%. Is that right?

That's right; a couple of our main carriers actually sent us notice of a rate hike; so we're going to focus intensely on this part of the business, since we believe there's considerable opportunity here to uncover some real improvements. And by the way, Scott McGuire, our new COO, has deep experience in supply chain fulfillment logistics. In this arena, he's what I'd call a global expert. And Monday is his start date. So getting him aboard is something we're genuinely excited about. And digging deep into this part of the business will be one of his first initiatives.

That sounds like an excellent addition. Congrats on the upside this quarter.

Congrats on a truly strong quarter. I'd like to ask about the subscriptions on lairdsuperfood.com. I understand those have historically been a fairly significant revenue contributor for you. Could you tell us what portion of third quarter online sales came from subscriptions? Or any detail on how your subscription count has been trending through the year would be very useful.

Sure, absolutely. Subscription and repeat business still accounts for roughly 2/3 of our direct online business, even with that robust new customer growth in the third quarter. That figure was still about 31%. Repeat came in just above that, at 32%, 33%. And as for subscription accounts specifically, well, that keeps expanding overall too. So we think we were up roughly 24% versus the second quarter; but if you look back a year, we're up 277% against Q3 of last year. So there's ongoing strength in that area of the business, and subscriptions will always be a priority for us because, once again, a subscriber's LTV is dramatically better and higher than a onetime purchaser or a repeat purchaser; and we're going to devote a lot of focus there.

That's genuinely useful. So now I'm just attempting to piece everything together. What I mean is, it appears you're experiencing some very encouraging, sustained momentum in online sales. Wholesale, clearly, will be somewhat more uneven, and you had that significant sell-in with the liquid launch during the third quarter. It seems your revenue has risen quarter-over-quarter quite steadily across a long stretch now. Given how large that liquid creamer sell-in to retail was in Q3, is it fair to expect Q4 will likely take a step back before growth picks up again next year?

Yes. What I'd say is that at this point in the business's development, predicting things quarter-to-quarter is extremely difficult, and that's exactly why our guidance is annual. And it's — we — clearly, we have some excellent programs lined up; we're hoping to make an impact on Black Friday; but forecasting that precisely is beyond us. A large wholesale order is either coming in or it might slip into Q1. Those things have an enormous effect on those figures. So all we'd say is that we provided annual guidance, and we just — we'd stay with that. And when the next quarter ends, we'll give our guidance for next year. And we are certainly not attempting to conceal anything from anyone. It's simply that this is a highly dynamic, high-growth business, and predicting things quarter-to-quarter is extremely, extremely difficult at present. Once the company matures further out in a couple of years, I'm certain that will shift, and we can shift that kind of process. But for now, I'd simply stay with that. And we're glad to discuss every small business matter in thorough detail with — and share everything we know in the interim; and glad to keep those conversations going.