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

Thank you. Good afternoon, everyone, and welcome to the conference call and webcast where Laird Superfood will discuss its results for the fourth quarter and the full year 2020. With us on today's call are Chief Executive Officer Paul Hodge, Chief Financial Officer Valerie Ells, and Chief Operating Officer Scott McGuire. By now, everyone should be able to view the company's fourth quarter earnings press release, which was issued today following the close of the market. It is available in the Investor Relations portion of Laird Superfood's website, www.lairdsuperfood.com. Before we begin, please note that the financial information shared on today's call has not been audited, and during this call, Management may make forward-looking statements as defined under the Federal Securities Laws. These remarks reflect what management presently anticipates and believes, and they carry risks and uncertainties that might make real outcomes diverge significantly from what those forward-looking statements describe. For a thorough review of the dangers that could lead real outcomes to diverge significantly from anything stated or suggested in the forward-looking statements we make today, kindly look at the press release issued today along with our other SEC filings. At this point I want to hand the call over to Laird Superfood's Chief Executive Officer, Paul Hodge. Paul?

Thanks, Ashley, and wow, hello everyone. I'm delighted to talk with all of you about the results we posted for the fourth quarter along with the full year. First off, I'd like to give our team a shout-out for the incredible results we achieved in 2020 despite the hurdles COVID put in front of us; our net sales climbed 98% compared with 2019, we completed a successful IPO, and we brought out innovative new products while moving into new categories — that includes our liquid creamer, a number of snack items, our functional copies, plus activate and renew products, which round out our daily ritual healthy living, since we hold the belief that better food leads to a better world. Looking back, 2020 was truly an epic and amazing year. I want you to have confidence that this team is committed to grinding hard every day so that 2021 can be another amazing year too. On today's call, I'll go through the main drivers of our business that we think you'll be most interested in. First, for anyone who's a new investor, I'll take two minutes to summarize who we are and what we do. After that, we'll dive into our growth drivers in liquid creamer. Then I'll hand things over to Scott McGuire, our COO, who will discuss his work on operational efficiencies, and after him Valerie Ells, our CFO, will go over the financials. Consistent with our standard practice, we're setting aside a generous portion of time for questions and answers. So, for those of you who are new to the company, let's get started. Laird Superfood operates as a manufacturer of natural, plant-based foods experiencing rapid growth, and it holds a wide-open opportunity to expand within the grocery sector, which is worth $759 billion. In our view, Laird Superfood is positioned to become a top name among the better-for-you < > labels in the consumer space. We are driven by a sense of mission, our appeal spans trends on a global TAM basis, and we generate an unusually large share of revenue from ecommerce. Here at Laird, our conviction is that improved food creates an improved world, since healthier people who feel good tend to make wiser choices. What our products deliver is the everyday, lasting energy, nourishment and hydration required to thrive across our entire day, from the moment the sun rises until it sets. We begin each morning with our Superfood Coffee and creamer—that's just part of the routine. What we're trying to do is straightforward: create items that taste excellent and meet a high standard. Convenience matters to us, along with being simple to use, reasonably priced, and within reach for everyone. Being able to offer natural products of this caliber at a price point people can manage—especially when you calculate cost per serving—is something we care about deeply. And we're able to do that while bringing trustworthy, genuine goods to the broad market. How do we pull this off? Through vertical integration, making things ourselves, and sourcing directly whenever we can, which removes the middleman. Beyond that, owning more of the process lets us keep an eye on things, making sure our practices stay sustainable and ethical at every stage, all the way from the farm to your fork. Our strategy spans multiple channels, and our team's ability to lead in e-commerce as a platform built for the digital world never fails to impress me. During Q4, 61% of what we sold came through that online channel. On top of that, we sell through wholesale, grocery mass, and drug outlets, as well as food service — a segment where we're still fairly new, though our offerings are a great fit there and we see massive potential over the long haul. Now, on to what's fueling our growth. Overall, 2020 saw demand remain incredibly strong; our net sales jumped 98% versus the year before, a figure that reflects a 108% gain in wholesale along with a 90% increase in online revenue. With that, I'll walk through four growth areas. To start, the online business is the true gem of this organization. New customer acquisition rose 192% in 2020 versus 2019, and 201% in Q4 alone compared with Q4 of the previous year. That demonstrates the early 2020 COVID stocking wasn't merely a bubble for Laird Superfood. Online growth has held up, and we don't expect any deceleration anytime soon. Our retention metrics show this even further. We recorded a 33% reorder rate increase for the 2020 cohort versus our 2019 cohort, lifting our already-strong retention to still higher levels. And our subscription business is robust and growing too, still accounting for a third of our online business. What stands out even more is that our new subscription growth reached 184% in 2020 versus 2019, a result that highlights how our customer royalty revenue is recurring by nature. There is a long list of wins from our online operations. Our email list continues to grow both in health and in the revenue it produces, our conversion rates sit at twice the industry average, and our customer acquisition cost keeps demonstrating just how effective and efficient our organic strategy for acquiring customers is. Overall, our e-commerce operation is top-tier and performing exceptionally well. We see ourselves as setting the pace within the food sector, and we anticipate that digital sales will permanently account for over 50% of our total revenue. We're delighted by this because it provides a direct link to our shoppers and serves as an extremely useful testing ground for new items prior to committing to wholesale distribution rollouts. Next, when it comes to growth catalysts, let's take a look at wholesale. Our initial milestone is hitting 20,000 doors, and we've currently achieved one-third of that target. Looking at all the possibilities ahead of us across drug, grocery, mass and convenience stores, the upside down the road is much bigger than that. We're aiming to have our products sitting in 20,000 doors, and to get there we've just wrapped up assembling a top-tier wholesale sales team, bringing on a few more sales directors, each of whom comes to us with senior-level CPG experience, and both of these people have long records of growing emerging brands and speeding up wide space closure. On top of that, we've just made an upgrade to our broker team by bringing in a new national broker network that will cover natural, conventional, mass and drug. We've partnered with the leading brokers in this industry, people who carry deep expertise in developing natural food brands, and that network puts us in a stronger spot for long-term expansion across every one of these channels. On top of that, we're pleased to share a few notable wholesale victories from March that show the momentum we keep building. Our Liquid Creamer is hitting 290 targets during this month, along with < >. Functional coffee is beginning to gain real traction with us, and just this month we're entering 400 new stores. Beyond that, we're currently hashing out our international approach internally, and although it's still a fairly easy win with any fewer < >, we recognize there's an overseas opportunity too — we recently brought our Superfood shelf-stable creamers into 220 Lowblaw locations in Canada. Plenty of grocery retailers are gearing up for the back half of this year, and we plan to be a part of that as well. Wholesale growth for this year has us quite enthusiastic. Moving to the next growth driver, I want to cover platform expansion. Like you already know, we're building a brand platform that enables us to keep finding new products with big cans, since certain lines < > are able to move those hits into wholesale. To give just a few examples of what's in testing right now: functional coffee. I think that within five years, this becomes a multi-billion dollar market. In Q4, we rolled out Boost Coffee, our second functional coffee, and it's the first coffee ever made with vitamin D sourced from plant-based whole foods.

This built on our first Functional Mushroom Coffee, which came out in the middle of 2020, and then in January of 2021 we grew the lineup again by adding a third functional coffee, Focus Coffee, featuring functional mushroom extracts plus botanical adaptogens aimed at cognitive support; we have a deep pipeline of very innovative functional coffee products in the works, and we'll keep rolling those out over the next several quarters, and we're thrilled to be out in front driving innovation and creating functionality within this category; we introduced Pili Nuts and brought in the harvest during Q4. That was our first test in the enormous healthy Better for You Whole Foods snack category. Pili Nuts, the first one to launch, was a massive hit — we saw strong demand right away, and since Pili Nuts came out, Himalayan Salts rank as the seventh best-selling SKU and < > best-selling dotcom, an Amazon SKU. That's particularly notable given that our inventory sold out on Day One and we stayed out of stock for an entire month following the launch. On top of that, after spending years getting the formula exactly right, we've introduced our newest Activate product, our Prebiotic Daily Greens; it contains 18 superfoods, functional mushrooms, prebiotics, and shilajit, an incredible superfood found high up in the Himalayan Mountains. This product delivers the daily micronutrients you need, and beyond that it's built to support your microbiome, which plays a tremendously important role in our overall health, something researchers are only starting to fully grasp. And last, when it comes to growth drivers, I want to mention M&A; there's a great deal of M&A activity out there in the market, and opportunities keep coming to us. Still, our approach here is deliberate and measured. We look at several factors — innovative products, manufacturing capability, unique talent for supply chain opportunities. That said, we're at the early stages of our corporate development strategy, and we intend to prove out the power of this growth opportunity. We think we can quickly plug new products into our platform without pulling focus from our current mission and our critical internal growth projects. Now, gross margins in Liquid Creamer. As everybody knows, and as we've been discussing, we're dealing with some temporary compression tied to higher shipping costs in our online channel and because of our new Liquid Creamer launch, which has the short shelf life and associated distribution efficiency issues we're dealing with there. Specifically regarding Liquid Creamer, we set a goal of having these issues resolved in the first half of this year, and we believe we're still on track to hit that goal. Meanwhile, we've begun to get some wins by optimizing the supply chain and working to make significant improvements on our fresh product. Around the middle of this year, we anticipate resolving the waste problems that have been dragging down our margins, and we'll allow distributors ample time to work through their stock, which lets them hold more inventory; it likewise gives buyers ample time to use the product, plus it delivers extra efficiencies across shipping, logistics, and warehousing. This has stretched out longer than we'd prefer, and honestly, we could have wrapped it up sooner had we been prepared to sacrifice our principles by using stabilizers and emulsifiers that we don't stand behind. Instead, we're pursuing the longer-term fix, which means creating something different with a brand-new ultra clean label offering, a formulation nobody has ever attempted. Our dedication to authenticity and to earning trust for a brand sets us apart, and we won't cut corners by just tossing in ingredients we don't stand behind. That said, we think it's worth waiting for. In our view, the early launch, packaging difficulties and all, paid off, since we have time to test these items in the market, where consumer adoption has been very strong along with repeat purchases where we've been selling alongside the creamer. We've observed robust shelf loss, something we hadn't anticipated seeing before this year's end, and it keeps expanding. Also remember that these robust shelf losses < > come despite lower shelf flow rates than we'd have preferred, owing to the distributor challenges that we know are artificially depressing these figures. That's a compelling indicator of how much shoppers and customers adore our inventive Functional Liquid Creamers. As strong sales figures come in, we're also stepping up our work on the Liquid Creamer shelf-stable item, and we're beginning to pilot it with a new co-packer, expecting to release it during the back half of this year. We're thrilled for this liquid shelf-stable line to complement our shelf-stable powder offerings for conventional channels, given that the sub $5 price point fits nicely for plenty of these more value-focused grocery chains; it also unlocks a fantastic opportunity with Amazon across our DTC < > channels to sell at full retail, which will even out margins and lift revenues for the whole Liquid Creamer line. At this point, I'd like to hand things over to Scott McGuire, our COO, to talk about operations.

Thanks, Paul. It's been 3 months since I stepped into the Chief Operating Officer position, and I'm genuinely thrilled to be working alongside this group, which has created a fantastic platform — one with tremendous upside. It's an honor to help push this work toward higher levels of execution and innovation, and to carry the responsibility of making sure these excellent products reach everyone, everywhere, and do so quickly, safely, and tastily. Turning to Q4: the pandemic handed us the usual challenges around production supply. Keeping people safe was, and remains, our number one priority, along with securing on-time delivery of equipment and raw materials, and assembling a supply chain so that every consumer can get our products. Extremely difficult. Yet even with all these pandemic complications, we stay laser-focused on creating a world-class operational business and have been gaining ground on efficiencies — an effort we will never abandon. I want to walk through a few particular Q4 developments across three key areas: throughput production and direct-to-consumer capacity, parcel cost, and people in talent < >. On throughput: our first production line showed major improvement in Q4 compared with Q3. Thanks to a total team effort, those results came from putting in place a new sales and operations planning process, carrying out a production master scheduling and sequencing algorithm, ongoing upgrades to our preventive maintenance, and installing automated controls that give visibility into real-time results. Amid all of this — and we're quite proud of it — we installed, tested, and started ramping up our second production line. That line supports us on four critical levels: it gives us redundancy and more than doubles capacity, it boosts our ability to vertically integrate current < >, and lastly it delivers essential flexibility by letting us build inventories intelligently for new products, preventive maintenance, and major peak revenue periods. As a result of this progress on throughput and capacity, we hit our targeted safety stocks 2 months earlier than expected; on personal cost, this has created difficulties for us in direct-to-consumer. Freight rate increases from parcel companies have been handed down to us. It's a tricky balance, one needing surgical, real-time attention. We experienced an immediate rate increase in mid Q4. Chipping away at this takes multiple solutions, and we're pursuing all of them, including subscription consolidations, packaging and mode optimization, and strategic bundling of our offerings. Lastly, on our people and our talent for Q4: we made investments to strengthen our engineering and procurement teams. That has already paid off in automation, reliability, sourcing, and certainty of supply supplier of our raw materials. Looking ahead, I want to share a few key priorities for fiscal year 2021; we have 3 Ms < > that serve as a template for everything we do: Manufacture more ourselves; Make it more efficiently; Move it smarter and faster. When it comes to producing more on our own, we've already shifted some products this year from the co-packer over to our own manufacturing site, and additional conversions are coming. On the efficiency front, we'll be putting money into continuous improvement, lean practices, and automation; our goal is to deliver real-time feedback on efficiency and to get rid of tedious, redundant tasks that are hard to staff. Automation will be done the right way, and our hope is to build in the flexibility needed to support all the packaging innovations we anticipate across every channel. Our engineering team is literally all over this. Turning to moving product smarter and faster, what's really exciting is that last month we broke ground at our sister's campus for a new customer fulfillment center. Our aim is to optimize the layout for velocity, lower storage costs, direct-to-consumer enhancements, and most importantly, by showing our customers how well we move product to them. I'll now pass things to Val.

Appreciate that, Scott. Wrapping up the discussion about our P&L. In Q4, Operating Expenses stayed very much under our thumb, and like we've always done, we kept handling those costs well right across the board. For Q4 2020, General and Administrative expenses came in at 44% of net sales, versus 36% during the earlier years, which mirrors the added and anticipated costs of being a public company. Looking at it apples-to-apples, had we stripped out both public company costs, our G&A expense would have landed at just 32% of net sales, roughly 400 basis points lower. Research and development, at 2% of net sales, is still extremely efficient, with cash payback coming quickly. Turning to sales and marketing, expenses represented 37% of net sales for Q4 2020, against 49% of sales in the same period a year earlier, which shows how our organic customer acquisition strategy keeps delivering on effectiveness and efficiency, plus the monetary cost < > leverage we can access in that category. Now let's turn an eye toward next year. For 2021, our net sales goal stays at year-over-year growth of no less than 60%. These figures give us confidence, since our business naturally sits on a trajectory toward robust growth through our core product lines along with the direct and wholesale relationships we already have. Still, how steep that growth curve turns out will hinge on how well a number of initiatives perform next year, among them our Liquid Creamer packaging revamp during the first half, plus the introduction of a liquid shelf-stable option in the second half of 2021, timely and inventive new product launches paired with sustained strong online results, the addition of wholesale store, aimed specifically at larger teams using our Liquid Creamer as an entry point for those opportunities, and our ongoing work to land more product placements on shelf with bigger partners while raising the value of each one of those store, all while building greater brand awareness. Remember that on the cost front, expectations ought to keep shipping factors in view as we work out the best balance between free shipping and rising shipping expenses for our DTC business, which includes the higher shipping costs that started in the fourth quarter, and also factor in Liquid Creamer spoilage over the first six months of 2021, after which our margins ought to start a slow upward slope. Bearing those first half headwinds in mind, we anticipate a 2021 margin between 28% and 30%, which we intend to reach through the liquid packaging update, better optimization of our DTC shipping, and getting the most fixed cost leverage we can from vertical integration; and much like the top-line expectations, how much our margins improve will depend on executing these key initiatives too. One thing we want to stress again, though: the year ahead is merely the opening step toward our long term target, we entered the public markets with a very clear set of long term goals and we're glad to report that we stay confident in our ability to hit them. Looking ahead across a span of 2 to 4 years — that's 2023 through 2025 — our view is that this business is capable of operating with substantial yearly top-line expansion, once we start capitalizing on our brand platform, gross margins above 40%, and EBITDA margins sitting in the 19% < > range. At this point I'll hand things back over to Paul.

Appreciate that, Val. Our goal is to grow Laird Superfood into something that operates at a very large scale. Our ambition is to become a brand platform worth multiple billions of dollars. Choices we make aren't driven by a single quarter, or even by a full year. What we're doing right now — putting money into infrastructure, bringing in excellent talent, refining strategy, and developing supply chain product segments — all of it feeds into this long-range vision. We possess the resources and the people needed to create or purchase innovative Better For You offerings that come with sizable TAM opportunities, and we're assembling a genuine, dependable brand platform capable of tremendous scale and expansion well into the future, spanning decades ahead. Many thanks to everyone on our team and to those who hold our shares. At this point, let's take questions from the audience. Operator?

Hi, everyone. I appreciate you answering my questions. Nice work on the revenue beat and the EBITDA figure. I'm wondering, Paul — we discussed M&A, and I'd like to know your thinking on partnerships. What's your view when it comes to the major CPG and QSR companies? Other plant-based businesses have announced tie-ups with the big players. Could anything like that happen this year?

Every possibility is on our radar. If a chance comes along that essentially helps us grow this brand, that's the whole point. Our approach isn't to make acquisitions — we're not buying other brands and then pouring a lot of our own marketing resources into them. A partnership would follow roughly that same logic. We won't dedicate significant effort to pushing other people's brands. That said, should a deal arise that's simply a win-win for all involved, we would definitely take a look, and there have been opportunities that we've been evaluating. So these possibilities have us enthusiastic, though I can't predict whether anything will come together or not.

Absolutely, that's reasonable. And just real quick, I believe this one's directed at Valerie, regarding the gross margin outlook. You mentioned a gradual upward incline. It appears as though it would look more like a stair-step rise during the back half, unless there's a bit of room for margin improvement in the front half? Would that be accurate?

I try not to frame it quite that way, since as Scott said during his remarks, there's not a single fix for the shipping-related challenges we're dealing with right now, for instance. So certainly, whenever we achieve an enhancement, whenever some of those gains begin to materialize. We'll be moving in a favorable direction, but major leaps from each one of those, and I think if you've come to know me well enough, I'd prefer to be somewhat more cautious rather than promise too much on that front.

All right. My question was really about how gross margins will trend across the year. Reaching roughly 29% was necessary. Do you expect some improvement during the first half? Or is the gain weighted toward the middle of the year and after that?

Regarding Liquid Creamer, I believe our messaging on the shelf-life enhancement has been fairly clear. That will in all likelihood occur around mid-year, and then our aim is a shelf-stable Liquid Creamer available in the latter six months. So for those two items, that window is probably when gains are most likely to appear. As for free shipping combined with the DTC parcel cost pressures we face, I'd say that one will come along more steadily as the year progresses, yes. That's because this is live and we have many initiatives underway to address it, with Scott spearheading that effort at present.

That sounds excellent. Then only one more thing from my side. When considering how this hits your shipping expenses, or the effect on gross margin, could you hint at whether there's a rough division between the influence of free shipping and the broader rise in freight prices — simply the increased shipping costs — regarding how they affect your margins during Q4?

Sure, that's no trouble. When we consider the squeeze tied to the free shipping and parking cost issue, looking back at Q4 of last year, before free shipping was a factor, it was essentially an even divide. That amounts to roughly 900 basis points comparing Q4 of last year with Q4 of this year, and once more, almost perfectly even between the two halves. The rest of the pressure we're observing relative to Q4 of 2019 comes from Liquid Creamer, which accounts for the remaining 500 basis points at present.

Fantastic. Well, I appreciate everyone fielding the questions, folks. Yes, Paul?

I merely wanted to tack on a small bit regarding the free shipping, since that's what we're discussing. There's a point worth recalling — you know, free shipping ranks among the strongest deployments of capital we've ever witnessed. Looking at 2020, the three year LTV for our new customer cohort was 17.37 million, against 8.78 million for our 2019 three year new customer LTV. So our LTV value rose by 8.5million, even as we gave up essentially 100,000 in shipping income. So it's simply a phenomenal investment. When we consider it, you know, that spending makes everything operate more efficiently. Since we've doubled our conversion rates on the website; so that means every ad and all the other traffic we bring to the site becomes more effective. So at this point in the game, it's just a truly, truly potent tool that we must continue with.

Great, I appreciate that extra context.

Thank you so much for fielding my question, and congratulations on such a strong quarter and a strong year. I'd like to ask about the longer-term plan when it comes to grocery stores, plus other chances in food, mass, and drug. It definitely sounds like you keep pushing further into grocery and have brought on some impressive sales hires there. I just wanted to ask Paul about your remark that you see Laird Superfood always generating more than 50% of sales online. Does that imply that, looking ahead over the next couple of years, there might be somewhat less focus on traditional grocery? Or is it simply that your online business is expanding so quickly that grocery will never truly get the chance to catch up fully?

It's the second one < >; we're a company truly built on online channel sales. So we aren't placing a massive emphasis on either one; we're big fans of our wholesale customers, and we're big fans of the wholesale business. Naturally, we take an extremely methodical approach with wholesale, and we'll test products online first to confirm we've identified those blockbuster items that deserve a larger investment into wholesale channels. That's because you're working with thinner margins, you're working with a product sitting on shelves, and you don't want to make a mistake by putting items on the shelf that aren't actually moving. Our wholesale business is expanding remarkably well. I mean, our door count doubled last year. And you know, we're more than a third of the way toward the target we set of 20,000 doors, and we think we're actually beginning to reconsider that figure. You know, we believe that's a fairly conservative figure, and far more opportunity exists once you start examining drug and other. So we're pushing hard, you know, securing an extended kind of shelf life on our Liquid Creamers, a key part of sustaining the conventional rollout where a lot of the whitespace lies for us. And our shelf stable Liquid Creamer is a tremendously important tool as well, to get onto the shelf table < > of those more conventional stores with some $5 price point. So that's all arriving this year; and we're simply continuing to push. It's somewhat of a longer lifecycle with grocery you know, when category review meaning now that mean that you can you know, then place your products on the shelf towards the end of the year; so we're really hoping for third fourth quarter to get onto a bunch of those shells through that process. And we're excited for it. As I said before, we've just brought in what we consider a world-class group, and by this month we've truly assembled, in our view, the ideal roster of brokers, each focused on a distinct channel. Our freshly appointed sales directors covering the East and the West bring a career's worth of expertise in closing gaps, and in our judgment they align well with what this company stands for, and they'll pursue that aggressively. Naturally, our VP of sales, Josh, has performed remarkably in reorganizing things, putting us in a genuinely solid spot to sell into wholesale. So that's where our attention is, and we're thrilled about it. Meanwhile, the online side is simply taking off. It's an amazing, best-in-class operation; we're convinced we hold the most powerful online platform in this sector, full stop; and thanks to the group we've got powering it, the KPIs and the growth keep improving. So it's remarkable; and it's quite uncommon for this sector, which has us very enthusiastic, and we won't be easing up < > when it comes to the online business. And regardless of how quickly wholesale expands, our view remains that online will expand more quickly.

That's excellent. Thanks for that, Paul. Now, turning to the online side, based on what you've said, it seems you're seeing a strong lift in new customers thanks to the free shipping promotion. And it really sounds like you've brought in a large number of new subscriptions, even beyond that. Could you share some thoughts on how margins are affected by having customers on that subscription plan versus simply purchasing one-off, both currently, while free shipping is available, and then down the road, if you bring back some kind of minimum order threshold for free shipping, similar to what you may have had before the pandemic? In other words, how does profitability from a subscriber compare with what you get from customers placing comparable orders on their own?

I might let Vale address a few of those points, but what I will say is, once someone signs up for a subscription, that customer's lifetime value is amazing, our churn is extremely low, so joining that program, they receive a small discount as an incentive to subscribe. That said, we've been putting in a lot of effort recently to really examine those subscriptions. And we've been consolidating subscriptions, we've been discussing initiatives like, hey, reduce your carbon footprint by half, and we have an 18 month shelf life on this Braxton's. Rather than receiving one each month, one day a month, let's do two bags every two months, which creates more efficiencies on the shipping side. So, we're working hard to really make those efficient, but those are highly profitable, among the most profitable business we have.

No, I think that's everything. The one genuine distinction, I'd say, is that someone with a subscription gets a discount, and that shows up this year, but that's really the key thing that sets it apart?

That's fantastic. I really appreciate it.