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

Ladies and gentlemen, thank you for standing by, and welcome to the Laird Superfood Acquisition of Picky Bars announcement conference call. [Operator Instructions] I would now like to turn the call over to your speaker today, Reed Anderson from ICR. Please go ahead.

Thank you. Good morning, and thank you for joining us on Laird Superfood's conference call to discuss the company's announced acquisition of Picky Bars. On today's call are Paul Hodge, Chief Executive Officer; Valerie Ells, Chief Financial Officer; and Mike Quinones, Senior Vice President of Growth and Marketing. By now, everyone should have access to the press release announcing the acquisition, which was released at 7:05 a.m. Eastern Time. This is available on the Investor Relations section of Laird Superfood's website at www.lairdsuperfood.com. Before we begin, please note that all the financial information presented on today's call is unaudited. And during the course of this call, management 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 may involve risks and uncertainties that could cause actual results to differ materially from those described in these forward-looking statements. Please refer to today's press release and other filings with the SEC 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. And now I'd like to turn the call over to Paul Hodge, Chief Executive Officer of Laird Superfood. Paul?

Thanks, Reed, and welcome, everyone. I'm excited to announce the acquisition of Picky Bars, a very unique company focused on healthy, nutritionally balanced functional snacks to fuel performance. The transaction closed on May 3 and the total purchase price was $12 million. Val will provide additional financial details later in her prepared remarks. Strategically, Picky Bars is a perfect fit for the Laird Superfood brand platform in several key levels. First, the product assortment is entirely additive to our existing lines, including a complementary add to our performance Whole Foods snack category with a product that truly stands alone, the Picky Bar, what we believe to be the best whole food bar in the world today. In addition, Picky has a line of Performance Oatmeal and Performance Granola products that complements our strong lineup of beverage focused products related to breakfast in our daily morning ritual. Distribution is another aspect of Picky that closely aligns with Laird's current approach and proven competitive advantages. The majority of Picky's revenue is derived from online direct-to-consumer sales to an incredibly loyal customer base. And a couple of things I'd like to highlight there. One, Picky's strong online and has a very high retention rate and low churn, which is exactly what we strive for in our base. Two, while there's overlap between Picky and Laird in culture and target consumers, we share less than 1%. This creates a great opportunity both ways to introduce our larger consumer base to the Picky products, while the consumers gain access to a more widespread offering. Mike Quinones, Laird's SVP of Growth and Marketing, will provide some additional color on the opportunity we see for Picky after my remarks. Location was another factor that made this acquisition so attractive to us. Picky is located in Bend, Oregon, so they're essentially our neighbor. We've known the founders for many years and have incredible respect for their business and the approach they've taken to build such a unique and authentic brand. Finally, from a cultural standpoint, Picky is also mission-driven and shares the same values as Laird Superfood around sustainability, the environment and the quality. So like Laird, Picky's products emphasize functional performance and real ingredients, providing natural fueling throughout the day. Picky Bars was found in 2010 by 3 professional athletes who were looking for a better way to provide fuel or high-endurance activities. Generally, Laird Superfood views itself as a builder versus aggregator. However, we are very open minded to and well positioned to become an accelerator to potentially highly accretive opportunities like this for investors. We see significant growth potential in applying Laird Superfood's resources. The most immediate impact will come from driving Picky products into our best-in-class online platform, and we see additional upside in driving into our wholesale distribution platform, which encompasses over 7,000 retail doors and growing. I'd also like to announce that in order to manage and continue to look for highly accretive M&A opportunities in the future where we feel we can have a significant impact in accelerating growth in products aligned with our mission values, we have placed Jamin Kerner as our Director of Corporate Development. Jamin is uniquely qualified with his background and long tenure at Goldman Sachs as well as his VP of sales role at Laird Superfood. So I'm going to stop here and turn the call over to Mike to provide some additional color on products and our go-to-market strategy for integrating Picky.

Thanks, Paul, and great to be here with all of you on such an exciting day. Picky Bars is truly the perfect first acquisition. There are some key points we'd like to highlight on how we're taking this opportunity to the next level. Overall, we're seeing a bar category that is resetting and our feedback from buyers is that consumers are realizing many of the current bars in the market are actually not that good for them. There's huge opportunity for truly natural whole food bars that taste great to come in and completely reorder the entire category. And of course, Picky's products extend well beyond the bar category. The Performance Oatmeal and Granola are going to fill out our morning ritual as a better way to fuel the day. With that being said, there are 3 things I'd like to highlight on how we'll be fully maximizing this opportunity. First being the inclusion of Picky Bars into our best-in-class e-commerce platform. The Picky team has done an incredible job building their brand thus far, and we're excited to apply our growth accelerating playbook to their solid foundation. It's our best-in-class digital platform that allows us to act as an accelerator to rapidly increase sales and ultimately expand the reach of the Laird Superfood brand. Overnight, we're able to plug Picky Bars into an e-mail list 475% larger than their current list and a social presence nearly 500% larger, on average, by platform. Couple this with 514% more active customers with less than 1% of overlap, and you can see why we're very excited about this opportunity. We want to try and introduce each brand's products in authentic and intentional way. The early focus will be driven by cross-selling and purchasing flows aimed at driving shopper trial. We want to make sure that Laird Superfood customer has every opportunity to take these delicious bars out of the gate and vice versa. Secondly, the Picky Bars product catalog is completely complementary to ours. We've seen an incredible response to our new products like pili nuts and are confident that these delicious bars, granola and oatmeals will follow suit. These new products also come with smaller and lighter [indiscernible] weights versus our current products and, as a result, make for a new and higher AOV car configurations with current Laird Superfood items that won't necessarily increase our shipping expenses. Over time, we look forward to maximizing our parcel scenarios with these new Picky Bar products. These new products also add additional layers to our pricing architecture. The sub $5 price point is important for wholesale as we look to launch Picky Bars into our over 7,000 current doors. Third and finally is the timing of the full integration of Picky Bars into Laird Superfood. Top of mind, first all, is protecting the trust and equity of the amazing Picky Club customer platform. Like we mentioned, out of the gate will be cross-selling top-performing products between both brands. Within the first 6 months, we expect to have the full Picky catalog integrated to the Laird Superfood e-comm platform and a target of 12 months for total brand integration. Our goal is to amplify, enhance and expand what Picky has built with long-term growth in mind for the new categories being brought to the Laird Superfood brand platform. Thank you all for your time, and now I'll pass it over to Val.

Thanks, Mike. As Paul mentioned, we closed the Picky acquisition on May 3 for a total purchase price of $12 million with an approximate 80-20 split between cash and stock, the stock portion being earned out over 3 years subject to revenue targets. In terms of valuation, the purchase price equates to around 1.2x projected 2022 revenues with synergies. Picky Bars generated revenue of $4.1 million in 2020, which represented a 42% growth rate over 2019. Including synergies, we are expecting approximately $4 million of incremental revenue from this deal over the balance of 2021 and modeling a $10 million contribution in 2022. Given the midyear timing of the acquisition and our expectation of generating incremental revenues from these stated product lines and the customer base, we are increasing our full year 2021 net sales estimate from $42 million to $46 million. Historically, Picky's gross margins have been in the low to mid-30s, and there are several factors that should help to lift those margins as the business scales factor on the Laird platform. Accordingly, in addition to all the strategic reasons for this transaction, it supports our path to an improving gross margin profile. However, while we do expect the expanded product lines to be supportive of our path to the 40% gross margins over time, in the current year, we do not anticipate a material impact and, therefore, we maintain our full year gross margin guidance of 29% for the annual period. And finally, we are anticipating some small benefit to SG&A as a percent of net sales in the current period. But as we noted earlier in the remarks, we want to keep the focus on executing this integration to the best of our ability. And so we will not rush any synergies or cost saves at the risk of harming the top line potential. We do, however, expect this acquisition to be accretive to our net income position in 2022 and beyond. And with that, I'll turn it back over to Paul.

Thanks, Val. To summarize, Picky Bars products combine real food ingredients, balanced nutrition and great taste better than anyone on the market. It's this unique and intentional balance that sets them apart. They have an authentic founding story created by 3 world-class athletes in their home kitchens. They have an incredible strong D2C business, including a 9000-member subscription service with industry-leading customer loyalty and retention. Laird Superfood will become a powerful accelerator to the Picky lineup of products, providing the platform needed to rapidly expand its reach. Given the similarities in culture, focus, costs and geography, we view this transaction as relatively low risk, particularly from an integration standpoint with significant potential for accretion and long-term value creation. We chose to buy versus build in this unique situation for the reasons listed above and also the fact that this will cut years off our time to market in its categories. This is what makes opportunity unique and potentially highly favorable over building this ourselves from the ground up. We understand this is our first acquisition and its importance. We are committed to getting it right, proving our playbook works well for other potentially accretive M&A deals that align with the Laird Superfood brand envision. We are excited for this opportunity and thank all of our investors for their support. Onward and upward. Now to Q&A.

[Operator Instructions] Our first question comes from the line of Bobby Burleson of Canaccord.

Congratulations. It sounds like a pretty good acquisition. I'm just curious, when we look at the Picky Bars organic growth up until now, anything that you can highlight that might have been holding back the growth a little bit? Clearly, you guys were growing a little faster.

Yes. I mean, Picky has done a great job of organic growth. So really, they didn't raise significant capital. It was reinvesting profits back in the growth for years and years. It did do 40% growth in that last year. And yes, so they just -- they've taken just a little bit more of that organic approach and less aggressive selling primarily online, not really having any sort of focus on wholesale or food service.

And I would just add to that. I mean, yes, 40% in total, but when you pull apart their business and look at the different channels they're selling into, their direct platform alone grew 90% last year. And remember, over 60% of that business is subscription with a really strong retention rate. So the wholesale is really the offset there. As Paul mentioned, with capital constraints, they just didn't have the people, the resources to invest there, and that's something we see as a really big opportunity for us moving forward after we rebrand.

Okay. Great. And so in terms of the wholesale timing, is it after the 6 months or is it after the 12 months that you guys really focus on that?

I would say we would really target that 12 months. There's going to be some packaging changes. So that always takes time. I would think 12 months would be really the target for the full wholesale rollout.

Okay. Great. And then just one last one for me. Just curious about manufacturing, whether or not this gets pulled into your internal production capacity or how that's going to work?

Yes. So currently, they're co-packing their products, and we see that as a huge opportunity. As we look at vertically integrating the manufacturing over time, there's a great potential for additional margin with the products. And we looked at the CapEx requirements for these manufacturing sets of products, and it's really quite reasonable. We'd expect a really great fast payback on that.

The next question comes from the line of Alex Fuhrman with Craig-Hallum Capital.

Great. Congratulations on the acquisition. I wanted to ask about your strategy for growing this brand here. I mean, it certainly crosses my mind that bars and oatmeal and some of the product that Picky has are a much bigger product category than plant-based creamers. So if your customers really gravitate to these products and adopt them, and it certainly sounds like your customers have been interested in these categories, how quickly can you ramp up the manufacturing here? I think you mentioned that Picky is using co-packers. I mean, are they going to be able to potentially triple or quadruple revenue over the next couple of years? Can they manufacture to that run rate?

Yes. So the co-manufacturer has a tremendous amount of capacity. So we've got a big runway for potential growth. And as far as the marketing growth sales question, I'll refer to Mike Quinones here.

Great to talk to you all today. I think one of the most exciting parts about this Picky acquisition is obviously being able to plug them directly into our online platform. We've obviously seen a lot of interest and success with ready-to-eat foods as we introduced pili nuts. And there's a really big demand from the existing Laird Superfood customers to try new items, specifically like Picky Bars. We have a lot of opportunity to plug them into our cross-selling platform out of the gate. So I think we're excited about a quick growth in sales. I think, long term for us, the bar category is just ripe and prime for disruption. Really a lot of customers, we feel like are looking for a more delicious, more functional bar overall. And that's part of the reason why we get so excited around Picky Bars. And to your point, I think our customers are also really excited about food that is really accessible and quick to grab and eat on the go. Picky Bars definitely offers that as well for us. It's an entirely new value proposition to our existing customers. So all around, the products themselves is being very complementary to what we're doing is a really big excitement for us.

Great. That's terrific. And then it seems like there's certainly a big opportunity to grow by acquisition, just given how strong your customer base is and how much repeat customer use that you have? I mean, it seems like the opportunity to expand the product line is pretty significant. And I think you mentioned that this is your first acquisition, and there could be others. I mean, curious if you could just talk about kind of what the landscape out there looks like for other -- for M&A? Are there other companies that are in your funnel right now that look promising? Just any thoughts on that more broadly would be helpful.

Yes. Let me preface that by saying we definitely view ourselves as builders versus aggregators. So we're -- whenever you look at a potential M&A opportunity, you're always going to ask yourselves, should we just build this or is this a good buy opportunity? So it's really going to take a special set of circumstances to make an M&A opportunity make sense for us. Having said that, there are opportunities out there, and it starts with the product. The product really needs to fit the authenticity of Laird and Gabby and the Laird Superfood platform. And that's a bigger hurdle than people can really ever imagine because when people say natural products are our level and scrutiny of going through the ingredients is pretty -- it's very limiting as far as a lot of products out there. They call themselves natural, but they're going to have ingredients that we just don't agree with their platform. Then there's got to be really other value that comes with that because it's pretty affordable for us to create these products from the ground up. So then we're going to look at that cross-selling opportunity, customer opportunities, how big of a customer base do they have. Picky, for example, with their 9,000 subscribers are really sticky, very loyal. That's a great solid subscription revenue that we're also bringing along. And we had less than 1% of our customers that we share. So there's just a great opportunity to sell both directions on the platforms. Then we might look at manufacturing capability. In some cases, there's some plug-and-play ways to get into manufacturing maybe different types of products that could be a value to us. And then the talent. The talent acquisition is another value area that we might look at for M&A. In the case of Picky Bars, we've got these 3 professional athletes who have done an incredible job building this business, have a strong following and just really fit the values of our company. So it's actually a very similar founding story to Laird Superfood, athletes that developed these products to feel themselves. I mean, it's got to sound familiar, right, and it's really the story for both companies. So this was a very special opportunity, quite unique. But there are others out there. And we are looking, that's why we put Jamin Kerner as Head of Corporate Development so that we have somebody full-time looking at evaluating these opportunities.

That's great. It sounds like a really unique opportunity for you guys.

Thank you.

Next question comes from the line of George Kelly with ROTH Capital Partners.

So just a couple. The first one, I guess, just to clarify. So it sounds like you'll be migrating their subscription and e-commerce business into your platform. Did I hear that correctly? And then along those same lines, how are you going to manage the growth of this brand going forward? Is this kind of about getting you those new customers and entree into these new categories? And over time, are you kind of start showing us Laird Superfood branded bars and granola, et cetera? Or are you going to sort of innovate in this brand and launch new products under Picky?

So happy to answer that question. I think for us, the goal is always long term to build the Laird Superfood brand. With the Picky acquisition, right, we're really mindful of what this integration plan looks like. To your point, they have a great subscription platform, an incredibly loyal customer. And we want to be very, very protective of how we integrate them long term into the Laird Superfood platform. For us, out of the gate, we're already cross-selling Picky Bars products on the site today. We're looking for, in the next 6 months, to fully sell the Picky catalog on the lairdsuperfood.com site. And It really looks like probably a 12-month time line to fully integrate all the Picky Bars products into the Laird Superfood packaging. So we're absolutely building the Laird Superfood brand platform here, and the goal is to absolutely update and integrate the Picky Bar products into our packaging and brand identity. That's something that I think we're all really excited about. In terms of their current subscription platform, their current e-commerce platform, I mean, they've done an incredible job building their online business in the way that they have. And we're just really excited to put our playbook on top of it to really grow and to accelerate that business in a very, very quick way. So I think does there -- do all the mechanics of their online business come into the Laird Superfood mechanics overnight? I mean, absolutely not. We want to be really smart around doing it the right way so that we keep their equity and we keep their customers happy and healthy, but absolutely long term they're going to be integrated into our business.

Okay. Got you. And then a couple of financial-related questions. Val, can you help what was growth looking like just generally pre-2020? And then can you walk us through how you got to guidance again? I think it was $4 million of revenue plus $4 million of synergy. Just kind of walk through that math again.

Yes. So updated guidance. We had previously discussed around $42 million for our core LSF business and we are expecting, for the balance of the year, to generate an incremental $4 million from the Picky products and the new customer base with LSF products. So that gets you to about $46 million. In terms of their growth, I actually don't have 2019 growth in front of me. 2020 was a great year for them though, and again, 40% growth for the Picky brand and 90% growth on their direct platform.

We have a follow-up question from the line of Bobby Burleson of Canaccord.

Just one quick one. Did you pick up any other assets with this? Any real estate or a nice condo on the river in Bend?

No. No, we did not. They do have a great warehouse space locally that we'll certainly use and we'll continue to use as great space expansion that's leased, but nothing else outside of that.

Okay. And then just I didn't get it down to my notes here, but can you touch on -- Val, can you touch on the synergies again? I think you put out a -- you had a metric related to synergies.

So the top line, we just kind of went over there, moving from $42 million to $46 million for our expectation on top line sales from 2020 -- excuse me, 2021, that's the year we're in right now. On gross margins, we are not changing our annual guidance there. They do have low to mid-30 margins on their own. That's with the co-packing, that's with free shipping, that's with very limited buying power and volume-based purchase power. We expect to be able to improve that over time. But this year, with it only representing $4 million max of our $46 million, we don't expect it to drive any material impact to our gross margin. So we're leaving that alone. And then in terms of operating expenses, moving forward in future years, we definitely expect some synergies there. We expect 2022 and beyond that this will be accretive to our net income position, but we're not going to rush those at the risk of sacrificing any top line opportunity. So not really any change to our annual outlook on that perspective either.

And at this time, there are no further questions. I'll turn back over to Paul Hodge, Chief Executive Officer, for closing remarks.

Yes. Thanks, everybody. We're really excited for the opportunity. And this is just a really special company, special products with great people that we're bringing on board. And we're really excited for the future. And we're going to do this right. We're going to take our time. We view this as a relatively low-risk transaction that are local, the size of the deal, but what we're really looking to do is to prove that we can be highly successful with the strategy so we can look to the future and potentially look at more. So thanks for your time, and we'll talk to you next week.

Thank you, ladies and gentlemen. That concludes this conference call. You may now disconnect.