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

Thanks. Good afternoon, and welcome to the Laird Superfood first quarter 2021 earnings conference call and webcast. Joining us today are Paul Hodge, our Chief Executive Officer; Valerie Ells, our Chief Financial Officer; and Scott McGuire, our Chief Operating Officer. At this point, everyone ought to be able to access the company's first quarter earnings press release that was filed today once the market closed; you can find it in the Investor Relations section of the Laird Superfood website, which is at www.lairdsuperfood.com. Prior to getting started, we want to point out that all financial information shared on today's call has not been audited, and throughout this call, management might make forward-looking statements as defined under the Federal Securities Laws. Such statements rest on management's present expectations and beliefs and carry risks and uncertainties that might lead actual results to differ materially from what those forward-looking statements describe. For a detailed discussion of the risks that might lead actual results to differ materially from anything expressed or implied in any forward-looking statements made today, please see today's press release along with other filings with the SEC. I would now like to hand the call over to Paul Hodge, Chief Executive Officer of Laird Superfood.

Thank you, Reed, and greetings to everyone. I'm happy to talk with all of you about the earnings report for our first quarter of 2021. Once more, I'd like to begin with a quick overview of our company's identity and operations, plus a look at Q1's notable points and the main drivers behind our growth. After that, I'll pass things to Scott McGuire, who serves as our COO, and then to Valerie Ells, our CFO, and we'll leave ample room for questions. Laird Superfood is a mission-driven, high-growth maker of plant-based natural foods, aiming to lead among better-for-you brands within the grocery sector, which is worth $759 billion. We operate as an omni-channel business, yet we have a best-in-class native online platform. During Q1, 59% of net sales came from online, while the remaining portion was distributed among wholesale, grocery, mass, drug, and foodservice accounts. Here at Laird, our conviction is that better food creates a better world, since healthier people who feel good tend to make wiser choices. What we offer delivers sustained energy along with the nutrition migration required to perform from sunrise until sunset, fitting into our daily ritual that begins with Superfood coffee and creamer and, more recently, has expanded into whole food breakfast items. Beyond great taste and great quality, our products are convenient, simple to use, and affordable, embedding sustainable and ethical practices throughout every stage of our supply chain, from farm to fork. Now, let me touch on a few Q1 highlights. Better margins stood out as a main takeaway from Q1's results, with our gross margin hitting 25.1%, which is a 480 basis point sequential rise from Q4. Several elements helped margins, among them liquid improvements, strong shelf velocities, and efficiencies in shipping and manufacturing. Laird is a growth story, and expanding the top line is a primary focus. Even so, we are just as dedicated to boosting profitability. The first quarter's results show meaningful movement toward our longer-term 40% margin targets, and we anticipate additional progress toward that aim as 2021 continues. Scott and Val will go into more detail on this. Net sales for Q1 climbed 35% versus last year, reaching $7.4 million, and we keep seeing wide-ranging gains across every key category. Notably, momentum grew steadily throughout the quarter, and March set a record with strong run rates across all channels. Although timing factors shifted some wholesale revenue into Q2, that's a reminder of why we guide annually and set quarterly. Now I want to turn to a few of the main growth drivers, beginning with online. Our online platform remains best-in-class, and we believe it's one of the strongest online food and beverage platforms in the industry. Online sales rose 65% year-over-year, which includes D2C growth of 135%. Online made up 59% of Laird's Q1 net sales, versus 48% a year earlier, underscoring the competitive strength of our brand and digitally native model. In Q1, customer acquisition growth rose 29%, and new subscriptions increased 153% compared with a year ago. We're also seeing better retention among customers — among the 2020 group, repeat buys were 27% greater in Q1 2021 than what the 2019 group posted during Q1 of 2020. Our e-mail list keeps expanding aggressively, and churn sits below the industry average. Online conversion rates for us run at double the industry average, and what we spend to acquire customers keeps proving that our strategy works and works efficiently. During the first quarter, we made solid headway on offsetting the effects of free shipping, and we're pleased to report that freight costs measured against D2C sales, along with average order values, both came back to where they stood in 2020 before free shipping. Add in our smallest quarter for discounts since Q1 of 2020, and our online operation remains a leading example across the CPG space. Turning to wholesale growth drivers — while we genuinely delivered a solid quarter in wholesale, which I'll get into, the year-over-year figure here isn't especially thrilling, and that's not too shocking when you consider how COVID timing and the pantry stocking that swept through wholesale in February and March of 2020 played out. Three points I want to make. Last year's Q1 was a huge wholesale quarter thanks to COVID stocking, and since we're vertically integrated, we could grab that opportunity and serve the heightened demand last year, including a massive quarter of $1.7 million with Costco. The end result: Q1 2020 wholesale rose 48% compared with Q4 of 2019. If you dig into Q1 of this year, you'll find that base wholesale non-club sales were in fact elevated because our door count was nearly twice as large. Last year's wholesale base sales, leaving out Costco, came to about $970,000, while this year, again leaving out Costco, they reached roughly $1.8 million — that's strong 85% growth in our base wholesale sales year-over-year. We did get Costco orders during Q1 of this year, but a good chunk slid into Q2, which perfectly illustrates why we guide annually rather than quarterly, since this dynamic creates lumpiness from one quarter to the next. That said, we still firmly believe we'll hit or beat our annual guidance, meaning the remainder of this year is positioned for strong revenue growth; and three, we've still never lost a major retail partner in wholesale, and we have a growing assortment of products we're just beginning to sell into existing doors, new doors nationwide, and most recently, new doors in Canada. We've built a very strong base, far improved from a year ago, and we expect to see results from it through the rest of the year. Now, a few wholesale wins from this quarter. First, at the close of Q1, we brought our refrigerated creamers into additional doors through key retailer launches at Target, Harris Teeter, and Wakefern. One key point: the expansion we're seeing in refrigerated creamers isn't just about getting more shelf space. We're also seeing higher watch numbers at important retailers, Whole Foods being one example, and there weekly non-promoted velocities are up over 3x compared with Q4 of 2020. Next, we're quite enthusiastic about our fourth wave of functional coffees, an innovative line that lifted our coffee business 156% in Q1 of this year against Q1 of 2020. In our view, these coffee products sit in a strong spot to disrupt the enormous coffee occasion by bringing added functional benefits to a daily ritual that more than 200 million people across the US enjoy every day. As Q1 ended and Q2 got underway, we wrapped up wholesale packaging for the new functional coffees, Focused and Boost, and got those functional coffees into over 515 doors, with key retail launches at Sprouts and Natural Grocers. The Safeway Seattle division is set to bring our full functional coffee line into its 200-plus stores during Q2; we locked in a major cost reduction in our coffee COGS as of May 1st, brought our functional coffee line pricing down to $12.95 at wholesale, and we think that sets us up for mass market adoption of these innovative products.

And last, beyond what we've achieved in the US, we made our formal debut in Canada, rolling out three products—two shelf-stable creamers plus one instafill—into 150 Loblaw locations during late January. An extra 120 stores have already been confirmed for expansion in June. When we consider future growth possibilities, this marked a strong first move, met with solid acceptance that we aim to expand on going forward. Also, among our growth drivers, on May 4th we revealed our purchase of Picky Bars, a key strategic milestone that complements our robust organic growth. Picky generated roughly $4 million of revenue in 2020 and has been expanding quickly. This deal adds materially to revenue and backs our push toward a better margin profile; the business we built ought to serve as a strong brand platform capable of supporting several growth drivers, and buying Picky is a perfect transaction for demonstrating our M&A abilities. We think we can generate revenue synergies beneath our platform in 2022 totaling no less than $10 million, which underscores the value in locating these distinctive and complementary M&A possibilities. Organizationally speaking, the two companies share close philosophical alignment regarding products and market opportunities, and culturally as well. Picky is likewise founder led, and we've been acquainted with the principals for a long time, holding a great deal of respect for their business, for them as individuals, and for what they've accomplished with products. Their flagship offering is a functional bar, uniquely built to deliver balanced fuel for lasting energy and performance—one we regard as the finest whole food bar anywhere. Picky also carries multiple performance granola items alongside a line of performance oatmeal items, an ideal complement to our already robust daily morning ritual routine. Picky Bar items represent a fantastic incremental, non-cannibalistic expansion of our catalog; they bring new ready-to-eat choices for our customers, which we know they adore given the early success of our Harvest Pili Nuts, plus newer price points that boost our carb bundling opportunities and wholesale expansion opportunities. Although both companies aim at similar customers and markets, our existing customer overlap sits below 1%. Adding Picky certainly gives Laird wider exposure to mixed diet customers, along with us examining tasty functional and ready-to-eat items for their daily ritual. The synergy here is enormous when we consider the sales targets these items could hit once layered onto the Laird Superfood omni-channel platform. Picky's online customers are low and highly recurring, much like ours. We know they're highly engaged, and we know their repeat rates are exceptional. So with shared priorities around functional foods and the highest-quality ingredients, we believe these items will connect powerfully with the Laird Superfood audience. This recent reach will speed up under our brand platform, our online business, which by comparison ranks best-in-class within the CPG industry. Also, naturally, with the marketing team we have in place—proving time and again, quarter after quarter, the leadership and outcomes through D2C revenue contribution, customer value, repeat rates, and retention—and last, when it comes to the main growth drivers, I want to talk about new product launches. Although Q1 brought only a small number of new product launches, we continued to see strong online results from items launched in Q4, such as our activate prebiotic greens through new protein and functional coffees. Looking at Q2, we're really excited about OatMac Creamer, which will begin rolling out online in June. In the plant-based beverage space, it owns the fastest-growing category, likely by a factor of 5x. Ours will stand apart by combining the strengths of oat and macadamia milks, plus adding the functional benefits of avocado and acumen; this marks our first creamer that sits outside our core coconut base, and we believe it will be an accretive addition to our lineup, aimed at non-coconut consumers. Beyond broadening what we offer and increasing sales, bringing in OatMac Creamer also helps move forward other core strategies, such as manufacturing efficiency, since it will be made on existing production lines that have ample capacity, along with supply chain diversification. Before passing it to Scott, I want to highlight two great ESG cause initiatives we recently started. First, alongside Feeding America, we're donating 1.5 million meals to help combat food insecurity. Over the past year, more than 42 million Americans have lived without knowing where or when their next meal would come, and 13 million of them are children. Second, we've laid the groundwork for what we call our carbon-neutral last mile, making sure orders placed at lairdsuperfood.com have their greenhouse gas impact offset; it's been a strong year for the online business, and we want to stay mindful of what that means for the world around us. We've brought in First Environment to provide a comprehensive, transparent audit for last mile e-commerce impact. And we're partnering with Eden Reforestation Projects as our tree planting partner. These are two new initiatives we're excited to add to our existing efforts for a very minimal cost, and we look forward to expanding and discussing more in the future. To sum up, in Q1 we once again showed our ability to keep executing across all our strategic priorities while driving top line growth, which perhaps draws the most investor attention; we place equal priority on profitability as a core element of our mission of building a sustainable business for the long-term. To that end, efficiency gains in Q1 that showed up as improving gross margins should serve as a clear indicator of our level of commitment as well as optimism for the future. Now I'd like to hand off to Scott to talk about our stellar operational performance this quarter.

Thanks, Paul. You're going to hear me touch on a number of items I laid out in the Q4 earnings release, where I pointed to areas of real progress along with what we planned to focus on in Q1. As is appropriate while the pandemic continues, our highest priorities have stayed the same: protecting our people, making sure customer orders get fulfilled, and getting ourselves ready to take on more — though welcome — complexity tied to exciting new products and higher revenues; and we pulled it off. When it came to keeping people safe, by any metric you could use, we knocked it out of the park. Our customer service was great. We made major strides cutting down out-of-stock problems during 2020, and in Q1 there was just a single out-of-stock situation on our greens product, lasting 13 days. On top of that, we sourced, planned and project managed each element of the supply chain to lay the groundwork for our multiyear plan of expanding revenues and margins; the driving force behind that was the straightforward yet powerful set of priorities I mentioned in the prior quarter, the 3Ms: manufacture more ourselves, make it more efficiently, move it smarter and faster. So when it comes to manufacturing more ourselves, I want to emphasize that we never do this without careful thought — we weigh our costs, covering capital, labor and transportation. That said, we have a strong inclination toward believing our incredible team can outproduce anybody. We also see value in being valuable, and in having the ability to call scheduling and fulfillment audibles whenever customer needs and supply chains require it. We just showed this when a very large order came in with a short lead time. We held 100% control over every aspect of the process, and we got the job done, did it very well, and honestly, finished it faster than what was asked; so just like in Q4, we moved more co-pack items in-house, and one of our biggest and most exciting new products performed successfully on in-house trial lines. On making it more efficiently, you can see that reflected in our margin improvements. And as I noted in the prior quarter, we again boosted throughput on our original line, and our newest lines are now at parity when it comes to capacity, capability and instantaneous output. That has let us maintain safety stocks at levels that guarantee orders get filled, and it's given us the flexibility to react to customer needs, as I brought up earlier. Beyond that, we keep up best practice, as I discussed during Q4, including refining our sales and operations planning process, running our production master scheduling and sequencing algorithm, making ongoing enhancements to preventive maintenance, and taking advantage of automated controls, which creates visibility into real-time results. Naturally, you can't make things more efficiently without raw materials on hand. As everyone is aware, the pandemic along with port congestion has thrown supply chains into chaos throughout most industries. Yet thanks to relentless efforts from the group handling procurement, we've reached the inventory targets we set for every one of our key inputs, and each remains in a tight position; beyond that, when it comes to moving things in a smarter, quicker way, there were a number of significant victories involving optimization of both the liquid and master production schedules, the master delivery schedule line, and approaches to raw materials, which delivered gains in shelf life while cutting manufacturing waste and spoilage. Thanks to all this, we're set up nicely to execute flawlessly as we watch some thrilling things unfold in the liquid channel. Free shipping for direct-to-consumer buyers — among our biggest "capital investments," drawing in new shoppers and encouraging more trial, which means more revenue — carries a cost that's plain to see and often talked about. We keep offsetting those expenses by raising average order value. Our cost as a share of revenue came down, and we enjoyed our strongest quarter ever for parcel ship for people. There's also more ahead of us as we keep expanding our new customer fulfillment center, built to maximize velocity, unlock further growth, and delight our customers through perfect order execution. This is the ideal moment to address the Picky Bar acquisition: aside from the fact that a larger portion of the world will encounter their revolutionary, delicious offerings, we're able to merge our supply chains, push our average order values even higher, and enhance every element of moving smarter and faster. And lastly, let me introduce a fourth M: my company. Since the very beginning, authenticity has defined us, along with the values we hold for our culture and our people. Our people rank among our greatest assets, and we want each person to say, and genuinely feel, that this is my company. And when every one of our teammates behaves like an owner, adding to the culture and thereby fueling gains in safety, quality, service, and efficiency, no force can prevent a great result for the remaining three Ms — so we'll talk about the four Ms often. With that, I'll pass things to our CFO, Valerie Ells.

Appreciate it, Scott. Looking at our financial results, as you've already been told, the headline for Q1 was strong top line expansion compared to last year, plus gross margins that came in above what we had expected. Net sales rose 35% versus the prior year, reaching $7.4 million, driven by 135% growth on our lairdsuperfood.com platform. Now, the opening half of Q1 tends to be a weaker selling stretch for us historically, since it follows the holiday season. We finished Q1 with a really robust run rate across all channels, which strengthens our confidence that we'll hit our yearly goals — and that's a helpful reminder of why we examine our business, and why we urge others to examine it, on an annual basis rather than quarter by quarter. Because of our size and where we sit in our growth trajectory, results can be uneven from one quarter to the next, particularly when it comes to the timing of large wholesale orders. Turning to how each channel performed: on the online side, we continued to see gains in our AOV and retention metrics, and our repeat and subscription business kept performing well, accounting for 69% of DTC sales. In wholesale, even though club sales were lower than a year ago — a period that included COVID-related pantry loading — our grocery business posted solid growth thanks to our door count nearly doubling and the introduction of our refrigerated liquid creamer products, which extended our reach into the previously untapped 90% of the creamer TAM. On top of that, our first Canadian door delivered solid early results, opening the door for possible expansion in that country down the road. Gross margin for the quarter came in at 25.1%, which is up 480 basis points from Q4 and represents our highest quarterly margin over the past 12 months. The main drivers behind that sequential gross margin gain were better spoiled rates, shelf life and waste for liquid creamer, optimizing our DTC shipping expenses while also improving AOV, and generating efficiencies in our manufacturing processes. Operating expenses totaled $7.2 million in Q1 2021, versus $4.1 million in Q1 2020, with the current quarter including roughly $1 million in non-cash stock-based compensation, about $160,000 of transaction-related expenses, and ongoing public company costs. Keep in mind, we're building a large CPG platform, and investing in our SG&A cost is necessary to create a best-in-class business that's much bigger than the one we have today. That said, we stay very confident in our capacity to leverage SG&A costs as our top line keeps growing in future periods. Our balance sheet is still strong, with more than $60 million in cash and investments as of March 31, 2021, and essentially no debt. After the quarter closed, roughly $10 million in cash went toward completing the Picky acquisition, which leaves us with substantial liquidity to run and grow the business as planned for the foreseeable future. On guidance: as you're aware, we've committed to giving annual guidance only. That said, because of the midyear acquisition of Picky Bar, we do expect to generate incremental revenues from the expanded product lines and customer base. So, because of this unique transaction, we've raised our earlier 2021 net sales projection from $42 million up to $46 million. That extra $4 million in net sales is mainly anticipated to come from the robust organic growth Picky Bar has already been generating independently, and we expect that to account for roughly $3 million out of the full $4 million in added revenue. We also expect to generate the other $1 million in 2021 revenues by bringing our considerably bigger online customer base into contact with the recently acquired lines of bars, oatmeal and granola, and by introducing the current Picky customer base to our core layered line-up, since we overlap on under 1% of online customers; in our view, that's a very modest adoption rate in either direction. And we further anticipate beginning to realize the advantages of wholesale opportunities in 2022. As mentioned during last week's acquisition call, we aren't revising our margin guidance of 28% to 30% for the annual period, and we expect that the additional sales generated by the new product lines acquired in the Picky Bar deal will help support our path to 40% margins overtime. Paul, I'll hand it back to you.

Appreciate that, Val. The first quarter came in strong, delivering growth compared to last year along with meaningful operational gains—something you can see in the higher gross margin and in the fact that we completed our inaugural M&A transaction, a deal that fits our brand extremely well and that we anticipate will bring substantial benefit to shareholders. From an outsider's perspective, it's simple to remark, wow, Laird Superfood sure has a great deal happening. Still, I want to reassure everyone that because we're in a strong capital position and can draw top-level talent, our team is outstanding and entirely able to handle every one of the shifting parts, and that will keep enabling and fueling the swift expansion of our brand platform strategy. We've stated before that our guidance is annual, not quarterly. When large wholesale orders land can heavily sway results for a given quarter. That said, we absolutely anticipate hitting or beating the yearly guidance, meaning we ought to see robust revenue growth through the remainder of the year. We're grateful for every one of our shareholders' support. Now let's move to Q&A.

Hello, and thanks for fielding my question. Also, congratulations on those gross margins — that was a fantastic performance.

Thanks, Bobby.

I'm a bit curious — maybe we can stay on gross margins here. I realize your guidance for this year isn't being revised, but given that it's already May, I'd like to know what you expect will drive the further gross margin expansion. Could you break down the main contributors for the remainder of the year that get you to that target?

Paul Hodge, would you like to take that?

Yes. No, of course, Bobby happy to talk through it.

Thanks for having me.

When I look at the shifts, hi Bobby. What could be useful is examining the differences from the fourth quarter, which closely mirror the topics we've discussed. On the DTC side, we had lost shipping revenue combined with efforts to optimize our parcel cost. Between Q4 and Q1, making our DTC shipping expense more efficient lifted our margins by roughly 110 basis points; this came from a higher AOV, getting more dollars into each package, ensuring we use the correct price or cost, collaborating with carriers, cutting down on single item orders — a long list of programs that are clearly paying off. I don't believe we've finished there. There's still additional space to gain; and when we consider closing the distance to where we aim to end the year, plus aiming to return to those 40% margins we want over the long term, we have further room for improvement and will maintain our attention there, which is something Scott is pursuing very diligently. Another aspect is that we still have considerable opportunity to keep enhancing the liquid creamer product; during the fourth quarter that improved by 140 basis points from Q4 to Q1. Yet we still have a considerable distance to cover. We continue working on maximizing the shelf life. We still face some distribution center charge backs, and our aim is to bring that far lower than where it stands now. The shelf life will assist with that, as will certain distribution adjustments we are implementing. Then, thinking even further ahead, a truly major factor will be to keep taking advantage of the factory fixed cost we've invested in our factory here, which can support three to four times what we currently run through our sister facilities. So it will be the mix of those elements. Every one of them will add to the remainder of the year and every one will keep adding as we progress over the next couple of years to reach that 40% and beyond.

That's excellent, thanks. One additional question from my end — clearly, given your multi-omnichannel strategy, you folks have a solid grasp of how demand is shifting in real time, plus what your wholesale partners are up to and what they've got planned. Last year was huge for plant-based milk and plant-based dairy. I believe it caught many off guard, since growth in certain categories actually sped up considerably compared with the year before. So I'm curious what your partners are saying about how sticky that higher growth rate really is. Does it feel like something that can be sustained, something that will stick around? Is there any lasting quality to it? I'd just love any perspective on how long those elevated growth rates we saw thanks to COVID might persist.

Well, our view is that demand for plant-based products will simply keep growing. I mean, humans have eaten plant-based foods forever. Nothing much has shifted. People are circling back. More options exist now. And the — it isn't only about the plant-based side; the functional food side truly matters too. So you might be noticing plenty of reports circulating lately saying things like, oh, mushrooms will be a really big deal for us this year. We've carried mushroom products for years. So we've stayed ahead of that trend, and our liquid creamer was actually the first to launch with mushrooms in the creamer. So we're already a step ahead. And looking forward, the focus will simply remain on functional food products, which is genuinely what consumers are beginning to want; when they eat something, they — getting a functional benefit from it is truly the trend we're seeing, and we don't believe it's going anywhere.

Alright. I realize foodservice represents only a very small piece right now, though around my area, reopening is going smoothly — and honestly it feels that way nationwide. So, are the partners and customers in that segment coming back into the fold? Is there anything on the horizon during this year that might push the revenue you're bringing in from that area up in a big step-change way?

Yeah. Our view remains that food service, especially for what we offer, is a huge opportunity. So we've got initiatives underway. We're running tests alongside several corporate office settings as those start reopening. We've partnered with a coffee retail company and have been experimenting with a range of different recipes, which has turned out to be quite a success; as a result, we're now preparing to broaden that effort, and that's certainly something we'll stay focused on while hunting for those openings. Within the food service sector, relationships really drive everything. Growing the business takes time, yet we've been putting in work to develop those relationships, and our expectation is that it keeps expanding, particularly once conditions return following COVID.