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

Thanks. Good afternoon, and welcome to the Second Quarter 2021 Earnings Conference Call and Webcast for Laird Superfood. 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, all of you ought to be able to access the company's second quarter earnings press release, which was filed today following the market close. You can find it in the Investor Relations section of Laird Superfood's website, at www.lairdsuperfood.com. Before we get started, please be aware that all financial information shared on today's call is unaudited. Also, during 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 consult today's press release 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.

Thanks, Reed. Hi, everyone. I'm glad to be here to talk about Q2. Before we dive into discussing the second quarter's results, I want to spend a few minutes covering the leadership change we announced alongside this afternoon's earnings release. Following careful consideration, I've concluded the right moment has arrived for the company, my family, and me for me to begin moving into a nonexecutive position, and I'll step down as President and CEO as soon as my successor has been found. Once that transition happens, I'll continue serving on the Board of Directors and stay a significant shareholder, which keeps me deeply engaged in bringing our company's long-term vision to life. Many of you are aware of my profound, steadfast passion and dedication to helping Laird Superfood succeed for everyone involved — shareholders, employees, friends, among them my dear friends and cofounders, Laird and Gabby, my family, and the community of Sisters, Oregon, where we've grown into an essential piece of the local economy. Leading this company over the last 6 years has been an honor, and I take enormous pride in everything we've achieved together in so brief a span. Strengthening our team's expertise only sharpens our competitive standing and, from my perspective, makes the long-term opportunity that much more attractive. All right. Now I'll give a quick overview of who we are and what we do, along with a review — Q2 highlights and our main growth drivers. Then I'll hand the call to Scott McGuire, our Chief Operating Officer, and Valerie Ells, our Chief Financial Officer, and we'll leave ample time for Q&A. Laird Superfood is a mission-driven, high-growth, plant-based natural food manufacturer, positioned to lead among better-for-you brands within the $759 billion grocery industry. We operate as an omnichannel business with a best-in-class native online platform. Here at Laird, we hold the belief that better food creates a better world, since healthier people who feel good tend to make better choices. Our offerings deliver the sustained energy, nutrition, and hydration required to perform from sunup to sundown as part of our daily ritual. Beyond great taste, our products are convenient, simple to use, and affordable, and they incorporate sustainable, ethical practices throughout every phase of our supply chain, from farm to fork. Now let's move to second quarter results. Total sales rose 64% to $9.2 million, powered by ongoing momentum in our DTC business, plus strong grocery results and a solid contribution from our recently acquired Picky Bars. Online sales climbed 57%, or $2.1 million, reflecting 94% growth in B2C year-over-year, even though the prior year period included a meaningful consumer shift toward online purchasing at the height of COVID. As you're aware, we're native digital, and our strength in this channel keeps proving itself, with 63% of total net sales in the second quarter coming from this best-in-class online platform. The important numbers coming out of our online operation continue to look really good, which highlights just how competitive our model is. Our conversion rate is still twice what the CPG industry typically sees, and recurring purchases make up more than two-thirds of the D2C side of things. Subscription items rose 77%, while unique active subscribers were up 57% versus the same time last year. Retention keeps improving too — we're seeing a 15% gain over Q2 of 2020 across the entire history of the company, plus a 20% lift in both second order rate and the reorder rate for our 2020 cohort when measured against the 2019 cohort. And average order value, or AOV, also kept getting better, up 30% compared with a year earlier, which puts it right at the level of our AOVs from before we introduced free shipping. The wholesale numbers show how much stronger that side is getting, along with the stable foundation we keep building in grocery. During the second quarter, wholesale overall was up 77%, or $1.4 million, even though our club business stayed flat and even without the industry trade shows, which traditionally have been a major way our company generates new opportunities. Club sales came in unevenly, and momentum going into Q3 looks strong. Liquid sales jumped 271% year-over-year and made up roughly 60% of the dollar gain in wholesale revenues, helped by robust demand reflected in both product turns on shelf and new door wins versus the prior year period. We also kept making progress on spoils and waste for our refrigerated product, cutting DC spoils by more than 80% compared with the prior year and lifting fill rates into the mid-90s by late Q2 — far above the 30% to 60% fill rates we had before we took over logistics for that product. New door adds for refrigerated liquid creamer in Q2 included raising yolks, and this product line now sits in about 2,600 total doors. Just as significant within those doors was getting additional flavors placed in existing doors, like our turmeric flavor in 340 Sprouts locations, which improves our points of distribution and expands both our shelf presence and prominence. And last, though it shouldn't be missed, is how our shelf-stable business keeps growing. Setting club sales aside, shelf-stable grew 42% against last year, which reflects our extended dates for both coffee products and Powdered Creamers. Looking at mix, we had solid growth across every category in the second quarter. Creamers were up 27% year-over-year, mostly on the strength of refrigerated liquid creamers. Hydration and beverage enhancing supplements climbed 54%, led by our prebiotic Daily Greens plus a big contribution from our Renew Rest & Recover product in May. Coffee, Tea & Hot Chocolate rose 36%, led by Instafuel, one of our foundational products, and close behind came similar gains in our new functional coffees as well as regular coffee. And finally, harvest snacks and other food items, our newest category, drove $1.3 million in incremental sales. When it comes to our harvest snacks and the rest of our food offerings, that covers pili nuts and harvest dates, the browning and cookie baking mixes we rolled out not long ago, and naturally the Picky Bar lines we just brought in — bars, oatmeal, granola. This new category's results strike us as solid proof that our brand platform strategy keeps gaining traction, both in how it fits into the everyday routines of the customers we already have and in bringing fresh customers to the brand. As for folding Picky Bars into the business, it's good to report that all of it is proceeding as planned. The new items sold well during the second quarter, and our rebranding work and systems integrations keep moving forward; naturally, we're picking up fresh lessons along the way, and we intend to apply those in possible acquisitions down the road. All the same, right now, we feel quite good about where we stand. Even with meaningful gains across the majority of our top line drivers, and even with us following through on our pledge to extend shelf life and cut waste on our refrigerated liquid creamer, we hit a snag with our shelf-stable liquid creamer, something we had counted on as a key revenue driver for the second half of 2021.

Towards the close of June and in the first part of July, fresh details came to us from our co-packer: because the industry lacks capacity and their current customers are demanding so much, they wouldn't be able to get our product to us in September as we'd intended, and that timeline is now moving into 2022. They also let us know they'd need us to change our formula so it contains ingredients that don't align with what we stand for, which would undermine the authenticity and positioning of the Laird Superfood. As a result, the introduction of our shelf-stable liquid creamer will be delayed until the co-packer has capacity available. Beyond that, we've shifted to different flavor profiles whose formulations continue to satisfy our rigorous standards; our original plan was to begin with our coconut-based creamer. However, in light of what we've now learned, our OatMac creamer will be the first shelf-stable product we bring to market. OatMac has performed quite strongly since we introduced our powder creamer into this rapidly growing category, bringing in a new customer, and we also think this product can be manufactured more readily to meet our standards. Our optimism remains high that shelf-stable creamer will serve as a significant growth engine for us, in wholesale as well as e-commerce. Sadly, though, based on what we know right now, it will in all likelihood slip to 2022. Though this setback for shelf-stable creamer is aggravating, staying faithful to our mission and values matters greatly, as does preserving our brand's integrity and the formidable barriers to entry that brings, together with generating long-term value for every one of our stakeholders. With that said, here's a brief update on our ESG work. When we last talked about our ESG initiatives, we pointed to 3 truly thrilling cause promises. Jointly, we pledged to give 1.5 million meals to Feeding America, to lessen the footprint of our online sales by creating a carbon-neutral last mile with Eden Projects and First Environment, and to stand behind our critical care workers and first responders as they protect us throughout this pandemic via ID.me. On Feeding America, we remain on schedule with our commitment to donate 1.5 million meals to Americans dealing with food insecurity, with more than 500,000 meals already lined up. On Eden Projects, work has started on planting 100,000 mangrove trees over 900 hectares in Kenya, which helps us reach our carbon-neutral last mile target for online orders. And through ID.me, we just finished the first of our ID.me activations, handing out more than 3,000 Everyday Hero Bundles at no cost to the courageous critical care workers and first responders who keep us safe. This effort receives financial backing from our partner, Danone. Past these bigger cost projects, our in-house sustainability team keeps working on numerous clever ESG efforts, which can touch virtually every part of our company. Such efforts sit at the heart of our company's mission and values and are something we take great pride in. Looking back at the second quarter, even with a few hurdles, we once more achieved solid expansion in several channels, widened our lineup by launching new and inventive items, grew our customer count further, and started bringing Picky into the company. Our strategy built around a brand platform keeps proving how effective it is. And even though that platform now spans several sizable TAMs, we feel we have only just begun to tap what Laird Superfood can achieve over the long run. With that said, I'll hand things over to Scott so he can discuss operations.

Thanks, Paul. Protecting people and making sure customer orders get built while putting ourselves in position for more complexity and higher revenues—those stay at the top of the list. While keeping our focus there, we accomplished a great deal with the Picky integration, and we nailed the launch of 9 new products; we've got an excellent system in place for accomplishing all of that. As I've mentioned the past 2 quarters, the 4Ms describe how we operate: manufacture them ourselves, make them more efficiently, move it smarter and faster and my company. Let me say a quick word about each. Manufacture more ourselves. The reason we do this is to keep cost and quality under control and to build in flexibility so we can answer our customers' growth requests and constantly shifting supply chains. I take such pride in each member of our team who stepped up to produce in-house 6 new SKUs this quarter. That's what we refer to as going vertical, and we're winning with vertical in other areas as well, which I'll get to shortly. Make it more efficiently. Even as we concentrate on a number of key automation projects for the third and fourth quarters, we keep delivering inflation offsets by way of continuous improvement projects. On top of that, with so many companies having a hard time with raw materials and transportation, our year-long strategy of building inventories amid pandemic uncertainties has paid off and left us well positioned in finished goods and raw material safety stocks; for the second quarter in a row, this showed up in the form of nearly perfect customer order compliance. Move it smarter and faster. The CapEx we talked about in the first quarter produced a 33% extension in our fresh liquid shelf life. And as you'd imagine, we cut manufacture waste and spoils by 50%. Also, in May, we put into place a form of going vertical across the balance of our liquid distribution logistics and assumed delivery to the distribution centers. This all but wiped out store level out of stocks, consistent with our goal that every consumer find our product when they want it. Because it worked so well, we're aggressively chasing further vertical moves in other distribution channels, which we expect will generate benefits in our P&L late Q3 or early Q4. When it comes to direct-to-consumer and free shipping, we not only carried on with our mission of bringing in new customers, but we also increased our average order value, once again, which gives us leverage against our personnel costs. Looking ahead, we're optimistic about further subscription consolidations along with their early returns on how Picky products mix with various parcel configurations. Last, we agreed to a partnership with 2 industry leaders in order fulfillment who will implement our next level execution software for our vertically integrated direct-to-consumer business. Both of these will be part of our new on-campus customer fulfillment center set to open in the fourth quarter. And then my company. Last, from day 1, authenticity, values, our culture and our people and naturally, growth have always been what we're about. The individuals who make up this organization rank among our most valuable resources, and our goal is for each person to state, and genuinely feel, that this is my company. With that in mind, the Picky acquisition is thrilling not just when viewed through mission, product, and quality lenses — it also brings exciting talent into the fold. We couldn't be happier that the Picky team now says this is my company. At this point, I'll hand things over to Valerie Ells, our CFO.

Thanks, Scott. The main drivers behind our Q2 results were expansion in the online and wholesale channels, which together pushed net sales up 64% compared with the same period a year earlier, reaching $9.2 million. As Paul pointed out, the metrics across our DTC business are still quite robust and keep stacking up extremely well against both peers and comparable companies. With 94% growth delivered through established offerings as well as newer ones, we're quite happy about the ongoing gains on top of already solid retention, subscription, and AOV figures, along with other measures. On the wholesale side, our customer base keeps getting wider, and we're experiencing ongoing momentum in grocery. Brand and quality are major contributors to expanding our door count and points of distribution in grocery, yet it's equally worth noting that we've achieved considerable headway in lifting results among customers we already have. To illustrate, velocities for our liquid SKUs at Whole Foods have risen markedly across the last several months, almost doubling from where they stood at the start of the year. Simultaneously, we've sharply cut back our liquid creamer-related chargeback tied to certain shelf life problems, accomplishing this through both an extended shelf life and meaningful operational and logistical gains late in Q2. Gross margin came in 30 basis points higher than a year ago, at 23.9%. The year-over-year gross margin gain came from several drivers, among them an optimized DTC shipping expense and fewer liquid creamer-related chargebacks from distribution centers, partly canceled out by greater wholesale shipping expense and higher co-manufacturing costs stemming from growing demand for liquid creamer. Additionally, the margin lift from Q2 2020 air shipment fees for raw materials not repeating was mostly offset by sell-through of higher cost inventory, with elevated fixed labor costs standing out as the main driver, since we've expanded our team in advance of scale. Looking sequentially, Q2 gross margin fell 120 basis points, chiefly because of higher wholesale freight expenses. Meanwhile, the margin gain from an optimized DTC shipping expense and reduced liquid creamer-related chargebacks was mostly offset by the sell-through of higher cost inventory. Operating expenses totaled $8.5 million in Q2, equal to 92% of net sales, versus $4.3 million, or 77% of net sales, during the equivalent period a year ago before we became a public company. General and administrative costs made up 45% of net sales this quarter, compared with 33% a year earlier, and more than 70% of the added expenses stemmed from public company factors. Noncash stock-based compensation, for instance, made up 35% of the rise in the comparable prior year period. Q2 also featured deal-related costs and the establishment of our reserves for prepaid inventory, both of which we expect not to recur. Sequentially, G&A costs stayed fairly flat but edged up slightly as a percentage of sales, from 49% in Q1 to 45% in Q2, and 41% once the deal and inventory reserve items mentioned earlier are excluded. During Q2, sales and marketing expenses came to 43% of net sales. That's unchanged from 43% in the prior-year quarter, and it's a modest step down from 45% in the quarter right before. Looking ahead, we anticipate gaining leverage on our operating expenses as the business scales up substantially. Our balance sheet is still in a solid position, with more than $43 million in cash and investments and zero debt, giving us enough capital to back our growth plans. Moving from Q1 to Q2, the cash change comes from routine operations along with roughly $10 million in net cash used to close the Picky acquisition in early May. Turning to our full year 2021 outlook: when we set our guidance earlier this year, we pointed out that hitting our top line revenue goals would depend on whether several priorities succeeded: optimizing refrigerated liquid creamer during the first half of the year, plus bringing a shelf-stable liquid creamer option to market in the second half of 2021; introducing new products on time and innovatively, with online performance staying strong; adding wholesale doors, particularly certain large chains that would use our liquid creamer as an entry point for these opportunities; and keeping on winning more product placements on shelf with bigger partners, boosting the value of each of those doors, while also building greater brand awareness. Paul covered how some of these initiatives are progressing in his remarks, but I'll quickly go back over them now. On optimizing refrigerated liquid creamer in the first half of the year, as Paul mentioned, we're very happy that we delivered on this priority. Late in Q2, we reached a 60-day shelf life, which unlocks expanded future store placement for our refrigerated products and has helped us — and will keep helping us — greatly cut down on spoils and waste. Turns on shelf are strong and still getting better, and we remain optimistic about this product's capacity to drive grocery growth going forward and about our team continuing to deliver logistical improvements for future margin benefit. On new product introductions, Q2 brought a significant number of launches, and we're excited to keep telling those stories to consumers through the second half of the year, driving trial among new and existing customers and encouraging inclusion in the consumer's daily ritual. On earning more product placements on shelf with existing partners and securing new wholesale doors, we've notched some meaningful wins this year, including replacement in Target, Harris Teeter, Wakefern and Statesboro in the U.S., as well as Loblaws in Canada; we've also grown item placements in CVS, Whole Foods, Sprouts, Safeway, and < > and CG, just to name a few. We also anticipate additional gains during the latter portion of 2021. That said, multiple retailers have told us they scrapped their category reviews and resets, which had been scheduled for Q3 and Q4, and that pushes back certain anticipated wins along with wholesale growth opportunities into 2022. Our confidence in securing further placements hasn't wavered. The schedule, though, will slip beyond what we'd expected. Last, we're bringing out a shelf-stable liquid creamer in the back half of 2021. Paul mentioned this in his remarks — our co-packers have told us the production schedule we'd planned has slipped to 2022. We continue to feel quite positive about this item, yet it's now clear that both the schedule and the growth tied to this launch will arrive later than we first thought. Because of this fresh information — mainly tied to co-packer availability slipping for the shelf-stable liquid creamers — we're revising our annual guidance. We're confident we can carry out this priority, yet with the schedule slipping, we now expect net sales for full year 2021 to land between $38 million and $40 million, which represents 46% to 54% growth over 2020. Additionally, we expect gross margins of 25% to 28% for the full year. Our route to ongoing gross margin gains is unchanged: keep refining the mix of free shipping versus rising shipping costs in our DTC business; strengthen our refrigerated liquid creamer business, which includes pushing more volume plus delivering additional logistical and operational enhancements; roll out a shelf-stable liquid creamer to improve channel margin mix; and get the most fixed cost leverage we can through vertical integration at scale. We anticipate ongoing advancement on these efforts will keep us moving toward our long-term objectives. Regarding 2022, because of uncertainty around the schedule for shelf-stable liquid creamer and the significant growth effect we expect that item to deliver on our top line once it ships, along with ongoing assessment of other 2022 growth drivers, we won't offer 2022 expectations right now; still, once we possess fuller and more dependable details on the production and release date for the shelf-stable liquid creamer, we'll pass that along to all of you, and we'll give our 2022 annual guidance on our year-end call in March. What we can promise today is that we stay very well positioned across the markets where we compete, with plant-based offerings continuing to drive growth across categories while also gaining share. More specifically for our business, our direct online platform keeps delivering exceptional results and remains a powerful growth driver, and we don't expect that to shift. Our grocery business keeps expanding its base, fueling growth in our overall wholesale run rate with a very long runway. Things are steady in our club segment, tracking at the run rates we've seen historically, and we're seeing good momentum as the third quarter gets underway; we're also going after more offerings and partners in that channel so we can push growth further. On top of that, several recent product launches are posting strong early results, and we still have some exciting launches ahead of us in the remainder of the year, so we continue to feel confident about our ability to deliver solid growth in the years ahead across a range of categories. Paul, I'll hand it back over to you.

I appreciate everyone taking a moment to join us today. Judging by the expansion we've achieved lately, Laird Superfood is still well positioned on its path toward becoming a major force within food and beverage, since we keep making the most of our strong omnichannel capabilities. I'm grateful for your backing, and at this point we're set to begin the Q&A. Operator?

Paul, all the best in whatever you take on next. I have a few things to ask. The guidance you've provided, gross margin guidance included — could you explain exactly how those unanticipated developments affected that gross margin outlook? Specifically, is it mainly a matter of reduced fall-through, given that internal production volumes in the back half of the year clearly won't be at the same level, and that's the biggest factor? Or are other things also playing a role?

No — what we're mainly discussing, I'd say, is clearly the softer top line. Take the shelf-stable liquid creamer: we had planned to use that item on the e-comm side too, and it would have brought a higher margin profile, so that hurt us. Then the other element — I'd call the other element behind the reduced guidance just a Costco and club business that's a bit slower than what we'd initially expected. Momentum entering the third quarter is great, but what we saw slow down in the first half simply can't be recovered, so really it comes down to those two factors combined. Costco remains a fantastic business for us and is still quite healthy — make no mistake — plus it's a margin profile we're happy with. The product is efficient to produce, and it shifts our top line quite substantially. So beyond that, nothing else is really happening. We have some truly exciting initiatives lined up for the second half of the year, and we're confident we'll still make headway — just not as far as we'd hoped before.

Alright. So regarding those expected resets that have been pushed back — is this happening just in your case? Or does it apply broadly across those partners?

Yeah, no — it's broad. Given the COVID year, many grocery retailers we've spoken with have simply chosen to push back numerous category resets into the following year. So a number of the bigger partners we had hoped to work with during this year have taken that step, and we keep hearing about additional ones through the pipeline as shifts occur at that level. So it isn't anything unique to us.

All right. And then just one final quick item. I'm curious about the competitive landscape — some big companies are strengthening their balance sheets and pursuing plant-based creamers, along with other categories. How do you view the competitive landscape as it evolves? And how does the OatMac creamer stack up against other oat-based creamers?

Yes. I mean, what we offer is still one of a kind on the market, and that's the single thing about this company and its innovation profile — our creamers are genuinely clean label. There could be plenty of plant-based creamers available, but ours unquestionably represents a distinct product, with functional ingredients, clean label, and we've kept innovating. And honestly, that's what caused some of the delays, because on the shelf-stable liquids we simply won't compromise; and so the OatMac itself has proven to be an excellent platform. Lately we've observed, for example, with the pumpkin spice launch using the OatMac, that it's actually been beating the coconut base; it's one of a kind. You notice plenty of oat on the market. You notice Macadamia nut. Ours delivers a wonderful mouthfeel, wonderful flavor by combining the oat, the mac, the healthy fats from the mac nut and including avocado oil and similar things. So it's a wonderful product and unquestionably differentiated, and it still contains things such as functional mushrooms, acumen, calcified CLG or the 7 sea minerals. So we're quite optimistic. We're witnessing consumer adoption of our fresh packaged liquid creamer, and it's performing remarkably well. Shelf velocities continue to rise. And we believe we're well positioned to compete in the space and be highly competitive; and naturally, this is one piece of the broader brand platform we're building too.