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

Thanks. Good afternoon, and welcome to Laird Superfood's Third Quarter 2021 Earnings Conference Call and Webcast. With 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 get the company's third quarter earnings press release, which was filed today after market close; it can be found in the Investor Relations section of Laird Superfood's website at www.lairdsuperfood.com. Before we start, please be aware that all financial information shared on today's call has not been audited; and over the course of 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 cause actual results to differ materially from those described in these forward-looking statements. Please see today's press release and other SEC filings for a detailed discussion of the risks that might cause actual results to differ materially from those expressed or implied in any forward-looking statements made today. And now I'd like to hand the call over to Paul Hodge, Chief Executive Officer of Laird Superfood.

Thanks, Reed. Hello, everyone. I'm glad to talk with all of you about our third quarter. Let me begin with a quick overview of where we stand overall, our main growth engines, and the quarter's highlights. Scott McGuire, who serves as our Chief Operating Officer, along with Valerie Ells, our Chief Financial Officer, will provide further specifics after me, and after that we'll take your 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 industry, which is worth $759 billion. Ours is an omnichannel operation, yet it features a best-in-class native online platform. At Laird, we believe that when food is better, the world becomes better too, because people who are healthier and feel good are likely to make smarter decisions. What we offer provides sustained energy, nutrition, and hydration that people need to get through the entire day, from morning until evening, as part of their daily routine. Along with tasting excellent, our products are easy to use, convenient, and priced affordably, and we build sustainable, ethical practices into each link of our supply chain, all the way from the farm to the fork. In the third quarter, total sales climbed 45%, reaching $10.9 million, powered by the strength of our native digital platform, which includes continued growth for Picky. Online sales came in at $6.3 million, up 70% year over year — a faster pace than what we saw in the second quarter — and DTC jumped 108%. E-commerce accounted for 58% of revenue in Q3 2021, compared with 50% in the same period a year ago, driven by organic gains along with the Picky Bars acquisition in May. All the important D2C metrics remain solid, including a 30% increase in AOV over Q3 2020. On top of that, our first and second retention rate hit an all-time high, improving 10% in the third quarter of '21 versus the third quarter of '20. Revenue that repeats, meaning orders from subscribers and returning customers, continues to represent over two-thirds of what our D2C segment brings in. On the wholesale side, we saw a 21% increase compared with the same period a year ago, reaching $4.4 million, with grocery posting especially strong numbers. Club, however, came in flat, since the prior year's Q3 was just as strong. One thing worth highlighting: sequentially, club jumped dramatically — close to 170% higher than Q2 — which speaks to just how uneven this category can be, and ties back to what we said earlier about solid momentum as Q3 got underway. Our door count continues to rise, roughly 11% above last year, and we've also expanded shelf presence in stores we're already in, securing additional coffee SKUs at Safeway and HAV, along with seasonal creamers at Sprouts. Gross liquid sales climbed 77% compared to the prior year and accounted for about 54% of the increase in wholesale revenue dollars. Operational gains in our refrigerated product continue to pay off, including a 53% drop in DC spoils, all while we maintained average fill rates around 90%. Finally, our shelf-stable segment delivered another strong quarter, as sales—leaving out our club business—grew 11% versus Q3 of last year. Regarding category growth, performance remained broad-based, with one exception tied to timing that involved trial and club during last year's third quarter. Year over year, creamers were up 23%, driven by momentum and gains in refrigerant liquid creamers as well as expansion in the club channel. Supplements that boost hydration drinks reached 28%, driven by launches including Renew Rest and Recover, Prebiotic Daily Greens, and Activate Immune. The Coffee, Tea & Hot Cholate group dropped 20% in total, which came from a big first-time trial on club during Q3 of last year. Even so, healthy expansion continued in our business outside club, largely because of our new functional coffees plus our functional hot chocolate. Finally, harvest snacks and other food items delivered another strong contribution. Within the snack category, sales for the third quarter hit $1.9 million, up 39% versus Q2, and this category now brings in new revenue compared with the same period a year earlier. On the harvest snacks side, our momentum was driven by the launch of new baking mixes, plus incremental upside from Picky and ongoing strength in pili nuts. Regarding the timing for rolling out our shelf-stable liquid creamer, we have no additional updates to share. Reformulation work is moving along nicely and we continue broadening our network of co-packers, but this new item is not expected to add anything in 2021. Turning to the CEO search, that process is progressing well and we are narrowing things down to the last remaining candidates. We are encouraged by how strong these prospects are — they bring the exact CPG background we need to elevate LSF, and they embody the principles that guide and shape who we are as a company. To finish up my summary, here's a quick note on our ESG efforts. When it comes to ESG, as our online business expands rapidly, we remain hard at work on our carbon-neutral last mile programs alongside Eden projects. We believe achieving carbon neutrality isn't optional anymore — it's a requirement in the world we live in today, and we're dedicated to it while always searching for new answers. We're equally dedicated to our collaborations with Feeding America and ID.me, which address hunger and security challenges here at home and also back our essential care frontline workers. Sustainability is woven into who we are, and it's an area we keep pushing forward on our own team while also seeking out solid chances outside the company where we can contribute. To wrap up, the numbers we posted in Q3 matched our growth playbook, which draws on fresh products and strong customer relationships built across a distinctive, highly capable omnichannel setup; the total addressable market in front of us is massive and still expanding, and our brand sits in a great spot to deliver meaningful expansion and pick up share for as far out as we can see; having said that, I'll hand things over to Scott so he can cover operations.

Appreciate that, Paul. During my opening 2 quarters here at Laird, I've described our framework as the 4Ms: produce more in-house, produce it with greater efficiency, transport it more intelligently and rapidly, and my company. To recap the key points, we increased output once again in the prior quarter, and we accomplished that while bringing in and rolling out new technology that complements our current lines, boosting speeds and delivering over 2x throughput on one of our top-selling SKUs, along with similarly impressive gains elsewhere. Our team didn't only focus on greater efficiency in production; we also advanced on transporting it more intelligently. To begin, within our expanding liquid operation, during the quarter's final month we shifted to a more streamlined production cycle, increased our DC drop sizes by 100%, and raised our revenue per pellet position, which matters greatly given freight capacity limits and fuel inflation. Next, you might have noticed the news that we reached occupancy at our new customer fulfillment center. This cuts down third-party storage, places inventory within easy reach, enables a new enhanced PIC process, and above all, adds capability to serve our customers at the proper cost. And when it comes to my company, having everyone think and act like owners is the sole reason we've achieved so much. Since a large share of our distinctive ingredients are sourced from abroad, what's on everyone's mind is the matter of input inflation and port congestion caused by supply chain imbalance and the trucking shortage. For the most part, we steer clear of the hardest-hit ports; yet more crucially, the inventory safety stock approach we began putting in place last year, when COVID hit, has kept delivering benefits. That gave us inventory protection and a degree of advantage against the latest inflation; even so, we aren't relaxing and congratulating ourselves on last year's smart choices. The freight, labor and material cost pressures our suppliers confront are quite real and are being tackled via our near- and long-term measures. To be specific, we're taking a balanced tack that puts productivity first, paired with strategic pricing moves that support revenue and margins while causing minimal, if any, effect on unit sales. I'll now hand the call over to Valerie Ells, our CFO.

Thanks, Scott. Like Paul said, we posted a solid top line this quarter, with net sales reaching $10.9 million — that's a 45% gain versus the same period a year earlier. DTC drove much of that, climbing 108%, which shows key metrics like AOV and retention are getting better. We also felt good about wholesale growing 21%, especially since the club business came in basically flat against a prior-year quarter that was just as strong. Gross margin rose 600 basis points year over year, landing at 29.4%, mostly driven by better inventory costs, which speaks to efficiency gains in our production and operation processes, plus ongoing improvement in refrigerated liquid creamer disposals thanks to optimized logistics and shelf life and optimization of DTC parcel costs. Those gains were partly offset by higher costs tied to wholesale fulfillment. While we're quite happy with the stronger gross margin this quarter and think we'll keep driving efficiencies in our production processes, our outlook hasn't really shifted, since we anticipate sustained headwinds from climbing freight rates and other inflationary pressures. On operating expenses, we made meaningful headway bringing relative expense levels down this quarter, which reflects our ongoing push to control costs and capture scale-related efficiencies. Total operating expenses came to $8.5 million, or 78% of net sales, in the third quarter. Looking at the sequential trend, you'll notice the third quarter posted the lowest expense ratio of the past 4 quarters and showed substantial improvement over the second quarter. To be specific, just $52,000 of incremental operating expense in the third quarter was needed to generate a $1.7 million rise in net sales versus the second quarter. This will remain a key focus for us going forward. Having finished the predominant build-out needed to support our business as a public company, we've now turned to seeking ways to maximize our efficiency and leverage without giving up growth. We expect to keep making progress here over the coming quarters, though as with other parts of our business, it won't always follow a perfectly linear path. G&A expense represented 39% of net sales in the third quarter, compared with 30% in the same period last year, largely before we became a public company, and 45% in the sequential quarter. Versus Q3 of 2020, most of the G&A increase remained attributable to public company factors. Noncash expenses accounted for 37% of the increase, including stock-based compensation and amortization of intangibles. Insurance costs, professional fees and personnel costs also contributed to the pressured G&A in the third quarter. Sales and marketing expense was 37% of net sales in the third quarter, versus 38% a year ago and 43% in the sequential quarter. The improvement over the year-ago quarter came from a mix of several factors, as lower expense levels for stock-based compensation and personnel costs were partly offset by relative increases in advertising and marketing spend. The state of our balance sheet is still solid, with close to $40 million in cash and investments and basically no debt. Also, as was mentioned, we are staying highly concentrated on getting the most leverage throughout our operations so we can keep moving ahead toward profitability, all while keeping growth rates robust. Paul, I'll hand it back over to you.

Appreciate everyone joining us. Our most recent numbers make clear that Laird Superfood is still headed toward a top position within natural food and beverage, and we keep drawing on the strength of our omnichannel platform. We value your backing, and at this point we're set to start the Q&A. Operator?

So, let me just check — am I coming through?

Yes, I can hear you.

Alright, I'm just wondering about how the rest of the year looks compared to what you told us during the previous quarter's call. Nothing about it appeared in the prepared remarks. That doesn't automatically indicate I overlooked something. What's going on there? Is there any difference now?

Nothing at all has shifted. Guidance for 2022 is going to come out when we report year-end results, probably during early March. Still, as things stand right now, I continue to believe we're on pace to hit the annual goals we set.

All right, that's helpful. Now turning to club stores — is there anything to report for Q4? We saw a decline there, clearly, in Q3 compared with the prior year. I'm wondering whether things pick up before the holidays, or what's going on in that channel?

To be honest, Q3 came in essentially even with Q3 a year ago, and that quarter was a remarkably large one for club. After that, it was up, I think, 100-and-something percent relative to Q2 — so a sizable sequential gain — though that's simply how the club channel behaves; it swings around a great deal. You can get some better-for-you business at year-end from Costco, arriving right as the year closes and carrying into Q1. The thing is, this business simply moves through up-and-down cycles. Our relationship with Costco remains quite strong. It serves as an excellent customer acquisition vehicle to keep the factory full. For a couple of years now we've been working our single SKU with them, the Superfood creamer, and at this point we're looking into a number of additional SKUs so we can broaden what we offer them next year. So the business has us enthusiastic, even if it does swing around.

All right. So I mean, you folks turned in solid club sales once more, I suppose, against a hard comparison from the prior year, the key point for Q3.

Yes, yes.

All right. And regarding aseptic co-manufacturing or co-packing assistance, have alternatives been found by you folks? What's the status of that effort? Looking ahead to 2022, how constrained is third-party capacity out there?

Yeah. The difficulties facing the aseptic co-packing sector are certainly identical — demand is heavy while capacity is quite scarce — yet we've been tackling this with real effort. Our relationships have been broadened so that we now collaborate with several co-packers. Our formula has been adjusted somewhat, making production somewhat simpler, all while maintaining our rigorous value standards of clean label, clean product, plus our functional ingredients, something fairly distinctive within that sector; consequently, we've been achieving solid momentum. Revenue from this definitely won't come during 2021. So 2022 is what we're targeting. However, right now, no particular date exists. We're — the only thing I can tell you is that progress is being made, suppliers are being brought back on board, and the formula work is advancing considerably.

All right, fantastic. And Val, you brought up gross margin, and it sounds like there could certainly be some pressure coming from freight expenses. Yet if your full-year objectives remain that solid, shouldn't we anticipate a bit of improvement in gross margin, considering the other favorable factors at play?

Yes, we certainly enjoyed a robust third quarter, and we're pleased with how it turned out. Scott and his group are doing excellent work. We genuinely think that down the road, there will be opportunity for additional efficiency improvements and greater leverage in the plant regarding that labor and overhead cost structure. However, the inflation-related challenges are genuine. We managed to postpone a portion of them, but they will be genuine for our company too. So we simply want to ensure we're staying realistic about what to expect and not setting the bar at something that can't be reached or isn't realistic going forward. That said, we remain quite confident about those goals we established during the previous call for Q2.

So those figures are clearly the goals for revenue as well as gross margin.

Right, that is accurate.