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

Welcome to today's Laird Superfood fourth quarter business update. Thank you for standing by. I would like to now turn the call over to Mr. Reed Anderson of ICR to begin.

Thank you. Good afternoon, and welcome to Laird Superfood's fourth quarter business update conference call and webcast. On today's call are Geoff Barker, Chairman; Jason Vieth, the newly appointed Chief Executive Officer; and Valerie Ells, Chief Financial Officer. By now, everyone should have access to the press release filed today after market close. This is available on the Investor Relations section of Laird Superfoods' website at www.lairdsuperfood.com. Before we begin, please note that all the financial information presented on today's call is preliminary and 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 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 Geoff Barker, Chairman of Laird Superfood.

Thank you, Reed, and thank you to everyone for joining us on our call this afternoon. I'm very pleased to announce the appointment of Jason Vieth as the new Chief Executive Officer of Laird Superfood. Jason has an extensive background in the CPG industry and has been instrumental in growing several leading brands in the healthy and natural segment. He has a strategic mindset, coupled with deep operational experience ranging from startups to major global players. Importantly, he shares our passion and vision for the Laird Superfood brand and its long-term potential. In short, he is the ideal candidate to lead the company today and drive our next wave of major growth. Welcome, Jason. And with that, I'll turn it over to you to introduce yourself and provide some additional remarks.

Thanks, Geoff. Hello, everyone. It's great to be here. First, I want to thank you for taking the time to listen in to our call today. I'm honored to be on board as the CEO of Laird Superfood, and I look forward to spending time with each of you in the near future. I am obviously just beginning my tenure at Laird Superfood, but I've been familiar with the brand for quite a while. My wife discovered the Original Creamer years ago at our local natural food store, and we've been addicted ever since. I've admired the work done to build the product portfolio and to promote the Laird Superfood website, and I've long thought that this is a brand destined to go mainstream with consumers. I am also excited about the opportunity to broadly expand the various Picky Bars products. Some background on me. I've been working in consumer goods for over 20 years, most recently as the Executive Vice President and General Manager of the breakfast and snacking segment at Sovos Brands. While at Sovos, I led the turnaround of the Noos Yoghurt business, taking it from a position of double-digit sales declines to a multi-outlet retail, or MULO, growth rate of more than 14% in recent periods. I was also a member of the Sovos executive team that took the company public in September of last year. Prior to joining the Sovos Brands, I was the CEO of a start-up prebiotic beverage soda company called Poppi. I also spent nearly a decade at WhiteWave Foods, leading various functional areas and businesses, including strategic planning and business development. I started and built WhiteWave's international business and ultimately led the acquisition and integration of several brands that we combine to create a yogurt business, which I ran until Danone acquired the company. I expect to utilize the knowledge, experience and contacts that I built during my time in the natural foods industry to grow Laird Superfood into a leading national brand of plant-based functional foods. During my initial few weeks, my primary emphasis is on becoming deeply acquainted with the business and the team that is running it. This company has some great talent, and we've obviously had an incredible run over the last few years so I want to ensure that I understand and can help to propagate that success as we go forward. Let me share a few of these areas of focus where I see the greatest potential for near-term impact. Wholesale is on top of my current list. I'm already actively recruiting for a head of wholesale who will be responsible for growing sales in that channel. At this point, we have just 37% of our sales coming from the wholesale channel and only 3% ACV and MULO on our top items. The success that we've had, thus far, in wholesale is a strong testament to the quality of our products as well as the power of the Laird Superfood brand. But we are still a small company and don't have the luxury of unlimited resources. So it's critical that we look at this opportunity more surgically and focus on the customers and/or products where we are best positioned to support aggressive growth and to drive strong returns. Growing our liquid creamer business is another major area of focus for me initially. 88% of all creamers sold in MULO are liquid and yet we barely participate in that segment. Liquid creamers are clearly the consumer-preferred format, and we will look to expand capacity for this business and to grow it aggressively. Along with liquid creamers, we will be evaluating our entire product portfolio and innovation road map. With the breadth of our product range, we likely have a number of SKUs that are not earning their way, and we need to make space for some exciting new products that the team has been developing. We will also be finalizing the integration of Picky Bars and outlining our growth plan for that business. As with Laird Superfood, the Picky Bars products taste great and are made with the finest ingredients, and I believe that we can expand this brand to more consumers across the country. Finally, we will be assessing our cost structure, including what it costs to acquire and retain our customers as well as our product cost and G&A. Given the inflationary environment that we are in, I anticipate that we will identify gross margin opportunities across size, price and product cost. The entire U.S. is obviously in a very challenging business environment with regards to inflation and material availability. But with a stable of plant-based functional foods that are on trend with consumer preferences, I truly believe that the future for Laird Superfood has never been brighter. With that, let me turn the call over to Val to provide some additional detail around the fourth quarter business update that we announced.

Thanks, Jason. After market close today, we announced preliminary results for the fourth quarter and fiscal 2021. For full year 2021, net sales increased approximately 43% to $36.8 million, slightly below our guidance of $38 million to $40 million. For the fourth quarter, net sales increased approximately 29% over the prior year period to $9.4 million. The shortfall versus our guidance is primarily attributable to 3 factors: first, a softer-than-anticipated club performance in the fourth quarter, coming off a very strong third quarter and reflecting the continued lumpiness of this business; second, and also related to wholesale, while fourth quarter refrigerated liquid creamer sales grew 60% on a gross basis versus a year ago, they slightly lagged expectations; and finally, online. While we had our largest single month sales ever in November and drove continued improvement in our average order value, net sales were slightly less than anticipated. Gross margin is expected to be approximately 26% for the full year 2021, which is within our guidance of 25% to 28%. For the fourth quarter, gross margin is expected to be approximately 24%. The improvement compared to Q4 of 2020, gross margin of 20.1%, stemmed from lower inventory costs due to operational efficiencies, continued optimization of our DTC shipping expense and improvements in both distributor chargebacks and production waste from a refrigerated liquid creamer. We anticipate our full earnings release to occur in March, and we look forward to providing additional insights at that time as well as providing our full year 2022 guidance. I'll turn the call back to Jason.

Thanks, Val. In summary, I want to thank you all for taking the time to join our call today. As you can see from this preliminary view of our results, we remain on track to become a leading player in the natural food and beverage industry. I'm excited to have joined Laird Superfood and look forward to spending time with each of you over the coming months. This concludes our prepared remarks. Operator, we are now ready to open the call to questions.

[Operator Instructions] The first question is from the line of Bobby Burleson with Canaccord.

Welcome aboard, Jason. Congratulations.

Thanks, Bobby. Appreciate that.

Yes. So I guess my first question, it sounds like you kind of went through what your priorities are. And I'm just wondering maybe how they rank. If you had to look at operations, brands and distribution, kind of what's the most acute kind of area of focus in the near term?

Yes, it's a great question, Bobby. It's -- to be honest, we're going to be working through some of that. You probably picked up, I'm on day 1 today. So I haven't had as much time with the team yet to work through all the details. But off the top my head at the moment, I would tell you that we've got to expand this brand and these products into grocery. We have such an opportunity in the wholesale channel in total, not just grocery, really, grocery mass, club, all as opportunities for us to expand from here. So I have to put that up at the top of the list. We also have real opportunity on our cost structure as well. So we'll be taking a look across our portfolio, where we're priced relative to competitors and how our gross margins are falling, where we have opportunity to take cost out of the model to really drive additional reinvestment back into the marketing and sales functions so we can grow the business more aggressively.

Great. And then I don't know if this is maybe more of a question for Val. But you kind of walked through the revenue softness versus your plan, club, liquid and online all being softer than expected. On the gross margins, you saw a nice improvement year-over-year. But is there anything that you can impact on the gross margins vis-a-vis like expectations for Q4 and what you guys put up? Any additional color on why maybe there are a couple of points softer than at least what consensus is looking for?

Yes, sure. I think when we were coming off of a really strong third quarter, we were expecting a slight pullback with the softening top line, of course, that played a factor. But we're looking to definitely dive in a little deeper and provide some more insight on our March call. Right now, what I could tell you, on a sequential basis, the fourth quarter did see some compression related to the timing of promotional activity. But that was largely offset by the improvements we saw both in distributor chargebacks and in production linked to refrigerated liquid creamer business. If that continues to improve, and we're hoping to keep our foot on the gas there. DTC shipping expenses, the one we talk about often, we continue to optimize there. AOV continued to grow. We saw a really nice growth actually on a sequential basis, but we were facing industry-wide small parcel rate increases. Those typically go into an effect in October. That's what we saw this year. And we felt very fortunate to be able to offset it. We know that's not the case for everyone in the industry, but we're really proud of that accomplishment, and we're going to keep working on that moving forward as well.

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

Congratulations, Jason. I wanted to ask about the liquid creamer, the refrigerated one underperforming in Q4. Can you unpack that a little bit? Can you tell us a little bit more about why that was? Was it a matter of getting into more doors? Or is it supply chain related? And can you give us just an update on when we're going to see the rollout of the shelf-stable liquid products?

Yes. Alex, it's nice to meet you. I'll share a little bit and I'll hand it over to Val as well to add any additional color commentary. But my understanding is this was largely supply chain-driven, really a matter of getting the product from our distributors to our retailers. So we've been working through challenges in getting the order quantities correct to those distributors and making sure that they have inventory to be able to move it through the channel and out into the grocery doors that we're in. I think that was really the predominant issue that we had in Q4. And on the aseptic question that you asked, we are working through that. We actually started to discuss that today. As you probably know, capacity is still very challenging. And so we're working through various co-packer options, and we'll continue to unpack that over really the next couple of weeks as we look at opportunities for production going forward from here. Val, is there anything you want to add to that?

No. Just would maybe reiterate that we did execute on that 1 flavor swap-out that we mentioned on the call last time. We were working through the turmeric change out for both cacao and cinnamon, both more mainstream flavors. We did see in spot that turmeric is delicious, but it is a little bit more of niche flavor, and we would like to have a better shot at really performing against retailer expectations, something more in line with our vanilla [ creamer ], which continues to do very well on shelf and meet all of the retail expectations that we have eyes on for sure.

Great. That's really helpful. And then if you think about beyond just the liquid options, but all of the different SKUs that you have, it sounds like, Jason, you're looking -- going to want to look pretty hard at pulling back on some of the underperforming ones. Can you give us a sense of what that might look like? Is that just kind of the fifth, sixth performing flavor of some of your lines? Or are there any kind of whole area, be it hydration or activate or creamers or something else where there's a pattern of underperformance?

Yes. I think for me, Alex, I would tell you, I probably need to defer that until we come back together in a month or so. I have had a chance to look -- a cursory look across the portfolio. And it's not -- from what I've seen so far, there is not really any obvious underperformance until you get down into the tail SKUs. So to your point, when you're at that third, fourth, fifth item within a category, that's really going to be the opportunity to consolidate the volume back into your bigger SKUs. It's always that 80-20 issue, right, where 20% of your products are going to drive 80% of your revenue, 80% of your profit. And we're going to really bring that mindset into force and discipline on ourselves. We have a very large portfolio at this point of great products, really all fantastic, delicious, nutritious products. But we can do -- we can help ourselves operationally by really focusing in on those more core items that we can drive consumer preferences with.

Okay. That makes a lot of sense. And then, Jason, you mentioned looking to bring on a head of the wholesale division. Are there any other roles from where you stand right now that you think needs to be built into the organization?

Yes. That's the big capability gap that we have right now, Alex. So we're going to go after that first. We do have a number of roles still that are currently open. Like others in the industry and really across the country, we've been caught a bit in this Great Resignation and had some turnover. So we do have a couple of key roles. Val and I were speaking recently about the need to bring in additional legal resource, and we'll pick those off as necessary here as we start off 2022. But the reality is, once we get wholesale up, that will really help us to start driving our products on a mass scale into retail. And that -- once we're doing that, I think then we can take a look at what else is really in need. That's going to remain priority 1 for a while.

[Operator Instructions] There are no additional questions waiting at this time. With that concludes the Laird Superfoods fourth quarter business update. Thank you for your participation. You may now disconnect your lines.