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

Thanks. Good afternoon, everyone, and thanks for joining us for Laird Superfood's Q4 2021 earnings conference call and webcast. Joining us today are Jason Vieth, our Chief Executive Officer; Valerie Ells, our Chief Financial Officer; and Scott McGuire, our Chief Operating Officer. At this point, you should all have the fourth quarter earnings press release that the company filed today after the market closed. You can find it in the Investor Relations area of Laird Superfood's site, www.lairdsuperfood.com. Before we get started, I want to point out that the financial information we're presenting on this call has not been audited; and as part of this call, management might make forward-looking statements as defined under the federal securities laws; those statements reflect 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 the forward-looking statements made today, please see today's press release and our other SEC filings. With that, I'll hand things over to Jason Vieth, Laird Superfood's Chief Executive Officer.

Thanks, Reed. Hello, everyone, and I appreciate you being with us today. To kick things off, I'll give you a quick overview of where we stand overall, what's fueling our growth, and the quarter's standout points. Scott McGuire, who serves as our Chief Operating Officer, along with Valerie Ells, our Chief Financial Officer, will come next with further specifics, and before we take your questions, we'll touch briefly on what we expect for 2022. Let me begin by noting that having devoted the past five weeks to digging into the business, I can confirm we're achieving genuine momentum toward our long-range goal of ranking among the top companies in natural food and beverage. Our brand carries real strength, and on every significant purchase driver — quality, taste, functionality, sustainability and price — the products connect with consumers. Shoppers have a deep bond with our brand and are eager to interact with us, which our robust repeat rate and 76% Net Promoter Score demonstrate. And what may matter most is that the Laird Superfood brand stands out remarkably among food brands, having shown it can cover several dayparts and usage occasions, giving consumers a lineup of products to activate and power their morning, hydrate and nourish their day and wind down their evenings. On strategy, we've already started making two significant pivots in our business. The first is that we're transforming from a company designed to expand at any cost into one that will operate in a fundamentally more strategic, measured and analytically driven way; you'll see this reflected in our marketing investments during 2022. Similar to other companies that depend heavily on the Internet and social media to promote and sell what they make, the digital marketing costs we incur to bring in new customers have risen over the past year, partly because of structural shifts at the largest digital and social platforms, but also because we leaned too heavily on the same tactics. Although we stay deeply dedicated to our online platform, this obstacle means we must conduct a more thorough evaluation of our marketplace dynamics so we can fine-tune our marketing spend to generate high ROI, and I'm happy to say this work is already in motion. At the same time, we've launched work streams aimed at obtaining stronger consumer insights, which will let us create better segmentation and aim our marketing spend more efficiently. We've also taken up efforts to redesign and align packaging throughout our entire product range, allowing us to improve both the first and second moment of truth with our consumers. Beyond that, we're moving away from being an entrepreneurial, founder-led organization toward a more conventional consumer packaged goods business model. Accordingly, expect to see us bring in more CPG talent to scale and operationalize our business. Last month, I noted that the wholesale channel would prove essential to achieving our vision at scale, and that we'd keep broadening our portfolio while growing our overall store count. So with that in mind, it's my pleasure to share that we've brought on a leader for the Wholesale side of our company. Daryl Moore will come aboard next week, stepping in as Senior Vice President of Sales overseeing every physical retail channel. Daryl brings decades of experience in the natural food space, and most recently served as COO and Head of Sales at Performance Kitchen. Before that, as VP of Sales at Bulletproof, Daryl played a key role in taking that brand from roughly $20 million to over $100 million in sales spanning numerous categories, channels, and retailers. Now that Daryl is with us, we can push strategic focus and activity alongside key sales agencies and retailers, and we'll start putting together our go-to-market strategy in foodservice along with other alternative channels. On the operational side, I'm delighted to share that we keep performing far beyond our size, even with every difficulty our industry has encountered around inflation, labor, material availability, the broader supply chain, and beyond. The 98% fill rate we achieved in the fourth quarter stands as a strong illustration of what our team has accomplished and shows both the resilience of our operation and the skill of the people running it daily. On top of that, we're finding many chances to cut costs across a range of factors, among them ingredients, packaging, and distribution. As we set our sights on 2022 and what comes after, Laird Superfood's future is still thrilling and full of possibility. We've rapidly established a trusted and respected brand with a lineup of health and wellness oriented foods, and we stay confident in our capacity to expand distribution in bricks-and-mortar stores as well as in our native online environment. Because of the recent difficulties I mentioned regarding the value proposition for digital advertising, we do anticipate slower growth in the near-term while we evaluate various marketing tactics for acquiring new customers online. Even so, we know we've built something special within the CPG industry and stay deeply committed to the digital channel; we'll concentrate on turning our database of existing Laird Superfood customers into repeat purchasers and subscribers by delivering a new white glove customer experience; and though we'll sell aggressively into the wholesale channel, that startup takes time because of retailer reset timing, so we expect our net sales to land between $41 million to $44 million in 2022. We expect our gross margin percentage to be lower during the first half of the year, then improve steadily as the year goes on as we carry out several operational improvements and revise our free shipping policy. These initiatives will require time to implement and generate benefit, which we should begin to see in Q2 and then accelerating for the balance of the year. To sum up, while we do anticipate some modest headwinds in the near-term as we reset our customer acquisition model and keep operationalizing our manufacturing facility, the growth opportunity for our brand has never been stronger. With buyers still hunting for plant-based options that deliver both flavor and nutrition, Laird Superfood stands ready to seize that opening — growing what we offer in the wholesale channel, sharpening how we sit in packaging, and reshaping the way we market. Our dedication to creating a top-tier plant-based health and wellness brand hasn't wavered, and we'll keep pushing the company forward while honoring what we owe the planet and our team. On that note, I'll pass things to our Chief Operating Officer, Scott McGuire, who can walk through the fourth quarter and full-year operations in greater depth. Scott?

Appreciate that, Jason, and hello everybody. I'd like to cover three main points regarding Q4, plus give you a status report on our supply chain and how it's currently affecting the business. To start, we set records for production volume in terms of both units and total efficiency. That came about through several engineering initiatives and the combined work of a talented team that never stops pursuing excellence. Next, during the prior quarter we noted the relocation of our new customer fulfillment center. Thanks to that shift, we've been able to bring together essential raw materials and finished goods inventory in one campus location. More significantly, it represented a major move toward realizing the synergies we anticipated between Laird Superfood and the Picky Bars acquisition; and lastly, the way this facility is designed allows for quicker and more streamlined fulfillment for both direct and retail customers. Everything was ready in time for a strong Black Friday promotion, during which we met our velocity and service targets. Number three, within our expanding refrigerated creamer category, we completed our first full quarter under a new production and supply strategy, which brought about a steady decline in spoils and consequently better margins. Our supply to distributor distribution centers remained solid. And although we ran into certain store level in-stock problems during the initial rollout of our two new flavors, we're confident those have been worked out by now. Turning to supply, over recent quarters we've talked about the widespread worry over our distinctive internationally sourced ingredients and the supply chain disruptions making headlines. Since we avoid the biggest ports and have secured our position with safety stock, we experienced minimal disruption and managed to fulfill 98% of orders in Q4. We understood that shipment delays and ingredient shortages remained an ongoing threat, yet we keep planning carefully and monitoring the latest supply chain news regarding inflation and availability. And last, going back to what Jason said about our forward-looking strategy for gross margin improvement opportunities, though we anticipate Q1 will show a lower margin because of seasonally reduced volumes, higher shipping costs, and product mix, our gross margin ought to climb throughout the year as we roll out and take advantage of technology, and automation projects, grow our in-house SKU production, keep enhancing our fulfillment process, and capitalize on greater volumes in the back half of the year; at this point, I'll hand things over to Valerie Ells, our CFO, for a deeper dive into Q4 results.

Thanks, Scott. In the fourth quarter of 2021, net sales rose 29% to $9.4 million, up from $7.3 million during the same period in 2020. Driving this year-over-year gain was a 39% jump in online business, which speaks to robust direct-to-consumer demand, alongside a 16% increase in wholesale. Ongoing momentum in our DTC segment came from sustained conversion rate strength, a 40% rise in average order value, reorder rates that improved another 6% versus the fourth quarter of last year, and gains tied to our Picky Bars acquisition. Wholesale's mid-teens increase showed continuing traction in grocery, spanning both our refrigerated liquid creamer line and our shelf-stable offerings, though this was partly offset by a modest pullback stemming from club sales timing. Turning to product categories, the quarter saw robust expansion in Harvest Snacks, powered by the Picky Bar portfolio we acquired. Coffee Creamer held steady, mostly because growth in refrigerated liquid creamer sales was counterbalanced by weaker club results tied to our shelf-stable creamers. Gross margins came in 350 basis points higher year over year, reaching 23.6% of net sales in Q4 2021 versus 20.1% of net sales a year earlier. Contributing to this gain were reduced inventory costs from operational efficiencies, further refinement of our DTC shipping costs through a better average order value, and enhancements in both distributor chargeback's and production waste within refrigerated liquid creamer, thanks to the longer shelf life and logistics takeover we covered in earlier quarters. Partly working against these gains were wholesale fulfillment costs, promotional activity timing, and broad inflationary pressure. Operating expenses totaled $9.2 million, versus $6 million a year ago. General and administrative costs grew $1.2 million from the prior-year fourth quarter, mainly from personnel costs, professional fees, and amortization tied to intangibles from the Picky Bar acquisition. Club sales and marketing expense climbed $2 million, driven largely by higher advertising and marketing. On a sequential basis, operating expenses were $9.2 million in the fourth quarter against $8.5 million in the third quarter of 2021, with general and administrative expenses flat and marketing expenses up roughly $650,000 because of promotional activity timing. As we've mentioned on earlier calls, having finished the infrastructure build-out needed to operate as a public company, we've now turned to seeking ways to maximize efficiency and leverage within general and administrative expenses; so we were glad to post yet another sequentially flat quarter. On sales and marketing, our focus now is generating returns and efficiency from our investments without giving up growth. We anticipate further progress on this front in upcoming quarters, though it won't always follow a perfectly straight line. Our balance sheet stays healthy, and we closed the year with close to $32 million in cash and investments and no debt. The state of our inventory is still solid, and we're keeping that level of investment in place so we can back growth and lessen the impact of supply chain disruptions. Now, turning to what we expect for 2022, we're looking at net sales between $41 million and $44 million, powered by wholesale expansion, especially in refrigerated liquid creamer and functional coffee products, plus online games throughout our portfolio. The strategies Jason mentioned, along with our new SVP of Sales Daryl Moore, are promising signs for our retail future, though they'll take time to ramp up, which means wholesale growth will be more evident in the second half of 2022 and carry into early 2023. For the full year 2022, we're projecting gross margins of 24% to 26%, helped by ongoing operational efficiencies at our Sisters facility, optimization of our DTC parcel costs, and better margin profile in refrigerated liquid creamer, though inflationary pressure will offset some of that. Throughout 2022, we'll put more focus on finding elasticity in our free shipping program, optimizing product pricing, sizing and packaging, reviewing our portfolio for SKU rationalization opportunities, and many other efforts to drive further margin improvements in late 2022 and into 2023; and as our business keeps scaling and we capture continued share gains across the several large addressable markets where we operate, a vertically integrated approach opens up significant opportunity for fixed cost leverage. I'll hand the call back to Jason.

Thank you, Val. To sum up, 2021 proved to be a robust period for Laird Superfood's, since we achieved a 43% increase in net sales despite a tough macroeconomic backdrop and demanding year-over-year comparisons. Progress has been made, and we keep making it, on numerous important initiatives that will position our company for ongoing achievement. Moving ahead, we will keep carrying out a focused collection of strategies that assist us in further propelling our top line growth through broadening our distribution points and enhancing our customer and consumer marketing model; and although we anticipate some unevenness across the next couple of quarters while we establish these initiatives and strive to better our operations, our long-term growth thesis stays whole as we keep leading and innovating in the plant-based food sector. That brings our prepared remarks to a close. Operator, we are now ready to begin the question-and-answer portion of the call.

Hi everyone. I appreciate you answering my questions. So I suppose the first thing I'd ask is that it seems like wholesale, and especially liquid creamer, represent a significant portion of what you expect for growth in 2022. I'm wondering, when it comes to every product and segment you operate in, which areas do you view as the most cautious in the guidance, if you had to name a few?

Yes. Hi Bobby, how's it going?...

Good Jason.

Thanks for the question. I think — hi there, nice to be speaking with you again here. So, a great question for us: the liquid creamer remains an incredible opportunity for us just given the addressable market of what that category is as well as the fact that we're still sitting at about 5% ACV in conventional. The opportunity is enormous for us. And what we've been working on is really to get our capacity in line and be ready to go. I mentioned that we have a new sales leader that's joining and he's really going to be able to take the helm here quickly and start to drive that business as we go forward. We're walking into review season. There are a number of reviews that he'll be able to jump into pretty quickly with the sales organization; so we do see an incredible opportunity to drive that business from here. And that's going to be our number one SKU as we go forward in the broader bricks-and-mortar channels. And so that will be to your question of where do we see opportunity from here. That's a big part of the opportunity for us. And I'd say the upside very much sits in that particular channel and with that product. At the same time though, we have really a tremendous opportunity on the powder creamers. The powder creamers today are again a largely untapped opportunity. I think at this point we're at about a 15% ACV on that product, and so to get that into ubiquitous distribution but also in the broader distribution with our club channel where we've made really great headways headway already. I see tremendous opportunity in that space also. So the creamer portfolio first and foremost, I would tell you too the coffee portfolio has really been requested by a number of retailers already. We're presenting that over the course of the next few months and see opportunity to take that into club as we go forward as well; and then on the DTC side, there's really a great opportunity here Bobby to continue to drive the whole portfolio; that's what the DTC channel provides us of course and the ability to take more of our products to Amazon, leverage that as — in a stronger way as a ready-to-go platform is another space where I would tell you that we have a lot of upside opportunity versus where we are today and what we're planning in the next couple of months.

Great. And then just a quick follow-on; in terms of inflationary and supply chain concerns, you touched on having, I think, managed to avoid any significant disruptions. Are there specific ingredients or supply chain kind of channels that you could call out where maybe you're more concerned about inflation and disruptions?

Yes. Thanks. Great question Bobby. I would say that just like you heard from everybody anything coming over ocean container has risk whether you can get it on a ship, whether it's going to make it to the port. That's all worked out pretty good for us up to this point. And as I've said, we've been at a really good spot in inventory levels; and so we haven't had quite the same issues that others have had, but we have to keep an eye on it too, because even though we largely bypassed the major ports, there are still challenges in some countries getting products onto the ship.

Great. Understood. Thank you.

Thanks, Bobby.