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

Thanks. Good afternoon, and thanks for joining us on Laird Superfood's First Quarter 2022 Earnings Conference Call and Webcast. Joining us today are Jason Vieth, our Chief Executive Officer; Valerie Ells, our Chief Financial Officer; and Andy Judd, our Chief Commercial Officer. At this point, everyone ought to be able to view the company's first quarter earnings press release, which was filed today following the close of the market. You can find it in the Investor Relations area of Laird Superfood's website, at www.lairdsuperfood.com. Prior to starting, please be aware that all financial information shared on today's call is unaudited; 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 may 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 those expressed or implied in any forward-looking statements made today, please see today's press release and other filings with the SEC. And now I'd like to hand the call over to Jason Vieth, Chief Executive Officer of Laird Superfood.

Thanks, Reed. Hello, everyone, and I appreciate you being with us today. Joining me on this call are Valerie Ells, who serves as our Chief Financial Officer, and Andy Judd, who was recently named our Chief Commercial Officer. My remarks this morning will mainly cover the strategic moves we have made to keep strengthening the company's position, along with the steps and milestones ahead that provide a road map for our ongoing progress. After that, I'll hand things to Andy for more detail on products, marketing, and business development work. Val will wrap up our prepared comments with a look at the Q1 financials and what we expect for the rest of 2022. Then we'll open it up for your questions. I'm happy to share that Q1 delivered solid results, with the top line rising 26% to $9.3 million. Those results featured solid gains in both online and wholesale channels. As anticipated, gross margin is under pressure during the first half of the year while we navigate known constraints in our operations structure and make the adjustments needed to position us for success going forward. In Q1, we made meaningful headway in rightsizing our cost structure, which offset a good portion of the hit to quarterly profitability, and we'll keep taking steps to find and resolve supply chain inefficiencies in our operations. Organizationally, we've brought in some key people over the past months, which reflects the strength of the Laird Superfood brand and its enormous growth potential. As we mentioned on our fourth quarter call, Daryl Moore came aboard in March as Senior Vice President of Sales, overseeing all physical retail channels. Daryl most recently served as COO and Head of Sales for Performance Kitchen, and he brings decades of experience in the natural food industry. Daryl has demonstrated omnichannel excellence, having led sales at Bulletproof as it grew 5x to roughly $100 million in revenue. We also recently brought on Andy Judd as our Chief Commercial Officer. Andy will own Laird Superfood's commercial strategy, overseeing marketing sales, product development, and customer experience to further leverage our platform to drive business growth and aggressively expand our market share across the online and wholesale channels. Like Daryl, Andy brings extensive consumer goods experience in the natural products industry, most recently serving as Chief Marketing Officer of Yasso. Prior to that, Andy was CMO of ONE Brands and VP of Marketing for the Boulder Brands business unit of Pinnacle Foods, and earlier in his career he held various leadership positions at several other major companies, including WhiteWave, Saputo, and Campbell's. Andy will introduce himself to you in a few minutes. Last week, we finished reviewing our new 3-year strategic plan with our Board of Directors, and our goals and strategies are aligned and clear. We're going to keep building a genuine omnichannel operation, one centered on that everyday routine happening online, while we also bring to bear what we do well in functional creamers, coffee and hydration across retail locations nationwide. Our commercial group now has a defined set of sales and marketing goals along with the metrics to match, and they're already carrying those out with fresh energy and a high standard, which Andy will walk through shortly. From here on, we'll stay sharply focused on lifting our gross margin, with the longer-range aim of once again getting above 35%. Work is already underway to make our manufacturing and distribution operations more efficient, and that effort will keep going, supported by the investments we made not long ago in automation, software and other areas; back in March, we stopped offering free shipping on orders under $30, and we didn't observe any meaningful effect on our volume; beyond that, we've flagged over 10% of our portfolio for SKU reduction and have just started work aimed at evaluating and optimizing our products on taste, health credentials and cost. Then last, we'll shortly be announcing a list price increase covering the bulk of our portfolio, which will respond to the cost inflation we've absorbed over the past 2 years. Last month, we took the hard step of cutting our operations headcount costs by roughly 20%, which works out to $1 million per year on an annualized basis. That kind of decision is never easy, yet it became necessary given how far we've come over the last year in automating and enhancing our manufacturing processes and efficiency. Even with that step, I'm happy to say we're still serving our business with no significant supply shortfalls. We also anticipate unlocking cash throughout our balance sheet by way of targeted inventory reduction and selling off nonproductive assets, and we think those actions can lift our cash balance by over $5 million during 2022. Going forward, we'll keep taking steps that make our operations simpler and let us concentrate on commercializing our portfolio of great tasting, better-for-you products. As you can tell, the team has had a very busy couple of months, and we're moving quickly toward the goals we set out: strengthening our sales and enhancing our long-term profitability and cash position. Ahead of us, we'll stay focused on 3 key areas. First, our commercial team will keep reworking how we target and retain customers on our own site and the Amazon platform, while we sit down with retailers to broaden distribution across our core product lines. Second, we'll keep working relentlessly to get past the cost challenges clogging supply chains around the world, and we'll do what's needed to restore and grow our gross margin back to where it stood before the pandemic. And finally, we'll keep developing the company's capabilities in the areas that are central to our continued success, including within our commercial and operation teams, but also throughout our entire G&A structure. To wrap up, the upcoming chapter of the Laird Superfood story is already in motion, and we're achieving meaningful headway toward building a sizable, profitable enterprise. And although conditions in the U.S. economy and marketplace stay very difficult, my outlook on where we're headed is positive; thanks to a top-tier Net Promoter Score along with a lineup of delicious, better-for-you, plant-based offerings, we sit squarely on trend and are positioned to gain further market share and realize our long-term goal of becoming a top player in the natural food and beverage space. Having said that, I'll now pass things to our Chief Commercial Officer, Andy Judd, so he can walk through our first quarter and annual operations in somewhat greater depth. Andy?

Thanks, Jason. Hi, everybody. It's great to be here, and I can't wait to meet lots of you in the near future. Laird Superfood has tremendous momentum right now, and the mix of team members, offerings, and enthusiasm is exactly right. What drew me to this opportunity is that it brings together my background in scaling and developing young, fast-growing brands with my own desire to consume more plant-based foods that benefit both personal health and the planet. Laird Superfood possesses two extremely strong assets for connecting with shoppers where functional food meets adaptable purchasing habits. First, we boast a dynamic lifestyle brand with an excellent lineup. That lineup has substantial room to grow within coffee and creamers, and it can also establish entirely new segments spanning various occasions throughout the entire day. And second, considering the constantly shifting ways people buy through both brick-and-mortar and online channels, Laird Superfood occupies a strong position thanks to infrastructure that lets us attract shoppers and collaborate with retailers, offering the adaptability required for a genuinely comprehensive omnichannel strategy; looking ahead short term, we're set to keep expanding within our primary platforms of coffee creamers and coffee. With the recent debut of our Bright cups functional coffee pods, shoppers can now savor single-serve coffee pods featuring a DPI certified pod that breaks down via commercial composting — a brighter future for everyone, truly. We also intend, over the next few months, to broaden our footprint in snacks through new introductions later this summer: a lineup of Laird Superfood plant-based protein bars. Every bar meets Laird Superfood's rigorous clean ingredient and nutrition criteria, delivering 10 grams of plant-based protein derived from a mix of pea, hemp and pumpkin seed. We're thrilled to grow our snack offerings by going after a vital category focused on satisfaction and flavor. These bars taste amazing, and I'm eager for all of you to try them. As Jason noted, we have enormous untapped opportunity to advance a more comprehensive growth plan spanning both digital and retail channels. On the digital side, we keep witnessing strong loyalty and connection, with rising LTV and a top-tier retention initiative, as roughly 400,000 consumers in our CRM and SMS databases stay actively involved with our mission-driven brand. Even with ongoing year-over-year strain on acquisition costs, during Q1 we observed modest sequential gains in our CAC and continue to enjoy healthy expansion on our DTC platform, alongside faster growth of new customers on Amazon; there's room to gain even greater reach and growth once we settle on the proper investment balance across channels. Turning to wholesale, I'm eager about our ability to spearhead efforts redefining the potential of plant-based creamers and coffee — moving beyond basic nondairy substitutes to assisting consumers in getting more from every cup. There's a lot of room for us to grow our retail presence, since our ACV in MULO sits below 10%, and we could get that up to where plant-based nonfunctional rivals already are. With other plant-based brands, I've personally witnessed how much transformation is possible when you team up with major retailers to build a destination around incremental need states. Functional coffee and beverages give us that same opening, because traditional food remains mostly untapped there; at this point I'll hand things over to Valerie Ells, our CFO, so she can go deeper into what happened in our first quarter results.

Thanks, Andy. In Q1 2022, net sales rose 26%, reaching $9.3 million, versus $7.4 million during the same quarter in 2021. Both of our main channels delivered robust gains: wholesale climbed 31%, while online grew 24%, which included a 35% rise in DTC. That was fueled by what our acquired Picky Bar portfolio brought in, plus ongoing gains in average order values and retention rate. Wholesale results showed continuing momentum in groceries—covering both our refrigerated liquid creamer operation and our shelf-stable lineup—along with a modest lift in club sales. Looking at categories, Picky Bar, acquired in May of last year, remained the biggest driver behind Harvest Snacks' impressive expansion. Hydration and beverage enhancing supplements climbed 18%, which speaks to healthy uptake of new items like Mushroom Botanical, Renew Rest and Recover, and Activate Immune. Coffee creamers advanced almost 9%, thanks to growth in both liquid and powder creamers. Gross margins fell 390 basis points year over year, landing at 20.9% of net sales for Q1 2022, down from 24.8% of net sales a year earlier. Several things caused that drop, among them compression tied to heavier promotional activity—both from our expanding retail business and from particular online promotional events. Along with higher inventory costs—partly from inbound freight rates and other inflationary forces—those factors were partly counterbalanced by steady headway in optimizing DTC shipping expense, plus better production and waste expenses in our liquid creamer business. Operating expenses as reported came to $15.9 million, against $7.2 million in the prior-year period, with most of that increase traceable to a onetime noncash charge of $8 million for goodwill and intangible asset impairment. Strip those out, and operating expenses stood at $7.9 million. General and administrative expenses as reported were $11.8 million, an increase of $8.2 million over the prior year period, almost entirely attributable to the noncash goodwill and intangible asset impairment charge just mentioned. Back out that goodwill and intangible asset impairment charge, and G&A expenses were $3.8 million, roughly $150,000 higher than the year ago period, with bigger personnel costs tied to executive transitions and higher professional fees, partly offset by a benefit from forfeited market-based stock units linked to an executive departure. Sales and marketing expense rose by about $670,000 to $4 million, driven by growth in advertising and marketing fees. Sequentially, though, sales and marketing expenses dropped by roughly $690,000, an improvement as a percent of net sales—from 50% in Q4 to 43% this period. Net loss as reported was $14.1 million. Adjusted net loss came to $6.7 million, roughly $1.4 million above the year ago period. You'll find a full reconciliation of non-GAAP adjusted net loss in our earnings release. We're still in a solid financial position, wrapping up the quarter with more than $27 million in cash and investments, and we owe nothing. The cash burned through our operating activities got 30% better, landing at $3.6 million compared to $5.1 million during the same stretch a year earlier, mostly because we streamlined what we had on hand. Our stock levels are still in good shape, and we keep pushing to boost turnover rates while making sure we invest enough to fuel expansion and cushion against supply chain problems; so now let's talk about what we expect for 2022. Right now, we're sticking with the 2022 forecast we gave before, looking for net sales between $41 million and $44 million, powered by wholesale gains, especially in creamers and functional coffee products, plus growth online throughout our lineup. The approaches Jason and Andy brought up set us up nicely for the retail side down the road, but they'll take time to build momentum, which means our wholesale improvement should become more apparent during the back half of 2022 and heading into early 2023. We're still anticipating gross margins for all of 2022 to land between 24% and 26%, thanks to pricing adjustments, better operational efficiency, and gains in the margin profile of our refrigerated liquid creamer, though inflation is working against us. Now I'll hand things back over to Jason.

Appreciate that, Val. Over these last several months, the strides we've taken are obvious, and my enthusiasm for what lies ahead for this brand has never been higher. With the busiest stretch of retailer reviews about to begin, I feel good about securing meaningful distribution growth during 2023. Andy is spearheading an overhaul of our branding, packaging, and insights, and I believe that effort will bear fruit when it comes to spotting, pursuing, and drawing shoppers toward our brand in wholesale as well as online; meanwhile, we'll keep hammering away at expenses and refining our products so that gross margin can climb. Yes, the broader economy is tough and the Laird Superfood Business is undergoing real transformation, yet what we delivered in the first quarter shows how strong our brand proposition and product portfolio truly are. Going forward, we'll keep leveraging those strengths to bring consumers the healthiest, best-tasting plant-based foods anywhere. That wraps up what we prepared. Operator, please go ahead and open the line for questions.

First off, congratulations on a strong quarter and for reaffirming your guidance. A few points — clearly there's a great deal out there affecting shoppers right now, and we keep hearing about how sensitive people are to pricing in grocery and other areas; yet based on what you've accomplished by removing free shipping on orders of $30 and below, it seems you aren't encountering much resistance; so we're simply wondering what your take is on your specific customer base when it comes to that pricing sensitivity everyone's talking about?

Bobby, Jason here. Appreciate the question. That's actually been something we've discussed quite a bit ourselves these past couple of weeks, as you might expect. We did a whole lot of deliberating about free shipping. And it turns out, it was basically a nonissue. My sense is that shoppers have grown so used to prices climbing across the board, and so many other online ordering platforms have stepped away from free shipping, that I don't think customers feel it as acutely as they once would have; and I'll expand on that a bit more broadly too; and I do want to pass things to Andy Judd so he can introduce himself and offer a few thoughts on that question as well; we compete in a market of premium products, and we always carry that worry that as prices keep climbing and shoppers pay closer attention to their grocery totals, you'll take a hit. I remember experiencing something quite comparable a little over 10 years back, the last period when inflation looked like this; and we were setting prices for the Silk business, and we worried about making that initial price increase. We wound up making several of them; and we did so one after another over a brief stretch. What we discovered is that, although certain shoppers within your franchise at the lower end might be inclined to trade down for value, doing that also brings in a number of other shoppers who are leaving coffee houses, for instance, or restaurants more broadly; and as they return to their homes and eat there, they're seeking products that are just as premium as what they've given up; and we believe our portfolio at Laird is very well positioned to ride that trend; that's a trend I referenced that Silk performed really well with, along with Horizon Organic data. And honestly, most premium products did well during that stretch, and you watched organic and natural foods keep expanding impressively despite inflation and the recession that struck the economy; so I sense we're in a comparable spot today; but Andy has spent the last 6 weeks or so that he's been here really digging in to understand our consumer and begin truly generating insights. I'll now hand things over to him so he can add a bit more.

Bobby, I appreciate you asking that. Along with what Jason mentioned, we've noticed something quite significant — the loyalty aspect is really strong too, an impressive degree of loyalty among this particular consumer group and cohort. They get what our product does functionally. Many of them are enrolled in a subscription-based program as well. And quite a few of those AOVs exceeded the threshold. So this isn't only about recognizing that our consumers are extremely loyal, but also about becoming sharper regarding our order mix and raising prices on certain smaller orders, so that we're boosting profitability across the entire platform too.

Great; so, just a quick follow-up question. It sounds like that may have given you a bit more confidence regarding the upcoming list price increase; but I'm curious about doing away with free shipping — for orders at $30 and under, roughly what share of your DTC or online business does that account for? How large a portion of your activity is that?

Yes. Bobby, I'll let Val chime in if she happens to have that percentage at her fingertips; honestly, it's a fairly small percentage; and like Andy mentioned, they're also our least profitable consumer. The pattern we observed involved customers moving to higher-priced options, which pushed our average order volume upward as a result. Through the first quarter, then, the numbers have been trending favorably for us, and we've managed to shift a solid majority of those shoppers toward premium choices so far. As for the precise percentage, though, I'd need to follow up with you on that — I don't currently have it in front of me.

I'd like to ask something — Jason, I believe during your prepared remarks you brought up that protein bars would be coming out soon. I'm curious whether you could give us a bit more detail about when that launch will happen, and what kind of impact you expect it to have? And my guess is that a lot of your most devoted core customers are already buying these from rival brands? In other words, do you have any idea which protein bars your shoppers are eating right now, and what portion of them you think you'll be able to get to try your offerings?