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

Good afternoon. Thank you for standing by, and welcome to the First Quarter 2022 Earnings Conference Call and Webcast for Laird Superfood, Inc. I would now like to turn the call over to Mr. Reed Anderson of ICR to begin. Please go ahead.

Thank you. Good afternoon, and welcome to Laird Superfood's First Quarter 2022 Earnings Conference Call and Webcast. On today's call are Jason Vieth, Chief Executive Officer; Valerie Ells, Chief Financial Officer; and Andy Judd, Chief Commercial Officer. By now, everyone should have access to the company's first quarter earnings press release filed today after market close. This is available on the Investor Relations section of Laird Superfood's website at www.lairdsuperfood.com. Before we begin, please note that all the financial information presented on today's call is 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 Jason Vieth, Chief Executive Officer of Laird Superfood.

Thank you, Reed. Welcome, everyone, and thank you for joining us today. On the call with me today are Valerie Ells, our Chief Financial Officer; and Andy Judd, our recently appointed Chief Commercial Officer. My comments today will primarily focus on the strategic actions that we've taken to further strengthen the company's position as well as our upcoming steps and milestones to give you a road map for our continued progress. I'll then turn it over to Andy for additional commentary on products, marketing and business development efforts. Val will close our prepared remarks with an overview of the Q1 financials, and our outlook for the balance of 2022. We'll then take your questions. I'm pleased to report that our first quarter results were solid, with top line growth of 26% to $9.3 million. These results included solid gains in both online and wholesale channels. As expected, gross margin is proving to be challenged in the first half of the year as we work our way through known constraints in our operations structure, and make the necessary adjustments that will set us up for future success. During Q1, we did make significant progress in rightsizing our cost structure, which helped to offset much of the impact on quarterly profitability, and we will continue to make moves to identify and address supply chain efficiencies in our operations. From an organizational perspective, we've made some key hires over the past months that speak to the power of the Laird Superfood brand and its tremendous growth potential. As mentioned on our fourth quarter call, Daryl Moore joined us as the Senior Vice President of Sales in March, with responsibility for all physical retail channels. Daryl was most recently COO and Head of Sales for Performance Kitchen and has decades of experience in the natural food industry. Daryl has a proven track record of omnichannel excellence, having led sales at Bulletproof as it increased 5x to around $100 million in revenue. We also recently added Andy Judd as our Chief Commercial Officer. Andy will be responsible for 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. As with Daryl, Andy has extensive experience in consumer goods in the natural products industry, most recently as the Chief Marketing Officer of Yasso. Before that, Andy served as CMO of ONE Brands, and VP of Marketing for the Boulder Brands business unit of Pinnacle Foods, and previously 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 completed a review of our new 3-year strategic plan with our Board of Directors, and our goals and strategies are aligned and clear. We will continue to build a true omnichannel business that focuses on the daily ritual online, while leveraging our strength in functional creamers, coffee and hydration in broader retail outlets across the country. Our commercial team has a clear set of sales and marketing objectives and measures and is already executing against them with renewed vigor and excellence, as Andy will share in a few moments. Moving forward, we will be laser-focused on improving our gross margin with a long-term focus on again exceeding 35%. We have already begun to streamline our manufacturing and distribution operations, and we'll continue to do so behind investments that we've recently made in automation, software and more. In March, we eliminated free shipping on orders below $30 and did not see a meaningful impact to our volume. In addition, we have identified more than 10% of our portfolio for SKU reduction and recently initiated work to assess and optimize our products across taste, health credentials and cost. And finally, we will soon be announcing a list price increase across the bulk of our portfolio, which will address the cost inflation that we've incurred during the past 2 years. Last month, we took the difficult action of reducing our operations headcount costs by approximately 20%, or $1 million per year on an annualized basis. While this is always a difficult decision, it was a necessary move given the progress that we have made in the last year to automate and improve our manufacturing processes and efficiency. Despite this move, I am pleased to report that we continue to service our business without any significant supply shortfalls. We also expect to free up cash across our balance sheet through targeted inventory reduction and the sale of nonproductive assets, and believe that we can increase our cash balance by more than $5 million from such activities during 2022. As we go forward, we will continue to make moves that simplify our operations and allow us to focus on commercializing our portfolio of great tasting, better-for-you products. As you can see, it's been a very busy couple of months for the team, and we are rapidly making progress against our stated goals of shoring up our sales, and improving our long-term profitability and cash position. Looking forward, we will remain focused on 3 key areas. First, our commercial team will continue to overhaul our approach to targeting and retaining customers on our own site and the Amazon platform, while we meet with retailers to expand our distribution across our core product lines. Second, we will continue to work tirelessly to overcome the cost challenges that are plugging supply chains worldwide, and we'll take the necessary actions to maintain and expand our gross margin back to pre-pandemic levels. And finally, we will continue to build the company's capabilities in areas that are core to our ongoing success, including on our commercial and operation teams, but also across our entire G&A structure. In summary, the next phase of our Laird Superfood journey is well underway, and we are making significant progress to create a substantial and profitable company. And while the market in U.S. economy remain extremely challenging, I am optimistic about our trajectory. With a leading Net Promoter Score and a portfolio of great-tasting, better-for-you, plant-based products, we are right on trend and poised to capture additional market share and achieve our long-term vision to become one of the leading players in the natural food and beverage space. With that, I will hand it over to our Chief Commercial Officer, Andy Judd, to discuss our first quarter and annual operations in a bit more detail. Andy?

Thanks, Jason. Hello, everyone. I'm excited to be on board and look forward to meeting many of you very soon. There is great momentum for Laird Superfood, and we have the right combination of people, products and passion. I was attracted to this moment as it will combine my experiences in growing and building emerging high-growth brands and a personal passion to eat more plant-based foods that are better for you and the earth. Laird Superfood has 2 very powerful tools, to find consumers at the intersection of functional food and flexible shopping. First, we have a powerful, active lifestyle brand with a great portfolio. This portfolio can expand significantly in coffee and creamers, and has the ability to create new categories across multiple dayparts from sunrise to sunset. And second, when we look at the ever-evolving landscape of how consumers shop across physical and digital platforms, Laird Superfood is well positioned with an infrastructure to capture shoppers and partner with retailers with the necessary flexibility to create a truly holistic omnichannel approach. In the near term, we are poised to continue our growth across our core platforms in coffee creamers and coffee. With the recent launch of our Bright cups functional coffee pods, we are enabling consumers to enjoy single-use coffee pods, but with a DPI certified pod that is commercially compostable, a brighter future for all indeed. We also have plans in the coming months to expand our reach in snacks with new launches later this summer of a line of Laird Superfood plant-based protein bars. Each bar lives up to the clean ingredient and nutritional standards of Laird Superfood, with 10 grams of plant-based protein made from a blend of pea, hemp and pumpkin seed. We are excited about increasing our snack portfolio by attacking a key category to satisfier and taste. These bars taste incredible, and I can't wait for each of you to taste them. As Jason mentioned, we have a ton of great potential to unlock a more holistic growth agenda across both digital and retail platforms. For our digital platforms, we continue to see deep loyalty and affinity with growing LTV and a best-in-class retention program, with nearly 400,000 consumers in our CRM and SMS databases, actively engaged in our mission brand. Despite continued year-over-year pressure on acquisition costs, in Q1, we did see slight sequential improvement in our CAC and are still experiencing solid growth on our DTC platform, with an acceleration of new consumers on Amazon. We have the opportunity to unlock even more reach and growth as we lock in the right balance of investment across platforms. For our wholesale business, I'm excited about how we can lead the charge to redefine the power of what plant-based creamers and coffee should be from simple nondairy alternatives to helping consumers get more out of every cup. We have significant upside to expand our retail footprint from our less than 10% ACV in MULO to consistent with the levels seen at plant-based nonfunctional competitors. I have seen firsthand the potential with other plant-based brands to achieve transformative growth when partnered with key retailers to create a destination for incremental need states. We have the same opportunity for functional coffee and beverages as it is largely untapped in traditional food. Now let me turn the call over to Valerie Ells, our CFO, to further discuss our first quarter results.

Thanks, Andy. Net sales increased 26% to $9.3 million in the first quarter of 2022 compared to $7.4 million in the first quarter of 2021. We had strong growth across both primary channels, with wholesale up 31% and online increasing 24%, including 35% growth in DTC, driven by the contribution of our acquired Picky Bar portfolio as well as continued improvement in average order values and retention rate. Results in wholesale reflected continued progress in groceries, both in our refrigerated liquid creamer business and our shelf-stable product assortment as well as a slight improvement in club sales. From a category standpoint, Picky Bar, which we acquired in May of last year, continued to be the primary factor driving strong growth in Harvest Snacks. Hydration and beverage enhancing supplements were up 18%, reflecting solid adoption of new products, such as our Mushroom Botanical, Renew Rest and Recover and Activate Immune. And coffee creamers rose nearly 9% due to both liquid and powder creamer growth. Gross margins declined 390 basis points on a year-over-year basis to 20.9% of net sales in the first quarter of 2022 compared to 24.8% of net sales in the prior year period. The decline was due to a combination of factors, including compression related to elevated promotional activity due to both our growing retail business and specific promotional events online. Combined with elevated inventory costs due in part to inbound freight rates and other inflationary pressures, these factors were partially offset by ongoing progress around optimizing DTC shipping expense as well as improvements in production and waste expenses related to our liquid creamer business. Operating expenses, as reported, totaled $15.9 million compared to $7.2 million in the year ago period, with the majority of the increase stemming from a onetime noncash charge for goodwill and intangible asset impairment of $8 million. Excluding these items, operating expenses were $7.9 million. General and administrative expenses, as reported, were $11.8 million, up $8.2 million from the prior year period, nearly all of which was driven by the noncash goodwill and intangible asset impairment charge mentioned previously. Excluding the goodwill and intangible asset impairment charge, G&A expenses were $3.8 million, up approximately $150,000 from the year ago period, with elevated personnel costs relating to executive transitions and elevated professional fees, partially offset by a benefit from the forfeiture of market-based stock units associated with an executive departure. Sales and marketing expense increased approximately $670,000 to $4 million due to growth in advertising and marketing fees. Compared to the sequential quarter, however, sales and marketing expenses were down approximately $690,000, reflecting an improvement as a percent of net sales from 50% in the fourth quarter to 43% in the current period. Net loss, as reported, was $14.1 million. On an adjusted basis, net loss was $6.7 million, up approximately $1.4 million from the year ago period. A detailed reconciliation of non-GAAP adjusted net loss is included in our earnings release. Our balance sheet remains healthy, and we ended the quarter with over $27 million of cash and investments and no debt. Cash used in operating activities improved 30% to $3.6 million versus $5.1 million in the year ago period, primarily driven by inventory rationalization. Our inventory position remains strong, and we continue to strive for improving turns while balancing the level of our investment to support growth and mitigate supply chain disruption. Now for our 2022 outlook. At this point, we are maintaining our previously provided 2022 guidance, anticipating net sales of $41 million to $44 million, driven by wholesale growth, particularly in creamers and functional coffee products, as well as online gains across our portfolio. The strategies Jason and Andy referenced bode well for our future in retail, but will require time to ramp up, implying more visible progress of our wholesale growth in the second half of 2022 and building in early 2023. We continue to expect full year 2022 gross margins of 24% to 26%, driven by price optimization, operational efficiencies and improvements in our refrigerated liquid creamer margin profile, offset by inflationary pressures. I'll turn the call back to Jason.

Thanks, Val. We've clearly made a lot of progress over the past few months, and I'm more excited than I've ever been for where this brand can go. As we head into the heart of the retailer review schedule, I am optimistic that we will be able to gain significant distribution expansion in 2023. I'm confident that the revamp that Andy is leading across our branding, packaging and insights will pay dividends in identifying, targeting and attracting consumers to our brand across both the wholesale and online channels. And we will continue to relentlessly attack our costs and optimize our products in order to expand our gross margin. Though we are in both a challenging macro environment and a transformative moment for the Laird Superfood Business. our results in the first quarter demonstrate the strength of our brand proposition and our product portfolio. Moving forward, we will continue to build off of these assets to deliver the healthiest and best-tasting, plant-based foods to our consumers. This concludes our prepared remarks. Operator, we are now ready to open the call to questions.

[Operator Instructions] Our first question comes from the line of Bobby Burleson with Canaccord.

So congrats on the solid quarter and reiterating guidance. A couple of things, just there's obviously a lot of stuff impacting the consumer these days, and we're hearing a lot about price sensitivity in grocery and elsewhere. But it sounds like from what you've managed to do with the elimination of free shipping for $30 and under that you're not seeing a lot of pushback. And we are just curious like what you think about your particular customer cohort when it comes to this price sensitivity that we're hearing out there?

Bobby, this is Jason. Thanks for that question. That's something that has been a topic of conversation for us as well over the last couple of weeks, as you'd imagine. So we went through a great deal of deliberation with regards to free shipping. And as it turns out, it ended up being pretty much a nonevent. I think what's happened is the consumers become so accustomed to prices rising in general, and so many other online ordering platforms have moved away from free shipping that I don't believe that the consumer is as sensitized to it as they would have been in the past. And I'll take that and run with it a little bit more broadly as well. And I do want to hand it over to Andy Judd to introduce himself and also share some thoughts on that question. We're operating in a market with premium products, and we always have that concern as prices continue to rise and consumers become more aware of their shopping bills that you're going to be hit. I recall going through something very similar just over a decade ago, the last time that there was inflation like this. And we were pricing the Silk business, and we're concerned around taking that first price increase. We ended up taking a few of them. And we did it sequentially in a short period of time. What we found is that, while some consumers that are in your franchise at the lower end and maybe willing to trade the value, do that you're also attracting a number of other consumers that are leaving coffee houses as an example, or restaurants in general. And as they come back into their homes and are consuming food there, they're those for products that are as premium is what they're leaving behind. And we feel like our portfolio at Laird is really well positioned to sustain that trend. That's a trend that I mentioned that Silk did really well with Horizon Organic data. And really, frankly, most premium products during that time, and you saw organic and natural foods continue to grow remarkably well despite the inflation and the recession that hit the economy. So I feel like we're in a similar position now. But Andy has spent the last 6 weeks or so that he has spent here, really getting in to understand our consumer and start really driving insights. So let me turn it over to him so he can share a little bit more.

Bobby, thank you for the question. I think in addition to the comment that Jason brought. We have seen a really deep -- hit the loyalty piece as well, a really loyalty in this consumer group in this cohort. They understand the functional benefits of our product. A lot of them are in a subscription-based program as well. And a lot of those AOVs were above the threshold. So this is also not just about understanding that we have really loyal consumers, but also making sure that we're getting more savvy on our order mix and pricing up on some of our smaller orders to make sure that we're driving profitability across the total platform as well.

Great. And so just a quick follow-up. So it sounds like maybe that's given you a little confidence on that list price increase that's coming. But just wondering on the elimination of free shipping, $30 and below kind of what percentage of your DTC or online that is? How big of a slice of your activity does that represent?

Yes. Bobby, I'll let Val jump in if she happens to know that percentage off the top of her head. It's a relatively small percentage, quite frankly. And as Andy alluded to, is our least profitable consumer as well. So what we saw is a trade up, and therefore, an increase in our average order volume as we did that. And so through Q1, the metrics are going the right way for us, and we are able to -- we have been able to trade up a good majority of those consumers thus far. But in terms of the actual percentage, I can get back to you with that. I don't have that handy right now.

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

I wanted to ask -- Jason, I think you mentioned in your prepared remarks launching protein bars in the near future. Curious if we can get a little bit more color on the time line of that launch, and how impactful you think it can be? And I imagine this is something that most of your loyal core customers are already consuming from competing brands? I mean do you have a sense of what protein bars your customers are currently eating, and how many of those customers do you think you'll be able to trial your products.

This is Andy. I'll jump in on that one in particular. We're really excited with the plant-based protein bars. I think there's a couple of components here. One, it does present a really nice incremental space that extends that afternoon daypart for us in a snacking occasion that is differentiated from some of our portfolio, but really rounds out the complementary snacking products that this consumer is looking for. But that lives up to the clean and nutritional standards that Laird provides against our broader portfolio. It also gives us a chance to leverage some of the capabilities that we've been able to build in concert and collaboration with our Picky Bar acquisition, and look at how we can drive incrementality across both the Picky business and the Laird Superfood business. And when we looked at the opportunity to drive this particular nutritional bundle that is higher protein than the Picky Bar, lower net carbs as well, it really stood out that there's a great opportunity there. Obviously, it's a multibillion dollar category and as consumers continue to shift their behaviors and eating towards snacking, it's a really nice opportunity for us, and that will launch here later this summer.

That's terrific. Really...

Alex, let me add one other thing on that, because I think as Andy was kind of alluding to, this is a product we for a while, considered putting under -- putting the Picky Bar under the Laird brand and incorporate those we've moved strategically to let those live alone. And so we're going to have this product come out as Laird's first entry into the bar business. We think that it is a very differentiated proposition with its protein makeup plus an ingredient makeup plus the adaptogenic ingredients. And then we are, at the same time, as a result of that, though, going forward with the Picky Bar expansion on those bars, too. And that's a really big strategic shift for us. It gives us the ability as we're going in and selling the layered bars to sell the Picky Bar and sell them as a complete package of very differentiated brands and products, but the Picky Bar being more of that immediate energy source available for on the go and athletic consumption, whereas Laird's is a protein bar that's not bringing those ready carbs in the same way. And so we're really excited about what those can do together for us.

Our next question comes from the line of George Kelly with ROTH Capital Partners.

So just a couple for you. I'll start with the cost reductions. I think, Jason, you mentioned that there were some reductions that you guys already implemented on the OpEx side. Just wondering if you could just talk through what were those? And are there still areas that you think there's real opportunity, both with respect to OpEx and with COGS for continued cost savings?

Yes. George. We -- great question, and I'm glad to get a chance to share a bit more of the details on this. As I mentioned, we did go through a headcount reduction. And as painful as that always is, the reality is it was necessary because of the combination of the automation and the process improvements that the team had made over the course of the last 12-plus months. We have a team that's really executing very well and, frankly, is able to meet our demand even today as we scale up additional revenue in the back half of the year with the team that's in place. So we're really excited about what we've done on the factory floor. So that was one move that we made. As I mentioned, we did bring down -- or we did change the free shipping policy. So we implemented a $30 threshold on that, and that allowed us then to reduce some of the shipping costs that we had and pick up some shipping income on some of those smaller orders. As we go forward, there's still a number of areas, and we're working on all of them simultaneously. One is on the product formulation. We're in a position now where we have a number of ingredients that either were included without really realizing the product benefit or sharing the product benefit with consumers. And as a result, consumers are purchasing the products without recognizing the benefit that's being received, and therefore, we have ingredients that becomes superfluous to the proposition. Those are expensive. So we have some product reformulation work that's already teed up or kicked off, I should say. And then we have a number of initiatives still that we'll be working on in the back half of the year. We do have opportunities in external fees as well. I think about the off-premise warehousing that we have today. We have a significant number of pallet positions that are being held for us off site that handle a lot of space internally still, and we're looking now at how we optimize that and consolidate that. And we have some software and other expenses that we'll be reducing as well. And then on the G&A front, we still have a number of non-headcount-related costs that we're going to be ripping through. We've put targets out for each one of our departments, and they're executing against that. But as you would imagine, with this being the first time we've really executed against something like that, we're really -- as we're digging through this we're finding a lot of quarters, and we're really bringing this in. So those are the 3 primary areas. As we go forward, I mentioned we'll continue to structure the organization appropriately as well. And in the G&A space, we've made moves already as you guys have seen across the executive team and a number of other areas. And as we go forward we'll continue to consolidate as appropriate to bigger jobs and be able to put people in great positions to lead bigger teams. So there's a lot underway still at this point, but primarily, it's going to be around that product formulation and getting rid of some of those external fees.

Okay. That's super helpful. And then second question for me on your full year guidance, if I just play that through it, I'm going to a sequential improvement kind of in revenue throughout the year. So I have revenue stepping up just to hit your number. What gives you confidence that you can execute on that? Is it -- what I'm hearing is that new products and sort of a renewed focus on wholesale. And is there anything sort of within that business that gives you visibility on hitting those numbers?

Yes, George. This is -- that's a great question as well. And I'll turn this over to Andy Judd to speak on commercial strategy. We had a similar perspective as we built the year and as we got to the second half of the year, our expectation is, at that point, we're getting some of the wholesale wins that start to come in. Most of those are going to hit in 2023, but we are going after some, quite a few, in fact, accounts that are off-cycle able to cut in products. And so you think about some of those nontraditional retailers in this space where our products fit really well. Companies like REI or Bed Bath & Beyond, et cetera, that are carrying creamer, coffee and bar products, we'll certainly be spending time with them and trying to get that product listed prior to next year and have an expectation that will make some success there. We also have a number of initiatives across retailers that we're working with today for expansion. We had a recent win on Costco that I'll let Andy speak to in a moment. And there are a couple of other retailers that will be working to do the same. And then on the DTC side, we have significant opportunity. Last year, in Q4, we reported that we had some challenges in executing due to our staffing and resource issues where we have a number of folks where there were a number of positions but they got taken. And so we feel like there's an opportunity there to recapture what was missed. We know that we can do more with Amazon. We've already started to press forward with that. And so with that -- I would tell you that multipronged approach across Amazon, DTC and wholesale is really where we're putting our efforts and we feel like we can get additional listings and drive additional consumers to the platform.

Yes, George, the only as I'll put on top of that beyond the channel is on the product side. So we do have a number of new item launches, as I mentioned in the prepared remarks relative to our bright cups, coffee pods that were just launched here at the end of April, our protein bars coming up to summer and we've got some other creamer and beverage products coming out towards the end of the year. So I think the cumulative effect that the channel mix that Jason went through as well as continued expansion into incremental spaces for our portfolio and product side does give us good confidence.

There are no additional questions waiting at this time. I would like to pass it back to Jason Vieth for any closing remarks.

Sorry, I was trying to get off of view there. So yes, I'll thank all of you again for listening in today. As always, we appreciate you supporting our team and our business as we push through this transformation. Q1 was a solid start to 2022 for Laird Superfood, and I'm proud and excited for the position that we're in. But at the same time, we recognize that the market and the economy are likely to remain challenging for the foreseeable future. Still, I'm confident in our team and our brands, and believe that we're poised to continue to grow and improve our business from here. So from our entire LSF team to you and your families, we wish you all a hearty mahalo and look forward to talking with you soon.

That concludes the Laird Superfood First Quarter 2022 Earnings Conference Call. I hope you all enjoy the rest of your day. You may now disconnect your lines.