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

Thanks, everyone. Hello and good afternoon, and I appreciate you joining us for Laird Superfood's earnings conference call and webcast covering the second quarter of 2022. Joining us today are Jason Vieth, our Chief Executive Officer; Anya Hamil, Interim Chief Financial Officer; and Andy Judd, Chief Commercial Officer. At this point, all of you ought to be able to access the press release about the company's second quarter results, which was filed earlier today following the close of the market. You can find it in the Investor Relations area of Laird Superfood's site, www.lairdsuperfood.com. Prior to getting started, I want to point out that each piece of financial data shared on this call has not been audited, and that throughout this call, members of management could deliver forward-looking statements as defined under the federal securities laws. Such statements reflect management's present expectations and beliefs, and they carry risks and uncertainties that might lead actual outcomes to differ materially from what those forward-looking statements describe. For a thorough review of the risks that might cause actual outcomes to differ materially from anything expressed or implied in forward-looking statements made today, please see today's press release along with other documents filed with the SEC. With that, I'll hand things over to Jason Vieth, Chief Executive Officer of Laird Superfood.

Thank you, Reed. Hello, everyone, and we appreciate you being with us today. To kick off this meeting, I'll give a big-picture look at how we performed in the second quarter along with a status report on the strategic moves that matter most to us. After that, I'll hand things to Andy, who will take a closer look at sales, channels and products, and then Anya will walk through the financials in full detail; after that, we'll take your questions; yet before I get into the quarter's numbers, I'd like to pause and acknowledge the Laird Superfood leadership team, and say thanks to them — the majority of these folks are only a handful of months into their positions. They have stepped up during a tough stretch for Laird Superfood as well as for the economy and end market more broadly, and they are doing an outstanding job of pivoting the business and the company toward our greatest opportunities on the commercial side and the operational side alike; within only a few months, we have managed to fully rebuild our sales and marketing teams and agency partners, and to make our operations leaner so we can capture significant cost and cash savings. A great deal of this effort has not yet borne fruit. I'm still just as excited about the opportunity to expand how many people make Laird Superfood part of their daily routine, and to do it with a much better cost structure than we had previously. In Q2, we saw some early benefits from our cost-cutting efforts and from accelerating growth in the wholesale channel, even as the operating environment became more challenging. Ongoing fallout from Apple's privacy feature changes continues to create hurdles for our e-commerce business. The result is less customer engagement on our website, especially among those with lower order values; on top of that, we're seeing increased promotional spending and revised projections supporting our DTC segment. On the brighter side, customer metrics keep getting better, and we've made more headway growing our footprint on Amazon.com, which represents a major part of our long-term growth plan. Our NPS score for Q2 came in at 82, and our customer lifetime value and average order value both kept climbing. I'm happy to report as well that we achieved growth in the wholesale channel and made strong headway bringing new retail customers on board, which Andy will describe in greater depth shortly. Since a large share of our products are made in-house at our Oregon facility, when sales slow down, our gross margin feels the squeeze. In Q2, weaker direct-to-consumer revenue resulted in over two points of negative leverage on the fixed expenses at our facility versus the same period in 2021. Had we not restructured the operations team earlier that year, the impact of that deleveraging would have been significantly greater. On the distribution side, we offset rising shipping costs by achieving greater internal efficiency within our warehouse and shipping functions. Looking at our position in the current marketplace, protecting cash is unmistakably our foremost strategic objective. On the prior quarter's call, I mentioned that we are taking aggressive steps to reduce our cash burn, including initiatives to improve costs and efforts to manage the balance sheet. Speaking of which, I can share some good news: our free cash flow burn for Q2 came down by 38% versus the previous quarter and also versus the same quarter a year ago. That brought it to just $2.7 million for the quarter, so as we head into Q3, our cash balance stands at $24.5 million. Our new leadership team, as I mentioned earlier, is making real headway and executing on the strategic plan. You may remember that during the first quarter call, we had only just wrapped up a review of our new 3-year strategic plan, and that review created strong alignment across our objectives, tactics, and strategies aimed at reaccelerating growth and getting our cost structure right sized. It's still very early, but we're off to a solid start on that plan. Looking ahead briefly, our attention will remain on four priorities. First, we aim to speed growth back up by going after online shoppers and keeping them, plus growing our retail buyer base to fuel expansion in wholesale. Second, we're lifting gross margin via tough cost cuts across both products and processes. Third, we're strengthening essential skills inside our commercial and operations groups. And fourth, we're lowering cash burn by making working capital accounts more efficient and rolling out operational improvements. During Q2 we achieved meaningful progress on these strategic goals, among them ending complimentary delivery for purchases under $40. We've recently put a list price hike into place, brought on over 1,600 additional wholesale distribution points, introduced 4 new products, and completely rebuilt our wholesale brokerage team covering every trade channel — those are just a handful of the things we've been doing. Looking ahead, we'll keep doing what's required to strengthen the business and set the groundwork for even more gains throughout our P&L and balance sheet. To wrap up, even with conditions proving difficult, our plan is being carried out, and the initial strides this team has taken toward positioning the company for renewed sales growth and better profitability make me feel encouraged—though this effort has only just gotten underway. Looking ahead to coming quarters, I anticipate being able to talk about how we keep expanding into a genuine omni-channel operation, with a revenue mix that is more balanced and a stronger focus on the daily ritual. The branding and packaging initiatives currently in motion have given us some really valuable foundational marketing insights, and I'm genuinely enthusiastic about them. Our expectation is that these insights will sharpen our ability to target, engage, and convert consumers into Laird Superfood customers as we move through the back half of 2022. As I've said before, we'll keep going after costs and making every part of our operation simpler, which should strengthen how well we compete, improve profitability, and slow down how quickly we burn through cash. Nothing has shifted regarding how confident we feel about our direction or our prospects for growth, and we remain of the view that we're well positioned to capture a meaningful share of the market and ultimately achieve our long-term ambition of being counted among the leading players in natural food and beverage. With that said, I'll turn things over to Andy Judd, our Chief Commercial Officer.

Thank you, Jason. Even with all the ups and downs we're seeing in the market and among shoppers, our confidence stays high that our purpose — assisting people as they move forward on their path to better health and wellness through functional plant-based foods and drinks — is both impactful and able to scale. Across every channel, we're moving closer to establishing an agenda of lasting, profitable expansion. Q2 brought difficulties for our Online segment, which fell 16%; we cut back substantially on ineffective spending, with direct media for the DTC business dropping 48% compared with the same period last year, so we could reset toward a marketing mix that's more sustainable and profitable across every digital channel; instead, we put money into producing fresh content, supported a different media strategy, and kicked off the work of redoing our packaging and brand so it's more relevant and delivers a compelling look that communicates what our value proposition offers right at the first moment of truth. Inflation-driven pressure on what consumers spend also hurt Online sales. The main symptom was a drop in new customer orders below $40. Even so, we held AOV, or average order value, at a gain of more than 25% against a year earlier, and more than 14% against the previous quarter. That came about because of the wider inflation shoppers are dealing with, plus structural shifts hitting digital advertising models throughout the industry. You can see this in a 78% rise in CAC, or consumer acquisition cost, compared with a year ago. Even with all that, momentum showed up thanks to adjustments we're making in how we handle Amazon. At Amazon, new consumers rose more than 25% against the same period last year, and the CAC we're seeing there is far lower than in our DTC business. Retail-wise, several new activations should generate momentum across Q3 and Q4 and beyond. We've put substantial effort into bolstering our selling network, bringing on additional sales brokers in all classes of trade; we secured roughly 5,000 more points of distribution across a range of channels, including natural, conventional, drug, and club outlets. It's thrilling to see how retailers respond when we talk about the consumer momentum supporting functional plant-based food and beverage as well as the Laird Superfood brand. Everybody's aware that it takes a while to land additional shelf placement at retailers, because of the way reviews from shoppers and reset calendars work, and when we can show genuine momentum with major retail partners, it speaks to the power of our brand and the strength of what we sell. Looking at the retail business overall for Q2, the picture was uneven; we're seeing encouraging movement in our main segments, creamers and coffee, as shoppers appear to be gravitating toward consuming beverages at home instead of in cafés. In both creamer and coffee, the category's expansion across the twelve weeks that closed on 6/12/2022 came in above the pace recorded in prior periods. Retail dollar velocities are still rising for us, along with refrigerated creamers — climbing 35% and 17%, respectively, in Natural and Nuwell < >, during the 12 weeks that ended 6/12/2022. Fresh research supports this trend, indicating that over 85% of our dollar sales bring incremental value to the category, and within that figure, 35% of dollars stem from new consumers who are just entering the creamer category. This tells us shoppers are willing to trade up when a cream ingredient statement provides extra functional benefits. In the natural channel, there's a meaningful opportunity for us to match the distribution level achieved by our plant-based competitors, given that we currently hold 44% ACV, whereas the top 5 plant-based leaders in non-dairy share reach 70%. In Nuwell, the disparity is actually larger. That said, refrigerated creamer growth got canceled out by lower sales in our shelf stable creamer segment. We did take on some distribution setbacks tied to changes retailers made in their in-store assortments, out-of-stock situations, and mismatches between authorized items and what actually shipped. As part of expanding our sales force and broker network, we've launched retail operations coverage aimed at recovering those important distribution points. When it comes to shelf stable creamers, we're additionally observing decelerating velocities on our premium value offering and a mostly value-focused assortment. When people start making coffee at home to cut costs, we give them a more practical choice that improves each cup and supports their daily energy needs. In the natural channel, our coffee brands achieved strong expansion, with sales climbing 45% over the 12 weeks that concluded on 6/12/2022; throughout those same weeks, we ranked as the category's fastest-growing labels and among its top 25 brands. Despite the obstacles this quarter brought, our measures of consumer loyalty reached their highest level ever, as our NPS, or Net Promoter Score, registered 82 in Q2. Customer satisfaction likewise landed at 4.92 on a 5-point scale. People have faith in that everyday routine, and our bundles are up more than 97% compared with a year ago, because customers recognize the value from morning until night across the variety of items we sell. Along with fresh developments coming in the back half of the year, such as the plant-based protein bars we just introduced, additional creamer products still to come, pumpkin spice returning, and new single-serve instant fuel plus instant coffee sachets, we continue to feel enthusiastic about leading in plant-based function across drinks and food. At this point, I'll hand things over to our CFO, Anya Hamil, so she can go deeper into the second quarter results.

Thanks, Andy. In Q2 of 2022, net sales fell 6% to $8.7 million, down from $9.2 million during the same quarter in 2021, largely because of weaker revenue in our direct-to-consumer segment. The year-over-year drop in the food < > business seems tied to a broad retreat in consumer spending stemming from inflation worries, along with online traffic returning to physical stores now that COVID has wound down. Beyond those main factors, I will cut marketing spending as we refine the marketing mix across every digital channel toward programs that are more profitable, plus higher promotional spending and adjustments to our free shipping options, all to boost gross margins. Even with this tough economic backdrop, our wholesale channel posted year-over-year growth of 4%, fueled by distribution gains in Grocery and Club. Our Amazon business rose 13%, which mirrors the emphasis we've put on that channel given its comparatively strong profitability and its capacity to reach a sizable existing consumer base. Gross margins dropped 560 basis points, landing at 18.2%, against the equivalent period a year earlier. The squeeze on margins came mainly from inflation affecting raw materials, packaging and inbound freight, caused by higher ocean freight costs for moving raw materials into all production facilities. Outbound freight was essentially unchanged from a year ago, since our teams managed to counter higher freight rates via efficiency gains in DTC parcel shipments. Additional factors included fixed costs to leverage at our internal manufacturing facilities stemming from low production volume and heightened promotional activity, partly offset by reduced labor costs thanks to efficiency gains and organizational rightsizing done earlier in Q2. Shifting further down the P&L to OpEx: operating expenses came to $6.5 million, a $2 million improvement from $8.5 million in the prior-year period. The biggest factor was a $1.5 million reduction in general and administrative costs, which totaled $2.6 million. That figure reflects both the gain from selling land and the reversal of stock-based compensation resulting from former executive officers forfeiting equity awards. Research and development spending declined by $260,000, landing at $116,000, since the costs of introducing new products that were incurred last year were absent this year. Sales and marketing costs also decreased by approximately $170,000, reaching $3.8 million, driven by reduced advertising and marketing fees. The reported net loss stood at $4.9 million, which is a 22.2% improvement compared with the same period last year. When you look at adjusted figures, the net loss came to $6.3 million. You can find a full reconciliation of the non-GAAP adjusted net loss in the earnings release we put out. Now, shifting over to what our balance sheet and cash flow picture looks like: we closed out the quarter holding approximately $24.5 million in cash and investments. It's worth pointing out that we've implemented several measures aimed at cutting down how much cash we use, all with the goal of setting the company up for growth that can be sustained. Those efforts showed up in our second-quarter numbers, where the total cash burn amounted to $2.7 million — that's a 38% improvement compared to the same time a year earlier, helped along by proceeds from selling off real estate assets. On the operating cash flow side, we also recorded a 33% increase, coming in at $3.9 million, up against the $5.8 million we posted during last year's comparable period. The main factor was better working capital, in particular lower inventory balances. Our plan is to keep bringing those inventory balances down by year-end, though it will move unevenly from quarter to quarter as we improve inventory turns, all while keeping our investment at a level that supports growth and shields us from supply chain disruptions. Now I'd like to offer a few remarks on what we expect for 2022. The economic climate we're facing is exceptionally uncertain, with inflation at its highest in decades — especially for food and fuel — and that cuts into consumers' purchasing power while placing greater strain on margin mix and operating costs than we had projected when the year began. We expect the broader economic environment to stay the same for the rest of the year. Because of that, we're updating our outlook for the full year 2022. For net sales, we're looking at somewhere between $36 million and $38 million. As for gross margin, we expect it to come in at approximately 20% for the full year 2022. It's worth noting that this roughly 20% gross margin figure reflects Outbound Distribution costs of around 13 points. We remain confident in our brand's strength and in how well the strategies Jason and Andy outlined will help us achieve our growth goals. Our focus is on improving gross margins and reducing cash burn, so the company can be set up for sustainable growth. Getting this effort fully up to speed won't happen overnight, so the bigger, more visible strides should show up toward the end of 2022 and roll forward into the first part of 2023. That said, I'll now turn things over to Jason so he can wrap us up. Thanks, everyone.

Thank you, Anya. Given the eye-catching stories about rising prices and economic downturns, it's undeniable that consumers now find themselves in a more unpredictable period, and capturing their interest and getting them to consider premium health and wellness items has plainly grown tougher; the numbers we posted for Q2 show that Laird Superfood possesses considerable durability among those who follow it, and actually keeps expanding on numerous important measures with our buyers. The ongoing increases we've seen in average order value, lifetime sales value, and Net Promoter Score show that even with the obstacles confronting today's consumer, they still appreciate what Laird Superfood offers and turn to us as a top-quality food source for their health and wellness journey. Our committed team stays dedicated to our brand positioning and core strategies, and our enthusiasm for the possibility that Laird Superfood might become a leading name in healthy functional foods has never been greater. That wraps up our prepared remarks. Operator, we're now ready to take questions on the call.

Thanks a lot, everybody, for fielding my question. I'd like to ask about the gap you've identified in your guidance. You listed several separate headwinds that, in my view, plenty of other e-commerce businesses are also experiencing; especially certain marketing difficulties tied to the iOS updates. I'm wondering whether that's mainly hurting your capacity to bring new customers into the brand while inflation has been pressing on shoppers? Have you noticed your long-standing core customers beginning to act differently too? Or is it truly more a matter of marketing difficulties when it comes to bringing in new customers?

Hi, Alex, Jason here. I'll offer a few thoughts. Then I'll pass it to Andy so he can add a bit more detail. That's a really excellent question. And clearly, as you said, this isn't something only Laird faces — it's something the whole industry faces at the moment, particularly among DTC-oriented businesses such as ours. So roughly 12 months ago we began noticing this, and you'll recall we discussed it across a couple of quarters, though we've also absorbed part of it through moves of our own. As we mentioned, when we raised prices, we simultaneously reduced the free shipping we had been providing. So now, apart from new orders, any order below $40 no longer gets free shipping, since we scaled that benefit back. Because of that, you're observing a shift in behavior. You're seeing our most tenured customers mostly move toward bigger orders, with hardly any decline, if any at all, in that group, and I'll have Andy address that shortly. What you are also seeing is a certain amount of attrition, particularly immediately following that change, among new customers. And we've adjusted that move — really just within the past few days we restored free shipping for new orders from new customers who are coming in, in order to encourage them to place that initial order. What we discovered is that we weren't achieving the conversion we had anticipated. So the decline has really been concentrated among customers who would come to Laird, unlike our existing subscriptions and subscribers, where we've observed genuinely strong retention, as I mentioned earlier in my remarks. But Andy, if you'd like to add a bit more of a wrapper around that, please go ahead; that would be great.

Absolutely, and thank you, Alex, for raising that. Jason's point is correct. What we're observing is that the biggest chunk of the consumer mix is clearly putting pressure on orders from new consumers. Specifically, that applies to new consumer orders coming in at lower price points, and there we're certainly witnessing a squeeze caused by — I'd describe it as — a media mix that isn't working as efficiently, one that leans mostly on our social media approaches, and as we mentioned in the prepared remarks, our CAC remains more than 70% above where it stood 12 months earlier. At the same time, we're noticing certain consumer behavior patterns in what you could call a post-COVID reality, with people shifting back toward retail, and there we're seeing meaningful velocity gains in our food and creamer business too. So I'd say the blend of less efficient marketing tools, plus some shifts in behavior, plus the consumer inflation dynamics currently at play, are genuinely creating pressure on that specific group, whereas we see positive trends among some of our larger loyal returning attrition levels, where NAV or LTV is rising and keeps climbing both quarter over quarter and versus a year ago, and orders of $75 and above actually grew modestly during the quarter.

All right, that's quite useful. Appreciate it. Then, could you spend a moment on cash burn? In Q2 it improved quite a lot compared with how much cash you were using during last year, and you provide plenty of excellent specifics about expenses in the press release. So it appears there may have been certain non-recurring offsets to G&A this quarter, such as the gain from the sale and the reversal of some stock-based comp. But if we set aside certain one-time costs, can you help us understand what to expect for cash burn or EBITDA going forward — or maybe just G&A, or sales and marketing spend — for the rest of the year, assuming the remainder of the year comes in according to your revised guidance?

Hello, Alex, it's Anya Hamil. I appreciate the question. Yes, you've got that right. Total cash burn came to $2.7 million, while operating activity accounted for slightly less than $4 million. Both figures showed improvement compared with the prior year, consistent with the approaches we've been pursuing to reduce cash burn and move the company toward sustainable growth. Right, so like you said, during Q2 we had a one-time gain. That came from our balance sheet improvement plan — we sold off some real estate assets, OEM ones in particular. That brought in $1.5 million toward better cash flow. Aside from that, though, we still managed to improve cash flow mainly by managing working capital, especially inventory balances. Our team is working hard to bring inventory down to levels that are sustainable and optimized — levels that won't hurt our supply chain relationships, while making sure we're not holding too much inventory relative to the cash locked up in it. That process remains underway right now, and I anticipate additional decreases before the year finishes. During the release I put out, I noted that things will shift somewhat from one quarter to the next, since we continue to meet commitments we owe to vendors. Even so, we remain on schedule to reach the stock level we've set as our goal before the year is over, and that should unlock more cash. Beyond that, regarding the third item — managing total operating costs — we've undertaken considerable effort beyond staffing, in areas unrelated to personnel, such as G&A costs, with a strong emphasis on getting better rates on fees, including those for professionals and consultants, so we can cut down our cash outflow. We'll keep pushing forward on that front as the year draws to a close.

All right, that's genuinely useful. Thank you, Anya, and thank you, Jason.

Thanks a lot for fielding my questions. I'm interested in those distribution losses you brought up — I realize you're trying to recover them — do you have any idea when that might happen?

Andy here. I can offer some insight on that — no, you go first, Jason.

No problem, Andy. Go ahead.

Yes, so a handful of order reductions have appeared, and those are truly impacting the shelf stable creamer operation we run in the natural channel; the distribution loss from that only comes to roughly a 5% drop in distribution, so it's fairly modest, mostly because of a few factors. First, we've observed certain store-by-store optimization happening, 1Q < > we've encountered some out of stock problems that are certainly creating difficulties, similar to what numerous partners and other brands are experiencing, where staffing challenges exist at retail. And the third factor involves some authorization to shipment difficulties. We've just added a new partner to provide us with retail coverage; they are already actively working in stores as of this month. And we're hoping to see those matters resolved across the remainder of the second half of the year as things progress.

Okay, great.