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

Thank you for standing by, and welcome to the Second 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. Mr. Anderson, please proceed.

Thank you. Good afternoon, and welcome to Laird Superfood's second quarter 2022 earnings conference call and webcast. On today's call are Jason Vieth. Chief Executive Officer; Anya Hamill, Interim Chief Financial Officer; and Andy Judd, Chief Commercial Officer. By now, everyone should have access to the Company's second 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.

Thanks, Reed. Welcome, everyone, and thank you for joining us today. I'm going to begin today's meeting by providing a high-level overview of our second quarter results and an update on our key strategic initiatives. I'll then turn it over to Andy for a deeper dive into sales, channels and products, followed by Anya, who will cover the financials in detail. We'll then open up the call to your questions. But before I jump into our quarterly results, I want to take a moment to recognize and thank the Laird Superfood leadership team, most of whom are still within the first few months of their new roles. This team has taken the reins during a challenging time for both Laird Superfood and the broader economy end market and are doing a phenomenal job of reorienting the business and Company to our biggest opportunities across both the commercial and operational aspects of the business. In just a few short months, we've been able to completely overhaul our sales and marketing organizations and agency ecosystems and to streamline our operations to deliver meaningful cost and cash savings. The fruits of much of this labor are yet to be realized, and I'm as excited as ever for the prospects of expanding the reach of our Laird Superfood daily ritual and doing so with a much better cost structure than in the past. Our second quarter results reflect some early progress on cost savings initiatives and efforts to drive wholesale channel growth against the backdrop of what has become a challenging operating environment. We continue to face headwinds to our online business due to the ongoing impact from changes in Apple security features, [ the resulting ] that we're seeing less consumer engagement on our site, especially at the lower order values. We also incurred greater promotional expenses than forecast in support of our DTC business. On the positive side, we continue to see customer metrics improve and make further inroads to expanding our presence on Amazon.com, which is a significant piece of our long-term growth strategy. Our NPS score in Q2 was in 82 and both our customer lifetime value and average order value continue to rise. I'm also pleased to share that we were able to deliver growth in the wholesale channel, and we made solid progress activating new retail customers, which Andy will cover in more detail in a few minutes. Because many of our products are self-manufactured in our Oregon facility, a slowdown in our sales creates pressure on our gross margin. We experienced that in the second quarter, as slowing DTC sales led to more than 2 points of deleverage of fixed costs in our facility versus Q2, '21. This deleveraging would have been significantly more severe had we not already moved to reorganize our operations team earlier in the year. On the distribution side, we were able to offset an increase in our shipping rates through increased internal efficiency in our warehouse and shipping operations. For a Company of our size and the current market situation, there is no doubt that protecting cash is the paramount strategic initiative. As I shared on the first quarter call, we're taking aggressive steps to moderate our own cash burn, including cost improvement initiatives and balance sheet management activities. To this end, I am pleased to share that we were able to improve our Q2 free cash flow burn by 38% versus both prior period and prior year to just $2.7 million for the quarter, leaving our cash balance at $24.5 million, as we began Q3. As I mentioned earlier, our new leadership team is making significant progress in executing our strategic plan. Recall that at the time of the first quarter call, we had just completed a review of our new 3-year strategic plan, which created a strong alignment between our goals, tactics and strategies for reaccelerating growth and rightsizing our cost structure. While it's still very early, we have a solid start in this plan, and over the near term, we will remain focused on the following key areas: one, reaccelerating growth by targeting and retaining online customers, while expanding retail customers to drive our wholesale channel expansion; and two, improving our gross margin through strict cost reductions in our product and processes; three, enhancing core capabilities within our commercial and operation teams; and four, reducing cash burn by optimizing working capital accounts and implementing operational efficiencies. We made significant headway against these strategic [ imperatives ] in Q2, including the elimination of free shipping on orders below $40; the implementation of a list price increase that just recently went into effect; the addition of more than 1,600 doors of new distribution in wholesale; the launch of 4 new items; and the overhaul of our entire wholesale brokerage team across every channel of trade, just to name a few activities. As we go forward, we will continue to take the steps necessary to improve the business and lay the track for further improvement across our P&L and our balance sheet. In summary, despite a challenging environment, we are executing our plan, and I am pleased by the early progress that this team is making to structure our business for restored sales growth and improved profitability, but we are still only at the beginning of this journey. In future quarters, I expect to be able to discuss our continued build-out of a true omnichannel business with a more balanced revenue mix, emphasizing the daily ritual. I'm excited about the foundational marketing insights and branding and packaging work that is underway, and we expect that this will help us to better target, engage and convert consumers into Laird Superfood customers, as we go forward in the second half of 2022. And as I mentioned previously, we will continue to attack cost and simplify all aspects of our business to improve our competitiveness and our profitability and to slow our cash burn rate. We remain confident in our direction and growth outlook and continue to believe that we are poised to capture significant 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.

Thanks, Jason. Despite marketplace and consumer volatility, we remain optimistic that our mission to help consumers take the next step in their health and wellness journey by providing functional plant-based foods and beverages is powerful and scalable. We are making progress towards building a sustainable, long-term and profitable growth agenda across all channels. Our online business was challenged in Q2, down 16%. We significantly reduced insufficient spending with direct media down 48% for DTC business versus a year ago in order to reset to a more sustainable and profitable marketing mix across all digital channels. We instead made investments to create new content and support of an alternative media approach and began the process of redesigning our packaging and brands to be more relevant and create a compelling design that speaks to the benefit of our value proposition at the first moment of truth. Online sales were also impacted by consumer spending pressure due to inflation. This was primarily reflected in declines in new customer orders less than $40, while we did maintain plus 25% growth in AOV or average order value versus a year ago and plus 14% versus prior quarter. This was a result of the broader marketplace inflation consumers are experiencing and structural changes impacting digital advertising models industry-wide, as shown and a plus 78% increase in CAC or consumer acquisition costs year-over-year. Despite these factors, we did see momentum driven by changes we are making with regard to our approach on Amazon. On Amazon, we saw a plus 25% increase in new consumers versus the same period a year ago, and we are seeing a much lower CAC compared to our DTC business. From a retail perspective, we have several new activations that should drive momentum in Q3, Q4 and beyond. We have been working diligently to enhance our selling network, including new sales brokers across every class of trading. We sold nearly 5,000 new points of distribution across several channels, including natural, conventional, drug and club outlets. We are excited to see the engagement we are having with retailers, as we talk about the consumer momentum behind functional plant-based food and beverage and the Laird Superfood brand. As most of you are aware, garnering additional retail shelf space takes time due to the cadence of customer product reviews and resets. So being able to show meaningful progress with key retailers underscores the strength of our brand and product lineup. Overall, our retail sales in Q2 had mixed results. We are seeing positive trends in our core categories of creamers and coffee, as consumers appear to be migrating to in-home consumption and away from coffee houses, both creamer and coffee category growth in the 12 weeks ending 6/12/2022 outpaced growth in prior periods. Our retail dollar velocities in refrigerated creamers continues to increase plus 35% and plus 17% in natural and MULO, respectively, for the 12 weeks ending 6/12/2022. This is consistent with the recent research showing our dollar sales are over 85% incremental to the category, including bringing 35% of dollars from new consumers to the creamer category, an indicator that consumers are willing to trade up for added functional benefits and a clean ingredient statement. In the natural channel, we saw a significant opportunity to match the distribution level of our plant-based peers, as we have 44% ATV versus 70% for the top 5 plant-based and non-dairy share leaders. We have even a greater gap in MULO. However, this success in refrigerated creamers was offset by a drop in sales in our shelf-stable creamer business, where we experienced some distribution losses, as a result of retailer in-store assortment changes, out-of-stock issues and gaps between the authorized items and shipments. Consistent with our build-out of our sales team and brokers, we have initiated retail operations coverage to gain back these crucial points of distribution. For our shelf-stable creamers, we also had strong velocities on our premium value proposition in a largely value-oriented [ set ]. As consumers shift to in-home consumption for coffee to save money, we are providing a more functional option to make every cup even better to help fuel their day. We did see solid growth in our coffee business in the natural channel, up 45% in a 12-week period ending 6/12/2022. And we were the fastest-growing brand in the top 25 brands for the category in the same period. Despite the headwinds in the quarter, our consumer loyalty metrics reached an all-time high with our NPS or Net Promoter Score reaching 82 in Q2, and our consumer satisfaction was at 4.92 on a 5-point scale. Consumers believe in the daily ritual and our bundles have grown over 97% year-over-year, as consumers see the benefit from sunrise to sunset on the range of products we offer. When combined with the new innovation on the horizon for the second half of the year, including our recently launched plant-based protein bars and upcoming new creamer offerings, the return of Pumpkin Spice and new single-serve instafuel, instant coffee sachets, we remain excited about our leadership in plant-based functional beverages and foods. Now let me turn the call over to Anya Hamill, our CFO, to further discuss second quarter results.

Thanks, Andy. Net sales decreased 6% to $8.7 million in the second quarter of 2022 compared to $9.2 million in the second quarter of 2021, primarily due to lower sales in our direct-to-consumer business. Year-over-year sales decline in DTC business appears to be driven by an overall pullback in consumer spending due to inflationary concerns combined with online traffic, [ shifts investor stores ] [indiscernible], as well as these key factors, our reduced marketing expense, as we optimize marketing mix between all digital channels towards more profitable programs, elevated promotional spend and changes in our free shipping offering to improve our gross margins. Despite these challenging economic environment, we saw year-over-year growth in our wholesale channel, which grew 4%, driven by distribution gains in Grocery and Club. Amazon business grew [ 3% ], reflecting the focus that we have placed in this channel due to [indiscernible] profitability and ability to reach a large installed consumer base. Gross margins declined 560 basis points to 18.2% versus the same period last year. Margin compression was driven primarily by inflation in raw materials packaging and inbound freight, driven by increased cost of ocean freight to bring raw materials to our production facilities. Outbound freight was nearly flat year-over-year, as our teams were able to offset higher freight rates through efficiency improvements in DTC parcel shipments. Other drivers included fixed cost deleverage in our internal manufacturing facility due to lower production volume and elevated promotional activity, partially offset by lower labor costs due to [ gain efficiency ] and organizational rightsizing earlier in the second quarter. Moving down to the P&L to OpEx. Operating expenses totaled $6.5 million, an improvement of $2 million compared to $8.5 million in the year ago period. The biggest driver was the reduction of $1.5 million in general and administrative expenses to $2.6 million, reflecting the gain on sale of land and a reversal of stock-based compensation driven by the 4 features of equity awards by former executive officers. Research and development expenses declined $260,000 to $116,000 due to new product introduction costs incurred last year that were not repeated this year. Sales and marketing expenses also decreased approximately $170,000 to $3.8 million due to lower advertising expenses and marketing fees. Net loss as reported was $4.9 million, an improvement of 22.2% versus the same period a year ago. On an adjusted basis, net loss was $6.3 million. A detailed reconciliation of non-GAAP adjusted net loss is included in our earnings release. Turning to our balance sheet and cash flow highlights. We ended the quarter with approximately $24.5 million of cash and investments and no debt. We have taken a number of steps to reduce cash consumption to position the Company for sustainable growth. We saw results of these actions in the second quarter, as total cash burn was $2.7 million or [ 38% ] improvement versus a year ago, reflecting benefit from the sale of real estate assets. Cash used in operating activities also improved 33% to $3.9 million versus $5.8 million in the year ago period, primarily driven by improvement in working capital, specifically decrease in inventory balances. We expect to continue to reduce our inventory balances by the end of the year, although it will be lumpy quarter-by-quarter through improving inventory turns, while balancing the level of our investment to support growth and mitigate supply chain disruptions. Next, I will provide some commentary about our 2022 outlook. We are operating in an unusually uncertain economic environment with the highest inflation rate in decades, particularly in food and fuel, which negatively impacts consumer buying power, increase more pressure on margin mix and operating costs than we had anticipated in the beginning of the year. We expect this macroeconomic environment to continue in the second half of the year and are accordingly updating our guidance for the full year 2022. We estimate net sales will be in the range of $36 million to $38 million, and gross margin for the full year 2022 is forecasted to be approximately 20%. Note that our gross margin estimate of 20% includes outbound distribution expenses of approximately 13 points. We remain confident in the strength of our brand and the effectiveness of the strategies that Jason and Andy talked about to deliver our growth agenda. We are focused on improving gross margins and reducing cash consumption to position the Company for sustainable growth. It will require time to ramp up these initiatives, leading to more visible progress in late 2022 and building on in early 2023. With that, I'll turn the call back to Jason for any closing remarks. Thank you.

Thanks, Anya. With the attention grabbing headlines of inflation and recession, there's no doubt that we are now operating in a less certain moment for consumers, and it has clearly become more challenging to gain their attention and consideration for premium health and wellness products. Yet, our Q2 results demonstrate that Laird Superfood has strong staying power amongst its followers, and in fact, continues to grow across many key metrics with our consumers. Our continued growth in average order value, lifetime sales value and Net Promoter Score demonstrate that despite the headwinds facing today's consumer, they continue to value the Laird Superfood proposition and look to us as a high-quality food source for their health and lowness journey. Our dedicated team remains committed to our brand positioning and core strategies, and we are as excited as ever for the potential for Laird Superfood to become a leading name in healthy functional foods. This concludes our prepared remarks. Operator, we are now ready to open the call to questions.

[Operator Instructions] Our first question comes from Alex Fuhrman with Craig-Hallum.

I wanted to ask about the shortfall in your guidance. You mentioned a number of different headwinds that I think a lot of other e-commerce companies are seeing as well, and in particular, some of the marketing challenges related to the iOS changes. Curious, is that mostly impacting your ability to get new customers to come into the brand, as inflation has been weighing on consumers, have you seen your long-term core customers start to behave any differently as well? Or is it really more about marketing challenges and reaching new customers?

Hey, Alex, this is Jason, and I'm going to give you a couple of thoughts, and I am going to hand it over to Andy to give a little bit more detail. It's a really great question. And obviously, to your point is it isn't just a Laird issue. It is an industry issue right now, especially amongst the DTC focused companies like ours. So we started to see this about a year ago. You'll remember we talked about it a couple of quarters. We've taken some of that into -- through our own actions as well. We -- as we touched about -- as we took price increase, we also pulled back on the free shipping that we were offering. And so for any orders under $40 now other than new orders, we've pulled back on the free shipping aspect. And as a result of that, you're seeing a change of activity. You're seeing our longest-standing consumers largely migrate to larger burgers, and very little drop-off if any in that space, and I'll let Andy speak to that in a moment. But what you are seeing is some attrition that took place, especially right after that change with new consumers. And we have modified that action just really in the last few days, we put free shipping back on for new orders for new consumers that are coming in. So to entice them to make that first order. What we found is that we weren't getting the same conversion that we expected. And so the drop-off has really been amongst consumers that would come into Laird as opposed to our current subscription and subscribers we've always seen really positive staying power, as I referred to in my earlier discussion. But Andy, why don't you -- if you want to put a little bit more of a wrapper around that, that would be great.

Of course. Thanks, Alex, for the question. Yes, Jason is right. It's the largest portion of consumer kind of mix that we're seeing is definitely impacting new consumer orders and in particular, new consumer orders at the lower value range, where we're seeing definitely compression through or, I'd say, a less efficient media mix primarily anchored in our social media tactics, where, as noted in the prepared remarks, our CAC is still over 70% higher than it was a year ago. What we are also seeing is some consumer behavior trends in kind of a post-COVID reality that we're seeing migration back to retail, where we are seeing significant velocity increases in our fluid creamer business as well. So I think that the combination of the inefficiency and the marketing tools, as well as some behavioral changes and the consumer inflation dynamics that are happening are really putting a pressure on that particular set. Well, we are seeing favorability in some of our larger loyal returning subscription levels, where we're seeing increases in AOV. Our LTV is up and continuing to rise both sequentially and year-over-year and orders in the $75 range plus have actually moderately increased in the quarter.

And then if we can talk about the cash burn for a minute, it was pretty significantly improved here in the second quarter relative to the rate that you've been burning cash last year, you guys gave a lot of great detail on your expenses in the press release. So it looks like maybe there were some non-sustainable offsets to G&A this quarter like the gain on the sale and the reversal of some stock-based costs. But if you kind of strip out some of those non-sustainable items, can you give us kind of a sense of what we should expect to see in terms of cash burn or EBITDA or even just G&A or sales and marketing expenses for the rest of the year, assuming results for the rest of the year come within your updated guidance?

Alex, this is Anya Hamill. Thanks for the question. So yes, you're correct, cash burn was $2.7 million total and just under $4 million from operating activity. So they both improved relative to prior year and in line with the strategies that we've been focusing on to improve the cash burn and to get the Company to sustainable growth. So as you mentioned, there was a one-time benefit in Q2 that we realized. It was part of our plan to improve our balance sheet. We have sold some real estate assets, land specifically, and so that generated $1.5 million improvement to our cash flow. But overall, outside of that, we were able to achieve an improved cash flow primarily through working capital management. specifically around inventory balances. So our team is focused on driving the inventory down to sustainable and optimized levels that don't jeopardize supply chain [ interruptions ], but ensure that we have optimal level of inventory versus the cash that's tied up in that asset. So that is an initiative that's going to continue. And I expect to see further reductions by the end of the year. As I mentioned in the earnings release, it will change a little bit quarter-by-quarter because we still have obligations to our suppliers that we are fulfilling. But we are on track to get to the inventory position that we're targeting by the end of the year, which will free up additional cash. And then, just the last -- the third thing is overall operating expenses management, we've been doing a lot of work outside of headcount, non-headcount related, G&A expenses and really focusing on optimizing fees, professional fees and consulting fees to help us reduce that cash burn. And we're going to continue making progress towards the end of the year in that area.

Our next question comes from Bobby Burleson with Canaccord.

Curious about the distribution losses that you mentioned. I understand you're working to gain those back. Any sense on timing?

This is Andy. I can give you some perspective on that. Go ahead, Jason.

I'm sorry, Andy. You go ahead.

Yes. So we've seen a few order declines, particularly that are affecting our shelf-stable creamer business in the natural channel. That distribution loss has only resulted in about a 5% loss in distribution. So pretty moderate, largely due to a couple of things. One is we have seen some kind of store-by-store optimization that's taken place, one. Two, we've got some out-of-stock issues that are definitely causing troubles like many partners and other brands are seeing where we've got staffing issues at retail. And then the third one is we've got some authorization to shipment challenges. We have recently brought in a new partner to give us some retail coverage. They're actively already in stores starting this month, and we hope to see that stuff rectified over the balance of the second half of the year, as we go forward.