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

Thanks for joining us. Hello, and welcome to the earnings conference call and webcast for Laird Superfood's third quarter of 2022. With us today are Jason Vieth, our Chief Executive Officer; Anya Hamil, our Chief Financial Officer; and Andy Judd, our Chief Commercial Officer. At this point, you should all be able to get the press release about our third quarter results, which was filed today once the market closed. You can find it in the Investor Relations area of Laird Superfood's site, www.lairdsuperfood.com. Prior to starting, I want to point out that the financial details we're sharing on this call have not been audited, and as we go along, management might offer 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 results to differ materially from what those forward-looking statements describe. For a detailed look at the risks that could make actual results differ materially from anything expressed or implied in the forward-looking statements made today, please see today's press release and our other filings with the SEC. I'd now like to hand the call over to Jason Vieth, Chief Executive Officer of Laird Superfood.

Thank you, Reed. Hello, everyone, and I appreciate you being with us today. As we normally do, I'll begin with a look back at how we performed in the third quarter, plus a progress report on the strategic efforts that matter most to us. After that, Andy Judd, who serves as our Chief Commercial Officer, will take you through a more detailed review of sales, products and channels. Following him, Anya Hamil, our CFO, will walk through the third quarter financials in depth, and then we'll wrap up by taking your questions. This marks the third occasion I've given you a quarterly update on how our business is doing. When I held my first call as CEO, I was still in the process of getting to know the Laird Superfood brand and what the business involves. Back then, I spent a lot of time listening closely to analysts and the investor community while weighing different possibilities for where we should head. During my second call, I restated that our priority was bringing costs under control and repairing the middle section of our P&L. That was the stretch when it became obvious to me that poor marketing efficiency and a weak gross margin were draining our cash, and that we would exhaust our cash before reaching any benefits from scale. On that call, I said again that enhancing our gross margin would be one of the main things we concentrate on moving forward. From then on, our leadership team has concentrated on implementing the essential strategic shifts needed to steady operations and set us on a course toward profitability. It turns out the range of steps required to transform Laird Superfood is far wider than what was anticipated when I joined, reaching almost every part of the business. Today, I'm happy to share that we've made considerable progress, and I'd like to spend a few minutes reviewing the positive changes taking shape in this business and explaining why our team feels such strong energy about next year and what lies beyond. On the commercial front, we've been busy reshaping our portfolio, sharpening the core focus for each channel and dropping products that don't belong. We raised prices by close to 10% throughout our business in every channel, and that increase only recently made its way into the wholesale channel. We've fully rebuilt our DTC marketing engine and ecosystem, cutting our tax by over $20 relative to the run rate of the prior three quarters, and we're on track to bring it down further going forward. Within our DTC business, we eliminated free shipping and have actually raised what we charge for shipping so that holiday costs from our carriers get passed through. We're deliberately moving our business toward the channels that generate the most profit and going after cost problems in specific areas, including our liquid creamers. Also, our brand redesign is finished, with almost 25% of our portfolio reformulated to enhance taste and/or boost functional benefits. Regarding our supply chain, we shared news not long ago that we've chosen to shut down the sisters Oregon manufacturing plant. This wasn't a simple call to make, but once the transition is finished, it will deliver a meaningful boost to our gross margin. We've formed an alliance with a co-manufacturer who will make the full range of powder products, taking over all items that our own facility used to produce. Through this move, we've brought new capabilities and flexibility into the business, among them the capacity to make single-serve items for the very first time. I'm delighted to share as well that we've just finalized a deal with a third-party logistics provider who will manage the entirety of distribution and logistics for Laird Superfood; that agreement marked the last piece needed to bring our variable cost supply chain model to life, and for a small CPG company like ours, it lets us grow or shrink without carrying the heavy overhead that previously obscured our financial visibility and decision-making. Additionally, we've developed and trialed a fresh liquid creamer formulation capable of being produced at scale, and that will let us turn what was a deeply unprofitable segment into a product we can profitably grow going forward. Last, when it comes to people and organization, our teams have been fully rebuilt, with almost the whole Executive team replaced, bringing in decades of consumer goods and food experience and expertise spanning every discipline. As you can tell, we've achieved a great deal across recent quarters and anticipate wrapping up this turnaround around the middle of 2023, at which point Laird Superfood will resemble an entirely different company. At the same time, appetite for healthy, nutritious whole food items such as Laird Superfood has never been stronger, and we're thrilled to be positioning ourselves to take advantage of these trends; now let's dig into a few specifics from our third quarter. On earlier calls, we laid out margin improvement as this team's number one priority, and I'm pleased to share that we kept gaining ground on cost reduction efforts in the third quarter, especially in relation to consumers and the macro environment. Within our online business, we cut Q3 DTC marketing spend by almost 60% compared with last year, and those adjustments are producing reduced and more efficient marketing spending along with lower customer acquisition costs. We redirected part of that spending toward the Amazon platform, fueling 27% growth for that business in the quarter. As I noted before, we also increased our shipping costs in Q3, and we managed that without any meaningful drop in consumer acquisition or conversion. What this means is that across 2022, we've been able to raise prices on the majority of our online portfolio by roughly 10% and to shift along many shipping expenses that had weighed on us before. The drop in wholesale revenue for Q3 mostly came from the club channel, since we didn't run a regional rotational program again that we had done the year before. Andy will explain shortly that we also ran into some unforeseen problems in the grocery channel in Q3, related to product transitioning from distributor warehouses onto retailer shelves. Those issues are mostly resolved now, and we're collaborating with our customers to create a smoother route from distributor warehouses to their shelves, which includes reviewing order patterns and conducting audits to confirm product reaches the shelf. Gross margin for the third quarter delivered strong sequential gains, hitting 23.4%, which is 520 basis points better than the second quarter, thanks to reduced discounts and labor costs; yet compared with the same period last year, gross margin fell 5.9 points, because our emphasized effort to reduce inventories kept deleveraging our fixed manufacturing costs; however, as I noted earlier, after Q3 closed, we announced a co-packing partnership set to relieve these pressures quickly in 2023; this strategic move toward an outsourced manufacturing approach will substantially enhance our financial profile by cutting fixed overhead and streamlining our operations, letting us concentrate on maximizing our commercial growth potential. This marks a key step toward our pledged long-term goal of 35% gross margin, which in 2023 will also include optimizing and harmonizing products and ingredients. The new co-packing partnership spans all our powdered creamers and hydration products, accounting for close to half of our total product sales mix at present. We anticipate that shifting these products to a co-packing model will contribute six to eight points to our gross margins, which we expect to capture across the coming quarters as the transition is completely carried out. It's important to mention that we expect certain one-time charges in Q4 tied to the co-packer transition, namely impairment of fixed assets, leasehold improvements, and inventories, plus cash charges for the sisters lease exit and restructuring costs. I'm happy to report that we have reached an agreement in principle regarding our exit from the sister's facility, and we are currently working through those estimates. Moving to third-party manufacturing will also let us respond better to customer demand, while fully bringing our cost structure in line with the business's current state. Although the operating environment is still quite difficult, the modifications we're making to our business model are greatly enhancing the underlying economics and bolstering our competitive position, building a more seasoned and more agile organization centered on maximizing our most profitable commercial growth opportunities. Going forward, we will keep a tight focus on boosting our profitability and preserving our cash position to sustain future operations and other opportunities that might arise. With that, I'll pass things to our Chief Commercial Officer, Andy Judd.

Thank you, Jason. At Laird Superfood, our goal of assisting customers in maximizing daily performance through the natural, functional advantages of plants is gaining traction. We're achieving meaningful strides toward a durable, profitable expansion strategy over the long haul, spanning various avenues—from our direct-to-consumer operations to Amazon and every retail distribution channel. Although the online segment as a whole declined 8% in Q3, we observed a sequential quarter-over-quarter gain of five points for that channel, and the makeup of that gain aligns with our strategic roadmap. Amazon experienced considerable expansion, rising 27% compared to the prior year, as we enlisted an excellent new collaborator to oversee and roll out our advertising efforts. Following that shift, we've already witnessed an 11% sequential boost in return on ad spend for that platform, and we notched our best Prime Day outcomes ever. We anticipate ongoing enhancement in Amazon's results as further chances arise to convert ongoing customer acquisition into additional subscribe and save orders—an area where we lag considerably behind our competitors—while also having capacity for more spending on upper funnel awareness campaigns and putting into place fresh replenishment and inventory management strategies. Regarding our direct-to-consumer segment, we keep restructuring our platform to ensure enduring profitability. To accomplish that, we must confirm that our spending levels and yields remain viable. And although acquiring customers remains difficult and our cost to acquire was still 32% higher than the previous year, we cut media spending by 60% compared to twelve months earlier, which led to just a 19% drop in sessions—demonstrating both the devoted organic visitors we retain and the past wastefulness in our advertising. Consequently, we saw an 80% rise in return on ad spend from what remained invested during the quarter. The pricing adjustment we implemented in June barely impacted sales volume, and site conversion remains above 6%, marking a 13% gain from the prior year and far surpassing typical industry standards. Even with the difficulties in bringing in new customers for DTC, we keep observing record-breaking loyalty toward Laird Superfood, evidenced by a 4% rise in subscriptions and 5% expansion in our lifetime value, which climbed two points on a sequential basis from Q2. Furthermore, we recorded 25% growth in average order value compared to the previous year, and we're noticing expansion in popular sections of our lineup as we strengthen our dominance in functional plant-based coffees and creamers through offerings such as our coffees containing functional mushrooms, our superfood coconut creamer featuring functional mushrooms, and our Instafuel Instant Latte. We're enthusiastic about establishing a fresh market-entry strategy that merges a sharper, more lucrative expenditure approach with improved application of our CRM resources to bring in new and returning customers. Paired with strong loyalty toward trendy items, we're confident that our DTC operation is headed in a promising direction. When it comes to retail sales in Q3, the picture was mixed. The biggest factor behind the year-over-year swing is that we no longer have a regional rotation in our club business that we had 12 months earlier, and that explains 70% of the drop in wholesale net sales for the quarter. We've reworked the entire set of products we offer the club channel, and in Q1 of 2023 we'll roll out new packaging aimed at lifting performance there. On top of that, we've added fresh channel sales leadership so we can execute better on these opportunities. Positive momentum is showing up in our core coffee and creamer categories, with consumers continuing to do more drinking at home. Within liquid creamers, retail dollar velocities climbed plus 11% and plus 21% and Natural Mulo, respectively, across the 12 weeks ending 10/2/2022. Our growth in dollar sales is running ahead of both the overall category and the plant-based creamer segment. In the natural channel, we hold a top five dollar and unit share brand position in plant-based creamers, with unit share up nearly three points, and we still have a sizable chance to reach the distribution levels our plant-based peers enjoy. We got to this share position with 15 less points of ACV than the other top plant-based share leaders; we're enthusiastic about this ongoing growth in liquid creamers and intend to build further on our productivity with new packaging in Q1 and a new aseptic format in Q2; the wins in refrigerated creamers were offset by difficulties in our shelf-stable powdered creamer business, where distribution losses came from retailer in-store assortment changes affecting lower-performing items, along with replenishment problems between distributors and retail customers; we've begun work to fix replenishment by collaborating more closely with key wholesale partners and by adding support in Q4 through key digital platforms to turn the velocity trend around. Even with the quarter's headwinds, our consumer loyalty metrics hit an all-time high, with our Net Promoter Score coming in at 82 in Q3, and customer satisfaction landing at 4.9% on a five-point scale; during the quarter we finished new research showing that over 43% of the US is actively using functional food and beverages, a clear signal that the addressable market is getting to significant scale as consumers keep seeking out cleaner and more functional foods; in Q4, our redesigned packaging will begin its rollout, which will meaningfully boost our shopability and breakthrough at the first moment of truth at shelf and shine a brighter light on our functional benefits that make our value proposition truly unique. Our new protein bars are on shelves now, and we're preparing more exciting innovation set to launch in Q4 and into 2023; we'll be bringing out renovated product lines with better taste and functionality, plus expanded single-serve offerings spanning our creamers, Instant Lattes and Daily Prebiotic Greens. I'd like to point out that we accomplished every bit of that even as we cut our total outlay on marketing, along with sales and marketing G&A, quite a lot compared with a year ago. Our focus has never been sharper when it comes to directing funds toward the strategic priorities that matter, constructing a genuine omnichannel growth plan, and generating future growth far more efficiently. My gratitude goes out to the whole LSF team for their hard work in pushing further and uncovering fresh chances to strengthen our business; at this point, I'll hand things over to Anya Hamil, our CFO, who will go into more detail about the third quarter results.

Appreciate that, Andy. In Q3 of 2022, net sales fell 19%, landing at $8.8 million, versus $10.9 million during the same quarter in 2021. That drop came from softer volumes across wholesale and our DTC channels, though it was partly offset by robust expansion at Amazon.com. The wholesale softness largely reflected reduced volumes in club, since we chose not to repeat the original rotation we had run a year earlier. Along with ongoing strain on consumer spending tied to inflation worries, the DTC decrease stemmed from fewer new customer orders — a result of deliberate steps aimed at lifting our gross margins, such as cutting marketing spend, a price increase put in place at the close of Q2, and adjustments to the threshold for free shipping. Partially countering the D2C decline was double-digit growth in our amazon.com channel, fueled by sustained adoption and momentum generated through a refined marketing approach. Gross margin dropped 590 basis points, coming in at 23.4%, against Q3 of 2021, yet it rose 520 basis points on a sequential basis versus Q2. Pressure on margin relative to the prior year period came mainly from fixed manufacturing cost deleverage, as we intentionally lowered production volumes to bring inventory balances down. Higher freight costs also weighed on gross margin, partly offset by reduced labor costs resulting from cost reduction efforts. Operating expenses came to $7.8 million, down $0.7 million from $8.5 million a year ago. That decrease stemmed from smaller sales and marketing expenses plus lower research and development costs, while general and administrative expense matched the prior year period. Sales and marketing expenses fell roughly 16%, to $3.4 million, on the back of reduced advertising expenses and personnel costs. Net loss as reported stood at $5.7 million, up 7% from the prior year period. On an adjusted basis, net loss likewise came to $5.7 million — roughly a 6% increase over the year ago period — while improving sequentially by about 10% relative to our Q2 results, which shows ongoing progress from our cost savings initiatives. A full reconciliation of non-GAAP adjusted net loss appears in our earnings release. Now let's move to our balance sheet and cash flow. We closed the quarter holding slightly more than $21 million in cash with zero debt, as we keep managing our balance sheet conservatively. Cash yields from operations reached $3.6 million, an improvement of more than $300,000 over Q2. Now on to our outlook: even though we expect a tough economic backdrop to persist through the fourth quarter, we reaffirm our guidance, and our estimate of net sales for 2022 will be at the lower end of the board stated range of $36 million to $38 million, with gross margin projected at roughly 20% for the full year. Keep in mind that this gross margin guidance leaves out any onetime charges tied to shutting down our manufacturing operations in Sisters, Oregon, along with other onetime actions. With that, I'll hand the call back to Jason.

Thank you, Anya. To begin, I'd like to take a brief moment to offer my warmest and most public congratulations to Anya on being promoted to the position of Chief Financial Officer at Laird Superfood. Although the economic picture here in the US and the way it affects consumers is still unclear — some might even say quite difficult — we continue to feel positive about the chance for wellness and health-focused companies such as ours to keep expanding and capture a bigger portion of the market. During the opening three quarters of 2024, we were able to make substantial gains in the core strengths of the Laird Superfood branded operation, and we're now set to grow throughout the coming year and afterward, supported by a fresh brand platform featuring better products and enhanced retail positioning nationwide. And even though there's still more to be done before this turnaround is finished, we feel good about the adaptable, variable-cost approach to manufacturing and distribution that we'll be implementing in Q4, and we're eager to finish 2024 on a high note and bring that energy forward into 2023. That wraps up our prepared comments. Operator, we're now ready to take questions...

Thanks for taking my question. Hey, Jason, and everyone on the team. I'd like to understand more about the aseptic liquid streamer version that was pushed back because Coman didn't support it. From what I gather, that was already being shipped before you joined, and now you're shifting to a fully outsourced approach. What are you sacrificing in exchange for what you're getting? It looks like margins could move somewhat closer to prior levels, but does that place a limit on how high they can go for you? Does it bring down the margin ceiling? And do you give up some control of the— What I'd like to understand is what we gain and what we give up with this change.

Thanks for bringing that up, Bobby. It's an excellent question, and honestly it's one we spent a lot of time debating while we were figuring out our approach; the truth is that for a food company of our scale, running your own plant is extremely difficult, particularly given the sheer variety of package formats and items we make. Because we went down that road, we ended up with a site operating below 30% utilization, and on top of that, not a single line was even exceeding 10% utilization. The team we have at the Sisters facility is excellent. They got it running as well as we possibly could. And this past year, we invested a lot of effort into figuring out just how far we could drive costs down. Ultimately, we discovered that being competitive in the market simply wasn't achievable, so that gives you some sense of the backdrop for how we arrived at this decision. By shifting to a co-packer model, we gain considerable flexibility. We gain the capability to produce various sizes, single serves among them; we also gain the capability to produce various package formats, canisters included, should we decide to go that route, especially in retail. On top of the expense reduction, there's substantial adaptability upside. Regarding expenses, as you noted, this instantly returns us to our peak margin level — or at least the recent peak — and we conservatively anticipate this will restore over six percentage points of margin to the P&L. My guess is the gain will end up larger once we truly put it into practice. We've got a solid partner who can pit our volume against their other volume across their network and is ready to pass savings back quite aggressively. So my sense is this doesn't really place a ceiling on us. Suppose the plant were operating at 80% utilization with every process running flawlessly — chances are we'd be sitting in a stronger spot right now. That said, we don't expect that scenario to materialize over the coming years. The way we see it, gaining that kind of flexibility, along with the cost benefits a co-packer delivers, is very much worth it. On the liquid front, which you also raised, I should clarify that liquid isn't among the products routed to this particular packer. That item, as you know, is currently handled by a co-packer. Even so, we're glad to report that the formula has been reformulated. Previously we couldn't secure an aseptic manufacturer, and that truly restricted which co-packers were available to us. Looking ahead, we now have an aseptic offering that we can roll out whenever the timing is right; so we're examining what that means once it's back in the market, what it could do, how an aseptic item can be sold, and how it can also be sold through a DTC and Amazon style channel; and this opens up fresh possibilities we lack right now because we no longer have to remain in a cold chain at all times. So we anticipate considerable savings from that, along with, as I said, a great deal of commercial versatility too.

All right, that's great. Then perhaps just a few more — I'm not sure how many folks are in the queue with questions — but allow me to ask about the guidance. For revenue this year, it started out as a tight band. And while there isn't a great deal of time remaining in the year, there's still a sizable holiday period we need to drive; so I'm curious what you're observing that leads you folks toward the bottom end of a band that tight?

Yeah. So on our side, Bobby, for the remainder of the year, here's what we're seeing: we think we've got a really robust digital initiative lined up as we move toward Black Friday and the holiday period. The Indian team has been — and I could say a little more on that — they've placed a great deal of emphasis, clearly, on this part of the calendar, and we believe our product portfolio sits in an excellent spot, and that our marketing efforts are the right ones to hit those targets. On our side, the greatest difficulty, particularly for a business our size, is simply how uneven retail can be; most of what we sell moves through a small number of distributors plus one club partner especially. Because of that, when one order fails to materialize, it generates problems, or it fills you up when it does arrive; so — so what I'd say is, yes, we continue to guide toward that band; right now we're eyeing the bottom end of it. And we anticipate being able to land within it, and we're monitoring that unevenness in retail very carefully.

Alright, got it. One last thing, and it's more of a big-picture question. A few months ago we attended a food tech expo in New York, and plenty of those smaller, digitally native companies were voicing frustration — they're having a tough time with the expense of bringing in customers, plus all those broader challenges that come up in every conversation these days. So what I'd like to know is, how would you make the case for the layered value proposition when you're in a market full of potentially subscale brands that look appealing?

Bobby, that's a great question. I'll start us off, and then I'll pass it over to Andy too — since he leads marketing and commercial for us, I'd be foolish not to let him take a swing at this one as well. It's a really good question, and honestly, it's something we get pretty enthusiastic about. Honestly, the thing you're bringing up is the exact reason I came to work here — and I'd add that everyone sitting around the table felt the same way. Laird stands for something, and what it delivers is a kind of glow around health, wellness, and nutrition — whole food nutrition that has no real equivalent. That shows up in our NPS numbers, which keep sitting at 80-plus right now. And our customer satisfaction figure, which came in at 4.9 out of five not long ago — people truly appreciate the value we offer and how we stand apart from the other items labeled "superfoods" and the rest of the health foods on shelves. The recognition is there, and it's extremely, extremely strong…

I'm an associate — pardon the self-promotion, but I noticed a fairly compelling influencer who essentially set aside every other creamer they had been considering at a rather well-liked retailer and concentrated solely on yours as the single product worth suggesting. So you've clearly captured some share of attention out there; it appears an opportunity remains to take advantage of that.