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

Thanks, and good afternoon, everyone. I'd like to welcome all of you to the earnings conference call and webcast for Laird Superfood's fourth quarter and full year 2022. Joining us today are Jason Vieth, who serves as Laird Superfood's President and Chief Executive Officer, our Chief Financial Officer Anya Hamill, and Andrew Judd, our Chief Commercial Officer. At this point, you should all be able to access the company's fourth quarter and full year earnings press release, which was filed today after market close. You can find it in the investor relations section of Laird Superfood's website, www.lairdsuperfood.com. Prior to getting started, I want to point out that management might make forward-looking statements during this call within the meaning of the Federal Securities laws. Such statements reflect management's current 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 discussion of the risks that might cause actual results to differ materially from those expressed or implied in any forward-looking statements made today, please see today's press release as well as other filings with the SEC. Now, I'd like to hand the call over to Jason.

Thanks, Steve. Hi everyone, and thanks for joining us. It's been a busy stretch since we last updated you on our efforts to turn Laird Superfood around, and I'm looking forward to sharing everything we have for you today. Andrew Judd, our Chief Commercial Officer, will go into more depth on how we did across products and channels, but before I pass it to him, I'll start with an overview of the business and where our key strategic initiatives stand. Our CFO, Anya Hamill, will walk you through the fourth quarter in detail, and once that's done, we'll take your questions. During our last earnings call, I mentioned that we planned to close the manufacturing site we operate in Sisters, Oregon. That decision followed the completion of a deal with a co-manufacturer and a third-party logistics provider, who would handle powder production and distribution for us. I'm pleased to report that the transition to both partners is now complete, and each one is fully operational and connected into our supply chain. As of December, all of our powder products have been produced and shipped by these partners, and they have proven themselves responsive, adaptable, and supportive in every way. Before we go further, I'd like to take a moment to say how deeply proud I feel about the team handling Laird Superfood's supply chain. In just a span of roughly two months, they came together to shut down our Oregon manufacturing site completely, get a brand-new co-packer up and running alongside a third-party distribution center in Utah, and develop and roll out all the different support systems and other controls needed to operate the business in that location. Every bit of that was finished ahead of the end of January, and I'm blown away by the speed and professionalism with which our people, working as one, pulled off this transition — and by the long-term possibilities it opens up for making our supply chain more flexible and bringing our overall operational expenses down. On the commercial side of things, I'm equally happy to report that we've made enormous strides. We kicked off the switch to our updated branding and packaging in Q4, which introduces a completely fresh look across our portfolio and upgrades our visuals so that both the Laird Superfood name and the appetizing quality of our different food items come through more clearly. We introduced this refreshed appearance at Expo West, the biggest gathering in the natural food sector, and I can tell you the response was overwhelmingly enthusiastic. Andy will be sharing this in just a moment, but we've already noticed a solid increase in how quickly our products are moving at retail. We credit that to the refreshed branding, which is pulling shoppers in right at that initial point of decision—whether they're looking at our updated package on a shelf or on a screen. On top of that, we're rolling out packaging that uses a new Velcro fastener, giving our products a better way to stay sealed after opening. That issue has been one of a small set of complaints that keep coming up over the past several years. And now, when it's sitting in a store, our brand is grabbing the shopper's attention. After someone buys it and sees it at home, it brings delight during that crucial second moment of truth whenever they get ready to use the product. I'm equally proud to report that our updated strategy for the direct-to-consumer, or DTC, segment keeps delivering results. In Q4, we brought our cost to acquire consumers down from $90 during Q4 of 2021 to only $30 during Q4 of 2022. We didn't just cut acquisition expenses by two-thirds over the past year—we managed that while also raising our average order value, and we're still on course to thoroughly transform our DTC operation as we steer it toward profitable growth. While we were honing and sharpening our DTC strategy and spending approach, we set a strategic objective to speed up our expansion on Amazon. I'm happy to report that this channel grew 38% in Q4 compared with the same stretch 12 months earlier. We achieved that through a robust Black Friday and an overall strong holiday shopping period, enabling us to boost our average order volume 13% compared with the prior year. Simultaneously, we made solid headway in eliminating third-party sellers offering our items and securing the buy box for our product lineup—vital operational gains that lay the groundwork for additional growth across this year. Until now, our wholesale segment has represented our toughest and least realized opportunity. One positive development in Q4 was bringing on a new person to head sales and address this issue. Doug Lee joined us in November, arriving from Chocolove, where his role was sales chief for that top chocolate label in the natural channel. He's only been with us a handful of months, yet Doug is already collaborating closely with the many brokers representing Laird Superfood across grocers in both the conventional and natural channels, as well as club and mass. A robust series of category reviews sits on our calendar for the months ahead, and these have the potential to change our business's sales trajectory quickly. As I noted earlier, we're already witnessing meaningful gains in our retail velocities as our refreshed branding and packaging gain traction and as we collaborate with retailers to carry out improved trade promotion plans and fine-tune assortment and shelving for our products. Similarly, results from our club business keep getting better, fueled by a mix of new branding and stronger in-store activation for our brand. Beyond the transitions and enhancements I've already described, we keep making consistent headway on our Liquid Creamer shift to an aseptic product, which is still slated to debut later this summer. Not long ago, we got the chance to sample what came out of our initial scaled manufacturing batch, and I can say with confidence that it's a delicious creamer and represents a significant taste upgrade over the formulation we currently use. Moving this product into an aseptic format is also going to let us offer it through every channel, such as DTC and Amazon. Taking everything into account, I anticipate that after our aseptic output hits a steady state, this shift should deliver an improvement of over 20 points compared with the present gross margins on our Liquid Creamer product, thanks to improved tolling, distribution, and raw material expenses. Amid all the encouraging progress in the business, last month we ran into a problem with product quality, and its effects showed up partially in our Q4 financials. Basically, a rancid coconut milk powder product arrived from one of our suppliers, and that ingredient ended up in a number of our products before we detected it. We figured out that these items fell short of our standards very soon after shipment, and I'm pleased to report that we launched a voluntary product withdrawal right away and got in touch with every affected retail customer and brand consumer to aggressively retrieve as much as we could. By doing that, we protected the brand and our ties with customers and consumers to the greatest extent, and we've swapped out the product for affected consumers wherever we were able.

The response we've gotten from our retail partners and from shoppers has been terrific, with both groups expressing how much they value the openness we've shown and their loyalty to our brand. We're continuing to work out what this event will cost in total, and we anticipate being reimbursed by our suppliers, since we've managed to trace the problem back to the product they supplied to us. There isn't a great deal else I'm able to say right now, though naturally we'll make sure everybody stays informed about any significant developments on upcoming calls. During the last year, we assembled a strong group of veteran CPG leaders, and their efforts have been instrumental in driving the turnaround of this business within a remarkably brief period. With our 2023 reporting cycle getting underway, I'd like to briefly highlight yet again how much meaningful progress we've achieved over the last year. To start, we fully revamped our branding and packaging and enhanced the taste, functionality, and packaging of numerous products. Because of that, we anticipate better takeaway as an expanding number of shoppers discover and sample what we offer and as their repeat buying grows; we shifted away from owning manufacturing in Central Oregon toward a highly flexible, asset-light approach located right on a key transportation hub. Setting aside one-time charges, we anticipate seven-10 points of gross margin gain across 2023. Number three, we reconstructed our whole retail broker network along with our ecosystem of marketing partners; we hope to talk about meaningful distribution growth in the back half of this year; we've also mostly right-sized our inventory and are actively steering our AR and AP to make better use of our working capital and thereby strengthen our cash position. Last of all, we've delivered substantial upgrades to our finance and accounting functions as well as to our IT systems and infrastructure. That has, in turn, given us confidence in our data and our decision-making and sped up how quickly we can execute. I couldn't be prouder of everything the Laird Superfood team has achieved in such a brief period; we sit in a vastly different place in 2023, one that lets us now grow quickly and confidently. When I took on the CEO position here 12 months ago, our rate of cash burn meant that absent major operational gains, our cash would have run out in barely more than one year. I'm happy to report that 12 months later, we've put countless changes in place that have simultaneously cut our cash burn and boosted our efficiency and our market positioning. Thanks to those changes, and without raising any extra capital along the way, we still have over a year's worth of cash on hand. Although we anticipate needing to secure additional funding at some point prior to mid-2024, we will be in a position to showcase a far more robust business model, one that positions us for ongoing growth and expansion as we establish ourselves as a leader in functional plant-based foods. With that said, I'll now turn things over to Andrew Judd, our Chief Commercial Officer.

Thank you, Jason. Come next month, I'll mark one full year with Laird Superfood. We've just gotten back from the Natural Products Expo West Trade Show, and my optimism hasn't been higher as we put our brand transformation on display and spoke with retailers regarding our goal of helping consumers reach new performance levels by making sure they fuel themselves with genuine, functional, whole plant-based foods. As Jason went over, this has been twelve months of strategic transformation and enormous headway as we set out to refine how we go to market and move away from a main emphasis on DTC toward becoming an omni-channel brand. I appreciate the dedication our team has shown in strengthening our business fundamentals, running a marketing model that is more efficient and effective, and constructing a base for growth across multiple channels in the years ahead. Q4's progress showed up as a better trajectory in key sales channels where we had historically been underdeveloped, among them a +19% net sales growth in retail, excluding club, plus the substantial Amazon growth Jason referenced. Though our total online business declined 5% in Q4, the channel managed sequential growth across two consecutive quarters while spending less, as we kept seeing robust Amazon growth and enjoyed our most efficient quarter of the year in DTC. Such improvement aligns with our strategic plan, since Amazon grew +38% year-over-year while we simultaneously lifted average order value on that platform by 8% compared with a year ago. That powerful Q4 finish let us post +18% net sales growth on the platform for 2022 versus a year ago. We're likewise seeing gains from scaling our strategy on the platform, with a +16% sequential rise in Q4 for our Subscribe & Save orders; in DTC, we concentrated on driving a more efficient model as we reset the platform for long-term profitability. To accomplish that, we cut our advertising investment sharply, by 52% versus a year ago, while sessions fell only 35%, which speaks both to the loyal organic traffic we have and to prior inefficiency in our media. Consequently, we achieved a 67% reduction in our consumer acquisition cost, or CAC, our lowest since Q3 of 2020. The price increase we implemented in June of 2022 contributed to an 8% year-over-year lift in average order value for the quarter. Our team carried out a disciplined Q4 holiday plan, generating strong conversion above 9%, up +50% versus 2021. Rebuilding around richer retention marketing grew our CRM database past 400,000 consumers, a +11% gain versus Q4 2021, and produced our best email conversion in more than eight quarters at 9%. As anticipated, 2022 proved a difficult year for our DTC business, as it did for many others in the industry, since climbing acquisition costs and changing consumer behaviors held back growth. Our team stayed resolute about finding ways to reallocate resources, cut excess, and still preserve robust loyalty and repeat customer orders. Because of the work we did to keep customers, our repeat customer rate was still 45% in 2022. At retail, we keep seeing encouraging momentum in our main creamers segments, since shoppers keep gravitating toward more functional products that deliver added benefits — such as those found in our functional plant-based creamers with adaptogens. For the 12 weeks ending 1/1/2023, in our liquid creamers business, retail dollar velocity rose +74% in natural and +21% in MULO. Inside those channels, we are still the top functional creamer, and once again our dollar sales growth beat both the overall category and the plant-based creamer segment. With velocity growth speeding up and dollar share in the natural channel improving — up almost two points in Q4 compared with the prior year — we feel great about the ongoing expansion of liquid creamers; these persistent, strong productivity gains at retail clearly show we have a powerful brand and a proven concept. Given the margin improvement we expect from the switch to aseptic that Jason discussed earlier, we are extremely optimistic about the chance to grow our position in the Liquid Creamer segment. On our shelf-stable powdered creamer business, we are also seeing a better velocity trajectory, thanks to stronger retail support and execution. In the natural channel, our dollar sales velocity rose +13% for the most recent 12 weeks ending 1/1/2023. During each month of the quarter, we saw velocity climb on our powdered creamers. Broadly speaking, our consumer loyalty metrics are still at record highs, with our Net Promoter Score hitting 82 in Q4. Customer satisfaction held steady at 4.9 on a five-point scale. I want to point out that we accomplished all of this while also cutting our total spending on marketing and sales and marketing G&A substantially compared with a year ago. I have never been more certain that a bright future lies ahead of us. The Laird Superfood value proposition is on trend in large markets and categories, with a devoted consumer base and the backing of a gifted team. In Q4, we put the first stages of our brand and portfolio improvement plan into action. Our redesigned packaging started reaching consumers; in fact, as the new packaging arrived on shelves, we have already seen year-over-year velocity accelerate, +11% in natural and +4% in MULO, during the first four weeks of 2023; this packaging redesign makes retail shopping easier and creates impact at the first moment of truth at shelf, and it further emphasizes the functional benefits that set our value proposition apart. Our brand refresh involves far more than packaging alone. As we announced recently, throughout 2023, we will refresh almost 30% of our portfolio to enhance taste and functionality while continuing to uphold our industry-leading standards for clean, simple, functional ingredients. To illustrate, adaptogens plus functional mushroom extracts are being incorporated into every product within our Instant Lattes range. We've introduced additions such as Mocha Latte flavors and on-the-go single-serve sachets, both set to hit retail and online channels during March. Additionally, Prebiotic Daily Greens is getting a relaunch featuring a remarkably tasty reformulation, offered in single-serve sachets too. All of this merely kicks off what promises to be a thrilling 2022 filled with innovation. Now I'll hand things over to our CFO, Anya Hamill, who will go deeper into the fourth quarter results.

Thanks, Andy. In Q4 of 2022, net sales came to $9 million, which was flat on a sequential basis versus Q3 of 2022, and that figure dropped 4% against the $9.4 million recorded during the same period a year earlier, with the decrease attributable to softer volume across DTC and club channels. As Andy explained, the drop in our DTC business stemmed mainly from a 52% year-over-year cut in media spending aimed at eliminating inefficient outlays and bringing down customer acquisition costs as we work toward a more sustainable direct-to-consumer operation moving forward and better profitability within that channel. Partially counterbalancing the DTC decrease was extraordinary expansion in our Amazon.com channel, which came from ongoing adoption and the momentum generated by refined marketing approaches. Double-digit growth also came through in our wholesale channel, fueled by fresh distribution within the natural channel plus improved velocity on Liquid Creamer. Gross margin, as reported, stood at -4.6%, which reflected one-time exit and disposal costs tied to shifting toward a co-manufacturing model along with restructuring costs linked to shutting down our Sisters facility. Adjusted gross margin reached 19%, down 440 basis points from Q4 of 2021. The year-over-year margin squeeze resulted chiefly from fixed cost deleverage tied to reduced production volume as we trimmed and optimized inventory levels ahead of our packaging refresh and move to co-packing, plus higher costs from inventory reserves and disposals and inflationary freight expenses. Operating expenses came to $15.3 million, up $6.1 million from $9.2 million during the comparable period last year. That rise stemmed from impairment of intangible assets, losses and lease terminations on manufacturing facilities, exit and disposal costs that included impairment charges on factory equipment, furniture, and software, along with severances and retention bonuses. Once one-time costs are excluded, operating expenses were $6.1 million, which is in fact $3.2 million below the fourth quarter of last year thanks to decreased sales and marketing expenses and reduced people costs throughout the organization. Net loss, as reported, reached $15.6 million, a 126% increase over the prior year period. On an adjusted basis, net loss came to $4.3 million, roughly 38% below the year ago period and 23% lower sequentially than our Q3 results, which shows ongoing progress on our cost savings initiatives. A detailed reconciliation of non-GAAP adjusted net losses appears in our fourth quarter earnings release. Shifting to our balance sheet and cash flow; we closed the quarter holding $17.8 million of cash with no debt as we keep managing our balance sheet conservatively. Cash used in operations was $3.2 million, an improvement of more than $400,000 against Q3. Now on to our outlook. Even though we expect a shaky economic climate, with inflation at historic highs weighing on what consumers buy, to carry over into 2023, we feel the moves we made strategically during 2022, and are still making in 2023, have set the business up to achieve net sales growth in the high single digits along with gross margin gains of seven- 10 points for the full year 2023, not counting any one-time charges. I do expect gross margin gains to show up immediately from the co-packer move, but the schedule of losses and possible recoveries tied to that product quality issue Jason mentioned earlier, which has nothing to do with the move, will hold back our first quarter results. We already factored that in and built it into our gross margin outlook across 2023, and we expect to finish the year with gross margins above 30%. With that, I'll hand the call back to Jason.

Appreciate that, Anya. After coming aboard at Laird Superfood in the prior year, it quickly grew clear that although our brand was outstanding, a tough reset of the company's core fundamentals would be necessary. Starting last summer, everyone here has been overhauling each part of the operation, and it makes me very happy that we're at the point where a significantly better business is about to take shape. Now that our e-com platform has steadied and early positive signals are showing up in wholesale, we're well positioned to take advantage of how flexible our new asset-light supply chain is and push growth throughout the company during 2023. We've brought together a compact yet formidable group of CPG leaders and specialists, and I can't wait to watch everything they accomplish this year and afterward. That wraps up what we had prepared to say. Operator, please go ahead and open the line for questions.

Hi everyone, and I appreciate you giving me the chance to ask. I wanted to ask about the big gross margin gain you expect to deliver in the current year. Anya, I believe you mentioned this toward the end of your comments just now. If I have this right, the margin rate benefit from moving to the outsourced model should show up immediately, and then Q1 may carry an extra headwind tied to the quality control problem. As you consider your goal of 30% plus for this year, should gross margins climb across the year and gradually reach that target, or are you roughly expecting to land near that level despite the Q1 quality issue?

Hello, Alex.

Alex Fuhrman here. Jason speaking.

Appreciate the inquiry. Speaking is Anya. Jason, please proceed.

I apologize that we have to hold this meeting over the phone. A few of us, myself included, came down with something after Expo, so parts of this may feel a bit clumsy. Alex, I appreciate the question. Look, what I'd say is that our plan called for gross margin to improve as the year went on. In fact, we anticipated getting most of that improvement in the first quarter, since we understood there would be some counterbalancing expenses tied to the transition. During Q4, we'd shifted the bulk of the inventory and completed setup along with some production runs. Our expectation was that we'd ease into the arrangement with our co-packer across a span of 2 months. What I can share is that things have gone extremely well with the co-packer; the work they're doing is outstanding. They ramped up far faster than our forecast and plans had assumed. We feel great about the position we're in. That said, as you pointed out, there is a quality problem that's going to hit us. I did say that we anticipate it being offset across this year while we collaborate with our supplier on what's causing it at the root. We're quite confident we grasp what the problem is. At this point we're reversing it out, and we anticipate having a remedy in place; for Q1, we'd definitely expect an impact, which means, exactly as you put it, the gross margin profile improves as we progress quarter by quarter through the year, putting us above 30% when the year closes.

All right, that's quite useful. Thank you, Jason. Could I just ask about the direct-to-consumer segment — it sounds as though the cost of acquiring customers dropped quite dramatically. Is that because of a change in approach, or possibly some marketing efforts that weren't working and were discontinued? I'm curious where that improvement is coming from, and whether you believe it can hold up as we move through this year.

Thank you, Alex. Andy here. Sure, I'll take that. We're genuinely happy with the direction and with what we observed regarding our CAC in Q4. My view is that we can keep this up moving forward. It stems from a few different factors. First, I think on the previous quarter's call, we mentioned fresh research we'd reintroduced that's genuinely assisting us early on with improved targeting against a new segmentation model introduced late in the summer, and that's really aiding us in generating what I'd describe as stronger-fit leads rather than wider-ranging prospecting; it also affects, second, the way our budget is structured and how those funds get deployed, in Q4. We feel very good. I believe we've reached a point where we're beginning to notice even a slight uptick beyond that in our marketing as a whole. There are still certain items we'll cycle past — long-term agreements, you know — that will run out as we move through the remainder of 2023, and I expect we'll keep seeing efficiency improvements in our marketing spend overall. Yes, the team made enormous strides in Q4, no question about it.

Alright, Alex, I’ll just add—allow me to tack on a single point there. Alex, one more thing from me on that. Andy strikes me as extremely modest when it comes to this area, and I simply want to note that over the past 12 months, there have genuinely been 2 major initiatives he has been spearheading. The first involves moving non-working media into media. In Q4 you observed media decline 52%, yet the channel continues delivering the same results. He has managed to remove substantial expense while keeping channel performance essentially at prior levels. Truly excellent work on that front. The second is that he has been transforming working media into genuinely working—you know, quote, unquote. We had quite a few programs, marketing programs, that simply were not delivering results, and Andy, together with his team, has done a terrific job eliminating them. What we anticipate for this year is, A, the ability to spend less, but B, the ability to deploy it more efficiently, including in areas where we continue spending. That genuinely points to good things for the coming year and beyond.