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

Thanks, and good afternoon. I'd like to welcome everyone to the conference call and webcast for Laird Superfood's first quarter 2023 earnings. Joining us today are Jason Vieth, who serves as Laird Superfood's President and Chief Executive Officer; Anya Hamil, our Chief Financial Officer; and Andy Judd, our Chief Commercial Officer. Everyone should by now be able to access the earnings press release for the first quarter of 2023 that the company filed today following the close of the market. You can find it in the Investor Relations portion of Laird Superfood's website, which is located at www.lairdsuperfood.com. Prior to starting, I want to point out that management might make forward-looking statements during this call as defined under the federal securities laws. Such statements reflect management's present expectations and beliefs, and they carry risks and uncertainties that may lead actual results to differ materially from what those forward-looking statements describe. For a detailed discussion of the risks that could lead actual results to differ materially from those expressed or implied in any forward-looking statements made today, please see today's press release along with other filings with the SEC. With that, I'll hand things over to Jason.

Appreciate that, Steve. Hi everybody, and thanks for being here. It's great to have all of you with us. What we delivered in Q1 shows the strategic plan we put together for this business is the right one, and that our people can carry it out. It's still a tough market in which to grow a mid-size food brand, yet I'm happy to say we're nonetheless achieving solid movement on our main strategic objectives: lowering our cost base, expanding our brand and wholesale business, and strengthening our portfolio through innovation in taste and packaging. During just a handful of weeks early in the year, we managed to move our supply chain to an asset-light setup using third-party manufacturing and distribution, and it's already running much more efficiently than was possible back when we ran our own plants in Oregon. Not only are we operational at those facilities, we're already turning out larger volumes at reduced costs, with better flexibility and responsiveness spanning a broader array of packaging sizes and formats. Our new partners have shown themselves to be extremely supportive and adaptive — genuine partners in the fullest sense. As Anya will explain in a moment, leaving aside one-time costs tied to our product withdrawal, we've already lifted our Q1 gross margin by over 8 points versus a year ago. Meanwhile, we've kept making dramatic headway in cutting our marketing spend in the DTC channel. Consequently, we keep seeing a much bigger return on our ad spend, a smaller consumer acquisition cost, and a greatly enhanced margin structure. We've now mostly cleared out the inefficient marketing contracts put in place across prior years, and at last we've been able to redirect our investment toward the strategies and tactics we think will deliver more meaningful impact in the marketplace. A prime illustration of that is our retargeting against the existing customer database, which let us bring back subscription growth in Q1 for the first time in more than a year. Over in the conventional and natural grocery channel, same-store sales are growing strongly, with our dollar sales velocity growth still positive for both our liquid and powder creamers in the conventional and natural channels. That growth is driven by our new branding and packaging, which mostly rolled out during Q1, along with ongoing progress on improving our pricing and availability at the shelf. As we noted on our fourth quarter call, we ran into a quality issue caused by a poor tasting raw material we received from one of our suppliers, and we chose to pull multiple creamer products from the market. We spotted the problem fairly quickly after production and managed to recover most of the products before they got to consumers. That removal ended up hitting our Amazon operation especially hard, since every item had to be pulled out of their fulfillment centers prior to us being able to resume selling there. Because of that, we missed the targets we had set for Amazon during this quarter. Fortunately, Amazon is now running at full capacity again, and we're already watching our numbers come back to where they stood before the withdrawal. Even with that quality problem, our net promoter score is still sitting at a very robust 69 points, while our customer satisfaction score comes in at 4.9 on a scale of five points. On the financial side, we keep making our business stronger compared with the same metrics a year ago. As Anya will explain later on today's call, we've boosted our go-forward gross margin while cutting our operating expenses and marketing costs substantially, and we're still making headway toward reaching a cash flow positive position. I'm also happy to share that one of the key ingredient suppliers for our business is collaborating with us to help recover the Q1 loss tied to our quality events. Right now, we expect to have enough cash to keep operating into at least the second quarter of 2024, and to be in a far better financial position from which to raise capital once that moment arrives. Without question, this team has achieved enormous progress in turning our company around, and I want to thank our talented and dedicated Laird Superfood employees for their creativity and perseverance in delivering these gains. We still have a long way to go, yet every quarter has shown consistent improvement toward our objective of breakeven profitability, and we anticipate more of the same moving forward. With that, I'll pass things over to Andy.

Thanks, Jason. When we kicked off our brand transformation effort a year ago, we understood there was a lot of heavy lifting ahead to rebuild the foundation of our go-to-market approach. Twelve months on, it's great to see how much we've actually accomplished. Before diving into specifics, I'd like to express appreciation to the whole company for their hard work and commitment in positioning our amazing brand for success well into the future; during Q1, we rolled out refreshed packaging and ran a new campaign aimed at repositioning Laird Superfood around supporting peak everyday performance. Even though these updates have been live for just a few months, we're already noticing better sales velocities in retail as well as stronger conversion on our site. We've additionally introduced a couple of our best-performing innovations so far: new adaptogenic protein bars and prebiotic daily greens. To tackle what we identified as inefficient spending from the past, we've fully revamped our marketing approach; within our DTC segment, we cut overall spend by 70% in Q1 compared to the prior year, all while boosting return on ad spend by 280%. Crucially, we've also brought down consumer acquisition cost at the same time, and thanks to strong lifetime value and better gross margins, we're now generating positive ROI from our DTC customers. Plus, we've brought net subscribers back to positive growth for the first time since 2021, with month-over-month gains throughout Q1. As we've adjusted our value proposition and encouraged repeat buyers to shift toward our subscription options; worth noting is that we pulled all this off even with the product withdrawal Jason brought up earlier. As Jason noted, the Q1 product withdrawal hit Amazon hardest, causing close to a 12 week blackout of our powdered creamer items there, which clearly held back our growth in that channel. That said, I'm glad to share that we're fully restocked on Amazon and our conversion rate is climbing back to the 2023 targets we'd set. Still, Amazon has turned into a pricey pay-to-play model, and right now we're evaluating the appropriate spend and growth levels to push through this channel. The most substantial shift in our go-to-market strategy is happening in wholesale, where we still see plenty of room to grow distribution. Over the past few months, we've brought in key leadership and skills, and we're watching our work generate both faster velocity and additional confirmed placements with new doors beginning in Q1. This distribution is happening alongside excellent retail partners spanning every channel at major retailers such as Whole Foods, Sprouts and Target. For the 12 weeks ending March 26, 2023, dollar velocity growth in our liquid creamer segment within the natural channel rose 42%, and total consumption for Laird Superfood across all items and measured channels climbed 23% over that stretch. As we move ahead, I feel enthusiastic about the wave of new products we've lined up for the rest of this year. When it comes to 2023, our planned expansion involves carrying on with growing our store presence, introducing fresh innovation platforms such as our hydration drinks that have been reformulated, rolling out oat milk creamers that incorporate functional adaptogens, plus a brand-new selection of ultra-premium items named Laird's Reserve < >. Beyond that, we're eager to carry out what stands as our strongest seasonal lineup ever, featuring a fresh assortment that includes Pumpkin Spice Superfood Instant Latte with adaptogens. We've also got efforts in motion aimed at boosting how well-known our brand is, pushing ongoing growth in sales momentum, and improving our margins further via targeted price adjustments and the introduction of our aseptic liquid creamer. To wrap up, the opening months of 2023 have truly been extremely active here at Laird Superfood, and the strides we're already witnessing make us happy. The determination our team holds for achieving success down the road has never been greater, and I can't wait to keep revealing what's behind our business strategies on upcoming quarterly calls. At this point, I'll hand things over to Anya so she can go deeper into the first quarter's results.

Thanks, Andy. In the first quarter of 2023, net sales came to $8.1 million, which matched our annual operating plan, and that was a decline of 12.7% from $9.3 million in the same period last year. Because of how much we had fullback in marketing spending, we anticipated this drop, which stemmed from reduced sales volume in e-commerce and club channels. To be specific, the decrease in our e-commerce sales came mainly from DTC, owing to a 70% year-over-year cut in media as we found spending inefficient and lowered our customer acquisition costs so we could build a more sustainable direct-to-consumer business and boost profitability in this channel. Growth in our retail channel, fueled by both higher velocities in liquid and shelf-stable creamers and distribution expansion in the natural channel, partly offset the DTC decline. Gross margin, as reported, stood at 23.1%, versus negative 4.6% in the fourth quarter of 2022 and 20.9% in the prior year period. A one-time cost tied to product withdrawal, which Jason and Andy both mentioned earlier, hurt first quarter margins. Leaving out those one-time charges, I'm happy to say we hit 27% adjusted gross margin, an improvement of more than eight points from the sequential quarter and prior year period; this margin expansion resulted from our supply chain transformation to a third-party co-manufacturing and fulfillment model that wrapped up at the start of the first quarter. And it matched what we expected for that transition. I anticipate our gross margin will keep improving through the year, as we realize the full benefit of the shift to a variable cost model along with other margin improvement initiatives slated for the second half of the year. Operating expenses came to $6.2 million, down $9.7 million from $15.9 million in the year ago period. That decrease was mainly because of lapping the $8 million impairment of goodwill and intangible assets in the first quarter of 2022, plus lower people costs and other general and administrative expenses after the exit activities in the fourth quarter of 2022. Marketing expenses also added $0.9 million of reduction in overall operating expenses. Net loss as reported was $4.1 million, a decrease of $10 million versus the prior year period. On an adjusted basis, net loss was $3.8 million, roughly $3 million lower than a year ago, driven by expanded gross margin and lower marketing and G&A spent. A detailed reconciliation of non-GAAP adjusted net loss is included in our earnings release. Turning to our balance sheet and cash flow. We closed the quarter with $11.9 million of cash and no debt, and we continue to conservative and manage our balance sheet. Cash use and operating activities was $6.1 million in the quarter as compared to $3.6 million during Q1 of 2022. During this quarter, our cash burn was higher because of several non-recurring items: payments tied to exiting the Sisters, Oregon facility lease, severance and bonus disbursements, and accounts receivable collections that arrived later than expected, pushing into early Q2. Across the rest of the year, we anticipate that our continuing cash burn will drop to between $2 million and $3 million each quarter. Turning to our outlook: we do expect that an unpredictable economic climate and historically high inflation rates weighing on consumer spending will persist through the remainder of the year. Still, we take encouragement from our first quarter results, since the strategic actions we implemented last year and are still implementing this year are gaining traction. Accordingly, we reaffirm our guidance for gross margins above 30% for the year, excluding any one-time charges, and we expect net sales growth in the mid-to-high single digits. With that, I'll hand the call back to Jason.

Appreciate that, Anya; that wraps up what we had ready to say. Operator, at this point we're ready to take questions on the line.

Thanks for the opportunity to ask. Perhaps we could begin there — it seems like the Amazon situation might have resulted in lost revenue this quarter. Still, stepping back, considering our position as Q1 wraps up and how things went over the past twelve months, what makes you feel assured about keeping the guidance as is, and how do you view whether demand has hit its lowest point and is now climbing? Could you share your perspective on that as we move through the rest of the year?

Sure, hi JP. That's a terrific inquiry, and it's one we grapple with around here fairly often. The truth is, as you're well aware and plenty of other folks are too, a rather enormous business transformation is underway at present, and most of it has actually occurred looking back over the past 12 months. And truly, as we progressed across those 12 months, our strategic move was to reduce DTC media spend. You heard that today. We did make a big cut during the first quarter, though this has been going on across the past several quarters, because that particular channel has become really inefficient for most companies operating in DTC, especially for companies like ours and in consumer goods where LTV isn't as high as it is in some other sectors. So we trimmed it back, and we made strategic shifts toward Amazon, wholesale, and — to build on what you asked — Amazon was hit by the quality issue in Q1. We're pretty optimistic about what we can do on Amazon; it isn't an inexpensive channel to compete in. We're constantly tweaking our approach, taking a hard look at what we put into media and every bit of backing for that channel compared with what comes back in sales. That's something we'll continue doing going forward too. Still, we believe there's a huge—truly substantial—chance to expand what we do on Amazon, and to be honest, that simply wasn't a focus for Laird Superfood as a company until this team arrived less than twelve months back. So from a strategic standpoint, we're considering cutting way down on DTC spending, essentially dialing it back, until that model stabilizes and we start seeing evidence of improvement in the marketplace. About eighteen months back, Apple's modifications to iOS completely reshaped the landscape; Facebook, along with others, has been working to adapt and find its footing again, and we'll keep observing, tracking, and putting money into areas where opportunities arise. That said, connecting with Amazon is important for us; it's about pursuing a strategy of being present where the customers truly are. And frankly, expanding into wholesale stands as our top strategic objective. In the coming months, we'll be going through the review period, when the majority of retailers across both traditional and natural sectors assess the various items and labels available to them within their respective categories. We have several meetings lined up across those months, and we keep being out in the marketplace pushing for growth in that area. So that’s likely a longer response than what you were after. Still, I think the way to frame it is this: for us it’s quite clear — retain the DTC channel, particularly via lower cost remarketing aimed at our subscribers and our repeat consumers, then truly leverage Amazon to bring in new consumers and retail to secure more placement for eyeballs as consumers have to buy.

Great. That's quite useful, I think. And perhaps that leads somewhat into my next question, but just when you consider — maybe more detail on the online side — are there any patterns you could identify regarding your repeat buyers' orders, whether the average order value is declining or rising, and then perhaps also set that against whatever you're seeing with new customers and what they order compared with, say, 1 or 2 years back?