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

Thanks so much, and welcome, everyone. It's a pleasure to have you join us for the Laird Superfood Third Quarter 2023 Earnings Conference Call and Webcast this afternoon. Joining us today are Jason Vieth, who serves as President and Chief Executive Officer of Laird Superfood, along with Anya Hamill, our Chief Financial Officer. At this point, all of you ought to be able to access the company's third quarter 2023 earnings release, which was filed today following the close of the market; you'll find it in the Investor Relations area of the Laird Superfood website, at www.lairdsuperfood.com. Prior to getting started, I'd like to remind you that throughout this call, management might present forward-looking statements as defined under 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 thorough review of these risks and uncertainties, we encourage you to consult today's press release as well as our other filings with the SEC. Having said that, I'll hand things over to Jason.

Thank you, Trevor. Greetings, everybody, and I appreciate all of you being with us today. It's my pleasure to share that the results for our third quarter mark a basic transformation in how this business is performing. Never since the third quarter of 2021 have we posted net sales growth compared with both the sequential period and the same quarter a year earlier. Simultaneously, we hit the 2023 objective of surpassing 30% gross margin by the latter half of the year — a gain exceeding 750 basis points relative to 1 year ago at this moment. And we delivered these gains using only a small portion of the marketing and SG&A expenses the business consumed across recent years, something we'll get into shortly. To begin, let's examine net sales. Back in 2022, I told you we would have to rework our sales algorithm so that we could build a profitable business that grows. I'm happy to say our third-quarter numbers came about because of that work, with the wholesale channel expanding over 42% versus the prior year, making up close to 1/2 of our total business in the quarter. Natural channel consumption figures reported by Spin covering the 12 weeks that ended October 8, 2023, revealed 61% growth for the Laird Superfood brand, alongside positive sales growth across every category where we compete; a solid mix of unit velocity gains, price hikes implemented in earlier quarters, and wider distribution is fueling that growth. As we anticipated, our online business — made up of the DTC and Amazon channels — shrank 16.6% while we kept pulling back media spend to support our profitability objectives; over the last 18 months, we've steered this business toward profitability via major cuts to media spend and by actively shifting current customers onto subscriptions. What this has produced is a move away from an inefficient, unproductive and unprofitable paid social media marketing model toward top-of-funnel awareness building marketing activations using podcasts, PR and organic media. Just in Q3, we generated over 1.1 billion media impressions, and we're only beginning. I'm glad to share as well that our Amazon inventory issues now sit behind us, since we managed to get our products restocked throughout their platform in Q3. Although that channel was held back during 2023 by insufficient inventory resulting from our Q1 quality event, we now see a major opportunity and anticipate a tailwind from that channel across the coming year. Now I want to give credit to our supply chain team. It succeeded in reaching the ambitious cost-reduction target we assigned to them for 2023. Keep in mind that just 1 year ago we decided to close our manufacturing and distribution facilities located in Sisters, Oregon, and shift to an asset-light model so we could boost our efficiencies, gain more flexibility and bring our costs down. During Q3, our results showed that vision coming to life, since we brought landed product costs down from 74.6% to 54.8% of gross sales in the latest quarter. Over that period, we built strong, mutually beneficial ties with our co-manufacturer and logistics partners, and having both of them in our supply chain makes us proud. Meanwhile, our G&A expense came in 50% below Q3 of last year, as the organization keeps doing more with less. Other businesses are only now rolling out cost savings programs to respond to the economy's current condition and how it affects business, so I'm glad to say we have mostly and successfully finished that effort, including reducing headcount and cutting discretionary spending. We also recently managed to close all outstanding litigation against us, and we successfully renegotiated our insurance to save more than $500,000 compared with last year's policy, which will start to be fully recognized during Q4. These savings have started showing up in our earnings results, but a solid amount of reduction remains that will materialize in Q4 of this year and during 2024, which will help us drive toward what is now our short to midterm goal of breakeven profitability and becoming cash flow positive. I take great pride in how far we have come over the past 2 years, and I'm grateful to our leadership team and our entire LSF organization for what they have accomplished, but I'm even more excited for where we'll go from here. Now that our cost structure keeps coming in line with best-in-class CPG companies, we can turn our focus to restoring LSF topline growth through wholesale expansion in 2024 and beyond. And as we keep chipping away at our least effective marketing activities to further reduce our G&A expenses, we believe we can now be positioned to achieve a cash flow positive run rate in the next 12 to 18 months. Now let me turn the call over to Anya to discuss the second quarter results.

Thanks, Jason. In 2023's third quarter, net sales came to $9.2 million, which was up 3.7% from $8.8 million during the same period a year earlier, and up 19% from $7.7 million in 2023's second quarter. Growth on a year-over-year basis came from distribution gains within natural and conventional channels, expansion of seasonal programs in club, pricing actions, and better velocity stemming from new packaging plus the rebranding campaign that launched earlier this year. Partially offsetting this were weaker sales in e-commerce channels. Because we pulled back marketing spend — a 19% year-over-year reduction across Amazon and DTC work in media — this decline was anticipated. Those marketing costs were strategic in nature, meant to cut inefficient spend and bring down our customer acquisition cost so we could build the most sustainable e-commerce business and boost profitability in these channels. On top of that, our Amazon sales keep getting hit negatively by residual inventory out of stocks tied to the product quality issue experienced in Q1 that we discussed previously. I'm glad to report that this issue got resolved at the close of the third quarter and is now fully behind us. During the third quarter, we kept building on the success achieved in the first half of the year from strategic actions implemented last year. Each quarter this year, we saw consistent margin expansion versus prior year, with Q3 margin hitting 31%, which is 670 basis points better sequentially over Q2 and 750 basis points better versus the same period last year. A Q3 gross margin of 31% is a milestone that puts us firmly on the way to achieving our long-term goal of gross margins in the high 30s; in Q3, this year-over-year margin expansion came from cost of sales improvement of 21% versus the same quarter prior year due to a supply chain shift to third-party co-packing model. It would have been even stronger except for the investment we've made in trade promotions to drive incremental awareness and trial in our wholesale channel. Beginning in Q4 of this year, I expect to start pulling back the elevated trade spend, which will let margin expansion ramp up even more as we see the full benefit of the supply chain transformation as well as other plant margin-driving initiatives take hold. Operating expenses for 2023's third quarter totaled $5.6 million, a decrease of $2.2 million compared to $7.9 million in the year ago period. This reduction came from lower marketing costs resulting from strategic cuts of inefficient spend and lower people costs and other general and administrative expenses following restructuring activities in 2022. Net loss, as reported, was $2.7 million for 2023's third quarter, a decrease of $3.1 million versus the prior year period. Q3 net loss was the lowest in the company's post-IPO history, driven by gross margin expansion and strategic pullback in spending across the board. In the third quarter, our SG&A came in at $1.8 million below the comparable period a year ago, which shows how much headway we've achieved on cost control and how we're steering the company toward breakeven and profitability down the road. Now on to the balance sheet and cash flow. We closed the quarter holding $7.4 million in cash with zero debt, reflecting our continued conservative approach to managing the balance sheet. Cash burn for Q3 reached $3.5 million, up from $1.4 million sequentially in Q2, driven by the planned inventory build to support stepped-up demand, just as we told you on last quarter's call. Our forecast for cash at year-end remains aligned with our operating plans. Let's shift to the outlook. With a single quarter remaining in the year, we anticipate fourth quarter net sales landing between $8.5 million and $9 million, with gross margins in the mid- to high 30s, excluding any onetime extraordinary charges; that wraps up our prepared remarks. Operator, we're ready to take questions now.

Pardon me, is this coming through? My apologies — is everyone able to hear me?

Yes, Bobby, we can hear you.

All right. Fantastic. I figured I'd accidentally disconnected from you folks for a moment there; so I simply wanted to — before anything else, congrats on achieving such significant strides and sort of getting past the hump here. I was hoping to just grasp the remark regarding media impressions. Based on what you've seen, what sort of delay exists between that kind of effort and possibly a rebound and possibly a shift back toward expansion in your DTC? And after that I'd also like to tack on to that, how much longer do you figure the boost coming from Amazon might carry on through 2024?

Yes. Wonderful to hear from you and to be present here once more and thank you. We definitely value the acknowledgment of the — every bit of headway that the team has achieved has been a pleasant extended stretch here of 2 years to arrive at this stage, and it's truly excellent at present to witness the payoff of so many of those labors; and there's still plenty ahead of us, 2 of the items you're bringing up here are genuinely significant. First, regarding the DTC impressions, indeed, media impressions will help our entire operation, naturally. When it comes to DTC, as you're inquiring, I believe it's crucial to grasp, we are currently altering our marketing approach and definitely as we transition into 2024 too, it's increasingly upper funnel awareness. And that truly began happening over the course of this year, though I'd say it intensified during Q3 and will once more in Q4. Consequently we're directing a greater share of our marketing budget toward podcasts we're backing and a collaboration we've already set up with the Shawn Ryan show. Plus an additional one we're developing at the moment that we're enthusiastic about finalizing, ideally quite soon. And we're also collaborating with our PR agency to genuinely create an intensified and focused push to produce these impressions, whether paid or unpaid, and they're delivering remarkable work for us at present. Thus a portion of this, as you're suggesting, will be a longer-term gain for us, and we won't witness the instant effect; and that's the reason these outcomes — we're so thrilled about these outcomes since we returned to expansion here in Q3, and we managed it absent the same degree of that pay-to-play, one-to-one social media style of marketing that we had been employing previously which all of us recognize has grown extremely inefficient beyond a particular spending threshold. So we're reversing the approach — on a band. We're observing superior outcomes compared to what we expected straight away, and we do think, exactly as you're suggesting, that eventually, as that awareness accumulates, we arrive at a more, let's say, a more standard marketing approach and one that delivers returns across numerous quarters and years ahead. Now turning to Amazon — honestly, at this point, I'd say that during Q3 we were still facing somewhat of a headwind there, even though we managed to get inventory where it needed to be roughly 2/3 of the way through that quarter. Winning back buy boxes remains something of a struggle for us, along with certain other execution issues stemming from all the stock we carried through this year. We're working through every one of those, with more fashion on the way. I'd say we're approaching the cleanest Amazon picture we've had since this same time last year. So we're beginning to put spend back into that channel. We had cut spend dramatically; so once again, even with that reduction, we could still report growth this quarter, and that's exactly why this position feels so good, since we know that as we reintroduce spend efficiently going forward, we have an opportunity to supercharge some of the growth in these channels at this moment.

All right, that's helpful. And a fast follow-up here — it seems like scaling back that heightened trade spend during Q4 ought to benefit gross margins, plus the cash burn will decelerate compared with what we saw in Q3, I'd imagine. But you mentioned aiming for cash flow positive within 12 to 18 months, and I think that clock starts in October? And what pushes you toward one end of that window versus the other? Any specific items you're monitoring that could meaningfully change when that milestone arrives?

Yeah, fair question. Bobby, here's how I'd put it — our gross margin, consistent with what we'd budgeted when the year began, came in above 30%. What we still need is to layer on more than 5 points across the coming year. Doing so, clearly, moves us closer to that breakeven profitability we referenced. Beyond that, the primary catalyst ahead of us really comes down to 2 things. First is continuing to trim our G&A; several actions have been taken that are only just beginning to show up in the G&A line, and we'll capture their full value over the next year. Second, on marketing, I referenced the approach we've shifted toward. Through that shift, we're bringing marketing spend down in the direction of a more conventional CPG model; so marketing will decrease next year, and yes, that involves some bets regarding our capacity to market more effectively and efficiently — though we have an excellent team that I believe has surfaced insights enabling us to pull that off. So essentially, it's the blend of higher gross margin plus reduced G&A and marketing expense, combined with what we expect will turn into a progressively better topline narrative, since across the past 2 years, our larger online operation shrank more quickly than we could expand our smaller wholesale operation. That situation has essentially reversed. As noted, the business now sits at roughly 50 to 50, wholesale versus online; and wholesale is presently expanding at a quicker pace than online is contracting. That naturally turns into a flywheel working to our advantage. We're genuinely enthusiastic about what that might deliver for us next year.