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

Thanks, and good afternoon, everyone. I'd like to welcome you to the earnings conference call and webcast for Laird Superfood covering both the fourth quarter and the full year 2023. Joining us today are Jason Vieth, who serves as President and Chief Executive Officer of Laird Superfood, and Anya Hamill, our Chief Financial Officer. At this point, all of you ought to have the ability to access the earnings release for the fourth quarter and full year 2023 that the Company filed following the market's close today; you can find it in the Investor Relations area of the Laird Superfood website, which is located at www.lairdsuperfood.com. Prior to getting started, I want to point out that management might deliver forward-looking statements throughout this call, made within the framework of federal securities laws. Such statements rest upon management's present expectations and beliefs, and they carry risks and uncertainties that might lead actual results to vary materially from what those forward-looking statements set out. For a thorough conversation about these risks and uncertainties, kindly consult today's press release along with other documents filed with the SEC. Having said that, I'll hand things over to Jason.

Appreciate it, Steven. Good afternoon, everyone, and thanks for being with us today. At this point, having reviewed our Q4 2023 results, I trust you'll concur it isn't an exaggeration to describe Laird Superfood as having delivered an outstanding quarter. In Q4, our team achieved what we call a financial trifecta: growth in sales, profitability, and cash flow — with the last two happening for the very first time since our company began trading publicly. What we're reporting now is simply the most recent milestone along a fairly consistent trajectory of gains dating back to when I initially addressed all of you 2 years ago. And I take pride in noting that because of these gains, we've been able to eliminate the going concern disclosure from our financial statements. That reflects substantial confidence in both our financial standing and our future prospects, and it gives our team even more reason to run this business with the utmost professionalism and assurance. Let me begin with perhaps the standout achievement in a quarter packed with them. In Q4 2023, we managed to bring our DTC business back to growth of plus 10% compared with the equivalent quarter in 2022. We pulled this off even as our marketing spend fell by 54% over that same comparison window, which clearly indicates our marketing effectiveness metrics climbed sharply yet again in Q4. This marks our first quarter of growth in that channel since roughly 2 years back, after the iOS changes disrupted the entire DTC sector, and we got there through better-targeted outreach and messaging, by putting emphasis on our strongest products, and by building improved bundle and cross-sell offers. A major factor behind this win was growth in our subscription revenue, which rose to 46% of our overall DTC net sales base — something I'd argue shows consumers see the value in consistently supporting their health through nutrition, and that our coffee, creamers, greens, and adaptogenic mushroom products suit consumers perfectly for building what we here at Laird Superfood call the healthy daily ritual. Beyond turning more customers into subscribers, we also succeeded in Q4 at boosting net sales from new DTC customers by 76% year-over-year, powered by our collaboration with the Shawn Ryan Show and other well-executed top-of-funnel marketing efforts. I'm also glad to share that our average DTC order came in above $57 during Q4. With numbers like these, it shouldn't come as a shock that our brand affinity with consumers remains very strong, with our Net Promoter Score continuing to sit in the mid-70s and our customer satisfaction score at 4.9 out of 5. A significant share of our e-commerce activity also takes place on Amazon. And on that front, I'm pleased to say we've kept making consistent headway toward restoring growth in that business following the difficulties caused by the quality event we ran into about a year back. After that incident, roughly half a year passed before we could completely pull back and restock our coffee creamers on Amazon. Sales dropped noticeably throughout that period. In Q4, however, once our inventory position returned to typical levels, we managed to run our marketing program on the platform and get back on a growth trajectory. Net sales via Amazon hit $1.76 million in Q4, up 38% from Q3 of '23, even though direct media spend on Amazon fell back 22% over the same stretch; that speaks to the strength of the cohorts we've built on this platform, helped further by a 26% lift in subscription revenue, which now accounts for close to 1/4 of Laird Superfood net sales on Amazon. With those 2023 headwinds now lapped in the first half of this year, we anticipate solid Laird Superfood performance through Amazon for all of 2024. Moving to wholesale. I'm happy to report that we keep making consistent headway growing distribution in this strategically important channel. Up to now, our wholesale operation has been mostly focused on the natural channel, where we've kept up strong momentum building our brand with health-driven consumers. In 2023, our clubs of distribution in natural closed the year up 24% compared with the close of 2022, fueled by wins at large national retailers and among smaller independents that matter greatly to shoppers in this channel. For Q4 specifically, I'm glad to announce that we landed national distribution with Whole Foods for our shelf stabilizers, which pairs with the full national distribution we'd recently secured on our core item liquid creamer portfolio. Those items started shipping a few weeks back and bring us to eight items in distribution within Whole Foods nationwide. I'm just as happy to share that we've also kept up our success at Sprouts Farmers Market! who has been a terrific partner to our brand and where we now carry 22 items in distribution, one of our most complete build-outs with any retailer in the country. I'm also pleased to share that in Q4, we became the number one brand within the coffee category of sprouts, pulling ahead of the likes Beats, Full Approved, Meltdown, Death Wish and all the other brands in this category; we believe this is only the beginning of exciting developments ahead as we keep strengthening our brand and sharing our health and wellness portfolio with consumers nationwide. Looking ahead from here, we'll pursue an expansion strategy into additional categories in the natural channel and start prioritizing growth in distribution and the conventional channel, where we presently have very little distribution in a very large market. Beyond the commercial wins we're seeing, we also recognize none of it would be possible without a supply chain as flexible, responsive, and adaptive as ours. In the past year, our supply chain shut down our own Oregon facility, found co-packing distribution partners, and relocated our whole business in roughly 2 months. Through a quality event in the first half of last year, our supply chain team performed almost perfectly, rapidly refilling raw material inventory and keeping most key suppliers stocked during that difficult period. Now that our powder products have fully shifted to an asset-light supply chain model and our liquid creamer transition is complete, we reached a gross margin above 40% in Q4. Our supply chain is agile and flexible, designed to underpin future growth. Looking ahead, we still expect gross margin to stay in the high 30s. Cost management isn't limited to the supply chain — it applies to operating expense too. In Q4, we brought total year-over-year adjusted OpEx down from $6.1 million to $3.7 million, a 38% decrease in Q4 of 2023, achieved through broad-based cuts to OpEx spending that we'll keep managing tightly going forward. Lastly, a few points on cash: our cash position rose by $280,000 in Q4 2023. Given working capital requirements and planned investments, we don't expect positive cash flow every quarter. Still, we believe our planned growth rate in 2024 and beyond may soon let us generate cash supporting operations. I'll also repeat that we removed the going concern disclosure from fires. We're proud of that recent change and believe that, with our forecast growth profile and gross margin outlook, Laird Superfood is now positioned to carry a stronger financial profile in future years. With that, let me hand the call to Anya to go through the fourth quarter results in more detail.

Thanks, Jason. In Q4 of 2023, net sales came to $9.2 million, which was up 2.6% versus the same period a year earlier — also $9.2 million — and level with Q3 of 2023. As Jason mentioned, growth during the fourth quarter came from both e-commerce and wholesale. E-commerce accounted for 66% of total net sales and rose 2% year-over-year, with DTC up 10% leading the way; partly offsetting those gains was a 12% year-over-year drop in Amazon sales — a decline that was substantial yet narrower than in earlier quarters, and one driven by cutting Amazon media spend 59% as we work to make that platform more profitable. Wholesale made up 34% of total net sales and grew 5% year-over-year, reflecting ongoing gains in club and expanded distribution within the natural channel, plus better product velocity tied to refreshed packaging that debuted in Q2 of 2023. In the fourth quarter, gross margin climbed to 40.4%, a 45-point gain year-over-year attributable to charges tied to Sister's access activities in Q4 of 2022. Adjusted gross margin was up 21 points versus a year ago and 10 points sequentially from Q3 of 2023, helped by ongoing benefits from the shift to third-party co-manufacturing and distribution. Reaching a Q4 gross margin of 40% marks a milestone that backs our belief we can produce margins in the upper 30s over the next several quarters. Operating expenses for Q4 of 2023 came to $3.7 million, down $11.6 million from $15.3 million a year earlier. That decrease stemmed from lab costs and expenses tied to leaving Sisters in Q4 of 2022. Setting aside onetime charges, operating expenses fell $2.4 million, largely from lower marketing spend — the result of strategic cuts to inefficient spending — along with reduced people costs and other G&A expenses after the 2022 restructuring activities. I'm happy to share that in the fourth quarter, for the first time ever for the Company, we posted positive net income and positive cash flow. Reported net income was $0.1 million in Q4 of 2023, a $15.7 million improvement over the prior year period. Net cash added during the quarter was $0.3 million, versus cash burn of $3.2 million in both Q3 of 2023 and Q4 of 2022. Margin expansion and big cuts to general and administrative costs drove these results, showing the strong progress we've made in controlling costs and moving the business toward profitability in future quarters — though we don't expect that to happen in a perfectly linear way. We closed Q4 2023 with $7.7 million in cash and no debt, as we keep managing our balance sheet conservatively; we now expect to have sufficient cash to fund operations into 2026. Also, the going concern wording that appeared in our earlier quarterly report will not be part of our annual report on Form 10-K. Plus, following numerous discussions with a number of vendors about whether we could arrange an asset-backed loan, we feel good about the prospect that this kind of facility is within reach, in the event we conclude that extra funding would be desirable to back our operations or growth. The adjustments we've made to how we run our business have sharply bettered the fundamental economics and made us more competitive. Looking ahead, we'll keep concentrating on getting the most out of our most profitable commercial growth opportunities, while staying firmly focused on ongoing cost so as to move the business toward profitability and preserve our cash position to fund future operations and other opportunities that might arise. Here is our guidance for full year 2024. Net sales should land somewhere around $38 million to $40 million, which equates to growth of 10% to 15% versus 2023. Gross margin should widen to roughly 37% to 40%, not counting any onetime extraordinary charges, which works out to a 7- to 10-point gain against 2023; with that, I'll hand the call back to Jason.

Thank you, Anya. I realize I sound like a broken record each quarter, yet I want to stress once more my conviction that brighter days lie ahead for our Laird Superfood business than ever before. On this occasion, please bear with me as I lay out the reasoning behind that view. To begin, the scores we receive on Net Promoter and customer satisfaction reveal just how powerful our brand is and how much trust Laird Superfood consumers place in it — virtually any major food company out there today ought to be jealous of that. Next, our lineup of products sits in a strong spot to ride the health and wellness trends gaining ever more weight both inside the U.S. and abroad, which our Q4 volume and sales growth make clear. Crucially, our gross margin has reached parity with plenty of the leading players in our sector and can deliver robust cash generation as our business keeps expanding. Last, I would bet that our team remains just as steady, capable, driven and committed as any company of comparable size in this industry; that wraps up our prepared remarks. Operator, please go ahead and open the line for questions.

Congrats on the turnaround toward a much stronger performance — that's genuinely great to see. So I suppose my first question is simply this: when we look at the growth you've guided to for this year, what level of OpEx growth would be needed to back that guidance? Online sounds like it's recovering well, and clearly your DTC spending is far lower now. So I'm just wondering, are you putting more money into accessing conventional? Or can you actually generate a lot of operating leverage this year?

Yes. Bobby, that's an excellent question. Thanks, incidentally — I appreciate that. Obviously we're very excited about this quarter and how it landed. Yes, good to speak with you once more. So look, the truth is — and you and I have talked about this too, so I know this won't catch you off guard — we assembled this team specifically so it could scale from here, and we don't think we need any meaningful additional OpEx. A few line items in the P&L will be variable, and broker commission is among them; so as that portion of the business keeps expanding, we'll incur extra brokerage fees. Conversely, as Amazon keeps growing, there's a variable selling cost tied to that too. So those two sales organizations will need to scale as we grow. But honestly, Bobby, our organization was built to carry not just this brand but the piggy bar business as well. And frankly, as I've often told them, we're now in a position where, with everything we've accomplished, if we made an acquisition at some point or scaled the business substantially from here across the next 12, 18 months, we wouldn't really need to make any additional investments to do it.

That's fantastic. Truly wonderful to hear. And a fast follow-up regarding the source of that growth. Clearly, you folks called out daily creams and performance mushrooms as contributors to the DTC expansion. And I'm curious about how the brand is perceived overall — do you begin shifting further into other performance-focused items, or perhaps ready-to-drink shakes? Or might there be additional adjacent segments that capture Laird's athletic strength and something more performance-driven where the brand could genuinely take off?

Yeah, that's definitely something our team has been talking about these past few months. As you all know from the prior couple of years, we found ourselves in a spot where we truly needed to fix the business — it was headed toward running out of cash quite fast two years back. So the previous two years have centered on rebalancing the portfolio, correcting our mix, and clearly resetting the cost base. Not just manufacturing and distribution expenses, but the entire G&A and marketing too. So we're quite near completion on that, Bobby, I'd say. We're still fine-tuning and spotting some opportunities ahead within that core business. But now, certainly, we're positioned to do two things we couldn't do before, since our gross margins, as you remember, were so weak that expanding would only lose more money. Well, that's finished. Our gross margin now approaches that of best-in-class manufacturers in food. The more we sell, the more cash flows to the bottom line. So the sales team is absolutely committed, laser-focused on bricks-and-mortar opportunities, and we've had — as I said on that call, and I realize the audio quality wasn't good, hopefully it's improved now — but we've had incredible calls during 2023 that we think will lead to added distribution ahead, just like always. But we've managed to be forceful with those sales calls because we now possess the margin to fund expansion. The other point, more directly answering your question, that we're starting to concentrate on is: how do we broaden and keep growing our heritage in superfoods? For a period there, we turned into a creamer brand. And we still do have an excellent creamer business. Honestly, the finest creamer product available, the purest, best tasting, most nutritious one on the market. Yet we also have this incredible greens product, which I'd say is the best tasting, most nutritious in that category too. And we have these performance mushrooms, mushroom products, adaptogenic mushroom products that have really taken off. And honestly, those 3 items specifically, helped along by several other segments, bars being one of them, have been doing the heavy lifting for the whole portfolio. The 3 I mean are greens, adaptogenic mushrooms, and creamers. That said, it gave us a wider reach; it made us strong enough to truly stand as that superfoods brand, no longer merely a super-creamer brand, but a superfoods brand, and it creates the chance to move into certain more performance-driven segments in RTD, and others definitely sit on that list, Bobby.

Congrats on all the milestones you reached during this quarter. What I want to ask about is the fact that e-commerce is growing again, which definitely looks like a significant milestone. And assuming I'm reading your remarks right, it sounds like lairdsuperfood.com did particularly well. Could you discuss what's behind that? I know you brought up some of your newer items that are helping raise average order size. Has that been the main factor? It appears you've also been putting more emphasis on subscriptions. Any detail on that would be useful, plus what we should look for with lairdsuperfood.com for this year and after?