Laird Superfood, Inc. Q2 FY2023 Earnings Call

Good afternoon and thank you for joining the Laird Superfood Incorporated Second Quarter 2023 Financial Results Conference Call. My name is Kate and I will be the moderator for today’s call. I would now like to pass the call over to our host, Trevor Rousseau. You may proceed.

Thank you and good afternoon. Welcome to Laird Superfood’s second quarter 2023 earnings conference call and webcast. On today’s call are Jason Vieth, Laird Superfood’s President and Chief Executive Officer and Anya Hamil, our Chief Financial Officer. By now everyone should have access to the company’s second quarter 2023 earnings release filed today after market close. It is available on the Investor Relations section of Laird Superfood’s website at www.lairdsuperfood.com. Before we begin, please note that during the course of this call, management may make forward-looking statements within the context of federal securities laws. These statements are based on management’s current expectations and beliefs and involve risks and uncertainties that could cause actual results to differ materially from those described in these forward-looking statements. Please refer to today’s press release and other filings with the SEC for a detailed discussion of these risks and uncertainties. With that, I will turn the call over to Jason.

Thanks, Trevor. Hello and welcome everyone. Thank you for joining us again today. Our results in the second quarter continue to demonstrate that we are successfully reigning in spending and driving our business toward profitability. Our cash burn was a record low of $1.4 million during Q2 and continues to decelerate both on an annual basis and sequentially versus prior periods. Our adjusted net loss in Q2 came in almost 50% lower than during Q2 of last year, benefitting from improved gross margins, but also driven by lower marketing and G&A spend. This is the result of our success in improving our marketing effectiveness, where our ROAS increased by 86% during the past year as well as the streamlining of our organization and other G&A spend. On the commercial side, our strategy to drive business in wholesale continues to pay off. Our brand has always been a great fit for the natural channel and in the 12 weeks ending June 18, 2023, our Laird Superfood growth in the natural channel was plus 69%, driven by a combination of distribution expansion as well as strong increases in our dollar sales velocity behind rebranding activity that we outlined on prior calls. During Q2, we also made significant investments into wholesale trade, the majority of which was in support of new items and other distribution gains at key customers, but also included the ongoing charges associated with the product quality event that we had discussed during our Q1 earnings call. We have an exciting lineup of products hitting shelves in Q3 this year with our biggest seasonal program to date and we have a great digital program lined up and will continue to execute retail support programs with our top customers. We also have a series of initiatives underway to further grow our brand awareness and to drive continued sales velocity growth at the shelf. Our DTC business saw solid results on the relaunch of both our pre-biotic daily greens and coconut water hydration product platforms. These two lines helped us to rebuild crucial gaps in our supplements portfolio, driving plus 48% sequential growth versus Q1 in that segment. Our greens products have quickly become a top seller on our DTC platform and we are pleased with the repeat rates and reviews that we are seeing. In June, we relaunched our hydration platform, which we believe is among the cleanest hydration products in the marketplace, harnessing the power of dried coconut water now in convenient stick packs and with electrolytes. As in prior quarters, we strategically reduced our DTC media spend by 67% during Q2 by cutting inefficient spending, thereby improving our overall ROAS by 86%. The quality event that we discussed during our Q1 call led to unexpectedly long out of stocks on Amazon during Q2. Whereas we were able to quickly rebuild our inventory positions in both DTC and wholesale, it turned out to be far more challenging with Amazon, where we needed to wait for Amazon to fully withdraw the product from all of their warehouses across the country, before we could finally begin replenishing our inventory. The outcome of this was approximately 12 weeks without any inventory of many of our top-selling SKUs. In fact, we are only now getting our inventory at Amazon back to full strength on a national basis and we expect this issue to finally be fully resolved by the end of Q3. The silver lining to this issue is that we were able to quickly pull back our marketing spend on this platform, netting a positive return of contribution margin dollars to the P&L. Turning now to operations, we are now more than 6 months into our move to an asset-light supply chain and we remain extremely satisfied with the relationships and results that we have achieved so far with our co-packing and distribution partners. Not only did our Q2 cost of goods sold improve by 12 points of gross sales compared to a year ago, but we also increased our production capacities by approximately 3 times that of the peak production in our own facility. At the same time, we added incremental sensory and quality assurance checkpoints to our manufacturing processes to ensure that our product is of the highest quality. Finally, I am pleased to announce the continued evolution of our marketing model from a low ROI pay-to-play digital marketing approach to a focused celebrity and PR led model that will seek to leverage Laird Hamilton and other likeminded health and wellness influencers to drive awareness and trial of Laird Superfood. To that end, we just announced a large partnership with Shawn Ryan and the Shawn Ryan Show, which we expect to enable us to reach a largely untapped demographic for our products. The Shawn Ryan Show reports an estimated 3 million listeners between Spotify and Apple podcast platforms, 1.75 million subscribers on YouTube, and nearly 1 million followers on TikTok. We believe that a majority of these consumers have had little to no awareness of Laird Superfood in the past and are excited to be working with Mr. Ryan to share the positive health benefits of our food with millions of new potential advocates of the brand. We look forward to being able to share other big marketing ideas in the near future. Now, let me turn the call over to Anya to discuss further the second quarter results.

Thank you, Jason. Net sales of $7.7 million in the second quarter of 2023 decreased 11% compared to $8.7 million in the prior year period. This was primarily driven by lower sales in e-commerce channels. Given the level of pullback in our marketing spend, which was a 6% to 7% year-over-year reduction of DTC specific work in media and a 30% overall marketing spend decrease, this decline was expected. These marketing cuts were strategic in nature in order to cut inefficient spend and reduce our customer acquisition costs to build a more sustainable direct-to-consumer business and improve our profitability in this channel. Additionally, our Amazon sales were negatively impacted by inventory out of stocks related to the previously discussed product quality issue experienced in Q1. We expect this out of stock issue to be fully resolved in the third quarter. The decline in e-commerce was partially offset by growth in our wholesale channel driven by distribution gains in retail, pricing, as well as velocity improvements behind new packaging and rebranding campaigns launched earlier this year. In the second quarter, we continued to build on the success we achieved in the first quarter from the strategic actions implemented last year. For the second quarter in a row, gross margin was in the mid-20s, with Q2 gross margin reaching 24.3%, a 120 basis points improvement sequentially over Q1 and a 610 basis points improvement compared to the same period last year. This year-over-year margin expansion is driven by our supply chain transition to an asset-light third-party co-manufacturing and fulfillment model and it would have been even stronger except for the investments we have made in trade promotions to drive incremental awareness and trials in retail stores. I expect the need for this level of support in our retail channel to continue in the third quarter and taper off towards the end of the year, allowing gross margin expansion to ramp up further into the 30% plus range in the second half of 2023, excluding any one-time extraordinary charges. Operating expenses for the second quarter totaled $5.5 million, a decrease of $1 million compared to $6.5 million in the year-ago period. On an adjusted basis, operating expenses decreased $2.4 million driven by lower marketing costs resulting from strategic cuts of inefficient spending, lower personnel costs and other general and administrative expenses following restructuring activities in 2022. The net loss as reported was $3.5 million for the second quarter of 2023, a decrease of $1.4 million compared to the prior year period. On an adjusted basis, the net loss for the second quarter was $3.3 million, approximately $2.8 million lower than a year ago. These improvements in the bottom line were driven by expanded gross margins and lower marketing and SG&A spend. A detailed reconciliation of non-GAAP adjusted net loss is included in our earnings release. Now, turning to our balance sheet and cash flow, we ended the quarter with $10.6 million of cash and no debt as we continue to conservatively manage our balance sheet. Cash burn in the second quarter was $1.4 million, the lowest the company has ever achieved, and less than half of the prior year period of $3.9 million. I anticipate third quarter cash burn to ramp up due to working capital needs to support a stepped-up demand in the back half, although our year-end cash forecast is on track with our operating plans. Moving on to our outlook. Despite the progress made improving the middle of our P&L, we had higher promotional trade spend in the second quarter as we increased support in our wholesale channel as well as inventory out-of-stocks that impacted our Amazon performance. We expect to resolve these issues during Q3, but we are updating our guidance to reflect net sales in the range of $34 million to $37 million and gross margins of 27% to 29% for the full year 2023, with second half gross margins exceeding 30%, excluding any one-time extraordinary costs. With that, I will turn the call back to Jason.

Thanks, Anya. While turnarounds are by nature an unsteady progression, I am pleased to be able to report our continued progress against the key strategic goals of improving our cost structure and slowing our cash burn, growing our brand in the wholesale business and improving our product portfolio. As we move forward, we will continue to maintain a vigilant focus on reducing our costs and slowing our cash burn. This concludes our prepared remarks. Operator, we are now ready to open the call to questions.

Thank you. The first question will be from Diana Tokar with Canaccord Genuity. Your line is now open.

So congratulations on the reduced cash burn. Maybe it gives you a nice runway it looks like but I am wondering what’s kind of a steady state of cash burn that you would expect over the next 12 months?

Hi, Bobby. This is Anya Hamil. Thank you for that question. Our cash burn was $1.4 million in Q2 and it was about $6 million in Q1. It was much higher in Q1 because of the Sisters exit, but also timing of account receivables collections, which was above $1.4 million that fell into Q2. So, if you normalize for that, it’s just under $3 million is kind of the normalized Q2 cash burn.

Thank you.

And I expect that to continue in that range but slowly reduce throughout the back half of the year.

Okay, great. Thank you. And then I am wondering, just understanding the Amazon dynamic as you restock in that channel, so you guys benefit on a sell-in basis or sell-through?

Hey, Bobby, it’s Jason. I can take that, so let me give a little bit more color on what’s going on with Amazon. So in Q1, we had a quality event, as you know, that caused us to go out of stock as we recalled all of the products that had the rancid coconut powder inside of it that we had received from our supplier. And as we pulled that back, we were able to quickly get the product out of the wholesale channels. By going to independent channels, we got everything out of their warehouses quickly. And then we reached into each one of the retailers that had been shipped and we were able to withdraw that as well. And some of that you are seeing, we continue to get the final bills now as we went through that product, but we allocated for that for the most part back in Q1. On the DTC channel, it was even easier because, of course, we control all that inventory and so we simply cordoned that off and then reran the product and put it into our warehouses. However, we were surprised quite frankly within Amazon. The challenge we had is first, we needed to have all the products withdrawn from the Amazon warehouses. We would have thought of that as a series of distribution centers that we had shipped to, but Amazon subsequently ships that down to smaller distribution centers so that we can all receive our orders overnight or within 24 hours through Prime memberships, etc. Withdrawing out of all of those warehouses turned out to be a slow affair. You can’t start restocking until they have withdrawn from every warehouse and removed the product out, because we had several SKUs impacted, it took a long time—much longer than we anticipated. You can’t start to restock until they are all out either. So, as those were coming back, we were waiting to send, we had the replenishment order, but we couldn’t send it until the product was out. Anyhow, it just ended up being a lengthy process that knocked us out for about 12 weeks. The resulting impact of that is that we were out of stock on our top items for almost 3 months; we went dark. The good news is, we knew this was happening, and we were able to adjust our spending accordingly. We pulled back on the marketing spend. You saw that flow back in as we talked about with the EBITDA and cash benefit that we received, the slowdown that we had and that the losses there. But what it does mean is we can go back and rebuild cohorts. So, to your question on sell-through, we are now finally getting to the position where we're getting the last of that inventory out. We expect to be fully in stock over the course of Q3. It is still impacting our business a bit at this point. But we have pulled back our Amazon marketing media dollars accordingly. Thus, we are in a position now where, from a contribution margin perspective, we are not being hurt. However, from a sales perspective, unfortunately, we are delaying it a bit as we wait to get fully back in stock. I don’t believe there will be any long-lasting impacts. Amazon is essentially a pay-to-play model where the media you put in will generate the eyeballs and typically the conversion that you would expect. We have seen those conversion metrics where we need them to be; we just can’t spend at this point because of the out-of-stocks we have had. I anticipate by the end of Q3—before the end of Q3—that we will have that business humming again.

Okay. Great. And then just quickly on the natural channel growth, so you guys had some nice growth there. I am wondering, if you can remind us where the ACV is for you guys in that channel, as that is a measure of the amount of headroom left to go?

Yes. It’s a great question. It varies across items, of course, but generally, you can think about our liquid creamers in the 60% range and our powder creamers in the 40% range. We still have a lot of opportunity to fill out the breadth of the portfolio in both of those two lines. We also have a number of other products that are really gaining traction in the natural channel as well, bars most notably recently, and our supplement lines are also starting to gain momentum. They are barely on the radar at this point, Bobby. There is a strategic question for us as we go forward. I would tell you, we are doubling down into the natural channel as we go forward to close those distribution gaps with our broker and those retailers, really filling out our portfolio and then start to promote the family line accordingly. That’s why we are seeing such great lift right now. We have had tremendous promotional responsiveness as well as those distribution gains, and the result has been some really strong growth in that channel.

Great. Thank you.

Thanks, Bobby.

Thank you. The next question will be from the line of Alex Fuhrman with Craig-Hallum. Your line is now open.

Hi guys. Thanks for taking my question. Just looking at the numbers here, I mean even with the lower guidance for the full year, I mean you are still implying a nice little sequential build in revenue in the third quarter and fourth quarter relative to what we saw in the first half of the year. Can you talk about what’s going to drive that and to what extent we might expect that growth or some of those drivers to persist into next year?

Hey, Alex, how are you doing? It’s great to hear your voice. Good question. I’m glad to talk about this a little bit, because we are really excited about the back half as well. I would tell you there are a number of initiatives really that are driving that. One has continued expansion within especially that natural channel. But we have a really big seasonal program that’s launching in natural and in club, but especially in natural and club will be carrying that. We have expanded our pumpkin lineup, as well as our holiday later season lineup, peppermint mocha, as well. That pumpkin lineup, we really expect to be a big one for us with additional shippers and displays that we have picked up and a couple of new products. We also had some really exciting movement on our daily greens. You will recall that we reformulated that to a much better tasting product. The consumer response has been outstanding. We continue to drive that online. It’s quickly become our top SKU online over the course of just the last few months. We are seeing tremendous uptake from consumers in that and are really excited about the possibilities as we go forward there. Additionally, with Amazon coming back to the question we just answered from Bobby, we expect to see Amazon inventories replenished. The sell-through will really pick up again as we go into late Q3 and coming out of Q4. We have got some really exciting promotions and merchandising opportunities that we are executing at retail as well. Really, we expect it to be a nicely rounded incremental increase basically for the rest of this year.

Okay, that’s really helpful. Thanks, Jason. Then it looks like you guys have taken some price increases over the past year and year-to-date. Has there been any sort of material reaction, customer-wise, to the price increases? Have those been enough to cover your rise in product cost?

Yes. Great question. I would be remiss if I didn’t mention one big driver in the back half as well. That wasn’t on my notes, because I was waiting to ensure we got the press release out. But we just entered the first of what we expect to be several large marketing deals that we are exploring right now. We are partnering with the Shawn Ryan Show, which we believe will help us to tap millions of new consumers that are outside of our core focused demographic today. This is very much a fit within our demographic, but they are consumers we have not been targeting as well as we could have. So, I think that’s going to be a really exciting opportunity for us as we go forward. You will see more on that. Shawn has been just a tremendous partner to us already, even as we have just started this up, and is a believer in the products and what we are doing here with the company. We are really excited about that. Regarding the price increases, I would tell you, last year we mentioned we needed to move price; we hadn’t touched it for many years. We still believe that we are delivering incredible value relative to the products that we are putting out. We are in a position now where we expect gross margin, as we have mentioned before, to eclipse the 30% rate in the second half of this year. So, we are getting to a place where we have a business that can return gross margin dollars as we sell incrementally in a way that starts to support the marketing. That’s the exciting position we talked about last year and probably seemed far off back then. Now through a couple of targeted and smart price increases, we have been able to hold the line and cover the COGS increases that had taken place through the pandemic. We are now back in a good position on that, Alex. I think as we go forward now with the transition made with the re-launch of our liquid products, we are going to see gross margins rise above 30% and a very different business model in place.

That’s great. Thank you very much, Jason. Appreciate everything.

Yes. Thanks, Alex.

Thank you. At this time, there are no additional questions remaining. I would like to pass the call back over to the management team for closing remarks.

Thanks everybody for joining today. It’s an exciting opportunity for us to get back with you every quarter to share the progress we are making against the strategy we outlined that’s really reducing our losses on the P&L and really holding on to our cash position to create optionality for us into 2024 and 2025. We feel like we are taking the right steps here. While we continue to tweak the business and, as you see with some of the call down on revenue, we are making choices that hold on to cash in a smart way and really position ourselves to be able to grow some of these new exciting lines that you will see in the second half of this year. Thank you for joining us and we look forward to sharing additional updates very soon.

That concludes today’s conference call. Thank you for your participation. You may now disconnect your lines.