Earnings Call Transcript - LSF Q2 2021

Operator, Operator

Thank you for standing by and welcome to the Second Quarter 2021 Earnings Conference Call and Webcast for Laird Superfood, Inc. I would now like to turn the call over to Mr. Reed Anderson of ICR to begin.

Reed Anderson, ICR Representative

Thank you. Good afternoon and welcome to Laird Superfood's second quarter 2021 earnings conference call and webcast. On today's call are Paul Hodge, Chief Executive Officer; Valerie Ells, Chief Financial Officer; and Scott McGuire, Chief Operating Officer. By now, everyone should have access to the company's second quarter earnings press release filed today after market closed. This is available on the Investor Relations section of Laird Superfood's website at www.lairdsuperfood.com. Before we begin, please note that all the financial information presented on today's call is unaudited and during the course of this call, management may make forward-looking statements within the meaning of the 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 the risks that could cause actual results to differ materially from those expressed or implied in any forward-looking statements made today. And now I'd like to turn the call over to Paul Hodge, Chief Executive Officer of Laird Superfood.

Paul Hodge, CEO

Thank you, Reed, and aloha everybody. It's a pleasure to be speaking with you regarding our second quarter. Before we begin the discussion of second quarter results, I'd like to start by taking a few minutes to address the upcoming leadership transition that was announced in conjunction with the earnings release this afternoon. After careful consideration, I've decided now is the appropriate time for the company, my family, and me, for me to start transitioning to a non-executive role. I will be stepping down as President and CEO once we have identified my successor. After the transition, I'll remain on the Board of Directors and remain a major shareholder, keeping me closely involved in realizing our long-term vision for the company. Most of you know my deep unwavering passion and commitment to making Laird Superfood successful for everyone involved: shareholders, employees, friends, including my close friends and co-founders Laird and Gabrielle, my family, and a ton of Sisters Oregon where we have become an integral part of the local economy. It's been a privilege to lead this company for the past six years and I'm extremely proud of all we've accomplished together in such a short period of time. By bolstering the expertise of our team, it only enhances our competitive positioning and makes the long-term potential even more compelling. Now I'll start with a brief summary of who we are and what we do, as well as provide a review of Q2 highlights or key growth drivers. Laird Superfood is a mission-driven, high-growth, plant-based natural food manufacturer positioned to be a leader among better-for-you brands in the $759 billion grocery industry. Our business is Omni-channel but with a best-in-class native online platform. At Laird, we believe that better food leads to a better world because when people are healthier and feel good, they make better decisions. Our products provide the sustained energy and nutrition that we need to perform from sun-up to sun-down as part of our daily ritual. In addition to delivering great taste, our products are convenient, easy-to-use, and affordable, incorporating sustainable and ethical practices through all phases of our supply chain from farm to fork. Now on to the second quarter results. Total sales increased 64% to $9.80 million driven by continued momentum in our D2C business, strong results in grocery, and a solid contribution from new products. Online sales were 57% or $2.1 million, a 94% growth in D2C year-over-year, despite the prior year period including a meaningful consumer shift to online purchasing in light of COVID. As you know, we are native digital, and our strength continues to prove itself with 63% of total net sales in the second quarter attributable to this best-in-class online platform. Key metrics in our online business remain very positive underscoring the competitive strength of our model. The conversion rate remains three times the CPG industry average and over two-thirds of our D2C business is recurring. Items on subscription increased 77% and unique active subscribers increased 57% from the year-ago period. Retention metrics continued to climb with a 15% improvement from Q2 2020 for all the company's history. We've seen a 20% improvement in second order rates and a 2020 cohort reorder rate compared to the 2019 cohort. Finally, average order value, or AOV, continued to improve as well, rising 30% year-over-year and is now on par with our pre-free shipping AOVs. Our results in wholesale illustrate a growing strength and solid base we continue to build aggressively. In the second quarter, wholesale sales increased 77%, totaling $1.4 million despite our club business remaining level and the lack of industry trade shows, which have historically been a key source of opportunity creation for our company. Club sales are inconsistent, but we're seeing strong momentum leading into Q3. Liquid sales increased 271% on a year-over-year basis and accounted for approximately 60% of the dollar increase in wholesale revenues. This growth is driven by the strong demand for our products, positive trends on shelf, and new door wins from the prior year period, continuing to reduce spoils and waste for refrigerated products and dramatically improving fill rates to the mid-90s in late Q2 compared to the 30% to 60% fill rates we experienced prior to taking over logistics for that product. New door placements for refrigerated liquid creamers in the second quarter include vegan yolks, and we're now under approximately 2,600 total doors in this product line. Equally important is the continued growth of our shelf-stable business. Excluding club sales, our shelf-stable business grew 42% this last year, reflecting our expanded offerings for both coffee products and powder creamers. From a mix standpoint, we experienced growth across all categories during the second quarter. Creamers grew 27% year-over-year predominantly due to gains in the refrigerated liquid creamers. Hydration and beverage-enhancing supplements increased 54% due to our prebiotic daily greens and the strong contribution from our Renew Rest & Recover product in May. Coffee, tea, and hot chocolate increased 36% due to our foundational products, complemented by gains in our new functional coffees as well as regular coffee. And finally, our Harvest snacks and other food items drove an additional $1.3 million in incremental sales. Our Harvest snacks and other food items include our Pili Nuts and Harvest Dates, our recently launched brownie and cookie baking mixes, and our newly acquired Picky Bar pipeline, including bars, oatmeal, and granola. We view the performance of these new categories as strong evidence that our brand platform approach is continuing to resonate with existing customers and is also introducing new customers to our brand. Regarding the integration of Picky Bars, we are pleased that everything remains on track. We saw strong sales of the new products in the second quarter, and we continue to make progress on our rebranding efforts and systems integrations. We are, of course, learning new lessons as we go which we plan to implement in potential future acquisitions. Overall, at this point, we are very happy with our progress. Despite the significant progress across most topline drivers and our commitment to achieve shelf life extensions and waste reductions for our refrigerated liquid creamer, we did encounter a setback related to our shelf-stable liquid creamer, which we viewed as an important revenue driver for the second half of 2021. At the very end of June and in early July, we received new information from our co-packer, indicating that due to lack of industry capacity and strong demand from their existing customers, they would not be able to deliver our product as planned in September. Instead, it will now be pushed back until 2022. We were also informed that the co-packer would require us to modify our formula to include ingredients that are inconsistent with our values, compromising our positioning of the Laird Superfood brand. Accordingly, we will see a delay in the launch of our shelf-stable liquid creamer until the co-packer capacity becomes available. In addition, we have pivoted to alternate flavor profiles and formulations still meeting our high standards. We had planned to move forward with our coconut-based creamer first. However, given the new information, we'll be prioritizing our oat and nut-based creamer as our first shelf-stable launch. We have seen solid performance from our oat and nut products since launching our powder creamer in this high-growth category, including new customer acquisitions. We believe we can produce this product more easily to our standards, and we are still very optimistic that the shelf-stable creamer will be a strong growth driver for us in both wholesale and e-commerce. Unfortunately, with the recent developments, it will most likely be delayed until 2022. While the delay in the shelf-stable creamer is frustrating, remaining true to our mission and values is critical for maintaining the integrity of our brand and driving long-term value for all our stakeholders. On that note, a quick update on our ESG initiatives: last time we discussed our ESG initiatives, we highlighted three incredibly exciting commitments. Together, we can meet the goal of donating 1.5 million meals to Feeding America, reducing the impact of our online sales by building a carbon-neutral last mile with sustainability projects in First Environment, and supporting our critical care workers and first responders during the pandemic with Houdini. Regarding Feeding America, we are on track with our pledge to donate 1.5 million meals, having already secured over 500,000 meals. As for our sustainability projects, we are planting 100,000 mangrove trees across 900 hectares over 10 years to achieve our goal of a carbon-neutral last mile for online orders. Additionally, with Houdini, we recently completed our first activations by giving over 3,000 cereal bundles at no charge to critical care workers and first responders. This effort was financially supported by our partner Danone. Beyond these larger projects, our internal sustainability team has been constantly working on various initiatives that positively impact every aspect of our company. These efforts align with our mission and values, and we are very proud of them. To summarize, in Q2, despite some challenges, we delivered strong growth across multiple channels, expanded our portfolio, introduced new innovative products, further broadened our customer base, and began integrating Picky Bars into the organization. Our brand platform approach continues to demonstrate its strength, and our build-up platform now spans multiple large categories. We believe we are only just beginning to scratch the surface of what Laird Superfood is capable of long-term. With that, I'll turn the call over to Scott to talk about operations.

Scott McGuire, COO

Thanks, Paul. Our top priorities remain people safety, keeping our customers' orders filled, and positioning ourselves to handle greater complexity and revenues. We're also making great strides in our Picky integration and executing flawlessly on nine new products. We have developed a robust process for getting all of these done. As I shared in the last couple of quarters, our approach encompasses manufacturing more in-house, doing so more efficiently, and moving smarter and faster within the company. I will briefly touch on each of those aspects. Manufacturing more in-house allows us to control costs and quality while creating flexibility to respond to our customer's growth requests and the ever-changing supply chains. I'm proud of every person on our team who rallied to produce in-house six new product lines. This approach is what we call going vertical, and we are applying it in several areas. As for making operations more efficient, we focus on key automation projects for the third and fourth quarters, and we continue to implement inflation offsets through ongoing improvement projects. Additionally, with many companies struggling with raw materials and transportation, our year-long strategy to build inventories during pandemic uncertainties has paid off. As a result, we achieved nearly perfect order compliance for our second quarter. In terms of moving smarter and faster, we have extended our fresh liquid shelf life by 33%. Furthermore, we reduced manufacturing rates and spoilage by 50%. In May, we initiated a form of vertical integration by taking over the delivery to our distribution centers, thereby nearly eliminating store-level out-of-stocks. Because of our success, we are aggressively pursuing additional vertical moves in other distribution channels, which we anticipate will create benefits in our P&L in late Q3 or early Q4. Regarding direct-to-consumer and free shipping, we are not only continuing our mission of attracting new customers but also raising our average order value, leveraging it against our parcel costs. Going forward, we are optimistic about additional subscription consolidations and are seeing promising early returns on how Picky products mix with various parcel configurations. Finally, we have agreed to a partnership with two industry leaders in order fulfillment, who will implement our next-level execution software for a vertically integrated direct-to-consumer business. This will both support our new on-campus customer fulfillment center due to open in the fourth quarter. From day one, we've always emphasized authenticity, values, our culture, and our people, along with growth. Our team is one of our greatest assets, and we want everyone to feel that this is their company. In that light, the acquisition of Picky Bars is exciting not only from a mission and product quality standpoint, but it's also thrilling because of the talent they have brought to our organization. Now let me turn the call over to Valerie Ells, our CFO.

Valerie Ells, CFO

Thank you, Scott. The growth in our online and wholesale channels were key factors in our second quarter performance, driving a 64% year-over-year increase in net sales to $9.2 million. As Paul highlighted, metrics in our DTC business remain robust, with 94% growth coming from both core and new products. We are pleased with our continued improvements in retention, subscription, and average order value performance, among other metrics. In wholesale, we continue to broaden our customer base and are seeing traction in grocery. Brand and quality are key factors helping to grow our door count and points of distribution in grocery. It's also important to note that we have made significant progress improving results within our existing customers. For example, velocities in our liquid products have improved significantly over the past several months, nearly doubling since the beginning of the year. Additionally, we've greatly reduced our liquid creamer-related chargebacks stemming from shelf life issues by achieving extended shelf life and significant operational and logistical improvements late in the second quarter. On a sequential basis, Q2 gross margin was down 120 basis points, primarily reflecting elevated wholesale freight expenses. While the margin benefits of optimized DTC shipping expenses and reduced liquid creamer-related chargebacks were largely offset by the sell-through of higher-cost inventory. Operating expenses for the second quarter were $8.5 million, accounting for 92% of net sales, compared to $4.3 million or 77% of net sales in the same period last year prior to becoming a public company. General and administrative costs represented 45% of net sales in the current quarter, compared to 33% a year prior, with over 70% of the incremental expenses being attributable to public company factors. Non-cash stock-based compensation accounted for 35% of the increase compared to the prior year period. The second quarter further included deal-related costs, and the creation of a reserve for prepaid inventory, both expected to be non-recurring. On a sequential basis, G&A costs remained relatively stable but improved as a percentage of sales from 49% in Q1 to 45% in Q2, and 41% excluding the previously mentioned deal in inventory reserve items. Sales and marketing costs represented 43% of net sales in the second quarter, unchanged from the year-ago period and down slightly from the sequential quarter at 45%. We expect to leverage our operating expenses as our business significantly scales in the future. With over $43 million in cash and investments and no debt, our balance sheet remains strong, providing sufficient capital to support our growth initiatives. The cash changes from Q1 to Q2 reflect normal operating activities and the net use of approximately $10 million to complete the acquisition of Picky in early May. Related to our full-year 2021 outlook, we noted that achieving our top-line revenue targets would depend on several priorities: optimizing our refrigerated liquid creamer in the first half of the year; launching a shelf-stable liquid creamer option in the second half of 2021; introducing timely and innovative new products with strong online performance; adding wholesale doors, especially with larger chains using our liquid creamer as an entry point; and continuing to earn shelf placements for more products at larger partners, increasing the value of those doors while fostering greater brand awareness. Paul discussed some progress on these initiatives, but I will briefly revisit them again now. As for our refrigerated liquid creamer optimization, we are pleased to have executed on this priority. Late in the second quarter, we achieved a 60-day shelf life which opens our refrigerated products to expanded future store placements and helps reduce our spoils and waste. Turns on shelf are strong and continue to improve, and we remain optimistic about this product's ability to contribute to grocery growth moving forward. We also had a significant number of new product launches in Q2 and we are excited to continue sharing those stories with consumers in the second half of the year. In terms of earning more product placements on shelves with existing partners and winning new wholesale doors, we have had some meaningful wins this year, including placements in Target, Harris Teeter, Wakefern, and Stater Bros in the U.S., Yeswellness in Canada, as well as expanding item placements in CVS, Whole Foods, Sprouts, Safeway, and others. We expect to have continued wins in Q3 and Q4. However, we have been informed by various retailers that they have canceled their category reviews, which were previously planned for Q3 and Q4. This will delay some expected wins and growth opportunities in wholesale until 2022, although we remain confident in earning additional placements, albeit with a slower timeline than we had anticipated. Finally, launching a shelf-stable liquid creamer option in the second half of 2021 is now pushed back until 2022 due to information from our co-packer indicating that our planned production timeline has been delayed. We are still optimistic about this product, but the timing and growth stemming from it will be later than initially expected. Given the new information regarding the shelf-stable liquid creamer co-packer delay and its impact on our top line, we are updating our annual guidance. We are confident in our ability to execute on this priority; however, we are now anticipating net sales for the full year 2021 to be between $38 million and $40 million, reflecting growth of 46% to 54% over 2020. Furthermore, we expect growth margins of 25% to 28% for the full year. Our path to continued growth margin improvement remains the same; we will continue to optimize the balance of free shipping and increasing shipping expenses for our DTC business, enhance our refrigerated liquid creamer business by driving more volume and improving logistics, and introduce the shelf-stable liquid creamer to optimize channel margin mix. We expect to continue making progress toward our long-term goals. Regarding 2022, given the uncertainty of the timing of the shelf-stable liquid creamer and its overall growth impact, we will not be providing expectations for 2022 at this time. However, once we have more reliable information on our production and release dates for the shelf-stable liquid creamer, we will share that with you all and provide our 2022 guidance during our year-end call in March. What we can commit to today is that we remain well-positioned in the market we operate in, with plant-based options being growth drivers across categories. More specifically, our direct online platform remains an exceptional performer and growth driver, and we do not anticipate a change in that. Our grocery business continues to build an expanding base for growth, and our overall wholesale run rates remain strong. Our club business is stable with historical run rates and shows solid momentum in the early third quarter. We are pursuing additional offerings and partners within that channel to drive further growth. With a variety of recent product launches showing solid initial results and some exciting launches on the horizon, we remain confident in our ability to drive solid growth across several categories for years to come.

Paul Hodge, CEO

Thanks, everybody, for your time today. As you can see from our recent growth, Laird Superfood remains on track to become a leading player in the food and beverage industry as we continue leveraging our powerful omni-channel platform. Thank you for your support, and we are now ready to take your questions.

Operator, Operator

Thank you. We have our first question from Bobby Burleson at Canaccord. Your line is now open.

Bobby Burleson, Analyst

Good morning and best wishes, Paul, for your next endeavor. So a couple of questions here. The guidance obviously coming in includes gross margin guidance. Can you just clarify how these unforeseen changes impacted the gross margin guidance in particular? Is it simply just a question of the lack of shelf space and you're not going to see the same kind of volumes in your internal production in the back half of the year, and that's the primary driver? Or is there anything else that is at work here?

Valerie Ells, CFO

I would say primarily, what we're talking about here is obviously the lower top line. With the shelf-stable liquid creamer, that was a product we were going to utilize on the e-commerce side too, which would have carried a higher margin profile and that had a negative impact. The second piece pulling down our guidance is just a slower Costco and club business than we anticipated. We had great momentum heading into Q3, but we can’t really make up what we lost in the first half. So it is really a combination of those factors. Costco is a great business for us and still very healthy, but it has a margin profile that significantly contributes to our top line. So nothing else really going on outside of that. We do have some exciting initiatives lined up in the second half of the year that we are confident will help make progress, but we won't see the same extent as we hoped.

Bobby Burleson, Analyst

And those anticipated resets that are now delayed, is that specifically for you or is it generally for those partners?

Paul Hodge, CEO

No, that's generally because, with COVID, many grocery retailers we've been talking to decided to postpone many category resets until next year. Some of the larger partners we were expecting to play with this year have done that, and we’ are hearing more and more about this change occurring at that level. So nothing specific to us.

Bobby Burleson, Analyst

Just one last quick question. I'm curious about the competitive landscape. There are some large players that are building strong balance sheets and going after plant-based creamers among other categories. How do you see the evolving competitive landscape, and how is the oat milk creamer positioned against your competitors?

Paul Hodge, CEO

Our product is unique in the marketplace. We pride ourselves on our innovation profile in our creamers, particularly focusing on clean label ingredients. While there are many plant-based creamers available, ours stands out due to functional ingredients. The oat milk itself has become a strong platform for us, outperforming our coconut base. It is a unique offering; we have great mouthfeel and flavor, combining oat, macadamia nuts, healthy fats from avocado oil, and other functional ingredients like mushrooms and 17 minerals. We are optimistic about the consumer adoption of our fresh packaged liquid creamer, and sales are still growing. We believe we are well-positioned in this space and can remain competitive in this sector.

Operator, Operator

Thank you. Our next question comes from the line of Alex Fuhrman from Craig-Hallum Capital. Your line is now open.

Alex Fuhrman, Analyst

Thanks for taking my question. And Paul, congratulations on taking Laird from such a small company and growing it into what it is today and getting the company public. I wish you all the best in whatever you have next in store for yourself. I did want to ask a little about the guidance for the year. If I do some rough math, considering how well the online business has been growing, it sounds like there's no reason not to think this will continue performing well. However, my assumptions suggest that the wholesale channel for the back half may be flattish relative to last year and the first half. Can you unpack that a bit? How much of the lower guidance is due to the shelf-stable liquid product delay versus some softness in the club channel or anything else?

Valerie Ells, CFO

Most of the pull down is related to the shelf-stable liquid creamer. The remainder is a smaller portion related to the club business. However, you're spot on that in the second half, we are expecting our DTC to lead growth, thanks to our larger customer base than we had even a quarter ago. We have many more products at our disposal to drive growth in Q3 and Q4. However, as Paul mentioned, there are delays with our shelf-stable liquid creamer and grocery resets that will limit the growth we were originally anticipating. Still, we do expect some growth, particularly in our refrigerated liquid creamer due to the improvements in shelf life.

Alex Fuhrman, Analyst

That makes sense, thank you. Regarding liquid products, there seems to have been various issues with co-packers and shelf lives over the past year. Yet, demand appears strong from your retail partners and customers. Have you considered bringing manufacturing in-house and what might that entail cost-wise?

Paul Hodge, CEO

We are constantly evaluating all options for vertical integration, including bringing manufacturing in-house. We've been progressing with our refrigerated liquid creamer and have improved shelf life. We have resolved waste issues and optimized distribution logistics. We are working with a strong co-packing partner on that side as well. It’s a new process for shelf-stable products, but we are applying what we learned from the refrigerated side to ensure we succeed. This is part of our ongoing strategy to enhance our operational capabilities.

Alex Fuhrman, Analyst

That's very helpful, thanks Paul.

Operator, Operator

Thank you. Our next question comes from George Kelly from ROTH Capital Partners. Your line is now open.

George Kelly, Analyst

Hi, everybody, thanks for taking my questions. A few to start with the Picky Bars. What’s the expectation for the full year? If I remember correctly, when you acquired the brand, it was $4 million of expected contribution for this year. Is that still the expectation?

Valerie Ells, CFO

There are no changes there. The Picky integration is proceeding smoothly and as planned. They made a solid contribution in the first few months post-acquisition and remain on track with our initial expectations. We are excited to get the entire line of 50 products on our website soon and start really telling those stories. Early wins are also coming from the wholesale side where we have been making progress.

George Kelly, Analyst

Looking at a different segment, the coffee business; I didn't hear much commentary in your prepared remarks about coffee opportunities. Can you gauge what the growth expectations are? Will it take longer to show growth in that category based on your current learnings?

Paul Hodge, CEO

We are excited about the functional coffee segment. We believe it will be a major portion of the coffee market growth in the next five years. We just got our wholesale packaging in Q2, allowing us to sell into both conventional and natural channels. This is crucial as our products expand into a larger conventional market. Our organic coffee with functional benefits is priced competitively at $12.99 per bag. This pricing strategy expands our access to a broader customer base while allowing us to build a more comprehensive product offering.

George Kelly, Analyst

That’s helpful. Lastly, regarding the creamer business, could you provide the breakdown between powdered and liquid creamers for modeling purposes?

Valerie Ells, CFO

In the second quarter, liquid gross sales were just shy of $1.2 million, while the remainder reflects our shelf-stable business. We are pleased with the progress on the liquid side and anticipate more growth ahead.

Operator, Operator

Thank you. I will now turn the call back to Paul Hodge for closing remarks.

Paul Hodge, CEO

Thanks, everybody. I appreciate your time. I'm still going to be a highly active board member, and I'm excited about the company's future as a major shareholder. We are bullish about the long-term opportunity this company presents. Thank you for your support.

Operator, Operator

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.