Laird Superfood, Inc. (AMEX:LSF) Q1 2023 Earnings Call Transcript May 10, 2023

Laird Superfood, Inc. beats earnings expectations. Reported EPS is $-0.45, expectations were $-0.52.

Operator: Hello and welcome to the LSF First Quarter 2023 Financial Results. My name is Elliot, and I’ll be coordinating your call today. [Operator Instructions] I would now like to hand over to Steve Richie. Floor is yours. Please go ahead.

Steve Richie: Thank you, and good afternoon. Welcome to Laird Superfood’s first quarter 2023 earnings conference call and webcast. On today’s call are Jason Vieth, Laird Superfood’s President and Chief Executive Officer; Anya Hamil, our Chief Financial Officer; and Andy Judd, our Chief Commercial Officer. By now, everyone should have access to the company’s first quarter 2023 earnings press 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 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’ll turn the call over to Jason.

Jason Vieth: Thanks, Steve. Hello and welcome everyone. Thank you for joining us today. Our results in the first quarter demonstrate that we have built the right strategic plan for our business and that the team is capable of executing it. Though it remains a challenging operating environment to be growing a mid-size food brand, I am pleased to report that we are nevertheless making strong progress against our key strategic goals of improving our cost structure, growing our brand and wholesale, and improving our portfolio behind taste and packaging innovation. In just a few short weeks at the beginning of the year, we were able to transition our supply chain to an asset like manufacturing in third-party distribution model that is already operating with far greater efficiencies than what we were able to achieve when we operated our own facilities in Oregon.

We are not only up and running in those facilities, but we are already producing greater volumes and lower costs with increased flexibility and responsiveness across a wider range of packaging sizes and formats. Our new partners have proven to be highly supportive and adaptive and true partners in every sense of the word. As Anya will detail shortly excluding one-time costs associated with our product withdrawal, we have already increased our Q1 gross margin by more than eight points year-over-year. At the same time, we have continued to make dramatic progress in reducing our marketing spend in the DTC channel. And as a result, continue to see a significantly higher return on our ad spend, a lower consumer acquisition cost and a vastly improved margin structure.

We have now largely worked our way out of the inefficient marketing contracts that were set up over the last years and have finally been able to shift our investment to the strategies and tactics that we believe will have more meaningful impact in the marketplace. A great example of this is in our retargeting against our existing customer database where we were able to restore subscription growth for the first time in over a year during Q1. Within the conventional and natural grocery channel, we are seeing strong growth in same-store sales where our dollar sales velocity growth remains positive for both our liquid and powder creamers in the conventional and natural channels. This growth is being fueled by our new branding and packaging that largely rolled out during the first quarter, and by the continued progress in improving our pricing and availability at the shelf.

As mentioned on our fourth quarter call, we experienced the quality issue due to a poor tasting raw material received from one of our suppliers and decided to withdraw multiple creamer products from the market. While we identified the issue relatively soon after production and were able to retrieve the majority of the products before they reached consumers. This withdrawal did have an outsized impact on our Amazon business as we had to clear all inventory from their distribution warehouses before we could begin to sell on the platform again. As a result, we fell behind our goals for the Amazon business this quarter. Thankfully, we are now back to full speeded Amazon and are already seeing our metrics return to pre withdrawal levels. Despite this quality setback, our net promoter score remains at an extremely healthy 69 points and our customer satisfaction score is a 4.9 on a five point scale.

Financially, we continue to strengthen our business versus prior year metrics. As Anya will share during today’s call, we have increased our go-forward gross margin while significantly reducing our operating expenses and marketing costs, and we continue to make strides toward achieving a cash flow positive position. And I am pleased to be able to report that a key ingredient supplier of our business is working with us to help to recoup the Q1 loss from our quality events. At this point, we project that we will have cash to operate into at least the second quarter of 2024, and that we will be in a much improved financial position from, which to raise capital when that time comes. There is no doubt that this team has made tremendous progress in turning around our company and I want to thank our talented and dedicated Laird Superfood employees for their ingenuity and persistence in delivering these improvements.

Our journey is far from complete, but each quarter has demonstrated steady progress against our goal of breakeven profitability and we expect more of the same as we go forward from here. With that, I will hand it over to Andy.

Andy Judd: Thank you, Jason. When we began our journey of brand transformation last year, we knew we had significant work to do to rebuild our go-to-market foundation. A year later, I’m pleased to see the scale of the changes that we have executed. And before I jump into details, I want to thank the entire organization for their diligence and dedication to set our incredible brand up for future success for years to come. In the first quarter, we launched updated packaging and executed a new campaign to reposition our Laird Superfood brand around fueling optimal daily performance. Though these changes have only been in market for a few months, we are already seeing improved sales velocities in retail and better conversion on our website.

We have also launched some of our most successful innovation to date behind new adaptogenic protein bars and prebiotic daily greens. To address what we called out as inefficient historical spending levels, we have completely overhauled our marketing model. In our DTC business, we have reduced total spend by 70% in Q1 versus year ago, while simultaneously improving our return on ad spend by 280%. Importantly, we have simultaneously decreased our consumer acquisition cost and with our high lifetime value and gross margin improvements such that we are now delivering a positive ROI from our DTC customers. We’ve also returned net subscribers to positive growth for the first time since 2021 with sequential improvement in each month of Q1. As we’ve rebalanced our value proposition and drove the conversion of repeat consumers to our subscription offerings.

It is important to note that all of this was achieved despite the product withdrawal that Jason discussed earlier. As Jason mentioned, the Q1 product withdrawal had its largest impact on Amazon, which led to a nearly 12 week blackout of our powdered creamer products on Amazon, which obviously slowed our growth in that channel. However, I’m happy to report that we are now back in stock on Amazon and that we are seeing our conversion rate return to the levels that we had planned for 2023. Nevertheless, Amazon has become an expensive pay-to-play business model and we are currently assessing the right levels of spend and growth to drive through this channel. The biggest change in our go-to-market model is taking place in our wholesale business where we still have significant opportunity to expand distribution.

During the last few months, we have added important leadership and capability and are seeing our efforts produce both velocity growth and incremental confirmed placements with new doors starting in Q1. This distribution is taking place with great retail partners across all channels at key retailers like Whole Foods, Sprouts and Target. In the 12 weeks ending March 26, 2023, we saw a 42% increase in dollar velocity growth in our liquid creamer business in the natural channel and total consumption for Laird Superfood for all items and measured channels was up 23% during this period. Looking forward, I’m excited about the innovation expansion that we have ready for the balance of this year. Our plan growth during 2023 includes the continued expansion of our retail footprint, the launch of new innovation platforms like our reformulated hydration beverage products, the launch of our oat milk creamers to include functional adaptogens and a new line of super premium products called Laird’s Reserve [ph].

We are also looking forward to the execution of our best seasonal program to date with a new lineup of products including Pumpkin Spice Superfood Instant Latte with adaptogens. We also have initiatives underway to grow our brand awareness drive continued sales velocity growth, and further enhance our margin through surgical pricing actions and a launch of our aseptic liquid creamer. In summary, it has indeed been a very busy first few months of 2023 at Laird Superfood, and we are pleased by the progress that we are already seeing. Our team’s resolve for future success has never been stronger, and I’m looking forward to continuing to share details behind our commercial initiatives on subsequent quarterly calls. Now let me turn the call over to Anya to further discuss first quarter results.

Anya Hamil: Thank you, Andy. Net sales of $8.1 million in the first quarter of 2023 were in line with our annual operating plan, and decreased 12.7% as compared to $9.3 million in the prior year period. Given the level of fullback in our marketing spent, this decline was expected driven by lower sales volume in e-commerce and club channels. Specifically, our e-commerce sales decline was driven primarily by DTC due to a 70% year-over-year reduction in media as we got inefficient spent and reduced our customer acquisition costs in order to build a more sustainable direct-to-consumer business and improve our profitability in this channel. The decline in DTC was partially offset by growth in our retail channel driven by both higher velocities in liquid and shelf-stable creamers and distribution expansion in the natural channel.

As reported, gross margin was 23.1% compared to negative 4.6% in the fourth quarter of 2022 and 20.9% in the prior year period. First quarter margins were negatively impacted by a one-time cost related to product withdrawal that Jason and Andy both talked about earlier. Excluded those one-time charges, I am pleased to report that we achieved 27% adjusted gross margin, which is an improvement of over eight points from the sequential quarter and prior year period. This margin expansion came as a result of our supply chain transformation to third-party co-manufacturing and fulfillment model that was completed in the beginning of the first quarter. And as in line was our expectation for that transition. I expect our gross margin to continue to improve throughout the year, as we see the full benefit of the transformation to variable cost model as well as other margin improvement initiatives planned for the second half of the year.

Operating expenses totaled $6.2 million, a decrease of $9.7 million compared to $15.9 million in a year ago period. The decrease was primarily due to the lapping of $8 million impairment of goodwill and intangible assets in the first quarter of 2022, as well as reduced people costs and other general and administrative expenses following the exit activities in the fourth quarter of 2022. Marketing expenses also contributed $0.9 million 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, which was approximately $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 ended 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. The elevated cash burn this quarter was driven by one-time payments related to the facility lease exit in Sisters, Oregon, severance and bonus payments and a delayed timing of account receivables collections, which was resulted early Q2. For the balance of the year, we expect our ongoing cash burn to be reduced to $2 million to $3 million per quarter. Moving on to our outlook, although we anticipate that an uncertain economic environment was historically high inflation rates impacting consumer spending will continue into the balance of the year.

We are encouraged by our first quarter results as a strategic actions we took last year and continue to take this year are taken hold. As such, we reaffirm our guidance for gross margins in excess of 30% for the year, excluding any one-time charges and anticipate mid-to-high single digits net sales growth. With that, I’ll turn the call back to Jason.

Q&A Session

Jason Vieth: Thanks, Anya. This concludes our prepared remarks. Operator, we are now ready to open the call to questions.

Operator: Thank you. [Operator Instructions] We have a question from JP Wollam from Roth Capital Partners. Your line is open.

Operator: We have no further questions. So this concludes our Q&A and today’s conference call. We’d like to thank for your participation. You may now disconnect your lines.