Laird Superfood, Inc. (AMEX:LSF) Q3 2023 Earnings Call Transcript

Laird Superfood, Inc. (AMEX:LSF) Q3 2023 Earnings Call Transcript November 12, 2023

Operator: Good afternoon. Thank you for attending today’s Laird Superfood Third Quarter 2023 Financial Results Conference Call. My name is Cole, and I’ll be the moderator for today’s call. [Operator Instructions] I would now like to pass the conference over to our host, Trevor Rousseau. Please go ahead.

Trevor Rousseau: Thank you, and good afternoon. Welcome to Laird Superfood Third 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 third quarter 2023 earnings release filed today after market close. It is available on the Investor Relations section of Laird Superfood 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’ll turn it over to Jason.

Jason Vieth: Thanks, Trevor. Hello to everyone, and thank you all for joining us in today. I am proud to be able to report that our Q3 results represent a fundamental step change in the performance of our business. For the first time since Q3 of 2021, we are reporting net sales growth against both the prior period and the prior year same quarter. At the same time, we achieved our 2023 goal to exceed 30% gross margin by the back half of the year, an improvement of more than 750 basis points versus this time just one year ago. And we executed these improvements, which is a fraction of the marketing and SG&A costs that we utilized in the business during the last years, as we will discuss shortly. First, let’s dive into net sales.

During 2022, I shared that we would need to reshape our sales algorithm in order to create a growing profitable business. I’m pleased to announce that our Q3 results were the result of this effort as the wholesale channel grew by more than 42% year-over-year to become nearly one half of our total business during this quarter. Natural channel consumption data as reported by Spin for the last 12 weeks ending October 8, 2023, showed a 61% growth for the Laird Superfood brand with positive sales growth in every category in which we compete. This growth is being driven by a healthy combination of unit velocity growth, price increases taken in previous quarters and distribution expansion. As expected, our online business, which is comprised of the DTC and Amazon channels, contracted by 16.6% as we continued to scale back media spend in support of our profitability goals.

For the past 18 months, we have been managing this business towards profitability through significant reductions in media spend and by actively converting existing customers to subscription. The result of this is we have now moved from an inefficient, unproductive and unprofitable paid social media marketing model to top-of-funnel awareness driving marketing activations that employ podcasts, PR and organic media. In Q3 alone, we garnered more than 1.1 billion media impressions, and we are just getting started. I am also pleased to report that our Amazon inventory challenges are now behind us, as we were able to get our products restacked across their platform during Q3. While this channel has been constrained during 2023 due to the lack of inventory stemming from our Q1 quality event, we are now looking at a significant opportunity and expect to have a tailwind from that channel over the next year.

Next, I’m going to tip my hat to our supply chain organization. It was managed to achieve the aggressive cost-saving target that we set out for them in 2023. Remember that it was only a year ago that we determined that we were going to shut down our manufacturing and distribution facilities in Sisters, Oregon, and transition to an asset-light model to improve our efficiencies, increase our flexibility and lower our costs. Our results in Q3 were the realization of that vision as we decreased our landed product costs as a percent of gross sales from 74.6% to 54.8% in this most recent quarter. During this time, we have developed strong and mutually beneficial relationships with our co-manufacturer and logistics partners and are proud to have both of them in our supply chain.

At the same time, our G&A expense was 50% lower than during Q3 of last year as the organization has continued to do more with less. While other companies are just announcing cost savings programs to match the current state of economy and its impact on the business, I’m proud to report that we have largely and successfully completed that work, including headcount downsizing and discretionary expense reduction. We were also able to recently close all outstanding litigation against us, and we successfully renegotiated our insurance to save more than $500,000 versus last year’s policy, which will begin to be fully recognized during Q4. While these savings have begun to flow into our earnings results, still had a solid amount of reduction that will materialize in Q4 of this year and during 2024, which will help us to drive toward what has now become our short to midterm goal of breakeven profitability and becoming cash flow positive.

A close-up of a freshly roasted coffee bean, accompanied by a vintage aluminum scoop.

I am extremely proud by how far we have come during the past two years, and I am 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 continues to come 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 continue to chip away at our least effective marketing activities to further reduce our G&A expenses, we believe that 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.

Anya Hamil: Thank you, Jason. Net sales of $9.2 million in the third quarter of 2023 increased 3.7% as compared to $8.8 million in the prior year period and increased 19% as compared to $7.7 million in the second quarter of 2023. The year-over-year growth was driven by distribution gains in the natural and conventional channels, seasonal program expansion in club, pricing actions as well as velocity improvements behind new packaging and the rebranding campaign launched earlier this year. This was partially offset by lower sales in e-commerce channels. Given the level of pullback in our marketing spend, which was 19% year-over-year reduction across Amazon and DTC work in media, this decline was expected. These marketing costs were strategic in nature in order to cut inefficient spend and reduce our customer acquisition cost to build the most sustainable e-commerce business and improve our profitability in these channels.

Additionally, our Amazon sales continue to be negatively impacted by residual inventory out of stocks related to the previously discussed product quality issue experienced in Q1. I’m happy to say this issue was resolved at the end of the third quarter and is now fully behind us. In the third quarter, we continue to build on the success we achieved in the first half of the year from strategic actions implemented last year. Every quarter this year, we saw a consistent margin expansion versus prior year, with Q3 margin reaching 31%, which is 670 basis points improvement sequentially over Q2 and 750 basis points improvement versus the same period last year. 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 was driven by cost of sales improvement of 21% versus the same quarter prior year due to supply chain shift to third-party co-packing model. It would have been even stronger except for the investment that we have made in trade promotions to drive incremental awareness and trial in our wholesale channel. Starting in Q4 of this year, I expect to begin to pull back the elevated trade spend, which will allow margin expansion to 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 the third quarter of 2023 totaled $5.6 million, a decrease of $2.2 million compared to $7.9 million in the year ago period.

This reduction was driven by 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 the third quarter of 2023, 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. Our Q3 SG&A was $1.8 million lower than the same quarter last year, demonstrating the strong progress we have made in managing costs and pushing the business towards breakeven and profitability in future quarters. Turning to our balance sheet and cash flow. We ended the quarter with $7.4 million in cash and no debt as we continue to conservatively manage our balance sheet.

Cash burn in the third quarter of $3.5 million was elevated as compared to sequentially from $1.4 million in Q2 due to planned inventory build to meet stepped up demand, as we communicated on this call last quarter. Our year-end cash forecast is on track with our operating plans. Moving on to our outlook. With one more quarter left in the year, we expect fourth quarter net sales to be in the range of $8.5 million to $9 million and gross margins in mid- to high 30s, excluding any onetime extraordinary charges. This concludes our prepared remarks. Operator, we are now ready to open the call to questions.

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Q&A Session

Operator: Thank you. We will now begin the Q&A session. [Operator Instructions] Our first question is from Bobby Burleson with Canaccord Genuity. Your line is now open.

Bobby Burleson: Sorry, can you hear me? I’m sorry, can you guys hear me?

Jason Vieth: Yeah, we can hear you, Bobby.

Bobby Burleson: Okay. Great. I thought I hung up on you guys for a second. So I just wanted to — first of all, congratulations on making so much progress and kind of turning the corner here. I wanted to just understand the media impressions comment made. What type of in your experience lag is there between that type of activity and maybe a pickup and maybe a move towards growth again in your DTC? And then I just want to add on to that, how long do you think just the tailwind from Amazon could persist into 2024?

Jason Vieth: Yeah. Hey, bob, good to hear your voice and to be back here again and thanks. We certainly appreciate the recognition of the — all of the progress that’s been made by the team has been a nice long run here for two years to get to this point, and it’s really great now to see the culmination of a lot of those efforts. And we still have a lot in front of us, two of the points that you’re hitting on here are really important. One, on the DTC impressions, yes, media impressions that will benefit all of our business, of course. In the case of DTC, as you’re asking, I think that it’s important to understand, we are shifting our marketing strategy right now and certainly as we move into 2024 as well, it’s more top of funnel awareness.

And that really started to take place through this year, but I would say it was heightened in Q3 and will be again in Q4. And so we’re spending more of our marketing dollars in podcast that we’re supporting and a partnership that we have already established with the Shawn Ryan show. And another one that we’re working on right now that we’re excited about closing, hopefully very soon. And we’re working as well with our PR agency to really make a heightened and concerted effort to generate these impressions, both paid and unpaid, and they’re doing phenomenal work for us right now. And so some of this as you’re alluding to, is going to be a longer-term benefit for us, and we won’t see the immediate impact. And that’s why these results — we’re so excited about these results because we got back to growth here in Q3, and we did it without the same level of that pay-to-play, one-to-one social media type of marketing that we have been doing in the past that we all know has become very inefficient after a certain level of spend.

So we’re flipping the model on it — on a band. We’re seeing better results than we anticipated right out of the gate, and we do believe just as you’re alluding to that over time, as that awareness builds, we start to get to a more, I would say, a more conventional marketing model and one that bears fruit for multiple quarters and years to come. And then with regards to Amazon, we actually, right now, I would tell you, even in Q3, we had a bit of a headwind still with Amazon, while we were able to get inventory back in position in, I would say, probably two-thirds of the way through the quarter. We continue to have some challenges winning back buy boxes and with some other executions that were the result of that all the stocks that we had throughout this year.

And we’re knocking down all of those in whac-a-mole fashion. And I would say getting to the cleanest look at Amazon that we’ve had really since last year at this time. So we’re starting to spend back into the channel. We pulled back spend significantly. So again, despite that pullback, we’re able to report growth this quarter, and that’s why it feels so good to be in that position because we know as we go to put spend back in, in an efficient manner from here, we have a chance to supercharge some of the growth in these channels right now.