Sow Good Inc. (PNK:SOWG) Q2 2024 Earnings Call Transcript

Sow Good Inc. (PNK:SOWG) Q2 2024 Earnings Call Transcript August 15, 2024

Operator: Good morning everyone, and thank you for participating in today’s conference call to discuss Sow Good Financial Results for the Second Quarter Ended June 30th, 2024. Joining us today are Sow Good’s Co-founder and CEO, Claudia Goldfarb; and Interim Chief Financial Officer, Brendon Fischer. [Operator Instructions]. Before we go further, I would like to turn the call over to Mr. Cody Slach as he reads, the company Safe Farber statement within the meaning of the Private Securities Litigation Reform Act of 1995 that provides important cautions regarding forward-looking statements. Cody, please go ahead.

Cody Slach: Good morning everyone, and thank you for joining us in today’s conference call to discuss Sow Good financial results for the second quarter ended June 30th, 2024. Certain statements made during this call are forward-looking statements, including those concerning our financial outlook or market opportunities and the impact of the global economic environment on our business. These statements are based on currently available information and assumptions, and we undertake no duty to update this information except as required by law. These statements are also subject to a number of risk and uncertainties, including those highlighted in today’s earnings release and our filings with the SEC, additional information concerning these statements and the risks and uncertainties associated with them highlighted in today’s earnings release and in our filings with the SEC.

Copies are available on SEC’s website or on our investor relations website. Furthermore, we will discuss adjusted EBITDA, a non-GAAP financial measure on today’s call, a reconciliation of adjusted EBITDA to net income or loss the nearest comparable non-GAAP financial measure discussed on today’s call is available in our earnings press release at our Investor Relations website. With that, I will turn the call over to Claudia.

Claudia Goldfarb : Thank you, Cody, and good morning everyone. We appreciate you joining us today to discuss our second quarter 2024 financial results. I am thrilled to report another exceptional quarter with sequential revenue growth of 37% driving net income of $3.3 million or $0.29 per share. Adjusted EBITDA also surged to $6.2 million compared to a negative $2.1 million in Q2 of last year. These remarkable results highlight the power of our innovative and disruptive product offerings and the strength of our exceptional team. I extend my deepest gratitude to our employees for their unwavering commitment to so good and our vision. Our collective efforts have enabled us to help revolutionize the candy industry, introducing products that not only delight our customers, but also set new standards for quality and innovation.

We have consistently pushed the boundaries, ensuring that our offerings remain at the forefront of the nascent freeze dried candy market. As we look ahead, we remain steadfast in our mission to innovate and lead this category. During our last call, we highlighted the significant milestones we reached early in our second quarter that has paved the way to achieving our initiatives as a public company. To summarize, in May, we successfully listed our common stock to the NASDAQ Capital Markets Exchange. This strategic move expanded our investor base and increased our market visibility, driving improvements in liquidity and long-term shareholder value. The positive impact of this listing is already evident, confirming that we are on the right path.

Along with this listing, we completed an underwritten public offering raising $12.8 million in proceeds net of underwriting fees. This influx of capital positions us exceptionally well to achieve our ambitious strategic objectives for 2024 and beyond. I’ll have more to say about these strategic initiatives that we’ve outlined at the beginning of the year, our new product offerings, our increase in in-house manufacturing, the strengthening of our supply chain, and updates on the third quarter in my concluding remarks. But first, I will pass it to Brendon to walk through our Q2 results in detail. Brendon, over to you.

Brendon Fischer: Thank you, Claudia. Jumping right into our financial performance. Revenue in the second quarter of 2024 increased significantly to $15.6 million compared to $1.3 million in the prior year period. On a sequential basis, revenue this quarter increased 37% over the first quarter of 2024. Overall, our top line growth continues to be driven by our strategic pivot to the production of freeze dried candy and our increased ability to meet growing market demand through the expansion of our production capacity. Gross profit in the second quarter of 2024 increased significantly to $9 million compared to negative $1.6 million for the same period in 2023. Gross margin was 57.6% in the second quarter of 2024, up considerably from 40.6% in the first quarter of 2024.

The sequential margin expansion was driven by strong revenue growth, but also lower raw material costs, improved sales mix and price optimization. Please note we moved into our new facility late in the quarter, so rent costs were not as prevalent in Q2 cost of sales as they will be in Q3. This along with continued investments in our operations to increase our production capacity, will create near-term headwinds to quarterly gross margin, but are expected to drive margin expansion over the long term. Operating expenses in the second quarter of 2024 were $4.1 million compared to $0.9 million for the same period in 2023. The increase was primarily driven by higher compensation and professional services expenses. As so good scaled this business and invested in systems and process improvements as well as executed on its NASDAQ listing and underwritten public offering.

Net income in the second quarter of 2024 increased substantially to $3.3 million or $0.29 per diluted share compared to a net loss of $3.3 million or a loss of $0.68 per diluted share for the same period in 2023. The improvement reflects the higher level of gross profit generated during the quarter. Adjusted EBITDA in the second quarter of 2024 improved significantly to $6.2 million compared to a negative $2.1 million for the same period in 2023, and $2.5 million in the first quarter of 2024. Moving to the balance sheet, we into the second quarter of 2024 with cash and cash equivalent of $14.4 million compared to $2.4 million as of December 31st, 2023. This increase in cash and cash equivalence is primarily driven by the public offering we completed in the second quarter, where we raised $12.8 million in proceeds net of underwriting fees.

We intend to use the net proceeds from their offering for general corporate purposes, which will include capital expenditures for the expansion of production capacity, funding working and growth capital, expanding our sales and marketing efforts, and reducing certain crunches of indebtedness. We would like to thank our new and existing investors for their support and look forward to further enhancing our foundation for growth. This concludes my prepared remarks. I’ll now turn in the call to Claudia for closing remarks. Claudia?

Claudia Goldfarb: Thank you, Brendon. As we’ve discussed throughout this call and over the past few quarters, we have made rapid progress since launching our first freeze dried candy SKUs in the first quarter of 2023. In this first year of focusing on freeze dried candy, we have meaningfully expanded our production infrastructure, our retail customer and distributor network, and our SKU and store count. We firmly believe this is just the beginning of our growth trajectory. As this rapid trajectory unfolds, we continue to gain valuable insights into our business operations at scale, as well as retail and customer buying behaviors. An example of this is our candy shipments in July and early August slowed due to the sweltering summer conditions.

This year’s extreme heat posed a logistical challenge affecting product quality during transportation and storage. To safeguard our product integrity and quality to limit returns and avoid any negative brand reputational impact, we strategically decided to pause shipments to customers that did not have temperature-controlled warehouses or trucking, irrespective of continuing growing customer demand. Despite this pause, our customers maintain strong in stock positions, ensuring in-store velocities were unaffected. To address the seasonality in the coming years, we will work closely with our retail partners to ensure that they are well positioned with sufficient stock prior to the peak heat month where shipping will once again decrease. Additionally, through discussions with our customers, we’re observing that consumers tend to spend less on the candy category during the summer months.

As our younger demographic target is out of school, families are away on vacation and consumers are otherwise shifting from their normal routines and buying patterns. Furthermore, with beach vacations at a peak, consumers often become more health-conscious impacting overall candy sales. We believe this will be a normal seasonal trend moving forward, and as a result of the summer candy buying trend and strategic shipping reduction, we anticipate a downturn in Q3 sales relative to the second quarter. However, Q4 is poised for a resurgence to our normal accelerating rate of growth, fueled by critical factors such as customer restocking, the back-to-school rush, and the peak holiday buying surge, including Halloween. Our targeted initiatives will amplify this momentum, positioning us for exceptional growth as we close out this year.

At the beginning of the year, we outlined strategic initiatives designed to propel our mission of revolutionizing the candy category. We remain confident that these initiatives are the right path forward, consistently guiding us toward our objective of market disruption. Our unwavering commitment to these strategies underscores our dedication to innovation and excellence, ensuring that we continue to set new standards and exceed expectations within the industry. To recap those strategies: first, expanding production capacity. Our Q2 production capacity surpassed projections reaching over 7.5 million units compared to the 7.2 million we had projected. We installed our fifth free freeze dryer with a sixth freeze dryer under construction and expected to be completed by the end of the third quarter.

We have secured a long-term lease and moved into a 324,000 square foot production facility in Dallas, enabling us to further expand our production capacity and optimize our shipping and distribution operations. Initial deposits for an additional six proprietary freeze dryers have been secured, which would be placed in our new Dallas facility. This enhanced capacity optimizes our raw material storage, product, packaging, and overall operational efficiencies to fulfill the increased order volumes we receive. This expansion also allows us to uphold our stringent food safety and quality standards, while integrating more of our custom-built proprietary freeze dryers and specialized packaging environments. We commence distribution from the new facility in June, and we plan to initiate packaging operations and freeze drying production by the end of the year.

Second, disrupting the candy category, we are driving relentless innovation in the category, introducing new treats such as lemon puffs, and by the end of the third quarter, we will unveil over 10 new SKUs, mint, chamoy flavored, and seasonal candies, as well as smaller bag sizes of our top performing SKUs. These offerings are crafted to elevate Halloween celebrations perfectly suited for gift bags and party failures, and provide ultimate convenience for lunchboxes and on-the-go snacking. Our strategic efforts to elevate product quality, expand our offerings, and drive innovation are dependent on bringing more of our manufacturing in-house to strengthen our competitive advantage. To advance these goals, we launched a pivotal initiative in the second quarter to produce our very own two candies in our new Dallas facility.

This strategic move powerfully distinguishes us from competitors who depend on external overseas suppliers for their candy production. They rely on costly branded candies whose availability and supply chain can be unpredictable, and these formulations have not been optimized for the freeze drying process. By controlling our raw material supply chain, we can enhance our product quality with custom formulations, foster further innovation and mitigate potential disruptions from overseas markets. This production equipment has already been ordered and is expected to arrive in the fourth quarter of this year. We anticipate production of our two candies to begin by the end of the first quarter of 2025. A significant step made possible by our manufacturing expertise and one that will further solidify our competitive advantage and reinforce our market leadership.

Third, strengthening distribution partnerships. We made substantial progress in diversifying our distribution partnerships and expanding our retail presence. We launched new SKUs and displays across major retailers and convenience stores, enhancing our market penetration and our brand visibility. Recent updates include five below continuing to be a very strong partner, and we anticipate launching two to four new SKUs during the third quarter. We anticipate launching our first Halloween seasonal SKU with Cracker Barrel this month. We’ll be launching a full seasonal line featuring freeze dried marshmallows in the shapes of various holiday figures, such as Santa’s, Easter bunnies and hearts with our retail partners throughout the year. We launched six SKUs in HEB in June and performed very well, earning a significant reorder.

We expect to add two to three additional SKUs to their assortments by the beginning of the fourth quarter. We added five views SKUs in Big Lots in May, and we launched so good displays in 300 of their stores for increased exposure and brand building, capitalizing on it, and lifting their existing strong sales. We launched displays in 1,897 Kroger stores in early summer. Our original launch in Kroger contains 56 units of product. After a strong performance, we launched a second round of displays containing 116 units and new SKUs. Our sales with Kroger continue to perform strongly and we expect to launch seasonal items this Easter in their stores. We launched our 116 SKU count displays in all Albertsons divisions throughout early summer and saw extremely exciting sales performance with continued reorders.

We increased our target store presence to nearly 2,000 stores this summer. We continue to perform strongly and are collaborating on ways to grow the partnership. We launched our displays in over 400 Sprout stores in July and are excited to see strong performance. We launched three SKUs at Ross in June, and after strong sales, we added our new Lemon Puffs to the assortment and we’re actively discussing ways to grow the partnership after such an exciting launch. We launched four SKUs in nearly 8,00 7-Eleven stores in June. Sales continue performing, highlighting our success in the convenience store space. Due to our exceptional performance in the space, we’re launching an additional 1500 Circle Ks in September. Other exciting retail opportunities include international markets, international duty-free shops, and thousands of additional treats [ph] store door launches in October and November.

As we look to the coming quarters, we continue to be humbled by the consumer’s response to our product and positive reception to our treats on social media. This consumer support has translated to strong organic sales velocity. To further support this demand, develop this category and cement our position as the category maker and leader. We hired FINN Partners, an integrated marketing agency that is helping us develop a comprehensive marketing strategy. Our focus to date has been on solidifying our advantage in the freeze dried candy space through building a strong brand, scaling our production and distribution capabilities without compromising our stringent food, safety and quality standards, and diversifying our distribution strategy across all channels.

We deliberately developed this economic vote prior to making any significant investments. Now with our robust operational foundation in place and primed for further growth, we are eager to fortify these barriers to entry even further. In addition to bringing our two candy-making capabilities in-house, our engineers have spent the last four months designing and developing proprietary packaging machines specifically to automate our packaging processes. Unlike traditional automated machinery currently used in the market, our innovative systems maintain the same high quality as our hand-packing process, ensuring no compromise in our product quality. We believe that the combination of our free stride and manufacturing expertise, along with candy made right here in the USA will significantly widen our competitive advantage in this disruptive, fast growing segment of the market.

These investments not only give us greater control over food, safety and quality, but also allow us to optimize ingredient formulations and drive our innovation pipeline. Ultimately, this enhances the consumer experience with our product and solidifies our competitive advantage. In fact, just last week, a buyer from one of America’s leading retailers asked us, so why choose Sow Good? What resonated the most with the buyer was the fact that we are expert manufacturers. As this market evolved and imitators emerge, our manufacturing prowess and expertise in freeze drying and food manufacturing are evident in the superior quality of our products. And when you are dealing with some of the biggest retailers in the world, these qualities truly matter.

So, as we reach the halfway mark of 2024 with momentum that we expect to continue and accelerate in the fourth quarter, this ongoing growth will be driven by our innovative product portfolio, increasing production capacity, enhanced manufacturing capabilities, and our growing customer base. We look forward to sharing more exciting updates over the coming quarters. And thank you very much for your continued support. Operator, we’ll now open the call for Q&A.

Q&A Session

Operator: [Operator Instructions]. Our first question comes from George Kelly with Roth Capital Partners. Your line is open.

George Kelly: Thank you, for taking my questions. So, maybe to start I was hoping for some more detail just regarding the weather-related and seasonal slowdown that you explained in the press release and your remarks. So curious, I guess the question, or a couple questions on that topic, when did you start seeing a slowdown? Has it stabilized at all in Q3? And is there any other kind of quantification or added context just to get a better sense of the sort of level of slowdown that you’ve seen? I don’t know if you could give sort of weekly sales numbers for certain periods or anything else just to give more context?

Claudia Goldfarb: Hi, George. Good morning. We started seeing the sales slowdown in July and by sales slowdown, we had two trucks that we shipped out. And if you guys all remember, record setting heat across the country. During those two shipments, we started seeing melting of the product. So within about 48 hours, which is about how long the truck route was particularly our gummy product, the worms and the bears had just clumped together within the bag. And so, we returned — obviously we replaced all of that product and started sending product via refrigerated trailers. Now, the issue that we ran into is, awesome, easy solution, you start shipping with refrigerated trailers, you control the temperature in transit, problem solved.

But what we found is, even though, we were prepared to do that, a lot of our retail partners don’t have either temperature-controlled warehouses. So, they were running into that same issue within their warehousing or from their distribution centers to the stores. They weren’t able to have refrigerated trailers do that leg of the shipment. And so, we decided to pause all shipping. We spoke with our retailers. They felt that they had sufficient in stock to take us through July, August and not affect in-store velocities. And so, we anticipate that sales will start. And by sales, I mean shipments. Our shipments to our retailers because we’re not seeing an impact in, in-store velocities. We’ll start again in about two weeks as temperatures begin to come back down.

Now because of this lesson learned, as you guys all know, this is our first full year in freeze drying. We’re already actively working on how to address this on a go forward basis. So, when this hits next year, because we do expect this to be an annual seasonal event, we will have distributors in place that have refrigerated warehousing and transportation available so that this doesn’t occur again. As for weekly sales, George, we don’t provide guidance or ongoing information. So, we don’t have that information for — but we’re looking for a really strong fourth quarter as we rebound, as customers begin to restock what they work through in their existing inventory.

George Kelly: Okay. That’s very helpful, Claudia. And then the second issue on the slow down though, I thought you had talked about maybe slower velocities just due to more seasonal trends people out of school and vacations and all that stuff. Could you maybe explain that? Because it just based on the answer to their prior question, it seems like you’re still comfortable with the velocities you’re seeing. So maybe just high-level like what are you seeing with respect to velocity at some of these new retail partnerships? And any surprises I guess, that you’ve observed?

Claudia Goldfarb : Outside of the weather temperature, there haven’t been huge surprises. There was a slight slowdown and we’re talking about probably maybe two less units per store per week per store. Let’s say if we’re going to a five below or some of the other customers that we’re talking about [indiscernible] substantial, significant [indiscernible] but definitely slight slowdowns in velocity on shelf. Now, having said that, we had incredibly successful launches during the third quarter. We launched with HEB with Albertsons with Kroger. They took full displays, and those launches just exceeded expectations and outperformed what we anticipated and what the retail buyers anticipated. So, from an on-shelf getting off-shelf once we’re in store there are no surprises and we’re continuing to see very strong demand that we anticipate is going to continue to grow.

As people go back to regular schedules, schools back in session and fourth quarter we’re incredibly excited. Halloween’s coming. Christmas is coming. We’re launching SKUs that we feel are going to really cater to those timings and events. I am looking forward to, and I hope that I see our new little mini bags in every trick-or-treat basket in the US this coming Halloween. So, we’re really excited about the demand that we see on a go-forward basis.

George Kelly : And then last question from me. You explained the continued internalization or I guess optimization of your input candy. I’m curious, could you walk through again the timing on your process there? I think it has to do with just the gummy stuff that’s still the biggest sort of branded input that you’re utilizing. When do you expect that to happen and how significant as that upon conclusion maybe next year, how significant could the gross margin savings be on that?

Brendon Fischer : On that, most of the candy that we trans — like we moved away from the higher cost brand of candy really in this quarter. So, there’s not a lot of the higher cost brand candy that we’re still using. So most of that impact is going to be felt was felt in this quarter, which was a very rapid pace faster than I thought. I always underestimate how quickly Ira and Claudia can move when they put their minds to things. So, we got most of that impact in this quarter. There may be some marginal benefits in the next quarter, but I would say the most of that raw material sourcing benefit is coming through right now.

Operator: Our next question comes from Eric Des Lauriers with Craig-Hallum Group. Your line is open.

Eric Des Lauriers : My first question is just on these seasonal trends, I’m wondering what you are seeing or hearing from the sort of competitive landscape. I mean, is this something that you — this sort of extreme heat, is this something that you see as impacting sort of the whole category? Is this something more almost Texas-specific? I’m just kind of wondering if you could comment on any competitive dynamics as this extreme heat is sort of impacting the category.

Claudia Goldfarb: We’re definitely hearing across the board that the extreme heat and the seasonality of summer is affecting the candy category as a whole. Recent Nielsen data shows that the candy category is down a little under 8% year over year. So definitely feeling it across the board. And Eric, you know us well, one of the things that we’re always going to focus on is our long-term strategies, the quality of our product and that consumer experience. And so even though we could have continued shipping trailers to stores and not all product would’ve been bad, we decided very strategically not to do that. Regardless of what other competitors do or do not do because we’re in this for the long term we want to be the dominant player for years to come.

And to do that you have to have the best product, best quality, best service for your customers. And so that’s why we decided to pause the shipments, regardless of what other competitors were doing or not. And that was very much a US wide slowdown in the candy category, not specific to Dallas. And the other thing we learned is people are taking beach vacations and that they’re buying fruits and yogurt instead of candy for two months while they try to hit the beaches. So, we see a strong resurgence coming back in the fourth quarter as a lot of those pieces fall off the board.

Eric Des Lauriers: On the gross margin side, obviously very, very strong this quarter. Brendon you were mentioning as you move into the new Dallas facility, obviously there’s some increased rent expense that’ll hit cogs and I think you sort of characterize it as a short-term headwind, but something that could lead to long-term margin expansion. I’m sort of weighing that plus the commentary on utilizing more refrigerated trailers. I’m guessing that’s going to sort of increase cogs just in and of itself. So, to the extent that you have visibility here, I’m just wondering sort of how we should think about the long-term gross margin potential as it relates to this current Q2 kind of mid to high fifties. do you see long-term expansion from here? Or is it more so from that kind of 40% level as we look out long term?

Brendon Fischer : In general, kind of giving the long-term expectations, it’s really difficult to say just because we have so many moving parts we’re managing. I mean, if you just look at the business level as a company, we’re still in our infancy. We’re dealing with rapidly evolving customer base sales mix. We have new products coming online, new product sizes, and you we’re adjusting the raw material sourcing. And we have the new facility as well as automated packaging and all the candy making. So, we’re going to have a lot of moving parts to the margin story in the next couple quarters. So, it’s really tough to say where we’re going to fall out on that. Now as far as the current quarter, we got real big benefits from three areas.

One was price mix. We had a very favorable price mixer in the quarter. And we also had the lower raw material costs from moving away from the higher branded products. And we also got some increased operational efficiencies, primarily in labor utilization and overhead out utilization. Now, if we go through those going forward, we do expect to see a near term pullback off of the number we delivered in Q2. And that’s going to be driven by the fact that on price mix, we’re really comfortable with our pricing strategy right now, but we do have variability related to the sales mix that’s going to be in there quarter to quarter. So that might impact it a little bit going forward. In addition, we’re also going to be seeing probably an increase in sliding fees, marketing promotion fees, which tend to net out against pricing.

So that may have an impact on the price mix side of the business. On the raw material costs, as I said in the earlier answer to George question, that’s mostly priced in. and we suspect that to be sustainable. Now as we produce stuff like in-house candy production, there may be changes there, but for the most part, the raw material costs benefit, we’ll see maybe a little bit more benefit in the future, but not most of that got priced in this quarter. On the operational efficiencies, we’re going to continue to get efficient but we will probably see a pullback in the overhead efficiencies that we achieved this quarter. And really what that was driven by, we signed the new facility later than we expected during the quarter, so we really had to be at full capacity on our prior warehouse space.

We’re basically operating at 110% on that space. It is great for the bottom line, but it’s not a great place to work at on an everyday basis. So, as we move into that new facility we’re going to have the increased rent from that and probably pull back in some of the overhead efficiencies we achieved this quarter. So again, it is tough to give you an exact range at this point, but I do expect some fallback off of the Q2 levels.

Eric Des Lauriers: Last question from me here on the chew candies. Just wondering if you could expand on that a bit. I guess just to clarify, are these still freeze dried products? should we think of them as, I guess almost like multi-textured, freeze dried candies or slightly less crunchy freeze dried candies, or is this kind of a new product category altogether? Just kind of wondering if you could help us understand that a bit more.

Claudia Goldfarb: No, definitely. Eric, we’ve always believed in vertically integrating all of our production capacity. As we’re looking around really controlling our supply chain, our quality and our product mix is incredibly important and so sweet bites, sour bites, sweet squares those staples to our current assortment are what we’re going to be bringing in house and we really wanted to do that in order to increase the quality of the product. So, they’re going to be even crunchier, they’re going to be more flavorful, they’re going to have even more of that freeze dried impact to the consumer. It’s also really going to help us with innovation. One of the things that we’re continually hearing from our retail partners and our consumers is that they want more, they want more innovation, they want greater concentration and flavor. So, by bringing this in house, we’re going to be able to give them what they’re asking for.

Brendon Fischer : Just to stuff that out a little bit, Eric, just — in how we refer to certain product lines, chew for the most part are our rainbow bites or the sweet bites, the sour bites, those type of products. And then we have gummy products, so that’s also just a nomenclature that we use internally choose versus gummy, so they’re not new products in the sense of a category.

Eric Des Lauriers: That’s very helpful. I guess we could almost think of this as sort of more improvement on the raw materials costs for these specific SKUs. Is that kind of the right way to think about it?

Claudia Goldfarb: That is the correct way to think about it.

Eric Des Lauriers: Thank you, for taking my questions.

Operator: I’m not showing any further questions at this time. I’d like to turn the call back over to Claudia for any closing remarks.

Claudia Goldfarb: First of all, everyone, I’d just like to thank you for your continued support. We have had a record year. We’re continuing to grow and we’re incredibly excited as to where Sow Good is headed, and we couldn’t have done it without all of your support. So, thank you. Have a wonderful day, and we are incredibly excited to keep you updated in the quarters to come.

Operator: Thank you, ladies and gentlemen, that concludes today’s presentation. You may now disconnect and have a wonderful day.