Stryve Foods, Inc. (NASDAQ:SNAX) Q3 2023 Earnings Call Transcript

Stryve Foods, Inc. (NASDAQ:SNAX) Q3 2023 Earnings Call Transcript November 14, 2023

Operator: Good afternoon, ladies and gentlemen, and welcome to the Stryve Foods, Inc. Third Quarter Fiscal 2023 Financial Results Conference Call. At this time all lines are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session and instructions will be provided at that time for you to queue up for question. [Operator Instructions] I would like to remind everyone that this conference call is being recorded on November 14, 2023. I will now turn the conference over to Luke Weil. Please go ahead.

Luke Weil: Thank you, operator, and welcome to the Stryve Foods third quarter earnings conference call. With me today are Stryve’s Chief Executive Officer, Chris Boever; and Chief Financial Officer, Alex Hawkins. Before we begin, I would like to remind everyone that part of our discussion will include forward-looking statements that are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements, by their nature, are uncertain and outside of the company’s control. Actual results could differ materially from these expectations. These statements are not guarantees of future performance, and therefore, undue reliance should not be placed upon them. We do not undertake to update these forward-looking statements at a later date, and they only refer to today.

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In addition, today’s call would include a discussion of non-GAAP financial measures, including adjusted EBITDA and adjusted EPS. Non-GAAP financial measures should be considered as a supplement to and not a substitute for GAAP financial measures. We refer you to the reconciliation of non-GAAP to the nearest GAAP measures included in today’s earnings press release for further details. This call is being webcast and can be accessed through the audio link on the News and Events page of the Investors section at ir.stryve.com. Also, the earnings press release is posted on our website, and a copy of the release has been included in the Form 8-K submitted to the SEC. With that, I would now like to turn the call over to Chris Boever. Chris?

Chris Boever: Thanks, Weil. Good afternoon, everyone, and welcome to our earnings call for the third quarter of fiscal year 2023. I appreciate you joining us today as we discuss another quarter of progress on our key transformational initiatives. This quarter has been a testament to our team’s resilience and dedication amidst challenging market conditions. We’ve not only sustained our growth trajectory but also reinforce our commitment to innovation and excellence in the healthy snacking segment. Our focus this quarter has been multifaceted, strengthening our brand presence, driving operational efficiencies and delivering on our promise to our shareholders of taking steps towards building a profitable, sustainable long-term business.

These areas are pivotal to our long-term strategy and are the pillars upon which our future success will be built. As we share our accomplishments and plans today, I am reminded of the incredible journey we have embarked upon. This is not just about financial metrics, but a broader story of transformation, market leadership and the relentless pursuit of excellence. Delving into the specifics of our retail performance in measured channels, the metrics speak volumes about our brands, residents in the market. For the 24 weeks ending October 8th, 2023, as reported by SPINS, our retail dollar sales have seen an impressive growth of 21%, outpacing the category, which was largely flat. This growth can be attributed in part to an expansion of our total points of distribution, which grew 9.9% year-over-year, demonstrating our increased market presence and accessibility to consumers.

While I am pleased with the progress, I am even more excited about the accelerated momentum that we are generating in regards to distribution wins. As we’ve discussed previously, improving our equivalized price mix has been a strategic focus, and I’m pleased to report that it is up 16.4% versus the prior year period. The pricing strategy is key to improving our unit economics, which will help to drive profitable growth over time. This is supported by our packaging redesign and significantly improved product quality, which are both pivotal in driving consumer trial and fostering brand loyalty. Turning to our packaging transition, the focus has been squarely on enhancing the consumer experience at retail. The redesign centered around vivid food photography and clear depiction of product attributes is aimed at making our products more appealing and accessible to consumers.

This approach is showing promising results. Initial feedback from select retailers indicates a notable increase and unit velocity since introducing the new packaging. While these indicators are preliminary and the transition is ongoing, they underscore the effectiveness of our packaging redesign and driving consumer engagement and purchase decision. Remember that these transitions take time due to the multiple touch points and replenishment steps in the overall supply chain, which can vary from retailer to retailer. Virtually all of our production is now in the new bags. And as retailers pull through, the new packaging will continue to flow through to the market. This strategic redesign is not just an aesthetic upgrade. It’s a fundamental part of our mission to make healthy snacking, accessible and appealing to the broader consumer base.

Turning inward. As I’ve shared before, a critical aspect of our journey has been our continued operation operating transformation. This transformation is a cornerstone of our strategy aimed at refining our processes and enhancing our overall operational efficiency. Based on a comprehensive review of our operations, we identified and continue to identify areas where we can optimize performance and reduce costs. The results have been significant. We’ve managed to streamline our supply chain, reducing lead times and improving our inventory turnover rate. These improvements have not only resulted in cost savings but also enhanced our ability to respond swiftly to market demand. Additionally, we’ve invested in technology to automate several of our key processes.

This automation has led to a reduction in manual errors and an increase in overall productivity. It’s a step forward in ensuring that as we grow, our operations remain agile and efficient. Another area of focus has been on our workforce. We’ve implemented training programs to enhance the skills of our employees fostering a culture of continuous improvement and innovation. This investment in our people is pivotal as they are the driving force behind our operational success. In essence, our operating transformation is about creating a more resilient, efficient and scalable business model. It’s about being prepared for future growth equipped with the right processes, technology and people. This quarter’s achievements and operational transformation are just the beginning of a long-term journey towards operational excellence.

As we look to the future, I want to emphasize our immense growth potential an unwavering commitment to creating value for our shareholders. Our strategic initiatives are not just about current gain but are firmly rooted in long-term growth and sustainability. We are actively exploring new market opportunities that align with the consumer trends and our brand ethos. This includes expanding into new geographies, channels, territories and diversifying our product portfolio to cater to evolving consumer preferences. Our recent product launches have been met with enthusiasm, and we anticipate this momentum to continue as we introduce more innovative and health-conscious offerings. In addition to product and market expansion, we are also focused on strategic partnerships and collaborations.

These alliances are crucial for extending our reach and enhancing our brand visibility. By leveraging synergies with our partners, we aim to tap into new customer segments and drive incremental growth. Additionally, we’ve been working for many months to better leverage our capital investments and better utilize our capacity to co-manufacture products for a strategic partner in a non-competitive complementary space. I anticipate this to be a significant contributor to revenue, gross margin and overall bottom line results in the very near future. Our growth strategy is also underpinned by a commitment to operational efficiency and cost management. We believe that sustainable growth is not just in expanding our top line, but also improving our bottom line.

Our efforts in streamlining operations and optimizing our cost structure are critical in this regard, ensuring that we deliver consistent and robust financial performance. To my fellow shareholders, I assure – I can assure you that our actions and strategies are geared towards enhancing shareholder value. We are mindful of the responsibility to deliver returns and our growth initiatives are aligned with this objective. We are excited about the future and very confident in our ability to capitalize on the opportunities ahead delivering sustained value to our shareholders and stakeholders. With that, I’d like to turn it over to Alex Hawkins, our CFO, to provide you with details and color around our financial performance for the third quarter.

Alex Hawkins: Thanks, Chris. As we discuss our financial results for the third quarter of fiscal year 2023, it’s important to frame our discussion within the context of our ongoing transformation and strategic – this reflects the significant strides we have made in our operational transformation. We’ve redesigned our business model to leverage operational efficiency, focusing on streamlining processes and optimizing our cost structure. These efforts are critical in building a foundation for sustainable growth and scalability. Our strategy has been to create a business that is not only resilient in the face of market challenges, but also poised to capitalize on opportunities. This approach is evident in our financials, where the impact of our transformation is clear in our streamlined cost base.

Despite the headwinds in the market, including flat category growth, rising commodity beef prices and an atypical retailer category reset cycle post COVID, our disciplined approach has allowed us to navigate these challenges effectively. Our commitment to this strategy is unwavering, and we are confident that the decisions we make today are setting the stage for stronger financial performance and long-term value creation for our shareholders. I will now provide a detailed analysis of our financials comparing our current performance with the prior year to give you a clearer picture of our progress in the areas where we continue to focus our efforts. For Q3 2023, our net sales were approximately $4.2 million compared to $6.2 million in the prior year period.

This year-over-year decrease of approximately 32.3% is driven in part by our strategic choices and product rationalization and market positioning. Additionally, the prior year period was benefited by a non-normal increase in shipments to catch-up network-wide out-of-stocks that persisted following the execution challenges the company faced in Q2 of 2022. This catch-up dynamic was not present in 2023. Despite the decrease in net sales, we still believe our decisions to rationalize low-quality revenue were aligned with our long-term strategy to focus on sustainable growth. With respect to commodity beef prices, we’ve seen a significant increase. However, we intentionally built up our inventory levels in the early summer before beef prices began to run this year.

And over the course of the third quarter, we intentionally limited our production and beef purchasing to mitigate the impact of the increased commodity costs we would otherwise have been subject to. This benefited us in two ways. One, it served to limit the impact of the increased commodity costs on the business in Q3, but it also served as a source of near-term liquidity as we manage down our inventory levels by approximately $2.1 million from Q2 to Q3 this year. We do expect that as our production schedules return to a more regular cadence in Q4 that beef prices, should they remain elevated, could have an impact on our business. And accordingly, we will watch closely and take steps necessary to mitigate in other ways. Our gross profit this quarter stood at $0.6 million with a gross margin of 13.3%.

In comparison, Q3 of 2022 saw gross profit of $1.4 million and gross margin of 22.4%. We acknowledge that the lower, rationalized volumes through the plant and our decisions to dynamically manage our production schedule continue to create near-term absorption challenges that are a drag on margins. However, our unit economics are strong. And as more volume comes online in the coming quarters and production increases, we expect to see our gross margins expand, all things equal and notwithstanding potential commodity inputs. An additional contributor to our gross margin performance in Q3 of this year relates to moving through our legacy packaged product and rationalized products. As we’ve discussed before, the liquidation market has been challenging in 2023.

And while we did have success in moving some of this inventory in Q3, market dynamics yielded a less than desirable price, which put further pressure on margins. We’ve seen a significant reduction in operating expenses, which decreased to $4.2 million from $6.1 million in the previous year, a 31.4% reduction. And keep in mind, that operating expenses in the third quarter of 2021 were $11.4 million, which represents a 63% reduction over two years. This demonstrates our commitment to cost control and operational efficiency, essential components of our strategy to achieve operational leverage. Our net loss for the quarter was approximately $4.8 million slightly better than $5.0 million loss last year. The loss per share decreased from $2.40 to $2.14 year-over-year.

However, a key variable affecting the comparability of these periods is the presence of the non-cash interest expense of approximately $0.5 million in the third quarter of 2023, not present in the prior year that relates to the warrants that were issued in connection with Bridge Notes in April of this year. Accordingly, on a pro forma basis, our adjusted loss per share for the third quarter of 2023 was $1.66 as compared to the prior year adjusted loss per share of $2.21. The key measures we use in assessing our progress is adjusted EBITDA. Our adjusted EBITDA loss improved to $2.5 million in Q3 from $3.9 million in the prior year period. This 35% improvement reflects the positive impact of our operational transformation efforts and is even more impressive in the context of our top line rationalization efforts.

These financial metrics are critical in understanding our current position and the trajectory that we are on. While we face challenges, our strategic decisions and operational improvements are laying the groundwork for a stronger and more resilient business model. Our focus remains on driving efficiency, optimizing our product portfolio and strategically investing in growth opportunities. Turning our attention to liquidity, an area that’s crucial for the health and growth of our business [indiscernible].

Chris Boever: Alex, we lost you there. I will pick up. Turning our attention to liquidity, an area that’s crucial for the health and growth of our business, our current liquidity position is a reflection of our strategic financial management and our ability to navigate market complexity. As we navigate through the current economic landscape, our approach to liquidity management is both strategic and mindful of the broader financial environment. We’re operating with a tight liquidity position, a conscious decision influenced by the higher cost of capital in today’s market. This quarter, we’ve taken proactive steps to strengthen our liquidity position. We’ve actively utilized our at-market equity facility doing 194,949 shares of Class A common stock at a weighted average price of $5.37.

This move has generated net proceeds of approximately $1 million, contributing positively to our liquidity. Furthermore, we’ve worked closely with our lenders to access previously untapped borrowing capacity under our line of credit. This effort is part of our strategy to augment our short-term liquidity and ensure we have the financial flexibility to manage our operations effectively, while pursuing critical growth initiatives, which should yield improved results overall. We continue to be disciplined in our approach to capital expenditures. We have carefully calibrated our investments and assets to ensure they align with our long-term strategic goals and do not unnecessarily burden our cash flow. This approach has been vital in maintaining a healthy liquidity position.

Additionally, our effort improving our operational efficiency have positively impacted our working capital requirements. By streamlining our supply chain, and optimizing our inventory levels, we have been able to manage our working capital more effectively with inventory contributing positively to our operating cash flow. In essence, our liquidity strategy is multifaceted. It involves not only strategic financial transactions, but also operational efficiencies and prudent capital management. This approach positions us to navigate the current economic challenges effectively, while maintaining the agility to capitalize on future growth opportunities. As we project our path forward, I am confident in the growth trajectory. Our strategic plan is showing promising time and are well positioned to capitalize on the opportunities ahead.

We are seeing positive momentum in the leading indicators of our business, driven by differentiated nature of our products. Our offerings stand out in the market, appealing to a growing base of health-conscious consumers. The dynamics of our category are evolving favorably and our products are in the forefront of these changes, resonating strongly with the market trends. Looking ahead, we are confident that the growth we are building now will pave the way for reduced losses, ultimately, an inflection point. Our strategic initiatives are designed to scale efficiently ensuring that as our revenue grows to the requisite levels, profitability will follow. This balance of growth and profitability is at the heart of our financial strategy. Our unique product offerings combined with effective market strategies and operational efficiencies are creating a very strong foundation for sustainable growth and profitability.

We remain steadfast in our commitment to our strategic plan, confident in its potential to deliver significant value to our shareholders and stakeholders. And as we conclude today’s call, I want to reiterate our confidence in the direction and potential of Stryve Foods. The discussion we’ve had today underscores not only the progress we have made, but also the exciting path that lies ahead. Our journey this quarter has been marked by strategic decisions, and operational advancements and the positive consumer response to our updated packaging to the ongoing improvements and our operational efficiencies. Each step has been a testament to our commitment to growth and excellence. The differentiated nature of our products continues to set us apart in the marketplace.

We are not just participants in the healthy snacking segment. We are leaders driving the category forward with innovative and appealing offerings. The market dynamics are in our favor, and we are poised to leverage these trends to further our growth. Looking ahead, we are enthusiastic about the potential for significant growth. Our strategic initiatives are aligned and geared for not only expanding our market presence, but also ensuring that profitability follows as our revenue grows. We believe in the strength of our products, the effectiveness of our strategy and the dedication of our team. In closing, I want to thank our shareholders, customers and the entire Stryve Foods team for your continued support and belief in our vision. We are on a promising trajectory, and I am confident in our ability to realize our full potential and create substantial value for all of our stakeholders.

With that, I would now like to open the line for questions. Operator?

Operator: Thank you. [Operator Instructions] Your first question comes from Alex Fuhrman from Craig-Hallum Capital Group. Please go ahead.

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Q&A Session

Alex Fuhrman: Hey guys. Thanks very much for taking my question. I wanted to ask about gross margins here. It sounds like the lower gross margins, is due mostly to less volume running through your facilities. Can you give us a sense of maybe what gross margins would have looked like with a more normalized volume level? And then kind of additionally, what would gross margins look like perhaps with more normalized volume and then taking into account the more recent rise even in beef prices that you mentioned?

Alex Hawkins: Yes, so happy to take that. Notwithstanding beef prices, which I’ll put aside for a moment, our gross margin potential in the facility when fully utilized, obviously, dependent upon a number of variables, mix being one of them, product and price mix. We should be able to get into the high-30s, low-40s gross margin range in the facility and the footprint that we have today based on our cost structure and unit economics overall. Now that said, we have – within our cost of goods and gross margin, gross profit, we have operating leverage that we will see as volumes continue to rise, and we’ll more fully utilize the footprint we have there. I mean it’s somewhat indicative of the significant capacity we have – untapped capacity we have to grow into overtime. And as we do, there isn’t as much incremental cost that needs to be added to the business within the manufacturing facility overall as we scale.

Chris Boever: Yes, I would just add to that, Alex, the team and our facility has done a phenomenal job identifying and streamlining operations and taking our overall labor cost down in a material manner to reflect the size and scale the size of the business. As we utilize and better lever our fixed overhead assets and get to the volumes that we know we’re going to be achieving in the very near future, we anticipate that to have a huge impact on gross margins. In addition, a lot of our productivity initiatives that we’ve had in place haven’t even been fully realized yet, whether we’re procuring differently with strategic partners and how we’re constructing the payments and the ways of working and the cash flow operations side of it, there’s multiple levers there that hasn’t even started to reflect into the gross margin side.

So there’s a lot still to be had there. And then I did mention in my comments there about a strategic partnership for a co-man arrangement on a non-competitive, complementary line of products that we are very excited about and being able to help us absorb some of our overheads through a tolling arrangement that we think will help gross margins certainly help revenues and dramatically improve our profitability.

Alex Fuhrman: That’s great. We’re looking forward to hearing more about that in the future. And then, Chris, I think you mentioned some new distribution wins that will likely hear more about in the coming weeks and months here. Which brands and products have really been leading the charge there as you’ve been increasing the distribution points for your brands?

Chris Boever: Yes, great question. Great follow-up question. Across the convenience channel in particular and really across all channels, [indiscernible] has been really in [indiscernible]. It is growing at a very rapid pace for distribution, velocity and overall positioning in the marketplace. The better for you, combined with a lot of the heat level types of flavor profiles are spot on every single consumer trend. Retailers love the new packaging, the new foil pouch and the expression that we’re able to get across on our packaging is being very well received. So that momentum will very, very much continue. Kalahari has been growing in the natural channel. Our distribution is significantly increasing, and we’re getting far more penetration there.

Stryve brand has undertaken the greatest change in its packaging positioning. And while we’ve had a little bit of headwinds on that with some of our velocities the new expression and the new packaging and the improved quality has also been well received, and we expect that to be picking up in its increased rates of distribution and velocity. But we’ve got to turn that momentum on that brand a little bit more. There’s a little bit more work to do on that particular. But in total, we are gaining significantly and we’re picking up lots and month distribution across all classes of trade.

Alex Fuhrman: Okay. That’s really helpful. Thanks very much Chris and Alex as well.

Chris Boever: Thank you, Alex.

Operator: [Operator Instructions] Your next question comes from Mike Grondahl from Northland Securities. Please go ahead.

Mike Grondahl: Hey guys. Two questions, just looking for a little bit more clarity. Chris, on that last one, and it says in the press release, in coming weeks, we’ll announce or expect to announce several new wins. Could you talk a little bit about the timing of when those could hit revenue and sort of the range of revenues maybe like low-to-high from some of these new wins or in aggregate?

Chris Boever: Yes. Not to be too specific on this. I would tell you, you’re going to see some announcement here in the coming days and weeks across several different retail formats. From a National Sales perspective, where you’ll see new placements of distribution of products that we haven’t even had anything in before. That’s 100% incremental as its new distribution in totality. And you’re going to see a list of numerous additional customers where we’re getting expanded distribution, which can mean more SKUs and in more stores. So I am very, very excited and pleased about how our sales team is starting to get our complete category solution out in front and being able to discuss our impact and incrementality that we will have on the category because nothing is like us in the category.

There’s a lot of assortment optimization opportunities and productivity within the category that retailers have in front of them. Historically, there has not been a tremendous amount of innovation in this category. There’s been a lot flavor extensions and sometimes different forms and formats. But there’s a lot of brands that have a lot of the same life type products that deliver the same types of attributes. And as a result, there’s a high switching level. Nobody has the points of difference that we have because of our minimal processing that we have. Our products yield 50% more protein than the leading jerky, 2.5x the protein of the leading meat-stick brand. And we have unique characteristics that make us even a healthier alternative with no sugar, no broth, no water, no preservatives, no cancer-causing preservatives that are added to our product.