Laird Superfood Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
November 8, 2023

There are 6 speakers on the call.

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. All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end. I'd now like to pass the conference over to our host, Trevor Russo.

Operator

Please go ahead.

Speaker 1

Thank you, and good afternoon. Welcome to Layered Superfood's Q3 2023 earnings conference call and webcast. On today's call are Jason Beef, by Superfood's President and Chief Executive Officer and Anja Hamel, our Chief Financial Officer. By now, everyone should have access to the company's Q3 2023 earnings release filed today after market close. It is available on the Investor Relations section of Layered Super Foods' website at www.layeredsuperfood.com.

Speaker 1

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 the call over to Jason.

Speaker 2

Thanks, Trevor. Hello to everyone and thank you all for joining us again 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 7.50 basis points versus this time just 1 year ago.

Speaker 2

And we executed these improvements with just a fraction of the marketing and SG and 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 Spinz 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.

Speaker 2

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 continue 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 subscriptions. 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 1,100,000,000 media impressions, and we are just getting started.

Speaker 2

I am also pleased to report that our Amazon inventory challenges are now behind as we were able to get our products restocked 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 want to tip my hat to our supply chain organization. It was managed to achieve the aggressive cost savings target that we set out for them in 2023.

Speaker 2

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 cost. Our results in Q3 were the realization of that vision as we decreased our landed product cost 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 and 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 their business, I am proud to report that we have largely and successfully completed that work, including headcount downsizing and discretionary expense reduction.

Speaker 2

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, We still have 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 mid term goal of breakeven profitability and becoming cash flow positive. I am extremely proud by how far we have come during the past 2 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 top line growth through wholesale expansion in 2024 and beyond.

Speaker 2

And as we continue to chip away at our least effective marketing activities to further reduce our G and A expenses, We believe that we can now be in position to achieve a cash flow positive run rate in the next 12 to 18 months. Now let me turn the call over to Anja to discuss the 2nd quarter results.

Speaker 3

Thank you, Jason. Net sales of $9,200,000 in the Q3 of 2023 increased 3.7% as compared to 8,800,000 in the prior year period and increased 19% as compared to $7,700,000 in the Q2 of 2023. The year over year growth was driven by distribution gains in the natural and conventional channels, seasonal program expansion in club, price and 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 and Media.

Speaker 3

This decline was expected. This marketing cuts were strategic in nature in order to cut inefficient spend and reduce our customer acquisition costs to build the most sustainable e commerce business and improve our profitability in this channel. Additionally, Our Amazon sales continued 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 3rd quarter and is now fully behind us. In the Q3, we continue to build on the success we achieved in the first half of the year from strategic actions implemented last year.

Speaker 3

Every quarter this year, we saw a consistent margin expansion versus prior year, with Q3 margin reaching 31%, which is 6 70 basis points improvement sequentially over Q2 and 7 50 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 3rd 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.

Speaker 3

Operating expenses for the Q3 of 2023 totaled $5,600,000 a decrease of 2,200,000 compared to $7,900,000 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 the restructuring activities in 2022. Net loss as reported was $2,700,000 for the Q3 of 2023, a decrease of $3,100,000 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 and A was $1,800,000 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.

Speaker 3

Turning to our balance sheet and cash flow. We ended the quarter with $7,400,000 in cash and no debt as we continue to conservatively manage our balance sheet. Cash burn in the Q3 of $3,500,000 was elevated as compared to sequentially from $1,400,000 in Q2 due to plant 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.

Speaker 3

With 1 more quarter left in the year, we expect 4th quarter net sales to be in the range of $8,500,000 to $9,000,000 and gross margins in mid to high 30s, excluding any one time extraordinary charges. This concludes our prepared remarks. Operator, we are now ready to open the call to questions.

Operator

Thank you. We will now begin the Q and A session.

Speaker 4

Sorry, can you hear me? I'm sorry, can you guys hear me? Hey, Bobby.

Speaker 2

Yes, we can hear you, Bobby.

Speaker 4

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.

Speaker 4

And then I just want to add on to that, how long do you think Just the tailwind from Amazon could persist into 2024.

Speaker 2

Yes. Hey, Bobby, 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 this team has been a nice long run here for 2 years to get to this point and it's really great now to see the culmination A lot of those efforts and we still have a lot in front of us. 2 of the points that you're hitting on here are really important.

Speaker 2

1, on the DTC impressions, It's for 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, 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 podcasts that we're supporting in a partnership that we have already established with the Sean 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.

Speaker 2

And so some of this As just as you're alluding to, it's going to be 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, 1 to 1 Social media type of marketing that we had 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 its end. 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.

Speaker 2

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, and I would say probably 2 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 out of stock that we had Throughout this year. And we're knocking down all of those in lack of mold fashion. And I would say getting to the cleanest look at Amazon that we've had really Since last year at this time.

Speaker 2

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 had a chance to supercharge some of the growth in these channels right now.

Speaker 4

Okay, great. And then just a quick follow on. It sounds like you're pulling back on the elevated trade spend in Q4 should help with gross margins and the burn is going to slow, I guess, from what it did in Q3. But you talked about a cash flow positive goal of 12 to 18 months from, I guess, is that from October? And then, what swings you to either end of that range?

Speaker 4

Are there particular things you're watching that you think could really affect how soon that outcome is reached?

Speaker 2

Yes, great question. I'd tell you, Bobby, our gross margin as we had planned at the beginning of the year, gross margin exceeded 30%. We have lined up Yes, to add on 5 plus points to the course of the next year. And as we do that, obviously, we'll start to close Towards the breakeven profit that we mentioned. The big driver on top of that, the big driver for us as we go forward, there are really 2.

Speaker 2

One is The continued skinnying of our G and A, we've made a number of moves that are only now starting to trickle into the G and A line and we'll get the full benefit of over the course of the next year. And then similarly on the marketing side, I mentioned the strategy that we've moved to. And as part of that move, we are compressing marketing spend down towards a more traditional CPG model. So You'll see marketing come down next year and obviously making a few bets on that with regards to our ability to market better and more efficiently, but we have A great team here that I think has generated some insights that will allow us to do that. So it's really the combination of the increased gross margin and that the lower G and A and marketing costs coupled with what we believe will become an increasingly positive story on Because for the last two years, we have had a bigger online business declining faster And we were able to grow our smaller wholesale business.

Speaker 2

And that has just about flipped. As we mentioned, it's about a fifty-fifty business now, wholesale to online. And our wholesale business is currently growing faster than our online business is declining. And so that obviously becomes a flywheel. It starts to work in our favor.

Speaker 2

We're really excited about what that can mean for us next year.

Speaker 3

And I just want to add one more thing to that. Hi, Bobby. This is Anja. Hi. I think working capital is another driver and continue optimizing Our working capital, especially as we grow and expand the business, we think that we still have room to improve in terms of our inventory efficiencies.

Speaker 3

That's another area where we're looking to free up our cash.

Speaker 4

Okay, great. Thank you for that additional

Operator

Our next question is from Alex Fuhrman with Craig Hallum. Your line is now open.

Speaker 2

Hey guys, thanks very much

Speaker 5

for taking my question. Wondering if you can talk about what you're seeing here in Q4 from Amazon. And when would you really expect your business through that important channel to be more or less what you would have expected to be full strength Following the coconut milk powder issue that you had.

Speaker 2

Yes. Hey, Alex, I'll start that and Anja can jump in if she has anything to add afterwards. But I'll just tell you, the way we're looking at Amazon right now is we're about a year behind where we had planned to be. And so we were coming into, as you guys may recall, from Q3 and Q4 last year. We had headed up our spend.

Speaker 2

We had built cohorts. And we really felt like we had Amazon in position to drive growth for the next year. But lo and behold, the quality issue Q1, Q2 basically knocked us Straight back to where we had been a year before. And that's what we're just coming through now. We're getting back to where we were a year ago.

Speaker 2

We're rebuilding those cohorts. I would say we're also marketing much more efficiently than we were at the time. So our advertising spend is quite a bit reduced and yet we're seeing really strong sustenance from the existing sales. We have a tremendous opportunity still to convert A number of those large number of those current consumers over into subscribers and we're working on that right now as well as the conquesting of Our competitors now that we have full inventory in place. So really excited about that channel for next year.

Speaker 2

We're excited about it giving a call for this year. That was going to be one of our big growth drivers. Unfortunately, it didn't materialize with quality event that we had, but we were able to keep that product out of the hands of consumers. So there was really no downside except that we had Basically to put a pause on for call it 7 ish, 7 or 8 months, while we got everything back in stock and got our buybacks 1 and all of our basically all of our existing business put back in place. So from here, we should have a really great growth driver in front of

Speaker 5

Okay. That's really helpful. Thanks, Jason. And then just on the gross margin, I think you kind of touched on this a little bit with Bobby's question. But mid to high 30s gross margin in Q4, that's quite a bit more than you've done any Quarter this year or the last couple of years.

Speaker 5

Now that you've got your core, shelf stable creamer manufacturing being outsourced, So, I mean, is that a run rate we could expect to see throughout next year? Is there any reason why Q4 is maybe a little step up and maybe we should expect that to be a little bit lower in the first half of next year?

Speaker 2

Yes, great question, Alex. I would tell you that you're right where we are as we think about our margins through Q4. And As we go forward from here, we actually see more opportunity than we see risk. There are always commodity movements that may Go against you, but given where we bought commodities thus far and where it looks like next year and with some of the cost savings Yes, that we have in place. We actually see opportunity to further improve from here.

Speaker 2

That being said, we are also looking Add investments that we can make to gain market share online and retail. And so we'll be balancing that as we go forward. But I would tell you, no, we don't Really see a spike in Q4 that we won't be able to hold on to. We really see the start of the long term trend to be sitting in that 35 plus range as we go forward.

Speaker 3

And I'll just add to it. It's my Alex, it's lasagna. So I'll just add is that quarterly wise, our margin is sensitive to, So just depending on the timing or the seasons, Q1, I expect to be a little heavier because it's back to health Seasoned for consumers and we want to line up our promotions with that season to really drive the top line. And then it kind of comes down in Q3 and Q4 I'm sorry, in Q2 and Q3 and then we have the Black Friday event, which seasonally Fluctuates somewhat with trade, but as far as our cost of sales, that's going to be pretty steady Throughout the quarters next year, at Q4 or better levels.

Speaker 5

That's terrific. Well, thank you both very much and congratulations on the really improved results here in the 3rd quarter.

Speaker 2

Thanks, Alex. Thank you.

Operator

There are no additional questions at this time. So I'll pass the conference back to the management team for any closing remarks.

Speaker 2

Yes. I just want to say, I'll say thanks to everyone for joining us again today. It's extremely exciting and gratifying to be able to report on our continued progress of this turnaround. And now with gross margin in line with many of Top CBG companies in the industry, we can get back to growing our business. And that's obviously when it really gets fun for us as a management team and exciting hopefully for the investors as well.

Speaker 2

The future has not looked this bright for Laird Superfood for quite some time and frankly not since I've been here. And

Operator

That concludes today's conference call. Thank you for your participation. You may now disconnect your line.

Powered by Quartr
Earnings Conference Call
Laird Superfood Q3 2023
00:00 / 00:00