Laird Superfood, Inc. (LSF) CEO Paul Hodge on Q3 2021 Results - Earnings Call Transcript

Nov. 10, 2021 8:58 PM ETLaird Superfood, Inc. (LSF)
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Laird Superfood, Inc. (NYSE:LSF) Q3 2021 Earnings Conference Call November 10, 2021 5:00 PM ET

Company Participants

Reed Anderson - ICR

Paul Hodge - Co-Founder, President, CEO & Director

Scott McGuire - COO

Valerie Ells - CFO

Conference Call Participants

Robert Burleson - Canaccord Genuity

Alex Fuhrman - Craig-Hallum

George Kelly - ROTH Capital Partners

Operator

Thank you for standing by, and welcome to the Third Quarter 2021 Earnings Conference Call and Webcast for Laird Superfood, Inc.

I would now like to turn the call over to Mr. Reed Anderson of ICR to begin.

Reed Anderson

Thank you. Good afternoon, and welcome to Laird Superfood's Third Quarter 2021 Earnings Conference Call and Webcast. On today's call are Paul Hodge, Chief Executive Officer; Valerie Ells, Chief Financial Officer; and Scott McGuire, Chief Operating Officer.

By now, everyone should have access to the company's third quarter earnings press release filed today after market close. This is available on the Investor Relations section of Laird Superfood's website at www.lairdsuperfood.com.

Before we begin, please note that all the financial information presented on today's call is unaudited. And during the course of this call, management may make forward-looking statements within the meaning of the federal securities laws. These statements are based on management's current expectations and beliefs and involve risks and uncertainties that could cause actual results to differ materially from those described in these forward-looking statements. Please refer to today's press release and other filings with the SEC for a detailed discussion of the risks that could cause actual results to differ materially from those expressed or implied in any forward-looking statements made today.

And now I'd like to turn the call over to Paul Hodge, Chief Executive Officer of Laird Superfood.

Paul Hodge

Thank you, Reed. Aloha, everybody. It's a pleasure to be speaking with you in regards to our third quarter. I'll start with a brief summary of our overall positioning, key growth drivers and highlights from the quarter. Scott McGuire, our Chief Operating Officer; and Valerie Ells, our Chief Financial Officer, will follow with additional detail. And then we will open the call up for your questions.

Laird Superfood is a mission-driven high-growth plant-based natural food manufacturer, positioned to be a leader among better-for-you brands in the $759 billion grocery industry. Our business is omnichannel but with a best-in-class native online platform. At Laird, we believe that better food leads to a better world because when people are healthier and feel good, they make better decisions.

Our products provide the sustained energy, nutrition and hydration that we need to perform from sun up to sun down as part of our daily ritual. In addition to delivering great taste, our products are convenient, easy to use and affordable, incorporating sustainable and ethical practices through all phases of our supply chain from farm to fork.

Total third quarter sales increased 45% to $10.9 million, led by the strength of our native digital platform, including continued growth for Picky. E-commerce net sales of $6.3 million were up 70% versus last year, an acceleration from the second quarter growth rate, with DTC increasing 108%. As a percent of the total, e-commerce accounts for 58% of revenue in the third quarter of 2021 compared to 50% a year ago, reflecting organic growth and the acquisition of Picky Bars in May. All the key metrics in our D2C business remains strong, including a 30% improvement in AOV compared to third quarter 2020.

Moreover, our all-time first and second retention rate improved by 10% in the third quarter '21 versus third quarter '20. Recurring revenue based on repeat and subscription orders continues to represent over 2/3 of our D2C business.

Wholesale increased 21% on a year-over-year basis to $4.4 million, reflecting strong gains in grocery, while club was flat as we cycled an equally strong quarter in Q3 of last year. Importantly, club was up sharply on a sequential basis, rising nearly 170% from Q2, reflecting the lumpiness of this business and our previous comments about strong momentum early in Q3.

Door count continue to rise with an increase of around 11% versus last year. We also expanded shelf placement in existing doors, adding coffee SKUs in Safeway and HAV and seasonal creamers at Sprouts. Gross liquid sales increased 77% on a year-over-year basis and accounted for approximately 54% of the dollar increase in wholesale revenue.

We continue to benefit from operational improvements around our refrigerated product, including a 53% reduction in DC spoils, while maintaining average fill rates in the 90%. Finally, our shelf-stable business delivered another solid quarter with sales, exclusive of our club business, up 11% compared to Q3 last year.

Category growth remains broad-based with one exception related to timing of trial and club during last year's third quarter. Creamers increased 23% on a year-over-year basis on the strength and gains in refrigerant liquid creamers and growth in the club channel. Hydration beverage enhancing supplements increased to 28%, driven by new products, including Renew Rest and Recover, Prebiotic Daily Greens and Activate Immune.

Coffee, Tea & Hot Cholate was down 20% overall due to a large initial trial on club during last year's third quarter. However, our non-club business continued to exhibit healthy growth, mostly attributable to our new functional coffees and our functional hot chocolate.

Finally, we had another solid contribution from our harvest snacks and other food items. Third quarter sales of $1.9 million in the snack category were up 39% from Q2, and we now have a new revenue from this category in the prior year period. Growth in harvest snacks was driven by our new baking mixes, additional gains of Picky and continued success in pili nuts.

There are no additional updates on the expected timing of our shelf-stable liquid creamer launch. While we are making solid progress on reformulation efforts and expanding co-packer relationships, we are not anticipating any contribution from this new product in 2021.

Regarding our search for a new CEO, we are well underway and honing in on final candidates. We are pleased by the caliber of potential candidates that have the specific CPG experience we are looking for to take LSF to the next level, who also live the values that drive and define our business.

Let me wrap up my overview with a brief update on our ESG initiatives. On the ESG front, with explosive growth of our online business, we are still actively pursuing our carbon-neutral last mile initiatives with Eden projects. As we feel carbon neutrality is no longer a choice, the necessity in today's world is something we're committed to and constantly looking for solutions. We are also committed to our partnerships with Feeding America and ID.me, to both help solve the food and security issues in our own country as well as supporting our critical care frontline workers.

ESG efforts are part of our DNA and something we are constantly working on internally as well as looking for good external opportunities where we can play a part.

In summary, our third quarter results were consistent with our growth algorithm, which leverages product innovation and customer engagement across a powerful, unique omnichannel platform. We have an enormous growing total addressable market opportunity, and our brand is well positioned for significant growth and share gains for the foreseeable future.

With that, I'll turn the call over to Scott to talk about operations.

Scott McGuire

Thanks, Paul. As I've shared during my first 2 quarters at Laird, the 4Ms are our approach: manufacture more ourselves, make it more efficiently, move it smarter and faster and my company. Summarizing the highlights here, we made more units in the previous quarter, again, and we did it while installing and implementing new complementary technology to our existing lines and improve velocities and gave us 2x plus throughput on one of our largest selling SKUs and equally notable improvements to others.

Our team didn't just work on making it more efficiently, we also made progress in moving it smarter. First, in our growing liquid business. In the last month of the quarter, we converted to a more efficient production cycle, doubled our DC drop sizes, and improved our revenue per pellet position, which is essential in this world of freight capacity constraints and fuel inflation. Secondly, and you may have seen the announcement we achieved occupancy in our new customer fulfillment center. This reduces third-party storage, puts inventory at our fingertips, allows for a new enhanced PIC process and most importantly, provides additional capability to serve our customers at the right cost. And in terms of my company, everyone thinking and executing like owners is the only way we've got so much accomplished.

Given so many of our unique ingredients come from overseas, the question at the front of everyone's mind is what about input inflation and the congestion at the ports driven by supply chain balance and the trucking shortage? Largely, we bypass the most impacted ports. But most importantly, the inventory safety stock strategy we started implementing last year when COVID began has continued to pay dividends. That provided us inventory security and some edge against the most recent inflation. However, we're not sitting back and celebrating great decisions we made last year. Freight, labor and material cost pressures, our suppliers are facing are very real and are being addressed through our short- and long-term actions. Specifically, we are using a balanced approach that prioritizes productivity efforts, combined with strategic pricing efforts that help revenue and margins and provide very little impact, if any, to unit sales.

Now let me turn the call over to Valerie Ells, our CFO.

Valerie Ells

Thanks, Scott. As Paul mentioned, we had a strong top line quarter with net sales of $10.9 million, a 45% increase over the comparable period last year. DTC was a leading contributor, up 108%, reflecting further improvement in key metrics, including AOV and retention. We were also pleased with the 21% growth in wholesale, given that the club business was essentially flat as we went up against an equally strong prior year quarter.

Gross margin improved 600 basis points on a year-over-year basis to 29.4% and largely on and improving inventory costs, demonstrating efficiency improvements in our production and operation processes as well as continued improvements in refrigerated liquid creamer disposals, given our optimized logistics and shelf life and optimization of DTC parcel costs. These improvements were partially offset by elevated wholesale fulfillment-related costs.

While we are very pleased with the strengthening gross margin this quarter and believe we will continue to drive efficiencies in our production processes, our future expectations have not materially changed as we expect to encounter prolonged headwinds from rising freight rates and other inflationary issues. Related to operating expenses, we've made notable progress improving relative expense levels during the quarter, reflecting ongoing efforts to control costs and drive scale-related efficiencies.

Total operating expenses were $8.5 million or 78% of net sales during the third quarter. And when looking at the sequential trend, you'll see that third quarter had the lowest expense ratio in the past 4 quarters and included significant improvement from second quarter. Specifically, it required only $52,000 of incremental operating expense in the third quarter to drive a $1.7 million increase in net sales compared to the second quarter. This will continue to be an area of focus for us moving forward.

After completing the predominant build-out required to support our business as a public company, we have now shifted to finding opportunities to maximize our efficiency and leverage while not sacrificing growth. We expect to continue to make progress here in the coming quarters, though similar to other areas of our business, not always in a perfectly linear manner.

G&A expense was 39% of net sales in the third quarter versus 30% in the comparable period last year, largely prior to becoming a public company and 45% in the sequential quarter. Compared to Q3 of 2020, the majority of the increase in G&A continued to be attributable to public company factors. Noncash expenses made up 37% of the increase, including stock-based compensation and amortization of intangibles. Insurance costs, professional fees and personnel costs were also factors to the pressured G&A in the third quarter.

Sales and marketing expense was 37% of net sales in the third quarter versus 38% a year ago and 43% in the sequential quarter. The improvement from the year ago quarter stemmed from a combination of several factors as lower expense levels for stock-based compensation and personnel costs were partially offset by relative increases in advertising and marketing spend.

Our balance sheet remains strong with nearly $40 million of cash and investments and essentially no debt. And as noted, we remain very focused on maximizing the leverage across our business to continue driving forward toward profitability while maintaining strong growth rates.

Paul, I will pass it back to you.

Paul Hodge

Thanks, everybody, for your time today. As you can see from our latest results, Laird Superfood remains on track to become a leading player in the natural food and beverage industry as we continue leveraging our powerful omnichannel platform.

Thanks for your support, and we are now ready to take your questions. Operator?

Question-and-Answer Session

Operator

[Operator Instructions]. First question comes from the line of Bobby Burleson from Canaccord.

Robert Burleson

So I guess, just -- can you hear me?

Paul Hodge

Yes, yes.

Robert Burleson

Okay. So just curious on the outlook for the balance of the year versus what you guys said last quarter. I didn't see anything in the prepared remarks. It doesn't necessarily mean anything that I missed. What that is? Has anything changed?

Valerie Ells

So nothing's changed. We will be providing guidance for 2022 on our year-end reporting cycle likely in early March. But at this point, I still feel like we are on track for our annual targets.

Robert Burleson

Okay. Great. And with club stores, anything happening there in terms of Q4? There was a noted downtick there, obviously, in Q3 versus last year. Curious if there's some acceleration ahead of the holiday season? Or what's happening there?

Paul Hodge

Actually, Q3 was pretty much flat with Q3 of last year, which was an exceptionally big quarter for club. And then it was, what, 100-and-something percent over Q2. So a significant growth over Q2. But that's just the nature of the club business. It's very, very lumpy. There can be some end of the year kind of better-for-you business that can come from Costco right at the end of the year that rolls into Q1. But the business is just -- has sort of up and down cycles.

We still got a very strong relationship with Costco. It's a great tool for customer acquisition to fill the factory. We've been playing with our 1 SKU with them for a couple of years now, the Superfood creamer, and we're now exploring a series of other SKUs to expand that offering with them for next year. So we're excited about the business, but it is lumpy.

Robert Burleson

Okay. So I mean you guys delivered nice club sales again, I guess, versus a tough compare last year, the takeaway for Q3.

Paul Hodge

Yes, yes.

Robert Burleson

Okay. And then just in terms of aseptic co-manufacturing or co-packing support, have you guys been able to find alternatives? How is that process going? How tight is the capacity out there from third parties as you look out to 2022?

Paul Hodge

Yes. Certainly, the problems in the aseptic co-packing industry is the same, there's a lot of demand and very little capacity but we've been working on it hard enough. We've been expanding our relationships to work with multiple co-packers now. We've changed our formula a little bit to make it a little bit easier to produce while still adhering to our strict value guidelines of clean label, clean product and also our functional ingredients, which is pretty unique to that industry.

And so we've been making great headway. Certainly, won't be any revenue from it for 2021. So we're looking at 2022. But at this point, we don't have a specific date. We're -- all I can say is that we're making progress, getting back up suppliers and making great progress on the formula.

Robert Burleson

Okay. Great. And Val, you made a comment about gross margin where it sounds like maybe there's definitely some headwinds on freight costs there. But if your overall targets for this year are so intact, should we expect some gross margin lift, given some of the other positives that are happening there?

Valerie Ells

Well, we definitely had a strong 3Q, and we're happy with where that shook out. And Scott and his team there are making great progress. We do believe in the future, there's going to be room for even further efficiency gains, more leverage in the factory as for that labor and overhead base. But the inflationary pressures are real. We've been lucky enough to defer some of those, but they're going to be real for our business as well. So we want to just make sure that we're being realistic with expectations and not putting the bar to something unachievable or unrealistic moving forward. But again, still very confident in those targets we did set in the last call of Q2.

Robert Burleson

And that's obviously revenue and gross margin targets. So...

Valerie Ells

Yes. That's correct.

Operator

Next on the queue is Alex Fuhrman from Craig-Hallum Capital.

Alex Fuhrman

So I know that you mentioned that the wholesale business has perhaps benefited in the quarter just from the timing of some orders. But this was a pretty huge quarter for your wholesale segment. And I'm just curious if there's any particular items or retailers that have really been driving that growth recently?

Paul Hodge

I think if you're including Costco and the wholesale number, we did have a really strong Costco quarter. But the wholesale business is great. It's just been a very steady sort of consistent growth. We still haven't lost any large retail customers. We're adding more customers, not quite as many as we'd hoped this year just due to some of the COVID issues and resets -- category resets getting pushed in next year. But we're still making solid gains on the wholesale business, adding new customers. The customers are performing well with the products, and it's just -- it's a great business.

And then again, Q3 just got a little bump from that lumpy Costco business. We did quite a bit of business there. And we love the Costco relationship, but it is lumpy from quarter-to-quarter, which throws numbers around. Having said that, we are looking to stabilize a little bit by expanding some of our SKUs with Costco to kind of diversify some of that lumpiness next year in different regions.

Alex Fuhrman

That's great. And then just thinking about your product assortment, you've launched a lot of new products online lately and, of course, made the acquisition of Picky Bars. Can you talk about who these new products are really targeted after? Are they mostly just your core existing LSF.com customers that have been trying some of these new products? Or any of them perhaps showing signs that they could have a viable sales in the wholesale channel as well?

Paul Hodge

Yes, absolutely. So as a reminder, our business model, what we love about it is we get to take these products online, which cost us very little to launch and test them with a really hard-core customer base, which is rapidly growing still from quarter to quarter to quarter is just getting bigger and bigger. And so what we're really doing is filling out what we call part of our daily ritual. So it's a system from morning to night, different products that people can utilize through the day.

And what that's done for the online business is driven up things like average order value. So people are adding more different items into their cart. Subscriptions, it also is just an exciting thing for consumers to come back to the site as they see new products to try to the trial aspect. And also new customer acquisition, as we launch some of these different new products, we're sometimes grabbing new different customers online that haven't tried our other products, bringing them into the fold. And as they try those products and like it, then they'll start to try their products.

But that doesn't necessarily mean all those products are going to wholesale. What we like to do is test it for 6 to 12 months kind of minimum to kind of really get a sense of how strong the product is. If there's any indications from that direct consumer communication, which is another benefit of that online business to see if maybe we need some packaging tweaks, if we need to do any flavor tweaks or anything like that. And then we will take those top-performing products and push them into the wholesale channels.

But the wholesale channels require a bigger effort and bigger launch. And so far, we've just really been focused because we've got a lot of runway left with our creamers and our functional copies of products that we're driving on both the liquid and the shelf-stable front. So we're just very cautious to not dilute those efforts and especially being that the wholesale business is a much longer cycle to sell into and it's more expensive. We've got free fills and brokers and distributors and a lot of people to deal with.

So we will take those blockbuster products, but we're not rushing into that. We're making sure that those products are true winners. And the place to test it's online, and we had a great couple of quarters of getting some great products, and we're getting great feedback right now.

Operator

Next one on our queue is George Kelly from ROTH Capital Partners.

George Kelly

Paul, can you hear me?

Paul Hodge

Yes, we can hear you, George.

George Kelly

Gosh, I got through my first question, and I was on mute the whole time. I'll start over. So a question for you on the creamer business. Congrats on the sequential improvement there that you saw over the second quarter, a big jump. I was curious if you could break down that segment between liquid and shelf-stable. And then part 2 of the question is, can you give us an update on the liquid business and expectations for the next few quarters?

Valerie Ells

Yes. I can take that.

Paul Hodge

Sure. Yes.

Valerie Ells

So in terms of the creamer business, about $1 million of it was related to refrigerated liquid. The bulk -- the rest of that then obviously is your shelf-stable business. Costco business this quarter was predominantly, if not all, our shelf-stable powder creamer, so we just see a nice lift from that. But our -- excluding both of those, the underlying shelf-stable powdered creamer business was still up nice sequentially. I believe just south of 10% sequential growth from Q2.

George Kelly

Okay. That's great. And then what about the plans around the liquid business for the next couple of quarters? Any kind of update just around some of the changes that have been happening there?

Paul Hodge

Yes, yes. I mean, really, there's a lot of great news with our refrigerated liquid creamer. We've got our shelf life about to 60 days now, and that was a big factor limiting some of the door growth earlier in the year as many retailers just want to see a little bit longer shelf life, that sort of 68 minimum that we've now achieved.

And then also, our shelf fill rates are much higher. They are from the 60% to 90%. And then also the waste numbers, which were big, big numbers, 6, 9 months ago are -- back down to single digits. So along the sort of industry average numbers.

So we made some incredible, I guess, strides on that product. And continuously, we're seeing really strong shelf loss season in the areas that we're selling the product. Whole Foods is a big customer doing really well, and we're now expanding some flavors. So we've got some new sort of, I guess, a little bit more mainstream flavors that we're pulling into the mix that kind of appeal to a broader audience, popular flavors that we know. But it, of course, still has that unique sort of true clean label, fresh packaging and also the functional ingredients.

So the liquid business is great on the refrigerated side, and that's where the bulk of the volume is in the store when you're talking refrigerated versus shelf-stable. And then on the same front, we're working on a shelf-stable liquid product to really focus on opening a lot of those doors in the conventional channels and have an opportunity to do well, sell on Amazon and other online venues with that product as well. And we're just still working with various different co-packers or formulas to dial in the product and get on schedule, hopefully sometime in 2022.

George Kelly

Okay. Great. That's helpful. And then separately, Picky Bars, a question for you on distribution. So is it entirely e-commerce? And are there plans to broaden distribution of those products?

Paul Hodge

Yes. The bulk of the business has been e-commerce. And keep in mind, we're still in the integration phase, which is going very well, in making the branding switch on the packaging. And we expect next year to make a pretty big push with Picky on the wholesale front. We've got some very interested customers on the wholesale side. And we're making some slight tweaks to a wholesale product, but the big thing is having a rebranded also with the Laird Superfood brand before we go into those wholesale channels, which is coming very soon.

In the meantime, we're still working on the integration internally. It's going very well. We've been meeting or exceeding our expectations with the product. And we have -- we just started selling the full Picky sort of catalog in our website, was it last month, October. And then we're -- again, we're expecting that sort of rebranding in Q1 so that all the products are then branded Laird Superfood as we move forward.

So the other good note on Picky is even with sort of the brand change, we're actually seeing subscriptions grow on the Picky side, which is pretty exciting, and we definitely didn't expect that. So all good there, and we really hope to prove to the market that we can do M&A deals like this and make them very accretive to shareholder value in the future.

George Kelly

That's great, that's great. And last question for me is just around new products. So as you look to next year, are there certain categories of your portfolio of products where you think there's maybe the most exciting opportunities to launch new stuff? Like where are you most focused for new products.

Paul Hodge

Well, there's a -- first off, I'd say we're going to probably slow down the amount of new products that are released next year and focus on what we have. We've got a pretty big catalog right now. And there's actually some -- we're seeing early signs of some really incredible products that we just need to put some more focus into. And in some cases, that's a little bit easier than launching a new product.

So we are going to focus a lot on what we have. We're really excited about the snack category, baking mixes, all those products in that sector have been performing pretty strongly. And of course, we're never going to lose sight #1 priority with the creamers. The creamer business and coffee business still has a huge, huge amount of potential. And so big focus there while we really hone in on some of the products that we have. There will be some new product launches, but most of them will be complementary to the categories that we're already in for next year.

Operator

And there are no further questions in our queue. I will now turn the call over back to the presenters.

Paul Hodge

Yes. Thank you, everybody, for listening in and for your support in helping Laird Superfood achieve its goals and making the world a better place through nutrition, health and wellness. As saying, we believe better food leads to the happier and healthier people and ultimately, a better world. So thanks again, and aloha.

Operator

This concludes today's conference call. Thank you for participating. You may now disconnect.

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