Q2 2023 Laird Superfood Inc Earnings Call

Participants

Trevor Rousseau; SEC Reporting & Technical Accounting Manager; Laird Superfood, Inc.

Jason Vieth; CEO & President; Laird Superfood, Inc.

Anya Hamil; Interim CFO; Laird Superfood, Inc.

Alex Fuhrman; Analyst; Craig-Hallum Capital Group LLC

Presentation

Operator

Good afternoon, and thank you for joining the Laird Superfood, Inc., second-quarter 2023 financial results conference call. My name is Kate, and I will be the moderator for today's call. (Operator Instructions)
I would now like to pass the call over to our host, Trevor Rousseau. You may proceed.

Trevor Rousseau

Thank you, and good afternoon. Welcome to Laird Superfood's second-quarter 2023 earnings conference call and webcast. On today's call are Jason Vieth, Laird Superfood's President and Chief Executive Officer; and Anya Hamil, our Chief Financial Officer. By now, everyone should have access to the company's second-quarter 2023 earnings release filed today after market close. It is available on the Investor Relations section of Laird Superfood's website at www.lairdsuperfood.com.
Before we begin, please note that during the course of this call, management may make forward-looking statements within the context of federal securities laws. These statements are based on management's current expectations and beliefs and involve risks and uncertainties that could cause actual results to differ materially from those described in these forward-looking statements. Please refer to today's press release and other filings with the SEC for a detailed discussion of these risks and uncertainties.
With that, I'll turn the call over to Jason.

Jason Vieth

Thanks, Trevor. Hello, and welcome, everyone. Thank you for joining us again today. Our results in the second quarter continue to demonstrate that we are successfully reining in spend and driving our business toward profitability. Our cash burn was a record low $1.4 million during Q2 and continues to decelerate, both on an annual basis and sequentially versus prior periods.
Our adjusted net loss in Q2 came in almost 50% lower than during Q2 of last year benefited by improved gross margins, but also driven by lower marketing and G&A spend. This is the result of our success in improving our marketing effectiveness where our [ROEs] has increased by 86% during the past year, as well as the leaning out of our organization and other G&A spend.
On the commercial side, our strategy to drive business and wholesale continues to pay off. Our brand has always been a great fit for the natural channel. And in the 12 weeks ending June 18, 2023, our Laird Superfood growth in the natural channel was plus 69%, driven by a combination of distribution expansion as well as strong increases in our dollar sales velocity behind the rebranding activities, we outlined on prior calls.
During Q2, we also made significant investments into wholesale trade, the majority of which was in support of new items and other distribution gains at key customers, but which also included the ongoing charges associated with the product quality that we had discussed during our Q1 earnings call. We have an exciting lineup of products hitting shelves in Q3 this year with our biggest seasonal program to date. And we have a great digital program lined up, and we'll continue to execute retail support programs with our top customers.
We also have a series of initiatives underway to further grow our brand awareness and to drive continued sales velocity growth at the shelf. Our DTC business saw solid results on the relaunch of both our Prebiotic Daily Greens and coconut water hydration product platforms. These two lines helped us to rebuild crucial gaps in our supplements portfolio, driving plus 48% sequential growth versus Q1 in that segment.
Our greens products have quickly become a top seller on our DTC platform, and we are pleased with the repeat rates and reviews that we are seeing. In June, we relaunched our hydration platform, which we believe is among the cleanest hydration products in the marketplace. Harnessing the power of dried coconut water now in convenient stick packs and with electrolytes.
As in prior quarters, we strategically reduced our DTC media spend by 67% during Q2 by cutting inefficient spend, thereby improving our overall ROEs by 86%. The quality event that we discussed during our Q1 call led to unexpectedly long out-of-stocks on Amazon during Q2, whereas we were able to quickly rebuild our inventory positions in both DTC and wholesale.
It turned out to be far more challenging to do with Amazon, where we needed to first wait for Amazon to get the product fully withdrawn from all of their warehouses across the country, before we were finally able to begin rebuilding our inventory. The result of this was approximately 12 weeks without any inventory of many of our top-selling SKUs. In fact, we are only now getting our inventory at Amazon back to full strength on a national basis. And we expect this issue to finally be fully resolved by the end of Q3. The upshot to this issue is that we were able to quickly pull back marketing spend on this platform, netting a positive return of contribution margin dollars to the P&L.
Turning now to operations. We are now more than six months into our move to an asset-light supply chain, and we remain extremely satisfied with the relationships and results that we have so far achieved with our co-packing and distribution partners. Not only did our Q2 cost of goods sold improved by 12 points of gross sales versus just a year ago, but we also increased our production capacities by approximately three times that of the peak production in our own facility. At the same time, we have added incremental sensory and quality assurance checkpoints to our manufacturing processes to ensure that our product is the highest quality.
Finally, I'm pleased to announce the continued evolution of our marketing model from a low-ROI pay-to-play digital marketing approach to a focused celebrity and PR-led model that will seek to leverage Laird Hamilton and other like-minded health and wellness influencers to drive the awareness and trial of Laird Superfood.
To that end, we just announced the large partnership with Shawn Ryan and The Shawn Ryan Show, which we expect to enable us to reach a largely untapped demographic for our products. A Shawn Ryan Show reports an estimated 3 million listeners between Spotify and Apple podcast platforms, 1.75 million subscribers on YouTube, and nearly 1 million followers on TikTok.
We believe that a majority of these consumers have had little to no awareness of Laird Superfood in the past and are excited to be working with Mr. Ryan to share the positive health benefits of our food with millions of new potential advocates for the brand. We look forward to being able to share other big marketing ideas in the near future.
Now let me turn the call over to Anya to discuss further the second-quarter results.

Anya Hamil

Thank you, Jason. Net sales of $7.7 million in the second quarter of 2023, decreased 11% as compared to $8.7 million in the prior year period. This was primarily driven by lower sales in e-commerce channels. Given the level of pullback in our marketing spend, which was 67% year-over-year reduction of DTC-specific working media and 30% overall marketing spend decrease. This decline was expected.
These marketing cuts were strategic in nature in order to cut inefficient spend and reduce our customer acquisition costs, in order to build a more sustainable direct-to-consumer business and improve our profitability in this channel. Additionally, our Amazon sales were negatively impacted by inventory out-of-stocks related to the previously discussed product quality issue experienced in Q1. We expect this out-of-stock issue to be fully resolved in the third quarter.
The decline in e-commerce was partially offset by growth in our wholesale channel, driven by distribution gains in retail, pricing, as well as velocity improvements behind new packaging and rebranding campaign launched earlier this year.
In the second quarter, we continued to build on the success we achieved in the first quarter from the strategic actions implemented last year. For the second quarter in a row, gross margin was in the mid-20s, with Q2 gross margin reaching 24.3%, 120 basis points improvement sequentially over Q1 and 610 basis points improvement versus the same period last year.
This year-over-year margin expansion is driven by our supply chain transition to an asset-light, third-party co-manufacturing and fulfillment model. And it would have been even stronger except for the investments that we have made in trade promotions to drive incremental awareness and trial in retail stores. I expect the need for this level of support in our retail channel to continue in the third quarter and taper off towards the end of the year, allowing gross margin expansion to ramp up further into 30%-plus range in the second half of 2023, excluding any one-time extraordinary charges.
Operating expenses for the second quarter totaled $5.5 million, a decrease of $1 million compared to $6.5 million in the year ago period. On adjusted basis, operating expenses decreased $2.4 million, driven by lower marketing cost, resulting from strategic cuts of inefficient spend, lower people cost, and other general and administrative expenses following the restructuring activities in 2022.
Net loss as reported was $3.5 million for the second quarter of 2023, a decrease of $1.4 million versus the prior year period. On an adjusted basis, net loss for the second quarter was $3.3 million, which was approximately $2.8 million lower than a year ago. These improvements in the bottom line were driven by expanded gross margins, lower marketing and SG&A spend. A detailed reconciliation of non-GAAP adjusted net loss is included in our earnings release.
Now turning to our balance sheet and cash flow. We ended the quarter with $10.6 million of cash and no debt as we continue to conservatively manage our balance sheet. Cash burn in the second quarter of $1.4 million was the lowest the company ever achieved and less than half of the prior year period of $3.9 million. I anticipate third-quarter cash burn to ramp up due to working capital needs to support a stepped-up demand in the back half, although our year-end cash forecast is on track with our operating plan.
Moving on to outlook. Despite the progress made improving the middle of our P&L. We have higher promotional trade spend in the second quarter as we increased support in our wholesale channel as well as inventory out of stocks that impacted our Amazon performance. We expect to resolve this issues during Q3, but we are updating our guidance to reflect net sales in the range of $34 to $37 million and gross margins of 27% to 29% for the full year 2023, with second half gross margins exceeding 30%, excluding any one-time extraordinary cost.
With that, I'll turn the call back to Jason.

Jason Vieth

Thanks, Anya. While turnarounds are by nature an unsteady progression, I'm pleased to be able to report our continued progress against the key strategic goals of improving our cost structure and slowing our cash burn, growing our brand and wholesale business and improving our product portfolio. As we go forward, we will continue to keep a vigilant focus on reducing our costs and slowing our cash burn.
This concludes our prepared remarks. Operator, we are now ready to open the call to questions.

Question and Answer Session

Operator

(Operator Instructions) Diana Tokar, Canaccord Genuity.

So congratulations on the reduced cash burn. Maybe gives you a nice runway, it looks like. But I'm wondering what's a steady state of cash burn that you would expect over the next 12 months?

Anya Hamil

Hi, [Bobby], this is Anya Hamil. Thank you for that question. Though our cash burn was high -- our cash burn was $1.4 million in Q2, and it was about $6 million in Q1. It was much higher in Q1 because of the Sisters exit, but also timing of account receivables collections, which was above $1.4 million, that fell into Q2. So if you normalize for that, it's just under $3 million. It's kind of the normalized Q2 cash burn, and I expect that you continue in that range but slowly reduce throughout the back half of the year.

Okay, great. Thank you. And then I'm wondering -- just understanding the Amazon dynamic as you restock into that channel. Do you guys benefit on a sell-in basis or sell-through?

Jason Vieth

Hey, Bobby. It's Jason. Hey, so yeah, I can take that. So let me give a little bit more color what's going on with Amazon. So in Q1, we had a quality event, as you know, that caused us to go out of stock as we recalled all of the product that had rented coconut powder inside of it that we had received from a supplier. And as we pulled that back, we were able to pretty quickly get the product out of the wholesale channel.
So by going to [Unify and Kayhe], we got everything out of their warehouses quickly, and then we reached into each one of the retailers that have been shipped and we were able to withdraw that as well. And some of that you're seeing we continue to get the final bills now as we withdrew through that product, but we allocated for that -- for the most part back from Q1.
On the DTC channel is even easier because, of course, we control all that inventory and so we simply could own that off and then reran the product and put it into our warehouses where we were surprised, quite frankly, within Amazon. And the challenge that we had is, first, we had to have all the product withdrawn from out of the Amazon warehouses. We would have thought of that as a series of DCs that we had shipped to, but Amazon subsequently shipped that down through the -- I don't know if you call them micro DC, but basically smaller DCs, so that we can all receive our orders overnight or we know within 24 hours through Prime memberships, et cetera.
And so withdrawing out of all of those warehouses turned out to be a slow affair. And you can't start restocking until they have withdrawn from every warehouse and gotten all the product out because we had a number of SKUs impacted. It took a long time, much longer than we anticipated. You can't start to restock until they're all out either. So as those are coming back, we were waiting to send. We had their replenishment order, but we couldn't -- we weren't allowed to send it until the product was out.
And so anyhow, it just ended up being a very lengthy process, knocked us out for about 12 weeks. The resulting impact of that is, one, we're literally out of stock on our top items for almost three months. We went dark. And the good news is we knew this was happening. We were able to adjust our spend accordingly.
So we pulled back on the marketing spend and you saw that flow back in as we talked about with the EBITDA and cash benefit that we got on slowdown that we had in the losses there. But what it does mean is we have to go back and rebuild cohort.
So to your question on sell through, we're now finally getting to position where getting the last of that inventory out and in a sustainable fashion where the sell through is not so fast that we're again depleted because that started to happen also. Because you could line up all the orders fast enough to keep up with sell through, but we're getting back into position now. We expect to be fully in stock over the course of Q3.
It is still impacting our business a bit at this point, but we've pulled back our Amazon media -- marketing media dollars accordingly. And so we're in a position now where from a contribution margin perspective, we're not being hurt. But from a sales perspective, unfortunately, we're kicking it down the road a little bit as we wait to get fully back into stock.
I don't believe there will be any long-lasting impacts. Amazon is essentially a pay-to-play model where the media that you put in will generate the eyeballs and typically the conversion that you would expect. And so we've seen those conversion metrics. They are where we need them to be. We just can't spend at this point because of the other stocks that we've had so I do anticipate by the end of Q3 -- before the end of Q3 that we'll have that business humming again.

Okay, great. Then just quickly on the natural channel growth, so you guys had some nice growth there. And I'm wondering, just if you can remind us where the ACV is for you guys in that channel just as a measure of the amount of headroom left to go?

Jason Vieth

Yeah, it's a great question. So we're -- it varies across items, of course. But in generally, you can think about our liquid creamers in the 60% range and our powdered creamers in the 40% range. We still have a lot of opportunity to fill out the breadth of portfolio in both of those two lines.
And we do still have a number of other products that are really gaining traction in the natural channel as well, bars, most notably recently. But our supplement lines also are now starting to gain steam, and those are barely on the radar at this point, Bobby.
There is a strategic question for us as we go forward. We've -- I would tell you we're doubling down into the natural channel as we go forward to close those distribution gaps with our broker and with those retailers, really fill out our portfolio, and then start to promote the family line accordingly. And that's why we're seeing such great lift right now. We've had tremendous promotional responsiveness as well as those distribution gains, and the result is some really strong growth in that channel.

Great. Thank you.

Jason Vieth

Thanks, Bobby.

Operator

Alex Fuhrman, Craig-Hallum.

Alex Fuhrman

Hey, guys, thanks for taking my question. Just looking at the numbers here, I mean, even with the lower guidance for the full year, I mean, you're still implying a nice little sequential build in revenue in the third and fourth quarter relative to what we saw in the first half of the year. Can you talk about what's going to drive that, and to what extent we might expect that growth or some of those drivers to persist into next year?

Jason Vieth

Hey, Alex, how are you doing? It's great to hear your voice and good question. I'm glad we get to talk about this a little bit because we're really excited about the back half as well.
I tell you there are a number of initiatives really that are driving that. One is continued expansion within the -- especially the natural channel, but we have a really big seasonal program that's launching in natural and in club. Watching [mula] as well, but really natural and club will be carrying that. And we've expanded our pumpkin lineup as well as our holiday -- later season lineup, peppermint mocha as well.
But that pumpkin lineup, we really expect to be a big one for us with additional shippers and display that we've picked up in a couple of new products. We also had some really exciting movement on our daily greens. You'll recall that we reformulated that to a much-better tasting product, and the consumer response has been outstanding. And so we continue to drive that online. It's quickly become our top SKU online over the course of just the last few months. And we're seeing tremendous uptake from consumers and that are really excited about the possibilities as we go forward there.
And then on top of that, with Amazon coming back on, to the question we just answered from Bobby, we expect to see Amazon inventories replenished and that sell through to really pick up again as we go into later Q3 and coming out of Q4. We've got some really exciting promotions and merchandising opportunities that we're executing at retail as well. And so really, we're expecting it to be a nicely rounded incremental increase basically for the rest of this year.

Alex Fuhrman

Okay, that's really helpful. Thanks, Jason.
And it looks like you guys have taken some price increases over the past year and year to date, has there been any material reaction customer-wise to the price increases? Have those been enough to cover your rise in product cost?

Jason Vieth

Yeah, great question. I forgot. I would be remiss if I didn't mention one big driver in the back half as well that wasn't -- I didn't have here my notes because I was waiting to make sure we got the press release out, but we just entered the first of what we expect to be several large marketing deals that we're exploring right now.
We are partnering with The Shawn Ryan Show and with Shawn Ryan, which we believe will help us to tap millions of new consumers that are outside of our core focused demographic today. Very, very much of fit within our demographic but consumers we had not been targeting as well as we could have. So I think that's going to be a really exciting opportunity for us as we go forward. You'll see more on that.
Shawn has been just a tremendous partner to us already even as we have just been starting this up. And he's a big believer in the products and what we're doing here with the company. And so we're really excited about that.
And then yeah, with regards to the price increases, what I would tell you on that, Alex, is we -- we mentioned last year, we needed to move price. We hadn't touched it for really many years and still believe that we're delivering an incredible value relative to the product that we're putting out. But we are in position now where we expect gross margin as we've mentioned before, to eclipse the 30% rate in the second half of this year.
So we're getting now to where we have a business that can return gross margin dollars as we're selling incrementally in a way that starts to support the marketing. And that's the exciting position that we talked about last year and probably seems far off back then. But now to a couple of, I would say, targeted and smart price increases, we've tried -- really tried to hold the line and really just cover the COGS increases that had taken place through the pandemic.
And so now we're back in a good position on that, Alex. And I think as we go forward now with the transition that we made with the relaunch of our liquid products, we're going to see gross margins rise above 30 and a very different business model in place.

Alex Fuhrman

That's great. Thank you very much, Jason. Appreciate everything.

Jason Vieth

Yeah. Thanks, Alex.

Operator

Thank you. (Operator Instructions) At this time, there are no additional questions remaining, so I would like to pass the call back over to the management team for closing remarks.

Jason Vieth

Thanks, everybody, for joining today. It's an exciting opportunity for us to get back with you every quarter to share the progress that we're making. And against that strategy that we outlined that we're really reducing our losses on the P&L as well as really holding on to our cash position to create optionality for us into 2024 and 2025.
We feel like we're making the right steps here. And while we continue to tweak the business and as you see with some of the -- with the call down on revenue, we're making choices to hold onto cash in a smart way and really put ourselves in position to be able to grow some of these new exciting lines that you'll see in the second half of this year. So thanks, much for joining in, and we'll look forward to sharing additional updates very soon.

Operator

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