Q3 2021 Laird Superfood Inc Earnings Call

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.

And the 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 will turn the call over to Scott to talk about operations.

Thanks, Paul.

As I've shared during my first two quarters of near the floor in our approach manufacture them ourselves make them more efficiently move it smarter and faster and my company some.

Summarizing the highlights here, we made more units in the previous quarter again.

We did it while installing and implementing new complementary technology to our existing lines and improved velocities and gave US two X plus throughput of one of our largest selling skus and equally notable improvements to others.

Our team didn't just work on making them more efficiently. We also made progress in moving it smarter.

First in our growing liquid business.

The last month of the quarter, we converted to a more efficient production cycle doubled our D. C drop sizes and improved our revenue per pallet 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 new enhanced pick 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 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 imbalance 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 hedge 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 helped revenue.

Margins and provide very little impact if any to unit sales.

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

Thanks Scott.

As Paul mentioned, we had a strong top line quarter with net sales of $10 9 million or 45% increase over the comparable period last year.

<unk> with a leading contributor up 108%, reflecting further improvement in key metrics, including a L E and retention.

We're also pleased with the 21% growth in wholesale given that the club business was essentially flat and 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% largely on an improving inventory costs demonstrating efficiency improvements in our production and operation processes.

Continued improvements in refrigerated liquid creamer disposal.

Given our optimize logistics and shelf life and optimization of DTC parcel cost.

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 are 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 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 Youll see that third quarter had the lowest expense ratio in the past four quarters and included significant improvement from second quarter.

Specifically required only $52000 or incremental operating expense in the third quarter to drive $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.

After completing the predominant buildout 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 of 39% of net sales in the third quarter versus 30% in the comparable period last year.

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 factor.

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 that 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 towards profitability, while maintaining strong coffee.

I will pass it back to you.

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

Thanks for your support and we are now ready to take your questions operator.

Okay. So as a reminder, SaaS question, you will need to press star one on your telephone.

All your question press the pound key again that is star one on your telephone please standby, while we compile the Q&A roster.

First question comes from the line of Bobby Burleson from Canaccord. Your line is now open.

Hi, Thanks for taking my question.

So I guess just can you hear me.

Yes, yes, okay.

Hi.

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 but I did I Miss what what that is has anything changed.

Nothing's changed we will be providing guidance for 2022 on our year end reporting cycle likely in early March.

But at this point.

We feel like we are on track of our annual target.

Okay great.

And with club stores anything happening there in terms of.

Q4.

There was a noted.

Down.

A downtick there obviously in Q3 versus last year.

I'm curious if there is some acceleration out of the holiday season or.

Yeah, what's happening there.

Actually Q3 was pretty much flat with Q3 of last year, which was a.

Exceptionally good quarter for club.

And then it was 115% over Q2, so the significant growth over Q2.

But that's just the nature of the club business is very very lumpy.

There can be some.

<unk>.

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 it 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 one 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.

Okay. So I mean.

You guys delivered nice club sales again, I guess versus a tough compare last year.

If you take away the aperture theory.

Yeah, Okay, and then just in terms of.

Hey, septic, who co manufacturing or co packing support.

<unk>.

Have you guys been able to find alternatives how has that process gone way how to.

Right.

Has to be out there from third parties.

You look out to 2022.

Yes, certainly the problems in the <unk>.

Packing industry has the same there is there is a.

A lot of demand and very little capacity.

We've been working on a hard math, 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 Val.

Value guidelines of clean label, a 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.

At this point, we don't have a specific date, where all I can say is that we're making progress getting backup suppliers and making.

Progress on the Formula.

Okay, Great and Valley, you made a comment about gross margin there.

It sounds like maybe.

Yeah, there is definitely some headwinds on freight costs there but.

If you're if your overall targets for this year still intact should we expect some gross margin lift.

Given some of the Covid positives that are happening there.

Well, we definitely had a strong <unk> and we're happy with where that shook out.

Scott and his team they are making great progress and we do believe in the future they're going to be room for even further efficiency gain more leverage in the factory I forgot labor and overhead base.

Inflationary pressures are real.

We've been lucky enough to defer some of those but they are they're going to be real for our business as well. So we want to just make sure that we're being realistic with expectation.

<unk> not setting the bar for something on achievable or unrealistic moving forward, but again still very confident in our project, we did set and last holiday.

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

Okay, great. Thank you.

Thank you.

Thanks, Simona Q is Alex Fuhrman from Craig Hallum Capital. Your line is now open.

Great. Thanks, very much for taking my question.

So I.

I know that you mentioned that you know the whole belt at that.

Perhaps benefited in the quarter just from the timing of some orders, but this was a pretty a pretty good quarter for for your wholesale segment and just curious if theres any particular items or retailers that have really been driving that growth recently.

Yeah.

<unk>.

I think if youre, including Costco and the wholesale number we did have a really strong cost per quarter, but the wholesale business is great. It's just been a very steady.

Sort of.

Consistent growth, we still Havent lost any large retail customers, we're adding more customers not quite as many as we'd hope this year just due to some of the COVID-19 issues and resets category resets are being 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 prop.

<unk> and its a great business.

And then again Q3, this got a little bump from that lumpy Costco business.

We did quite a bit of business there.

<unk>.

And we love the Costco relationship, but it is lumpy from quarter to quarter, but 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 some of that Lumpiness next year in different regions.

Yes.

That's great. Thank Paul and then just thinking about your product assortment, you've lost a lot of new products online at lately and of course made the acquisition of Picky bar can you.

Talk about.

New products are really targeted app there.

Are they mostly if your core existing <unk> dot com customers that had been trying some of these new product R&D at bama, perhaps showing signs that they could have a viable.

Sales in the wholesale channel as well.

Yeah, 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 this getting bigger and bigger and so what we're really doing is filling out what we call part of our daily.

So it's a system from morning to night of different products that people can utilize through the day and what that's done for the online businesses drove enough things like average order value. So as 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 so the trial aspect and also a new customer acquisition as we launch some of these different new products, sometimes grabbing new different customers online that haven't tried or other products, bringing them into the fold.

And as they tried those products and like at the mill and they'll start to try other products.

But that doesn't necessarily mean all of those products are going to wholesale what we like to do is test it for.

Six to 12 months kind of minimum to kind of really get a sense of.

How strong the product is.

There is any indications from that direct consumer communication, which is another benefit 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 pushing into the wholesale channels.

But the wholesale channels require a bigger effort in bigger launch and so far we've just really been focus because we've got a lot of runway left with our our creamers in our functional copies of products that were 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.

It's a much longer cycle to sell into and it's a more expensive you've got rebuilds and brokers and distributors in 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 in the.

Place to test its online and we had a great couple of quarters of getting some great products and we're getting great feedback right now.

That's terrific well, thank you very much Paul.

You bet.

Next one on accused George Kelly from Roth Capital Partners. Your line is now open.

Hi, George.

Turning to the airlines have opened.

Both Paul can you hear me.

Yes, we can hear you George has it gone gosh I got through my first question and I was on mute the whole time.

Yeah I'll start over thanks for taking my questions.

A question for you on the creamer business congrats on the sequential improvement there.

So over the second quarter Big jump I was curious if you could breakdown.

That segment between liquid and shelf stable and then part two of the question is can you give us an update on on the liquid business and expectations for the next few quarters.

Sure Yes.

In terms of the creamer business.

$1 million of it was related to refrigerated liquid.

The rest of it and then obviously as yourself stable business Costco business. This quarter was predominantly if not all.

Our self developed harder creamer.

We did see a nice lift from that but are excluding both of those the underlying shelf stable housing consumer business.

So up nice sequentially I believe just south of 10% sequential growth from Q2.

Okay, that's great and then what about the plans around the liquid business for the next couple of quarters any kind of updated just around some of the changes that have been happening.

Yes, yes, I mean really there's a lot of great news with our refrigerated local Kramer.

We've got our shelf by about 60 days now and that was a big factor limiting some of the door growth earlier in the years. Many retailers just wanted to see a little bit longer shelf life that sort of 60 day minimum that we've now achieved and then also are.

Self fill rates are much higher than they are.

From the 60% to 90%.

And then also the waste numbers, which were big big numbers.

Six nine months ago are down back down to the single digit so.

Along with sort of industry average numbers. So we made some incredible.

You know.

I guess strides on that product.

And continuously we're seeing really strong sell philosophies in the areas that we're selling the product.

<unk> 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 bit more mainstream flavors that we're pulling into the Mexican kind of appeal to a broader audience.

Popular flavors that we know but.

Of course still has that unique sort of true clean label fresh packaging and also the functional ingredients.

So.

Our liquid business is great on the refrigerated side and Thats, where the bulk of the volume isn't absorbed when youre talking to in refrigerated hurts a shelf stable.

On the same front, we're working on.

Shelf stable liquid products 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 our formulas too.

Dial in.

The product and.

Get on schedule hopefully sometime in 2022.

Okay, Great that's helpful and then.

Separately.

Picky bar question for you on.

A lot of distribution so is it entirely ecommerce.

Are there plans to broaden the distribution of those products.

Yes, the bulk of the business has been e-commerce and keep in mind, we are still in.

In the integration phase, which is going very well and making the branding switch on the packaging.

And we.

We expect next year to make a pretty big push with picky on the wholesale friends. So we've got some very interested customers on the wholesale side and we're making.

Some slight tweaks to our wholesale product but.

The Big thing is having a rebrand it also with alerts even food brand before we go into those wholesale channels, which is coming very soon.

Meantime, we're still working on the integration internally, it's going very well we've been.

<unk> 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 for the last months of October and then we're again, we're expecting that sort of rebranding in Q1. So that all the products are then branded large super food 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 <unk> 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.

That's great that's great and last question for me.

Just around the new products.

So as you look to next year are there certain categories of your portfolio of products, where you think.

There is maybe the most exciting opportunities co entrepreneurs, just like where are you most focused for new products.

Okay.

Okay.

Well there is.

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 is actually some we're seeing early signs.

Really incredible products that we just need to put more focus into and in some cases vessel over the 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 of those products and that that sector had been performing pretty strongly in.

Of course, we're never going to lose sight number one priorities with the Creamers, the creamer business and coffee business still has a 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 were already in for <unk>.

Next year.

Okay excellent. Thank you.

You bet.

And there are no further question on queue I will now turn the call over back to the presenters.

Yes. Thank you everybody for listening in and for your support and helping <unk> achieve its goals in making the world a better place for nutrition health and wellness.

We believe better food leads to a happier and healthier people and ultimately a better world. So thanks again and Aloha.

Okay.

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

Okay.

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