Q4 2022 Laird Superfood Inc Earnings Call
Thank you for see anyway, and welcome to the fourth quarter and full year 2022 earnings conference call and webcast for layered Superfood, Inc. I would now like to turn the call over to Mr. Steve Ritchie of Weird superfood to begin.
Thank you and good afternoon, welcome to large Super Foods fourth quarter and full year 2022 earnings conference call and webcast.
This call our Adjacencies alert Superfoods, President and Chief Executive Officer on your Hamill, Our Chief Financial Officer, and Andy Johnson, Our Chief commercial officer by now everyone should have access to the company's fourth quarter and full year earnings press release filed today. After market close. This is available on the Investor Relations section of large super groups website at W.
W. W Dot alert superfood dot com.
Before we begin please note that 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.
At least on 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 Jason.
Thank you Steve.
Welcome everyone and thank you for joining us today.
It's been a busy few months since we reported our progress I'm, turning around and they're Super food and I'm excited for all the progress that we will be sharing with you today.
I'll start the call with an update on our overall business and progress against our key strategic initiatives before I hand, it over to Andy Judd, our chief commercial officer for a deeper dive into our performance across products and channels.
Then on Campbell, our CFO will cover the fourth quarter in detail and will finish by opening up the call to your questions.
During our last call I announced that we would be closing our manufacturing facilities and sisters of Oregon.
As we have just completed an agreement with both a co manufacturer and third party logistics provider to handle the powder manufacturing or distribution for our business.
I am happy to report that we have already completed that transition to these two partners and that they both are now fully operational and integrate it into our supply chain.
Since December these partners have produced and shipped 100% of our powder products and they have proven to be responsive adaptable and supported in every way.
I want to take a moment to share my immense pride in our layered super big supply chain team.
In the span of just a couple of months came together to completely shut down our manufacturing facility in Oregon.
You end up with a new co Packer and third party distribution center in Utah and.
We had to build and implement the various support systems and other controls required to run our business there.
This was all accomplished before the end of January and I had blown away by the speed and professionalism with which our combined teams have completed this transition.
And by the long term opportunities this will create to increase our supply chain flexibility and drive down our total operational costs.
Similarly, I am pleased to be able to announce tremendous progress on the commercial side of the business.
In the fourth quarter, we began to transition to our new branding and packaging, which brings an entirely new design to our portfolio and enhances our imagery to better highlight both our layered superfood brand and the taste appeal of our various food products.
Unveiled this new look at the natural food industries largest convention Expo West and I can attest that the feedback was ferocious to positive.
And as Andy will share very shortly we have already seen a nice bump in our recent retail sales velocities, which we attribute to the new branding and its ability to drive consumers at the first moment of truth when they see our new package on the shelf or on the screen.
We are also in the process of rolling out packaging with a new Dow cross deal that will allow for better reach feeling of our products, which has been one of the few complaints that we've consistently received over the last few years.
When viewed on a retail shelf.
<unk> now commands consumer attention.
When purchased imputed held it delights consumers at the all important second moment of truth, each time that they are preparing to consume the product.
I'm also proud to share that our revised approach to our direct to consumer or DTC business is continuing to pay off.
During the fourth quarter, we lowered our consumer acquisition costs from $90 back in Q4 of 2021 to just $30 in Q4 2022.
Not only did we reduce our acquisition costs by two thirds in the past year, but we did it while simultaneously increasing our average order value and we remain on the right track to fundamentally reshape our DTC business as we drive toward profitable growth.
As we were refining and focusing our DTC approach in spending model, we made it our strategic goal to accelerate our growth on Amazon.
Pleased to share that we grew that channel by 38% during Q4 versus the same period a year ago.
We accomplished this by executing a strong black Friday, and overall holiday shopping season, which allowed us to grow our average order volume by 13% versus the year before.
At the same time, we also made good progress in driving out third party sellers of our products and I don't need to buy box for our product portfolio key operational improvements that set the table for further expansion throughout this year.
Up to this point, our wholesale business has been our most challenging and unfulfilled opportunity.
And I am pleased to be able to share that we brought in a new sales leader during Q4 to address this.
In November the Ugly joined us from chocolate lovers, where he was the head of sales for the top chocolate brand in the natural channel.
So he's only been here for a few months Doug has already partnering closely with our various brokers that represent large super food across conventional and natural channel Grocers club and mass and we have a solid slate of category reviews coming up over the next months that can quickly change the sales trajectory of our business.
As I mentioned earlier, we are already seeing significant improvements in our retail velocities as our new branding and packaging. It takes hold and as we work with retailers to execute better trade promotion plans and optimize absorb it and shelving of our products.
Likewise, the performance of our club business also continues to improve driven by a combination of new branding and better in store activation of our brands.
In addition to the transitions and improvements that I've already outlined we continue to make steady progress on our liquid cream or transition to an accepted product which remains on track to launch later this summer.
We recently had the opportunity to taste the product coming from our first scale production run.
And I can attest that it isn't great tasting creamer.
Taste improvement versus our current formulation.
The conversion of this product to a nice up tick format will also allow us to sell it across all channels, including BTC and Amazon.
All in I expect that once we reach a steady state in our aesthetic production. This transition will enable more than a 20 point improvement versus current gross margins for our liquid creamer product driven by better tolling distribution and raw material costs.
Amongst all the positive developments on the business, we did encounter a product quality issue last month, the impact of which was partially reflected in our Q4 financials.
Essentially we received a rancid coconut milk powder product from one of our suppliers and ingredient made it into several of our products before we got it.
You realize that these products went up to our standards very early after shipment and I am proud to share that we immediately initiated a voluntary product withdrawal.
Contact at all impacted retail customers brand consumers to aggressively pull back everything that we could.
In doing so we took out most care of the brand and our relationships with customers and consumers and have replaced the product for impacted consumers wherever possible.
The feedback from our retail customers and consumers has been outstanding as they haven't started their appreciation for our transparency and their commitment to our brand.
We are still estimating the total cost of isn't that and expect to receive reimbursement from our suppliers given that we have been able to trace the issue to the product that they provided to us.
I don't have much more that I can share at this time, but we will obviously keep everyone apprised of material updates during subsequent calls.
Over the past year, we brought on a leading team of seasoned CPG executives that had gone a long way in executing the turnaround of this business in a very short time frame as.
As we set up our reporting cycle in 2023, I want to take a moment to point out once again the tremendous progress that has been made in the past year.
First we completely overhauled our branding and packaging and improved the taste functionality and packaging of many of our products.
As a result, we expect to see improved takeaway as more consumers find and try our products and as they increase their repeat purchases.
We transitioned from one manufacturing in central Oregon to a highly flexible asset light model.
It's squarely on our major transportation node.
Excluding onetime charges, we expect to see seven to 10 points of gross margin improvement during 2023.
Third we rebuilt our entire retail broker network as well as our marketing partner ecosystem.
As a result, we expect to be able to discuss solid distribution expansion during the second half of this year.
We have also largely rightsize their inventory positions and are actively managing our a R and AP to better leverage our working capital to maximize our cash position.
And finally, we've made significant improvements to our financial and accounting capabilities and to our I T systems and infrastructure.
Yes Terry.
That's provided us with confidence in our data and decision, making and improve the speed with which we are able to execute.
I'm extremely proud of all that are there. The superfood team has accomplished in a very short time frame.
We're in a very different position and 2023.
From which we can now expand with speed and confidence.
A year ago, when I accepted the CEO role at this company our cash burn rate was such that without substantial operating improvements our cash without last much more than one year.
Pleased to share that a year later, we have implemented numerous changes to the company that have both reduced our cash burn and improved our efficiency and market positioning.
As a result of these changes and without having to raise any additional capital during this time.
We still have more than a year of cash related.
And while we expect to require a cash raise at some point before mid 2024.
We will be able to present, a much stronger business model that sets us up for continued growth and expansion as we become a leader in functional plant based foods.
With that I'll hand, it over to our Chief commercial officer and Jen.
Thank you Jason.
Next month I'll celebrate my first year at Laird Superfood, We just returned from the natural products Expo West trade show and I am as optimistic as ever as we showcased our brand transformation and talk to retailers about our mission to help consumers achieve new levels of performance.
Sure they feel their bodies with real functional whole plant based foods.
As Jason discussed it has been a year of strategic change and tremendous progress as we work to improve our go to market model and transition from a primary focus on DTC and Omnichannel brand I'm grateful for the hard work. Our team has made to improve our business fundamentals operate more efficient and effective marketing.
Model and build the foundation for multichannel growth for years to come.
Q4 progress was marked by an improved trend in crucial sales channels, we have historically been underdeveloped, including a plus 19% net sales growth in retail excluding club and the significant growth on Amazon that Jason mentioned.
All our overall online business in Q4 was down 5% the channel saw sequential growth in back to back quarters on reduced spend as we continued to see strong Amazon grows and our most efficient quarter in our DTC business for the year.
This improvement is consistent with our strategic plan as Brooklyn, and Amazon was up plus 38% year over year, while simultaneously improving average order value on the platform by 8% versus year ago.
This strong Q4 close enabled us to deliver a plus 18% net sales growth on the platform for 2022 versus a year ago.
Also seeing the benefit of scaling our approach to the platform and solid plus 16% sequential increase in Q4, and our subscribe and save the waters.
For our DTC business, we focused our efforts to drive a more efficient model as we reset the platform for long term profitability.
In order to do this we significantly reduced our advertising investment by 52% versus year ago, with only 35% reduction in sessions.
Fucking both the loyal organic traffic, we have and the previous inefficiency in our media.
As a result, we realized a 67% decrease in our consumer acquisition costs or cat, which is our lowest level since Q3 of 2020.
Price increase that we took in June of 2022 helped increase our average order value by 8% year over year for the quarter.
The team executed a tight Q4 holiday plan, realizing strong conversion of over 9% plus.
Plus 50% versus 2021 R.
Our efforts to rebuild behind Richard retention marketing resulted in the growth of our CRM database to over 400000 consumers, a plus 11% increase versus Q4 2021.
And you're seeing our highest email conversion and over eight quarters at 9%.
As expected 2022 was a challenging year for our DTC business, along with many others in the industry is rising acquisition costs and shifting consumer behaviors challenged growth.
Team remains steadfast in finding ways to shift resources eliminate excess and still maintain strong loyalty and return customer orders. Thanks to these retention efforts, we still maintained a 45% repeat customer rate in 2022.
We continue to see positive trends in our core kremers categories at retail as consumers continue to move towards more functional offerings with increased benefits like the ones in our functional plant based creamers with reductions in our liquid Creamers business. We saw our retail dollar velocities increase plus 74% and plus two.
One, 1% in natural and new low respectively for the 12 weeks ending one 123.
Within these channels, we remain the number one functional crema and our dollar sales growth once again outpaced the overall category and the plant based Creamers segment.
With accelerating velocity growth and improving dollar share in the natural channel up nearly two points in Q4 versus year ago. We were excited about this continued growth in the premiums. These.
These continued strong productivity gains at retail are a clear indicator, we have a strong brand and proof of concepts.
With the margin enhancement expected from our transition to subject that Jason mentioned earlier, you have a ton of optimism about the opportunity to scale our position in the liquid creamer segment.
We are also seeing an improved velocity trajectory on our shelf stable powdered creamer business driven by improved retail support and execution.
In the natural channel our dollar sales velocity grew plus 13% for the latest 12 weeks ending 123.
We saw increasing velocity on our powdered creamers in every month of the quarter.
Overall.
Our consumer loyalty metrics remain at an all time high with our net promoter score, reaching 82 in Q4 and our customer satisfaction remained at a $4 nine on a five point scale.
I want to note that we have executed all of this while also substantially reducing our overall spending on marketing and sales and marketing G&A versus year ago.
I am more convinced than ever that we have a bright future ahead.
Layered supports the value proposition is on trend and sizable markets and categories.
A loyal consumer base and supported by a talented team.
Q4 saw us implement the initial stages of our brand and portfolio improvement plan and we saw a redesigned packaging begin to rollout to consumers. In fact, we've already seen an acceleration in year over year velocity, plus 11% and plus 4% and the natural new channels, respectively. In the first four weeks of 2023.
As a new packaging landed on shelves.
And this packaging.
Design improved shop ability in retail and breakthrough at the first moment of truth that shelf.
Further highlights the functional benefits that make our value proposition truly unique.
Our brand refresh is much more than just packaging as we recently announced over the course of 2023 we will refresh nearly 30% of our portfolio to improve taste and functionality, while still maintaining our industry, leading standards and clean and simple functional and Greens.
For example online of instant Lockneys will now have adaptogen and functional mushroom extra months across all items in the segment.
And we've added new flavors like Moca launching.
And new single serve sessions for on the go with both launching in retail and online in March.
We are also re launching our daily prebiotic Greens with an incredibly delicious new formula and available in single serve Sashays. This is just the beginning of an exciting year of innovation in 2022.
Now, let me turn the call over to Anya Campbell, our CFO to further discuss fourth quarter results.
Thanks, Sandy net sales of 9 million in the fourth quarter of 'twenty or 'twenty two what's it sequentially flat to the third quarter of 2022 and decreased 4% as compared to $9 4 million in the prior year period, driven by lower volume in DTC and club channels.
As Andy discussed our DTC decline was primarily driven by a 52% year over year reduction in media to cut inefficient spend and reduce customer acquisition costs as we build a more sustainable direct to consumer business going forward and improve our profitability in this channel.
The decline in DTC was partially offset by tremendous growth and now Amazon Dot Com channel.
Driven by continued adoption and momentum built from optimized marketing strategy.
Our wholesale channel also delivered double digit growth driven by new distribution in the natural channel and velocity improvements and liquid cleaners.
As reported gross margin was negative four 6% driven by one time exit and disposal costs related to the transition to car manufacturing model in restructuring cost associated with closure of our sisters facility.
Adjusted gross margin was 19% a decline of 440 basis points versus Q4 of 'twenty or 'twenty one.
The margin compression versus a year ago period was driven primarily by fixed cost deleverage on the lower production volume and will reduce and optimize inventory levels, leading into a packaging refresh and transition to co packing as well as increased costs associated with inventory reserves and disposals.
Yeah, and inflationary freight costs.
Operating expenses totaled $15 3 million, an increase of $6 1 million compared to $9 2 million in the year ago period.
The increase was driven by impairment of intangible assets losses, and termination of leases with manufacturing facilities.
Exit and disposal costs, including impairment charges, well sector equipment furniture, and software as well as severance and retention bonuses.
Excluding one time costs operating expenses were $6 1 million, which is actually a $3 2 million lower than fourth quarter of last year due to reduced sales and marketing expenses as well as lower people costs across the organization.
Net loss as reported was $15 6 million, an increase of 126% versus the prior year period on an adjusted basis net loss was $4 3 million and approximately 38% lower than the year ago period, and 23% lower sequentially.
Compared to our Q3 results demonstrated continued progress in our cost savings initiatives.
Detailed reconciliations of non-GAAP adjusted net buses is included in our fourth quarter earnings release.
Now turning to our balance sheet and cash flow, we ended the quarter with $17 8 million of cash and no debt as we continue to conservatively manage our balance sheet.
Cash used in operations was $3 2 million an improvement of over $400000 versus Q3.
Moving onto our outlook, although we anticipate the little uncertain economic environment with historically high inflation rates impacting consumer spending will continue into 2020 three we believe that the strategic actions we have taken in 'twenty to 'twenty, two and continued to take in 'twenty to 'twenty three have positioned the business.
For net sales growth in the high single digits and gross margin improvement of seven to 10 points for full year 2023, excluding any onetime charges.
Well I anticipate that we will see gross margin improvement from the co Packer move right away, the time and those losses and potential recoveries related to the product quality issue that Jason talked about earlier unrelated to the move will dampen our first quarter results.
We have already anticipated and ramp up in our gross margin outlook throughout 2020 and.
And expect that we will exit the year with gross margins in excess of 30%.
With that I'll turn the call back to Jason.
Thanks Tanya.
When I joined there superfood last year. It soon became apparent that while we had an exceptional brand we would need to do a hard reset of our business fundamentals.
Since last summer our team has been reworking every aspect of this business and I'm extremely pleased that we are now on the cusp of emerging as a much improved business.
With a stabilized E com platform and green shoots forming in our wholesale operation. We're in a great position to leverage the flexibility of our new asset light supply chain and drive growth across our business in 2023.
We have assembled a small but mighty team of CPG leaders and experts and I look forward to seeing all of that they will deliver in this year and beyond.
This concludes our prepared remarks, operator, we're now ready to open the call to questions.
Secondly, if.
If you would like to ask a question. Please press star followed by one on your telephone keypad. If for any reason you would like to remove that question. Please press star followed by two again to ask a question press Star one.
As a reminder, if you are using a speaker phone. Please remember to pick up your handset before asking your question well pause here briefly ask questions are registered.
The first question is from the line of Alex Fuhrman with Craig Hallum. You May proceed.
Hey, guys. Thanks, very much for taking my question I wanted to ask about the significant improvement in gross margin that you're expecting to see this year end and on your I think you kind of touched on this in your very last remarks here, but if I'm understanding this correctly it sounds like the improvement in.
Margin rate from shifting to the outsourced model. It sounds like you should see that right away and then Q1 has perhaps an additional headwind related to the quality control issue do you think about your target of 30% plus this year. She should we expect gross margins to build.
Throughout the year and kind of grow into that target or are you more or less expecting to be right around there notwithstanding the Q1 quality issue.
Hey al.
Thank you for the question.
Yeah.
Okay.
Jason go ahead.
Hey, Alex Hey, sorry, where we're having to do this remotely today, we've got a couple of folks that got sick, including myself coming back from Mexico. So we might be a little bit awkward in some of these hey, Alex Thanks for your question.
Listen I would tell you that we had planned for the gross margin to build throughout the year are really we expect it to largely achieve it in the first quarter, but we knew we had some offsetting costs as we've made the transition.
We had moved most of the inventory in Q4.
Had set up and done some production runs, but we expected really to step into that relationship with a co packer over the course of a couple of months I can tell you that it's gone swim.
Swimmingly.
Now some of the co Packer theyre doing a phenomenal job.
They've come up to speed much more rapidly than we had planned in our forecast and in our plants.
So we're really excited about where that is as you alluded to though we do have this quality issue that will impact us.
I'd mentioned that we expect that to be offset over the course of this year as we as we work with our supplier.
Around the root cause behind us, we're very comfortable that we understand what the issue is and so now we're working that back and we expect it to have remediation against that but for the first quarter certainly we would expect to see an impact and as a result, just as you said a build in the gross margin profile as we move sequentially through the year so that we're.
Exiting a well over 30% by the end of the year.
Okay, that's really helpful. Thanks.
Thanks, Jason and if I could ask just.
Just on the direct to consumer business. It it it sounds like your customer acquisition costs were reduced really significantly is that a function of something you're doing differently or maybe some ineffective marketing programs that got caught just curious you know where you're seeing that coming from and if you.
It's possible to sustain that.
Going forward this year.
Thanks, Alex This is Andy Yeah, I'll I'll jump in here, Yeah, we're really pleased with the trajectory and what we saw in Q4 on our on our tax overall I do think it is something that we'll be able to sustain going forward the combination of a cut.
All of things one I believe in last quarter's call, we talked about a new research that we brought back that's really helping us in the upfront with better targeting overall against our new segmentation model that came in at the tail end of summer, which is really helping us with what I would clarify what I would classify as more qualified.
Leads versus more broad prospecting that also has implications secondly to the overall structure of where we spend our dollars and how we spend our dollars and Q4. So we're really pleased I think we've come to a place where we're starting to even see a little bit of improvement from there.
On an overall marketing we still do have some.
Things that we're going to lap out that are long term or long term contracts that will expire here as we as we go through the balance of 2023, but I think we will see continued efficiency gains on our overall marketing spend but tremendous progress made by the team in Q4 without a doubt.
Okay. That's really helpful. Alex I'll, just add let me add one thing to that.
Thats.
Pretty much where it was.
So really a great job there, but then secondarily he spend moving working media to be truly working.
Quote unquote, so we had a number of.
Our programs marketing programs that really were not effective and he's been doing a great job with his team of weeding those out and so what we expect this year is a to be able to spend less but b to be able to spend it more efficiently, even where we are still spending so it really does bode well for the for the next year and beyond.
Okay. That's really helpful. Thank you, all and and Jason and your whole team I Hope you all feel better soon.
Thanks, Alex Thanks, Alex.
Thank you Mr Chairman.
The next question is from the line of Bobby Burleson with Canaccord you May proceed.
Hey, Jason and team sorry for the background noise.
So.
Just curious on a couple of things.
Congratulations on that gross margin outlook for well over 30% exiting this year.
I'm curious does that include any benefit from potential reimbursements or would that be an infusion.
Yeah, Hey, Hey, Bobby.
Thanks for that question I think it's as we think about the margin going through this year I would tell you that we ought to be over 30%, regardless certainly with at this point that would be included in there, but we expect that in either condition, we would be able to exceed 30% over the course of this year.
This is really I mean, as we've talked about in the past we needed to make this move are in.
In order to truly be able to reset our moat our margin profile and in doing so we just put ourselves into a very different manufacturing position not only in terms of the costs, but I wanted to ask you to just.
This asset light model and the flexibility that it presents in a business that is still very young and as a result has some erratic swings in sales from month to month. So this really allows us to produce not only.
More.
Cost effectively in general but really.
As as the revenue is swinging for in any given month to match up our supply to our demand much better and really help our inventory carrying costs and our labor costs as well. So it's a really big transformational change for our business.
Great.
And then in terms of the net sales growth high single digit.
Yes.
Curious what's happening on a segment level there.
It sounds like DTC is.
We are on track.
And Theres still some big changes coming for wholesale so.
Curious kind of order of magnitude where the contribution is coming from.
Top line growth.
Your segments.
Hi, Bobby this is Cam I'll.
Thank you for the question.
So our growth is going to be driven by retail channels, including club more sell down in 2022.
We expect that segment to be outpacing the overall company growth and then within E. Com. It's also returning to growth in 2023, driven by Amazon, while we stabilize and our direct to consumer segment.
Hope that helps.
No that's helpful and the D T C opportunity septic.
That kind of baked into it is there going to be some.
Commencement for that this year as long as everything goes right where they are.
Oh man that you'd have.
Some ace uptick moving through DTC and perhaps Amazon.
Yeah.
Yes, Bobby.
I do think that's an opportunity for sure will start to begin to have that happen in the second half of the year as we put the proposition and make sure that we got the right profit structure around that unit pack out.
Going in in the second half for sure.
Great. Thank you.
Thank you Mr Burleson.
That concludes the question and answer session as well as today's call. Thank you for your participation you may now disconnect your lines.
Yes.