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spk03: Good afternoon, and thank you for joining the Laird Superfood Incorporated Second Quarter 2023 Financial Results Conference Call. My name is Kate, and I will be the moderator for today's call. All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end. I would now like to pass the call over to our host, Trevor Russo. You may proceed.
spk06: Thank you, and good afternoon. Welcome to Laird Superfood's Second Quarter 2023 Earnings Conference Call and Webcast. On today's call are Jason Beeth, LiveSuperfood's president and chief executive officer, and Anya Hamel, 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 LiveSuperfood's website at www.livesuperfood.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 of the SEC for a detailed discussion of these risks and uncertainties. With that, I'll turn the call over to Jason.
spk07: 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 ROAS 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 layered 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 rebranding activity that 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 event 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 will 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 ROAS 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 products 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 improve 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's superfood. To that end, we just announced a large partnership with Sean Ryan and The Sean Ryan Show, which we expect to enable us to reach a largely untapped demographic for our products. The Sean 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 of 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.
spk01: 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 continue 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 growth 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 an adjusted basis, operating expenses decreased 2.4 million driven by lower marketing costs resulting from strategic cuts of inefficient spend, lower people costs, and other general and administrative expenses, following 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 growth 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 plans. Moving on to our outlook, despite the progress made improving the middle of our P&L, we had higher promotional trade spent 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 these 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 costs. With that, I'll turn the call back to Jason.
spk07: 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.
spk03: Thank you. We will now begin the question and answer session. If you would like to ask a question, please press star followed by a one on your telephone keypad. If for any reason you would like to remove your question, please press star followed by a two. As a reminder, if you're using a speakerphone, please remember to pick up your handset before asking your question. Again, to ask a question, please press star followed by a one. We will pause momentarily to compile the roster. The first question will be from the line of Diana Toker with Canaccord Genuity.
spk02: Your line is now open.
spk04: Congratulations on the reduced cash burn. Maybe it gives you a nice runway, it looks like, but I'm wondering what's kind of a steady state of cash burn that you would expect for the next 12 months.
spk01: Hi, Bobby. This is Anya Hamel. Thank you for that question. 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 sister's exit, but also timing of account receivables collections, which was about $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 to continue in that range, but slowly reduce throughout the back half of the year.
spk04: 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?
spk07: Hey, Bobby, Jason. Hey, so yeah, I can take that. You know, so let me give you a little bit more cover what's going on with Amazon. uh the the in q1 we had a quality event as you know that caused us to go out of stock as we recalled all of the products that had the rancid uh coconut powder inside of it that we 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 kahey 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 You know, some of that you're, you're seeing, we continue to, to get the final bills now, uh, as we were through that product, but we allocated for that for the most part, back in Q1. On the DTC channel was even easier because of course we control all that inventory. And so we simply cordoned that off and then reran the product and put it into our warehouses where we were surprised quite frankly, uh, was on, was in Amazon. And, you know, 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 ships that down to the, I don't know if you call them a micro DC, but basically smaller DCs so that we can all receive our orders overnight or 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. And 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 were coming back, we were waiting to send, we had the replenishment order, but 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, you know, as we talked about with the EBITDA and cash benefit that we got, the slowdown that we had in the losses there. But what it does mean is we have to go back and rebuild cohorts. So to your question on sell-through, we're now finally getting to the position where We're getting the last of that inventory out and in a sustainable fashion where the sell-through is not so fast that we're getting depleted because that started to happen also because you couldn't 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 say where we need them to be and We just can't spend at this point because of the out of 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.
spk04: Okay, great. And then just quickly on the natural channel growth. So you guys had some nice growth there. And I'm wondering kind of 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.
spk07: Yeah, it's a great question. So, you know, it varies across items, of course, but I think generally you can think about our liquid creamers in the 60% range and our powder 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 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. 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.
spk04: Great. Thank you.
spk02: Thank you.
spk04: Thanks, Bobby.
spk03: The next question will be from the line of Alex Furman with Craig Halem. Your line is now open.
spk05: Hey, guys. Thanks for taking my question. You know, just looking at the numbers here, I mean, even with the 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, you know, we might expect that growth or some of those drivers to persist into next year?
spk07: 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. You know, 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, launching in MULO as well, but really natural and club will be carrying that. And We've expanded our pumpkin lineup as well as our holiday, you know, 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 and a couple of new products. We also have 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 in that and 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.
spk05: 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 sort of material reaction customer-wise to the price increases? Have those been enough to cover your rise in product cost?
spk07: 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 on 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 Sean Ryan Show and with Sean Ryan, which we believe will help us to tap millions of new consumers that are outside of our core focus demographic today. Very much a fit within our demographic, but consumers we have 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. And you'll see more on that. Sean's been just a tremendous partner to us already, even as we have just been starting this up. is 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 mentioned last year we needed to move price. We hadn't touched it for really for 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, you know, it seemed far off back then, but now through 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 product, we're going to see gross margins rise above 30 and a very different business model in place.
spk05: That's great. Thank you very much, Jason. Appreciate everything.
spk06: Yes, thanks, Alex.
spk03: Thank you. At this time, there are no additional questions registered, so as a reminder, it is star followed by a 1 to ask a question. We will pause here briefly. 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.
spk07: 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 of really reducing our losses on the P&L as well as really holding onto our cash position to create optionality for us into 2024 and 2025, we feel like we're making the right steps here. while we continue to tweak the business and as you see, you know, with some of the, with the call down on revenue, we're making choices to hold on to 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.
spk03: That concludes today's conference call. Thank you for your participation. You may now disconnect your lines.
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