Stryve Foods, Inc.

Good afternoon, ladies and gentlemen, and welcome to the Stripe Foods, Inc. Third Quarter Fiscal 2023 Financial Results Conference Call. At this time, all lines are in a listen-only mode. Following the presentation, we will conduct a question and answer session. Instructions will be provided at that time for you to queue up for questions. If anyone has any difficulties hearing the conference, please press star zero for operator assistance at any time. I would like to remind everyone that this conference call is being recorded on November 14, 2023. I will now turn the conference over to Will Pugh. Please go ahead.

Thank you, operator, and welcome to the Strive Foods Third Quarter Earnings Conference Call. With me today are Strive's Chief Executive Officer, Chris Beaver, and Chief Financial Officer, Alex Hawkins. Before we begin, I would like to remind everyone that part of our discussion will include forward-looking statements that are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements, by their nature, are uncertain and outside of the company's control. Actual results could differ materially from these expectations. These statements are not guarantees of future performance, and therefore, undue reliance should not be placed upon them. We do not undertake to update these Fort Lincoln statements at a later date and they only refer to today. In addition, today's call would include a discussion of non-GAAP financial measures, including adjusted EBITDA and adjusted EPS. Non-GAAP financial measures should be considered as a supplement to and not a substitute for GAAP financial measures. we refer you to the reconciliation of non-GAAP to the nearest GAAP measures included in today's earnings press release for further detail. This call has been webcast and can be assessed through the audio link on the news and events page of the investor section at ir.strive.com. Also, the earnings press release is posted on our website and a copy of the release has been included in the Form 8K submitted to the SEC. With that, I would now like to turn the call over to Chris Beaver. Chris?

Thanks, Will. Good afternoon, everyone, and welcome to our earnings call for the third quarter of fiscal year 2023. I appreciate you joining us today as we discuss another quarter of progress on our key transformational initiatives. This quarter has been a testament to our team's resilience and dedication amidst challenging market conditions. We've not only sustained our growth trajectory, but also reinforced our commitment to innovation and excellence in the healthy snacking segment. Our focus this quarter has been multifaceted, strengthening our brand presence, driving operational efficiency, and delivering on our promise to our shareholders of taking steps towards building a profitable, sustainable long-term business. These areas are pivotal to our long-term strategy and are the pillars upon which our future success will be built. As we share our accomplishments and plans today, I am reminded of the incredible journey we have embarked upon. This is not just about financial metrics, but a broader story of transformation, market leadership, and the relentless pursuit of excellence. Delving into the specifics of our retail performance and measured channels, The metrics speak volumes about our brand's resonance in the market. For the 24 weeks ending October 8, 2023, as reported by SPIN, our retail dollar sales have seen an impressive growth of 21%, outpacing the category, which was largely flat. This growth can be attributed in part to an expansion of our total points of distribution, which grew 9.9% year over year. demonstrating our increased market presence and accessibility to consumers. While I am pleased with the progress, I am even more excited about the accelerated momentum that we are generating in regards to distribution wins. As we've discussed previously, improving our Equivalized Price Mix has been a strategic focus, and I'm pleased to report that it is up 16.4% versus the prior year period. The pricing strategy is key to improving our unit economics, which will help to drive profitable growth over time. This is supported by our packaging redesign and significantly improved product quality, which are both pivotal in driving consumer trial and fostering brand loyalty. Turning to our packaging transition, The focus has been squarely on enhancing the consumer experience at retail. The redesign centered around vivid food photography and clear depiction of product attributes is aimed at making our products more appealing and accessible to consumers. This approach is showing promising results. Initial feedback from select retailers indicates a notable increase in unit velocities since introducing the new packaging. While these indicators are preliminary and the transition is ongoing, they underscore the effectiveness of our packaging redesign in driving consumer engagement and purchase decision. Remember that these transitions take time due to the multiple touchpoints and replenishment steps in the overall supply chain, which can vary from retailer to retailer. Virtually all of our production is now in the new bag. And as retailers pull through, the new packaging will continue to flow through to the market. This strategic redesign is not just an aesthetic upgrade. It's a fundamental part of our mission to make healthy snacking accessible and appealing to the broader consumer base. Turning inward, as I've shared before, a critical aspect of our journey has been our continued operating transformation. This transformation is a cornerstone of our strategy, aimed at refining our processes and enhancing our overall operational efficiency. Based on a comprehensive review of our operations, we identified and continue to identify areas where we can optimize performance and reduce costs. The results have been significant. we've managed to streamline our supply chain, reducing lead times and improving our inventory turnover rate. These improvements have not only resulted in cost savings, but also enhanced our ability to respond swiftly to market demands. Additionally, we've invested in technology to automate several of our key processes. This automation has led to a reduction in manual errors and an increase in overall productivity. It's a step forward, ensuring that as we grow, our operations remain agile and efficient. Another area of focus has been on our workforce. We've implemented training programs to enhance the skills of our employees, fostering a culture of continuous improvement and innovation. This investment in our people is pivotal as they are the driving force behind our operational success. In essence, Our operating transformation is about creating a more resilient, efficient, and scalable business model. It's about being prepared for future growth, equipped with the right processes, technology, and people. This quarter's achievements in operational transformation are just the beginning of a long-term journey towards operational excellence. As we look to the future, I want to emphasize our immense growth potential. and unwavering commitment to creating value for our shareholders. Our strategic initiatives are not just about current gain, but are firmly rooted in long-term growth and sustainability. We are actively exploring new market opportunities that align with the consumer trend and our brand ethos. This includes expanding it to new geographies, channels, territories, and diversifying our product portfolio to cater to evolving consumer preferences. Our recent product launches have been met with enthusiasm and we anticipate this momentum to continue as we introduce more innovative and health conscious offerings. In addition to product and market expansion, we are also focused on strategic partnerships and collaboration. These alliances are crucial for extending our reach and enhancing our brand visibility. By leveraging synergies with our partners, we aim to tap into new customer segments and drive incremental growth. Additionally, we've been working for many months to better leverage our capital investments and better utilize our capacity to co-manufacture products for a strategic partner in a non-competitive complementary space. I anticipate this to be a significant contributor to revenue, gross margins, and overall bottom line results in the very near future. Our growth strategy is also underpinned by a commitment to operational efficiency and cost management. We believe that sustainable growth is not just in expanding our top line, but also improving our bottom line. Our efforts in streamline operations and optimizing our cost structure are critical in this regard. ensuring that we deliver consistent and robust financial performance. To my fellow shareholders, I can assure you that our actions and strategies are geared towards enhancing shareholder value. We are mindful of the responsibility to deliver returns, and our growth initiatives are aligned with this objective. We are excited about the future and very confident in our ability to capitalize on the opportunities ahead, delivering sustained value to our shareholders and stakeholders. With that, I'd like to turn it over to Alec Hawkins, our CFO, to provide you with details and color around our financial performance for the third quarter.

Thanks, Chris. As we discuss our financial results for the third quarter of fiscal year 2023, It's important to frame our discussion within the context of our ongoing transformation and strategic This reflects the significant strides we have made in our operational transformation. We've redesigned our business model to leverage operational efficiency, focusing on streamlining processes and optimizing our cost structure. These efforts are critical in building a foundation for sustainable growth and scalability. Our strategy has been to create a business that is not only resilient in the face of market challenges, but also poised to capitalize on opportunities. This approach is evident in our financials where the impact of our transformation is clear in our streamlined cost base. Despite the headwinds in the market, including flat category growth, rising commodity beef prices, and an atypical retailer category reset cycle post COVID, Our disciplined approach has allowed us to navigate these challenges effectively. Our commitment to this strategy is unwavering, and we are confident that the decisions we make today are setting the stage for stronger financial performance and long-term value creation for our shareholders. I will now provide a detailed analysis of our financials comparing our current performance with the prior year to give you a clearer picture of our progress and the areas where we continue to focus our efforts. For Q3 2023, our net sales were approximately 4.2 million compared to 6.2 million in the prior year period. This year-over-year decrease of approximately 32.3% is driven in part by our strategic choices in product rationalization and market positioning. Additionally, the prior year period was benefited by a non-normal spike in shipments to catch up network-wide out of stocks that persisted following the execution challenges the company faced in Q2 of 2022. This catch-up dynamic was not present in 2023. Despite the decrease in net sales, we still believe our decisions to rationalize low-quality revenue were aligned with our long-term strategy to focus on sustainable growth With respect to commodity beef prices, we've seen a significant increase. However, we intentionally built up our inventory levels in the early summer before beef prices began to run this year. And over the course of the third quarter, we intentionally limited our production and beef purchasing to mitigate the impact of the increased commodity cost we otherwise had been subject to. This benefited us in two ways. it served to limit the impact of the increased commodity cost on the business in Q3. But it also served as a source of near-term liquidity as we managed down our inventory levels by approximately 2.1 million from Q2 to Q3 this year. We do expect that as our production schedules return to a more regular cadence in Q4, that B prices, should they remain elevated, could have an impact on our business. And accordingly, we will watch closely and take steps necessary to mitigate in other ways. Our gross profit this quarter stood at $0.6 million with a gross margin of 13.3%. In comparison, Q3 of 2022 saw a gross profit of $1.4 million and gross margin of 22.4%. We acknowledge that the lower rationalized volumes through the plant and our decisions to dynamically manage our production schedule continue to create near-term absorption challenges that are a drag on margins. However, our unit economics are strong, and as more volume comes online in the coming quarters and production increases, we expect to see our gross margins expand all things equal and notwithstanding potential commodity inputs. An additional contributor to our gross margin performance in Q3 of this year relates to moving through our legacy package product and rationalized products. As we've discussed before, the liquidation market has been challenging in 2023. And while we did have success in moving some of this inventory in Q3, market dynamics yielded a less than desirable price, which put further pressure on margins. We've seen a significant reduction in operating expenses, which decreased to $4.2 million from $6.1 million in the previous year, a 31.4% reduction. And keep in mind, that operating expenses in the third quarter of 2021 were 11.4 million, which represents a 63% reduction over two years. This demonstrates our commitment to cost control and operational efficiency, essential components of our strategy to achieve operational leverage. Our net loss for the quarter was approximately 4.8 million, slightly better than 5.0 million loss last year. the loss per share decreased from $2.40 to $2.14 year over year. However, a key variable affecting the comparability of these periods is the presence of the non-cash interest expense of approximately 0.5 million in the third quarter of 2023 not present in the prior year that relates to the warrants that were issued in connection with bridge notes in April of this year. Accordingly, on a pro forma basis, our adjusted loss per share for the third quarter of 2023 was $1.66 as compared to the prior year adjusted loss per share of $2.21. The key measures we use in assessing our progress is adjusted EBITDA. Our adjusted EBITDA loss improved to 2.5 million in Q3 from 3.9 million in the prior year period. This 35% improvement reflects the positive impact of our operational transformation efforts and is even more impressive in the context of our top-line rationalization efforts. These financial metrics are critical in understanding our current position and the trajectory that we are on. While we face challenges, our strategic decisions and operational improvements are laying the groundwork for a stronger and more resilient business model. Our focus remains on driving efficiency optimizing our product portfolio, and strategically investing in growth opportunities. Turning our attention to liquidity, an area that's crucial for the health and growth of our business.

Alex, we lost you there.

I'll pick up. Turning our attention to liquidity, an area that's crucial for the health and growth of our business, our current liquidity position is a reflection of our strategic financial management and our ability to navigate market complexity. As we navigate through the current economic landscape, our approach to liquidity management is both strategic and mindful of the broader financial environment. We're operating with a tight liquidity position, a conscious decision influenced by the high cost of capital in today's market. This quarter, we've taken proactive steps to strengthen our liquidity position. We've actively utilized our at-market equity facility, selling 194,949 shares of Class A common stock at a weighted average price of $5.37. This move has generated net proceeds of approximately $1 million, contributing positively to our liquidity. Furthermore, we've worked closely with our lenders to access previously untapped borrowing capacity under our line of credit. This effort is part of our strategy to augment our short-term liquidity and ensure we have the financial flexibility to manage our operations effectively while pursuing critical growth initiatives which should yield improved results overall. We continue to be disciplined in our approach to capital expenditures. We have carefully calibrated our investments and assets to ensure they align with our long-term strategic goals and do not unnecessarily burden our cash flow. This approach has been vital in maintaining a healthy liquidity position. Additionally, our efforts in improving our operational efficiency have positively impacted our working capital requirements. By streamlining our supply chain and optimizing our inventory levels, we have been able to manage our working capital more effectively, with inventory contributing positively to our operating cash flow. In essence, our liquidity strategy is multifaceted. It involves not only strategic financial transactions, but also operational efficiency and prudent capital management. This approach positions us to navigate the current economic challenges effectively while maintaining the agility to capitalize on future growth opportunities. As we project our path forward, I am confident in the growth trajectory. Our strategic plan is showing Promising sign, and I'm well positioned to capitalize on the opportunities ahead. We are seeing positive momentum in the leading indicators of our business, driven by differentiated nature of our product. Our offerings stand out in the market, appealing to a growing base of health-conscious consumers. The dynamics of our category are evolving favorably, and our products are in the forefront of these changes. resonating strongly with the market trend. Looking ahead, we are confident that the growth we are building now will pave the way for reduced losses and ultimately an inflection point. Our strategic initiatives are designed to scale efficiently, ensuring that as our revenue grows to the requisite levels, profitability will follow. This balance of growth and profitability is at the heart of our financial strategy. Our unique product offerings combined with effective market strategies and operational efficiencies are creating a very strong foundation for sustainable growth and profitability. We remain steadfast in our commitment to our strategic plan, confident in its potential to deliver significant value to our shareholders and stakeholders. And as we conclude today's call, I want to reiterate our confidence in the direction and potential of Strive Foods. The discussion we've had today underscores not only the progress we have made, but also the exciting path that lies ahead. Our journey this quarter has been marked by strategic decisions and operational advancements and the positive consumer response to our updated packaging, to the ongoing improvements in our operational efficiencies. Each step has been a testament to our commitment to growth and excellence. The differentiated nature of our products continues to set us apart in the marketplace. We are not just participants in the healthy snacking segment. We are leaders, driving the category forward with innovative and appealing offerings. The market dynamics are in our favor, and we are poised to leverage these trends to further our growth. Looking ahead, we are enthusiastic about the potential for significant growth. Our strategic initiatives are aligned and geared towards not only expanding our market presence, but also ensuring that profitability follows as our revenue grows. We believe in the strength of our products, the effectiveness of our strategies, and the dedication of our team. In closing, I want to thank our shareholders, customers, and the entire Strive Foods team for your continued support and belief in our vision. We are on a promising trajectory, and I am confident in our ability to realize our full potential and create substantial value for all of our stakeholders. With that, I would now like to open the line for questions. Operator?

Thank you. Ladies and gentlemen, should you have a question, please press the star followed by the one on your touchtone phone. If you'd like to withdraw your question, please press the star followed by the two. Again, to ask a question, press star one. Your first question comes from Alex Furman from Craig Hellam Capital Group. Please go ahead.

Hey, guys. Thanks very much for taking my question. I wanted to ask about growth margins here. It sounds like the lower gross margins is due mostly to less volume running through your facilities. Can you give us a sense of maybe what gross margins would have looked like with a more normalized volume level? And then, you know, kind of additionally, what would gross margins look like, you know, perhaps with more normalized volume and then taking into account the more recent rise in prices that you mentioned?

Yeah, so happy to take that. Notwithstanding beef prices, which I'll put aside for a moment, our gross margin potential in the facility when fully utilized, obviously dependent upon a number of variables, mix being one of them, product and price mix, you know, we should be able to get into the, you know, high 30s, low 40s gross margin range. in the facility and the footprint that we have today based on our cost structure and unit economics overall. Now, that said, we have within our cost of goods and gross margin, gross profit, we have operating leverage that we will see as volumes continue to rise and will more fully utilize the footprint we have there. I mean, it's somewhat indicative of the significant capacity we have, untapped capacity we have to grow into over time. And as we do, there isn't as much incremental cost that needs to be added to the business within the manufacturing facility overall as we scale.

Yeah, I would just add to that, Alex and Alex. The team at our facility has done a phenomenal job identifying and, you know, streamlining operations and taking our overall labor costs down in a material manner to reflect, you know, the size and scale of the business. As we utilize and better lever our fixed overhead assets and get to the volumes that we know we're going to be achieving in the very near future. We anticipate that to have a huge impact on gross margins. In addition, a lot of our productivity initiatives that we've had in place haven't even been fully realized yet, whether we're procuring differently with strategic partners and you know, how we're constructing the payments and the ways of working and the cash flow operation side of it. There's multiple levers there that hasn't even, you know, started to reflect into the gross margin side. So there's a lot still to be had there. And then I did mention in my comments there about a strategic partnership for a command arrangement on a non-competitive complementary line of products that we are very excited about and being able to help us absorb some of our overheads through a tolling arrangement that we think will help gross margins, certainly help revenues, and dramatically improve our profitability.

That's great. Well, looking forward to hearing more about that in the future. And then, Chris, I think you mentioned some new distribution wins that we'll likely hear more about in the coming weeks and months here. Which brands and products have really been leading the charge there as you've been increasing the distribution points for your brands?

Yeah, great question. Good follow-up question. Across the convenience channel in particular, and really across all channels, Bacadillos has been really en fuego. It is growing at very rapid pace. for distribution, velocity, and overall positioning in the marketplace. The Better For You combined with a lot of the heat level types of, you know, flavor profiles are spot on on every single consumer trend. Retailers love the new packaging, you know, the new foil pouch, and the expression that we're able to get across on our packaging is being very well received. So that momentum will very, very much continue. Kalahari has been growing in the natural channel. Our distribution is significantly increasing and we're getting far more penetration there. Strive brand has undertaken the greatest change in its packaging positioning. And while we've had a little bit of headwinds on that with some of our velocities, the new expression and the new packaging and the improved quality is also being well received. And we expect that to be picking up in its increased rates of distribution and velocity. um but we've got to you know turn that momentum on that brand a little bit more a little bit more work to do on that particular brand but in total um we are gaining significantly and we're picking up lots and lots of distribution across all classes of trade okay that's that's really helpful thanks very much chris and alex as well thank you alex ladies and gentlemen as a reminder should you have a question please press the star followed by the one

Your next question comes from Mike Grondahl from Northland Securities. Please go ahead.

Hey, guys. Two questions, just looking for a little bit more clarity. Chris, on that last one, and it says in the press release, in coming weeks we'll announce or expect to announce several new wins. Could you talk a little bit about the timing of when those could hit revenue? and sort of the range of revenues, maybe like low to high from some of these new wins or in aggregate?

Yeah, not to be too specific on this, I would tell you, you're going to see some announcement here in the coming days and weeks across several different retail formats from a national change perspective. where you'll see new placements of distribution of products that we haven't even had anything in before. So it's 100% incremental as it's a new distribution in totality. And you're going to see a list of numerous additional customers where we're getting expanded distribution, which can mean more SKUs and in more stores. So I am very, very excited and pleased about how our sales team is starting to get our complete category solution out in front. and being able to discuss our impact and incrementality that we will have on the category because nothing is like us in the category. There's a lot of assortment optimization opportunities and productivity within the category that retailers have in front of them. Historically, there has not been a tremendous amount of innovation in this category. There's been a lot of flavor extensions and sometimes different forms and formats. But there's a lot of brands that have a lot of the same light type products that deliver the same types of attributes. And as a result, there's a high switching level. Nobody has the points of difference that we have because of our minimal processing that we have. Our products yield 50% more protein than the leading jerky, two and a half times the protein of the leading meat stick brand. And we have unique characteristics that make us even a healthier alternative with no sugar, no broth, no water, no preservatives, no cancer-causing preservatives that are added to our product. So it is the leanest, cleanest form of protein. And therefore, the incrementality for the category is very, very high. So consumers can't switch to something else. They can opt to walk out of a store to go find it somewhere else. Because once they try our product and with the new quality that we have in our bag, and the consistency of that quality, we are extremely confident that the repeat levels will be very high. And as we get that more available in the marketplace and we market our brands in a way that will help people understand that they can eat steak and not be a jerky and they can say adios to jerky and hola to steak with sacadillos, that they're going to get something different that's great tasting and better for them at the same time And there's an unbelievable combination that's very rare in any category that I've ever competed with up and down the aisles of the store. So customers are starting to hear and see a different stride. Would we like it to come in rapid, faster form? Absolutely. But we're going to do this the right way. We're going to build this, and we're going to deliver great category expansion in a highly incremental, consumable, and expandable category. through delivering the best quality, the best positioned, and the most consistent consumer experience possible that has never been seen before. So we'll keep announcing them, and they're going to keep building. We'll give you a little bit more color on the impact of what we anticipate as we lay out our next year's annual operating plan. But rest assured, distribution is a key cornerstone to this. And you combine that with what we're starting to see as a really indicator around velocity for retailers that purchase directly from us and have transitioned a bit faster versus going through, you know, unique distribution channels. That is even more encouraging. So, I would venture to say that the data is going to continue to be very favorable for our brands and our aggregate portfolio, which is going to lend a lot of trust and credibility to our recommendations. and therefore we expect to continue to accelerate our availability in the marketplace. We also have lots of different new forms that we can bring to marketplace that will produce even more incrementality.

Will these hit the shelves before sort of the April and May resets?

Yes.

Okay. So timing is before April and May.

It's multifaceted. All retailers are slightly different. But more color will be shined on that in the very, very near future because we have the commitments. Until they're actually in-store, we respect the retailer's confidentiality that we don't want to express what's coming into their stores before it's there to tip the hand to their competition. But rest assured, we have the commitments are aggregating and accelerating, and we're very optimistic.

Got it. And then could you just explain – It sounds like you're going to do have like a complimentary offering or do some kind of packaging in your facility to generate revenue. Is that like a co-packing agreement or just explain kind of what you're doing there to generate revenue and kind of offset some overhead?

Yeah, look, we're in the intersection of protein and portability. We have some unique manufacturing capabilities. and really the only sizable, you know, USDA certified plant in the country that can make, manufacture and market the air dried beef. And with that comes those great attributes that we just talked about. That also creates different avenues for different types of products, for different types of segmented consumers that really wouldn't fit our brand, that we can make and we can, bring to market with a co-manufacturing relationship that will absorb and utilize some of our overheads, but also bring some really fine products to another segment of the marketplace that we really couldn't serve. And I think it's a win-win. We've been working on this for many months. We're getting into the last parts of the innings of the game. And we're nearing the ability to be able to make an announcement with more detail on that. But rest assured, it's going to be something that will benefit the consumer, benefit the retail community, and that segment of consumers that are underserved here, and certainly our partner in this effort and journey.

Got it. Okay. Hey, thank you.

You bet.

And there are no further questions at this time. I will turn the call back over to Chris for closing remarks.

Well, thank you all for your interest in our company. We look forward to providing an update of our progress on our third quarter results in a few months, our fourth quarter results in a few months, and wish everyone a happy, healthy, and prosperous holiday season. All the best. Thank you.

Ladies and gentlemen this concludes your conference call for today. We thank you for joining and you may now disconnect your lines. Thank you.