Stryve Foods, Inc.

Good afternoon, everyone, and welcome to the Strive Foods third quarter fiscal 2024 financial results conference call. At this time, all participant lines are in listen-only mode. Following the presentation, we will conduct a question and answer session. If at any time during this call you require immediate assistance, please press zero for the operator. This call is being recorded on Wednesday, November 13, 2024. Now I would like to turn the call over to Will Pugh. Senior Vice President of Accounting at Strive Foods, to make introductions and read a Safe Harbor Statement. Please go ahead.

Thank you, operator, and welcome to the Strive Foods fiscal year 2024 third quarter earnings 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 today will include forward-looking statements that are pursuant to the Safe Harbor provisions of the Private Securities and Litigation Reform Act of 1985. Forward-looking statements, by their nature, are uncertain and outside of the company's control. Active 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 forward-looking 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 measure included in today's earnings press release for further details. This call is being webcast and can be accessed through the audio link on the news and events page of the investor section at ir.strives.com. Also, the earnings press release is posted on our website, and a copy of the release has been included in the form AK submitted to the SEC. With that, I would now like to turn the call over to Chris Beaver. Chris.

Thank you, Will, and welcome to everyone, and thank you for joining us today. I'm excited to share that Strive Foods continues to make meaningful progress on our transformation, driven by our commitment to delivering differentiated, premium, high-protein, low-sugar, no-preservative snacks for today's growing health-conscious consumers. The third quarter has been a period where proof points are emerging and accumulating, supported by increasing consumer demand primarily from accelerating retail velocity. Our focus on top-line growth, operational improvements, and productivity will continue to enable margin expansion. The recently announced capital raise better positions us to support the increasing velocities and growing demand. We will begin to build appropriate inventories to scale and execute on known and expected retail distribution gains in the coming quarters. We are a very different company today with a much improved foundation. We have dramatically improved the food quality, unveiled upgraded packaging, created new brand positioning based on shopper preferences, upgraded the talent and capabilities within the organization, and streamlined the processes across the enterprise. I firmly believe that we will delight our consumers, we will execute with our retail partners, we will gain market share, and we will achieve profitability. Our strategic initiatives are focused on delivering higher rates of velocity at retail. Our improved food quality and brand positioning is achieving that vision. With velocities growing, we will expand our retail distribution, focused on our prioritized and streamlined portfolio. In addition, we see opportunities to grow through innovation, responsibly phasing in relevant new on-trend products, such as our recently announced launch of High Stakes, our high-protein, human-grade pet treat brand, which allows us to leverage our core expertise in another attractive category, with a highly differentiated offering. These efforts reflect our broader goal to create a diverse, sustainable growth engine for Strive, one that resonates across different segments and channels. In Q3 2024, we delivered strong financial and operational results, with net sales increasing by 36.4% year-over-year. This growth was seen across all of our brands, primarily driven by the significantly increased sell-through at retail and promotional efficiencies supported by our strategic pricing initiatives. Additionally, our gross margins improved to 21.7% from 13.3% in the prior year period, underscoring our focus on product mix, pricing, and operational efficiencies. The demand for our brands has exceeded our current ability to supply, not our capacity. This challenge is being addressed with the recent capital raise. Combined with the numerous operational improvements, we expect to see our service levels improve significantly on the current business. Within our supply chain, progress continues. Our productivity initiatives are generating as expected. and we are unlocking efficiency and effectiveness in our logistics network. One significant development recently announced is our partnership with DOT Foods, the largest food redistributor in North America. This partnership, set to begin in Q4 of 2024, enables us to leverage DOT's extensive distribution network and logistics expertise to streamline our supply chain, improve service levels, and ensure timely product availability for a growing footprint. Scott Foods has an unmatched infrastructure that will enhance our fulfillment operations, allowing us to efficiently reach thousands of retailers and food service operators nationwide. I am confident this collaboration will further strengthen our foundation for the upcoming year, supporting our growth and reinforcing our ability to meet rising consumer demand. Overall, the industry response to our initiatives has been encouraging and promising. Retailers are excited about Strive's continued evolution, and we are seeing solid traction across multiple channels. We deliver something different to the category, a contemporized and modernized set of brands that deliver shelf productivity and a highly expandable, consumable, attractive category. The combined impact of our strategic initiatives positions strive to not only drive top-line growth, but also to build a scalable, efficient model that supports and delivers long-term profitability. We remain committed to these core pillars. Number one, grow the core, increase velocity, increase distribution, and drive household penetration. Number two, add more. Through responsible innovation, of relevant flavors, forms, and extending day parts and occasions. Number three, flawless execution on how we serve our customers in the most efficient and effective manner. Number four, lower our cost to serve, ultimately executing on our productivity agenda. Number five, manage cash from procurement, conversion costs, utilization, inventory management, all the way to the strategic management of the balance sheet. There is no doubt we have a clear path to profitability, and we are better and more uniquely positioned than ever before. With our self-manufacturing footprint, our highly differentiated brand portfolio, which closely aligns us, like no other, to the list of on-trend consumer behaviors, more protein, ultra-convenience, elimination or reduction of preservatives and sugar, and the emergence of the GLP-1 craze. These important consumer dynamics provide us tailwinds to outperform the categories in which we compete. We will build consumer awareness. We will create greater availability in the marketplace by expanding distribution. And as new consumers try our brand for the first time, we will build on our established high level of repeat purchase behavior. As we look to close 2024 and prepare for an ambitious 2025, I am encouraged by the momentum we've achieved and the solid foundation we have built. Our strategic approach is delivering improved results and at an accelerated rate. And I believe the initiatives we have implemented will continue to produce strong growth well into the future.

With that, I'll turn it over to Alex. Thank you, Chris.

I'm pleased to walk through our third quarter financial results and highlight the impact of our ongoing transformation over the past two years. For the third quarter, we delivered net sales of $5.7 million, up 36.4% compared to Q3 of 23. While this growth is significant and a testament to our overall transformation, I should share that the demand for our products this quarter outpaced our ability to supply. This is not a function of capacity or supply chain constraints, but rather working capital to support the inventory build necessary to deliver on the demand for our products. We have and are continuing to take steps to try and solve this challenge. But suffice it to say, we believe that our run rate demand, based only on our existing distribution, is meaningfully higher than what we shipped this quarter. Importantly, this growth in demand has not been driven simply by increased distribution, but actually by a significant increase in the sell-through velocity of our products. The rate at which your products sell through on shelf at retail is one of the best indicators of the health of a consumer brand. and we are significantly outpacing the category in this regard. This performance speaks to the strong consumer engagement and brand loyalty we're building through our improved product quality and packaging renovation. The new packaging is doing its job by driving trial with new consumers, and the superior quality is what's driving the repeat. We're seeing our products perform exceptionally well in retail settings, and the consumption data shows it. Retailers across the country have taken note of our on-shelf performance, and this data-backed shelf productivity story positions us favorably for additional distribution wins, such as those we recently announced for early 2025, which will add our products to thousands of new locations nationwide. Moving down to income statements. we recorded over a 120% increase in gross profit for the third quarter year over year, achieving 1.2 million in gross profit in the current period as compared to 0.6 million in the prior year period. This increase in gross profit was driven by both volume and efficiency with a gross margin of 21.7% compared to a gross margin of 13.3% in Q3 of the previous year. This eight-point improvement in margins reflects the significant strides we've made to optimize our product mix, enhance operational efficiencies, and strategically manage pricing. Since the beginning of our transformation, we have intentionally rationalized and refined our product offerings, focusing on our highest demand, improving the profitability of the core portfolio through productivity and simplification, while also implementing cost savings initiatives across our production and procurement processes. The result is a leaner, more efficient operation that is now better equipped to generate stronger margins even as we scale. These improvements were achieved despite experiencing higher commodity price pressure this year as compared to what flowed through cost of goods in the prior year period. As we scale our volumes with adequate working capital and more fully utilized labor and overhead, we expect to see further margin enhancements, which could happen as soon as early next year given the recently announced winds. Our operating expenses for the third quarter were $3.5 million, representing a 15.9% reduction compared to Q3 of 2023. This reduction is a direct result of our disciplined approach to expense management and operational efficiencies. Over the last two years, we have made concerted efforts to control costs, eliminating non-essential expenses, and streamlined our operations to focus on productivity. As a result, we're now operating with a more efficient cost structure that enables us to support growth without proportional increases in operating expenses. This discipline remains a cornerstone of our strategy as we drive towards sustainable growth and profitability. Adjusted EBITDA loss for Q3 was $1.7 million, marking a 31.5% improvement from the $2.5 million loss in the prior year quarter. Our transformation efforts have yielded consistent quarter-over-quarter improvements in adjusted EBITDA. demonstrating that our strategy is working. And compared to two years ago, when our losses were more than double, this quarter's results show how far we've come in narrowing our losses through focused growth and efficiency. As we continue to gain scale and leverage our refined cost structure, we expect this positive trajectory to continue, moving us closer to our goals of profitability. In summary, The progress we're reporting this quarter reflects both the strength of our consumer demand and the disciplined financial approach that has guided our transformation over the last two years. By driving increased sell-through at retail, improving margins and controlling expenses, we are establishing the foundation that can prime us for long-term success as we expand further into new distribution channels and categories. Turning to our balance sheet and capital position. Securing the capital we need to execute on our plans is a key component of this last phase of the transformation. As we have shared, we have been working capital constrained for most of the last two quarters. We have been in market to remedy that challenge through raising equity in order to right-size the balance sheet and execute on our plans. We are pleased with the $2.9 million equity raise that closed yesterday. as it has provided us with the infusion necessary to build inventory to support our current run rate demand from existing distribution, which continues to be exceptionally strong. The heightened demand in recent distribution wins we've secured reflects Strive's momentum and the appeal of our products in an expanding range of retail channels. While the recent capital raise goes a long way towards meeting today's needs, A strong pipeline of new retail placements expected in Q1 2025 will likely require additional capital to fully support that growth. This is a great position to be in. Our products are performing well. Our distribution footprint is expanding rapidly. We are actively exploring creative capital solutions and partnerships to support this next phase of growth, ensuring that we can capture every opportunity while maintaining financial discipline. As we look to the end of 2024, we remain encouraged by the underlying demand for our products and the traction we're seeing in the marketplace. At this time, we are not providing guidance for the balance of the year. It's worth noting, however, that our prior guidance was based on the assumption that we would secure sufficient working capital in Q3 to support our ability to fulfill demand throughout this year, the balance of the year. While our recent capital raise will help us to address these service challenges, we estimate the timing of the raise will serve to benefit shipments for the remainder of Q4. We are actively working to manage and alleviate these constraints and will continue to explore additional capital solutions to support our upcoming growth. Looking into 2025, with the right capital base, we're optimistic that the strategic distribution wins coming online in Q1, along with our focus on operational efficiencies and cost management, will set us up for sustained growth with a clear path to profitability. As always, we are committed to balancing growth with disciplined expense management, ensuring that we are positioned to achieve our long-term objectives while maximizing value for our shareholders. With that, I'd like to turn the call back over to Chris for some additional comments.

Thank you, Alex, and thank you for all you do. In summary, Q3 was another quarter of progress for Strive. As we continue to execute on our strategic priorities, the demand we are generating across all channels validates that our strategies are indeed working. I want to thank our entire team and the board of directors for their hard work and dedication. Transformations are not easy, but they are when done properly and executed flawlessly can create a lot of value. The tireless commitment and passion has been instrumental in the delivery of the massive improvements in our overall business. As we look to the future, we are very excited and confident about the new stride. We are primed, prepared, and we are committed to achieve our full potential. To our shareholders, I extend my gratitude for your continued support and belief in our vision. The progress is real. We are on a promising path, supported by the facts, and we will responsibly continue to build the business in a disciplined, high-quality manner. That is what is required in consumer packaged goods. That is what is required to win in this category, and we have a team assembled and a portfolio poised to execute against that promise. With that, I'd like to turn it over to the operator,

for Q&A.

Thank you.

Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press the star followed by the number one on your touchstone phone. You will hear a prompt that your hand has been raised. Should you wish to decline from the polling process, please press the star followed by the number two. If you're using a speakerphone, please lift the handset before pressing any keys. One moment, please, for your first question. Your first question comes from the line of Mike Grandel from Northland Security. Your line is now open. Please go ahead.

Hey, guys. Thanks. You know, Alex, can you speak at all to sort of what's the minimum incremental capital you need to get to break even? Any rough thoughts there?

That's a great question. You know, we, as folks probably saw, you know, when we've been out in market for the public raise that we've been trying to secure, we initially went out with an S-1 that indicated $10 million of capital that we wanted to bring in, a fresh cash, along with the conversion of some debt. And ultimately that's about what we're looking for. It's probably a little bit less than that. Some cushions are dressing up for a minimum, but a little bit less. Now we just brought in 2.9, uh, that counts towards that. So it's probably in or around six or 7 million incremental from where we sit today. And that can come from a handful of, of routes that we're looking at. And we're trying to do that in the most minimally diluted way possible. Um, And this will likely be a multi-staged raise at this point. You know, we had gone out and looked to secure it in one fell swoop. But I think the path we're on now is to go out and incrementally bring it in in a multi-step process to support the business at the right time.

Yeah, I want to just add, Mike, the track record we've established has been to always be position and discover and deliver the funds needed to you know continue to run the business it has created some challenges but we've always worked through them through this difficult and meaningful transformation with most of this in the rearview mirror and a lot of upside in front of us it's imperative that we continue the progress on the balance sheet while this is one step in the right direction we are resolute and we are confident that we will continue to secure a the resources required and needed to be able to fuel this business.

Got it. You know, I know you got that capital kind of roughly midway through the quarter. Can we expect sequential growth in 4Q to close out the year?

Yes, absolutely.

I'll go first, Alex, and then you come on top. We anticipate a very strong fourth quarter. While we won't be fully recovered because of the timing of the infusion and where we are at midpoint of the quarter, but I can assure you it's going to be significant and meaningful growth year over year. We certainly can get close, if not exceed, 100% growth for the quarter year over year. And there aren't too many CPG companies, and there certainly isn't anybody in our category that's delivering that kind of impressive performance. Our brands and our units, SKUs, if you will, per point of distribution are working hard for us at retail. Our velocities continue to grow. Our demand continues to accelerate. In fact, exceeding some of our original projections, which is what kind of created a little bit more pressure on getting more capital in here as quickly as we could. But with some challenges in the capital market and us always putting the shareholder first, we wanted to be disciplined, thoughtful and, uh, responsible, uh, you know, closing out the, um, the funds required needed to support the business. These are good. This is a good problem to solve. When I came here a little over two years ago, we had a lot of other challenges to solve. And most, if not all of those are in our rear view mirror. We now have a lot of tailwinds, certainly the connection to the consumer, certainly a very attractive category. certainly a far better executing machine that works cross-functionally and a highly efficient and effective manner. And we're responsibly managing cash like this company has never done before. With that being said, it's a good problem, but it's still a problem. We will continue to solve it like we always have in scrappy means as well as strategic advancements. Alex, maybe you want to add some additional color to the growth of the fourth quarter?

Yeah, no, for sure. And I think the thing that we should focus on and what we've tried to communicate is that, you know, the demand for our products is there, right? What we're seeing consistently the past two quarters is demand driven by consumption, not necessarily driven by new distribution, driven by consumption off-shelf, putting our, you know, potential net sales you know, half a million to a million dollars higher than what we've been able to deliver. And that's been a function of the working capital. Now we've got the working capital in to kind of right-size us to that existing distribution demand that we have. And so we'll basically get, you know, the balance of Q4 benefit of that, but the first half of Q4 we didn't. But But it's more about what is the underlying demand for the products that we're keying off of as the success, because that's the story for the future. And we've got to make sure that we get the cash in the door and continue to get the cash in the door to support that growth in the future. But overall, the demand right now is meaningfully higher than what we've been able to deliver and what we will deliver ultimately in Q4.

So really, really strong growth year over year. Definitely strong growth as anticipated, projected, and expected.

Sure. And then just thinking about the model, you know, $10 million of revenues, roughly 30%, 35% gross margin. Is that still ballpark break-even if you can get to that level?

Our Gross margin profile is likely going to be a bit more attractive than that at those levels. You're talking about on a quarterly basis, 10 million in net sales in a quarter. Based on our current mix and our current unit economics, we should have more attractive gross margins than that. We should be high, high 30s is what we would expect, potentially even low 40s depending on the exact mix. And based on the productivity we have, at P&L and the operating leverage that we're going to see, it's still generally in the ballpark. We should get there. Our target is to try and get there less than $10 million in net sales. In between $9 and $10 is where we would like to get to, to be able to see that inflection point on an adjusted EBITDA basis.

Got it. Okay.

Hey, thanks, guys. Thank you, Mike.

As a reminder, if you wish to ask a question, please press star one.

Again, should you have a question, please press star one.

Yep, I think we can wrap it up here, operator. Thank you, and thanks to all of you for continued support and belief and strive. We are energized by the progress and potential, and we are laser-focused on executing. We look forward to updating you on our continued achievement in the quarters to come and the continuing of this exciting journey together. I wish you all a happy and healthy holiday season. Each day, don't be a jerky.

Thank you.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation.

You may now disconnect.