Q4 2023 Laird Superfood Inc Earnings Call
Participants
Steven Richie; General Counsel, Corporate Secretary; Laird Superfood Inc
Jason Vieth; President, Chief Executive Officer, Director; Laird Superfood Inc
Anya Hamill; Chief Financial Officer; Laird Superfood Inc
Bobby Burleson; Analyst; Canaccord Genuity
Alex Fuhrman; Analyst; Craig-Hallum
JP Wollam; Analyst; Roth Capital Partners
Presentation
Operator
Good afternoon, and thank you for attending the Laird Superfood, Inc., Q4 2023 financial results call. My name is Matt, and I'll be your moderator for today's call. (Operator Instructions)
I'll now pass the conference over to our host, Steve Ritchie, General Counsel. Steve, please go ahead.
Steven Richie
Thank you and good afternoon, and welcome to Laird Superfood Fourth Quarter and Full Year 2023 Earnings Conference Call and Webcast. On today's call are Jason Vieth, Laird Superfood's President and Chief Executive Officer, and Anya Hamill, our Chief Financial Officer.
By now everyone should have access to the company's fourth quarter and full year 2023 earnings release filed after today's market close and is available on the Investor Relations section of Laird Superfood website at www.lairdsuperfood.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 with the SEC for a detailed discussion of these risks and uncertainties.
With that, I'll turn the call over to Jason.
Jason Vieth
Thanks, Steven. Good afternoon, and thank you to everyone who has joined us today. Now that you have all seen our Q4 2023 results. I hope that you will agree that it is not an overstatement to say that Laird Superfood had a tremendous quarter during Q4. We had our team's goal of a financial trifecta, positive sales growth, positive profitability and positive cash flow, the latter two of which were our first time ever for our Company, while trading at the publication.
These results represent just the latest step on what has been a rather steady path of improvement since I first spoke with all of you two years ago, and I am proud to say that these improvements have allowed us to remove the going concern disclosure from our financials. This is a significant vote of confidence in our financial position and outlook and further motivation for our team to ensure that we operate the business as professionally and competently as possible.
I'll start with what might be our most noteworthy accomplishment and a quarter full of them. During Q4 2023, we were able to return our DTC business plus 10% growth versus the same quarter in 2022. This was accomplished despite decreasing our marketing spend by 54% in the same comparative period, which obviously means that our marketing effectiveness metrics surge once again during Q4.
This represents our first quarter of growth in this channel was almost two years ago after the changes the IOS upended, etc., industry, and was accomplished through more effective targeting and messaging. And by highlighting our most relevant products and creating better offerings for bundles and cross selling. One key to this accomplishment was the increase of our revenue from subscriptions for 46% of our total DTC net sales base, which I would assert demonstrates that consumers are recognizing the benefits from consistently attending to their health through their nutrition and that our coffee creamers, creams and adapt to genetic motion products are a perfect fit for consumers to create what we at Laird Superfood have referred to as the healthy daily ritual.
In addition to converting more of our customers and subscribers we were also successful in Q4 and increasing our net sales from new B2C customers by 76% year over year, driven by our partnership with Sean Ryan show another well-executed top of funnel marketing activities. I am also pleased to report that our average TGC. order size reached more than $57 in Q4. Given these metrics, it should not be surprising that our brand affinity remains extremely strong with our consumers with our Net Promoter Score. So hovering in the mid-70s and our customer satisfaction score at 4.9 or five points for a large portion of our e-commerce business is also conducted on Amazon. And here I am happy to report that we have continued to make steady progress in returning this business to growth after the challenges created by the quality events that we encountered approximately a year ago. Out of that event, it took approximately six months to fully withdraw and replenish our coffee creamers on the Amazon platform, during which time we saw a significant reduction in sales. But in Q4, with our in-stock inventory levels restored to normal, we were able to execute our marketing plan in this platform and to restore a path to growth.
During Q4, our net sales through Amazon reached $1.76 million, a 38% increase over Q3 at 23 despite a 22% pullback in direct media spend on Amazon during that time. This is a testament to the cohorts that we had established on this platform, which was further aided by a 26% increase in revenue from subscription, which now represents nearly a quarter of Laird Superfood net sales per annum. Given the lapping of those 2023 challenges during the first half of this year, we expect to see strong Laird Superfood growth through Amazon throughout 2020.
Before turning to our wholesale business. I am pleased to share that we continue to make steady progress in expanding our distribution in this important strategic channel. To date, our wholesale business has been largely concentrated in the natural channel where we have continued to make great strides to build our brands among consumers that are motivated by health and wellness.
During 2023, our points of distribution in national finished the year, up 24% versus the end of 2022, driven by wins in large national retailers as well as across smaller independents at our BiDil, the consumers in this channel.
Specific to Q4, I am pleased to announce that we were successful in securing national distribution at wholesale for shelf stable items, which will complement the full national distribution that we have recently achieved on a four item liquid creamer portfolio. Those items began shipping a few weeks ago and bringing us to eight items and distribution within all of the sourcing costs.
I'm equally pleased to share that we have also had continued success at Sprouts Farmers Market, who has been a great partner to our brand and where we now have 22 items in distribution, representing one of our most complete buildout of any retailer in the country. I am also pleased to share that during Q4 we became the number one brand in the coffee category at Sprouts charging ahead of the license fee electrode sell-down.
Yes, wish and all the other brands in this category, we believe that this is just the start of the exciting things to come as we continue to build our brand strength and share in health and wellness portfolio with consumers across the country.
As we look forward from here, we will execute an expansion strategy into additional categories in the natural channel and begin to put emphasis on growing our distribution in the conventional channel where we currently have very little distribution, a very large part, along with the success that we are having commercially comes in recognition that we couldn't achieve any of this if we didn't have a supply chain that with this flexible responsive and adaptive, as we did last year, our supply chain was able to shut down our own facility in Oregon, identify co-pack and distribution partners and move our entire business.
So there's and that's just allowed to us our supply chain team operating nearly flawlessly through a quality of that in the first half of last year, quickly replenishing our raw material inventory, keeping most of our key suppliers supply throughout that challenging stretch.
And now with our powder products, fully transition to an asset-light supply chain model. And with our liquid creamer transition behind us, we were able to achieve over a 40% gross margin during Q4. Our supply chain is flexible and agile and is built to support our future growth going forward.
We continue to expect that gross margin. It remain in the high 30s. Our focus on cost management extends beyond the supply chain to our operational expenses as well. During Q4, we reduced our total year over year adjusted OpEx of $6.1 million at $3.7 million, representing a decrease of 38% before 2023. This was accomplished by a broad-based reduction in our OpEx spend, which we will continue to manage tightly as we go forward.
And finally, I want to share a few thoughts on our cash position, which increased in Q4 2023 by $280,000 based on our working capital needs and planned investments, we do not anticipate generating positive cash flow in every quarter.
However, we do believe that with our planned growth rate in 2024 and beyond, may soon be generating cash on our operations. I also want to reiterate that we were able to remove the going concern disclosure for five. We are proud of this recent change and believe that with our forecasted growth profile and gross margin outlook. The Laird Superfood business is now positioned to carry an improved financial profile in the future years.
And now let me turn the call over to Anya to discuss the fourth-quarter results for detail.
Anya Hamill
Thank you, Jason. Net sales were $9.2 million in the fourth quarter of 2023, an increase of 2.6% as compared to $9.0 million in the prior year period and flat to the third quarter of 2023. As Jason discussed, both the e-commerce and wholesale channels delivered growth in the fourth quarter.
E-commerce contributed 66% of total net sales and increased 2% year-over-year, led by D2C growth of plus 10%. Sales improvements were in part offset by year over year decline in Amazon sales of 12%, a substantial and narrower decline than previous quarters and driven by a 59%. Amazon media spend reduction we resolved to improve profitability on this platform.
Wholesale contributed 34% of total net sales and increased 3% year over year, reflecting continued growth in club and distribution expansion in the natural channel as well as product velocity improvements behind updated packaging, which launched in the second quarter of 2023.
Gross margin in the fourth quarter rose to 40.4%, which is a 45 point improvement on a year-over-year basis due to charges related to exit activity in the fourth quarter of 2022. On an adjusted basis, gross margin improved 21 points year over year and 10 points sequentially versus Q3 of 2023, driven by continued benefits of transitioning from third party co-manufacturing and distribution.
Q4 gross margin of 40% is a milestone that supports our expectation that we can deliver margins in the upper 30s in the coming quarters. Operating expenses in the fourth quarter of 2023 totaled $3.7 million, a decrease of $11.6 million compared to $15.3 million in the prior year period.
This reduction was driven by lab and expenses related to our exit from systems in the fourth quarter of 2022. Excluding one-time charges, operating expenses were reduced $2.4 million, primarily due to lower marketing costs resulting from strategic cuts of inefficient spend and lower people, cost and other general and administrative expenses following the restructuring activities in 2022.
I am pleased to report that in the fourth quarter, for the first time in the company's history, we achieved positive net income and positive cash flow net income as reported was $0.1 million in the fourth quarter of 2023, an improvement of $15.7 million versus the prior year period. Net cash add in the quarter was $0.3 million compared to cash burn of $3.2 million in both the third quarter of 2023 and the fourth quarter of 2022.
These results were driven by margin expansion and significant reductions in general and administrative costs, demonstrating the strong progress that we have made in managing costs and pushing the business towards profitability in future quarters, although we did not expect this to recur in a perfectly linear manner.
We ended Q4 2023 with $7.7 million of cash and no debt. As we continue to conservatively manage our balance sheet, we now project that we will have enough cash to fund our operations into 2026 and our annual report on Form 10-K will now contain the going concern language that was included in our prior quarterly reports.
Further after having had conversations with several lenders regarding our ability to put in place an asset-backed loan. We are optimistic that such a vehicle is available to us. Should we decide that we would prefer additional funding to support our operations or growth the changes we have made to our business model have significantly improved the underlying economics and strengthens our competitive position as we go forward.
We will continue to focus on maximizing our most profitable commercial growth opportunities while maintaining a strict emphasis on controlling our costs to drive the business towards profitability and maintain our cash position to support our future operations and other opportunities that may emerge.
Our full year 2024 guidance is as follows. Net sales are expected to be in the range of approximately 38 to 40 million, representing growth of 10% to 15% compared to 2023. Gross margin is expected to expand to approximately 37% to 40%, excluding any one-time extraordinary charges, representing a seven to 10 point improvement versus 2023.
With that I'll turn the call back to Jason.
Jason Vieth
Thanks, Anya. I know that I seem to see it every quarter, but I want to reiterate that I believe that the future of our Laird Superfood business has never looked brighter this time around. Please indulge me while I share my thesis for that condition.
First, our Net Promoter Score and customer satisfaction scores are indicative of our incredible brand strength and the trust placed on our brand by Laird Superfood consumers also the albeit virtually any major food company today.
Second, our product portfolio is well positioned for the health and wellness trends that continue to grow in importance, both within the US and internationally, as demonstrated by our Q4 volume and sales growth.
Importantly, our gross margin is now in line with many of the premier food companies in our industry and can provide us with strong cash generation as we continue to grow our business. And finally, I would wager that our organization feel competent, motivated and engaged as any similarly sized company in the industry.
This concludes our prepared remarks. Operator, we are now ready to open the call to questions.
Question and Answer Session
Operator
(Operator Instructions)
Bobby Burleson, Canaccord Genuity.
Bobby Burleson
Hi, thanks for taking my questions and congratulations on turning the quarter here towards a much better performance. So really exciting to see. I guess my first question is just as we think about the growth for for this year that you guided to what kind of OpEx if growth would be required to support that guidance?
It sounds like online is coming back nicely and obviously your spends a lot lower these days, etc. So just curious, are you spending more access conventional, or can you really drive a lot of operating leverage here?
Jason Vieth
Yes, hey Bobby, great question. Thanks by the way. I appreciate it. We're really excited obviously about this quarter and where this can go. Good to talk to you again.
And so look, I mean, the reality is and you and I've discussed this as well. So I know this won't be a surprise to you, but we built this team really to be able to scale from here. And we don't I believe we need really substantially any more OpEx. There's there are a couple of line items that are going to be variable in the P&L and the broker commission is one of those.
So as we continue to grow that piece of the business will pay additional brokerage fees or on the flip side, as we continue to grow Amazon, there is a variable component selling cost to that as well. So we will have to scale that those two sales organizations as we grow. But really, Bobby, to be honest, our organization is built to be able to carry not only this organization, but the Picky Bar or sorry, not only different, but the Picky Bar business as well.
And frankly, as I told them many times, were in position that and now with everything that we've done, that if we were to make an acquisition at any point or if we were to scale the business significantly from here over the course of the next 12, 18 months, we don't really have to make any additional investments you do that.
Bobby Burleson
That's great, and really, really great to hear. And then, a quick follow-up just on where the growth is coming from. And obviously, you guys highlighted daily creams and performance mushrooms and as part of that DTC growth and I'm wondering kind of see overall perception of the brand does that you guys start to move more into and other kind of performance centric or yes, things like ready-to-drink shakes or are there other adjacent categories that kind of it reflects your leads?
Jason Vieth
Yes, NetIQ prowess and something that's more performance oriented where the brand would really kind of explode. But yes, you know that that's certainly a question that we've been discussing as a team over the last couple of months. We've been in a position that as as you guys know from the last couple of years where we really had a turnaround, the business where the the the business was on a path. So running out of cash pretty pretty quickly a couple of years ago.
And so the last two years have really been focused around rebalancing the portfolio, getting our mix right and then obviously resetting the cost base and not only in terms of the manufacturing distribution costs, but all of the G&A and marketing as well.
And so we're really close to that, I would say, body and we're still refining it and see some opportunities from here as we go forward as well within that core business. But but certainly now we are in position to do two things that we were not in position to do previously because we had gross margins, as you'll recall that were so anemic and we can expand the business without losing more money?
Well, that's done. We now have a gross margin that is approaching best-in-class manufacturers within the food space, the more we sell, the more cash we drop to the bottom line. And so the sales team is yes, that focus has been on bricks and mortar opportunities.
And we've had, as I mentioned on that call, and I know the sound quality wasn't great. Hopefully it's better now, but we've had tremendous calls throughout 2023 that we believe will result in additional distribution going forward. Just as we always do. But we've we've really been able to be aggressive with those sales calls because we now have the margin to support expansion.
The other thing to get more directly to your question that we're really starting to focus on now how do we expand and continue to grow our legacy within super foods for a little while there we became a creamer brand and we do still have a great creamer business and frankly, the best creamer product on the market, the cleanest best tasting, most nutritious product on the market, but we also have this amazing grains product, which I would tell you is the best-tasting most nutritious product in that space as well.
And we have these performance mushrooms, mushroom products, data, genetic motion products they've taken off. And it's really been those three products, in particular with support from a number of other categories, including bars.
But those three products being greens that atherogenic mushrooms creamers that are carrying the bulk of the weight for the portfolio, but abroad and us in doing that, it broadened our shoulders to really be that super foods brand, not just a super premium brand, but a super foods brand and does open up the opportunity to get to some of those more performance based categories. And our TD. and others are certainly on that list, probably.
Bobby Burleson
That's fantastic. I know there's other color, so I'll jump back into the queue. Thank you.
Jason Vieth
Yes, thanks for your question.
Operator
Thank you for your question.
Alex Fuhrman, Craig-Hallum.
Alex Fuhrman
Guys.
Thanks for taking my question here and congratulations on the many milestones that you hit here on the quarter. One I'd like to ask about is the return to positive e-commerce growth, which certainly seems like a big milestone.
And if I'm interpreting your comments correctly, it sounds like growth on Laird, superfood.com was even especially strong. And can you talk about what's been driving that? I know you mentioned on some of your newer products helping to lift average order size, has that been the primary driver? It looks like you guys have been emphasizing subscriptions more as well. And just any color on that would be helpful and what we might expect to see on Laird Superfood.com into this year and beyond.
Jason Vieth
Alex, nice to hear from you. Yes. Thanks. Great question. And I wanted to be able to talk more about this, I could not be more proud of our DTC. business. It is in fact that LSF or Laird Superfood.com platform that return to a 10% growth. That's the first growth in a couple of years.
We have as a new leader on that business. We have new I mean, you guys know, we've changed a lot of the organization. Now we have a new marketing leader and we have a new DTC. channel leader as well. And that combination has proven to be really powerful With that I'll tell you a couple of things in particular that have really helped to drive that.
One is that same broadening of our portfolio that I mentioned a moment ago with Bobby, it's really not only been the creamers in the last months, but the creamers, the grains, meat, antigenic mushrooms that are doing really well, and that's a function of a couple of things.
First is we've really reengaged Laird and Gabby, as you know, is as real as the real brand representatives of Laird Superfood, I would say that's only natural and you would think why why did we ever not why did we ever go away from that? And I think just as I mentioned before, a couple of years ago, there was some truth to that, and that's completely changed and doing that, we've really seen a great response from the activations that Laird and Gabby are doing. It's always our highest, our aligned, highest ROE as material marketing collateral that we put out so that they're really great.
We also entered a partnership with Sean Ryan and shown, right. So Sean is a podcaster has a tremendous show one of the largest followings in the country in the world. And Sean is not only a an advertiser or an advertising platform with us change our partner.
He partnered with us became an investor into the business and he is a big advocate of mushrooms adapters, Yannick mushrooms and the benefits for folks that have had traumatic brain injuries as well as everybody for their general health and becoming a spokesperson, trusted spokesperson for the adaptive agents. He has been an unbelievable partner to us as well. And we've really enjoyed working with Sean and have had tremendous benefits. And so those two have been really large.
And the third factor that I'd add to that is our DTC. team has just done incredible work to turn up it turn consumers into customers and customer subscribers. And as a result, we have almost 50% of our revenue in that DTC channel.
Now coming through subscriptions, which obviously pay off over the long term in terms of the stickiness and the amount of volume that consumers continue to order, especially when they consider how beneficial it is to their health on a regular basis. So those three factors have been the key driver, and we anticipate that they're going to be long living for us.
Alex Fuhrman
That's terrific. Really appreciate that and thanks, Jason. And then if I could ask also just on the returns and discounts, it looks like that was the lowest level on the fourth quarter in more than a year on, where is that improvement coming from? Is that more? I know you had some kind of higher profile incidents and with some of your wholesale customers and things like that is that kind of coming from the direct channel as well? And do you expect those improvements and to continue into this year?
Anya Hamill
Hi, Alex, this is Anya and thank you for the question, so I can address that.
Yes, you're right. It was the lowest in the year, however, know like we talked in the last couple of quarters, Q2 and Q3 were high because we chose to invest into growth for retail businesses. So we're now starting to pull that back and we did fill in Q4.
And so part of it saving part of the savings Stephen's comments from our wholesale and business, and they'll continue kind of at that optimized level of spend. No, quite linear, not quite maybe as low as Q4 but in that range and DTC. also as we have optimized our mix between tray and marketing investments, there's some savings coming from that business as well, although not nearly as much as from retail. And so I think you can expect to see a pretty similar range and mid-teens in terms of discounts going forward and 24.
Alex Fuhrman
Okay.That's really helpful. Thank you, Anya.
Operator
Thank you for your question.
JP Wollam, Roth Capital Partners.
JP Wollam
Hi Jason, yes. Thanks for taking the question.
And if I could maybe just start with sort of the revenue guidance for next year. Just want to kind of talk from a high level and maybe what gives you confidence in revenue growth?
And as we think about kind of the and drivers of that growth for next year, maybe if you could just talk about sort of what I don't know how much you want to say, but maybe there you'll have some smaller retail doors coming online in the middle of the year. But anything you kind of just want to say about how that revenue will build?
Jason Vieth
Yes. Hey, JP. Good to talk to you again. So I'll start off. I'll give a couple of thoughts on that. And then I hand over to Andrea. She can talk to the cadence a little bit, but I want to give you some of those drivers and where our confidence comes from. So I'm going to go sequentially through them through three different channels and platforms starting with Amazon because that's for us, that's a really attractive opportunity for us.
I mentioned on the call a couple of minutes ago on the pre record that last year we had a we had a bit of a trough in Amazon because we had a quality that in Q1 we had to withdraw all of our inventory out of Amazon. And that means you have to withdraw from their DCs and then they have to go out to all the micro DCs that they send to so that you can get that order in 24 hours or so.
So that it's a smooth process and we had to pull it all back before they let us put anything else back in because it all had the same, it skew number. So a UPC number. So as a result, we lost somewhere around five, maybe six months of creamer sales in that on that platform. And it wasn't I mean, I can't say zero, but we really lost a lot of business.
And as a result of that, when you lose that piece of business, you lose the opportunity to cross-sell as well. And so I would tell you that there's just a tremendous lapping opportunity on Amazon as a result of that. On top of that, we have very positive Amazon sales growth going on even before running into that. So as you saw coming into Q4, we were closing the gap quickly despite significantly less spend.
And as we were in 2023, we had pulled back the spend. And so you're going to see now in 2024, just a tremendous opportunity for us to grow that category or that that platform rather.
And then in the finish out the online business with e-com business, the DTC. opportunity for us it is really driven off those same fundamentals that I just shared with Alex's question. It just looks great. I know it's been a rough road for a couple of years and frankly, it's been a rougher road for a number of our competitors and continues to be.
So I think we're blessed to have a really great team in this space have really honed their ROE as metrics to make sure we're only making smart investments now that return at least to our bare minimum acceptable ROE at which is profitable at this point for us. We also have Laird and Gabby and we have the Sean Ryan partnership.
And with those two sets of highly influential individuals, Laird, Laird and Gabby, I guess three individuals Laird and Gabby separately, but then Sean Ryan as well, we feel we can really invest behind those three and and continue to make hay in that category or in that platform rather And then finally, wholesale and I didn't leave it for last because this is our biggest opportunity.
By far, we're still in just a fraction of the doors within natural. And we're in almost no doors. And I know it's not really their doors, but if we have very few distribution points within the conventional space today. So within natural first, I mentioned that we now have eight items in Whole Foods nationally, and we were we were in just maybe 12 months ago, we had a couple of liquid items.
Our three, I guess, liquid items and we had three powders regionally, if I remember correctly, now we have eight items nationally. That is a big distribution change for us year over year. We believe there's significant opportunity to continue to expand within Whole Foods as we go forward into other secondary and other categories with our portfolio.
That's now really been I would tell you cab displayed in a best-in-class fashion at Sprouts. I mentioned that on the call that we now have 22 items in distribution at Sprouts, 20 of those are in full distribution. We have a few more that we're working on now that we believe Scott really belong within the Sprouts stores. And then we're continuing to do the same with a new brokerage that we've employed we continue to do the same thing now to allow them to expand out into all the independents and smaller chains stores.
So just a really exciting opportunity within natural to continue to close those distribution gaps. But then the opportunity big opportunity that much larger opportunity than is on the conventional side, where we really haven't put any effort in the past and so the addressable markets and the opportunity, the whitespace that we have in distribution in that core in that conventional space, it's absolutely enormous, JP.
And so these numbers, you know, ask what gives me confidence numbers that I think are very attainable for us this year. We're committed to those numbers. And I think as we go forward, we'll continue to take for upside.
JP Wollam
Great. Thank you.
That's plenty plenty of color. So I appreciate all that. If I could just do one follow-up and maybe this one's more from you. But and there was the comment about the ABL during the year earlier remarks, and I just wanted to kind of follow up and make sure I think the direct impact with the commentary there more just that it was a vote of confidence in the future of the business or as we think about kind of expanding some of the full suite SKU expansion, some of the growth next year.
Is that something that you think is going to be put into use next year, too, either build inventory or kind of fulfill some of that demand?
Anya Hamill
Yes, thanks, for that question, JP. Yes, we think that we have enough cash to get us through 2024 and 25 and hopefully beyond. However, the point of the comment was too and signaled that we do have additional liquid resources or liquidity in case if we need it for working capital expansion or any other opportunities that may arise.
If we choose. So those funds are there based on conversations that we've had with several lenders that would be available.
JP Wollam
Yes. Okay. Makes sense. Thank you for taking my questions and good luck going forward.
Jason Vieth
Thank you.
Operator
Thank you for your question.
(Operator Instructions)
There are no additional questions waiting. I'll pass the call back to the management team for any closing remarks.
Jason Vieth
Just I would just want to thank everybody once again for jumping on this is by far the best performance that we've had as a public company, and we're really excited for the path from here as we go forward. We'll obviously be back talking with you guys in just a few weeks given how late the annual call ended up and as we wrap Q1, look forward to getting back with everybody to share the continued progress on the story. So thanks much.
Operator
That concludes the conference call and thank you for your participation. You may now disconnect your lines.
