Good afternoon. Thank you for attending today's Laird Superfood Third Quarter 2023 Financial Results Conference Call. My name is Cole, and I'll be the moderator for today's call. [Operator Instructions] I would now like to pass the conference over to our host, Trevor Rousseau. Please go ahead.

Thank you, and good afternoon. Welcome to Laird Superfood Third Quarter 2023 Earnings Conference Call and Webcast. On today's call are Jason Vieth, Laird Superfood's President and Chief Executive Officer, and Anya Hamil, our Chief Financial Officer. By now, everyone should have access to the company's third quarter 2023 earnings release filed today after market close. It 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 it over to Jason.

Thanks, Trevor. Hello to everyone, and thank you all for joining us in today. I am proud to be able to report that our Q3 results represent a fundamental step change in the performance of our business. For the first time since Q3 of 2021, we are reporting net sales growth against both the prior period and the prior year same quarter. At the same time, we achieved our 2023 goal to exceed 30% gross margin by the back half of the year, an improvement of more than 750 basis points versus this time just one year ago. And we executed these improvements, which is a fraction of the marketing and SG&A costs that we utilized in the business during the last years, as we will discuss shortly. First, let's dive into net sales. During 2022, I shared that we would need to reshape our sales algorithm in order to create a growing profitable business. I'm pleased to announce that our Q3 results were the result of this effort as the wholesale channel grew by more than 42% year-over-year to become nearly one half of our total business during this quarter. Natural channel consumption data as reported by Spin for the last 12 weeks ending October 8, 2023, showed a 61% growth for the Laird Superfood brand with positive sales growth in every category in which we compete. This growth is being driven by a healthy combination of unit velocity growth, price increases taken in previous quarters and distribution expansion. As expected, our online business, which is comprised of the DTC and Amazon channels, contracted by 16.6% as we continued to scale back media spend in support of our profitability goals. For the past 18 months, we have been managing this business towards profitability through significant reductions in media spend…

Thank you, Jason. Net sales of $9.2 million in the third quarter of 2023 increased 3.7% as compared to $8.8 million in the prior year period and increased 19% as compared to $7.7 million in the second quarter of 2023. The year-over-year growth was driven by distribution gains in the natural and conventional channels, seasonal program expansion in club, pricing actions as well as velocity improvements behind new packaging and the rebranding campaign launched earlier this year. This was partially offset by lower sales in e-commerce channels. Given the level of pullback in our marketing spend, which was 19% year-over-year reduction across Amazon and DTC work in media, this decline was expected. These marketing costs were strategic in nature in order to cut inefficient spend and reduce our customer acquisition cost to build the most sustainable e-commerce business and improve our profitability in these channels. Additionally, our Amazon sales continue to be negatively impacted by residual inventory out of stocks related to the previously discussed product quality issue experienced in Q1. I'm happy to say this issue was resolved at the end of the third quarter and is now fully behind us. In the third quarter, we continue to build on the success we achieved in the first half of the year from strategic actions implemented last year. Every quarter this year, we saw a consistent margin expansion versus prior year, with Q3 margin reaching 31%, which is 670 basis points improvement sequentially over Q2 and 750 basis points improvement versus the same period last year. Q3 gross margin of 31% is a milestone that puts us firmly on the way to achieving our long-term goal of gross margins in the high 30s. In Q3, this year-over-year margin expansion was driven by cost of sales improvement of 21% versus the…

Thank you. We will now begin the Q&A session. [Operator Instructions] Our first question is from Bobby Burleson with Canaccord Genuity. Your line is now open.

Sorry, can you hear me? I'm sorry, can you guys hear me?

Yeah, we can hear you, Bobby.

Okay. Great. I thought I hung up on you guys for a second. So I just wanted to -- first of all, congratulations on making so much progress and kind of turning the corner here. I wanted to just understand the media impressions comment made. What type of in your experience lag is there between that type of activity and maybe a pickup and maybe a move towards growth again in your DTC? And then I just want to add on to that, how long do you think just the tailwind from Amazon could persist into 2024?

Yeah. Hey, bob, good to hear your voice and to be back here again and thanks. We certainly appreciate the recognition of the -- all of the progress that's been made by the team has been a nice long run here for two years to get to this point, and it's really great now to see the culmination of a lot of those efforts. And we still have a lot in front of us, two of the points that you're hitting on here are really important. One, on the DTC impressions, yes, media impressions that will benefit all of our business, of course. In the case of DTC, as you're asking, I think that it's important to understand, we are shifting our marketing strategy right now and certainly as we move into 2024 as well, it's more top of funnel awareness. And that really started to take place through this year, but I would say it was heightened in Q3 and will be again in Q4. And so we're spending more of our marketing dollars in podcast that we're supporting and a partnership that we have already established with the Shawn Ryan show. And another one that we're working on right now that we're excited about closing, hopefully very soon. And we're working as well with our PR agency to really make a heightened and concerted effort to generate these impressions, both paid and unpaid, and they're doing phenomenal work for us right now. And so some of this as you're alluding to, is going to be a longer-term benefit for us, and we won't see the immediate impact. And that's why these results -- we're so excited about these results because we got back to growth here in Q3, and we did it without the same level of that…

Okay. Great. And then just a quick follow-on. It sounds like you're pulling back on the elevated trade spend in Q4 should help with gross margins and the burn is going to slow, I guess, from what it did in Q3. But you talked about a cash flow positive goal of 12 to 18 months from, I guess, is that from October? And then what swings you to either end of that range? Are there particular things you're watching that you think could really affect how soon that outcome is reached?

Yeah. Good question. I tell you, Bobby, our gross margin -- as we had planned at the beginning of the year, gross margin exceeded 30%. We have lacked -- we have to add on 5-plus points to the course of the next year. And as we do that, obviously, we'll start to close in towards the breakeven profit that we mentioned. The big driver -- on top of that, the big driver for us as we go forward, there are really two. One is the continued skin of our G&A. We've made a number of moves that are only now starting to trickle into the G&A line that we'll get the full benefit of over the course of the next year. And then similarly, on the marketing side, I mentioned the strategy that we've moved to. And as part of that move, we are compressing marketing spend down towards a more traditional CPG model. So you'll see marketing come down next year and obviously, making a few bets on that with regards to our ability to market better and more efficiently, but we have a great team here that I think has generated some insights that will allow us to do that. So it's really the combination of that increased gross margin and that the lower G&A and marketing costs, coupled with what we believe will become an increasingly positive story on topline because for the last two years, we have had a bigger online business declining faster than we were able to grow our smaller wholesale business. And that is just about flipped. As we mentioned, it's about a 50-50 business now, wholesale to online. And our wholesale business is currently growing faster than our online business is declining. And so that, obviously, becomes a flywheel that starts to work in our favor. We're really excited about what that can mean for us next year.

And I just want to add one more thing to that. Hi, Bobby, this is Anya, CFO. Our working capital is another driver and continue optimizing our working capital, especially as we grow and expand the business. We think that we still have room to improve in terms of our inventory efficiencies. That's another area where we're looking to free up our cash.

Okay. Great. Thank you for that additional point and congratulations.

Thank you.

Our next question is from Alex Fuhrman with Craig-Hallum. Your line is now open.

Hey guys, thanks very much for taking my question. Wondering if you can talk about what you're seeing here in Q4 from Amazon? And when would you really expect your business through that important channel to be more or less what you would have expected to be full strength following the coconut milk powder issue that you had?

Yes. I'll start that and Anya can jump in if she has anything to add afterwards. But I just tell you the way we're looking at Amazon right now is we're about a year behind where we had planned to be. And so we were coming in, as you guys maybe recall from Q3 and Q4 last year. We had heavied up our spend. We had built cohorts, and we really felt like we had Amazon in position to be able to drive growth for the next year. Lo and behold, the quality issue, Q1, Q2 basically knocked us straight back to where we had been a year before. And that's what we're just coming through now We're getting back to where we were a year ago. We're rebuilding those cohorts, I would say we're also marketing much more efficiently than we were at the time. So our advertising spend is quite a bit reduced, and yet we're seeing really strong estimates from the existing sales. We have a tremendous opportunity still to convert a number of those -- large number of those current consumers over into subscribers. And we're working on that right now as well as the conquesting of our competitors now that we have full inventory in place. So really excited about that channel for next year. We're excited about it. You recall for this year. That was going to be one of our big growth drivers. Unfortunately, it didn't materialize with quality event that we had, but we were able to keep that product out of the hands of consumers. So there was really no downside except that we had basically to put a pause on for, call it, 7-ish -- 7 or 8 months while we got everything back in stock and got our buybacks one and all of our -- basically, all of our existing business put back in place. So from here, we should have a really great growth driver in front of us.

Okay. That's really helpful. And then just on the gross margin, I think you kind of touched on this a little bit with Bobby's question, but mid to high 30s gross margin in Q4. That's quite a bit more than you've done any quarter, this year or the last couple of years. Now that you've got your core shelf-stable creamer manufacturing being outsourced. I mean, is that a run rate we could expect to see throughout next year? Is there any reason why Q4 is maybe a little step up and maybe we should expect that to be a little bit lower in the first half of next year?

Yeah. Great question. Alex, I would tell you that you're right where we are as we think about our margins through Q4. And as we go forward from here, we actually see more opportunity than we see risk. There are always commodity movements that may go against you, but given where we bought commodities thus far and where it looks like next year and with some of the cost savings initiatives that we have in place, we actually see opportunity to further improve from here. That being said, we are also looking at investments that we can make to gain market share online and retail. And so we'll be balancing that as we go forward. But I would tell you no, we don't really see a spike in Q4 that we won't be able to hold on to. We really see the start of a long-term trend be sitting in that 35-plus range as we go forward.

And I'll just add to it. Hi, Alex, this is Anya. So I’ll just add, is that quarterly wise, our margin is expected to trip, so just depending on the timing or the seasons, Q1, I expect it to be a little heavier because it's back to how season for consumers, and we want to line up our promotions with that season to really drive the top line and then it kind of comes down in Q3 and Q4 -- I'm sorry, in Q2 and Q3, and then we have the Black Friday event seasonally fluctuate somewhat with 3, but as far as our cost of sales, that's going to be pretty steady throughout the quarters next year at Q4 or better levels.

That’s terrific. Thank you both very much and congratulations on the really improved results here in the third quarter.

Thanks, Alex.

Thank you.

There are no additional questions at this time. So I'll pass the conference back to the management team for any closing remarks.

Yeah, I just want to say -- I'll say thanks everyone for joining us, again, today. It's extremely exciting and gratifying to be able to report on our continued progress of this turnaround. And now with gross margin in line with many of the top CPG companies in the industry, we can get back to growing our business. And that's obviously when it really gets fun for us with the management team and exciting, hopefully, for the investors as well. The future has not looked this bright for Laird Superfood for quite some time, and frankly, not since I've been here, and I don't think you all leave this meeting as excited for our future as our entire team is. Thank you very much.

That concludes today's conference call. Thank you for your participation. You may now disconnect your lines.