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spk04: Greetings and welcome to Local Bounty's third quarter 2023 earnings conference call. All participants will be in a listening mode. After today's presentation, there will be an opportunity to ask questions. Please also note today's event is being recorded. At this time, I would like to turn the conference call over to Jeff Sonick, Investor Relations at ICR. Please go ahead.
spk00: Thank you and good afternoon. Today's presentation will be hosted by Local Bounty's Chief Executive Officer, Anna Fabrega, and Chief Financial Officer Kathleen Valasek. The comments made during today's call contain forward-looking statements within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical facts are considered forward-looking statements. These statements are based on management's current expectations and beliefs, as well as a number of assumptions concerning future events. Such forward-looking statements are subject to known and unknown risks and uncertainties that could cause actual results to differ materially from the results discussed in the forward-looking statements. Some of these risks and uncertainties are identified and discussed in the company's filings with the SEC. We'll also refer to certain non-GAAP financial measures today. Please refer to the press release, which can be found on our investor relations website, investors.localbounty.com. for reconciliations of non-GAAP financial measures to their most directly comparable GAAP measures. With that, I'd now like to turn the call over to Anna. Go ahead.
spk03: Thank you, Jeff, and welcome to everyone on the call. I'd like to start today's call by highlighting some of our recent accomplishments, and then I'll share some insights on the operational improvements that we are integrating into our business. Kathy will round out the call with her financial discussion before opening the call for your questions. I continue to see incredible opportunity ahead for Local Bounty. We believe our patent-pending stack and flow technology, which combines the best aspects of traditional greenhouse approaches with vertical growing technology, is an efficient solution that can help solve food shortages globally. In early October, we completed the build-out of our Georgia facility with the finalization of Phase Ic. This represents the final phase of construction and was focused on the integration of our vertical plant incubators, which we call stacks. This is a huge milestone for us as it creates, for the first time, a large scaled growing facility that brings together all the technological advancements that our team has developed at our Hamilton, Montana facility. It is also a model for our facilities in Texas and Washington that are expected to open in the coming months. And perhaps most importantly, This greater capacity at Georgia will allow us to double our shipment volume to our large club customer under our offtake agreement, and we expect to see increased deliveries in the coming weeks. Given the significance of the planned increase in shipments, we took the time to thoughtfully calibrate our workflows and optimize our operations while Georgia's Phase 1c stack integration process was underway to account for the larger footprint and 40% greater capacity generated by the stack system. This involved taking an intentional look in the mirror and scrutinizing every level of operations to identify points of friction and how best to resolve them. This is the natural next step for local bounty following the development and integration of our patent-pending stack technology. We are now focused on harnessing the opportunity we have with stack and flow by implementing a production system which is focused on eliminating waste. Some of the key elements that we have put in place as part of our production system are hiring facility-level leadership with operational backgrounds at all levels, setting benchmark productivity goals, implementing standardized workflows for all processes, providing transparency to all associates so there's a clear view of performance, and advancing our ability to execute just-in-time production. I'd like to emphasize the focus that we are bringing to the organization with respect to operational execution. We have made large commitments with these build-outs to support retail partners that are key to lean into this category of fresh, local, and sustainably grown produce. It is absolutely imperative that we identify and implement replicable operating standards across our growing facilities to create the efficiency that underpins our long-term goals. After all, it is because of our unique ability to combine sustainability, efficiency, and quality at scale that we are able to attract leading global retailers like Sam's Club to Local Bounty. In order to achieve our goals of scaling the business and delivering the financial returns we believe are inherent in our model, we need to adapt to ensure that we have the right infrastructure and people in place to position Local Bounty for success. As part of this process, We have optimized our organizational structure and continue to add key talent to help accelerate our strategy. Most recently, we've appointed Bheeml Patel as our Chief Operating Officer. Bheeml brings to our team over 30 years of progressive experience and operational leadership at several global blue chip companies, including Amazon, Whirlpool, Ford, and UPS. Prior to joining us, BMO worked at Amazon for 11 years as its regional director of operations and most recently served as the worldwide director of Amazon Logistics Planning and Engineering. We are leveraging BMO's deep expertise across operations, process engineering, and logistics to ensure that our organization is optimized to drive efficiencies across all facets of our business. providing us with an opportunity to demonstrate how Local Bounty is redefining agriculture. The third quarter marked a transition period for Local Bounty. We continue to work hard to perfect the art and science of our technology, and the result is a standardized and hyper-efficient manufacturing process which we can replicate across our growing footprint. Beginning in the fourth quarter, we enter a new upward trajectory, and with the focus we are putting on our operations, I am confident that we have an organization that is up to the task of generating financial returns in the quickest and most efficient way possible. I look forward to demonstrating our progress in the quarters and years to come. With that, I will turn the call over to Kathy.
spk01: Thank you, Anna. I'll begin by providing an update on our facility scale up before covering our third quarter financial results and full year 2023 guidance. At our Georgia facility, We successfully completed the integration of the stacked zones that comprise Phase 1C in early October and immediately commenced operations with the seeding of the vertical nursery. This is a significant milestone for Local Bounty and is a model that we are working to replicate at our Texas and Washington facilities. We continue to make great progress on our six-acre facility in Texas. In the third quarter, we shifted our focus to installation of the stacked zones and greenhouse growing systems. We continue to expect operations at Texas to commence in the fourth quarter of this year. The similar design of this facility to that of Georgia will allow for synergistic operations and management of the two facilities. Texas will support production of our packaged leafy green varieties as well as locally grown living lettuces and fortify our national distribution network with localized facilities spanning coast to coast across the southern U.S. Construction at our Pasco, Washington facility remains on track, and we continue to expect operations to commence early in the first quarter of 2024. When complete, the facility will be comprised of three acres of greenhouse, which will be supported by multiple stacked zones. This location will help bolster the company's distribution capabilities in the Pacific Northwest. As a reminder, we've been consciously staggering construction to accommodate the commissioning of our Texas facility in the fourth quarter of 2023 to maximize the efficiency of our team. I'll now cover our third quarter results. Third quarter 2023 sales were 6.8 million as compared to 6.3 million in the prior year period. Our third quarter results largely reflected production from our California facilities and to a lesser extent our Georgia and Montana facilities. Our sales growth in the quarter was limited by two primary factors. First, the temporary closure of a section of one of our California facilities in order to make necessary repairs following weather-related damage from Q1, which impacted sales by 500,000 and has since been repaired and resumed normal operations in early October. And second, our operations in Georgia experienced some periods of lower utilization during the Phase 1c integration as we took the opportunity to thoughtfully redesign our workflows and optimize our operations to account for the larger footprint and 40% greater capacity generated by the stack system. This shifted revenue from Georgia into the fourth quarter as we work with our key customer accounts on preparing for a ramp and expanded distribution ahead of the holidays. With the Phase 1c stack integration complete and the facility fully functioning in October, we expect to increase the revenue run rate out of the Georgia facility in the fourth quarter of 2023. Third quarter 2023 adjusted growth margin, excluding depreciation, stock-based comp, and other non-recurring items, was approximately 25%. Our adjusted growth margin was constrained in the quarter, primarily by the lower utilization that I mentioned at both California and Georgia facilities. SG&A was 14.4 million in the third quarter, which was down 5.8 million from the prior year period, with the difference largely due to lower stock base comp. Adjusted SG&A was 7.5 million versus 7.1 million in the prior year period. Third quarter 2023 net loss was 24.3 million as compared to a net loss of 27.1 million in the prior year period, and includes 7.1 million in interest expense, 3.3 million in stock-based compensation, 3.4 million of depreciation and amortization, and a gain on a change of fair value of a warrant liability of 1.8 million. Adjusting for these and other non-recurring items, adjusted EBITDA loss was 9 million. From a capital structure perspective, for the third quarter ended September 30, 2023, we had cash, cash equivalents and restricted cash in the amount of $18.3 million and approximately $38 million of undrawn capacity on our credit facility with Cargill. Additionally, Cargill has agreed to provide Local Bounty $10 million in additional working capital subject to certain terms and conditions precedent. We anticipate closing on this transaction in November. I also wanted to provide some further context around how we are using our various capital facilities and the timing impact it has on our cash. For example, as we spend cash on CapEx, traditionally there was a 30-day period before we got reimbursed through our cargo line. We were successful and accelerated this reimbursement rolling forward to 15 days, which will improve the cash level to operate the business. We continue to believe that we have the necessary capital to reach break-even adjusted EBITDA by the end of 2024 or early 2025 which is a very important milestone that our entire organization has been working hard to achieve. As previously announced, at the end of the first quarter, we expanded our construction financing agreement with Cargill by up to $110 million for a total of up to $280 million. Then in April, we executed a sale leaseback transaction for $35 million. We continue to advance our work with a licensed USDA lender to reduce our use of construction financing and replace it with lower cost debt. Local Bounty has executed a conditional commitment letter and expects to enter into additional commitment letters from a commercial finance lender for total financing of up to approximately $228 million to fund its 2024 Greenfield build and facility expansions. We expect to close on the financings within 60 to 75 days. With all of these pieces taking shape, we believe we are on track to have the resources and agreements in place to execute our near-term plan. However, I also want to emphasize that we are continuing to work on additional strategies to lower our cost of capital while preserving the flexibility that our current agreements allow for. While we remain cognizant of our near-term capital requirements, our strategic philosophy is longer-term in nature, and we are constantly preparing for future growth opportunities. As of September 30, 2023, we have approximately 8.3 million shares outstanding. On a pro forma basis, including warrants and our employees' restricted stock units outstanding, we have a fully diluted share count of approximately 15.6 million shares. With respect to our outlook and in consideration of our year-to-date performance, we are revising our full year 2023 revenue guidance to a range of 30 to 34 million. As we've mentioned previously, we continue to anticipate a more significant revenue acceleration in the fourth quarter of this year, which will benefit from the improved underlying production and the positive impact from Phase 1c's stack implementation, which is expected to increase production by 40%, as well as our Texas facility coming online in the fourth quarter. With respect to our Georgia production, We are preparing to double our shipment volume to our large club customer under our offtake agreement and expect to see increased deliveries in the coming weeks. The timing of this ramp, coupled with our decision to implement some operational improvements during our stack implementation, accounts for the change in our guidance. In summary, we are working hard to scale up the business and have reached a significant milestone with the completion of the Georgia facility. So despite our ability to secure the funding for our currently planned projects, which we believe will take us to break even cash flow. The market is not currently trading on the fundamentals of the business as we work on our operational execution, and we believe that our market cap is not reflective of the value of our company. As such, a number of executives intend to look at making open market purchases in the near term to demonstrate our belief in the company's long-term strategy and future success. Further, we are also implementing a measured stock repurchase authorization of up to $1 million to support shares and take advantage of the market dislocation. That concludes our prepared remarks. Operator, please open the call for questions.
spk04: Thank you. Ladies and gentlemen, we will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad and the confirmation tone will indicate your line is in the question queue. If you would like to remove your question from the queue, please press star two. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, we'll recall for questions. And our first question comes from the line of Kristen Owen with Oppenheimer. Please proceed.
spk02: Great. Thank you for taking the question. I wanted to ask about some of the learnings in the Georgia facility. You mentioned this in the prepared remarks, and it seems as though you took some opportunity in the quarter to implement some of those learnings. Can you walk us through or just expand on some examples there, and particularly with Texas being more of a greenfield facility versus Georgia, which was more of an existing facility, just how we should think about the ramp of Texas as compared with Georgia?
spk03: Hey Kristen, thanks for the question. So recall that Georgia initially started as a three-acre facility and we later added 1B as an expansion. And so as we have kind of ramped up grow capacity and now with STAC as well, we've had to really take a hard look at kind of the process flow throughout the facility. Looking at everything from how do you move product through equipment like the harvester and the pack layer more efficiently? How do you make sure that you have minimal downtime? How do you reduce complexity? So even looking at how much conveyor does product go down before it gets put into a package to how to minimize changeover times. when we're changing pack size, for example. So each one of those points has been evaluated and we have created what is typical of the manufacturing industry standard work so that it's really, people can be super fungible within the operation. We can operate with minimal shifts but still support that 40% increase in yield. And you asked about Texas. Texas will ramp up significantly faster because one, we have the standardized processes in place, but two, we also designed for the stack and flow process from the get-go, and so there's not as much retrofitting and redesign that we have to be thinking about as we're trying to optimize that flow for the greatest amount of efficiency.
spk02: Okay, that makes sense. Thank you, Anna. So when I think about the guidance, then 4Q sales implied about $11 million. You know, how should we think about that in terms of the run rate going into 2024, understanding that Texas will be commissioning and so probably not a big contributor in 4Q?
spk03: Yeah, so I think, you know, we talked about Georgia as we ramp up 1C increasing, doubling our shipments to our club customer and increasing production by about 40%. Texas will be ramping up in December, and typically it takes some time just to get the operation fully running, but we expect to be seeding by the beginning of the year.
spk02: And then last one for me. Sorry, go ahead, Kathy.
spk01: Yeah, I was just going to throw in, in terms of a revenue perspective, Texas is less than we might have thought earlier in the year.
spk02: Okay, that's helpful. And then, Kathy, actually a follow-up last one for me. To the extent that you're able, just anything you can say about the USDA-backed construction facility, any early indications from those discussions, impact to total cost of capital, just how to think about that over the next 60 to 75 days.
spk01: Yeah, sure. So, you know, as we've said earlier, you know, a couple quarters ago, we restructured our agreement with Cargill such that they are allowing lower cost of capital to come into the cap stack. And we are considering and looking at term sheets actually on each of the facilities for long-term takeout of Cargill for long-term at much lower USDA rates.
spk02: Great. I'll hand it over. Thank you.
spk04: Our next question comes from the line of Ben Cleave with Lake Street Capital Markets. Please proceed.
spk06: All right. Thanks for taking my questions. First, I want to ask a question about the conditional commitment letters that you noted in your prepared remarks. I want to make sure I understand this correctly. So the $228 million of capital that you're referring to here, this is incremental capital above and beyond the existing facilities through cargo and this is for 2024 greenfield build and expansion beyond what we already know is in the works in texas georgia and washington are those both correct statements yeah exactly yeah okay okay yeah uh great and um and then is the and then is the usda uh uh uh backed loans a part of that 228 or is that separate as well?
spk01: It is separate. It's above and beyond.
spk06: Okay. All right. Very good. Thank you. With the fourth quarter outlook, you know, I would think you, at this point, you've got a pretty good sense of where you're going to come in on the quarter. So, you know, can you talk about the big drivers between the high and the low end of your range, what you're not sure if it's going to come through or not in the period?
spk01: You want to take that, Kathy? Yeah, sure. You mean in terms of the reset 30 to 34? Well, yeah. I mean, what needs to happen to hit 34 versus 30?
spk06: Yeah, so great question.
spk01: speed with which we get stack up and running is a piece of it. We did say that we seeded early in October, but it's a large number of stacks in the facility. And so it's just the ramp and the speed with which we can get that up and running, so to speak. And as we did mention that California We had an issue in Q3, but that one section is back up and running. So we should be great there. And then also just any timing for Texas coming online.
spk06: Okay. Okay, great. And the last one for me, I'll get back in line. It's regarding California. You know, for several periods in Rona, there's been some challenges that you guys have fought through there. Can you talk about your view on the long-term outlook for those facilities? Are these two facilities ones that you think are going to be in your business for the foreseeable future, or are you considering any kind of strategic initiatives around these, given the challenges that you've had here for several periods in a row?
spk01: Go ahead, Kathy. Sure. Go ahead. It is still so much about the crazy weather that we saw in Q1 in California. And one of the things that I'll say, right next to the facility for literally 20 years was a dry lake bed. And the rains were so strong in Q1 that there's now actually a lake there. And I'm just saying that the level of rain was so significant that it was, you know, it just had all sorts of implications to the facility, both facilities actually. But we definitely feel that both of those facilities are, you know, humming still right along and we consider them very, very important facilities in our outlook rolling forward. But of course also we are looking to expand at some point possibly on the land of one or other or one of the other or even both of the facilities. So although we have had issues this year, it's really just temporary issues. Yeah, Anna.
spk03: Yeah, I'll just add in regards to the section that we closed for repairs. We've been investing quite a bit in the infrastructure of these facilities. And, you know, we made the decision that rather try to make repairs and operate in that particular section, it would be better for our employees and better from a safety standpoint to close it down so that we could really get in there and make the repairs as quickly as possible. So, you know, as Kathy said, there's still really important facilities for us, and we're evaluating right now how can we make sure that You know, we are fortified against other events like that going forward.
spk06: Got it. Got it. Okay, great. I appreciate you taking my questions. I'll get back in queue.
spk04: Our next question comes from the line of Brian Wright with Roth and KM. Please proceed.
spk05: Thanks. Good afternoon. Good afternoon. I just wanted to follow up on the Georgia facility with 1C being completed and the impact to the yields that occurred. So there was more than just typical seeding at the 1A and 1B that could have occurred whether the stack was up or not. But for planning purposes, it was a function of the stack starting. I'm just like, I'm logistically struggling with, and I'm sure there's a simple answer, but just not being there, I'm having trouble visualizing it. visualizing the – so one is – On what happened with the lack of ramp in the Georgia.
spk03: Yeah, so we operationalized 1B, and we had to adapt and adjust to having those six acres and production plan to incremental volumes than what we had had at the three acres. 1C was originally planned to go up earlier in the year and it was delayed. And as part of bringing up 1C and starting the seeding process, we also took a step back from a production standpoint so that we could make sure that we had the workflow in place to support that incremental volume that would now be coming through as stack was brought on board. So as Kathy mentioned, We started seeding in the beginning of October. We are now kind of working that product through the system and, you know, feel really good about the process and the workflow and the efficiency that we have going through there. But that's not reflected in Q3, clearly.
spk05: I just wanted to follow up. The seeding beginning in October, are you referring to seeding at the stacks? Correct. Okay. Correct.
spk01: Yep. Yeah. I mean, it was honestly, with the advent of our COO, Bimal Patel, coming on, Brian, it was a very, very conscious effort and decision, the processes that he put in place, workflows, optimization of the operations. We realized, you know, we made a conscious decision here to go slow, to go fast, is what I would say. Yeah, I'll give an example.
spk03: We have in that facility, we have one harvester. So in order to make sure that you can operate that harvester at its maximum speed to run all of those lines through, plus the incremental, requires some process engineering work that we've had our engineering team engaged in, for example. Again, if we're mixing salad greens, those salad greens go to a mixing belt How can we reduce the amount of time that it takes to get those greens from harvester to the packaging machine? And potentially, you know, is there a different way we can mix it that doesn't require it to go to the belt? So it's every single point in the process. We're looking at, you know, minutes and seconds and trying to optimize that flow so that at 40% greater capacity, we're not having any bottlenecks at the end of the process that get in the way.
spk05: Okay. Okay. And then just wanted to confirm, I think you said last quarter you're selling everything you're making. Is that still the case?
spk03: Yes.
spk05: Great. Thank you so much. Thank you.
spk03: Thank you.
spk04: The next question comes from one of Chris Barnes with Deutsche Bank. Please proceed.
spk07: Hi, good afternoon. I guess I just wanted to ask on gross margin. The 25% this quarter was like noticeably weaker than like 2Q last quarter. And I know you cited the weather challenges in California and startup costs in Georgia. But I guess I'm just trying to understand like, Last quarter you said the weather issues were resolved, and this quarter they came back. So what really is driving the weaker margin? And then just going forward as revenue scales up at Georgia and Texas and in Washington, do you have a line of sight to getting back to, like, a mid-30s gross margin? Or is it going to be structurally lower than – just year-to-date it's come in quite a bit and – just continues to do so. I'd love your thoughts there.
spk01: Thanks. Chris, thanks so much for the question. I hear you. It is very frustrating for us, but yes, we absolutely have line of sight to get back to where we were. California, it was so much of getting through the food safety audit, shutting down the one section of the facility, and we had the surge headcount. And it was basically a one-off, and we, even this quarter, we will be back up and running at our normal gross margins. And I know it was definitely disappointing for us also, but we will be back on track this quarter.
spk07: I guess just what's your confidence level around that? Like, obviously, like, there are things that have come in out of your control. So, like, I just would really just love a little bit more color around it.
spk01: Yeah, I hear you. So, my confidence level is very, very high. We had to bring in a bunch of temp labor, actually, at both of the facilities. Just in Georgia, we were surging headcount to be sure that we could get stack up and running. And then in California, to get through the food safety audit and certain repairs and maintenance around shutting down this one section. And because just the utilization was lower. But for both facilities, the headcount is already back to normal.
spk07: Got it. Okay, that's helpful. And then I had just a follow-up on just capital allocation. I know you noted uh, management is, uh, selectively like repurchasing shares. And you also announced this, like the $1 million, uh, repurchase program. But I guess like given like the level of debt on the balance sheet and like indications to fund more of the growth, growth aspirations with new debt is repurchasing shares really the best use of capital. Like I, I, I, Your points about the dislocation and the valuation are well taken, and I understand the repurchase program is negligible in size, but is that $1 million going to a repurchase really the best use of your capital at this rate? Thanks.
spk01: Sure. I'll go ahead and take that one, Anna, and then you can add any comments. And, Chris, I hear you. So there's two things going on right now. we sped up the earnings release so that we could get information out into the market and also there's certain executives that want to buy shares. And so there's executives that are buying share and then there's the share repurchase program. Part of it is, as you see, the trading every day, the volume is only 20,000 shares, right? And it's obviously not any institutional activity or insider activity. And I hear you on the million dollars. It is over a 12-month period. And it's something that we will use if we feel that it's needed.
spk07: Got it. Okay. Thank you very much.
spk01: Thanks, Chris.
spk04: Thank you. Ladies and gentlemen, there are no further questions at this time. I would like to hand the call back over to management for any closing remarks.
spk03: I'd like to thank everyone for joining us this afternoon, and we look forward to updating you on our progress as we further scale and grow local bounties business in the coming quarters. Thank you.
spk04: This concludes today's conference. You may now disconnect your lines at this time. Thank you for your participation.
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