Local Bounti Corporation

Good morning, and welcome to the Local Bounties second quarter 2024 earnings conference call. All participants will be in a listen-only mode. After today's presentation, there'll be an opportunity to ask questions. Please also note, today's event is being recorded. At this time, I'd like to turn the call over to Jeff Sonick with Investor Relations at ICR. Please go ahead, sir.

Thank you, and good morning. Today's presentation will be hosted by Local Bounties Chief Executive Officer, Craig Hurlburt, and President 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. 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 Craig. Craig?

Thank you, Jeff, and good morning, everyone. Before I dive into our operational and financial highlights, I'd like to take a moment to comment on an important leadership change we made in the second quarter. I want to recognize our CFO, Kathy Balasek, and her role expansion to include President that we implemented in June. Kathy has been instrumental in driving operational efficiencies, building trust with large commercial customers, and developing key financing relationships. Her expanded role reflects her significant contributions that have reached well beyond the leadership of our finance organization and her unwavering commitment to scaling up our business. Together, we look forward to leading our organization through our next phase of growth. Now, turning to our second quarter results. Our sales increased 31% year over year to a record 9.4 million, representing 12% growth on a sequential basis. Our adjusted EBITDA loss also improved by approximately $800,000 year over year to $7.5 million. These results demonstrate that we are on the right trajectory to achieve our near-term goal of generating positive adjusted EBITDA in early 2025. I am especially excited to report that we have achieved several key milestones this quarter. which set a strong foundation for accelerated growth in the second half of 2024 and beyond. The most significant highlight of this quarter is the commencement of shipments from our new state-of-the-art facilities in Washington and Texas. These purpose-built facilities, optimized for our stack and flow technology, are now fully operational and already contributing to our revenue growth. What's particularly noteworthy is the rapid scaling of operations at these new sites. We've been able to achieve yield levels comparable to our Georgia facility in just one to two months, a process that initially took four to six months in Georgia. This accelerated ramp up is a testament to the learnings we've applied from our Georgia experience and the inherent advantages of our purpose-designed facilities. The Georgia Stack and Flow implementation, while very successful, required a more gradual approach to avoid disrupting existing operations. In contrast, our new facilities have allowed us to implement our optimized processes from day one. There are several key advantages inherent in the design of our Washington and Texas facilities that are focused on driving operational efficiency and accelerating our time to market. Both were designed with decoupled harvesting and packing areas, along with improved buffer systems, allowing for greater flexibility in processing various SKUs and reducing production bottlenecks. Built with expansion in mind, these facilities can support double the current acreage, enabling cost-effective scaling. Advanced climate control systems tailored to local conditions ensure consistent yield and quality year-round, while good manufacturing practices layouts with multiple quality control checkpoints uphold our commitment to food safety and product excellence. Additionally, sustainability features like water catchment and recycling systems in our Texas facility align with our environmental focus. These design elements and others collectively contribute to our ability to rapidly scale operations and maintain high quality production from day one. Capitalizing on this new capacity, we've successfully expanded our customer base and distribution network. I'm thrilled to announce that we are now shipping to more than 180 Brookshire Grocery Company locations from our new Mount Pleasant, Texas facility. Brookshire's is stocking our full line of products across three states in the southern United States, including our grab-and-go salad kits, living lettuce, and baby leaf varieties. Additionally, we've expanded our distribution with Sam's Club for our leafy greens production, with service commencing from our new Texas facility. With this added service, we are now fulfilling shipments to six of SAM's regional distribution centers from two of our facilities, Georgia and now Texas. We remain on track with the national expansion of our grab-and-go salad kits. In the second quarter, we rolled out grab-and-go to approximately 200 doors throughout the Pacific Northwest and the Southern United States. and we expect to expand to a total of 700 doors in the second half of 2024. This expansion will be important for driving incremental revenue and introducing more consumers to the Local Bounty brand. The response to these convenient fresh offerings has been overwhelmingly positive, and we are excited about the potential for further growth in this product category. Our stack and flow technology continues to provide opportunities to drive efficiency across our operations. I am pleased to report that our large scale trial mentioned in our last update has delivered as expected with yield increases of 10% over our current Georgia facility performance. These results are extremely encouraging. And we are now developing a comprehensive rollout strategy to implement these improvements across our Georgia, Washington, and Texas facilities. We look forward to sharing more details about this exciting development in future updates. Additionally, we've made significant strides in optimizing our seed costs. We've achieved this through two main approaches. First, by reducing overall seed usage. using fewer seeds per plant site while maintain or even increasing total yield. And second, by lowering our cost per seed. This latter improvement comes from both negotiating cost reductions with excellent suppliers given our growing scale and identifying alternate seeds that offer lower costs without compromising on yield, taste, texture, or flavor. From these combined efforts, we've been able to reduce our seed costs by approximately 20%. These advancements in yield and cost efficiency further strengthen our competitive position and contribute to our path towards profitability. In summary, we achieved significant milestones this quarter, from record sales to the successful launch of our new facilities and expanded retail distribution. This is a direct reflection of the great work our team is doing every day. Our commitment to innovation continues to drive operational efficiencies and product improvements. Looking ahead, we remain focused on meeting increasing demand for sustainable, locally grown produce while steadily progressing towards our goal of achieving positive adjusted EBITDA in early 2025. We're confident in our path forward and we're excited about the opportunities that lie ahead for local bounty. With that, I'll turn the call over to Kathy.

Thank you, Craig. I want to start off by saying that I am truly honored to take on the role of president of local bounty in addition to my responsibilities as CFO. I look forward to bringing a deep understanding of our financial fundamentals to a broader operational role. This unique perspective will help us further align our fiscal strategy with our growth initiatives, ensuring we maximize value creation and capital efficiency across all aspects of our business. Now I'd like to update you on our ongoing capacity expansion initiatives and a couple financial developments. First, we entered into negotiations for an additional $175 million of financing via another conditional commitment letter from the same commercial lender we have been working with. If we enter into this additional CCL, it would bring our total committed future capital to approximately $400 million, subject to completing definitive documentation. This substantial funding would support our strategic growth plans, including expanding capacity across our stack and flow facilities to meet growing demand, provide working capital, and strategic growth capital. Second, we also entered into a non-binding letter of intent for a $55 million sale leaseback of our Georgia facility, which will be used to pay down our existing construction financing and add additional working capital to our balance sheet. Alongside the advancement of these incremental financings, our plans to increase capacity across our network of facilities are progressing well. These expansions are strategically designed to increase our production capabilities and accommodate our growing product assortment. As we advance our plans, including our anticipated entry into the Midwest market, we're taking a measured and collaborative approach. We're actively engaging with our retail partners to optimize each facility for specific products that align with their distribution strategies. And this is of particular importance right now as we roll out our broader SKU assortment, which is of great interest to new and existing customers. This approach not only strengthens our market position, but also reinforces our commitment to delivering fresh, high-quality produce through sustainable, tech-enabled farming practices across the nation. I'm also pleased to report that we have nearly completed the transition of the Hamilton, Montana facility. from its previous R&D focus to a commercial-oriented facility. The Montana facility's new commercial focus is expected to contribute meaningfully to our product output. Furthermore, this shift is generating a material improvement in our facility-level EBITDA contribution. In fact, we are already seeing that we've improved by approximately 1 million compared to Q2 last year. Once we have ramped up sales out of that facility in Q3 and Q4 of this year, that facility will be near cash flow break even and drives us closer to achieving our near-term financial goals. Now, shifting to our second quarter results, second quarter 2024 sales increased 31% to $9.4 million as compared to $7.2 million in the prior year. and increased 12% compared to 8.4 million in the first quarter of 2024. Our results largely reflect the increased production and growth in sales from our Georgia facility, and to a lesser extent, the partial quarter contribution from our Washington and Texas facilities. I'd also point out that revenue contribution out of Montana was impacted due to the temporary shutdown associated with the transition to different SKUs for commercial production. which should reverse and be a tailwind for us in the second half of the year. The second quarter adjusted growth margin, excluding depreciation and stock-based compensation, was approximately 29%. While our adjusted growth margin performance continues to reflect costs associated with the ongoing optimization and scaling up of our growth facilities, we were pleased to see a five percentage point improvement in margin from Q1 to Q2. We continue to expect our adjusted gross margin to increase in the coming quarters as sales ramp in parallel with our capacity scale up this year. Beyond the scale-related benefits, as Craig mentioned, we continue to make good progress with other initiatives that we expect to further support margin improvement, such as improvements in our seed costs. SG&A for the second quarter decreased 6 million as compared to the prior year, to 10.7 million driven by cost-saving actions we took in the fourth quarter of 2023 and first quarter 2024 to streamline our org structure as well as lower stock-based compensation expense. We expect to continue to benefit from the cost-saving actions and the resulting lower cost base through the end of 2024. As a result of our year-over-year improvement in sales and cost savings, Our operating loss improved by $5.5 million in the second quarter as compared to the prior year. Net loss was $25.3 million in the second quarter of 2024 as compared to a net loss of $10.7 million in the prior year period. I'd note that the second quarter of 2023 was positively influenced by a $15.2 million non-cash mark-to-market gain in the fair value of a warrant liability which helps explain the variance year over year. Adjusted EBITDA loss improved to 7.5 million as compared to a loss of 8.3 million in the prior year period. From a capital structure perspective, as of June 30th, 2024, we had cash, cash equivalents and restricted cash in the amount of 16.2 million. And as of second quarter, we had approximately 8.6 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 16.1 million shares. We're encouraged by the increasing support for Local Bounty's innovative CEA approach. Our financial position remains solid with sufficient capital to fund operations, complete ongoing construction projects, and achieve our critical milestone of positive adjusted EBITDA in early 2025. This target will be reached through a combination of increased revenue from our new facilities, reduced SG&A expenses, and decreased R&D costs as we shift our Montana facility towards more commercial activities. Moreover, we're actively pursuing strategies to lower our cost of capital and refinance our construction debt including potential sale leaseback transactions and collaborations with USDA licensed lenders. These efforts underscore our commitment to optimizing our financial structure while driving operational growth. With respect to our outlook and in consideration of our year-to-date performance, we are reiterating our full year 2024 sales guidance of 50 to 60 million. This guidance continues to reflect expected production out of our Georgia California and Montana facilities, and to a lesser extent, the partial year contribution from production ramping up at our Texas and Washington facilities. In terms of how to think about the balance of the year, we expect a significant step up in revenue growth for the back half compared to the first half as Washington and Texas production ramps as well as significantly increased revenue from our grab-and-go rollout, both in terms of higher volumes associated with our placement in many of our customers' new resets and a higher average selling price, which helps our overall mix. Fourth quarter is expected to be larger than the third quarter to meet our full-year guidance. In closing, I really want to express my gratitude for our team's focus this year and also extend that gratitude to our customers who are supporting our efforts to bring locally grown produce to more consumers. As we've heard today, we've been incredibly busy making progress on all fronts, including scaling up our operations with the opening up of two new greenfield facilities, the transition of Montana to commercial operations, building out our product assortment, and expanding our distribution with new and existing customers. We couldn't be prouder of our organization. Thank you. That concludes our prepared remarks. Operator, please open the call for questions.

Thank you. 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. A confirmation tone will indicate that your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. Our first question comes from Kristen Owen with Oppenheimer and Company. Please proceed with your question.

Hi. Good morning. Thank you for taking the question, and congrats on all the progress made this quarter. Kathy, I was wondering, you used some great color on sort of how to think about the back half of the year. Maybe help us with some of those on-the-ground milestones. how to think about the contribution of Texas and Tesco in the back half, you know, when we really start to see Montana get up and running. And just as it relates to some of the commercial agreements that you announced or some of the commercial shipments that you announced in the quarter, how we should think about maybe capacity utilization or run rate of revenue on those facilities as we think about that bridge now into 2025.

Thanks, Kristen, and good morning. Love the question, multifaceted question. It's pretty amazing, as we said in our prepared remarks, how far Local Bounty has come just even in the last three to four months. And as Craig and I have said, we are just so incredibly proud of all of our teams and how far we've come. So many things have changed. to update on, I would say, since our last call, when you think about even the new facilities, right, the new customers coming online, the capacity that we are providing to SAMHSA in Texas and also to Brookshire's, right, and then also all of the new SKUs that are coming online that we've talked about in the past. But, you know, it's very significant in the sense that, you know, arugula, spinach, basil, power blends, right, they all have higher price points than the spring mix, which is kind of our bread and butter. So that's kind of one of the things that will make a significant difference to us in the second half. And when we did the Q1 call, we didn't have as great visibility as we currently do to the impact that those SKUs will have on, you know, top line revenue and also, you know, margin contribution, right? And then also we talked about the grab and goes. We did have one or two large customers that started up a month or two late with the grab and goes. In other words, they started in Q3 versus Q2. So there was a little bit of a shift there, just logistically no big deal, just a timing situation. And then we also And my prepared comments talked about Montana, the revenue out of Montana in Q2 was probably a little bit less than we had anticipated, partially because we realized that we wanted to bring in live and cut basil, living head basil, sorry, and cut basil out of Montana, which was Likewise, two SKUs, which are higher margin than our spring mix, which is great, but it took a little bit more time to get those SKUs kind of up and running. Let's see. Capacity-wise, we are... very much sold out for the most part. In our facilities, Washington is a little bit different in the sense that we didn't have SAMs buying out of that facility right away and Brookshires, et cetera, but it's coming along very, very quickly. And as we alluded also in our recorded comment, we are talking very closely with all of our customers. And why is that, right? They all see now that we actually can provide the scale and the volume that's needed in these products, right? And so very closely we're talking with them about, hey, what are the, they all want the new SKUs, but also what does that mean for the expansions and the 2024 builds? Let's be sure that you get the capacity you want in those new builds, right? So I hope that answered most of your questions, but let's follow up with that.

And Craig, any comments? They're helpful. Sorry. We love Kristen's questions because they're always detailed. So, yeah. Did we get everything there, Kristen?

Yes, you're getting the Kristen Owen special here. The only one I would ask, maybe just a little bit of a double click on, because of the news and how you're seeing these customers come on, the sort of exit revenue rate. I mean, if I think about your second half guidance, what's implied in the back half of the year, how do we think about that as a starting point for 2025? And what are sort of the ranges on that when we think about like that SKU mix or that customer mix?

I mean, it's such a great question. I mean, when we think about 2025, just the level of You know, these new fees are definitely going to very much impact our revenue and our margin, okay? And then also, I also should highlight the R&D project that we ran out of Georgia to increase the yields. We will also be blowing that out into all of our facilities in Q2, Q3. Sorry, Q3, Q4, and that will also impact the revenue when we think about it for next year. Yeah. Significantly.

I think we'll be honing in on this over the next, you know, couple of months on 2025. It's a great question and it's one that's on our minds every day.

In the interest of time and sparing everybody else, I will leave it there and take the rest of my questions offline. Thank you, guys.

Thanks, Kristen.

Our next question comes from Ben Cleve with Lake Street Capital Market. Please proceed with your question.

All right, thanks for taking my questions. First is around the sale lease back of the Georgia facility. Kathy, I'm wondering if you could just give us any additional detail on that, be it the cap rate, the degree to which this is going to be an EBITDA headwind given the addition of a lease expense or the impact on cash flow given. that you're replacing higher cost construction financing with lower cost rent payments. So any details you can provide on that would be great.

Yeah. Difficult to share a ton of details at this point. I think we've said sort of consistently this is the strategy, right? For each of the facilities, after they get to a certain level of profitability, bring a sale lease back into the facility and take up the construction financing, right? And so I would anticipate the similar similar situation is going to happen with Texas and Washington. And what I would say, especially for those two facilities, Craig mentioned it in his comments, you know, our teams brought those facilities to be, you know, up and running in such an impressive short period of time that those facilities, we will be able to flip them to sale lease back much sooner than we were able to with Georgia. I can't at this point kind of give the rate on the sale lease back, But I just wanted to give the color around, you know, this is a strategy that we've always been going for, and it's great with Texas and Washington because we'll be able to flip them to sell leasebacks sooner because, you know, significantly sold out to a certain degree and just they came up and running very, very quickly.

Got it. Okay. Now, fair enough, and we'll stay tuned for details on that one when you're able to provide them. On the EBITDA ramp, I'm wondering if you can kind of walk me through a bit of the sequential shift from Q1 to Q2 on EBITDA. So that burn rate ticked up a little bit from $6.9 million to $7.5 million. It sounds like you had some expenses in Montana associated with the transition, probably some elevated costs in Washington and Texas they turned on. Can you talk about kind of the drivers of that EBIT align from the first quarter to the second quarter and then the degree to which any of those contributing factors are gonna be getting turned off here in the third quarter to allow for an EBIT improvement here in the current quarter?

Yeah, thank you. I'm so glad you asked that question because it's constantly on my mind and I watch it every single day. So one of the points I did talk about in my script was Montana being less of a revenue contributor. And we really honestly weren't planning for that when we did our Q1 call, but we did it. The change that we made to bring Basel into that facility is really the right thing long term because we will be doing a spring mix queue out of there, but adding in Basel will increase the profitability out of that facility. But it meant a little less revenue in Q2. And then there were a couple of other things from a timing perspective. I already mentioned the grab and go. We had two customers that came in that started to buy that product. We had planned for a Q2 start. It was a Q3 start, just a month or two difference, no big deal there. And then the other thing that I would note is that Our construction team, all of those costs are typically capitalized. I didn't include this in my recorded comments, but all of those costs are typically capitalized. Those poor guys, finally in Q2, were able to actually all take the needed vacation. These guys, for two years, didn't take any vacation at all, and we had just a a couple of reasons that we had some of the construction guys' costs for, you know, I want to say $400,000 or $500,000 that hit the P&L, SG&A in Q2, and then it'll go away in Q3. So those are kind of the three or four factors.

Got it. That's all helpful.

I do really quickly want to say we are really tracking to Q1 EBITDA positive, and I'm thrilled to see the progress. I talked about it. you know, in terms of just even the loss out of Montana. We've already improved quarter over quarter, a million dollars, which is just fantastic also.

Very good. And then I have one more, either for you, Kathy, or Craig, as you guys see that. But Craig's opening comments noted that the expectation or that the Texas and Washington facilities can double. I'm wondering if you can elaborate a bit on the context behind that. Does that imply that the land is secure for a doubling? Does that imply that the infrastructure is in place such that you can double with just a greenhouse addition? Really, what does that doubling potential look like out of Texas and Washington?

Yeah. Hey, Ben, great question. And the answer is the land has been secured and we purchased the property with this in mind. under the anticipation that our customers would want more product. And that's pretty much what's happening to a significant scale. And so we went about the construction to do a lot of stuff we could do in the first round that would benefit the second expansion round of construction. So you can think of it kind of as a greenhouse only, but there will be some other things that go along, but it should go up relatively easy without interaction, much disruption at all, if any, with our current operations. And we'll be in a position to, you know, deepen those relationships with our customers as we're able to provide not only more products, but also just more, you know, more math as well. So, yeah, it's very exciting. And the feedback from the customer has been very positive. Kathy? Yeah.

Yeah, I mean, the strategy always is, Ben, to buy enough land so that we can double the capacity, right? We did that with the property in Georgia at some point. I'm sure we're going to have to double the capacity there also.

Got it. Very good. Well, exciting stuff. Congratulations on a good first half of the year. Looking forward to what comes here in the second half, and I'll get back and kill.

Thanks, Ben.

Thanks, Ben.

Our next question comes from Scott Fortune with Roth Capital Markets. Please proceed with your question.

Yeah, good morning and thanks for the questions. Great progress going forward. Just any updates on the Midwest and kind of timing there, kind of where you're looking at from that standpoint? Is that based on kind of building it or getting kind of customer feedback and kind of almost like supplier agreements or offtake agreements ahead of time? to really build that out. Just kind of a little more color on the Midwest build.

Yeah. Hey, Kathy, you want to tackle that? Yeah. Sure, sure. Hey, Scott. Good morning. Great question. So the Midwest build is Basically, at this point, I sort of alluded to it in the beginning of my unrecorded comments. All of the customers are seeing how we are able to scale and provide the level of quantity that these retailers need. And so the Midwest facility, we had always planned to put it in a certain part of the country where we can service many DCs out of there. What's happening with it is we have taken this a little bit longer to buy the land, but that's actually worked out because what's happening is with all of these new SKUs and with the heightened customer demand, the new SKUs have a different tempo in the facility. They require a fewer number of days. They're considered a faster crop. So what it actually means is we're tweaking the design a little bit so that we can more efficiently run all of these SKUs out of that facility and, frankly, even because of all the demand from customers, considering a significantly larger build than we might have thought, you know, two quarters ago.

Got it. I appreciate that, Collier. And just kind of a CapEx or kind of your need for expansion, any color on kind of the second half and, you know, working capital or the CapEx needs as you move forward into the second half? I know you probably didn't give guidance on that, but just kind of expectations around that. And kind of what the CapEx is going to be. Go ahead. Sorry.

Yeah, no worries, Scott. yeah as as we talked about in our um prepared comments the the ccls with our finance lender we are working um to close as soon as we possibly can that financing will provide you know the construction for our 2024 builds plus working capital plus um strategic capital and then also as we mentioned our sell leaves back um we will be using that those funds uh partially to pay down some construction financing, but also using some of that for working capital. We don't actually need a ton of working capital, but both of the financings will provide as much as we need in effect.

Thank you. I appreciate the questions. Thanks. Thanks, Scott.

Ladies and gentlemen, at this time, I'm showing no further questions. I'd like to end the question and answer session and turn the conference call back over to management for any closing remarks.

Well, thank you everyone. I'd like to reiterate what both Kathy and I touched on this morning, and that is tremendous gratitude to our team. To our knowledge, no one else has ever brought up two facilities of this stature and the size in the same quarter. And it's a Herculean effort by our entire organization. And Kathy and I are grateful to every single Local Bounty employee, our board of directors, and everybody involved. So a huge thank you sincerely from the bottom of Kathy and I's heart on that. I would like to thank everybody for joining us today, 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 so much, everybody. Have a great day.

Ladies and gentlemen, that does conclude today's conference call. We do thank you for attending. You may now disconnect your lines.