Local Bounti Corporation

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

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 today. Please refer to the press release, which can be found on our investor relations website, investors.local bounty.com for reconciliations of non-GAAP financial measures to their most directly comparable GAAP measures. And with that, I'd now like to turn the call over to Craig. Craig. Thank you, Jeff.

And good morning, everyone. In the third quarter, we delivered sales of 10.2 million, an increase of approximately 50% year over year. However, These results fell short of our expectations, but this was for good reason, which I'll describe in a moment. With our expanded scale afforded to us with the completion of our new facilities and growing customer reach, we've been particularly active with customer engagement to determine how we can work together to optimize our capacity to meet specific retailer demand. During the third quarter, we made the strategic decision to reconfigure our growing plans to align with current customer preferences. More specifically, we are seeing heightened demand for our specialty products such as arugula and spinach, among others, and are reworking our growing mix to meet this demand. Although we are continuing to grow our living lettuce product at the Texas facility, we are working on implementing plans to broaden our capabilities in this section of the facility to meet the demand from customers for our new higher value products. This dynamic caused a shortfall relative to our anticipated ramp in the third quarter and shifted our expected timeline for achieving positive adjusted EBITDA into the second quarter of 2025. However, we continue to believe this evolution positions us to deliver improved performance over the long term by focusing on high velocity, higher value products that our customers are looking for. These learnings have led us to adopt a more measured approach to our next phase of expansion, ensuring that each investment decision aligns with specific customer demand and distribution strategies. Our ongoing philosophy of driving capital efficiency is evident in how we're optimizing capacity utilization across our existing network. Our Washington facility is serving growing demand in the Pacific Northwest with a targeted product mix that matches regional preferences, while our Montana facility has completed its transition from R&D to commercial production. Though Montana's contribution to the third quarter results was modest as we established the right commercial processes with the introduction of basal production, the facility is now fully oriented toward commercial operations and is contributing to improved performance starting in the fourth quarter. Despite these temporary impacts, we are pleased with our adjusted gross margin performance, which reached 32% in the third quarter. This improvement reflects our continued focus on driving operational efficiency and combined with our products optimization efforts supports our margin expansion trajectory and broader efforts to achieve positive cash flow. The successful execution of our product portfolio expansion was another key highlight in the third quarter. Our new high velocity offerings have generated significant customer interest, particularly our arugula and spinach lines, which began shipping to customers toward the end of the third quarter. These new product lines have been exceptionally well received by customers validating our strategy of shifting our product mix to drive growth and value, which ultimately drives our efforts to generate superior unit economics. Our commercial relationships also continue to strengthen and expand. Year to date, we have achieved several significant commercial milestones. We're shipping to more than 180 Brookshire Grocery Company locations from our Mount Pleasant, Texas facility. with their stores carrying our full line of produce products across three states. We are fulfilling our agreement with Sam's Club, where we are shipping to their regional distribution centers from both our Georgia and Texas facilities. We are also having great success expanding our presence in the Pacific Northwest with a large national grocer and mass retailer in the third quarter, both of which are selling all of our new SKUs. Our grab-and-go salad kit program also continues to expand, most recently with the retailer HEB. And we've recently signed a new customer agreement where we will be utilizing all of our newer facilities to fulfill orders. Additionally, we believe recent industry developments have reinforced the value proposition of our controlled environment approach. As traditional outdoor agriculture continues to face food safety challenges, resulting in costly recalls and supply disruption, our ability to provide consistently safe, high-quality produce becomes increasingly important to our retail partners. This advantage, combined with our operational improvements and strategic initiatives, further strengthens our competitive positioning in the market. In closing, we are committed to executing our next phase of growth with a sharper focus on aligning production capabilities with verified customer demand, positioning local bounty to deliver sustainable, profitable growth. While this calibration and strategy shifts our timeline for achieving positive adjusted EBITDA out to the second quarter of 2025, we are confident that our disciplined approach to capital allocation and operational excellence will create meaningful long-term value for our stakeholders. With that, I will now turn the call over to Kathy.

Thank you, Craig. I'd like to start by updating you on our strategic initiatives related to how we are thinking about our next phase of growth. As you heard from Craig, we're taking a deliberate approach to further optimize our operations to maximize revenue generating potential in a capital efficient manner. This has been our core strategy since starting the company and is central to our stack and flow model. We have taken a huge leap forward this year. We simultaneously opened two new facilities in Washington and Texas. We completed our Georgia build out and transitioned Montana to commercial operations. We also introduced several new products and are working on scaling up their production to meet demand. This was an incredible lift by our entire team and I want to recognize their contributions and thank them. in what was a very dynamic period for our business and the industry. With these broader milestones accomplished, our team is taking the time to further advance our operational efficiencies, which goes hand in hand with our facility network optimization exercise. We have a clear focus on aligning capacity with specific customer demand, similar to the offtake agreement we established with Sam's Club. Moreover, as we ramp up our production of new products, There are also new considerations in terms of how best to utilize our capacity to meet customer demand for new products. These are good problems for us, but it is requiring us to slow down and ensure we are working closely with our retail partners to make the right long-term decision to optimize each facility for specific products that align with customer distribution plans. In other words, we are looking to maximize synergies across our growing footprint and customer network to drive our performance, accelerate our ability to generate positive cash flow, and ultimately improve our capital structure to attract long-term shareholders. This strategic approach to capacity expansion planning is exemplified in our designs for our Midwestern market entry. We're working closely with our retail partners to ensure each facility's capabilities are tailored to specific products that complement their regional distribution networks. This is particularly important as we roll out our broader SKU assortment, which continues to generate strong interest from both new and existing customers. This collaborative approach strengthens our market position while reinforcing our commitment to delivering fresh, high-quality produce through sustainable, tech-enabled farming practices. As we evaluate a variety of financing arrangements with existing and potential new partners, we've adopted a more patient approach to ensure that we are making the time for these important strategic discussions with our customers. In line with this approach, we have decided not to move forward at this time with closing the transactions contemplated by the previously disclosed conditional commitment letters with a commercial finance lender while we undertake this evaluation to best position the company for long-term success. These agreements had time-bound elements to them that would compromise our efforts to drive capital efficiency in the short run and result in an immediate interest expense burden that we believe is premature relative to our other goals associated with optimizing our growing network. We remain actively engaged with multiple financing partners to support our strategic initiative while ensuring we have the flexibility to execute on our near-term objectives. Now shifting to our third quarter results. Third quarter 2024 sales increased 50% to 10.2 million as compared to 6.8 million in the prior year and increased 9% compared to 9.4 million in the second quarter 2024. Our results largely reflected the increased production and growth in sales from our Georgia Washington and Texas facilities, and to a lesser degree, sales from our Montana facility following its transition. Due to the decision to realign our production mix to meet demand from our growing customer base and optimize our margin opportunity with differentiated products, our fulfillment of Texas production wasn't fully optimized, thus resulting in revenue contribution that was lower than expected. While this project is underway, we don't anticipate achieving optimized run rates in Texas until early in the second quarter of 2025. Third quarter adjusted growth margin, excluding depreciation and stock base comp, was approximately 32%. While our adjusted growth margin performance continues to reflect costs associated with the ongoing optimization and scaling up of our growing facilities, We were pleased to see a 300 basis point sequential improvement in margin from second quarter to third quarter. And I'd also note that we expect to see additional margin improvement in the coming quarters as a result of the mix optimization strategy we talked about today. Adjusted SG&A for the third quarter was $7.5 million. Our adjusted figures removed the influence of stock-based comp, depreciation and amortization, and other non-recurring costs. While we expect to continue to benefit from the cost-saving actions and the resulting lower cost base through the end of this fiscal year, in the third quarter, we observed higher insurance costs that we are working to mitigate. Further, I'd note that we have our transportation and logistics expenses located within SG&A. So, as we grow, you can expect to see higher SG&A dollars related to these costs. which we believe will be a source of operating leverage that we can realize longer term as our business scales and we drive efficiencies and realize synergies. R&D expense was $7.1 million in the third quarter, which increased $2.1 million from the prior year period. However, included in these amounts is non-cash depreciation in stock comp of $2.9 million in the current year period and $1.1 million in the prior year period. So on a cash basis, our R&D spend is up a modest 0.2 million year over year. While we've been working hard to reduce our R&D spend with the commercial transition at our Montana facility, this was partially offset by higher R&D spend associated with our scale-up of the new products across our facility network. As those products ramp and meet our production thresholds, Our cash R&D spend associated with their development will conclude and begin to trend down. We expect this dynamic to be visible in our fourth quarter results and support our efforts to achieve positive adjusted EBITDA in the near term. Our year-over-year adjusted EBITDA loss improved by $600,000 to $8.4 million. From a capital structure perspective, as of September 30, 2024, We had cash, cash equivalents and restricted cash in the amount of 6.8 million. Our lender continues to be supportive of our efforts to reach positive adjusted EBITDA and since quarter end has provided an additional 6 million to fund working capital. And as of third quarter end, we had approximately 8.7 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. Our path forward is clear. We're strengthening our business through smarter operations and maintaining a solid financial foundation. We're in discussions with new and existing financial partners about optimizing our capital structure, including potential sale leaseback arrangements and USDA-backed financing options. all supporting our very clear target of achieving positive adjusted EBITDA in Q2 of 2025. Our current capital position supports both ongoing operations and existing capital projects. And I'd reemphasize that while we are excited about the many growth opportunities we have available, we also want to ensure that we are making the best possible decisions we can in the short run to best position the business as we embark on our next phase of growth. Our aim is to grow alongside our customers, and by being strategic with our resources, we're well positioned to meet growing market demand while simultaneously improving our financial metrics. Every expansion decision we make directly connects to customer needs and our distribution strategy, ensuring sustainable growth. With respect to our expectations for the balance of 2024, We expect to achieve fourth quarter revenues in the range of approximately $11 million, which implies year-over-year growth of approximately 67%. We expect several key drivers to contribute to this growth. First, our Washington and Texas facilities continue to ramp production, with Texas expected to ramp further following its optimized product mix. Second, we anticipate meaningful contribution from our expanded assortment of new products supported by new customer resets and strong customer acceptance. Third, our focus on operating efficiency is expected to continue yielding margin improvement. And finally, our Montana facility's successful transition to commercial production provides additional capacity to meet growing customer demand. These factors position us well to deliver sequential improvement in both revenue and adjusted EBITDA performance in the fourth quarter. In closing, I really want to recognize our team's efforts and also thank our customers who continue to help us deliver on our mission of bringing locally grown produce to more consumers. We remain extremely focused on our path to positive adjusted EBITDA and look forward to demonstrating progress in the fourth quarter. We couldn't be prouder of our organization. Thank you. That concludes our prepared remarks. Operator, please open the call for questions.

Thank you. At this time, we'll be conducting a question and answer session. If you'd like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you'd 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. Our first question comes from the line of Kristen Owen with Oppenheimer and Company. Please proceed with your question.

Hi, good morning. Thank you for taking the questions. Good morning, Kristen. Hey, Craig. Kathy, I wanted to pick up on some of your remarks toward the end of the prepared discussion. And just in terms of how we should think about the drivers of that revenue ramp, whether it's 3Q to 4Q, 4Q into 2025, is it, you know, this ramp in production and throughput? Is it pricing? Is it this new skew mix from specialty? Just how we should think about the big buckets of that revenue growth ramp.

Yeah, yeah, yeah. Great question, and good morning, Kristen. Great to hear your voice. So I want to just sort of start off a little bit and just level set and just sort of say let's just take a step back and frame the conversation this morning, right? And some of this is iterative of our recorded comments, but just to frame it. So keep in mind, in the last six months, we brought up two new state-of-the-art facilities in Texas and Washington. So now we have three at-scale, large, stack-and-fill facilities for our customers to buy out of, right? And in the last six months, we've scaled arugula, spinach, power blends, etc., These are the SKUs that are the holy grail, so to speak, for our customers, right? And who are our customers? Almost all big box retailers. Albertsons, Walmart, Sam's, Safeway, HEB, Amazon, Brookshire's, et cetera. All of our customers are already either buying these new SKUs from us or they are sampling and considering buying, right? So these things take time. You know, when we built these facilities, you know, it's just six months ago even, we didn't know that we would be able to scale these amazing SKUs, but we have, right? But what I want to say is these things take a little time, right? So we are already selling these SKUs, these new SKUs out of Washington to Walmart and Albertsons, right? We scaled these products in Texas a little bit later than we did in Washington. We scaled them in Q3. And when we scale them, right, we grow them, which takes time. Then we ship the samples to the customers. They say they like or they don't like. They make decisions. All these things, you know, take 60 to 90 days. Texas was a little bit later than Washington, right? And so we're starting to sell the new SKUs even in December, but much more so to more customers in Q1, okay? That's a little bit of what kind of goes has been going on we when we built the Texas facility, right? We didn't realize that we were going to have arugula. It's all about skew Optimization right saving capacity for skews that customers value more right so The Texas again was a sort of the later facility to come up. So it's really the the decision of to save some capacity for those new SKUs in a section of the Texas facility. It's like literally, so the Texas facility is six acres, it's just three that is impacted by, you know, the decision to grow this different, the new SKUs.

Okay. Hey, Kristen, I think just one add-on, Kathy said that very well. One other thing to keep in mind, is with these SKUs that are very sought after, arugula and spinach, it also allows us in places where we're not able to sell our current products, you know, maybe our standard products, having those more specialty products allows us to further diversify with those customers that we're not in yet as well. So it gives our foot in the door and allows us to get sticky with those new customers. So it has several different benefits to it. And to Kathy's point, it takes time.

Right. And just let me make a couple of further points, right? So I would say, you know, the revenue was lower in Q3 than we would have thought. It's largely because of the second three acres that we're going to better, much better utilize than what we had planned, right? Again, it just takes time. And then also when we, I want to make sure that I get the statement out because I don't think I really elucidated it. rate in my prepared script, but the EBITDA loss didn't improve as much as we would have thought, and it's largely because we were incurring R&D costs to grow the new SKUs sample in each of the different facilities, right? Because, again, especially out of the three new state-of-the-art facilities, we want to be able to offer all of the SKUs out of each of the facilities. And so, like I said, we're already selling out of Washington in December, and then even more so in Q1, we'll be selling out of Texas, Georgia. We're doing spinach, and we will scale arugula there at a later date.

I really appreciate that, Culler. I'm kind of setting up for this next question, which is understanding that there are some some temporary choices you have to make for sort of the long run here. Help us understand, what are your goals for 2025? I mean, I'm not necessarily looking for, you know, revenue guidance or, you know, you've already talked about EBITDA timeframe, but just what are the corporate goals for 2025 in the context of this adjustment? You know, how you're thinking about capacity expansion now? Just any additional commentary you can provide there. Thank you.

Yeah, yeah. So obviously with our existing facilities, we want to get our utilization up as much as we possibly can. We are very much tightening and working on our operational efficiencies, which you saw in this quarter with the increased growth margin. When we think about next year, again, and we said it 20 times in the recorded comments, we have to go, you know, I'll say it quickly, you know, we have to go slow to go fast. We have to listen to what our customers are saying because every single thing that they tell us drives the new builds, okay? So if they like these new SKUs, which everyone seems to, the new SKUs have a different growth cycle. It's much shorter. And so what does that do? That drives growth. the the how how we build the facility doesn't change it hugely significantly it changes the equipment within the facility but it does change it so basically what we're doing is I want to say over the next two to three months listening to what our customers are telling us so that that and what it does is it drives our decisions around the expansions and the Midwest facility Because in other words, I don't want to break ground on a Midwestern facility when we have customers that say they want increased volumes of spring mix, but then also who's going to want to buy out of that facility in terms of arugula, the new SKUs, et cetera, which drive kind of a different process in each of the facilities. And as we've said, Kristen, part of what we're doing also listening to our customers, but also because we're able to broaden our SKU set in this way, it likewise means we're able to broaden our relationships with our customers. What does that mean? It allows us to talk to them about offtake agreements like we have with SAMS. And then what does that mean for local bounty? It means offtake agreements garner better construction financing as well as sale leaseback financing. right and so that's one of the reasons why we backed off from the ccls that we had had you know talked about in the past because those ccls required that the funds were to be deployed within a certain time frame but i didn't want to close on that financing because we have to listen to what our customers are saying so that the builds are sold out before we break ground right that was a lot i hope

Yeah, hey, Kristen, goals for 2025. I think Kathy just said a lot there, and I think it was all right on point. Operational excellence, which will show up in margin improvement. When you operate excellently, you get closer to your customers. We just saw what happened to McDonald's, Taylor Farms, that whole problem that hit. That's just not going to happen with local bounty. So if we can really deliver consistently across a broad mix of products like we're doing right now and continuing to improve on that and getting the margins up, what that's going to really do is get us even closer and closer to our customers. So operational excellence, so many great things happen from that. And we have a whole team led by Sergey Gil, who's our COO. He's doing a great job across Our whole platform really pulling all that together under Kathy's leadership. And what that does leads to goal number two is really deepen our relationships with our customers. And I think if anything should fall out of this call, we're in some very solid conversations across all of our customer base now, our current customer base and new customers around how do we work together more consistently on a longer-term basis to remove a lot of the transactional nature of the produce business that has been the history of the industry. What that means is having longer-term relationships across a broad skew level that allows us to deliver well and them to benefit from that ultimately for their customers to enjoy great product day in and day out. Those things are going to drive us to EBITDA positivity, we believe, in the second quarter of 2025. So we're very, very excited about – and the whole team's really laser-focused on that. And it seems like when Kathy and I were kind of putting all this together, we're like, it's a little bit different than what we've been saying, but it's a really positive message that it's a customer-driven approach – We're going to help us tighten up our design of our facilities so we have even more flexibility. And remember, why can local bounty grow things that other people can't? We have stack and flow. Some of the products don't have to spend as much time in the greenhouse, et cetera, et cetera. So we're really taking advantage of our technology to get operational excellence and getting closer to our customers in the process.

I really appreciate all of the callers this morning. I'll leave it there.

Kristen, thank you so much.

Thanks, Kristen.

Thank you. Our next question comes from the line of Ben Cleavy with Lake Street Capital Markets. Please proceed with your question.

First one, Kathy, you suggested on your prepared remarks that the Texas facility would hit an optimized run rate, you said early Q2-25. I'm wondering where that stands relative to the Georgia and Washington facilities.

Yeah, sure. So Georgia is at full capacity, full utilization. Washington is at full utilization this quarter. Okay. And I'll – yes.

Okay, great. Thanks. Um, uh, a couple of bigger picture questions then, um, First, regarding access to growth capital, you noted that you were actively engaged with multiple types of partners, but it would seem to me that those conversations are more early stage than those you were having with your prior CCL partners. So I'm curious if you can talk about where you are in those conversations and your degree of comfort that you have with the ability to secure that capital pretty swiftly once you have you know, the conversations with the customers and the, you know, site location design, et cetera, solidified. Is that something you think you're going to be able to secure pretty quickly, or are you pretty early in those conversations with new capital providers?

That's such a great question, and thank you for asking it. I am constantly talking to these – To many capital providers, right, we don't talk about it too, too often. There's a capital provider that is providing capital under our existing Cargill facility that bought into the Texas facility and they are covering that 30%. They are interested in committing much more capital towards the Midwest facility. All of these sale leaseback companies that I talked to, I have term sheets from all of them. I mean, we talked about it, Q2, that I had a term sheet on the Georgia facility for sale leaseback. We're just waiting, again, to hear all of the feedback from all the customers because there's certain things that we can't talk about on today's call. We'll be able to update on the Q4 call. We have other large customers that are wanting to come in to each of the facilities, which also kind of drives the size of the expansions. But if anything, it's easier and faster for me to do the sale-leaseback deal. So several of them want to do the construction on top of doing the sale-leaseback, right? And as you know, we have a sale-leaseback with store. on the California facilities. And, you know, they and others I talk to all the time, and I actually, you know, have several term sheets on them. I'm not closing on anything until we, you know, hear from our customers and, you know, we figure out what size we need the expansions to be, as well as the Midwest facility. So great question. I hope that was clear. Hey, Ben.

Hey, Ben. It's Craig. Good to hear your voice. One other thing to keep in mind, too, if we just level up, at what's happening inside of the industry, the controlled environment agriculture industry. Obviously, we had Bowery here a couple weeks ago going down. The customers are really interested in this because they see the way the consumers are reacting to the product. And there's more and more interest and more and more pull for the product. And yet, when the customers look at the industry They're saying, wow, who's going to make it, who's not going to make it, right? So if you keep that in mind, so what we've got is concern around some of the people that aren't making it, but yet the customers, there's kind of a pull there for the product. So as we get further into this, what's happening, and I'll just keep it at a very high level, is the customers are figuring out who's who in the zoo and who's going to be standing and they're more willing to enter into conversations based on that knowledge. The customers are very, very smart, almost to a customer. I like to say very high IQ in the CEA space. Almost every large customer is studying the space because they're chasing fresh, they're chasing great product, right? So as we kind of emerge here over the next couple of quarters and Our conversations are getting deeper with the customers, and our ability to raise capital will be easier, to Kathy's point, because of that. And so we're not – always it's a concern, but I think with what we'll be offering at that point and where the business is at that point knocking on the door of positive EBITDA, I believe you're going to find our path to raising that capital easier. is going to be easier this year than it was last year.

Okay. That's very helpful and all makes sense. We'll look forward to more updates there in the quarters to come. I have one more question around the expansion of the Midwest. I think it's a fair characterization here that that's maybe a little bit further out today than it was three months ago. I'm wondering if you can elaborate a bit on what is the same and what is different about the Midwest expansion? Is the site changed? Has the state changed? Has the size of the facility changed in your mind? The internal configuration of the facility? What's the same and what's different?

Yeah, yeah. So the site is the same. We are, honestly, it did take us a little longer bit of time to find the site the site we've been narrowed in on the site and working through you know finalizing the PSA and starting diligence etc but the the size of the site okay is under consideration and the reason being is a couple of our large customers want a would like a great amount of capacity at that facility and so we have to make the decision whether or not that works to increase the size of the facility and then how do we design it we're going to increase for that much more capacity and then additionally arugula spinach all these other skews drive a faster turn there's more turns of the farm with with those skews and so yes that's you know Honestly, one of the reasons why we haven't broken ground is because the conversations that we're having, we have to decide who the capacity is going to go to and whether or not we need to increase the size.

Got it. Okay. Very good. Well, best of luck wrapping up the year. We'll tell these ongoing dynamics. Look forward to updates next year, and I'll get back to you. Thanks, Ben.

Thank you, Ben. Appreciate your questions.

Thank you. Ladies and gentlemen, at this time I'm showing no further questions. I'd like to end the Q&A session and turn the call back to management for any closing comments.

Thank you. Kathy and 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. Have a great day, everyone. Thank you.

Thank you. This does conclude today's conference call. We do thank you for your attention. You may now disconnect your lines.