Local Bounti Corporation

Good morning and welcome to Local Bounties first quarter 2025 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 also 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 Executive Chairman Craig Hurlburt, and President, Chief Executive Officer, 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, 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, please go ahead.

Thank you, Jeff, and good morning, everyone. I want to start by taking a moment to express my sincere gratitude to our local bounty team. The dedication and commitment I've witnessed across the company has been truly remarkable as we navigate this important phase of our company's journey. We have assembled an exceptional group of people who continue to drive our mission forward with passion and focus. I'm pleased to see the continued validation from our customers whose increasing desire for CEA products reinforces the market opportunity ahead of us. The foundation we've built over these past years has positioned Local Bounty to achieve positive adjusted EBITDA in the near term. And I'm confident that under Kathy's leadership, we'll continue to execute on our strategic vision, create meaningful value for all stakeholders. With that, I'll now turn it over to Kathy.

Thank you, Craig. And good morning, everyone. First, I completely echo Craig's sentiment and want to acknowledge the incredible dedication and focus of our entire organization. As Craig alluded, our team has fully embraced our mission to reach positive adjusted EBITDA in the third quarter of this year. From operations to sales to finance, everyone is aligned around this critical goal, and I couldn't be prouder of the collective effort. To that end, our first quarter progress, including all of our commercial and operational initiatives, are converging toward a significant revenue lift in the second half of 2025 and our achievement of this positive adjusted EBITDA milestone we are positioned to reach in Q3. Importantly, the disciplined approach we've taken from product diversification to operational efficiencies to cost management is creating a strong foundation that will support our long-term growth and profitability as we scale our business to meet growing retail demand for our products. Starting with our operational progress, The product mix recalibration work at our Texas facility continues to advance as planned. We are in the final stages of completing this work and expect to begin full commercial production in this section starting this month. As we discussed previously, the purpose-built automated harvesting equipment will be installed early in the third quarter, replacing the temporary harvester we will use this quarter. The new harvester is expected to drive significant operational efficiencies and margin improvement. I'm particularly excited to share that our yields in our Georgia facility have increased by 20% in the first quarter compared to our fourth quarter rates. This improvement is largely attributable to the refinement of our growing system with the stack phase, which has outperformed our internal expectations. Our next step is to implement this program in our Texas and Washington facilities where we expect to achieve similar yield increases. These yield improvements over our existing performance create an excellent opportunity for a sales team to engage prospective retail partners who are looking for CEA suppliers that can deliver consistent performance, something that truly differentiates us at a time when retailers are increasingly taking interest in CEA products. regarding our plans to enter the Midwest with a new facility. I'm pleased to report significant advancement in our strategy there. We are actively engaged in promising discussions with multinational and national retailers to include the Midwest region in their sourcing plans. While we're very far along in this process, it's still too early to announce anything definitive. These developing relationships represent important validation of our expansion strategy and our ability to serve retail partners across multiple regions. Turning now to our commercial progress, building on the incredible momentum from last year, in Q1 2025, we expanded our Texas-grown arugula offering with Brookshire's in approximately 80 stores and began distributing organic living butter lettuce from California to HEB. We also started shipping living basil to an existing large retail customer across 60 stores and secured distribution with several other wholesalers for our basil products. Notably, our relationship with Walmart continues to strengthen. In addition to the 191 stores we are already serving with premium baby leaves varieties as of Q4, we've secured an additional commitment to serve 13 Walmart distribution centers with our conventional living butter lettuce. With those shipments having commenced just a couple weeks ago from both our California and Texas facilities. We've also evolved our grab-and-go salad kit offerings to better serve retail partners and consumer trends. This includes the launch of new salad kits in Q1 2025 with additional flavors expected to be introduced in Q3, as well as the creation of a new product line that meets the needs of today's value-oriented consumer. We're particularly excited about our upcoming exclusive launch of a new larger approximately 12-ounce family-sized Caesar salad kit with a large multinational retailer in the Pacific Northwest beginning in the third quarter. We also continue to expand our relationship with the leading meal subscription business that is now seeking additional SKUs from us. These commercial wins demonstrate the strong pull we're seeing from our customers and their increasing desire to purchase more CEA products. validating our mission and reinforcing the long-term market opportunity ahead of us. Turning briefly to our first quarter results, our first quarter sales were 11.6 million in line with our expectations and representing a 38% increase compared to the first quarter of 2024 and a 15% sequential increase compared to the fourth quarter of 2024. This growth was driven by increased production and sales from our Georgia Washington and Texas facilities, partially offset by the ongoing product mix for calibration work at our Texas facility, which has temporarily decreased capacity. Our adjusted growth margin for the first quarter improved approximately 500 basis points versus the prior year and approximately 400 basis points versus the fourth quarter, 2024. This improvement is particularly encouraging as it demonstrates that our product mix recalibration work and operational efficiency initiatives are yielding tangible results. We continue to expect that over time our adjusted growth margin will increase as a percentage of sales as a result of the continued scaling of the business and ongoing efforts to optimize costs. Net loss for the quarter was $37.7 million, compared to a net loss of $24.1 million in the prior year period, which largely reflects higher interest expense. Our adjusted EBITDA loss for the quarter was $8.8 million compared to $6.9 million in the prior year period, and importantly, representing an improvement of half a million dollars from our fourth quarter 2024 loss of $9.3 million. We remain on track to achieve our third quarter target to reach positive adjusted EBITDA driven by the full realization of our ongoing cost reductions alongside our anticipated revenue lift that we expect to be more fully visible in the third quarter of 2025. To emphasize the cost reduction point, we took out approximately $3 million of annualized G&A expenses in the first quarter, and during the second quarter to date period, we've actioned another $4 million of annualized expenses across both G&A and cost of goods sold. These initiatives are a direct result of our operational focus, which is resulting in significantly improved consistency across all facets of our growing operations and allowing us to drive those efficiencies through our income statement. Turning to our balance sheet, we ended the quarter with a significantly strengthened financial position with cash and cash equivalents and restricted cash of $28.4 million. That said, I do want to provide some clarity on how our debt restructuring appears on our financial statements. While we eliminated approximately $197 million of debt through our March restructuring, accounting rules require us to maintain the original carrying value of the pre-restructuring debt amount on our balance sheet with the reduction being recorded as a debt premium that is amortized over the new loan term. You'll see this as a new line item on our first quarter balance sheet. This means that our reported debt balance won't immediately show the reduction but the economic benefit remains unchanged and will be reflected through lower interest expense over time. This accounting treatment is standard for transactions of this nature and does not impact the fundamental improvement of our capital structure. Now for some comments on our outlook. For the second quarter, we expect revenue in the range of $12 to $12.5 million, which reflects the partial impact from our Texas facility transition, which is expected to be complete in the third quarter. Looking at the cadence for the balance of the year, we expect to see a material lift in the second half of 2025 resulting from the convergence of activity, including the aforementioned full quarter contribution from our Texas facility transition and the additional capacity from our Georgia yield improvement. Additionally, new product introductions and expansions with existing customers are anticipated to also support our expectation for sequential growth in the second half of the year. I'd also like to briefly comment on our EBITDA progression from Q4 to Q1 and highlight how we expect to improve on this in Q2. In Q1, we experienced temporary cost increases that we expect will be eliminated in Q2. These included higher utilities associated with weather anomalies and higher G&A expenses, which were impacted by the combination of a higher mix of product donations associated with the better than anticipated yield improvements in Georgia, lower capitalization of labor now that the construction projects have been completed, and lastly, higher severance associated with our cost optimization work. These collectively impacted our EBITDA by approximately 900,000 in the first quarter. and are not expected to reoccur in second quarter. These dynamics combined with our second quarter to date cost actions are providing us some tailwind toward our goal of achieving positive adjusted EBITDA in the third quarter of 2025. In conclusion, we're energized by the progress we're making across all areas of our business. Our entire organization is aligned behind our mission to reach positive adjusted EBITDA in the third quarter and I couldn't be prouder of the collective effort of our team. With that, please open the call for Q&A.

Thank you. 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.

Hi, good morning and thank you for taking the question. Congratulations on the nice progress made in the first quarter here. Kathy, you touched on this in some of your final prepared comments here, but I want to double click on sort of what's driving that material lift coming into the back half of the year. You noted Texas transition, the Georgia yield improvement, some new products. I want to double-click on that Georgia yield improvement. I think you said 20% over fourth quarter. Just help us understand, you know, what's changing in the production process, how you're achieving that yield, and then on the commercial side, sort of the velocity of sales and your ability to sort of sell out that incremental yield as you're thinking about that in the back half of the year.

Yeah, great series of questions, Kristen, and good morning to you. Thank you. So, yeah, the 20% yield increase in Georgia is – An R&D program that was developed last year, we were able to finally put it in place in And it actually exceeded our expectations in terms of yield increases, which is fantastic, right? So as I said in my comments, we will also be implementing that program in Texas and Washington in Q3. So we expect to see that similar level of bump in yield in both of those facilities. If you think about it, so out of Georgia, when the yield increases that much, your production And so it takes a little bit of time for our sales team to place the product, which is normal. And then in terms of the ramp in the back half, it's several things going on with all of our customers. We talked about all of the Walmart projects, the grab-and-go salads, the increased revenue that we will anticipate out of Montana. several things are impacting the uptick, including, you know, also as we discussed, the yields. So hopefully that's helpful.

That's great. The follow-up question that I have is a little bit more modeling-oriented. Just given some of the nuance around the restructuring that you announced last quarter, you mentioned the balance sheet implications. I'm trying to think about the income statement implications in particular. how to think about the interest expense that you're reporting, what if that is cash versus non-cash, and how that will change with this restructuring, just a little bit of nuance on the model there would be helpful. Thank you.

Yeah, for sure. So, you know, GAAP accounting, right, you would have anticipated that we would be able to recognize the full gain of the debt write-off of $197 million. But we're actually having to take it over 10 years, which actually in effect is fantastic because every quarter it will reduce our interest expense on the face of our P&L, right? So the accrual every quarter is the debt balance times the interest rate, which again, as we disclosed, it's 50% of what it used to be. And then the amortization of the premiums. will reduce the interest expense on the face of the P&L. So in effect, every quarter, the interest expense as it appears on the P&L will be less than $5 million. And then also keep in mind, yeah, let me just add one more comment there. Keep in mind that the restructure with cargo allows for two full years of no cash interest or amortization payments. So, but obviously, right, there's still the accrual.

Perfect. Thank you. I'll pass it on.

Okay. Thanks, Kristen.

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

Thanks for taking my questions. I want to circle back to this 20% yield enhancement. I'd like to kind of better understand. I think, Kathy, in your prepared remarks, you said that this was a project explicitly around the stack phase of the Georgia facility. And so I'm wondering, is this a situation where you have 20% more plants coming out of the stack phase just from a pure kind of per square foot perspective? Are the same number of plants coming off 20% faster? Are you kind of changing the varieties to maybe faster growing options? What exactly is the driving force behind that?

Yeah, sure. Great question, and good morning, Ben. Yeah, so it's really within the stack phase. It's Very simply, light optimization. And it's something we nicknamed it Thor. Our R&D scientists who are amazing developed the program actually early last year. What it does is it increases the output out of the stack phase. And basically, even all the way through then, the process through the greenhouse, we're literally seeing 20% increase in packed pounds every single week. It's actually pretty amazing. But it's basically within the stack. It's light optimization. And what it does is it increases the output of number of plants, sorry, poundage of plants coming out of the stack phase.

Got it. So four is light optimization on the same number of plants that makes those plants grow 20% faster. Correct. Got it. Okay. Um, very impressive. Um, so then, yeah, sounds like it. Um, uh, my, uh, my other question, uh, then before I'll get back in queue is, you know, you talk, uh, it seems like it was a bit more, uh, kind of conviction regarding the, the future of the Midwest, uh, facility. And I'm wondering if you can talk about, you know, how you're thinking about financing that facility. Are you looking, um, at kind of project specific financing? the external parties, you know, leaning back into the existing credit facilities that you have, a mix of those two or something else?

So we're, you know, as any company, right, you're always trying to bring new capital providers in the capital stack. So we are talking to sort of very project-specific companies. financing, but, you know, I think we'll probably be bringing new, you know, obviously non-dilutive partners into the capital stack.

Okay. Very good. That's helpful. Well, I appreciate you taking my questions. Best of luck here, and what should be a pretty interesting next few months for you guys. I'll get back to you.

Thanks.

Thank you. Ladies and gentlemen, I'm showing no other questions at this time. I'll turn the floor back to Ms. Balasek for any final comments.

You know, I just 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 Locoboni's business in the coming quarters. Thank you very much.

Thank you. This concludes today's conference call. You may disconnect your lines at this time. Thank you for your participation.