Local Bounti - Q1 2024

Transcript

Operator (participant)

Good morning, and welcome to Local Bounti's first quarter 2024 earnings conference call. All participants will be in the 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 conference over to Jeff Sonnek, Investor Relations at ICR. Please go ahead.

Jeff Sonnek (Head of Investor Relations)

Thank you, and good morning. Today's presentation will be hosted by Local Bounti's Chief Executive Officer, Craig Hurlbert, and Chief Financial Officer, Kathleen Valiasek. The comments made during today's call may 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.localbounti.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?

Craig Hurlbert (CEO)

Thank you, Jeff, and good morning, everyone. Our first quarter demonstrated strong operational progress, which enabled us to drive double-digit top-line growth versus both the prior quarter and the prior year, as expected. This performance was the result of a combination of recent improvements that we've made to our business, of which I'll touch on briefly before passing the call to Kathy for her financial remarks. Our Stack & Flow Technology continues to underpin our strategy. It has allowed us to ramp up production in our Georgia facility over the past quarter, and it afforded us the opportunities to further enhance our model, which is predicated on capital efficiency. In fact, we recently initiated a trial at scale for a differentiated use of our Stack Towers that, in a smaller trial, demonstrated a further yield increase of at least 10% beyond what we were currently achieving.

We are excited to see those results later in the second quarter. The flexibility of our design is of the utmost importance and allows us the ability to fine-tune individual plant recipes to maximize the utilization of our assets at all of our Stack-enabled facilities. These iterations can make a significant impact and can also be implemented extremely efficiently across all our Stack & Flow facilities, which further highlights the advantages of our efficient and data-driven Stack & Flow model, where we are able to apply our learnings rapidly. Our experience at the Georgia facility have armed us with immense highlights that we've incorporated into our new purpose-built facilities in Washington and Texas. These state-of-the-art facilities are optimized for our Stack & Flow technology from the ground up and have an operational design that maximizes capital efficiency and drives productivity.

We're thrilled to report that we are shipping out of Washington and Texas in the second quarter. This is a huge milestone for Local Bounti, and I want to recognize our entire team for their individual contributions to get these new facilities built and operational with amazing speed and efficiency. With the new capacity from Washington and Texas, our commercial team is working extremely hard to capitalize on pent-up demand from existing customers and convert new opportunities. On that point, we are thrilled to begin servicing two new customers, Albertsons Seattle and Brookshire's, to bring our fresher, more nutritious, and longer-lasting leafy green products to consumers in the Pacific Northwest and Texas regions. We are also expanding upon our existing relationships to add new distribution in Texas as well.

As I noted on our last call, we are continuing to work on our next phase of projects to add future capacity for growth. This is comprised of capacity expansions across our existing network of facilities, the opening of a new facility in the Midwest, and the conversion of our Montana facility to a commercially focused operation. While final determinations have yet to be made for the facility expansion, construction is slated to begin late in the second quarter of 2024. In terms of our new facility in the Midwest, we currently anticipating breaking ground in the third quarter of 2024, pending ongoing negotiations for final site selection.

With respect to the transition of our Montana facility from its current R&D focus to one that is more commercially oriented and growing produce for sale to customers, while this provides us with incremental revenue, we expect it to be more impactful in terms of our cash flow. As our capacity is scaled up, this has afforded us the ability to integrate our R&D efforts throughout our entire facility footprint, which is helping absorb those costs and also accelerate the learnings at each of our sites. We are on track to implement the shift this summer, and when complete, the Montana facility will be accretive to our overall Adjusted Gross Margin and be an important component to us reaching our goal of achieving positive Adjusted EBITDA in early 2025.

Our R&D efforts also operate in parallel with the product innovation team, who has been working hard on new offerings to meet customer and retailer demand. As we previously said, in the third quarter, we will be expanding our Baby Leaf product assortment by introducing several high-velocity offerings, including Arugula, Baby Spinach, and Spring Mix Blend, and Power Greens. This expansion remains on track, and although we are still scaling up, we were able to deliver our first shipment of spinach to customers from the Georgia facility in March. We've also made excellent progress towards the national expansion of our popular Grab-and-Go Salad Kits, which bring our total distribution to approximately 700 doors throughout the Pacific Northwest and the Southern US.

The response to this expansion has been very positive, and we look forward to working with our partners to bring our convenient grab-and-go salad kits into more consumers' homes. In closing, the efficiency of our operations and the new capacity we are bringing online will support our plans to grow the business and meet the incredible demand we are seeing for our products. Combined with new compelling product offerings, we are well positioned to deliver a step-up in revenue growth in the second half of this year to achieve our full-year guidance, which calls for doubling of revenue versus 2023, and puts us on track to achieving our near-term goal of becoming Adjusted EBITDA positive in early 2025. With that, I will turn it over to Kathy for her review of the financials.

Kathleen Valiasek (CFO)

Thank you, Craig. I'll start by reviewing our first quarter 2024 results, then provide an update on our capital structure before finishing with an update on our year-to-date progress in 2024. First quarter 2024 sales increased 25% to $8.4 million, as compared to $6.7 million in the prior year, and increased 22% compared to $6.9 million in the fourth quarter 2023. Our results largely reflected the increased production and growth in sales from our Georgia facility. First quarter adjusted gross margin, excluding depreciation and stock-based comp, was approximately 24%. Our adjusted gross margin performance was consistent with our fourth quarter 2023 results and reflects costs associated with the ongoing optimization and scaling up of our growing facilities.

We 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, we also have other initiatives that we expect to support margin improvement. As Craig mentioned in his remarks, we have a scaled trial ongoing related to our Stack zones that is providing some compelling data. Once we have those results and implement the adjustments, we also see an opportunity to drive down other production costs. For instance, seed optimization is an area that we've done some work, and in recent trials, we were successful in reducing our seed costs by more than 20%. We'd look to implement this program more broadly across all of our stack-enabled facilities later in 2024.

SG&A for the first quarter decreased $8.4 million to $7.6 million, driven by cost-saving actions we took in the fourth quarter to streamline our org structure, as well as lower stock-based comp. We expect to continue to benefit from the cost-saving actions and the resulting lower cost base through the end of 2024. Net loss was $24.1 million in the first quarter of 2024, as compared to a net loss of $23.5 million in the prior year period. Adjusted EBITDA loss was $6.9 million, as compared to a loss of $7.4 million in the prior year period, and reflects an improvement from the fourth quarter loss of $9.4 million.

From a capital structure perspective, as of March 31, 2024, we had cash, cash equivalents, and restricted cash in the amount of $14.7 million. As of first quarter end, we had approximately 8.4 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 15.1 million shares. We continue to expect to close on 4 conditional commitment letters from a commercial finance lender in the second quarter of 2024, subject to finalizing documentation and customary closing conditions. Together, the CCLs provide for total financing of approximately $228 million to fund our 2024 expansions, our new greenfield facility in the Midwest, and to repay certain existing construction financing, which will lower our cost of capital.

We are very pleased with the growing support for Local Bounti's unique CEA approach. We continue to believe that we have access to the necessary capital to fund our operations, complete the construction of our ongoing projects, and reach positive Adjusted EBITDA in early 2025, a very, very important milestone that our entire organization has been working hard to achieve. We expect that the combination of increased revenue contributions from our new facilities, lower SG&A expense, and decreased R&D costs from shifting our Montana facility toward more commercial activities are what will get us there in early 2025. Additionally, we continue to pursue opportunities to lower our cost of capital and replace our construction financing, including sale-leaseback transactions, and our work with a licensed USDA lender.

With respect to our outlook and in consideration of our year-to-date performance, we are providing our full year 2024 sales guidance of $50 million-$60 million. This guidance reflects expected production out of our Georgia, California, and Montana facilities, and to a lesser extent, the partial year of contribution from production ramping up at our Texas and Washington facilities. In terms of how to think about the year from a quarterly cadence perspective, we anticipate sequential revenue growth from Q1 to Q2, reflecting Georgia at full production in Washington and Texas, which begins shipping to customers in the second quarter. We then expect a significant step-up in revenue growth for the back half compared to the first half, as Washington and Texas production ramps up, with the fourth quarter being larger than the third quarter to meet our full year guidance.

That concludes our prepared remarks. Operator, please open the call for questions.

Operator (participant)

Your first question comes from the line of Kristen Owen of Oppenheimer. Your line is open.

Kristen Owen (Analyst)

Great. Thank you for taking the question. Good morning, everyone, and congratulations on all the, the progress this quarter. I wanted to ask about your, your gross margin outlook. You highlighted some of the things that are gonna move the needle there. I think bringing Montana out of R&D and making that sort of productive. Just help us understand how you're thinking about the cadence of gross margin as we go through the year to support that outlook of, I think you said actually early 2025, EBITDA break even.

Craig Hurlbert (CEO)

Hey, hey, good morning, Kristen. Great, great to hear from you. Kathy, you wanna just tackle that one? You may be on mute, Kathy.

Kathleen Valiasek (CFO)

I was on mute. Thank you. Sorry about that. Good morning, Kristen. Great to hear your voice, and thanks for the question. Yeah, so when we think about the gross margin as each quarter, you know, for the rest of 2024 by quarter, when we think about it, Georgia is going to continue to improve, whereas Texas and Washington are probably, you know, not going to be you know, they're gonna be ramping up, right? So, what I would say is we're going to see sequential improvement each quarter.

Yeah, and, and especially, like, when we think about the R&D trial on improving the yields, that's going to have a significant impact that we can implement right away, as we said, and, and also just the seed optimization, which is significant also, which we'll put into place in the second half of the year. But again, even that rollout we can bring into Texas and Washington also.

Kristen Owen (Analyst)

Okay. That's, that's helpful. Thank you. So, the other question that I wanted to ask, one of the, the updates that you provided in the prepared remarks was the, the, the additional customers that you signed on in the quarter. Just wondering, as those facilities ramp, how much of your capacity is already committed versus how much are you keeping available to be able to add those new doors?

Craig Hurlbert (CEO)

Yeah, Kristen, great question. Really good question. As you know, retailers, you know, have different periods of time in which they award, you know, new awards for different partners, if you will. So obviously, that's kind of over top of everything I'm about ready to say. But the momentum in our commercial group is really palpable. There is a lot of momentum with a lot of different customers, many of which we either couldn't name or didn't name in, in the prepared remarks. So what I would say to you is, that's, that's a number that we're tracking, and it will, it will, over the next couple of quarters, play its way out.

But I can tell you, we're all excited about the, what I would say, the enthusiasm around our kind of expanding platform across our existing customer base, and there's a lot of excitement with new customers inside of the regions. Like, Brookshire is a good example. I think it's 250 grocery stores, roughly, and, you know, primarily in Texas, Louisiana, and some in Oklahoma. They came to visit the site in Mount Pleasant in Texas, and were just super excited and blown away by, what we were putting in there and what, what that would allow, you know, their consumers to enjoy, you know, a more local-based product. So that's one example we did mention. But then our existing customers just looking to, you know, expand as well.

A lot of momentum, a lot of positive momentum, and you know, some of which is just the way the retail business works.

Kathleen Valiasek (CFO)

Yeah, and I'll just add, you know, Craig alluded to it, that all the customers have the shelf reset schedules, right? And so when we even think about our 2024 builds, we talk to all of our customers and think through, like, what is the capacity that we're going to have for our builds that we're completing this quarter, and then also the 2024 builds, and we do earmark the capacity for our customers.

Kristen Owen (Analyst)

Okay, that makes sense. It's sort of the last question that I'll ask here is very related to that, and it may be too soon to be able to quantify this, but maybe qualifying it for us the revenue generation capacity for Washington and Texas, particularly given that these are built to purpose and some of the learnings that you've had in both Georgia and Montana, just how to think about the maybe even relative to your prior expectations, what the revenue generation capacity is for those facilities. And I'll leave it there. Thank you.

Craig Hurlbert (CEO)

Kathy?

Kathleen Valiasek (CFO)

Yeah, sure. So when we think about each of the different facilities, we typically don't give the revenue by facility, but we absolutely estimate that they will. You know, Texas is 6 acres, so we estimate and assume that it will exceed the revenue out of Georgia, whereas Pasco, right, is 3 acres. But the productivity and the yields out of both of those facilities, we anticipate will be higher than Georgia simply because they were, you know, both purpose-built facilities. Whereas, you know, as we all know, we inherited kind of the Georgia build, which again, the Georgia build has improved significantly and we're doing very, very well there. But the Texas and Washington will be standout facilities because they're purpose-built.

Kristen Owen (Analyst)

Thank you so much.

Kathleen Valiasek (CFO)

Thanks, Kristen.

Operator (participant)

Your next question comes from the line of Ben Klieve of Lake Street Capital Markets. Your line is open.

Ben Klieve (Analyst)

All right, thanks for taking the questions. Congratulations. Good, nice little start to the year here. A question about OpEx. And you guys did a lot of work to right-size the business in late 2023. Had a much more pronounced and immediate impact than I was anticipating here in the first quarter. And I'm wondering if you can comment on the extent to which we can use kind of the first quarter SGA and R&D as kind of, as appropriate benchmarks for Q2 and beyond, or if there's any major puts and takes we should consider, for the balance of this year, especially as new facilities are coming online.

Kathleen Valiasek (CFO)

Yeah, sure.

Craig Hurlbert (CEO)

Kathy, do you want to take that one also? Yeah.

Kathleen Valiasek (CFO)

Yeah, sure. And boy, do I love that question, Ben, honestly, because we, you know, in terms of SG&A, I would anticipate that it's going to continue to decrease quarter-over-quarter through 2024. And honestly, I mean, I think we talked about it even on our annual call back at the end of March. We did reduce SG&A, and what we found is that we're actually much more efficient than we were before we made the edits and the changes, right? So it's fantastic. But I would say SG&A is going to continue to decline quarter-over-quarter, and you'll see the greatest decline, I want to say Q3, Q4, but you'll see a decline in Q2. Okay, and then R&D is likewise going to continue to decline.

However, when you think about it, Texas and Washington scaling the second half of the year, there will be, you know, some costs that will be R&D related. Hopefully, that's-

Ben Klieve (Analyst)

Okay. That's helpful. But yeah-

Craig Hurlbert (CEO)

Yeah, R&D is-

Kathleen Valiasek (CFO)

Yeah.

Craig Hurlbert (CEO)

Go ahead, Ben, then I'll follow up on that. Go ahead.

Ben Klieve (Analyst)

So that was very helpful. I mean, Craig, if you have any comments on that, you know, please let me know. Or otherwise, I do have a couple other questions.

Craig Hurlbert (CEO)

Yeah, I think, I think my comment on that is, when you get a platform that has multiple facilities, there's inherent efficiencies that come across the whole organization actually, and transitioning Montana and, you know, Georgia, Texas, Pasco, and the California facilities. You know, we sit, Kathy and I sit on these calls with all of our GMs and, you know, the whole organization is just really focused on efficiency and really taking lessons learned quickly in different facilities and applying them. And I think we're really seeing that across the board. In this case, we're talking about, you know, costs, getting cost out. So I think we're gonna continue to see that over time until, you know, you get to a point where there's just nothing left to get out.

But, that's, that's something that's going to continue to happen, and to some degree, we knew that was gonna happen, but maybe not to the extent. Thank you, Ben. Appreciate the question.

Ben Klieve (Analyst)

Yeah. No, thanks, thanks for the color, Craig. A couple other from me. One big picture. You noted your expectation of achieving positive Adjusted EBITDA in early 2025. Does this imply that you guys have line of sight to that, EBITDA profitability number from your existing facility footprint as they ramp, and not with any contributions coming from new facilities in the Midwest or elsewhere?

Kathleen Valiasek (CFO)

That's a great, that's a great question. I'll take that one, Craig. It's with our existing footprint.

Ben Klieve (Analyst)

Okay, great.

Kathleen Valiasek (CFO)

Very simply, it's with our existing footprint. Yep.

Ben Klieve (Analyst)

Perfect. Thank you. And then last one for me, and I'll get back in queue. The California facilities have been kind of a persistent source of issue for the last, you know, year or so. You didn't mention anything around those two facilities here today. Can you just kind of give us a you know, state of the state out of those two facilities? Are they operating as expected? Is there still work to be done here to kind of fix the lingering issues from last year? You know, any updates out of California would be great.

Kathleen Valiasek (CFO)

Yeah, sure. So I think I said it on the year-end call that we were gonna meet our budget in terms of revenue for California, which we did in Q1, which is fantastic. We did have significant rains again in Q1 of 2024, nowhere near what it was in Q1 of 2023. But I would say the facility is performing better, okay? And it's going to continue to perform better and not a large CapEx spend or anything like that. But you know, like we've said, there was the impact of Q1 2023, but you know, just a lot of repairs and maintenance spend is going to decline. You know, we saw a decline in Q1, and it'll continue to decline through the rest of the year.

Ben Klieve (Analyst)

Great. Very helpful. Appreciate taking my questions, and I'll get back in queue.

Craig Hurlbert (CEO)

Ben, thank you very much.

Operator (participant)

There are no further questions at this time. So I'd like to hand back to management.

Craig Hurlbert (CEO)

Great. Thank you so much, Gavin. On a personal note, I know Kathy and I would like to thank the entire Local Bounti team for their dedication and hard work. And I can tell you, we just had a dinner in Pasco. It was just working with these people is an absolute inspiration. We appreciate everything you're doing and all of the great progress we're making. And with 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 Bounti's business in the upcoming quarters. Thank you so much.

Kathleen Valiasek (CFO)

Thanks, everyone.

Operator (participant)

That does conclude our conference for today. Thank you for participating. You may now disconnect.