Local Bounti Q2 2024 Earnings Call Transcript

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Provided by Quartr
August 13, 2024

There are 6 speakers on the call.

Operator

Good morning, and welcome to the Local Bounty Second 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 also note today's event is being recorded. At this time, I'd like to turn the call over to Jeff Sonek with Investor Relations at ICR.

Operator

Please go ahead, sir.

Speaker 1

Thank you and good morning. Today's presentation will be hosted by Local Bounty's 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.

Speaker 1

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.

Speaker 1

With that, I'd now like to turn the call over to Craig. Craig?

Speaker 2

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 Q2. I want to recognize our CFO, Kathy Balacek, 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.

Speaker 2

Together, we look forward to leading our organization through our next phase of growth. Now turning to our 2nd quarter results. Our sales increased 31% year over year to a record $9,400,000 representing 12% growth on a sequential basis. Our adjusted EBITDA loss also improved by approximately $800,000 year over year to $7,500,000 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 twenty twenty four and beyond.

Speaker 2

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 1 to 2 months, a process that initially took 4 to 6 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.

Speaker 2

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 1. 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.

Speaker 2

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 1. Capitalizing on this new capacity, we've successfully expanded our customer base and distribution network.

Speaker 2

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 is stocking our full line of products across 3 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 6 of Sam's regional distribution centers from 2 of our facilities, Georgia and now Texas. We remain on track with the national expansion of our grab and go salad kits.

Speaker 2

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 twenty twenty four. 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.

Speaker 2

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 2 main approaches. 1st, by reducing overall seed usage, using fewer seeds per plant site, while maintaining or even increasing total yield.

Speaker 2

And second, by lowering our costs 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.

Speaker 2

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.

Speaker 3

Thank you, Craig. I want to start off by saying that I am truly honored to take on the role of President of Lobo Bownie 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 of financial developments.

Speaker 3

First, we entered into negotiations for an additional $175,000,000 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 $400,000,000 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. 2nd, we also entered into a nonbinding letter of intent for a $55,000,000 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.

Speaker 3

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.

Speaker 3

I'm also pleased to report that we have nearly completed the transition of the Hamilton Montana facility from its previous R and D focus to a commercial oriented facility. 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 $1,000,000 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 breakeven and drives us closer to achieving our near term financial goals.

Speaker 3

Now shifting to our Q2 results. 2nd quarter 2024 sales increased 31% to 9 $400,000 as compared to $7,200,000 in the prior year and increased 12% compared to $8,400,000 in the Q1 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. 2nd quarter adjusted gross margin, excluding depreciation and stock based compensation was approximately 29%, while our adjusted gross margin performance continues to reflect costs associated with the ongoing optimization and scaling up of our growth facilities, we were pleased to see a 5 percentage point improvement in margin from Q1 to Q2.

Speaker 3

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 and A for the Q2 decreased $6,000,000 as compared to the prior year to $10,700,000 driven by cost saving actions we took in the Q4 of 2023 and Q1 2020 4 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 $5,500,000 in the Q2 as compared to the prior year.

Speaker 3

Net loss was $25,300,000 in the Q2 of 2024 as compared to a net loss of $10,700,000 in the prior year period. I'd note that the Q2 of 2023 was positively influenced by a $15,200,000 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 $500,000 as compared to a loss of $8,300,000 in the prior year period. From a capital structure perspective, as of June 30, 2024, we had cash, cash equivalents and restricted cash in the amount of $16,200,000 And as of Q2, we had approximately 8,600,000 shares outstanding. On a pro form a basis, including warrants and our employees restricted stock units outstanding, we have a fully diluted share count of approximately 16,100,000 shares.

Speaker 3

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 and A expenses and decreased R and 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 commitment to optimizing our financial structure while driving operational growth.

Speaker 3

With respect to our outlook and in consideration of our year to date performance, we are reiterating our full year 2024 sales guidance of $50,000,000 to $60,000,000 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 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. 4th quarter is expected to be larger than the Q3 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 you've heard today, we've been incredibly busy making progress on all fronts, including scaling up our operations with the opening up of 2 new greenfield facilities, the transition of Montana to commercial operations, building out our product assortment and expanding our distribution with new and existing customers.

Speaker 3

We couldn't be prouder of our organization. Thank you. That concludes our prepared remarks. Operator, please open the call for questions.

Operator

Thank you. We will now be conducting a question and answer 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.

Operator

Kathy, I was wondering you gave 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 Pasco in the back half, 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?

Speaker 3

Thanks, Kristen. And good morning. Love the question. Many multifaceted question. It's pretty amazing, as we said in our prepared remarks, how far Local Bounty has come just even in the last 3 to 4 months.

Speaker 3

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 to have to update on, I would say, since our last call, when you think about even the new facilities, right, the new customers on coming online, the capacity that we are providing to Sam's in Texas and also to Brookshares, right? And then also all of the new SKUs that are coming online that we've talked about in the past, but it's very significant in the sense that arugula, spinach, basil, power blends, right, they all have higher price points than our 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 top line revenue and also margin contribution, right?

Speaker 3

And then also we talked about the grab and goes. We did have 1 or 2 large customers that started up a month or 2 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, in my prepared comments, talked about Montana.

Speaker 3

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 2 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 Sam's buying out of that facility right away and Brookshire's etcetera, but it's coming along very, very quickly. And as we alluded also in our recorded comments, we are talking very closely with all of our customers. And why is that, right?

Speaker 3

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 that they all want the new SKUs, but also what does that mean for the expansions in 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 now. And Craig answered that.

Speaker 3

Yes. Sorry.

Speaker 2

We love Christian's questions because they're always detailed. So, yes. Yes. That's great. Did we get everything there, Kristen?

Operator

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 new SKUs 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 was implied in the back half of the year, how do we think about that as a starting point for 2025?

Operator

And what are sort of the ranges on that when we think about like that SKU mix or that customer mix?

Speaker 2

Yes.

Speaker 3

I mean, it's such a great question. I mean, when we think about 2025, just the level of these new SKUs are definitely going to very much impact our revenue and our margin, okay? And then also I also should highlight the R and 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 significantly.

Speaker 2

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

Operator

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.

Speaker 3

Thanks, Hudson.

Operator

Our next question comes from Ben Klieve with Lake Street Capital Markets. Please proceed with your question.

Speaker 4

All right. Thanks for taking my questions. First is around the sale leaseback of the Georgia facility. Kathy, I'm wondering if you could just give us any additional detail on

Operator

that, be it the cap rate,

Speaker 1

the degree to which this is going

Speaker 4

to be an 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 flows given that you're replacing higher cost construction financing with lower cost rent that you're replacing higher cost construction financing with lower cost run payments. So any details you can provide on that would be great.

Speaker 3

Yes. Difficult to share a ton of details at this point. What we 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 them bring a sale leaseback into the facility and take up the construction financing, right? And so I would anticipate the 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, our teams brought those facilities to be up and running in such an impressive short period of time that those facilities we will be able to flip them to sale leaseback much sooner than we were able to with Georgia.

Speaker 3

I can't at this point kind of give the rate on the sale leaseback, but I just wanted to give the color around 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 sale leaseback sooner because significantly sold out to a certain degree and just they came up and running very, very quickly.

Speaker 4

Got it. Okay. 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 $6,900,000 to $7,500,000 It sounds like you had some expenses in Montana associated with the transition, probably some elevated costs in Washington and Texas as they turned on.

Speaker 4

Can you talk about kind of the drivers of that EBITDA line from the Q1 to the Q2? And then the degree to which any of those contributing factors are going to be getting turned off here in the Q3 to allow for an EBITDA improvement here in the current quarter?

Speaker 3

Yes, 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 and 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 skew out of there, but adding in basil will increase the profitability out of that facility. But it meant a little less revenue in Q2, okay?

Speaker 3

And then there were a couple of other things from a timing perspective. I already mentioned the grab and go. We had 2 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 2 difference, no big deal there.

Speaker 3

And then the other thing that I would note is that our construction team, all of those costs are typically capitalized, okay. I didn't include this in my recorded comments that 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 2 years didn't take any vacation at all and we had just a couple of reasons that we had some of the construction guys' costs for, I want to say 400,000 or 500,000 that hit the P and L, SG and A in Q2 and that will go away in Q3. So those are kind of the 3 or 4 factors.

Speaker 4

Got it. Got it. That's all helpful.

Speaker 3

I do want yes, 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 in terms of just even the loss out of Montana. We've already improved quarter over quarter $1,000,000 which is just fantastic also.

Speaker 4

Very good. And then I have one more either for you, Kathy or Craig, as you guys see fit. But Craig's opening comments noted that the expectation are that the Texas and Washington facilities can double. Wondering if you can elaborate a bit on the context behind that. Does that imply that the land is secure for doubling?

Speaker 4

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?

Speaker 3

Question. And the

Speaker 2

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 deepen those relationships with our customers as we're able to provide not only more products, but also just more math as well. So, yes, it's very exciting and the feedback from the customer has been very positive.

Speaker 2

Kathy?

Speaker 3

Yes. I mean the strategy always has been 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.

Speaker 4

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

Speaker 3

Thanks, Ben.

Speaker 5

Thanks, Ben.

Operator

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

Speaker 5

Yes. 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?

Speaker 5

Just kind of a little more color on the Midwest build.

Speaker 2

Yes. Hey, Kathy, you want to tackle that?

Speaker 3

Yes. Sure, sure. Hey, Scott. Good morning. Great question.

Speaker 3

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 a 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. And what's happening with it is we have taken us 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.

Speaker 3

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 significantly larger build than we might have thought 2 quarters ago.

Speaker 5

Got it. I appreciate that color. And just kind of a CapEx or kind of your need for expansion, any color on kind of the second half and 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 kind go ahead, sorry.

Speaker 3

Yes. No worries, Scott. So yes, as we talked about in our prepared comments, the CCLs with our finance lender, we are working to close as soon as we possibly can. That financing will provide the construction for our 2024 builds plus working capital plus strategic capital. And then also as we mentioned our sale leaseback, we will be using those funds partially to pay down some construction financing, but also using some of that for working capital.

Speaker 3

We don't actually need a ton of working capital, but both of the financings will provide as much as we need in effect.

Speaker 5

Thank you. Appreciate the questions. Thanks.

Speaker 2

Thanks, Scott. Thank you, Scott.

Operator

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.

Speaker 2

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 2 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.

Speaker 2

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 Banting's business in the coming quarters. Thank you so much. Everybody, have a great day.

Operator

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

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