Local Bounti Corporation (NYSE:LOCL) Q4 2022 Earnings Call Transcript

Local Bounti Corporation (NYSE:LOCL) Q4 2022 Earnings Call Transcript March 29, 2023

Operator: Good morning, and welcome to the Local Bounti’s Full Year 2022 Earnings Conference Call. All participants will be in 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 conference call over to Jeff Sonnek, Investor Relations at ICR. Please go ahead.

Jeff Sonnek: Thank you, and good morning. Today’s presentation will be hosted by Local Bounti’s Co-CEOs, Craig Hurlbert and Travis Joyner; President, Brian Cook; and Chief Financial Officer, Kathleen Valiasek. 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, investor.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 Hurlbert, Co-CEO. Craig?

Craig Hurlbert: Thank you, Jeff, and good morning, everyone. 2022 marked our first full year as a public company. We made significant advancements in the refinement and productivity of our Stack & Flow Technology, which continues to underpin our business model as the optimal capital efficient tool to enhance crop turns and maximize return on investment across a variety of CEA approaches. Beyond our greenfield expansion, this affords us great flexibility to establish greater scale quickly through strategic acquisitions, which we demonstrated with the Pete’s acquisition last April. As we approach the anniversary of that transaction, our team is relentlessly exploring new ways to integrate our technologies to further improve upon the productivity of those assets while also driving the business forward with new product development.

With our distribution reach, which surpasses 10,000 doors, combined with our growing capacity that is improving by the day, we’ve attracted new commercial partnerships and expanded upon others, most notably the offtake agreement with the Sam’s Club that we announced in November of 2022 for our leafy greens production. Others are taking notice of our rapid scale-up and enhanced capabilities, too. As such, our near-term focus continues to be on the completion of our ongoing facilities, including the implementation of our Stack systems. This is a critical link in our ability to generate additional capacity while simultaneously driving yield improvements, and it is the basis by which we will be able to meet the pent-up demand we are experiencing for fresh, sustainable and locally grown produce.

Looking ahead to 2023, we are in a great position to continue advancing our business across all fronts. As you may have seen, today, we announced an aggregate of up to $145 million of new financing. Kathy will speak to this in greater detail, but we are pleased with our strategic financing partnership with Cargill and the sale-leaseback transaction, the combination of which are allowing us to execute our growth initiatives despite the challenges presented by the current macroeconomic backdrop. Moreover, with this additional capital, we believe that we have the funding required to drive the business to positive adjusted EBITDA, which will be a major milestone not just for Local Bounti but for the entire CEA industry. We are proving that we can continue to drive top-line growth and simultaneously generate healthy margins as we scale the business in a responsible, capital-efficient manner.

This is due in large part by the continued gains we are making with our Stack & Flow Technology to drive improving unit economics, which our Co-CEO, Travis Joyner, will speak to. And then our President, Brian Cook, will provide some further commentary around our commercial strategies, product development and an update on our various construction projects before Kathy concludes with her financial review. On a personal note, I would like to extend a huge thank you to the hard-working members of the Local Bounti team. It is an honor to work with each of you such dedicated and passionate professionals. With that, I’ll now pass it over to Travis.

Travis Joyner: As Craig noted, our Stack & Flow Technology is the cornerstone of our business. It is immensely productive and our relentless focus on optimizing the technology continues to deliver impactful results that will cascade through our facility network. At our Montana facility, for example, we are currently seeing a 25% to 35% yield improvement compared to one year ago and that’s translating to between 17.5 to 25 pounds of production per square greenhouse foot for our core SKUs. These yields are 1.5 to 2 times higher than comparable greenhouse facilities demonstrating the real intangible value of our patent-pending technology. Similar to the historic ramp in our Montana facilities yield for our future Stack & Flow facilities, including our Georgia facility, there is a ramp period for production and sales.

In Georgia, we are preparing for that ramp as we begin to scale our bolt-on stack phase to the existing Georgia greenhouse infrastructure. Since September of 2022, we have commissioned one stack tower in Georgia, integrated our technology with the existing greenhouse infrastructure and have run hundreds of recipe trials. Early trials have consistently demonstrated our stack phase can yield 1.4 to 1.8x when operated head-to-head with the traditional greenhouse technology infrastructure that is operational today in Georgia, which is consistent with our expectations. We are incredibly excited by our ability to drive yield enhancements with the implementation of Stack & Flow at our facilities and reinforce our commitment to implement this technology in future facilities like the one in Texas.

At the end of the day, this is what Stack & Flow is all about. It allows us to make direct iterative improvements on existing greenhouses like in Georgia or greenfield infrastructure like in Texas in a manner that drives higher return on investment while minimizing capital needs. In addition to implementing Stack & Flow Technology across our footprint of leafy green facilities, we’re also working to apply our technology to a variety of other crops in growing environments. We are in the early trial stages of long-term projects for high-value crops such as berries, and although it is still very early, the initial results are very promising and strongly indicate meaningful improvements in unit level economics. It is this diversification across crop types that eventually provides us access to a larger share of the global produce market.

We are striving to be the world leader in CEA, and these initiatives work hand-in-hand with our efforts to translate our innovations into a robust IP portfolio across process improvements, genetics, computer vision, AI and controls. Formalizing our IP portfolio is an important component of the competitive moat we are developing around Stack & Flow and will ensure that we are well positioned for long-term growth. I’ll pass it over to Brian for his remarks.

Brian Cook: Thank you, Travis. I’ll start with a quick update on the progress of our facility build-out and then speak to some of the new product innovations we are testing. The emphasis that we placed on bringing additional local capacity online is paramount, only matched by our retailer partners who share the same ethos. This alignment is very powerful, driven by shifting consumer preferences and growing demand for better products. We are excited to announce as of Q1, we are shipping packaged salad products to 18 new distribution centers. We are pleased to bring our high-quality production to new regions and are very pleased by the enthusiastic response from the retail community. This alignment is demonstrated in our offtake agreement with Sam’s Club, which will add two new distribution centers serviced by the Georgia facility by the end of the second quarter with early indications showing strong demand.

Moreover, we expect to begin servicing two additional distribution centers operated by other retailers as well in the second quarter. All of these are examples of the demand we are seeing for reliable availability of locally sourced product in a high-velocity category. So, what are we doing to satisfy this demand? Our Georgia facility is a centerpiece of our near-term scale-up. Construction of Phase 1-B is progressing nicely, and we expect to reach completion of that facility early in the second quarter of this year. As a reminder, Phase 1-B will replicate Phase 1-A in terms of size and capabilities, essentially doubling our run rate production from the facility. Following Phase 1-B completion, the site’s greenhouse footprint will be established and ready to integrate the complementary stack zones that comprise Phase 1-C.

We expect this work to be completed and online early in the fourth quarter of 2023. Note that this timing reflects a delay in relative to our prior expectation due to excess rainfall and other severe weather that created some issues with the contractor’s ability to pour concrete that was specified in the design. As a reminder, our Stack & Flow Technology is expected to add approximately 40% of incremental revenue generating capacity to the finished Georgia facility, which will be comprised of six acres of greenhouses and multiple climate, water and spectral controlled stack zones. Importantly, as utilization rates increased, we expect to realize cost synergies with each additional pound of production that we have added to that facility. This speaks directly to the efficacy of our model and will be visible in our gross margin.

Beyond Georgia, we are also advancing our other build-out. In early January, we broke ground on our new six acre facility in Texas, and construction is now well underway. This facility will eventually support production of our packaged leafy green varieties as well as locally grown living lettuces and fortify our distribution network across markets in the South and Midwest United States, providing capacity that is already earmarked for blue-chip retailers throughout the region. We continue to expect operations at Texas to commence in the fourth quarter of this year and are excited to see this project come to life. In terms of our project in Pasco, Washington, the facility continues to progress with anticipated completion in the first quarter 2024, which reflects our decision to stagger construction to accommodate the commissioning of our Texas facility in the fourth quarter of 2023.

The Washington facility will be comprised of multiple stack zones and three acres of the greenhouse. Beyond our existing facility network, our team continues to evaluate locations in the Northeastern United States as a potential home for one of our next regional expansion. Finally, I’m excited to share some updates with you on the commercial front. We have been working diligently to merge the legacy Pete’s branding into Local Bounti’s branding, creating one cohesive brand with strong roots. This excludes the consolidation of our existing Eat Pete’s website into the Local Bounti corporate website, as well as the phased rebranding of our butter lettuce products. Across our integrated business, we’re seeing significant momentum for our product, and we’re pleased to report that in the fourth quarter, Local Bounti and Peat’s units per store sales velocities increased 16% and 20% on a dollar basis versus the same period last year.

On the innovation front, we have been busy bringing new products to market. In January, we launched our chef-inspired Asian Style Chicken Lettuce Wrap Kit, a restaurant-quality meal solution that is prepared at home in about five minutes; and 194 Sprouts Farmers Markets locations in California and Arizona. This represents our first entry into the Heat and Eat category, and we’re really excited to see customers enjoying this product. Our grab-and-go program is going through a package design and will be expanding to four SKUs in May. Now I’ll turn the call to Kathy for her review of the financials.

CHAIWATPHOTOS/Shutterstock.com

Kathleen Valiasek: Thank you, Brian. I will now cover our fourth quarter and full year results. Fourth quarter 2022 sales were $6.6 million as compared to $0.3 million in the prior year period. Quarterly recurring revenue from the company’s California facilities was down slightly on a sequential basis versus the third quarter of 2022 due to an isolated delivery interruption with the logistics provider as a result of the storms in California in the quarter. Although our Georgia facility opened in third quarter of 2022, product has been shipping out of the facility. Fourth quarter operations were still in the commissioning phase to prepare fulfilling demand. We expect a more pronounced lift in second quarter of 2023, once Georgia Phase 1-B comes online and the four additional distribution centers, as Brian mentioned.

Fourth quarter 2022 adjusted gross margin, excluding depreciation, stock-based compensation and other nonrecurring items was approximately 39%. We were pleased to see another quarter of continued sequential improvement in our adjusted gross margin. We continue to see opportunities to capture the COGS synergies between Local Bounti and Pete’s operations and we are making great progress despite the inflationary pressure. In fact, comparing our per unit cost prior to the Pete’s acquisition to our actual performance since it closed, we’ve reduced packaging costs by 40% and reduced seed costs as well. Fourth quarter 2022 net loss was $26.5 million as compared to a net loss of $28.3 million in the prior year period and includes $5.6 million in stock-based compensation, $4.5 million in interest expense, $3.6 million of depreciation and amortization, $2.9 million of business combination and integration costs, $0.4 million of restructuring and $0.4 million of costs related to inclement weather.

Adjusting for these and other discrete items, adjusted EBITDA loss was $7 million as compared to adjusted EBITDA loss of $5.1 million in the prior year period. Briefly looking at full year 2022 results, sales were $19.5 million as compared to $0.6 million in the prior year period and adjusted gross margin was approximately 38% compared to 43% last year. Adjusted EBITDA loss was $29.8 million as compared to adjusted EBITDA loss of $17.8 million last year. From a capital structure perspective, we ended the full year December 31, 2022, with cash, cash equivalents and restricted cash of $24.9 million and had approximately $29.1 million of undrawn capacity on our credit facility with Cargill. As we announced today, we secured up to $145 million of new financing from two sources to support our current growth plans.

The first component of this financing is an agreement to expand our existing credit facility with Cargill by up to $110 million to a total of $280 million. This expansion provides capital to fund construction at our facilities in Georgia, Texas and Washington. In exchange for the improved flexibility and expanded size of the facility, we issued Cargill 69.6 million warrants with an exercise price of $1 per share representing more than a 100% premium to our current stock price. The second component of the financing is an agreement for the sale-leaseback of our two facilities located in California, for approximately $35 million. Following this additional amendment and the closing of the sale leaseback transaction which is subject to customary closing conditions and is expected to close in the second quarter of 2023, the company expects to add approximately $50 million to its balance sheet to use for operations.

We are very pleased with the outcome of these transactions and the growing support for Local Bounti’s unique CEA approach. I would also reiterate Craig’s message on the broader importance of these developments. They provide us with the necessary capital to reach breakeven cash flow, which is a very important milestone that we’ve been working hard to achieve. We believe we will be in a position to share some greater precision in terms of timing during our first quarter 2023 earnings call. As of December 31, 2022, we had approximately 103.7 million shares outstanding. On a pro forma basis, including the existing and new cargo warrants and our employees restricted stock units outstanding as of March 29, 2023, and we have a fully diluted share count of approximately 194 million shares.

With respect to our outlook, we are providing full year 2023 revenue guidance of between $34 million and $40 million, representing growth of at least 74%. In terms of our quarterly cadence, we expect that first quarter will look similar to our fourth quarter 2022 results as we work through the commissioning of the Georgia facility and improved production ahead of the opening of Phase 1-B in a couple of weeks, the addition of the four distribution centers in the second quarter and stack Phase 1-C completion in the fourth quarter. As those elements come online over the course of the year, we’d expect sequential revenue improvement to follow. This is expected to have a commensurate positive influence on our adjusted EBITDA as well, which should gradually improve through the balance of the year, building from the low point in first quarter.

Once again, we believe we have line of sight to positive adjusted EBITDA, but we’ll update the market on timing during our next conference call. And finally, I’d also note that the impact of any potential acquisitions as part of our build and/or buy strategy for growth could potentially change this expectation. We believe this demonstrates the flexibility of our model and the advantages of our approach, which revolves around capital efficiency. That concludes our prepared remarks. Operator, please open the call for questions.

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Q&A Session

Operator: Thank you. At this time we will be conducting a question-and-answer session. Thank you. Thank you. And our first question today comes from the line of Ben Klieve with Lake Street Capital Markets. Please proceed with your questions.

Ben Klieve: All right. Thanks for taking my questions. And congratulations on all the news you were able to announce this morning. First question on the quarter itself. The R&D line item specifically, Kathy, would you mind kind of getting into the drivers behind the sequential growth in R&D over the second half of 2022 and your expectations for that line item specifically in 2023?

Kathleen Valiasek: Thanks Ben.

Brian Cook: Yes, hey good morning Ben. Kathy, go ahead, sorry.

Kathleen Valiasek: Yes, no worries. Good morning, Brian. Yes. So what we anticipate into later in 2023 is the R&D line is probably going to stay around that per quarter. Once the other facilities coming online end of this year and into early 2024, we anticipate that the R&D line will come down significantly.

Ben Klieve: Okay got it thank you.

Kathleen Valiasek: Yes go ahead.

Ben Klieve: Yes. No, that’s helpful. And then the next question I have is there’s so many moving pieces in terms of construction, and I get that this is a difficult thing to model out at this point given all the variables around construction. But the pushback and the timing of the Washington facility by a quarter or two and Phase 1-C, how comfortable are you really with this time line that you’ve laid out for all of these facilities at this point? What real risk do you see still remaining that could push out this expansion plan further into 2024?

Craig Hurlbert: Kathy, if you want to just continue with that and maybe add Brian in?

Kathleen Valiasek: Yes, sure. That’s such a great question, Ben. I mean what ended up happening was for various reasons when we broke ground and so the original plan was Pasco is going to come first and then Texas second. What happened was we broke ground for Texas in January, and everything went so well, we realized that we could actually almost get that facility up in September, which is of 2023, and we realized that was almost the exact same time frame that Pasco was coming up, okay? And so trying to commission two brand new facilities at the same time was just going to be too much for us. So we purposefully €“ we didn’t slow up Pasco, but we were racing to get Pasco up and running quickly. And so what we did was we got it back to a regular construction time line so that we could parse the two openings by two to three months because trying to commission two facilities at the same time was too much.

And really, to answer your overarching question, which is, €œHey, are you going to meet these time lines?€ I mean our construction team, every single day, I’m amazed at how they meet their targets both time line and budget-wise. They have done an amazing job, and we feel very comfortable with the time lines that we set forth. It is unfortunate Georgia 1-C is going to be a couple of months later than we had anticipated because of severe rains in Georgia. But that being said, I think, we’re good to go with the time lines that we’ve set forth. Brian, do you have any comments or thoughts you’d like to add?

Brian Cook: Yes, I think maybe just to add a little bit more to that, I mean barring the weather, one thing that may have come a question from the mind is as we got everything back on track, and we had these two sites stacking and we made the decision to stagger them a bit. One of the exciting notes to take away is that the Texas facility, we expect to be pretty much sold out as we €“ once we come to fruition. Now there’s obviously the on-boarding time period and a general ramp that comes along with it. But we fully expect Texas to be sold out in a very short order.

Ben Klieve: Got it. No, that’s helpful. Thank you. One more for me and then I’ll get back in line. In the context of the kind of broader dynamics going on in the specialty crop space over the last six months with just torrential rains in Southern California, disease pressure in 2022. What are you guys seeing from a pricing perspective from, given these headwinds at the conventional crop market is facing?

Craig Hurlbert: Hey, Brian, do you want to take that one?

Brian Cook: Yes. I think it’s really kind of playing into what CEA is all about. We are obviously a little bit more of an expensive price point that you’ve seen on shelf historically. But what it’s done is it’s really much €“ pretty much made that gap a lot smaller when it comes to what a retailer would see and a consumer would purchase at shelf. And that’s always a good thing, right, because at that point, the CEA space has the additional surety of supply; the ability to expand our Stack & Flow Technology allows us to do that in a far better way from a standpoint of capital expenditures and the ability to grow more with less. So this is really playing into Local Bounti’s hands in many ways, and we expect to see more and more room on the shelf with our €“ with our Local Bounti products moving forward.

Ben Klieve: Got it. Very helpful. Thanks for taking my questions and we’ll go back in line.

Jeff Sonnek: Hey Ben, thank you. Appreciate it.

Operator: Our next question is from the line of Kristen Owen with Oppenheimer. Please proceed with your questions.

Kristen Owen: Hi. Thanks. Good morning. I appreciate that you want to give some additional color on timing of that, that path to positive EBITDA and free cash flow on the next call. But I’m wondering if you can help maybe give a little preview to the movie or talk us through maybe on a facility basis what that path looks like for Hamilton, given that that’s your most mature facility? And how we think about sort of the timing of each of these facilities as you try to get towards EBITDA positive?

Craig Hurlbert: Thanks for that question, Kristen. Kathy, why don’t you start with that one? I think that’s a good question for you to start with.

Kathleen Valiasek: Yes. Yes, sure. Thanks and thanks Kristen, for the question. What we’ll see in Montana as well as all of us anxiously awaiting for the Pasco, Washington Facility to be up and running. Currently, what we’re doing €“ what we’re running out of that facility is many, many SKUs, okay, to support the Northwest. And what €“ the second that the Pasco facility is up and running, we will switch out what the Montana facility is doing and bring it down to 1 or 2 SKUs. And so much quicker that will come to €“ that facility will come to profitability. The other facilities, Georgia is ramping incredibly well. As we’ve said on other calls, the facilities will be cash flow positive. That Georgia, like any facility when you get them up and running, it takes three to six months for them to start operating profitably. Those are my thoughts and comments. Brian? Travis?

Brian Cook: Well said.

Travis Joyner: Yes, I have no…

Kristen Owen: So then if we could talk a little bit about what sort of OpEx you need to support the ramp. You already commented on the R&D expectations for 2023, but just give us a sense of what kind of OpEx you need to support this ramp over, say 2023, 2024 when we get to a run rate revenue?

Kathleen Valiasek: Yes, sure. And Craig, I’m sorry, I keep on having in here. Yes. So from an OpEx standpoint, we will be relatively steady, I would say for where our run rate is at Q4 2022. The significant drop down will be the R&D.

Kristen Owen: Great. And if I could squeeze just one last one in. Craig, I think €“ or maybe it was Travis, you talked about institutionalizing some of the learning cycles, getting the IT in place to protect growth over time. I’m just wondering what your process for institutionalizing those learning cycle is? And how you view sort of that ramp or closing the gap from the 1.4 to 1.8 times that you’re seeing initially in Georgia to maybe 2 or more out of the future facilities? Thank you.

Craig Hurlbert: That is a great question. Travis?

Travis Joyner: Yes, really, really great question, actually. Yes, I think the right way to answer the beautiful thing about having a Stack phase is you’re able to have a high degree of control of the environment, no matter where you are, whether it be Washington, Montana, Texas, Georgia or Abu Dhabi, you’re able to really replicate the same recipes within our Stack phase as they then transition over to the greenhouse. So what we’re seeing in Georgia in really a very short period of time in September of 2022, we activated our first Stack Tower. And since then we’ve been executing on literally in the hundreds of recipes to optimize that transition from Stack, into the greenhouse, into the Flow phase. And so the great part about where we sit is the Georgia facility is really a carbon copy or I guess I should say the Texas and Washington facilities are pretty much a carbon copy of the Georgia facility.

So the work that we’re doing in Georgia right now is from the playbook from Montana and the playbook from Georgia is going to transition to both Texas and Washington and accelerate our learning’s and scaling.

Kristen Owen: Great. Thank you so much.

Jeff Sonnek: Kristen, thank you.

Operator: Thank you. The next question comes from the line of Pam Kaufman with Morgan Stanley. Please proceed with your question.

Jeff Drezner: This is Jeff Drezner on for Pam Kaufman. Just a quick question on CapEx and what you anticipate that spend to look like this year in support of the expansion projects?

Craig Hurlbert: Kathy, why don’t you take that one?

Kathleen Valiasek: Yes. Hi. Good morning and thank you so much for the question. So we typically don’t give out our CapEx numbers kind of per facility or spend per year. We will give a more refined update when we do our Q1 earnings call in a few weeks. We just typically don’t give the spend upfront in the beginning of the year, but we will give a more refined answer Q1 earnings call.

Jeff Drezner: Got it. Okay. And then maybe just an update on how the off-take agreement with Sam’s Club is progressing, how many locations you’re in? And what are you seeing in terms of velocity?

Craig Hurlbert: Yes. Great question. Brian, do you want to start with that one?

Brian Cook: Yes, I can. So thank you for the question, Jeff. So the off-take agreement is going really well. All the indicators and KPIs that we go over with them continue to be positive. So we’re really happy with where that program is to date. We’re currently in one of their DCs, and by the end of Q2 we’ll be in all 3 DCs in the Southeast.

Craig Hurlbert: Yes. So that relationship is progressing very nicely, and a lot more to come there.

Jeff Drezner: Got it. Got it. Thanks. And then just if I can squeeze one more in. Maybe what are some things you’re learning or some of the €“ from the unexpected; anything you’re learning from the integration of the Stack & Flow Technology in the Georgia facility and what maybe has been unexpected?

Craig Hurlbert: Yes. It’s a great question. And maybe, Travis, you can touch on that, kind of on some of the things we’re learning, some of the things that are even better than we had anticipated maybe walk him through that, please?

Travis Joyner: Yes. So I think kind of consistent with my remarks, I think what’s unique about the Georgia facility is it’s an existing greenhouse facility with horizontal technology active. So if you think about how a traditional greenhouse tech works, you drop a seat in the greenhouse and then depending on the crop, 30 to 40 days later, you have a finished product on the other side. And so as we’ve gone through these recipe trials, what we’ve seen is our stack phase outperforms head-to-head very consistently as we’ve activated that section of the facility. I’d say the other thing is that I touched on the fact that year-over-year in our Hamilton facility we’re seeing a very consistent uptick in yield. And so I think the learning’s are very consistent with what we’ve seen in Montana, right out of the box, Stack wins when head-to-head to a greenhouse that’s operating on a sole basis with existing horizontal tech, and we’ve got lots of upside to go get from where we sit today.

Jeff Drezner: Got it. Thanks for taking my question. Appreciate that.

Jeff Sonnek: Thank you so much for your questions.

Operator: Thank you. And ladies and gentlemen, at this time I’d like to end the question-and-answer session and turn the conference back to management for any closing remarks.

Craig Hurlbert: I think management would again like to thank all of the amazing people at Local Bounti and I would just like to thank everyone for joining us this morning. We look forward to speaking to you soon. 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.