Cimpress Q1 2023 Earnings Call Transcript

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May 10, 2023

There are 10 speakers on the call.

Operator

Good morning, and welcome to the Local Bounty's First Quarter 2023 Earnings Conference Call. All participants will be in a listen only mode. After today's presentation, there will be an opportunity to ask questions. Please note, today's event is being recorded. At this time, I'd like to turn the conference over to Jeff Sonnack, Investor Relations at ICR.

Operator

Please go ahead.

Speaker 1

Thank you and good morning. Today's presentation will be hosted by Local Bounty's Co CEOs, Craig Hurlburt and Travis Joyner President, Brian Cook 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 today. 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 Krellberg, Co CEO. Craig?

Speaker 2

Thank you, Jeff, and good morning, everyone. We started 2023 on a strong note with the Q1 performance that was consistent with our plan. As we move into the 2nd quarter, Our growing operations are progressing nicely, most recently with the completion of our Georgia 6 acre greenhouse facility in April And the advancement of our new facilities in Texas and Washington. But perhaps most importantly, we put the financial resources in place to support our business for the long term. This was no small feat given the current economic environment.

Speaker 2

As we communicated on our last earnings call, we expanded our credit facilities with Cargill by up to 110,000,000 We're simultaneously relieving cash needs to fund our operations. Just last week, We built upon that support with the closing of a $35,000,000 sale leaseback transaction. This cash combined with the Cash available from our Cargill amendment provides us with approximately $58,000,000 of accessible cash to run our operations and scale up our business with the intent to reach breakeven adjusted EBITDA by the end of 2024 or early 2025. Our entire team continues to push our national platform ahead Into the future, constantly learning from our own trials and the mistakes of others to become the most capital efficient CEA platform in the industry. Travis will speak to some of the operational gains that we are realizing With our Stack and Flow technology in Georgia today and also speak to some additional productivity levers that we will be implementing in the future.

Speaker 2

These are extremely exciting advancements, which demonstrate our unique ability To squeeze the most out of our assets, to maximize revenue and cash flow, while delivering long lasting, delicious And sustainably grown products to over 10,000 locations nationwide. Our Stack and Flow Technology 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 expansions, the inherent flexibility of our approach also affords us other opportunities to achieve greater scale quickly through strategic acquisitions. 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 to the continued gains we are making with our Stack and 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 progress on our various construction projects before our CFO, Kathy, concludes with her financial review And financing update.

Speaker 2

I am so grateful to work with such a committed and talented team Here at Local Bounty. Our success is a direct result of their collective efforts and I'm honored to help lead this business on behalf of our employees and our stakeholders. With that, I'll pass it over to my friend, Travis.

Speaker 3

As Craig noted, maximizing our Stack and Flow technology is foundational to our strategy and will demonstrate the economic advantages of our CEA approach And help us achieve our long term financial goals. Stack and Flow is immensely productive and our relentless focus Optimizing the technology continues to deliver impactful results that will cascade through our facility network. Today, our STACK and FLOW enabled production at our Georgia facility, which at this stage is limited to a single STACK zone, is online and achieving trial production yields 40% to 70% higher than the rest of the greenhouse. As we complete the full stack integration in Georgia, Yields will increase over time as we solve to optimize facility output. Our successful integration of STACK with the dynamically index Gutter system in the Georgia greenhouse will drive enhanced yields with significant automation and labor savings compared to our first facility in Montana.

Speaker 3

At scale, we believe that these enhancements allow us to outcompete the best greenhouse growers by approximately 50% and the average greenhouse grower by 75% to 100%. Our production statistics are Proof that Stack and Flow generate 1.5 to 2 times the yield of traditional greenhouse growing methods. But we aren't stopping there. While we feel great about the productivity enhancements within the greenhouse, we have similar initiatives in place For our vertical stack production, through additional optimization of the vertical growing environment, we see an ability to increase output at the early stage of our system By another 20% beyond what we are currently achieving. This is of critical importance for our business and is foundational to our Not only do we realize the operational benefits of the higher rates of production on our fixed cost base, But these same gains create direct proportionate savings on future capital expenditures.

Speaker 3

This relationship is highly advantageous and demonstrates our rigorous approach. We do the math on every decision, including the vetting and implementation of technology to improve Unit Economics. I'll pass it over to Brian for his remarks.

Speaker 4

Thank you, Travis. In terms of our scale up, Our workflows are focused on completing projects that generate near term returns. With that in mind, we are working on completing our Georgia build out, finishing our Texas Facility in the Q4 of this year and our Washington facility early in the Q1 of 2024. With respect to Georgia, Construction of Phase 1B was completed and seating began in April. As a reminder, Phase 1A and 1B reflects The site's completed 6 acre automated greenhouse footprint.

Speaker 4

The completion of the 6 acres will effectively drive distribution of local bounty products Across the Southeast by the end of Q2 through multiple selling channels. While we have a single stack zone on for a vertical nursery operating within the It is largely a horizontal greenhouse at the moment. That will all change once we integrate the rest of the complementary stack zones That comprise Phase 1C. With the additional capacity brought on with the STACK technology, we will have the ability to open up our product New offerings, strengthening our position as the premier partner in the CEA space. We continue to expect this work will be completed and online early in Q4 of 2023, allowing local bounties to deepen our roots in the Southeast.

Speaker 4

Our new 6 acre facility in Texas is advancing nicely with recent completion of the pad and foundation. The similar design of this Facility to that of Georgia will allow for synergistic operations and management of the 2 facilities. As mentioned, Texas will support production of our packaged leafy green varieties as well as locally grown living lettuces and fortify our national distribution network Localized Facilities Coast TO Coast Across the Southern U. S. We continue to expect operations at Texas to commence in the 4th quarter.

Speaker 4

The pad and foundation work are also complete at our Pasco facility. True to Local Bounty's mission to deliver superior unit economics, The facility will be comprised of 3 acres of greenhouse that will be supported by multiple STAG zones. The location will help bolster the distribution capabilities in the Pacific Northwest and is expected to commence operations in the Q1 2024, Which continues to reflect our strategy of staggering construction to accommodate the commissioning of our Texas facility in the Q4 of 2023. Commercially, I'm excited to see a 13% increased velocity improvement in our current portfolio from 2022 levels As local bounty continues to resonate with consumers over quality and freshness. Our mature regions continue to grow and timing Scale velocities in new markets has shortened with successful market strategies.

Speaker 4

On that note, we are thrilled to confirm we have started shipping to 2 new distribution centers recently from our Georgia facility with 2 additional Sam's Club distribution centers set to come online by the end of the second quarter, As mentioned on our last earnings call, these are great wins for Local Bounty and reflect our increasing scale and ability to service large retail Now I'll turn the call over to Kathy for her review of the financials.

Speaker 5

Thank you, Brian. I'll cover our first Quarter results and provide a review of our recent financing activities. 1st quarter 2023 sales were $6,700,000 as compared to $300,000 in the prior year period. Our first quarter results largely reflect production from our California facility And to a lesser extent, our Montana and Georgia Phase 1A facilities. As previously discussed, We expect improved revenue run rates in 2nd quarter from Georgia with the recent completion of Georgia Phase 1B's Additional 3 acres of growing space.

Speaker 5

With this work now complete, we are beginning to fulfill demand and make preparations So the 4 additional distribution centers that will fold into our network during Q2. And of course later in the year, Our Phase 1C will be complete and come online further increasing the revenue out of that facility. Q1 2023 adjusted gross margin, Excluding depreciation, stock based comp and other non recurring items was approximately 33%. Adjusted gross margin was impacted by persistent heavy rains, which shut down roads at our California facilities and caused temporary And delivery interruption. We also saw reduced customer demand in the Western markets we served as customers made fewer shopping trips during Time due to the inclement weather.

Speaker 5

1st quarter 2023 net loss was $23,500,000 as compared to a net loss of 25 $8,000,000 in the prior year period and includes $6,000,000 in stock based comp, dollars 4,300,000 in interest expense, $3,500,000 of depreciation and amortization $1,700,000 of business combination and integration costs and $700,000 of increased utility costs related to inclement weather. Adjusting for these and other discrete items, adjusted EBITDA loss was 7 point $4,000,000 as compared to adjusted EBITDA loss of $8,500,000 in the prior year period. From a capital structure perspective, We ended the Q1 March 31, 2023 with cash and cash equivalents of $7,500,000 However, obviously, this doesn't reflect the incremental financing transactions that we put in place, which provided approximately Our agreement with Cargill to expand our existing credit facility by up to $110,000,000 to a total of up to $280,000,000 This expansion provides capital to fund construction at our facilities in Georgia, Texas and Washington. Just last week, we closed on the 2nd component of the financing via a sale leaseback of our 2 facilities located in California for 35,000,000 This cash combined with the cash available from our Cargill amendment provides us with approximately $58,000,000 of available Accessible cash to support our operations.

Speaker 5

With this cash in place and access to construction financing via our agreement with Cargill, Our focus is shifting to optimizing our capital structure, the results of which would reflect our efforts to lower our total cost of capital. We may pursue additional sale leasebacks for our other facilities in addition to utilizing approximately $90,000,000 of debt funding from a licensed USDA to reduce our use of construction financing and replace it with lower cost debt. I'd note that we added $10,000,000 from this funding source as Compared to our last update with you, we anticipate closing on the first $35,000,000 of this funding in the second quarter With the remaining $55,000,000 closing to be completed at a future date. Naturally, we are very excited about these developments. As of March 31, 2023, we had approximately 100 and We have a fully diluted share count of approximately 197,400,000 shares.

Speaker 5

With respect to our outlook, we are reiterating full year 2023 revenue guidance of between $34,000,000 $40,000,000 representing growth of at least 74% as compared to the end of 2022. In terms of our quarterly cadence, as I mentioned, We expect revenues to build sequentially through the balance of the year as our Georgia production stepped up with the completion of Phase 1B in April And the 4 additional distribution centers we are beginning to serve this quarter. Following this, the next lever will be the impact of STACK Phase 1C's completion in the 4th quarter, which will increase production by 40%. This is expected to have a commensurate Positive influence in our adjusted EBITDA as well, which should gradually improve through the balance of the year, building from the low point we established in the first Quarter we reported today. Once again, we believe we have line of sight to positive adjusted EBITDA.

Speaker 5

And finally, I'd also note that the impact of any potential acquisitions as part of our build and or Bright 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.

Operator

Thank Our first question comes from the line of Colin Rusch with Oppenheimer. Please proceed with your question.

Speaker 6

Thanks so much guys. As you get prepared for Phase 1C Later this year in Georgia, can you talk about how mature the conversations are with your customers around the products and your ability to kind of hone the Growing process for those products right now and when you start to ramp.

Speaker 2

Yes. Hey, good morning, Collin. Brian, do you want to maybe tackle that question for Collin?

Speaker 4

Yes, definitely. Hi, Collin. We're actually really excited about the extra Availability coming online. We do have a lot of demand that has been kind of put at bay as we continue to ramp up The construction 1A, 1B, 1C coming on and then just the full on commissioning of the product. So, we're really excited about it.

Speaker 4

We're having a lot of great conversations, and we do have more demand than we have availability at this time.

Speaker 6

Okay. I'll take the rest of that offline. Just Kathy, on the sale leaseback and the USDA loan, Obviously, there's a handful of puts and takes. Can you talk us through your decision making process and how you're going to look at what's the optimal source of capital for the company, Well, source of capital for the company with those facilities, whether you look at a sale leaseback or one of those loans.

Speaker 5

Yes, sure. So with the advent of the restructure of the Cargill agreement, it's fantastic in the sense that they are Allowing other capital providers to come into the cap stack with the goal of long term, right, reducing our cost of capital. Obviously, The USDA financing, a longer term, a much lower interest rate is fantastic, But also same with sale leaseback, much lower cost of capital, but it also brings cash onto our balance sheet. As we said, right, We recently brought about $58,000,000 onto our balance sheet, which we have for the full use of operations, right, For the coming quarters, which is fantastic. But again, the lowest cost of capital is USDA financing and also sale leasebacks, Both of which we are considering for our current facilities, but also as we look to the future for The facilities that we'll be planning to build in the Northeast and other locations throughout the country.

Speaker 6

Thanks. And then the last one is Really around the acquisition pipeline. Obviously, with the demonstration of the efficiency of the technology, Can you talk about inbounds that you're getting from folks that maybe want to partner with you and the flexibility or Creativity that you guys might be able to approach some of those deals. You guys mentioned it earlier in the call. Just want to get a sense of how we might think about the cadence Of that sort of activity.

Speaker 2

Yes. Hey, Collin. I think It's typically directly tied to their own capital situation. And so the timing of these It's varied a little bit, but the consistency of what's being asked for and what's being looked at is there. I think we said it in our comments, our technology gives us the ability to Bring on different types of technologies to help us do multiple things, one which would be geography, the other would be talent, Etcetera.

Speaker 2

So, we're taking these on. We have a team of people that are able to quickly evaluate What each specific opportunity could mean to us, we have a robust way of looking at these. And I would just say, It's a very real possibility. It's something we're looking at as evidenced by obviously what we did with Pete's And something we're not going to shy away from, but it's got to be the right opportunity for us and for our shareholders, obviously.

Speaker 6

Okay. Thanks guys. I appreciate it.

Speaker 2

Thank you, Colin. Appreciate it.

Operator

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

Speaker 2

All right.

Speaker 7

Thanks for taking my questions. First one on the Announcement today that you guys expect capital to be sufficient to get you to EBITDA breakeven. Can you clarify is that expectation Around production solely from the locations that we know about of California, Georgia, Texas, Washington, or do you include Expanded production beyond those locations either organically or inorganically to get you to EBITDA breakeven?

Speaker 2

Kathy, you want to take that one?

Speaker 5

Yes, sure. It's thanks, Ben. Good morning. It's with the existing planned facilities.

Speaker 7

Excellent. And then I guess one clarifying question on that. Does that include integration of the Stack Phases into California Or not.

Speaker 5

It does not.

Speaker 7

Okay, great. Thank you. And then one other one for me, around the adjusted gross margin, the Line item of a utility price spike, can you elaborate a bit on what this is and what is being reported a couple of quarters in a row, is there any concern of kind of a more permanent increase in utility costs From certain locations or do we really think this is the spike is one time in nature just over a couple of quarters?

Speaker 5

I'll go ahead and take that one. It is just we saw it in Q4 and in Q1 and it's already way back down To even prior, more like where we were at Q3. So we definitely feel it was a one time hit. And in fact, we might even get a credit back from

Speaker 7

Okay. Okay, very helpful. Very good. Well, plenty more to talk about, but I'll leave it there. Thanks for taking my questions and I'll get back in line.

Operator

Okay.

Speaker 5

Thanks, Ben.

Speaker 2

Thank you, Ben.

Operator

Thank you. Our next question comes from the line of Chris Barnes with Deutsche Bank. Please proceed with your question.

Speaker 8

Hi, good morning. I guess I'll just pick up where Ben left off on the gross margin. It contracted meaningfully from what you earned in the 4th quarter. And I know you highlighted the heavy rains causing production and delivery interruptions and reduced demand. But is there any way to Parse out like what your gross margins might have been without these one time items.

Speaker 8

I'm just trying to get a sense for how We should think about gross margin from here over the balance of the year and into the future just as we try to marry that with the expectation Breakeven EBITDA by like late in 'twenty four, early 'twenty five. Thanks.

Speaker 2

Yes. Hey, Kathy, I'll take that one.

Speaker 5

Yes, sure. Thanks for the question. And it's such an important one, right? But it is We do feel that we will be back to between 3540 consistently each quarter. We had A lot of one off things that happened in the California, but what will happen, you'll see as we continue to scale with the other facilities, The risk in that one facility that we saw in Q1 is diminished.

Speaker 5

So if you take away the one times for California, we would have been at 38% for the quarter.

Speaker 8

Got it. That's helpful. And then second, I just wanted to Ask for an update on the consumer reception you've seen from your Heat and Eat meal kit products that you launched earlier this year. Like how has demand performed relative to your expectations? And like what are you seeing in terms of repeat?

Speaker 8

And like have you And these products into other Sprouts stores or even into other retail banners or is it still too early for that? Thanks.

Speaker 2

Thanks, Chris. Brian, you want to take that one?

Speaker 4

Yes. Thanks, Chris. So we're actually currently looking at A package redesign right now on the heat and heat items. When we did our initial testing, they went and held Well through the cycle, but as they've kind of gotten to the stores and our merchandise within Kind of regular retail systems, they weren't lasting as long as we had hoped. And so we're actually taking Step back on the heat and eat items specifically to take a look at the packaging that we have it in now And looking to re launch it in the near future.

Speaker 8

Okay, great. That's very helpful. Pass it on. Thanks.

Speaker 2

Thank you, Chris.

Operator

Thank you. Our next question comes from the line of Brian Wright with Roth MKM, please proceed with your question.

Speaker 9

Thanks. Good morning. Just wanted a question about Kind of future facility costs, kind of given commodity pricing has started coming in, in this year and just kind of how to think about that Kind of going forward, is that something that's a potential longer term benefit if commodities kind of keep going what They've been doing in the past 6 months.

Speaker 2

Good morning, Brian. Thank you. Kathy, Brian, do you 2 want to maybe tackle that question? It's a good one.

Speaker 5

Yes, sure. So In terms of facility build, I mean, we're on budget for the facilities that we have coming online in 'twenty three In 2024 and we're not seeing frankly, we're just not seeing a lot of impact one way or the other. But that's Those are my sentiments. Brian, do you have anything to add?

Speaker 4

No, I don't have anything to add. I think that's the proper way of what we're seeing out there

Speaker 9

Okay. And then just is there you quantified the incremental On that weather impact on the gross margin in California in the quarter, but you did kind of You know, indicate that there was an impact on sales as well. Is there any way to kind of

Speaker 5

I don't know if I can actually well, go ahead. Brian, do you want to go for it?

Speaker 4

Yes. I mean, I think just from an overall demand perspective, everything Has brought has leveled back up. We had seen some continued operational Leverage that we had to update in April as part of this to kind of get And get demand or our supply back up. But as far as the demand looks, everything is back on track. Customers are putting in full orders and actually increasing to get volumes back to what they to traditional Supply numbers or what they usually have in stock.

Speaker 5

Yes. And I'll just add to that. I mean, just even being a consumer. I've lived in Northern California for 25 years and this Q1 of 2023, the level of rains were so strong and so prolonged. I've just never Experienced anything like it in the years that I've been here.

Speaker 5

And it was it rained, Frankly, like a Northeast heavy rain for days and days and days straight on. And it was just a complete anomaly. And what Drove was even myself personally, my family, we didn't want to leave the house because the rains were so Bad that it was actually dangerous to a certain degree to actually be out on the streets. I mean, I'll sort of say Maybe I shouldn't say this, but like even Kevin Costner announced that he couldn't make it to the award ceremony because he couldn't leave his house because the roads were shut down. It just was a complete anomaly and folks just weren't shopping as much because they weren't leaving their house.

Speaker 9

Okay, great. And then lastly, is there a way to be because like now that we've gotten in Georgia significant Presence in the distribution centers. How do we think about like metrics going forward as far as Penetration within like how many stores from those are being served as store penetration at the stores. Is there some sort of metric we can Kind of think about kind of going forward to maybe not exactly model, but give us some indications as far as No share gains within those DCs?

Speaker 2

Yes. Thanks, Brian. Good question. Brian Cook, you may want to tackle that one.

Speaker 4

Yes, yes, I could jump in on that one. So the big thing right now, Brian, around The Georgia penetration is that we are 1st and foremost taking care of our contractual obligations with the Sam's Club, which As you know, has now kind of gone out is the full Southeast. We do have customers outside of that as well. So we haven't put an official like, okay, here's how many doors we're in officially across The Southeast, but I could we could start looking at it, and, you kind of report that out as from A total door count for the Southeast coming out of that Georgia facility moving forward, but we haven't really looked at it too much yet because we've really been focusing On getting all the Sam's Club DCs onboarded, up until this the end of the Q2, And then we'll be moving on with 1B now coming online, which again, we said we're we ceded, right? And so we're not going to have product Availability till late May for that product.

Speaker 4

And so that what that will do is give us the availability to go out into multiple more Doors that we have kind of waiting in the wings here that where people are excited to get our product in the stores.

Speaker 9

Great. Thank you so much and congrats on the quarter.

Speaker 2

Thank you, Brian.

Speaker 4

Thanks, Brian.

Operator

Thank you. Ladies and gentlemen, there are no further questions. This concludes our Q and A session. I'll turn the floor back to Mr. Hurlburt for any final comments.

Speaker 2

Thank you so much. I would just like to thank everybody for joining us this morning, and we Sincerely look forward to speaking with you all again. In the meantime, we're back at it. Everybody have a great day. Thank you.

Operator

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

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Cimpress Q1 2023
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