Local Bounti Q4 2024 Earnings Call Transcript

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Provided by Quartr
March 31, 2025

There are 6 speakers on the call.

Operator

As a reminder, this conference is being recorded. It's now my pleasure to turn the call over to Jeff Sonick, Investor Relations. Jeff, please go ahead.

Speaker 1

Thank you, and good afternoon. Today's presentation will be hosted by Local Bounty's Executive Chairman, Craig Hurlburt and President, Chief Executive Officer and Chief Financial Officer, Kathleen Balacek. 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. And with that, I'd now like to turn the call over to Craig.

Speaker 1

Craig, please go ahead.

Speaker 2

Thank you, Jeff, and good afternoon, everyone. Today marks an important transition for Local Bounty as I step into the role of Executive Chairman and we welcome Kathy Valasek as our new Chief Executive Officer. After cofounding this company and serving as its CEO through our formative years, I believe this is the right time for this next step in our leadership evolution. Kathy has been instrumental in driving our organization forward as the President and CFO, demonstrating exceptional leadership and strengthening our commercial and financial relationships. Kathy's strategic vision, operational expertise and financial acumen make her the ideal person to lead Local Bounty forward.

Speaker 2

I look forward to continuing my support of the company's strategic initiatives and commercial efforts. I'm incredibly confident that with her guidance, we will continue to innovate, optimize our operations and create meaningful long term value for our stakeholders. We believe we are at a true inflection point for Local Bounty, marked by the transformative financing we secured and the restructuring of our balance sheet. These achievements position us well for the next chapter of growth under Kathy's leadership. Before I continue, I'd like to take a moment to express my sincere gratitude to our exiting Board members, Ed Forrest and Jennifer Carr Smith, for their dedicated service to Local Bounty.

Speaker 2

Particularly, Ed's guidance and expertise were invaluable during our restructuring process, and I'm personally grateful for his contributions during this critical period. What's particularly encouraging is the strong pull we're seeing from our customers. Their increasing desire to purchase more CEA products validates our mission and reinforces the market opportunity ahead of us. We're committed to meeting this growing demand with our sustainable locally grown produce. None of our progress would be possible without the remarkable team we've built here at Local Bounty.

Speaker 2

I'm constantly inspired by the passion and dedication of our employees. Their commitment to our vision has been the driving force behind our achievements. And we truly have a tremendous team that will continue to propel us forward. With that, I'll now turn the call over to Kathy.

Speaker 3

Thank you, Craig, and good afternoon, everyone. I'll begin with our recent financing and debt restructuring announcements, then review our commercial and operational progress and conclude with some brief financial remarks. Let me start by saying that I'm honored and thrilled to step into the role of CEO at this transformative moment for Local Bounty following this past year as President, leading our focus on operational improvement. 2024 was a pivotal year for our company with significant achievements across multiple fronts. We simultaneously opened two new facilities in Washington and Texas, completed our Georgia build out and transitioned Montana to commercial operations.

Speaker 3

We also introduced several new products that our customers love. We have a strong and growing customer base who are ecstatic with our products and with our newly strengthened financial position, we are poised for tremendous success. I truly look forward to working with our team and our board to build on the foundation already established and drive value for all of our stakeholders. Moving on to the transactions we announced today, we're pleased to have secured $27,500,000 of new funding, including $25,000,000 of equity from new and existing investors. We also entered into a term sheet with a commercial finance lender for approximately $2,500,000 in CapEx financing.

Speaker 3

In tandem with this new funding, we completed the restructuring of our existing credit agreement with our lender. The restructuring results in a nearly 40% reduction in our debt through a debt extinguishment of approximately $197,000,000 The restructured agreement allows for more favorable terms including no cash payments until April 2027, an extended maturity date to 02/1935 and a significantly reduced interest rate to approximately 6% today, which I'd add is approximately half of what the rate was previously. The updated agreement also allows for additional non dilutive working capital financing of up to $10,000,000 The significance of this capital transformation cannot be overstated. Not only do we now have enough capital available to get us to positive adjusted EBITDA and more, we now have a right sized balance sheet and capital structure that we believe provides us the flexibility to attract future capital on improved terms to support our growth. We cannot thank our lender enough for working with us on this transformation as well as our investors that supported Local Bounty and provided the equity capital.

Speaker 3

These transactions when combined with our focused efforts to improve operational efficiency results in a significantly strengthened financial foundation allowing us the flexibility to execute the next phase of our growth strategy. It really represents the culmination of our slowdown to speed up approach that we discussed during our third quarter update. After thoughtfully recalibrating our expansion strategy, we've now established the financial foundation necessary to support our path to profitability. With this strengthened position, we can fully implement our optimized product mix with high value specialty greens, while directly supporting our broader strategy of aligning production capabilities with specific customer needs. The patient, deliberate approach we took to address the balance sheet has yielded an improved capital structure that provides us the runway to achieve positive adjusted EBITDA and sustainable profitability over the long run.

Speaker 3

Further, our focus on operational excellence extends to how we approach expansion. With this new capital structure in place and as our expansion strategy evolves, we're taking a strategic approach that balances build versus buy considerations with a renewed focus on advantageous acquisition opportunities. We believe there is significant value in evaluating opportunities that accelerate our market entry and customer reach, while also offering potential capital savings in repurposing existing infrastructure. Acquisitions enable us to rapidly access established distribution networks, leverage existing customer relationships and apply our operational expertise to improve underutilized assets without the extended timelines required of greenfield development. This approach aligns with our disciplined capital allocation philosophy.

Speaker 3

We're prioritizing investments that deliver the fastest path to positive returns. With that, I'll now switch gears and turn to our 2024 commercial and operational progress. Our commitment to operational excellence has translated into strengthened commercial relationships in the fourth quarter, continuing the strong momentum we have experienced throughout the year. We expanded our high value specialty greens distribution in the fourth quarter of twenty twenty four, bringing products like arugula and Power Crisp to several Pacific Northwest retailers. We also expanded our Texas grown arugula offering with Brookshire's in approximately 80 stores in the first quarter and began distributing organic living butter lettuce from California to HEB, strategically leveraging regional production to align with specific customer needs.

Speaker 3

Additionally, we started shipping living basil to an existing large retail customer across approximately 60 stores and secured distribution with several other wholesalers for our Basel products. We further strengthened our distribution network by establishing a new partnership with a prominent Midwest wholesaler and also significantly expanding our relationship with Walmart, now serving 191 stores with premium baby leaf varieties. We also secured an additional commitment to serve 13 Walmart distribution centers with our conventional Living Butter Lettuce with shipments commencing in late April twenty twenty five from both our California and Texas facilities. Building on our grab and go salad kit rollout in 2024, we have evolved this offering to better serve retail partners and consumer trends. This evolution includes the launch of new salad kits in the first quarter of twenty twenty five with additional flavors expected to be introduced in the third quarter as well as the creation of a new product line that meets the needs of today's value oriented consumer.

Speaker 3

These developments reflect our strategy of matching our product assortment to production capabilities earmarked to specific customer needs. Additionally, we believe recent industry developments have reinforced the value proposition of our controlled environment approach. As traditional outdoor agriculture continues to face food safety challenges resulting in costly recalls and supply disruptions, our ability to provide consistently safe high quality produce becomes increasingly important to our retail partners. This advantage combined with our operational improvements and strategic initiatives further strengthens our competitive positioning in the market. Turning briefly to our results, sales for the full year increased 38% to $38,100,000 compared to $27,600,000 in 2023.

Speaker 3

This growth was driven by the increased production from our Georgia facility and the partial year contribution from our new facilities in Texas and Washington, which began shipping products in the second quarter of twenty twenty four. However, our fourth quarter results fell short of our expectations due to the ongoing product mix recalibration work at our Texas facility. As we discussed during our last call, we made the strategic decision to reconfigure approximately three acres of our six acre Texas facility to align with evolving customer preferences, specifically focusing on specialty products such as arugula and power crisps. This reconfiguration transforms space originally designed for head lettuce production into a flexible growing environment capable of producing both head lettuce and cut products based on customer demands. While this purposeful design approach temporarily impacted the full utilization of the facility in the second half of twenty twenty four and first quarter of twenty twenty five, it underscores our commitment to adaptability and customer centric operations.

Speaker 3

Adjusted gross margin for the full year was consistent with the prior year at approximately 27%, excluding depreciation and stock based comp. This reflects the continued production ramp up at our new Texas and Washington facilities as well as increased production at our Georgia facilities. More specifically, our fourth quarter adjusted gross margin which improved 200 basis points year over year was impacted by increased labor costs associated with the Texas and Washington production ramp ups. We continue to expect that over time, our adjusted gross margin will increase as a percentage of sales as a result of the continued scaling of the business and ongoing efforts to optimize our production costs. Now for some comments on our outlook.

Speaker 3

For the first quarter specifically, we anticipate sales to be approximately $11,500,000 which continues to reflect the ongoing work on the three acres of our Texas facility. With the final stages of this work nearing completion, we expect to begin commercial production across all six acres in the second quarter, which will drive a sequential revenue lift beginning in Q2 and carrying through the back half of the year. This revenue growth will be further supported by the installation of our purpose built automated harvesting equipment by early Q3 twenty twenty five, which embodies our commitment to operational efficiency and will significantly improve margins. As such, we now anticipate achieving positive adjusted EBITDA in the third quarter when we will be able to showcase the full potential of our optimized product mix and maximize efficiency of our operations across all facilities. I want to emphasize that with the new capital infusion and debt restructuring, our top priority as an organization is reaching positive adjusted EBITDA and we are centered around that goal at all levels of the company.

Speaker 3

This focus permeates every operational decision we make and to that end in the first quarter of twenty twenty five, we reduced annualized expenses by another $3,000,000 This is on top of all the reductions we have realized since the fourth quarter of twenty twenty three. We continue to further advance efficiencies throughout our operations, driving us closer to sustainable profitability. We believe our strengthened balance sheet, expanded product mix, growing customer relationships and commitment to operational excellence position us well to capture the increasing market demand for fresh, sustainable produce as we progress towards profitability. In closing, I want to recognize our team's efforts and also thank our customers who continue to help us deliver on our mission of bringing locally grown produce to more consumers. We remain extremely focused on our path to positive adjusted EBITDA and look forward to demonstrating progress in the first quarter.

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

Certainly. We'll now be conducting a question and answer session. Our first question is coming from Kristen Owen from Oppenheimer. Your line is now live.

Speaker 4

Hey, guys. This is Colin filling in for Kristen this afternoon. So can you talk a little bit about the changes you made in your Georgia and Texas production and how it's impacting overall unit economics? And then I have a quick follow-up around price and mix.

Speaker 3

Yes, sure. Hey, Colin, how are you? Good to hear your voice.

Speaker 4

I got you.

Speaker 3

So I don't yes, we've not really changed what we're doing in Georgia. It's primarily Texas, where half of the facility is shipped primarily to Sam's, right? It's cut product and that's under our long term offtake agreement with them. And then the second three acres in that facility, it's six acres in total. We are basically converting it, so it can do both living head products and also cut product.

Speaker 3

And basically the cut product, we talked about in our earnings release that, I mean, we're selling it obviously already and also in April, we'll start shipping that product to Walmart, but we also have quite a bit of demand for cut product, including arugula, etcetera, out of that side of the facility.

Speaker 4

And I guess, how much pricing power do you have right now? And how should we think about volume benefiting price and mix for you guys going forward?

Speaker 3

So pricing power, for us, it's primarily either retail or club. And what I would say in terms of our ability to negotiate pricing is that as our customers become more and more familiar with our products, it gives us more leverage to negotiate better pricing. In fact, with one of our retailers, we implemented a price increase that will go into effect in April.

Speaker 4

Okay. And just the last one for me is just the relationship with Walmart and getting shelf space with some of these larger retailers. Can you talk about the dynamics with industry really getting its footing in a little bit more substantial way with the balance sheet restructuring and how you think that will impact your ability to drive sales and shelf space with some of these customers?

Speaker 2

Yes. Hey, Colin.

Speaker 3

Yes, go ahead, Craig.

Speaker 2

Kathy, maybe I can take that one real quick and you can jump in. Colin, how are you doing? Good to hear your voice. I think what we're seeing from the major retailers is a definite interest in more and more and more CEA products. They're seeing the benefits from it and their customers are seeing the benefits from it.

Speaker 2

The challenge that they've had is each of them have to some degree or another taken on certain relationships that have to some degree or another left them unsatisfied. And I think what we've been telling them is we're here for the long haul. And so I think their desirous of finding a partner that they know they can count on and secure their supply chain accordingly. And I think that wind is blowing in the sale of the CEA industry at large. But the industry, as you know, has wildly kind of underperformed and has left many of these retailers wanting for something they can't have.

Speaker 2

So today, our announcing this restructuring really puts local bounty in very, what I'll call, rare air as it relates to other CEA providers. And I think it only really helps is going to help us solidify even further our relationships with all of our customers.

Speaker 4

That's super helpful guys. I'll hop back in queue. Appreciate it.

Speaker 3

Thanks, Collyn. Thanks, Collyn.

Operator

Thank you. The next question is coming from Ben Klievey from Lake Street Capital Markets. Your line is now live.

Speaker 5

All right. Thanks for taking my questions and congratulations to both of you personally on the Movie Chairman and CEO. First question on the Georgia facility, maybe most specifically, because it sounds like that's the location that's had the most kind of consistent utilization relative to its intended footprint at first. Can you talk about the variable cost structure of maybe that facility specifically and the kind of major buckets of variable costs be it utilities, labor, seed and fertilizer inputs. How are those variable costs meeting your expectations now that that facility is up and running?

Speaker 3

Yes. Thanks, Ben, for the question. Great question. So what we're seeing, especially in the Georgia facility, because it is a facility that's been up and running the longest, is that we are absolutely able to reduce seed costs and also primarily, I would say, labor. Our in terms of our seed costs, our innovation team is constantly focused on reducing seed costs, but also collectively our GM and our Head of Operations is dialing in the labor costs significantly.

Speaker 3

So we were seeing that actually across all of the facilities, but even more so I would say in Georgia because again it's the one that's been up and running the longest.

Speaker 5

Got it. Thanks, Kathy. And then on your expansion update, did you mention your prior initiative to expand into the Midwest at all on this call and I missed it? If not, can you give us an update there? Has that been scrapped in lieu of all these various ongoing initiatives or is that still an intention of yours?

Speaker 3

No, it has absolutely not been scrapped at all and it's definitely an intention of ours along with the expansions of the existing facilities. In fact, we are probably having meetings every other day of the week with our retailers about the Midwest facility. And we're just again, what we're trying to do is listen and listen hard to each of the retailers and what they want because each of them want different products, different SKUs, and we want to be sure that we nail the design of the building before we break ground.

Speaker 5

Got it. And then that leads in my last question, which is this, the ongoing challenges throughout the industry, both from the greenhouse and vertical side. As you look at the build versus buy dynamic, do you have any kind of bias for buying a modern but underperforming greenhouse versus a vertical farm and then second greenhouse on top of that? Is there one or the other that you would particularly find appropriate or does it all just really depends?

Speaker 3

Yes, sure. So, I we've looked at many, many, many vertical standalone farms and have passed on them, right? We definitely very easily can consider existing greenhouses that are relatively new that we can acquire, start selling out of them immediately and then implement our the stack phase to the facility. In fact, that's exactly what we did with Georgia, right? We built the first three acres, started selling out of it, built the second three acres, selling out of the full six acres, and then we implemented the stack and flow, or the stack to the greenhouse and that increased productivity by like 40%, thirty % to 40%.

Speaker 3

So that's really if we buy an existing greenhouse facility, that's what we would do.

Speaker 5

Got it. Okay. Very good. Well, congratulations, especially on the capital structure improvements. Thanks for taking my questions and

Speaker 4

I'll get back to you.

Speaker 3

Okay. Thank you.

Speaker 2

Thanks, Ben.

Operator

Thank you. We've reached the end of our question and answer session. I'd like to turn the floor back over for any further or closing comments.

Speaker 3

Well, Craig and I would love to thank everyone for joining us today and we look forward to updating you on our progress as we further scale and grow Local Bounding's business in the coming quarters. Thank you.

Operator

Thank you. That does conclude today's teleconference and webcast. You may disconnect your lines at this time and have a wonderful day. We thank you for your participation today.

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