Local Bounti Corporation/DE Q1 FY2022 Earnings Call

Good afternoon and welcome to Local Bounti's First Quarter 2022 Earnings Conference Call. All participants will be in listen-only mode. After today's presentation, there will be an opportunity to ask a question. Please also note today's event is being recorded. At this time, I'd like to turn the conference over to Jeff Sonnek, Investor Relations for ICR. Please go ahead.

Thank you, and good afternoon. Today's presentation will be hosted by Local Bounti's Co-CEOs, Craig M. 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 refer to certain non-GAAP financial measures today, please refer to the press release which can be found on the Investor Relations website, investors.localBounti.com for reconciliations of non-GAAP financial measures to their most directly comparable GAAP measures. With that, I'd now like to turn the call over to Craig M. Hurlbert, co-CEO.

Thank you, Jeff, and good afternoon, everyone. Since we last spoke in mid-March, we closed our acquisition of Pete's and have been busy integrating the team into our business. For those new to the Local Bounti story, we acquired Pete's in early April. This was a very important transformational and accretive transaction for us, from a distribution perspective. Pete's brings a national footprint and existing relationships with retailers covering some 10,000 doors. The opportunity this creates for our entire business cannot be overstated. The relationships with customers and the demand that they are generating is informing our build-out strategy, and we expect it to accelerate Local Bounti's brand-building and market access on a national level. In terms of operations, the transaction enhanced our capabilities and de-risked our near-term execution. Our ability to tap into Pete's wealth of knowledge and experience in growing techniques is invaluable as we embark on our own continuous improvement of Local Bounti's growing systems and contemplate new designs enabled by our patent-pending Stack and Flow Technology. The financial considerations are significant as well—the transaction brought with it a degree of scale that we otherwise would have had to build from scratch, consuming precious time, with our Georgia facility nearing completion and expected to come online in July. We will have three commercial facilities in production, not including our Montana facility, which was temporarily refocused on research and development activities in support of Pete's acquisition and other commercial facility plans. As we look ahead to the balance of the year, we expect commercial production at the Montana facility to ramp up significantly in support of our pent-up customer demand in the Pacific Northwest. Upon the Georgia facility reaching full production, we expect to be generating run-rate sales of at least $30 million on an annualized basis, producing positive gross margins and driving hard towards our goal of reaching break-even cash flow in the near term. Financial leadership and capital efficiency remain at the forefront of the Local Bounti strategy. With that, I'll pass it over to Brian.

Thanks, Craig. Over the past month, we have been on the road meeting with customers, sharing the wonderful benefits of our combined enterprise. Most importantly, we have been reinforcing our commitment to quality and service across our network. Our conversations have been very productive, reinforcing our build-out strategy so that we could be one of the key players to meet the demand in the marketplace for high-quality, controlled environment agricultural produce. We expect to create immense efficiency for our operations as we execute the commissioning of the Georgia facility and begin the ramp-up of production. We have been working hard to put the staffing in place to ensure a smooth ramp-up and are excited to get to work. Our customer interactions are enhancing our visibility for the build-out of our next facility. While we are still in the planning stages, we have several key regions with strong customer overlap and demonstrated demand for our brands and products. As soon as we can, we look forward to sharing the results of this work and our plans for the next phase of growth. Regarding our Greenfield build-out in Pasco, Washington, I’m pleased to share that construction activities have recommenced after a brief hiatus. As we noted during our last conference call, we have been working on a design to integrate learning from both Local Bounti and Pete's operations to ensure that facility is optimized in every sense, whether that be operational design or CapEx. Again, as Travis loves to say, we do the math and this reinforces our ongoing quest for capital efficiency and maximizing returns on capital. We continue to see significant value creation opportunities with our united front. Pete's growth has been constrained for years, and with Local Bounti's balance sheet and access to public capital markets, our combined organization is energized to put our growth plan into motion. Customer response has been very positive, which is a wonderful endorsement of the trust we've built and the value of both brands and the strategy we will employ to capitalize on the exciting opportunities that lie ahead. I'll pass it back to Craig for his additional remarks.

Capital efficiency continues to be at the forefront of our strategy. We intend to be direct in deploying capital towards revenue-generating activities. This is visible in our buy versus build approach with Pete's, which brought three facilities into our production network, cemented our presence in the West Coast market with its two California locations, and will add enhanced bi-coastal service to customers through the upcoming Georgia facility. The accelerated nature of our footprint growth is evident, but the quality of our team is invaluable, which is an increasingly important element in today's tight labor market. Looking ahead, we expect buy versus build to continue to be a key consideration for us, and we believe we are uniquely able to leverage this strategy on an opportunistic basis given the advantages of our flexible Stack and Flow technology. Stack and Flow provides the ability to unlock 1.5 to 2 times yield improvement compared to a traditional greenhouse operation. This is highly disruptive and differentiated, and why we are excited about opportunities that lie ahead while executing our plan to be the leader in Controlled Environment Agriculture (CEA). Put simply, our technology strategy gives us an advantage to make direct iterative improvements on existing infrastructure in a capital-efficient manner, which we expect will ultimately drive higher returns on investment while minimizing required capital. This was foundational to our rationale for the Pete's transaction and the integration strategy that is underway. We expect to implement Stack and Flow into existing operations with minimal disruption to production levels while continuing to build capacity around the operations to enhance throughput and drive higher unit-level returns. With that, I'll pass the call to Travis for a few additional remarks.

Thanks, Craig. Integrating Stack and Flow with our existing facilities is one of our highest priorities, and testing and optimization of those systems is an area we are keenly focused on at our Montana facility. In fact, we nearly doubled the rate of annual crop turns for our commercial head lettuce since last year, and we've made some exciting advancements in our commercial loose-leaf lettuce as well. As of March 31, 2022, we generated approximately 26 crop turns annually, compared to approximately 17 to 22 turns annually as of December 31, 2021. To put this into context, this performance already exceeds our long-term assumptions previously reported. We've also been hard at work translating our innovations into a robust intellectual property portfolio across process improvements, genetics, computer vision, AI, and controls, which will protect our investment and position the business for long-term growth. I mention all of this as a window into the importance of Stack and Flow to our long-term strategy to drive additional capacity at the lowest possible cost, thereby optimizing our unit-level economics and enabling value creation for our shareholders. We believe there is immense facility capacity that can be improved upon, and we intend to do just that. In summary, the integration of Pete's is progressing nicely. There is an incredible amount of learning happening across the organization, and I am pleased with how our cultures are coming together. We have a fantastic opportunity within the CEA landscape, and we're focused on capitalizing on it quickly. As we move our business ahead in the coming quarters and years, we expect to continue demonstrating wise strategy and sound capital allocation all geared toward establishing a formidable CEA leader with a corresponding financial profile that investors can have confidence in over the long term. Now I'll turn the call to Kathy for her review of the financials.

Thank you, Travis, and good afternoon, everyone. As previously announced, the company closed the acquisition of Pete's on April 4th for $122.5 million, creating a scaled CEA operator with a national distribution footprint that reaches approximately 10,000 retail doors. I'll cover our first-quarter 2022 results briefly, which represent Local Bounti on a standalone basis prior to the transaction, reflecting the performance of our Montana facilities, which were temporarily geared towards innovation and R&D activities while closing the Pete's transaction. As Craig mentioned, we expect commercial production at our facility to ramp up significantly in support of pent-up demand from Pete's customers in the Pacific Northwest. For the first quarter of 2022, sales were $282,000 compared to $57,000 in the prior-year period. Just for your information, Pete's standalone sales for the first quarter were $5.9 million. Local Bounti's gross profit was $48,000, representing a gross margin of 17%. Excluding depreciation, to make an apples-to-apples comparison to our long-term projections during the deep star process, adjusted gross margin was approximately 39%, consistent with the prior-year period. Our results reflect a temporary increase in R&D at our Montana facility associated with the development of additional crops and yield improvements. This is a critical part of our strategy behind the Pete's acquisition and other commercial facility plans, including the pending opening of the new Georgia facility. Looking ahead to the second quarter and beyond, our Montana facility is shifting back towards commercial production, and we expect improved revenue and margin performance at that facility. The net loss was $25.8 million in the first quarter of 2022, including approximately $3.9 million of expenses associated with the Pete's acquisition, as well as $11 million in stock-based compensation, $1.6 million in interest expense, and $0.5 million of depreciation. Adjusting for these and other discrete items, the adjusted EBITDA loss was $8.5 million. We recently filed an 8-K with historical Pete's figures, as well as some pro forma combined company financials for 2020 and 2021, including detail of various adjustments to align Pete's reporting with GAAP, including an adjusted EBITDA reconciliation. I'd like to highlight a couple of select metrics and articulate some influences on those results so you better appreciate what this business is capable of achieving. The gross margin is the key KPI for both Pete's and Local Bounti. Local Bounti has been driving a positive gross margin on our low revenue base, and Pete's 2021 adjusted gross margin was 45%, which aligns with our expectations and should provide a strong base to build from as we implement our margin-enhancing Stack and Flow technology. Additionally, we are just beginning to work through actions to capture the cost synergy opportunity, which we believe could approximate about 10% savings on Local Bounti's existing cost of goods sold from raw materials and packaging in the first full year of operations. We are hard at work to ensure our organizations are aligned to extract these synergies. The other key KPI is adjusted EBITDA margins. The Pete's performance in 2020 and 2021 has been more subdued due to the temporary impacts of COVID-related factors. Over the long-term, in the pre-pandemic era, Pete's consistently generated a 20% adjusted EBITDA margin. From a capital structure perspective, our balance sheet as of March 31, 2022, reflects the standalone Local Bounti business with cash, cash equivalents, and restricted cash of $76.4 million, as previously disclosed. In April, we utilized a combination of $92.5 million in debt through our credit facility and $30 million of equity to finance the acquisition of Pete's. We had 86.5 million shares outstanding as of March 31, 2022, and on a pro forma basis, including the consideration for the Pete's transaction and our warrants and restricted stock units outstanding, we have a fully diluted share count of approximately 115 million shares. As we look ahead to the full year 2022, we are really excited about the scale that Pete's provides our business. We are equally excited to begin implementing our Stack and Flow technology into Pete's facilities over 2022 and 2023. We are reaffirming our 2022 revenue guidance of at least $20 million, which includes three quarters of contribution from Pete's. Additionally, we continue to expect to achieve initial run-rate revenue from the three Pete's facilities of at least $30 million at full production, excluding the expected future positive impact from implementing our Stack and Flow technology across these facilities. We look forward to continuing to update you on our progress as we execute our milestones and identify new opportunities to drive growth in this exciting CEA marketplace. That concludes our prepared remarks, Operator, please open the call for questions.

Thank you. We will now be conducting a question-and-answer session. A confirmation will indicate your line is in the question queue. For participants using speaker equipment, enabling your line to be heard, please pick up your headset before pressing the star key. Please ask one question and a follow-up question, then re-queue for additional questions. One moment, please, while we pause for questions. Thank you. Our first question comes from Colin Rusch with Oppenheimer. Please proceed with your question.

Hi, good afternoon. This is Kristen on for Colin; thank you for taking our questions. I was wondering if we could start first with a little bit of color around the focus of the R&D efforts going on at the Hamilton facility. What specifically are the levers you are looking at to drive those incremental turns and the results that you've shared with us?

Great, Kristen. This is Craig M. Hurlbert. Thanks so much for your question, and give our regards to Colin, please. Travis, why don't you take the first cut of that, please?

Yeah, absolutely. Thanks for the question, Kristen and Colin. Specifically, as it relates to R&D efforts, we're leveraging a combination of enhancements to our core Stack and Flow system and investing in controls, computer vision, and AI. As we anticipated Pete's transaction in the first quarter, we decided to broaden and expand our near-term R&D at Hamilton to address increased specific SKU demand from Pete's customers in California and Georgia. Remember that Pete's is known for their head lettuce, with significant market share, and they have various SKUs. Specifically, we are focused on Pete's living butter lettuce. One of the innovations we aimed for in the first quarter was to apply our Stack and Flow Technology and optimize it to shorten the crop cycle and increase annual turns for our facilities. Through our R&D efforts, we've been able to reduce the crop cycle by seven days, yielding roughly four additional turns annually, bringing us to 17.3 turns per year in total. As Georgia comes online, we'll be scaling down our Hamilton R&D and increasing our commercial production. The main areas of innovation we focus on are core Stack and Flow patents, controls, and increasing the number of recipes.

That's really helpful. Thank you for that, Travis. And as my follow-up, I wanted to ask about the cycle times with customers. You talked about the change in the tone of your conversation with customers since the Pete's acquisition. Your ability to demonstrate favorable unit economics in this space is evident, but I'm wondering how that's affecting the nature of the conversations with customers and any commentary around co-location opportunities? I'll leave it there. Thank you.

Kristen, what a great question, I suppose series of questions. Brian, do you want to take that one, please?

Yes. Thank you for the question, Kristen. When you think of the overall sales life cycle, when a company enters the market, one thing becomes clear quickly: it's about being relational in our market. It generally takes a solid year or more for a new company to sell in any significant numbers within the produce arena. The beauty of this combined effort is that we already had access to 10,000 doors and have built long-standing trusting relationships over new product launches. This really reduces the time-to-market, not just for increasing capacity and current SKUs, but also for adding additional SKUs that are in the pipeline.

Thanks, Brian.

I think that addressed part of your question. Let me know if there's something I missed.

No. That's really helpful. I appreciate the color.

Our next question comes from Chris Barnes with Deutsche Bank. Please proceed with your question.

Hey, good afternoon, and thanks for the question. To start, I appreciate all the insights around the progress on the Georgia facility update, but I was hoping you could comment on the integration of Stack and Flow into the other Pete's facilities in California. Has that process started yet or has much of the time right now been focused on commissioning and ramping up Warner Robbins? Also, could you share any details around the implementation and integration costs for each of the three facilities? Thanks.

Thank you, Chris, appreciate the question. Again, I'll ask Travis to comment on the integration of the Stack and Flow technology in California specifically. Travis?

Yes. As mentioned, Pete's has many doors and numerous successful SKUs. However, those California facilities are primarily focused on their core products, including butter lettuce. Much of the integration and R&D efforts we've dedicated in Montana this year were centered around reducing the crop cycle at the existing Pete's facilities in California and Georgia. The result I highlighted, regarding head lettuce, is applicable to the California facility. Our current goal is to prepare our growth systems to facilitate full technology integration in both California and Georgia so that when we activate those systems, it's plug-and-play.

Got it. That's helpful. As my follow-up, I wanted to dig a little deeper into the $30 million per year run-rate you aim to achieve, excluding Stack and Flow. Do you have a timeline regarding that—do you think you could achieve these goals in 2023, or is that more medium-term? Additionally, could you share what Stack and Flow would add to that because it seems like around you would likely drive substantial growth after implementing Stack and Flow, so any color you could provide would be great. Thanks.

Hey, Chris, this is Craig. That's a great question, and I appreciate your insight. Kathy, I'm going to invite you to chime in on that, and then we can follow up with Brian and Travis.

Sure. The $30 million run-rate represents full production for each of the facilities, excluding Stack and Flow. Stack and Flow will improve yield by 40%, truly significant, but the $30 million run-rate is anticipated to begin in Q1 2023.

In other words, the $30 million run-rate is based on the operation of horizontal assets without the benefit of Stack and Flow. When Stack and Flow is activated in 2023, you will see an incremental bump.

Great, that's very helpful. Thanks, guys.

Thank you, Chris. I appreciate your question.

Our next question comes from Ben Klieve with Lake Street Capital Markets. Please go ahead.

Thanks for taking my questions. First, congratulations on closing the acquisition as quickly as you did. I wish the rest of my coverage could announce the closure of an acquisition so promptly. My first question is regarding the expected revenue contributions from here. With the $20 million revenue guidance for the year and given $6 million of Pete's revenue in the first quarter, it seems not much is anticipated from the Georgia facility when Phase 1-A is complete this summer. Can you discuss Georgia's specific contribution expectations for the back half of this year, please?

Great to hear from you, Ben. Why don't we have a combination of Brian and Kathy provide some insight? Kathy, please start, and Brian, feel free to add.

Great to hear from you, Ben. We are aiming for cautious projections here; we indicate in our release that Phase 1-A of the Georgia facility will be operational in July this year. We anticipate its performance will be strong—simply trying to be conservative with the $20 million figure.

Okay, understood. Fair enough. And then my follow-up to that point is regarding your legacy efforts and the Pasco facility. I'm pleased to hear that construction has resumed, but given that you discussed a redesign of the facility that had paused construction for a bit, I’m curious about current expectations for size and total revenue contributions from the redesigned facility, as well as the expected timeline for its completion.

Great question, Ben. Maybe, Travis, you can start on that one.

Sure. The Pasco facility, as I mentioned, is being redesigned to meet the demand from Pete's customers concerning the SKUs demanded. We've made adjustments to the selection and mix of our growth systems due to this. We’re still refining the design, but I believe we should have a more comprehensive update by next quarter, including estimated timelines and revenue contributions moving forward.

That’s a great answer, Travis, and I think you can look forward to that next quarter.

Okay, we will stay tuned for that. Thank you for taking my questions, and I'll get back in queue.

Thanks, Ben. We appreciate you.

Our next question comes from Brian Wright with ROTH Capital Partners. Please proceed with your question.

Hey, thanks. Good afternoon, and thanks for the questions. I wanted clarification on what consists of Phase 1-A and Phase 1-B, perhaps in terms of square footage. Number one, for each phase, and number two, is it that Phase 1 represents the traditional high-tech greenhouse and that Phase 2 involves Stack and Flow? Or are there multiple dimensions to this? I’d like to understand.

Brian, thanks for the question; I appreciate it. It is multifaceted, and I'll let Brian tackle that.

Hey, Brian. Phase 1-A is 130,000 square feet of production space, and that fits into our channel system. Phase 1-B is an additional 130,000 square feet related to the headhouse work required, completed as part of the original design. Therefore, Phase B serves as an add-on concerning headhouse requirements, and does not require additional square footage.

Okay. Understood. And regarding the $30 million we discussed—when everything is fully ramped up, what is the full capacity revenue of the Georgia facility?

Kathy, do you want to address that? I’m not sure we’re providing that guidance yet, but Kathy, go ahead.

Yes, Brian, thanks for your question, good to hear from you. We have not specified details on the Georgia facility just yet; we're not providing that specificity now. Perhaps we can give an update on that in the next call.

Got it, that's totally understandable. Can you remind me of the California facility sizes for Pete's?

Sure, Brian. The Carpentaria facility is 16 acres, and the Oxnard facility is 13 acres. It's worth noting that the Georgia facility has the same system as a newer retrofit executed in part of our Oxnard facility, which has been producing for about a year and a half now. I don’t want to overstate the comparison; the representation of 3 acres in Georgia is not directly comparable to the 29 acres operating in California.

Okay. Thank you.

Brian, anything else?

That will do it for now.

Thank you, Brian. I appreciate the questions.

This last question comes from Pamela Kaufman with Morgan Stanley. Please proceed with your question.

Hi. Good afternoon. This is Pam. I wanted to touch base on the company's long-term facility expansion plans. Going back to Investor Day, the company initially outlined a facility outlook with projections for around eight operational facilities by 2025, prior to the acquisition of Pete's. With the acquisition of two facilities in California and another operational facility in Georgia soon, what are the current projections for facilities through 2025? Alongside that, could you discuss the strategic priorities considered in determining when to break ground on new facilities and choosing their locations?

Great questions, and thank you for asking. I'll take a start on this and others can elaborate. With the Pete's acquisition, we are now in 10,000 doors, and the conversations we were having have accelerated significantly. Hence, we are really looking at these customer conversations to determine facility locations. There are robust discussions underway regarding optimal placement. While Local Bounti had plans in place prior to Pete's, we will be evolving that plan over time, focusing on our customers. Many are now seeking quality products with guaranteed supply to navigate current supply chain volatility. We are engaged in meaningful discussions and will announce updates on this quarterly as we develop plans.

You articulated that well, Craig. Kathy, do you want to provide specific guidance for 2025?

Yes. What we've communicated publicly indicates that we’re comfortable with the numbers we set forth last year regarding financial metrics. In other words, we are aiming to meet those targets but anticipate achieving them through a different strategy. Right now, as Craig pointed out, we are not solely counting facilities; rather, we are focused on fulfilling customer needs. Additionally, we’re considering build versus buy scenarios.

Apologies for interrupting, please continue.

No problem, thank you. That's insightful. As a follow-up regarding capital allocation, you mentioned assessing return on investment for Greenfield opportunities as well as the retrofitting of Stack and Flow technology. Given your insights, do you see room for more M&A as the company scales, and when might you be ready to consider another transaction?

That’s a great question and very important. You must begin to answer that by understanding the dynamics within the controlled environment agriculture industry, which is very cluttered today—with many smaller players and most being undercapitalized. We’ve discussed that consolidation is inevitable for quite some time, and with our combination with Pete's, we emerge as one of the very few leaders in this space. I anticipate more of these developments will unfold over time. However, we will do the math, assess the geographical placements, and listen to our customers, maintaining our focus on delivering high-quality products. I believe this strategy has positioned us well within the industry. Thus, while I can’t provide a timeline, the possibility remains throughout the pro forma period.

Great. Thank you so much.

Thank you for your question.

Ladies and gentlemen, at this time, I am showing no further questions. I'd like to end the Q&A session and turn the conference call back over to management for closing remarks.

On behalf of all 250 employees at Local Bounti, I want to thank everyone for their time today and your interest in the company. Please reach out directly; we would love to have you visit our facility to see firsthand what we’re doing. I believe that will clarify many questions you may have. Thank you again for your time and attention today. Have a great day.

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