Earnings Call Transcript - LOCL Q1 2025

Operator, Operator

Good morning and welcome to Local Bounti's First Quarter 2025 Earnings Conference Call. All participants will be in a listen-only mode. Please also note today's event is being recorded. At this time, I'd like to turn the call over to Jeff Sonnek, Investor Relations at ICR. Please go ahead.

Jeff Sonnek, Investor Relations

Thank you and good morning. Today's presentation will be hosted by Local Bounti's Executive Chairman, Craig Hurlbert; and President, Chief Executive Officer 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 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. Craig, please go ahead.

Craig Hurlbert, Executive Chairman

Thank you Jeff, and good morning everyone. I want to start by taking a moment to express my sincere gratitude to the entire Local Bounti team. The dedication and commitment I've witnessed across the company has been truly remarkable as we navigate this important phase of our company's journey. We have assembled an exceptional group of people who continue to drive our mission forward with passion and focus. I'm pleased to see the continued validation from our customers whose increasing desire for CEA products reinforces the market opportunity ahead of us. The foundation we've built over these past years has positioned Local Bounti to achieve positive adjusted EBITDA in the near term, and I'm confident that under Kathy's leadership, we'll continue to execute on our strategic vision to create meaningful value for all stakeholders. With that, I'll now turn it over to Kathy.

Kathleen Valiasek, President, CEO, CFO

Thank you Craig, and good morning everyone. First, I completely echo Craig's sentiment and want to acknowledge the incredible dedication and focus of our entire organization. As Craig alluded, our team has fully embraced our mission to reach positive adjusted EBITDA in the third quarter of this year. From operations to sales to finance, everyone is aligned around this critical goal and I couldn't be prouder of the collective effort. To that end, our first quarter progress, including all of our commercial and operational initiatives are converging towards a significant revenue lift in the second half of 2025 and our achievement of this positive adjusted EBITDA milestone we are positioned to reach in Q3. Importantly, the disciplined approach we've taken from product diversification to operational efficiencies to cost management is creating a strong foundation that will support our long-term growth and profitability as we scale our business to meet growing retail demand for our products. Starting with our operational progress, the product mix recalibration work at our Texas facility continues to advance as planned. We are in the final stages of completing this work and expect to begin full commercial production in this section starting this month. As we discussed previously, the purpose-built automated harvesting equipment will be installed early in the third quarter, replacing the temporary harvester we will use this quarter. The new harvester is expected to drive significant operational efficiencies and margin improvement. I'm particularly excited to share that our yields in our Georgia facility have increased by 20% in the first quarter compared to our fourth quarter rates. This improvement is largely attributable to the refinement of our growing system with the stack phase, which has outperformed our internal expectations. Our next step is to implement this program in our Texas and Washington facilities, where we expect to achieve similar yield increases. These yield improvements over our existing performance create an excellent opportunity for our sales team to engage prospective retail partners who are looking for CEA suppliers that can deliver consistent performance, something that truly differentiates us at a time when retailers are increasingly taking interest in CEA products. Regarding our plans to enter the Midwest with a new facility, I'm pleased to report significant advancement in our strategy there. We are actively engaged in promising discussions with multinational and national retailers to include the Midwest region in their sourcing plans. While we're very far along in this process, it's still too early to announce anything definitive. These developing relationships represent important validation of our expansion strategy and our ability to serve retail partners across multiple regions. Turning now to our commercial progress. Building on the incredible momentum from last year in Q1 2025, we expanded our Texas grown Arugula offering with Brookshire's in approximately 80 stores and began distributing Organic Living Butter Lettuce from California to HEB. We also started shipping Living Basil to an existing large retail customer across 60 stores and secured distribution with several other wholesalers for our basil products. Notably, our relationship with Walmart continues to strengthen. In addition to the 191 stores we are already serving with premium baby leaf varieties as of Q4, we've secured an additional commitment to serve 13 Walmart distribution centers with our conventional Living Butter Lettuce, with those shipments having commenced just a couple of weeks ago from both our California and Texas facilities. We've also evolved our Grab-and-Go Salad Kits offerings to better serve retail partners and consumer trends. This includes the launch of new salad kits in Q1 2025 with additional flavors expected to be introduced in Q3 as well as the creation of a new product line that meets the needs of today's value-oriented consumer. We're particularly excited about our upcoming exclusive launch of a new larger approximately 12-ounce family size Caesar salad kit with a large multinational retailer in the Pacific Northwest beginning in the third quarter. We also continue to expand our relationship with a leading meal subscription business that is now seeking additional SKUs from us. These commercial wins demonstrate the strong pull we're seeing from our customers and their increasing desire to purchase more CEA products, validating our mission and reinforcing the long-term market opportunity ahead of us. Turning briefly to our first quarter results. Our first quarter sales were 11.6 million, in line with our expectations and representing a 38% increase compared to the first quarter of 2024 and a 15% sequential increase compared to the fourth quarter of 2024. This growth was driven by increased production and sales from our Georgia, Washington, and Texas facilities partially offset by the ongoing product mix recalibration work at our Texas facility, which has temporarily decreased capacity. Our adjusted gross margin for the first quarter improved approximately 500 basis points versus the prior year and approximately 400 basis points versus the fourth quarter 2024. This improvement is particularly encouraging as it demonstrates that our product mix recalibration work and operational efficiency initiatives are yielding tangible results. 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 costs. Net loss for the quarter was 37.7 million compared to a net loss of 24.1 million in the prior year period, which largely reflects higher interest expense. Our adjusted EBITDA loss for the quarter was 8.8 million compared to 6.9 million in the prior year period and importantly, representing an improvement of $0.5 million from our fourth quarter 2024 loss of 9.3 million. We remain on track to achieve our third quarter target to reach positive adjusted EBITDA driven by the full realization of our ongoing cost reductions, alongside our anticipated revenue lift that we expect to be more fully visible in the third quarter of 2025. To emphasize the cost reduction point, we took out approximately 3 million of annualized G&A expenses in the first quarter and during the second quarter-to-date period, we've actioned another 4 million of annualized expenses across both G&A and cost of goods sold. These initiatives are a direct result of our operational focus, which is resulting in significantly improved consistency across all facets of our growing operations and allowing us to drive those efficiencies through our income statement. Turning to our balance sheet. We ended the quarter with a significantly strengthened financial position with cash and cash equivalents and restricted cash of 28.4 million. That said, I do want to provide some clarity on how our debt restructuring appears on our financial statements. While we eliminated approximately 197 million of debt through our March restructuring, accounting rules require us to maintain the original carrying value of the pre-restructuring debt amount on our balance sheet, with the reduction being recorded as a debt premium that is amortized over the new loan term. You'll see this as a new line item on our first quarter balance sheet. This means that our reported debt balance won't immediately show the reduction, but the economic benefit remains unchanged and will be reflected through lower interest expense over time. This accounting treatment is standard for transactions of this nature and does not impact the fundamental improvement of our capital structure. Now, for some comments on our outlook. For the second quarter, we expect revenue in the range of 12 million to 12.5 million, which reflects the partial impact from our Texas facility transition, which is expected to be complete in the third quarter. Looking at the cadence for the balance of the year, we expect to see a material lift in the second half of 2025 resulting from a convergence of activity, including the aforementioned full quarter contribution from our Texas facility transition and the additional capacity from our Georgia yield improvement. Additionally, new product introductions and expansions with existing customers are anticipated to also support our expectation for sequential growth in the second half of the year. I'd also like to briefly comment on our EBITDA progression from Q4 to Q1 and highlight how we expect to improve on this in Q2. In Q1, we experienced temporary cost increases that we expect will be eliminated in Q2. These included higher utilities associated with weather anomalies and higher G&A expenses, which were impacted by the combination of a higher mix of product donations associated with the better-than-anticipated yield improvements in Georgia, lower capitalization of labor now that the construction projects have been completed, and lastly, higher severance associated with our cost optimization work. These collectively impacted our EBITDA by approximately 900,000 in the first quarter and are not expected to reoccur in the second quarter. These dynamics, combined with our second quarter-to-date cost actions are providing us some tailwind toward our goal of achieving positive adjusted EBITDA in the third quarter of 2025. In conclusion, we're energized by the progress we're making across all areas of our business. Our entire organization is aligned behind our mission to reach positive adjusted EBITDA in the third quarter, and I couldn't be prouder of the collective efforts of our team. With that, please open the call for Q&A.

Operator, Operator

Our first question comes from Kristen Owen with Oppenheimer & Company. Please go ahead with your question.

Kristen Owen, Analyst

Hi, good morning and thank you for taking my question. Congratulations on the nice progress made in the first quarter here. Kathy, you touched on this in some of your final prepared comments here, but I want to double click on sort of what's driving that material lift coming into the back half of the year, you noted Texas transition, the Georgia yield improvement and new products. I want to double click on that Georgia yield improvement. I think you said 20% over fourth quarter. Just help us understand what's changing in the production process? How you're achieving that yield? And then on the commercial side, sort of the velocity of sales and your ability to sort of sell out that incremental yield as you're thinking about that in the back half of the year.

Kathleen Valiasek, President, CEO, CFO

Yes, thank you for your questions, Kristen, and good morning. The 20% yield increase in Georgia stems from an R&D program we developed last year, which we successfully implemented in Georgia, and it has surpassed our expectations. As I mentioned, we will also roll out this program in Texas and Washington in the third quarter, and we anticipate seeing similar yield improvements in those locations. With such a significant yield increase in Georgia, our production will rise as well, but it may take some time for our sales team to place the additional product, which is normal. In the latter half of the year, various factors will influence our operations with all our customers, including the Walmart projects, the Grab-and-Go Salad line, and the expected revenue boost from Montana. These elements, along with the yield improvements, will affect our overall growth. I hope that's helpful.

Kristen Owen, Analyst

That's great. The follow-up question that I have is a little bit more modeling-oriented. Just given some of the nuance around the restructuring that you announced last quarter. You mentioned the balance sheet implications. I'm trying to think about the income statement implications, in particular, how to think about the interest expense that you're reporting? What of that is cash versus noncash? And how that will change with this restructuring? Just a little bit of nuance on the model there would be helpful.

Kathleen Valiasek, President, CEO, CFO

Yes, of course. In terms of GAAP accounting, we expected to recognize the entire gain from the debt write-off of 197 million, but we will actually be taking it over 10 years. This is beneficial because it will lower our interest expense on our income statement each quarter. The accrual each quarter reflects the debt balance on the interest rate, which we disclosed is now 50% of what it used to be. The amortization of the premium will also decrease the interest expense on our income statement. Consequently, the interest expense reported on the income statement will be less than 5 million each quarter. Additionally, it's important to note that the restructuring with cargo allows for two full years without cash interest or amortization payments, although we will still have the accrual.

Kristen Owen, Analyst

Thank you, I’ll pass it on.

Kathleen Valiasek, President, CEO, CFO

Okay, thanks Kristen.

Operator, Operator

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

Ben Klieve, Analyst

Hi, thank you for addressing my questions. I want to return to the topic of the 20% yield enhancement and gain a clearer understanding of it. Kathy, in your opening remarks, you mentioned that this project specifically pertains to the stack phase of the Georgia facility. I'm curious to know if this means there will be 20% more plants emerging from the stack phase based purely on square footage, or are the same number of plants being produced at a 20% quicker rate? Are you possibly adjusting to faster-growing varieties? What is the main factor contributing to this improvement?

Kathleen Valiasek, President, CEO, CFO

Yes, great question, and good morning Ben. It's really about light optimization within the stack phase. Our R&D team developed this program early last year, which we refer to as Thor. What it does is increase the output from the stack phase. We're seeing a 20% increase in pack pounds every week throughout the process in the greenhouse, which is quite impressive. Essentially, it's focused on light optimization to enhance the output in terms of the number of plants and their weight coming out of the stack phase.

Ben Klieve, Analyst

Got it. So, is light optimization on the same number of plants that makes those plants grow 20% faster?

Kathleen Valiasek, President, CEO, CFO

Correct.

Ben Klieve, Analyst

Got it. Okay. Very impressive.

Kathleen Valiasek, President, CEO, CFO

It's incredible.

Ben Klieve, Analyst

Yes, it seems that way. My other question before I return to the queue is about the future of the Midwest facility. I'm curious how you are planning to finance that facility. Are you considering project-specific financing, involving external parties, leveraging your existing credit facility, a combination of both, or something different?

Kathleen Valiasek, President, CEO, CFO

So, as any company, right, you're always trying to bring new capital providers in the capital stack. So, we are talking to sort of very project-specific financing; but, I think we'll probably be bringing new obviously non-dilutive partners into the capital stack.

Ben Klieve, Analyst

Okay, very good, that’s helpful. I appreciate you taking my questions. Best of luck to you and what should be a pretty interesting next few months for you guys. I’ll get back in queue.

Kathleen Valiasek, President, CEO, CFO

Thanks.

Operator, Operator

Ladies and gentlemen, I'm showing no other questions at this time. I'll turn the floor back to Ms. Valiasek for any final comments.

Kathleen Valiasek, President, CEO, CFO

I just would like to thank everybody for joining us today, and we look forward to updating you on our progress as we further scale and grow Local Bounti's business in the coming quarters. Thank you very much.

Operator, Operator

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