Good morning, and welcome to Local Bounti's First Quarter 2024 Earnings Conference Call. [Operator Instructions] Please note, today's event is being recorded. At this time, I'd like to turn the conference over to Jeff Sonnek, Investor Relations at ICR. Please go ahead.

Thank you, and good morning. Today's presentation will be hosted by Local Bounti's Chief Executive Officer, Craig Hurlbert; and Chief Financial Officer, Kathleen Valiasek. The comments made during today's call may contain forward-looking statements within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical facts are considered forward-looking statements. These statements are based on management's current expectations and beliefs as well as a number of assumptions concerning future events. Such forward-looking statements are subject to known and unknown risks and uncertainties that could cause actual results to differ materially from the results discussed in the forward-looking statements. Some of these risks and uncertainties are identified and discussed in the company's filings with the SEC. We'll also refer to certain non-GAAP financial measures today. Please refer to the press release, which can be found on our Investor Relations website investor.localbounti.com for reconciliations of non-GAAP financial measures to their most directly comparable GAAP measures. With that, I'd now like to turn the call over to Craig. Craig?

Thank you, Jeff, and good morning, everyone. Our first quarter demonstrated strong operational progress, which enabled us to drive double-digit top line growth versus both the prior quarter and the prior year as expected. This performance was the result of a combination of recent improvements that we've made to our business of which I'll touch on briefly before passing the call to Kathy for her financial remarks. Our Stack & Flow technology continues to underpin our strategy. It has allowed us to ramp up production in our Georgia facility over the past quarter and it affords us the opportunities to further enhance our model, which is predicated on capital efficiency. In fact, we recently initiated a trial at scale for a differentiated use of our Stack towers that in a smaller trial demonstrated a further yield increase of at least 10% beyond what we are currently achieving. We are excited to see those results later in the second quarter. The flexibility of our design is of the utmost importance and allows us the ability to fine-tune individual plant recipes to maximize the utilization of our assets at all of our Stack-enabled facilities. These iterations can make a significant impact and can also be implemented extremely efficiently across all our stack and flow facilities, which further highlights the advantages of our efficient and data-driven Stack & Flow model where we are able to apply our learnings rapidly. Our experience at the Georgia facility have armed us with immense highlights that we've incorporated into our new purpose-built facilities in Washington and Texas. These state-of-the-art facilities are optimized for our Stack & Flow technology from the ground up and have an operational design that maximizes capital efficiency and drives productivity. We're thrilled to report that we are shipping out of Washington and Texas…

Thank you, Craig. I'll start by reviewing our first quarter 2024 results, then provide an update on our capital structure before finishing with an update on our year-to-date progress in 2024. First quarter 2024 sales increased 25% to $8.4 million as compared to $6.7 million in the prior year and increased 22% compared to $6.9 million in the fourth quarter 2023. Our results largely reflected the increased production and growth in sales from our Georgia facility. First quarter adjusted gross margin, excluding depreciation and stock-based comp, was approximately 24%, our adjusted gross margin performance was consistent with our fourth quarter 2023 results and reflects costs associated with the ongoing optimization and scaling up of our growing facilities. We expect our adjusted gross margin to increase in the coming quarters as sales ramp in parallel with our capacity to scale up this year. Beyond the scale-related benefits, we also have other initiatives that we expect to support margin improvement. As Craig mentioned in his remarks, we have a scaled trial ongoing related to our Stack zones that is providing some compelling data. Once we have those results and implement the adjustments, we also see an opportunity to drive down other production costs. For instance, seed optimization is an area that we've done some work. And in recent trials, we were successful in reducing our seed costs by more than 20%. We'd look to implement this program more broadly across all of our Stack-enabled facilities later in 2024. SG&A for the first quarter decreased $8.4 million to $7.6 million, driven by cost-saving actions we took in the fourth quarter to streamline our org structure as well as lower stock-based comp. We expect to continue to benefit from the cost-saving actions and the resulting lower cost base through the end of 2024. Net…

Your first question comes from the line of Kristen Owen of Oppenheimer.

Congratulations on all the progress this quarter. I wanted to ask about your gross margin outlook. You highlighted some of the things that are going to move the needle there. I think bringing Montana out of R&D and making that sort of productive. Just help us understand how you're thinking about the cadence of gross margin as we go through the year to support that outlook of -- I think you said actually early 2025 EBITDA breakeven.

Kristen, great to hear from you. Kathy, you want to just tackle that one?

Good morning, Kristen. Great to hear your voice, and thanks for the question. Yes. So when we think about the gross margin as each quarter for the rest of 2024 by quarter, when we think about it, Georgia is going to continue to improve, whereas Texas and Washington are probably not going to be -- they're going to be ramping up, right? So what I would say is we're going to see sequential improvement each quarter. Yes. And especially like when we think about the R&D trial on improving the yield, that's going to be a significant -- have a significant impact that we can implement right away, as we said and also just the seed optimization, which is significant also, which we'll put into place in the second half of the year. But again, even that rollout we can bring into Texas and Washington also.

Okay. That's helpful. So the other question that I wanted to ask, one of the updates that you provided in the prepared remarks was the additional customers that you signed on in the quarter. Just wondering, as those facilities ramp how much of your capacity is already committed versus how much are you keeping available to be able to add those new doors?

Yes. Kristen, great question, really good question. As you know, retailers have different periods of time in which they award new awards for different partners, if you will. So obviously, that's kind of over top of everything I'm about ready to say. But the momentum in our commercial group is really palpable. There is a lot of momentum with a lot of different customers, many of which we either couldn't name or did name in the prepared remarks. So what I would say to you is that's a number that we're tracking. And it will over the next couple of quarters play its way out. But I can tell you, we're all excited about the -- what I would say, the enthusiasm around our kind of expanding platform across our existing customer base. And there's a lot of excitement with new customers inside of the regions. Like Brookshire is a good example. I think it's 250 grocery stores roughly and primarily in Texas, Louisiana and some in Oklahoma. They came to visit the site in Mount Pleasant in Texas, and we're just super excited and blown away by what we were putting in there and what that would allow their consumers to enjoy a more local-based product. So that's 1 example we did mention. But then our existing customers is looking to expand as well. So a lot of momentum, a lot of positive momentum and some of which is just the way the retail business works.

Yes. And I'll just add, Craig alluded to it, all the customers have the shelf reset schedules, right? And so when we even think about our 2024 builds, we talk to all of our customers and think through like what is the capacity that we're going to have for our -- the builds that we're completing this quarter and then also the 2024 builds, and we do earmark the capacity for our customers.

Okay. That makes sense. It's sort of a -- the last question that I'll ask here is very related to that, and it may be too soon to be able to quantify this, but maybe qualifying it for us. The revenue generation capacity for Washington and Texas, particularly given that these are built-to-purpose and some of the learnings that you've had in both Georgia and Montana. Just how to think about the -- maybe even relative to your prior expectations, what the revenue generation capacity is for those facilities? And I'll leave it there.

Kathy?

Yes, sure. So when we think about each of the different facilities, we typically don't give the revenue by facility, but we absolutely estimate that they will -- Texas is 6 acres. So we estimate and assume that it will exceed the revenue out of Georgia, whereas Pasco is 3 acres, but the productivity and the yields out of both of those facilities we anticipate will be higher than Georgia simply because they were both purpose-built facilities, whereas as we all know, we inherited kind of the Georgia build, which, again, the Georgia build has improved significantly, and we're doing very, very well there. But the Texas and Washington will be standout facilities because they're purpose-built.

Your next question comes from the line of Ben Klieve of Lake Street Capital Markets.

And congratulations, good. It's a nice little start to the year here. A question about OpEx. You guys did a lot of work to rightsize the business in late '23, had a much more pronounced and immediate impact than I was anticipating here in the first quarter. And I'm wondering if you can comment on the extent to which we can use kind of the first quarter SG&A and R&D as appropriate benchmarks for Q2 and beyond? Or if there's any major puts and takes we should consider for the balance of this year, especially as new facilities are coming online.

Kathy you want to take that 1 also?

Yes, sure. And boy, I love that question, then [indiscernible] because in terms of SG&A, I would anticipate that it's going to continue to decrease quarter-over-quarter through 2024. And honestly, I mean, I think we talked about it even on our annual call back the end of March. We did reduce SG&A and what we found is that we're actually much more efficient than we were before we made the edits and the changes, right? So it's fantastic. But I would say SG&A is going to continue to decline quarter-over-quarter. And you'll see the greatest decline, I want to say, Q3, Q4, but you'll see a decline in Q2, okay? And then R&D, is likewise going to continue to decline. However, when you think about it, Texas and Washington, scaling the second half of the year, there will be some costs that will be R&D related. Hopefully, that's helpful.

Go Ben, and then I'll follow up on that. Go ahead.

So that was very helpful. I mean Craig, if you have any comments on that, please let me know. Otherwise, I do have a couple of other questions.

Yes, I think my comment on that is when you get a platform that has multiple facilities, there's inherent efficiencies that come across the whole organization, actually. And transitioning Montana and Georgia, Texas, Pasco and the California facilities. We sit -- Kathy and I sit on these calls with all of our GMs and the whole organization is just really focused on efficiency and really taking lessons learned quickly in different facilities and applying them. And I think we're really seeing that across the board. In this case, we're talking about costs. Getting cost out. So I think we're going to continue to see that over time until you get to a point where there's just nothing left to get out. But that's something that's going to continue to happen. And to some degree, we knew that was going to happen, but maybe not to the extent. Thank you, Ben. Appreciate the question.

Craig. A couple of other from me. One big picture. You noted your expectation of achieving positive adjusted EBITDA in early '25. Does this imply that you guys have line of sight to that EBITDA profitability number from your existing facility footprint as they ramp and not with any contributions coming from new facilities in the Midwest or elsewhere?

That's a great question. I'll take that one, Craig. It's with our existing footprint.

Perfect. And then last 1 for me and I'll get back in queue. The California facilities have been kind of a persistent source of issue for the last year or so. You didn't mention anything around those 2 facilities here today. Can you just kind of give us a state of the state out of those 2 facilities? Are they operating as expected, there's still work to be done here to kind of fix the lingering issues from last year? Any updates out of California would be great.

Yes, sure. So I think I said it on the year-end call that we were going to meet our budget in terms of revenue for California, which we did in Q1, which is fantastic. We did have significant rains again in Q1 of 2024, nowhere near what it was in Q1 of 2023. But I would say the facility is performing better, okay? And it's going to continue to perform better and not a large CapEx spend or anything like that. But like we've said, there was the impact of Q1 2023, but just a lot of repairs and maintenance spend is going to decline. We saw a decline in Q1, and it will continue to decline through the rest of the year.

There are no further questions at this time. I'd like to hand back to management.

Great. Thank you so much, Gavin. And on a personal note, I know Kathy and I would like to thank the entire Local Bounti team for their dedication and hard work. And I can tell you, we just had a dinner in Pasco. It was just -- working with these people is an absolute inspiration. We appreciate everything you're doing and all the great progress we're making. And with that, I 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 upcoming quarters. Thank you so much.

Thanks, everyone.

That does conclude our conference for today. Thank you for participating. You may now all disconnect.