Rubicon Organics Inc. (OTCQX:ROMJF) Q4 2021 Earnings Conference Call April 19, 2022 10:00 AM ET
Company Participants
Jesse McConnell – Chief Executive Officer
Margaret Brodie – Chief Financial Officer
Conference Call Participants
Neil Glimmer – Haywood Securities
Michael Freedman – Raymond James
Operator
Good morning, everyone and welcome to Rubicon Organics, Fourth Quarter 2021 Financial Results Conference Call. As a reminder, this conference call is being recorded on April 19, 2022. At this time, all participants are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. Instructions will be provided at that time for Research Analysts to queue up for questions. Before we begin, I will refer you to Slide 2 of our presentation, which contains Rubicon’s caution regarding forward-looking statements and non-GAAP measures. Today’s presenters will be Jesse McConnell, Chief Executive Officer, and Margaret Brodie, Chief Financial Officer. We’ll now turn the call over to Jesse McConnell for the presentation.
Jesse McConnell
Thank you Operator, and good morning, everyone. We have been unwavering in our mission to grow the best cannabis on earth in 40 years. We continue to invest in our people, facility, and cultivation systems resulting in a progressive reduction in our production costs and an increase in yield and quality of our products, helping us to grow our margins and deliver on our brand promises to the consumer. Building premium brands that consumers love and are loyal to, it gets with a culture that prioritizes quality. Our efforts to deliver that promise have seen Simply Bare Organic remain the number one premium brand in Canada, in flower and pre-rolls, for the 7.6% market share of the premium segment for the year ended December 2021.
We are proud to have maintained market share in the premium segment, which is outpacing growth of the overall market. During quarter four, we operated with our entire portfolio of brands in market and with coast-to-coast distribution. We held a 1.82% and 2.1% market share across all categories for the 12 and 3 months ended December 31, 2021 respectively; and we have achieved this using our own sales and marketing team and without any wholesale sales.
Rubicon had an outstanding year recognizing 141 % and 43 % growth in net revenue for the 12 and 3 months ended December 31, 2021, respectively, as compared to 2020. A big part of our success relates to the national rollout of our good, better, best brand portfolio strategy. This enables us to optimize margins across all the products we produce. For the time being, I will pass the call over to Margaret to share some specifics about our financial performance, and I will update you after our 3 pillar strategy for 2022.
Margaret Brodie
Thank you, Jesse. And good morning, everyone. I am very pleased to report that in the year ended December 31, 2021, Rubicon Organics reported net revenue of $22.6 million. This is the 141 % or $13.2 million increase over 2020. [Indiscernible] realized increasing operating leverage throughout the year, achieving gross profit of $1.5 million or 22 % on $6.8 million in net sales in the three months ended December 31. We continue to see positive gross profit from operations in the fourth quarter. As we operate with our full portfolio of brands and market, and we’re getting closer to our target of positive adjusted EBITDA.
The company also continued to maintain a healthy cash position and working capital position, allowing flexibility to fund growth and sales volatility and take advantage of other opportunities. As compared to 2020, the increase in our net revenue is attributable to our expanded new count for our super premium brand, Simply Bare Organic. The roll out across Canada of the premium brand, 1964 Supply CO, and the launch of our mainstream brand, Homestead cannabis supply. As communicated at our third quarter earnings call, we expected the fourth quarter to be a transitional period with some chunky timing on revenue and the impact of our CapEx installations, and we can see that with a slight reduction from Q3 to Q4, 2021. Consistent with what I have done in the past, our cost of goods sold are expected to remain relatively fixed as compared to current levels with the growth in gross margin coming from increased net revenue and throughput of our facility.
We have also refocused on finding additional efficiencies within our operations to further drive down our cost base and expand production volumes to spread costs over a larger output. In combination with bringing higher-price-point products to market under Simply Bare in 1964 plans, we expect notable margin gains in the latter half of 2022. We reported an adjusted EBITDA loss of $600,000 in the fourth quarter of 2021, a substantial improvement of $2.4 million versus Q4 2020.
Most importantly, as we had forecast in our third quarter release to be operating cash flow mutual in the fourth quarter, we have now seen the results of our investments in working capital with our first ever quarter of positive operating cash flows of $500,000. This positive cash flow from operations for the $6.8 million improvement over the comparable quarter in 2020 and a $1.7 million improvement over the third quarter of 2021. The improvement in cash flows reflects the operating leverage we realized on the gross profit line. Access to sell, our product cultivated across the entire portfolio of brands and the continued impacting of restructuring we announced in May 2021.
From a capital perspective, we have installed six new HVAC units. These HVAC units are part of our strategic plan to deliver 11 thousand kilo of production run rate Q4, 2022. The next significant budgeted project is the BC Hydro grid connection, which is expected to be completed by the end of the second quarter of FY22. This project is expected to reduce our operating costs by well over $1 million annually and drive us towards meeting our ESG goals. The company continues to maintain a healthy cash and working capital position, and as at March 31, 2022, we had a cash balance of $8.5 million. Furthermore, we are in discussions due to extend our debt facility or refinance to a longer-term facility the debt on our balance sheet. I would now like to turn things back to Jesse to share more about our 2022 outlook.
Jesse McConnell
Thank you, Margaret. To me our goals of sustainable profitability in the second half of 2022, we have developed clear priorities for the business, which consists of a three pillar strategy focused on yielding quality from our production facility, improving product mix to optimize margins and launching international products. Each of these three, we expect a lot of positive impact on our profitability and cash flow. Our first focus is a hone our production process we use at the delta facility to increase yield of our super premium cannabis.
We’ve completed facility upgrades, invested in process improvements, and continue to identify cost inefficiencies. The company installed new climate control systems, most critical being the dehumidification units and refined its cultivation system, which we expect will enable a run rate of 11,000 kilograms super premium cannabis by the end of 2022, maintaining high-quality flower with greater THC content from each crop continues to be a priority. And we anticipate our improved product offerings to enter the market in quarter two.
Our Delta facility is expected to also benefit the operating BC Hydro grid, resulting in further production cost savings in the second half of 2022. Our next pillar is to implement our commercial strategies within the Canadian domestic market to maximize the growth gross profit for each unit produced from our Delta facility, which coupled with delivering an increased quality of flour and higher TAC levels is expected to drive more volume and rate of sale into our Simply Bare organic and 1964 Supply CO branch.
The premium cannabis market is gaining momentum and outpacing the growth of the total market, which should bode well for the premium product innovations we are bringing to market in 2022. Translate too is also expected to be the first Full Year with all five of Rubicon’s fully owned and licensed brands in market with national distribution. Future innovation in flour, pre-roll and 2.0 products are expected to be launched under our existing brand portfolio, which is increasingly gaining recognition among bartenders and consumers.
Our final strategic pillar is a great access to international markets by obtaining key certifications and agreements enabling our launch into Israel and Europe with our first exports expected to occur in the second half of 2022. Rubicon believes that the combination of new brands and key Canadian markets and increased product offerings enabled us to capitalize on our momentum. And coupled with the continued increase in quality and yield from our production, we expect strong top-line and margin growth in 2022.
The company realized the significant milestone in quarter four, achieving positive operating cash flows for the first time. The company’s current expectation is to be operating cash flow positive and adjusted EBITDA profitable in 2022. We believe that despite any market volatility in 2022, our focus on our three key priorities coupled with our brand portfolio expansion achieved in 2021 will position with Rubicon to continue to deliver on its commitments and win in the premium Canada’s market. Thank you and we would now like to open the line for questions. Operator, please open the line.
Question-and-Answer Session
Operator
Thank you. [Operator Instructions] Please standby while we compile the Q&A roster. Your first question comes from the line of Neil Glimmer from Haywood Securities. Your line is now open.
Neil Glimmer
Thanks very much. And good morning.
Jesse McConnell
Good morning Neil.
Neil Glimmer
I want to start maybe on your second pillar of your strategy for 2022. And maybe if you could just expand a little bit on how you see that unfolding over the course of the year and what leverage you can pull forward that to drive that margin growth you referred to in pillar.
Jesse McConnell
Certainly. The second pillar is all about finding margin inside of our existing portfolio. A couple of examples of things that we’ve done there. And if we look at our lowest tier are good brand which is Homestead, each marketplace, we have limited amount of supply for that each marketplace we’ve received a different net sales value for. So we are prioritizing the marketplace in which we get the highest net sales value. Another example is that would be, we understand that the consumer is very keyed in on THC and the correlation between that and price.
We have higher-potency products, we are creating tiers inside of our existing brands to be able to take incremental price 1964 is coming out with its secret menu series, which has incremental price, but the same production costs as of the existing brands, so even inside of a tiers were great. The brands we’re creating subcategories inside of those brands where we can — where we have outstanding crops, or unique genetics, or other reasons that we believe the consumer will be willing to pay more, we’re able to take incremental margin there.
Neil Glimmer
Okay. All right, thank you for that. Second question for me would be your comment to get to 11,000 kilos by the end of this year. Can you give us any sort of sense of sort of what your annualized run rate right now and what’s the cadence of achieving that? Because I think you referenced other in the MD [Indiscernible] the press release, we expect that selling everything you can produce in the facility. So just trying to get a sense of you’re not going to be an 11,000 for this year. We are trying to get a sense of where you’re out now and how you grow into that for two 11,000.
Jesse McConnell
Critical question. Last year we had a production run rate of approximately 6,500 kilos. And coming into the end at the beginning of this year with all of our new HVAC installed at the process improvements, decisions that we’ve made on genetics. We’re coming out of quarter one, not at our 11,000 kilo run rate yet. But we’ll be pushing somewhere in the neighborhood of around 9,000 kilos as a run rate. So we are indicating that quarter four will be when we attain that run rate. And of course we’re doing everything we can to hit that run rate in advance of that.
Neil Glimmer
Fair enough. If I can sneak one last one in. Your commented in the press release on some Q1 factors with respect to COVID, and that in January and February — and then you said March was normalized sales. Can you give us any sort of sense on what your overall view on revenue in Q1, on a sequential basis? Are we’re looking at flat because of those disruptions or we still able to achieve a little bit of growth despite those disruptions?
Jesse McConnell
I think in quarter one we’ll see a dip. There’s a number of factors coming into play there from the provincial mandates for the stores to some absenteeism that we experienced in our own facility as a result of COVID. And then as we transitioned with all the commissioning being done with HVAC. There was — those first two months we didn’t have as much supply coming offline available for sale in the marketplace.
Typically, we see a seasonality effect around 15 % to 20 % and then we had our own effects on top of that with some of that absenteeism, some of that supply. And then we saw the return to normalization in March. I think the other thing that the industry is starting to understand is timing for when provincial distributors run their inventories down and do their year-ends. We’re seeing outside seasonality impacts in January, February as they run those inventories down for the March year-ends. And then they’re set to return to normal buying patterns in March.
Neil Glimmer
Okay. All right, thanks for taking my questions and congrats on the operating net cash flow positive in Q4.
Jesse McConnell
Thanks, Neil, appreciate the questions
Operator
[Operator Instructions] Your next question comes from the line of Michael Freedman from Raymond James. Your line is now
Michael Freedman
Hi Jesse, hi Margaret, thanks so much for taking our questions and congratulations on finishing the year strong. I’m going to follow on Neil’s question there on the annualized run rate coming out of 2022, targeting the 11,000 kilograms. What’s — like based on your current and anticipated product mix, what sort of revenue level might be anticipate for full capacity, a fully realized Rubicon operations? What might that yield?
Jesse McConnell
Well, there’s a number of factors that are playing there, Michael, when — that’s great question, by the way. And here if — as we look across where that product is landing, one of the big questions that is not entirely clear to us right now is the impact of the international. I want that revenue line could look like. So I think if we exclude the international possibility, I’m where you’ve given me revenue guidance there, but Margaret what would you — do you have a sense of where you think you will want to say on —
Margaret Brodie
I mean not —
Jesse McConnell
This question.
Margaret Brodie
Very good question. Look, I think firstly, looking at 23, we’re going to run up to that run rate, going to be less bullish always than Jesse and thing, as we hit things, we need to make sure that we have market for everything that we’re selling. So and to be clear, one point of clarification, which is we can grow a lot of down in [Indiscernible] as right now in the facility if we want to. Our focus is growing super premium product in our facility not just throwing cannabis in there and growing it in and dumping it into the market.
Because we’re focused on driving margins. So if we were at 11,000 stores, I think what we need to look at it, you can probably do a nice calculation of where last year’s revenue was based on what last year’s production was indicated both of those and do an extrapolation of that, then I would imagine we’re looking at somewhere between 0 % and 30 % of our business going internationally because demand for the organic product is very high. And then the margins in them and the revenue numbers on that, we have not yet signed contract. Obviously, those would be announced when they are, but they will be quite considerable, so I think that will be a very big boost in our top-line. I don’t know if that’s helpful?
Michael Freedman
It was — it is helpful. Thank you very much and totally appreciate that [Indiscernible]
Margaret Brodie
I think the question we’ve got is, what happens with price compression in Canada and we are seeing the premium market growing in Canada, which is exciting and that’s been let off of the trend in some of the more mature markets. In Colorado, while the overall market grew, the premium market after a few years, started to go faster than the overall market because consumers — legacy consumers came into the premium market in the legal stores. But also new consumers and consumers got more educated on the benefits of premium, the terpene profiles, etc in the plant and the improved experience. I expect that we’ll see the Canada market grow overall. And we’d like to take a big bite out of all of that as well.
Michael Freedman
Thanks very much. So next question. You guys are — you’re pulling all the levers looking to achieve profitability, like including adjusting year on wages, which is commendable. What needs to go right for Rubicon to reach your aim of second-half profitability this year?
Jesse McConnell
That’s a great question. What we have put in place over this quarter, I said, including adjusting our own compensation is we’ve taken a fair bit of cost of the business. And the way we are approaching the rest the year is to target a lower level of breakeven than we had initially targeted. The key pieces that needed to come through for us is the quality in the yield. When we look at the other pillars, if international doesn’t come through, if that turn into a total zero, which we don’t believe will be the case, we think it will be fairly significant by the end of the year, but if we call that as zero and we were unable to improve any margin mix, which is also very unlikely based on the yield alone with the new THC numbers that were coming through.
We can see what those rate of sales looked like in the marketplace. So if we continue at the existing run rate that we’re currently doing in our facility, we will achieve profitability this year. But if that one thing goes right, then we can achieve profitability. If any of the others coming through and we get increased margins through some of our domestic premiumization strategies, or we land international contracts those are other ways that we can achieve profitability, but on quality and yield alone we’re going to get there.
Margaret Brodie
We’re going to say we expect some planning into three.
Michael Freedman
Fabulous. Fabulous. If I could speak with one more. We’ve seen the introduction of infused tree roll products into the market. I [Indiscernible] transfer becomes looking at this category closely, but I would be interested in your view of the pretty outrageous cost and taxation structures apply to infused pre-rolls, whereas tax on milligram THC on a relatively high-volume products and how companies can be — enter this popular category while remaining profitable and having positive contribution.
Jesse McConnell
That is —
Margaret Brodie
Sorry, Jesse, go ahead.
Jesse McConnell
That’s a great question. It’s actually, it’s something that we looked at extensively. And as you said, infused pre-rolls category is growing significantly. And then I think you have to ask yourself the hype up. What is the — what are the assumptions behind that growth? Is it because individuals are looking for an experience that has flower and concentrate together? Or are they just looking for a high-potent experience because typically the flower only pre-rolls have lower potencies than flower.
We are in a strong position when you look at our own pre-rolls, we’ve actually been able to drive potency pretty significantly inside of the pre-roll category. So arguably some of our pre-rolls are already high or high or higher than some of the infused pre-rolls that are being offered in the marketplace today. We certainly have like so and one of the reasons that we are one of their top producers and sellers of the pre-rolls in the country.
When you look at the infused pre-roll the excise tax as a percentage basis is a, well 300 % what it is in the flower category and agreed was as an excellent term there. So we continue to investigate that and look at that, assuming we can charge the appropriate premiums for that but I think in the value category of infused pre-rolls you’ll see Rubicon stay away from there because the excise taxes is just to agree this and we believe that our high-potency flower only pre-rolls offer a very comparable experience for the consumer for a much more competitive price.
Michael Freedman
All right, thank you very much, Jesse and Margaret, I’ll jump back into queue and all the best towards FY22.
Jesse McConnell
Thank you, Michael.
Operator
[Operator Instructions]. I’m seeing no further questions in the queue presenters you may continue.
Jesse McConnell
Thank you, everyone for joining our call for our year-end today. We appreciate your continuing support in Rubicon, and thank you to the analysts for your pointing questions. Have a great day, everybody.
Operator
Ladies and gentlemen, this concludes today’s conference call. Thank you for participating. You may now disconnect.
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