Earnings Transcript for ROMJF - Q3 Fiscal Year 2022

Operator: Good morning, ladies and gentlemen, and welcome to the Rubicon Organics Q3 Earnings Call -- Conference Call. At this time, all lines are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. [Operator Instructions] This call is being recorded on Tuesday, November 15, 2022. I’d now like to turn the call over to Margaret Brodie, CFO and Director. Please go ahead.

Margaret Brodie: Thank you, and good morning, everyone. Big day from Rubicon, we began our thesis to cultivate the highest quality organic cannabis possible in the right size facility to generate strong operating leverage and to focus on the premium segment with premium brands delivered against targeted consumer insights. Rubicon is now at the stage where our thesis has proven and I am proud today to announce that we have delivered in Q3 record revenue, net profit, our second successive quarter of adjusted EBITDA profitability, and achieved free cash flow for the first time. In addition, we are now tracking adjusted EBITDA profitability for the year 2022. And we expect this trend to continue, but I would must put a caveat that in the cannabis industry there is Q1 seasonality. Rubicon Organics continues to be a market leading premium LP. We began Q3 as a top 10 licensed producer. And in September, Rubicon has a number nine position in Canada for total Flower, Pre-Roll and Hash. In Q3, we increased our market share in Flower and Pre-Rolls to 3.2% of total market, thus making us one of the fastest growing LPs in Canada. In our key segment, premium Flower and Pre-Roll, we were the number two LPs with 8% market share and we have seen our share of product mix improved favorably to simply theer in 1964. We expect this trend to continue and are currently at this stage where demand is larger than our available supply. And I'll come back more to this later. Our net revenue grew 52% for the 12-months ended Q3 2022, compared to 2021 and 49% net revenue growth for the three months ended ’22, compared to Q3, 2021. Our strategy is to focus on innovative and novel genetics. Cultivate organically to the highest standard and deliver quality too. We believe that together with our team, delivering consistently to provincial customers. These three elements are key to developing equity in our premium brands that consumers will love and be loyal to. In Q3, Simply Bare Organic remains the number one premium brand in Canada and Flower approval for the fifth quarter in a row with a 5.1% market share for the 12-months ended September 30 and retained the number one premium brand position across Flower and Pre-Rolls in our home province at B.C. with an 8.4% share in the three months ended September 30. Our 1964 Supply Co brand competes at the very top of the mainstream pricing segment. 1964 has become the number one mainstream brand in B.C. in the 3.5 gram format category, which is the highest sales volume category. 1964 has been a major contributor to our revenue growth and been our largest growth driver in 2022 thus far. Since the beginning of this year, we have seen the foundation of our investment thesis proven out, namely that the premium segment will outpace the growth in the total market as consumer taste preferences evolve and the development of a brand promise within the category is beginning. This trend is allowing premium brands like ours to emerge. While the pace of the overall cannabis market growth has decelerated, the premium segment continues to grow, as you can see in September. For the rolling three months, the growth rate was 28%, as compared to 13% in the overall cannabis market. In addition, in 2021, the premium segment was 18% of total cannabis dollars spent, and we have seen that number grow to 20% thus far in 2022. We expect the premium cannabis segment to grow to over a quarter of the category value and where most of the gross margin will be achieved. It is important to have quality competition in the premium segment of the market to allow the segment to grow and this is beginning to emerge, making all competitors better. For Rubicon to continue to win lead healthy competition on shelf, building the category to give consumers choice and allow us to stand out. With our portfolio of brands and market and our recent entrants into the infused Pre-Roll market with Live Rosin, Pre-Rolls in Simply Bare and Hash or Diamond Infused Pre-Rolls in 1964, we expect our innovation to keep us in a leadership position. And now to the fun stuff. In the three months ended September 30, 2022, Rubicon Organics reported record net revenue of $10.5 million, a second successive quarter of positive adjusted EBITDA achieving $1.9 million, net profit from operations of $2.2 million, operating cash flow of $1.4 million and the first quarter of positive free cash flow of $400,000. Furthermore, Rubicon's year-to-date adjusted EBITDA is now $600,000, and we remain on track for ‘22. The company has maintained a strong balance sheet with $6.8 million in cash and $22.7 million in working capital at September 30. We currently have $8.4 million in cash with $4.7 million in receivables. We delivered positive operating -- we delivered a positive operating cash flow in the Q3 of ‘22 in addition to achieving positive free cash flow for the first time. With our existing secured debenture due in December 2024, Rubicon has a strong position with its current trajectory to repay or seek competitive long-term mortgage financing in the coming years. Rubicon’s cash position and working capital mean that we are confident in our ability to fund growth in the final quarter of ‘22 and into ‘23. We completed our B.C. Hydro grid connection in September, which has been the single largest capital project of ‘22. The cost savings of being on the hydro grid are significant to our business and are expected to result in well over $1 million in operating cost savings annually. We are looking at other capital projects for ‘23, but we expect those to be relatively modest in nature, with the largest likely being putting tables into the parts of the cultivation room where they are not in place. These tables will increase yield by adding to our cultivation square footage available, but also improve airflow, thus the quality of our plants. Any CapEx is being evaluated based on maintenance, quality, efficiency and yield. In terms of costs, in general, given the high inflationary environment in which the company is operating in ‘22, management continues to monitor costs closely and is actively seeking cost savings initiatives that can be seen and proven in which we are incurring operating expenses. The area looking forward that we see the largest inflation in ‘23 is in salaries and wages, given the overall inflationary household pressures. In terms of revenue, we earned $10.5 million in revenue in Q3 ‘22, a 49% or $3.5 million increase over Q3 in ‘21. This increase in net revenue was 12% growth, compared to Q2 ‘22 and delivered despite the challenges in Q3, including the strikes in B.C. and Quebec, as well as the cyber incident affecting deliveries in Ontario. We believe the largest contributor to our revenue growth is a step-up in our product quality. This revenue growth was expected in the summer months, given typically higher consumption rate, and we are extremely happy with the improvement in our rate of sale of our products and the product mix between Simply Bare and 1964 and much less Homestead. This means that our gross margin results are more favorable with a rate of 39% in Q3 ’22, as compared to 32% in Q2 and 25% in the same quarter in ’21. The launch of new strains in the spring and summer, together with improved quality, is leading to better mix and higher consumption demand for our products. We have seen our distribution points in Ontario, the number of SKUs carried in each store increased 90% from Q1 to Q3 2022. We have successfully completed our highest volume of orders in September ’22, driven by the restocking of shelves in B.C., product listings in Ontario and the movement from online to in-store SKUs at the SQDC in Quebec. We also received repeat orders for our recently launched Infused Pre-Rolls available under 1964 and Simply Bare. We believe that Infused Pre-Rolls will continue to have a large share in the overall Pre-Rolls market. And while it is early days, the feedback on our quality is very positive. Our revenue growth has been delivered relatively evenly across our key markets of Alberta, B.C., Ontario and Quebec, which together make up 98% of our sales in Q3 ‘22 and 97% in the nine months ended September 30. As you may know, selling to client corporations means that the credit risk around our receivables is very low. After our revenue, our gross profit before fair value adjustments is impacted by two things

Operator: Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] Your first question comes from the line of Neal Gilmer with Haywood Securities. Please go ahead.

Neal Gilmer: Yes. Thanks very much. Good morning and congrats on the quarter. I think maybe -- so strong EBITDA numbers. And what I want to get a little bit better understanding from you, Margaret, is the B.C. Hydro project that was completed in September, and the $1 million of annualized cost savings that, that provides. So I'm assuming that we really didn't see much of that in Q3, we'll see more of an impact in Q4. And does that primarily go through the operating expense line? Or are we going to see a benefit to gross margins as well from the [Multiple Speakers]

Margaret Brodie: Correct. It will be through our production costs mostly, because -- and then allocated to our inventory. So what you're going to see is that really sitting right in our -- out of our gross profit. It's a major project -- pardon me, go ahead.

Neal Gilmer: Yes, that supports your comments about your continued improvement in gross margins going forward with the exception of the seasonality in Q1.

Margaret Brodie: Yes. And our product mix as well have been very favorable. We're seeing growth in both of our key brands Simply Bare and ‘64 and really thrilled with the real pull-through of the market rather than push out, I would say.

Neal Gilmer: So, thank you for that. I'm curious to sort of see you obviously commented that you can't control recession, and we're all sort of wrapped thing to just sort of see how the consumer responds. Have you seen any initial trends that you starting into Q4, as far as any impact of that? Or are you sort of seeing the momentum that you guys achieved in Q3 continue into Q4 here?

Margaret Brodie: I think we're going to look to be relatively flat in Q4 and waiting to see how things go. I think as we look into ‘23, look, we, as a management team and then with the Board, went through a SWOT analysis in August evaluating our product portfolio, our cost base of our products and making sure our listings were there, so that we had things that products on shelf available to consumers in every product in every province that would win in a recessionary environment when there's smaller amounts of dollars in pockets, including do we have the right Pre-Rolls listed for the lipstick type idex where you take the small luxury. We believe that we are in a good place on that overall. But I think it remains to be seen if truly people's wallets are smaller as we go through the winter months, and getting electricity and food costs really are going to be the big question mark.

Neal Gilmer: Yes. Fair enough. Okay, thanks for taking my questions, Margaret.

Margaret Brodie: Thanks, Neal.

Operator: Your next question comes from Michael Freeman with Raymond James. Please go ahead.

Michael Freeman: Good morniong, Margaret and congratulations Melanie on your appointment. And thanks for taking our questions and first, congratulations on this really strong profitability profile. My first question is on 1964, you mentioned this is your strongest growth driver over the most recent period. I wonder if you could describe some of the reasons why this brand, in particular, is growing so fast? And if you could break down, sort of, the proportion of revenue that is driven by this brand relative to your total sales?

Margaret Brodie: Absolutely. To start with, I would say, we are seeing and have available given the product quality that we have very little Homestead, we only sell Homestead when something doesn't meet our product quality for ‘64 or Simply Bare. And so that we expect going forward, that's going to be less than 10% of our market and I consider that -- it's great for the consumer to find it, but not what we're focused on. Look ‘64 has had a tremendous takeoff in market. The strength of the comatostrain has really given it a lot of kudos. And what we want is when consumers pick up 1964 and primarily really without Simply Bare, they're getting the best expression of the strain that they're going to see. So for Simply Bare, you're going to find novel unique genetics. I expect that to be about one-third of our net revenue in -- or sorry, our units in ’23. And the remainder probably two-third to 1964. We obviously are at a point where we have to be choiceful in which direction we go and where we place our product given the demand. So the success of ‘64 has really been, I think, it sits at the top of the price range that it's in, the product quality is excellent. And it started out really focused on legacy strength, but people knew and loved and they -- we believe got great, great value for that.

Michael Freeman: Okay. All right. That's really helpful. And thank you to the core operatings are going to be helpful in situating financial recession, given the mix Okay. So --

Margaret Brodie: It's a large pool of customer right at that price point as well. So I think that's the other end consumer.

Michael Freeman: Okay. Very helpful. Now you mentioned the point of distribution in Ontario, increasing 90%, I think you said between first quarter and third quarter. That's pretty excellent penetration. I wonder, if there are other jurisdictions in which you're seeing, call it, penetration during the last.

Margaret Brodie: Great question. In B.C., we have a very significant leadership position at 8.4% in the premium market. And we know we do well in B.C. We love, it's where we're from. And we really care about the B.C. consumer. Ontario, the numbers are great, Quebec, it’s -- you get listed in every store, because of where the SQDC drives. So that's good news. Alberta is a different -- very different market than the other three. I actually don't have the distribution numbers. It's something I'll take a note of and ask our team to look at data can be challenging. But I know we have built our Alberta profile quite a bit this year, and the teams worked very hard to tell our story to consumers, but I'll come back to you.

Michael Freeman: Okay. That's really helpful. And then last one for me. You mentioned different impact on sales coming from B.C. market, Ontario market and Quebec market for differents. I wonder if you have been able to -- if you could give a rough number on how much that impacted those different disruptions impacted sales in the quarter?

Margaret Brodie: Sorry, you're talking about the strike?

Michael Freeman: Yes, the strikes in the [Multiple Speakers]

Margaret Brodie: Yes. It's something that we really struggle to quantify, because to Rubicon’s mind what happened to a certain extent was, the B.C. strike there was basically a three week downtime, although the strike only lasted two weeks, because it took some time to get things back and going. And the shelves were restocked, and we believe we did very well in that restocking, where because the store shelves when empty, they basically sold out all their old inventory and they have the opportunity to come in with additional -- we also saw and -- Rubicon did well with the new strains coming back on and filling the shelves. But we also saw a lot of people go back to black market in that moment, and the black market dealers took advantage of it. So it's hard to say if there will be a long-term impact on that. Really, we've tried to quantify it. We've struggled to quantify, but I think there was a financial impact. There was also a financial impact in the Ontario delivery, and then the rotating strike in Quebec, again, given the data, the growth rates that we're in, we can't look at last year in the same rate, not tied [indiscernible] unfortunately. And as you know, it's challenging to figure out what would be true in different circumstances in cannabis. So it's not a great answer, but we've struggled with the same thing.

Michael Freeman: That’s just fine. Thank you very much for that color and congratulations on the strong quarter.

Margaret Brodie: Thanks, Michael.

Operator: [Operator Instructions] There are no further questions -- one moment, please. There are no further questions at this time. Please proceed.

Margaret Brodie: Thank you. Well, I want to say thank you, everyone, for dialing in today, and we're excited about where Rubicon is going. Thank you very much.

Operator: Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.