Earnings Transcript for ROMJF - Q4 Fiscal Year 2022

Operator: Good morning, everyone. Welcome to Rubicon Organics' Fourth Quarter and Year ended December 31, 2022 Financial Results Conference Call. As a reminder, this conference call is being recorded on April 3, 2023. 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 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 presenter will be Margaret Brodie, Interim CEO and CFO. I will now turn the call over to Margaret Brodie for the presentation.

Margaret Brodie: Thank you, operator and good morning, everyone. Today, I am reporting on Rubicon Organics’ fourth quarter and full year ending December 31, 2022, and our outlook for 2023. 2022 was a turning point for the business with significant growth and proof in the original thesis that cultivating high-quality organic cannabis in the right-sized facility will generate operating leverage. Furthermore, it provides evidence in our belief that focusing on the premium segment with premium brands delivered against targeted consumer insights can deliver profitability in the Canadian cannabis market. Rubicon is now at the stage where our thesis is proven. And today, I'm proud to announce that we have delivered in 2022 record net revenues of $35.5 million or a 57% increase over 2021, three quarters of adjusted EBITDA profitability, achieving $1.9 million in 2022. Operating cash flow of $2 million and positive free cash flow of $2.2 million in the second half of 2022. We also successfully extended our debenture for 18 months to December 31, 2024. And following from our financial success, we grew our national market share from 1.8% in 2021 to 2.4% of flower and pre-rolls in 2022 and 6.3% in the premium flower and pre-roll market. Looking at our fourth quarter, we saw consistent performance with Q3. In Q4, we had net revenue of $11 million, an increase of 61% from the same period in 2021. We achieved adjusted EBITDA of $1.3 million, positive operating cash flow of $2.8 million, and positive free cash flow of $1.9 million. The cannabis market overall has grown and we saw our market share remain strong with 2.4% of share of national flower and pre-roll and 5.4% of premium flower and pre-rolls. In the last 18 months, Rubicon has now passed a number of key milestones. We initially hit monthly adjusted EBITDA positive back in September of 2021, then delivering operating cash flow positive in Q4 2021. In Q2 2022, we hit adjusted EBITDA positive and today reporting that we have delivered three consecutive quarters and a full year positive adjusted EBITDA. After delivering the adjusted EBITDA in 2022, the results led to operating cash flow positive for the full year and free cash flow in the second half. For 2022, we had a three-pillared strategy composed of clear business priorities with the goal of delivering sustainable profitability. Today, I can comment on the success against that strategy. First, we focused on optimizing yield and increase in our quality of production from the Delta facility. In 2022, the company completed two significant facility upgrades with the installation of new dehumidification units and the completion of the BC Hydro grid connection. We also invested in process improvements and throughout the year continued to identify opportunities for cost and quality efficiencies. In terms of our production from January until August, we saw a significant increase in both quality and yield of cannabis produced, but in the autumn with certain facility maintenance and seasonal growing conditions, we had a relative plateau in production. In 2022, the company has now achieved repeated costs over our nameplate capacity of 11,000 kilos and see an increase in our average THC per crop with certain strains as high as 29%. We believe that our quality step change for the experience by consumers beginning in April 2022, leading to an improved rate of sale of our products and increased demand. Secondly, we sought to maximize our product mix to maximize the Canadian domestic market opportunity by improving gross margin for each gram produced from Delta. Through our approach, the provincial distributors and our consumers would have access to a greater range of product formats and strain varieties. And in 2022, our strategy has proven successful as evidenced by Rubicon achieving 6.3% market share of the premium market, flower and premium market, excuse me. In 2022, there was also a noticeable increase in competition with the rise of craft producers, and we believe that this competition led to the super premium brand simply there, experiencing a relatively flat year on revenue despite an increase in units sold. In contrast, 1964 had tremendous positive ground swell in the market with momentum beginning in the summer of 2022. We saw a decline in the pre-roll market where a portion of consumer preference shifted to infused pre-roll and Rubicon did not begin playing in that category until the fall, and we are working to regain our share of that category. In the third quarter of 2022 -- our third priority, excuse me, was to obtain the certificates to enable us to build an international route to market. The strength and success of delivering on our strategy from the first two pillars within our domestic business has led Rubicon to having more demand for its cannabis products in Canada than our available supply. Given the demand in Canada in Q4, we decided to prioritize the domestic revenue channel. As such, we decided to not continue to pursue or maintain any certifications needed for international export. We expect to review the international file later in 2023 and 2024. 2022 was our first full year of brands in market nationally. Simply Bare has established itself as a leader in super premium and organic category with its flavor forward genetics. As the premium category continues to experience minor price compression and increased competition from craft producers, we welcome the challenge but we are working hard to get better and continue to win and grow Simply Bare as a percentage of our volumes sold. Our 1964 brand has received national recognition winning Indica [ph] of the Year of the Kind Awards in December with our zero strain comatose [ph] that has resulted in a surge in demand. We are determined to replicate the success with other strains and looking for ways to fulfill the increasing demand for our product. Our Homestead brand serves as an outlet for biomass that does not meet the quality standards of Simply Bare or 1964. Although we have significant demand for this brand, it is not the focus of our business, yet it remains a profitable outlet for our biomass if need be. In 2022, we acquired the Wildflower brand in Canada with plans to expand this brand into the wellness market through 2023 and 2024. We firmly believe that Wildflower has good potential in this market, and we are excited to see how it develops in the future. Finally, our Lab Theory brand targets the small market of premium concentrates and consistently delivers high-quality products to its modeling. Although it is not our focus brand to drive growth, we have noticed an increase in demand in the latter part of 2022. The premium cannabis market is growing faster than the overall market, exiting December with a 26% growth rate compared to 24% in the overall cannabis market. We expect this segment to become a quarter of the cannabis flower market category value, delivering strong gross margins. Competition in the premium segment is crucial to give consumers choice on shelf and we have seen increased competition, but Rubicon is well positioned to win, given the consistency of our product quality and retail distribution. In terms of winning in the premium landscape, we expect over the next 12 months to see consumers shift away from the THC percentage as the only metric for purchase decisions and move towards terpene profiles within each strain and batch. Rubicon expects to benefit from this trend as our organic grow methodology generally delivers cannabis flower with a higher level of turbines than hydroponically produced flower. Following on from my comments earlier on the financial highlights, in addition to delivering record net revenue of $35.5 million, Rubicon achieved a third quarter -- third straight quarter, excuse me, of positive adjusted EBIT growth which led to a full year of adjusted EBITDA profitability of $1.9 million. We delivered positive operating cash flow in the quarter four of $2.8 million and $2 million for the full year 2022 in addition to achieving $1.9 million of positive free cash flow for the second half. In terms of the balance sheet, at December 31, 2022, the company had $8.2 million in cash and $19.3 million in working capital. We currently have approximately $8.4 million in cash and $4.8 million in receivables. 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. Our cash position and working capital mean that we are confident in our ability to fund the growth in 2022 -- 2023, excuse me. And in 2023 and beyond, the company plans to continue certain strategic capital investments to improve quality yield, increase efficiency and/or decrease operating costs within -- at Delta, the Delta site with items such as additional tables for plants in the cultivation area, a second boiler, and automation opportunities. The company's capital expenditures committee reviews every proposal for quality and yield improvement, risk management and payback of expenditure to cost savings. In terms of costs in general, given the high inflationary environment in which the company is operating, we continue to monitor costs closely and are always actively seeking cost-saving initiatives, and that can be seen in the prudence in which we are incurring our operating expenses. You can see from the chart that in the fourth quarter of 2022, the company earned $11 million in revenue, an increase of 5% when compared to the third quarter. As I said in our third quarter earnings call, the net revenue in the fourth quarter will be relatively flat next to the third quarter as we had certain facility maintenance and downtime, which impacted our crop yields and availability of supply in the autumn. This was offset by the positive momentum for Rubicon in the pre-roll category, followed by the launch of infused pre-roll. During Q4, we also began selling through the OCS flow-through program, which has been proven useful for products that do not yet have consistent supply or demand. And in Quebec, we benefited from additional listings. You can see from our results 2022 had a steady growth of revenue and helped us to realize the impact of operating leverage on gross profit. After our revenue, our gross profit before fair value adjustments was impacted by two things

Operator: [Operator Instructions]. First question comes from Neal Gilmer at Haywood Securities. Please go ahead.

Neal Gilmer: Thanks very much and good morning. Maybe just to start, Margaret, sort of one of your comments towards the end of your prepared remarks, can you sort of -- I don't know what color you can provide, but give us a little bit of sense as to sort of what your options are as far as increasing your capacity, if you're saying your demand is outstripping what you can do through Delta, are you looking at contract grows or what's sort of the nature, obviously, if you haven't signed anything or done anything you can't provide specifics, but just a little bit of sense as to what some of your options might be out there to increase that capacity?

Margaret Brodie: Thanks, Neal. Good question. And yes, I don't want to give away all of our hand in terms of our plans until we've got things locked and loaded. Look, everything is on the table for Rubicon contract grow being challenging to find partners that we really trust and want to work with that will deliver quality, but it is something we're pursuing. We're also looking at a variety of other things in terms of renting space, partnering with people, etcetera. So I think, look, we're in an environment where there are a number of distressed assets around Canada. And I think that Rubicon will be able to look at ways that we can capitalize on that.

Neal Gilmer: Okay, thank you for that. Moving on, obviously there's a noticeable increase in gross margins in the second half of the year. I'm going to assume that part of that is the BC Hydro connection, which was in September. So you still had an increase, I guess, even before that occurred. I'm wondering as we look out to 2023 here, is there further room for margins to expand or is this where we sort of finished off Q4 here, sort of the normalized level going forward?

Margaret Brodie: The answer is, yes, of course, we're working on that and that is the key focus in terms of our second priority for the year. Always focused on maximizing gross profit with every product. Look, product mix is a huge part of that. So us driving demand -- excuse me, we can't drive demand, but us creating the right situation where we have strong demand for simply there will increase that margin. We've got a lot of really exciting genetics coming down. But also because we're selling -- because the product quality has come up, we have way less Homestead available for sale, and that product is going more into 1964 and Simply Bear. But overall, we do expect some better product mix. But I can't put an exact number on it because obviously, we're in a market where there's a lot of changeable factors, but I'm very bullish.

Neal Gilmer: Okay, thanks. Maybe my last sort of housekeeping item, you talked about some potential CAPEX work that you want to do this year. Do you guys have a sort of a range of a budget that you set aside for this year?

Margaret Brodie: Yes. So the $3 million to $4 million would be a general -- a good number to look at. But we -- that's not all signed off and approved, we take things one at a time. The tables are moving forward. We have part of the facility that doesn't have tables in it. Anecdotally, I can tell you that one challenge, we have one compartment that our cultivation team doesn't love. And I told them their challenge is to have it be the compartment that they are most proud of by the end of this year. So we're -- every brand has to be great. Every project that we look at has to have payback to it in either cost, quality or efficiency -- so while we have set the budget for the year, every time we go to undertake a new project, it's reassessed before we actually pull the trigger. I'm very happy with where the facility is overall. We just did a facility maintenance check or had an external party review the facility itself, and we're quite happy with where it's at. And maintenance, I think, is the name of the game in this industry at this stage. What we've seen is -- and Rubicon has certainly been part of working very hard and driving very fast to get plants out, but now it's making sure that we can have that consistency that we have scheduled downtime to make sure things are in the right position and looking at keeping our assets in good order.

Neal Gilmer: Great, thanks for answering my questions.

Operator: Thank you. [Operator Instructions]. Next question comes from Michael Freeman at Raymond James. Please go ahead.

Michael Freeman: Hey, good morning Margaret and team, and congratulations on executing so well against your strategic plan this year and delivering on profitability. So, not many can say this. My first question is on changes to the Board. You gave a little bit of color on the skills and background of the new board members, but I wonder if you could share some thoughts on how their direction or the potential direction might shift Rubicon's trajectory moving forward?

Margaret Brodie: That's a great question. Look, Rubicon sees a really tremendous opportunity in the market right now. As I mentioned in my remarks, that most of the industry is just focused on survival, and that's a really great time for us to look at how do we build one of cannabis great businesses. These are the moments, I think the potential for David versus Goliath as the big companies that got all the money in the beginning, I don't necessarily think they're going to be the ones that win in the Canadian markets overall. We built a team with the new Board and if you look at each of them and their skill sets, Len comes from -- he was the Chair of the CICA in Canada, the Canadian Accountant Industry. He is known for governance and understands finance very well, obviously. Karen Proud, strong regulatory background, understands the workings of Health Canada and has worked in and out of that for a number of years. Doris Bitz took a business with her team from $60 million, $70 million in revenue to $900 million. She's moved to being over multiple sites, built strong in manufacturing and brand. Ian Gordon was part of the team running one of Canada's biggest businesses, Loblaws, managing their brands, manufacturing experience. And who did I miss, Michael Detlefsen, involved in a number of industries and a lot of expertise on agriculture, but also on strategy and winning. And so look, we are building a company to drive forward, get bigger and win. And look, one of my personal ambition is to have us be one of the most admired, if not the most admired Canadian cannabis company. So I think the long answer, I should be more succinct, but what I'm trying to say is we've got a really neat opportunity ahead of us right now. I'd like to take this team, demonstrate to them the strategic plan that our executive team has put forward, get them on boarded over the next three months and drive forward and focus on that. I think it's going to be an interesting year.

Michael Freeman: Absolutely, thank you very much for that. My next question is on sort of your rough guidance for next year is thinking about growth in top line, gross profit, and adjusted EBITDA for all of 2023. I wonder if it's hard, of course, to put a finer point on these numbers. But I wonder if you could speak to sort of ranges of growth you're thinking about four of these -- across these metrics? And any potential disruptions you could see that would hamper your ability to execute on these goals?

Margaret Brodie: Well, I think I would say, if you took our Q4 and put that across four quarters, you'd see double-digit growth from us. So even at a -- even if we can hold the line there, I think we'll deliver everything that is there, which includes increased gross profit, increased cash flow, etcetera, and in profitability, obviously. But further to that, look, the industry has lots of ups and downs, but we are -- I think we're in a strong position. In terms of disruptions, that's about why you're getting a hesitation from me. The disruption, one thing we've learned is there will be disruptions. Do I know what they will be? No. I believe our team has gotten used to sort of dropping and rolling, having been in the industry for quite a while. We're very lucky. We've got really experienced and talented people who are really dedicated. The biggest disruption, I think, would be a big event in the industry that we can't actually foresee. Regulatory change, I'm only seeing it as positive. Do expect some regulatory change, but we don't know what that is. We've seen the OCS make positive changes in terms of their markups. Can't quite quantify everything that's going to happen there. And even if in the wider market, we saw a turn to recession, etcetera, an official recession, I don't think -- I think Rubicon is well placed to weather all of that.

Michael Freeman: Excellent, thank you. Last question, during 2022 Rubicon made the decision to step away from international for the time being. I wonder how the company's feeling about the strategic decision and if there is any update on international you're willing to offer?

Margaret Brodie: Great question. Look, we get a ton of inbound inquiries for international. There's no doubt about that. What we've seen though is incredible price compression in the international markets. We've seen -- we firmly believe it's going to take longer for them to turn on. Also, the revenues would be very chunky in terms of consistency. We believe that a lot of companies are going to spend a lot of time and money hitting their head against the wall and that we can learn from what they do as time goes on. We've got demand in Canada, and it's profitable today. That's the focus. We will continue to watch it. It takes a tremendous amount of senior term and our skilled team members' time. So if we're going to do international, we're going to focus on it and do it properly. But we don't have the biomass right now. I'd like to prove the Canadian market is strong and grow from there. And I believe that there will be an opportunity just not today. We'll probably pick up the file again, as I said, end of this year and reevaluate and just set it out. And I do believe international will be part of our three-year plan. But exactly what that looks like is yet to be seen.

Michael Freeman: Excellent, thank you for the questions. And I will jump back in queue.

Margaret Brodie: Thanks Mike.

Operator: Thank you. At this time, we have no further questions. You may proceed.

Margaret Brodie: Thank you, everyone. Well, I just want to say thanks for dialing in. We did have a tremendous year, a big year, lots of change. And I think the table has been set for what's to come in 2023 and beyond and very much looking forward to reporting on that as we get there. That's the end of the line operator.

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