Rubicon Organics Inc. (ROMJ) Earnings Call Transcript & Summary

Good morning, everyone. Welcome to the Rubicon Organics First Quarter 2021 Financial Results Conference Call. As a reminder, this conference call is being recorded, May 18, 2021. [Operator Instructions] I will now turn the call over to Marc Charbin, Investor Relations. Please go ahead, Marc.

Thank you, operator. Good morning, everyone, and thank you for joining us today. Rubicon Organics first quarter 2021 financial results were released this morning. The press release, financial statements and MD&A are available on SEDAR as well as on the Rubicon Organics website at rubiconorganics.com. Before we begin, I'll refer you to Slide 2 of our presentation, which contain Rubicon's caution regarding forward-looking statements. I'm joined on the call today by Jesse McConnell, Chief Executive Officer; and Margaret Brodie, Chief Financial Officer. I will now pass the call over to Jesse.

Thank you, Marc, and thank you, everyone, for attending our quarter 1, 2021 conference call. It has only been 6 weeks since our last call, I believe a fresh market share update for you all. As you can see on Slide 3, Simply Bare remains a top-selling premium brand and is dominating the organic cannabis market across major provinces. We are a top 6 premium brand in Ontario, Alberta and Québec. We are both the top premium and organic brand in our home province of British Columbia. These results are a function of product excellence and executing on our innovation pipeline. I'm especially proud of these results, considering our competitors have been in market for a few years now, where Simply Bare is launched a little over a year ago. We will grow revenue by sticking with our strategy, mainly through increased offerings from our genetic portfolio and focusing on both brand and product innovation in the premium and super premium segment. Since inception, we have said we will follow a good, better and best strategy, starting with best or super premium. While our best is one of the best, if not the best, we will soon be launching our better brand, 1964 Supply Co., which is currently only available in Québec, into additional provincial marketplaces to capture market share within the mainstream premium pricing segment. In the past, we have spoken about our extensive genetic library, and we have spent the last year putting those genetics through a number of trials. I'm pleased to report that after several dozen tests, we are ready to bring a select few of these genetics to market. The first of these high-THC and high-terpene strains will become available around Canada Day. In addition to expanding our core Simply Bare strain portfolio, we will also be offering seasonal strains on a limited time offer basis that we anticipate being highly sought-after by cannabis connoisseurs. Premium segment has better margins and is where we have a proven competitive advantage with our organic cultivation methodology and the hybrid greenhouse that we specifically built to grow premium product at low cost. We stand by our decision to build the right-sized facility and build the right cost structure for the Canadian marketplace, and we expect to demonstrate the significance of this strategy as we drive the topline and reflecting the profitability in the second half of the year. As you have all seen in recent transactions in the cannabis sector, premium cultivation and premium brands cannot be easily replicated even with $1 billion of cash on the balance sheet. Turning to Slide 4. You can see our recent milestones. We discussed many of these on our last call. Of particular note is our much improved financial position and balance sheet. The proceeds of our recent bought deal will principally to repay debt, and we have done just that repaying substantially all of our outstanding debt. On Slide 5, we disclosed in our MD&A that Rubicon Organics undertook a restructuring this month. There are 2 factors that led to this restructuring: First, the operational efficiencies that we had outlined in our last call have been implemented sooner than we had expected. We continue to make significant improvements in our cultivation processes, and therefore, our plants are requiring less work. This increase in overall quality translates into us also having to spend less time harvesting and processing. We took advantage of the slowdown in the expansion of the domestic market due to the COVID closures to undertake certain Kaizen procedures, which resulted in discovery of additional efficiencies in both processing and packaging. Secondly, in quarter 1 2021, second COVID wave hit, resulting in provincial-wide store closures, in particular, in Ontario that have been ongoing since December. With stores closed and retail walk-by traffic significantly diminished, there has been a challenge to grow the top line. This is probably not news to most of you on this call as many of our peers have already reported earnings and have expressed as much. The Ontario closures are still in place, and internally, we are forecasting them to remain in place until the end of June. In response to these short-term challenges, we took the decision to restructure the business to significantly reduce our cost base and keep the company in a strong financial position. Unfortunately, this meant Rubicon had to part ways with some great people. Our initiatives are expected to save the company about $2.6 million a year in cash costs, and we expect to realize additional efficiencies as part of our ongoing continuous improvement process. It is always darkest before the dawn, and we view these COVID challenges as short term. Vaccines are rolling out nationwide, store level inventories are at all-time lows. We've already built a robust innovation pipeline, and our full sales team remains in place as we prepare for the sizable restocking event that we anticipate occurring on the back of store reopenings. We have redesigned our operational process plan to ensure we are able to accommodate the anticipated demand surge in quarter 3. To provide one example as to why we are confident in the demand surge beyond the obvious of simply wanting to spend -- people simply wanting to spend more time socializing outside of the current bubble. Ontario has licensed almost 200 retail stores since January of this year, many of whom have yet to open their doors or place their first orders. Turning to Slide 6. We are looking forward to the remainder of 2021. We have a pretty exciting product pipeline. There are a few big launches upcoming in quarter 2, 2021. First, we will be launching our first live resin product in Ontario under our Simply Bare organic brand. We are tremendously excited about this product as we believe it will be a much larger category than it currently is, and our genetics process and organic methodology is particularly well suited in creating an incredible product. We also anticipate entering the vape category through PAX ERA pods. We expect this launch by the end of June, and once in market, we'll be the only organic vape pod for PAX ERA products. And as previously mentioned, and in line with our good, better, best strategy, we also be launching our better brand, 1964 into new provincial marketplaces. Building the right strategic pricing segmentation strategy to capture margin while ensuring volume is critical to our goal of realizing industry-leading profitability. We have already launched 1964 in Québec with great success and with our province-by-province pricing strain strategy, we anticipate the size of the price for 1964 to be significant. In addition to our innovation pipeline, Rubicon Organics is advancing its industry leadership as it relates to environmental, sustainable -- sustainability and governance practices. We are a mission and value-oriented company, and sustainability is one of our 4 core values. In the coming days, you will see improvement in our commitment to ESG principles as we outline exactly where we are today and how we intend to improve our best-in-class standards. Thank you again for joining today's call. And I will now pass the call over to Margaret.

Thank you, Jesse, and good morning, everyone. In the first quarter of 2021, Rubicon Organics reported net revenue of $4.1 million. This is a $3.7 million increase relative to the first quarter of 2020. Although we experienced a sequential decline in net revenue relative to Q4 2020, given the change in buying patterns by the provincial distributors and the limitations placed on retailers for in-store shopping that came into effect in Q1 2021. We reported a write-off of approximately $600,000 relating to finished goods in Q1 2021. Unfortunately, it was necessary to write-off finished product that was entirely on spec. In December, we thought we had pretty good visibility on sales provinces, and we were preparing for it by packaging inventory. But given the limited in-store shopping due to COVID-19 closures, the indicated orders were less than planned, and this finished product remain packaged for over 90 days. And in line with provincial distributor requirements, we do not ship product package more than 90 days, so we wrote the product off. Removing the impact of this write off, we would have been gross profit positive this quarter, excluding the impacts of fair market value changes. Considering we experienced a sequential decline in net revenue, we are quite pleased with the progress we are making towards driving gross profit. We reported an adjusted EBITDA loss of $3.4 million in Q1 2021. Rubicon was built for higher levels of growth than we have experienced. As Jesse mentioned earlier, we have undergone a restructuring to adapt to market conditions. We feel that profitability as measured by adjusted EBITDA is imminently achievable with more favorable market conditions, the routes to market open and our lean operation. We ended the quarter with over $20 million in cash and over $20 million in working capital. And today, we have a cash position of approximately $6 million. While we are pretty comfortable with our balance sheet, we are still going to press really hard to extract all the efficiencies we can from our operation. We are currently debt-free although we are looking at lower cost mortgage options for our delta facility in the range of $10 million to keep our cash position strong and expect this to be in place before the end of the second quarter of 2021. At this point in our growth trajectory, we value the flexibility that cash provides. Turning to our financial objective. We are pushing out our goal of monthly EBITDA profitability to Q3 2021 and maintaining our objective of operating cash flow positive in H2 2021. We are still in a pretty difficult position in terms of forecasting revenue. If we start seeing retail openings in Ontario, we are off to the races, but if current lockdowns are extended further, we expect it will have an impact on our ability to deliver profitability in the short term. We are very bullish on Rubicon's ability to drive profitability. As Jesse mentioned, there is potentially a large restocking event once Ontario retailers get the green light to allow customers back in stores, and there are hundreds of stores waiting to make their first order. We have delivered exceptionally strong market share in the premium category to date, and we have a very deep innovation pipeline across flowers, vapes and concentrates that positions us well to capture additional market share across the premium category. The operational efficiencies and restructuring that we have implemented will drive production costs down, positioning the company very well to ensure that incremental sales fall directly to the bottom line. We are looking very forward to coming out of lockdown and showing Rubicon Organics' true potential. So now we would like to open the line to questions. Operator, please open the line.

[Operator Instructions] Your first question comes from the line of John Chu from Desjardins.

Can you maybe just talk about the wholesaler buying patterns that you're seeing currently? I think you said they were starting to pick up in about mid-March last time when you had your call. And so I'm just curious whether or not -- even with the shutdown, whether or not, we've been seeing a bit of a reversal of that destocking and seeing some of those purchase orders starting to emerge?

John, good to hear from you and a great question. We have an interesting graph we were building for internal purposes at looking at how those purchase orders have flown in. And in that brief few weeks that Ontario was open, there was a huge surge in POs, and then with the COVID closures, we saw it return to the January/February levels. So in addition to the SKU rationalization that occurred earlier, Ontario has also indicated that they have spread out the delivery slots. You're probably aware of this for social distancing purposes, meaning that a number of items actually ends up across the board, us and others going out of stock in popular items. So they really have not returned to normalized wholesale buying patterns yet, and we do not anticipate seeing that until the stores reopen, which could be as early as June 2 according to the current provincial governments. And again, internally, we forecast that to be a few weeks after that.

Okay. And then maybe just talk about the launching of some of your new products. You gave us a bit of a timeline, Q2 for live resin, the PAX launch end of June, but maybe just a bit more details on the 1964 launch specifically. Can you give us an order, which provinces you're looking to roll out first and then the timing of that? And then any other type of new products. You had some stuff with Valens that you had announced previously, maybe the timing of when we might see some additional 2.0 products as well?

Perfect. Well, just one minor correction, it's live resin, which is a solventless product, and therefore, certifiable organic, which is a little different than live resin. And that's something that we anticipate being actually a very strong category as the consumer adapts to that. So the easiest way to respond to that is, we are rolling out our new brand on a province by province basis, and the strategy inside of each province is slightly different. And therefore, the timing will fall a little differently in each one of those provinces. I can't give you specific dates on that right now, but I would broadly align to late quarter 2 or early quarter 3, you'll see 1964 move across to various different provinces. There is just slightly different timings in each province on the product calls, and then, therefore, the time which of that will become available to the consumer. As for PAX, I believe the PAX launch is...

In the next month.

Next month, yes. In June, you'll see that in Ontario first.

Yes.

And then some increments, some additional products coming after that in which state?

Alberta.

Alberta first, apologies, yes. Alberta is the first market that you're going to see that launched into. The solventless, we anticipate being in Ontario first. That's the live resin product. I expect to see that across the other provinces and within the same quarter. And then the various different genetic innovations. The way that has worked is -- I mean, we have gone -- I said dozens on the call, but probably, 100 trials, maybe more than that of various different genetics to understand how they grow best in terms of yield and quality on the cost base side and then, of course, to ensure that they're high-THC and the right terpene profile and going to be very attractive to the consumer. And you're going to see that innovation begin to roll out here in the next 4 weeks, 5 weeks. The first of our new genetics will begin to hit the market, and it's a pretty robust pipeline of genetics coming in after that. Again, it's slightly different in each province. We have -- you see different buying patterns in every province. So we've adapted our pricing and strain strategy to treat each province specific to those buying patterns, and we think that, that's going to be part of our strategic advantage.

Okay. And then maybe just a last question for me. On the EBITDA positive timeline, maybe just give us a sense of what kind of topline do we need to see to get there? Because it sounds like from at least on a cost perspective, you've been addressing that. So it seems like the 100s has been the topline, which -- it seems to be a bit out of your control given the initial headwinds. But can you give us a sense of what type of topline number you need for us to see that positive EBITDA?

Yes. I mean, certainly, the COVID headwinds have been real for the whole industry. We certainly do view it as short term. We're very excited, very bullish on quarter 3. You can imagine our frustrations, though, over quarter 2 and with the inability to visit stores or the hundreds of stores. This has been industry-wide, but hundreds of stores that are just kind of waiting for our product and excited about it. But just for all the right reasons, they haven't opened their doors and they shouldn't open the doors when you've got lockdown orders in place. But specifically to address your question, just under $7 million in revenue would be the inflection point for us with our current cost structure to break into EBITDA positivity.

Your next question comes from the line of Neal Gilmer from Haywood Securities.

Margaret, maybe starting with you with your comments with respect to the restructuring that you've undergone, the $2.6 million in annualized savings. Was any of that actually realized in Q1? Or is that something you've done post Q1 and will start to see that -- those savings reflected in Q2 onwards?

It will be reflected in Q3 onwards. Frankly, all of that is people, whether -- and obviously, a difficult decision for us, looking at the growth. We do expect that there are more efficiencies and costs to come as we move through the year, namely items like we're purchasing dehumidifiers which we were renting before. If you look at our cash, our biggest cash used in the last -- since March 31 is paying down all of our debt and buying some dehumidifiers, so other than just normal operations. So we're really driving forward. We're also waiting on a BC hydro update -- upgrade, which will reduce our cash costs as well. I think that's in the fourth quarter at the earliest. But there are improvements like that to come, which we're quite excited about. And they're all incremental, but those increments that will add up.

Okay. And then I know it's tough or whatever, but still just trying to get a gauge on your comments with respect to the provinces lockdown. I understand what's going in Ontario, obviously, sitting here myself. So would you think that -- or is it safe to say you're expecting sort of flat on a quarter-over-quarter basis. It's not much upside because of the lockdown. You're assuming it's closed through to the end of June, not too much downside because it's basically pretty much the status quo in Q2 versus Q1. Is that the right sort of way to sort of take a look at the dynamics in the marketplace right now?

I think we'll see that across the market. I would agree with that, Neal. We're -- on one hand, we're positive because we've got some new product launches coming out, but initial pipe fill orders have all reduced with COVID. We've seen Ontario reduce their hours with the curfew there. Ontario -- sorry, Québec, excuse me, Ontario stores being closed. That being said, at some point, whether that hits us in June or July, it will be very interesting when the large restocking event occurs, how the province will onboard different sizes of LPs and the demand. And we expect it to be very lumpy, probably until mid-August. There is going to be a huge -- if you think about the size of companies and the size of orders that are needed for these stores to open up is pretty considerable, and everybody is going to want to sit in various categories. You don't want your entire store to be sitting with one SKU. So then it will be a very large logistical exercise for the OCS. So my expectations are that we won't start to see the supply chain even out a bit until August or September. What I can tell you as a business is, we're working very hard to be nimble and reactive to take advantage of when the big guys can't deliver those large orders to be able to actually come in and do it. And I think with a smaller organization, we've got the ability to flex on that and be opportunistic to fill gaps.

Your next question comes from the line of Rahul Sarugaser from Raymond James.

So a bunch of my questions have already been answered by the previous question. So maybe just looking a little bit beyond Q2 and into Q3, Q4, recognizing that there is still some opacity in terms of opening up those retails. And your continued confidence that you should be able to turn EBITDA positive come Q3 and then, of course, still taking into account the restructuring of costs that you mentioned. So how should we be thinking about sort of the primary drivers of that positive EBITDA come Q3? And then hopefully -- and how do you assess the durability of that EBITDA sort of into Q4 and onwards?

Great question, Rahul. Well, firstly, our restructuring is twofold. It's, of course, a response to COVID closures, and 6 months of having depressed openings in Ontario. But it's also a response to us simply just getting better. Our cultivation processes have dramatically increased. Our processing has dramatically increased. Our quality has dramatically increased. And it's just meant we need less people to handle increased yields. So in that sense, we leaned out the organization, which I think is great. When you look at that restocking event and kind of -- I look back a couple of quarters and all the conversations around the industry were about the need for Ontario to open up its marketplace, create accessibility for the consumer, and frankly, that has never came to pass as a result of those closures going in place in December. So while there is a nice demand surge bump that will happen in quarter 3, it's also a leveling up of the demand curve in aggregate. It's not simply a onetime restocking events and drive on, we're talking about nearly 35-odd percent increase in stores in the province of Ontario alone. So we really see that whole thing leveling up. We also see the landscape shifting a little bit through this. LPs that didn't come into this last 2 quarters in a strong financial position are going to find themselves being a lot less competitive. The SKU rationalization, as you know, brought SKU counts down from -- I'm going to get the numbers wrong, but I'll get the magnitudes right, somewhere in the neighborhood of 2,000-odd SKUs, down around 200 SKUs. So really significant reduction in magnitude. So arguably, we've got more share on the shelf. So better options for consumers, more targeted. So when we look at the landscape going forward as we get into the end of this year, we've built a right-size facility. We're continuing to prove out our domination in the premium category. We've got the innovation pipeline that we've been building over the last year that frankly, we are just in the process of launching right now, specifically around our core business, which is high-grade flower. And we've got a more accessibility for the consumer, many more points of distribution that they're going to be able to access in the coming quarters. So there is a kind of a -- the whole industry, I think, is leveling up there, and those LPs who have remain focused with that process are going to really succeed in that. And I think a lot of LPs who have struggled in the last couple of quarters, you'll see push to the sidelines here in the upcoming quarters.

Perfect. That's great color. And so just maybe just a follow-on in terms of looking at that bottom line and the trajectory. Of course, the other factor that would drive that positive bottom line will be margin -- continuing margin improvement. Now we've seen some modest margin improvements quarter-over-quarter, how should we be thinking about margins over the next couple of quarters and then medium and longer term?

Well, I think in our Simply Bare portfolio, you're going to -- you should see some of that increase. Because when we look at our restructuring, some of the -- a lot of the costs that came out of that was overheads and people. But then you see on a unit economic basis, again, our quality and yields are improving, and that drives margin accretion. In terms of -- as we get away from the unit economics and look at the aggregate gross margin pool, the new pricing strategy that we're going to be implementing in the coming weeks should drive the overall size of that margin pool. To give you a simple example, Rahul, when we step down in price from our current offerings by around $5 to $6 in certain provinces, we access a gross margin pool that's almost twice the size of the one that we're currently in. So we'll still have the offerings in that higher-margin domain. But now that we've got this new genetic innovation, we can begin to offer in that segment just below that. So we're growing the aggregate size of gross margin pool while maintaining the unit economics and the one that we currently plan.

I'm showing no further questions at this time. I would now like to turn the conference back to Jesse McConnell.

Thank you. Well, just a couple of quick comments to close things up. We're very, very bullish on the future of this business. It's been a challenge, I think, for the whole industry in the last 2 quarters with these -- with the province-wide, nation-wide COVID closures. We've leaned out our organization. We've got a bunch of innovation that we've been talking about for the last year, ready to go here, ready to launch in the upcoming weeks. So we're tremendously excited about the future. Everybody is looking forward to something that resembles normalcy, getting back to a bit more of a normal life. So we're just going to stick with our strategy, continue to grow and drive revenue here and anticipate profitability here in quarter 3. Thanks, everybody, for joining our conference call, and I'll give you the rest of your day back.

This concludes today's conference call. Thank you for participating, and have a wonderful day. You may now disconnect.