RiceBran Technologies (RIBT) 2011 Q2 法說會逐字稿

Good day, ladies and gentlemen, thank you for standing by. Welcome to the NutraCea 2011 second-quarter financial results conference call. During today's presentation all parties will be in a listen-only mode. Following the presentation the conference will be opened for questions. (Operator Instructions). This conference is being recorded today, Thursday, August 18, 2011. I would now like to turn the conference over to Mr. Alan Sheinwald of Alliance Advisors. Please go ahead, sir.

Thank you very much, operator, and good morning and welcome to the NutraCea 2011 second-quarter earnings conference call. With us today is W. John Short, Chief Executive Officer; Mr. Leo Gingras, Chief Operating Officer; and Mr. Dale Belt, Chief Financial Officer.

Before I introduce the speakers I'd like to remind listeners that during the call management's prepared remarks may contain forward-looking statements which are subject to risks and uncertainties. Management may make additional forward-looking statements in response to your questions today. Therefore, the Company claims protection under Safe Harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.

Actual results may differ from results discussed today and therefore we refer you to a more detailed discussion of these risks and uncertainties in the Company's filings with the SEC. In addition, any projections as to the Company's future performance represented by management include estimates today as of August 18, 2011 and the Company assumes no obligation to update these projections in the future as market conditions change.

I'd like to congratulate the NutraCea team on the strong progress made during the quarter. And at this time I'd like to turn the call over to John Short, Chief Executive Officer. John, the floor is yours.

Thanks, Alan, and thanks to our shareholders and to the investors joining our call. I'll begin today by commenting on the agreement we signed with DSM on Monday.

NutraCea is a small company with enormous opportunities. We have what we and others, including many of our competitors, believe is best-of-breed technology and know-how for creating value from rice bran. A key part of our strategy for creating value for our stakeholders is to develop alliances with appropriately positioned global companies, often many times our size, that can help us to leverage our leading industry position for significant mutual benefit.

We have an excellent management team with a clear vision for creating shareholder value. Our goal is to utilize our patented and proprietary technologies and know-how to create value added products from a renewable and sustainable resource, rice bran, to help feed a global population that is expected to grow by over 2 billion people by 2050.

A key component of our business strategy is to develop key strategic alliances, ranging from distribution agreements to joint ventures, that will help us to leverage our competitive strengths to create value for our shareholders and for our partners in those alliances.

We're extremely pleased with the agreement signed on Monday with DSM Innovation Center, a subsidiary of Royal DSM N.V. DSM is a listed Dutch-based global life sciences and material sciences company with over $10 billion of revenue in 2010. The ability to produce high-quality protein from existing resources to feed a growing world population will become increasingly important given existing limitations on available resources including arable land and water.

Under the terms of the joint research and development agreement our two companies will share proprietary and patented technologies to develop and potentially commercialize protein extracted from rice bran for human food and ingredient applications.

Our joint development work with DSM started unofficially in the final quarter of last year. The agreement signed on Monday, which is retroactive to November 2010, ratifies the joint development work completed to date and sets the stage for continuing joint development efforts and future commercialization of products based on rice protein concentrates as well as other target products and applications. We believe our alliance with DSM provides a tremendous opportunity for significant growth at NutraCea in the medium term.

We continue to pursue discussions with other global companies where alliances, license arrangements, or joint ventures can help position NutraCea to execute on our vision for using sustainable and renewable resources to produce healthy products for a growing world population while producing attractive returns for our shareholders.

Another highlight of our most recent quarter that Leo will comment on in more detail later is the performance of our Irgovel subsidiary. As reported in Tuesday's press release, Bio-Refining revenues grew over 62% compared to the same period in the prior year and gross profit increased more than fivefold.

As a result of better than planned performance at Irgovel and specifically the delivery of financial performance that exceeded the targets set out in the membership interest purchase agreement, our partner Alothon accelerated its purchase of membership units from NutraCea resulting in an additional $1 million in cash flowing into the parent company in the second quarter. We are very pleased with the overall performance at Irgovel.

Now I'd like to comment on second-quarter performance in our SRB segment. As you can see in the numbers we reported Monday, we continued to make significant improvements in our operational and financial results in the second quarter and in the first half of 2011. We remain focused on increasing profitable sales, improving profit margins and rightsizing operating expenses.

While we're pleased with the progress, we won't be satisfied until all of our business segments are both cash flow and P&L positive. Revenues in the second quarter of 2011 in our stabilized rice bran business, which we refer to as our SRB segment, increased by 13.1% after excluding $800,000 of revenue recognized in 2010 from the discontinued infant cereal product line.

You will recall that in the second quarter of 2010 our infant cereal business was sold to Kerry, Inc. and our branded equine feed business was sold to Manna Pro. As previously reported, we continued to gain traction in both Europe and North America with SRB inclusions in baked goods, meat extenders and meat analogs.

In addition, we launched human food ingredient sales of defatted rice bran, or DRB, which has unique functionality in reducing oil uptake in fried foods like chicken nuggets and fish sticks. We believe that considering the prevalence of childhood obesity and early onset diabetes, a product that can reduce fat content for products heavily consumed by children and overweight adults has a tremendous market opportunity.

DRB has the additional value of reducing costs for manufacturers due to reduced use of cooking oil in the frying process. After over a year of application development testing we recently made our first production sales of defatted rice bran to a large consumer products company in the US and to an innovative manufacturer of batters and breadings in Europe.

We continue to see competition and price pressure in animal nutrition. To generate additional profitable sales in this market we are working with our major animal nutrition customers to develop new products for companion animals, wildlife such as wild turkeys and boar, zoo animals and hunting lures for deer, to mention a few. These markets represent opportunities to increase sales of bulk and bag SRB and DRB in our animal nutrition markets.

We've seen price increases in raw materials throughout the year. You will recall that we implemented price increases for our products in January of 2011 to offset part of the increased cost of our raw materials. We anticipate raising prices again in the coming months to offset the impact of continuing cost increases.

I want to make a few remarks about our overall sales tactics and strategy. The increase in core SRB segment sales is encouraging, but we believe we can achieve even faster growth in coming quarters, especially in the North American markets. We recently engaged six additional highly experienced independent ingredient sales specialists to further accelerate sales of our SRB, DRB RiSolubles and RiFiber products in North America.

This new group of commissioned sales agents has been assigned territories in the Southeast, East Coast, Midwest, West Coast, Central Southern states and Mexico. The new team members recently attended comprehensive technical and sales training seminars at our corporate headquarters. We expect these new members of our sales team to help generate incremental profitable sales beginning in the second half of 2011.

In our international markets the recent realignment of our distributor and broker networks outside of the US is beginning to bear fruit. We are seeing orders increase in the Philippines, Vietnam and China where SRB is being targeted at meat extenders and meat analogs that are used in processed meat or meatless products. These products are sold both at retail and in menu items in fast food chains. We're excited about the current growth in SRB sales and prospects for increased sales in these markets going forward.

Discussions continue with potential distributors, licensees and partners who we believe can provide increased sales, marketing and financial resources for expansion of our SRB and Bio-Refining segments in other markets around the world where we do not have either the market knowledge or the human and financial resources necessary to pursue aggressive sales growth strategies. We expect to be in a position to make further announcements related to these efforts in the near future.

Before turning to call over to Leo I want to add one further comment about strategic direction. While we're focusing the majority of our human and financial resources on Bio-Refining and the SRB segment, we continue to pursue discussions related to our investments in patents in the nutraceutical and functional foods arena.

Our objective is to identify partners or licensees that will allow us to leverage our historical investments as we continue to pursue alliances similar to the arrangements we just announced with DSM. We will make appropriate announcements as these conversations develop into concrete agreements.

I'll stop here and ask Leo to bring us up to date on Bio-Refining and operations at Irgovel.

Thank you, John. As a reminder to our shareholders, our Bio-Refining segment is composed of Nutra SA LLC, a Delaware company that holds 100% of Irgovel, our Brazilian bio-refinery. At this point in time Nutra SA is owned by 55% by NutraCea, 45% by the Alothon group. Alothon has the right to increase its ownership in Nutra SA to 49%.

Irgovel continues to do well. We had a strong second quarter with revenues up over 62% and gross profit up by $1.3 million compared to the second quarter of 2010. This is due to increased volume as well as favorable pricing across all product lines. We expect Irgovel to continue doing well for the balance of 2011 and beyond.

On the last several calls I've described a number of projects we have under well at Irgovel. These projects will expand capacity, improve efficiency and introduce new value added products. I'm pleased to report the completion in the second quarter of two components of this large effort.

First, we've completed a capacity expansion of our distilled fatty acids plant. This plant purifies a co-product of the rice oil refining system and the resulting high purity distilled fatty acids are sold to the Brazilian detergent industry. Post-expansion this plant is operating at 50% above baseline, well ahead of the 25% increase we initially anticipated. This increased capacity has been utilized for about two months and sales of distilled fatty acid have been increased accordingly.

Another project recently completed was the purchase and installation of a near infrared analyzer. This is a tool that provides rapid quality analysis of incoming raw rice bran. We are currently collecting a large amount of data that will allow us to provide feedback to suppliers to improve (inaudible) quality which in turn will improve processing yields and reduce processing expenses.

We continue to work diligently on the remaining project components and anticipate all projects to be completed on time and within budget in the first half of 2012. As noted in a previous press release, we expect a threefold increase in EBITDA at Irgovel measured against 2010 performance once our projects are complete and marketing efforts ramp up.

In the United States our two plants in California and our plant in Mermentau, Louisiana are operating while our Lake Charles, Louisiana facility remains idle. Our Stage II facility in Dillon, Montana continues to produce product for sales of RiSolubles, RiFiber and RiBalance, our enzyme modified derivatives of rice bran. We also continue to investigate other product options that would allow us to fully utilize plant capacity at Dillon and enhance our overall SRB segment sales.

Some of you may have heard about the rice acreage reduction in the southern United States this year. This shift is a result of some of last year's rice acreage being planted in other crops, primarily corn and soybean, as farmers seek to optimize their returns. In addition, the massive spring floods along the Mississippi River ruined additional rice and other crop acreage for this growing year.

California is the exception to the trend with rice acreage up by 3% over last year. As a result the USDA is predicting that the US rice crop will be down approximately 20% from last year's record production. All this said, we are confident in being able to obtain all the raw rice bran needed for our operations over the next year.

One outcome of the tight US rice situation has been a rise in prices for raw bran over the last several months. As with all food processors facing increasing raw material prices, we must pass these higher costs on to our customers.

I'll close with a few additional remarks about our recently announced joint development agreement with DSM. We are very pleased to be working closely with DSM. Doing so allows us to combine our two companies' technologies with the goal of producing new valuable food ingredient products. Like DSM, NutraCea believes that better utilization of existing food materials will be critically important in feeding future generations in a cost-effective, renewable and sustainable manner.

In previous calls we've discussed various aspects of rice bran Bio-Refining, including extraction and purification of protein from rice bran. We look forward to working closely with DSM to create this next level of technology as part of our Bio-Refining business model.

Under the terms of the agreement NutraCea and DSM will share existing patented and proprietary intellectual property and know how to investigate extraction and modification of high-quality vegetable proteins from rice bran. This collaboration will provide the opportunity to develop and potentially commercialize protein derived from rice bran targeting human food and ingredient applications.

I'd now like to join the call over to Dale Belt, our Chief Financial Officer, for a review of financial results.

Thanks, Leo. I'll begin with a review of our financial performance. Consolidated revenues for the three months ended June 30, 2011 totaled $9.6 million as compared to $7.5 million for the same period in 2010. The increase of $2.1 million represents a 28.6% gain which was driven by our Bio-Refining segment.

Bio-Refining segment revenues increased from $4.2 million in the second quarter of 2010 to $6.8 million this quarter. Bio-Refining revenue gains in 2011 are due to the current favorable pricing environment and increased volume in animal feed and oil product.

Animal feed revenue benefited from higher prices in other commodity products such as soy and corn. In a similar fashion, rice oil revenues continue to benefit from the current higher pricing trend in the premium vegetable oil market.

SRB segment revenues derived from our animal and human nutrition products have increased by $0.4 million quarter over quarter, a 13.1% increase. It's important to remember when comparing the 2011 and 2010 second quarters that we no longer have revenues from the sale of infant cereal products due to the March 2010 sale of the cereal product related asset. For the second quarter of 2010 those revenues were $0.8 million.

Consolidated gross profit for the three months ended June 30, 2011 totaled $2.6 million, an increase of $1.1 million over the prior year amount of $1.5 million. This represents a healthy 75.5% increase along with our gross profit percentage increasing from 19.6% in 2010 to 26.8%.

Bio-Refining gross profit percentage improved to 21.8% during the second quarter of 2011 as compared to 5.4% for the same period in 2010. This represents a strong 16 percentage point gain in gross profit for the period. Clearly we are seeing the plant's efficiency gains associated with the shift in sales mix and higher plant production levels along with the price increases already mentioned.

Consolidated operating expenses totaled $4.6 million for the second quarter of 2011 as compared to $5.2 million during the same period in 2010. These results yielded an improved loss from operations of $2.0 million for the second quarter of 2011 as compared to $3.7 million for the same period in 2010, noting that last year's loss included an impairment charge of $1.0 million.

Net loss attributable to NutraCea shareholders for the three months ended June 30, 2011 was $21,000 as compared to a net loss of $4.5 million for the same period in 2010. It is worthy to mention that for the second quarter of 2011 total other income was $2.0 million as compared to other expense of $0.7 million in 2010. Included in these amounts is warrant liability income of $2.4 million in the 2011 quarter as compared to warrant liability expense of $0.5 million for the 2010 quarter. As I did in our last conference call, I would remind everyone that warrant liability income and expense is a non-cash item.

For the six month period ended June 30, 2011 the key financial highlights are as follows. Consolidated revenues rose from $14.7 million to $17.6 million, a 19.8% increase. Consolidated gross profit was $4.8 million in 2011 as compared to $3.2 million for the six months ended June 30, 2010, an increase of 49.8%. Consolidated gross profit margin improved to 27.2% during the first six months of 2011 as compared to 21.8% in the same period in 2010. And finally, consolidated operating expenses totaled $8 million for the first half of 2011 as compared to $10.2 million during the same period in 2010, a decrease of $2.2 million.

I will close with a few comments about liquidity. The Bio-Refining segment continues to generate cash from operations. However, it's important to note that our agreements with Alothon currently require that positive cash flow being generated at Irgovel be utilized the fund the capital expansion and expected growth in that company.

The corporate and SRB segments, although improved quarter over quarter, continue to use cash operationally. To cover cash needs we received an additional $1 million from Alothon in the second quarter of 2011 as John noted earlier. Furthermore, we raised an additional $500,000 which was drawn down in June and July. We continue to carefully manage our cash resources while we pursue discussions with various parties regarding a potential fundraising transaction.

And with that I would like to turn the call back over to John for some closing comments.

Thanks, Dale. Overall we're pleased that our Bio-Refining segment continues to generate cash, that revenues are growing in both the Bio-Refining and the core SRB segment product lines, and that the cash burn at the corporate level has been reduced substantially. I want to thank the management team and staff, as well as our Board of Directors, for their continuing efforts aimed at driving our Company to overall profitability.

Before we open the call for questions I want to point out that Alliance Advisors has joined our team as Investor Relations counsel. Alan Sheinwald and his team will be assisting us in telling our story and keeping shareholders up to date as things progress here at NutraCea. We look forward to attending investment conferences and having the opportunity to personally meet with investors throughout the country in the coming months.

This concludes our formal comments and presentation. At this time we'd like to open the call for questions. Camille, if you could please start to the Q&A portion of the call.

(Operator Instructions). Bruce Galloway, Galloway Capital.

Congratulations, good quarter. Obviously you're showing a lot of strength in the bio-refinery business in Brazil and you're expanding that facility. What about utilizing that strength and going into other jurisdictions such as the United States and Asia? That's my first question.

Number two, can you highlight what your patent position is, what the strength of your technology is, and what the competitive advantage of NutraCea is vis-a-vis other stabilized rice bran companies? I understand that it's very popular in Japan and there's a strong presence of stabilized rice bran there.

Let me -- let's do it this way. Leo, I'll take the first one, you take the second one. Is that fair? Bruce, thanks for your questions. Regarding Bio-Refining, we stated previously that our strategy is to expand our Bio-Refining capabilities over time into other markets around the world.

We're certainly expanding our capacity in Brazil, but we're also adding technology there and we think that platform should be moved into other rice growing areas around the world. That is on the radar screen for us. A critical issue in terms of being able to do that is to be able to fund those operations and we've involved with discussions with various parties in various jurisdictions to try to make that happen.

So I think the answer to your question is, yes, that is a clear part of the strategy for the business going forward, work in progress. And we look forward to making those additional projects in additional jurisdictions materialize over time.

And what about once the -- is the expansion done in Brazil right now? Is that finished? I think you mentioned that it was finished. And if it is finished are you going to be building additional plants with Alothon in Brazil?

Leo, do you want to talk to that one?

Certainly. Bruce, we call the project in Brazil an expansion, but it's actually a multifaceted set of projects under one umbrella. And we're not -- the expansion itself won't be complete until the first half of next year. We have completed a few of the smaller components, as I described just a few moments ago, and a few more will come online before the end of this year. But the overall expansion of the oil extraction plant is going to happen into next year.

It's worth noting, Bruce, and for other folks who are on the call, we've achieved the increase in sales down at Irgovel without the expansion. And we will get -- Leo mentioned in his remarks that we completed the expansion of a distilled fatty acids facility where we're getting about a 50% increase in production out of that facility versus 25% that we had modeled or estimated.

And based on that and some other things we're doing in the business, we've gotten some very, very nice increases in sales and margins. So quite frankly we're very excited about what we think this business is going to do when the expansion itself comes online. But in the meantime other of the projects within the -- underneath that umbrella that Leo described are going to be coming on in the second half and early next year. And each of those projects will give us a nice little bump.

Okay, great.

Bruce, could we ask you to repeat the second question about technology to make sure we've captured it?

One moment, please.

You know and what your competitive stance is utilizing stabilized rice bran in the international markets particularly Japan where it's very strong? And they're pretty (technical difficulty) stabilized rice bran?

Yes, well, generally speaking, and I'm sure John will back me up here, that we have a technology for stabilization that, as John described, is the best in breed. And we feel very confident in our technology and its cost structure that's associated with it. And as far as the Japanese go, we actually export some product to Japan, stabilized rice brand as well as oil. So they're a customer.

And Bruce, I think when you were referring to a question earlier you were asking a little bit about patents, intellectual property and what kind of competitive positioning that gives us in the various markets. Leo, do you want to talk about patent versus proprietary on the stabilization mission?

Certainly. Bruce, this is a question that comes up quite frequently, not just in our industry but all industries. When you look at research and development efforts that are successful and you have intellectual property, the question always comes down to should I try to patent this or should I just keep it as a trade secret or proprietary.

Patents obviously can be very useful, but they can also be a means of telling the world how you do something and allowing the rest of the world to try to tweak the process or in some way just get around your patent. So what we -- what NutraCea did in terms of the machine that we use for stabilization is a decision was made not to patent that and keep it as a proprietary intellectual property.

You can imagine that if you do a patent and you do essentially lay out the blueprints for your machine, that a competitor could look at that and find ways to add (multiple speakers).

Design around it, yes.

Design around it, exactly. Now we do -- so that's been our approach there. Now other things, for example in the situation where we're doing diabetes and pain and inflammation extracts, that's an arena where patents can be quite useful around the functional food nutraceutical type of application. And also things like use of stabilized rice brand as a meat inclusion. Those kinds of use applications or -- patents can be useful in those cases. So it's really a case-by-case situation.

Okay, good work, guys.

[Cliff DiSilva], private investor.

Yes, hello, gentlemen. Thank you for taking my call. Very exciting to hear the new alliance with DSM. And what I'm wondering is in addition to looking for new products and working with them to design new products, is there any interest in utilizing the products that are currently available and incorporating them into some of their product lines, so SRB, defatted rice bran? And will this arrangement result in any immediate cash flow for NutraCea? That would be my first question.

And secondly, wondering a little bit about the extraction methods. I understand that currently a hexane extraction method is used for rice bran oil. Are there any processes in place or are you looking for any additional technologies to be incorporated into that? And does the hexane extraction process limit you from entering any markets with rice bran oil at this time? And perhaps letting us know of any other new technologies that might be employed with the rice bran extraction technology. Thank you.

Cliff, thanks for your questions. Leo let me take the cash flow piece and then you can take the other ones? Does that make sense?

Certainly.

As it stands now -- I mentioned in my prepared remarks that we've been working with DSM since last November. And based on the preliminary work that was done under a letter of intent, we have concluded that it is in everybody's best interest to accelerate that work and move to -- try to produce products that will be able to be brought to market.

In terms of timing, we have more work to do before we have products that can be commercialized, Cliff. So we will continue with sort of an accelerated research and development phase now. Our first target is to produce a rice protein concentrate and that rice protein concentrate can have a series of applications in a number of foods and functional foods.

We're very encouraged about the work that has been done to date and we think we will be able to move forward aggressively. But this will not produce revenues -- any product that comes out of this will not produce revenues for us in the 2011 calendar year.

We have generically targeted 2012, but I think everybody appreciates -- 2012 to be in a position to bring first products to market. But I think everybody appreciates that that depends on the way the research comes out and there's more work to do. Leo, do you want to talk a little bit about hexane and extraction methods?

Certainly. As you know, in Brazil we're employing the hexane extraction method for separating oil from defatted rice bran. The hexane approach is used globally on a large scale to produce the vast majority of the world's edible oils. Very safe process and I would add in the final product there are no traces of hexane left in any of the final product, it's all removed and reused actually, recycled.

So, Cliff, no real limitations there, the world is very accepting of hexane extracted oil, has been for a very, very long time. The world continues -- people continue to look for alternatives that don't employ solvents. Frankly a lot of work has been done through the decades but all of the alternative approaches just either lack in yields or they're just too expensive, frankly.

So where we are in the world right now, the hexane approach is the gold standard for extraction, everyone accepts it. I would say one exception to that would be in very niche markets like high end olive oils where traditional presses are used, where you literally just press the oil from the material. Again, very inefficient but it works fairly well for very high end expensive oils.

Okay.

(Operator Instructions). There are no further questions at this time. I would now like to turn to call back over to management for closing remarks.

Thanks, Camille. We'd like to thank the shareholders and everyone who participated in today's call. We look forward to updating everyone on our third-quarter financial results conference call in mid-November. If you have any further questions feel free to contact Dale or myself, Leo, Alan Sheinwald and his team at Alliance and this call has officially ended.

Ladies and gentlemen, this concludes the NutraCea 2011 second-quarter financial results conference call. If you'd like to listen to a replay of today's conference please dial 1-877-870-5176 with the access code of 446-4294. Thank you for your participation. You may now disconnect.