RiceBran Technologies (RIBT) 2015 Q2 法說會逐字稿

Greetings, ladies and gentlemen, and welcome. Welcome to the RiceBran Technologies Q2 2015 financial results conference call. (Operator Instructions) As a reminder, this conference is being recorded. I would now like to introduce your host, Mr. Fred Sommer of Ascendant Partners. Please go ahead, Mr. Sommer.

Thank you, operator. Good afternoon, listeners. Welcome to the RiceBran Technologies second quarter 2015 financial results conference call. With us today are John Short, Chief Executive Officer and President of RiceBran Technologies; Dale Belt, Chief Financial Officer; Dr. Robert Smith, Senior Vice President of Operations and R&D; and Mark McKnight, Senior Vice President of Sales and Marketing.

Before I turn the call over to John, I want to remind listeners that during the call, management's prepared remarks may contain forward-looking statements that 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 as of today August 13, 2015, and the Company assumes no obligation to update these projections in the future as market conditions change. This webcast and certain financial information provided in this call, including reconciliations of non-GAAP financial measures to comparable GAAP financial measures, are available at www.ricebrantech.com on the investor relations page.

At this time, I'd like to turn the call over to John Short, CEO and President of RiceBran Technologies. John, please go ahead.

Thanks, Fred, and thanks to all of our listeners for joining this call. In the second quarter of 2015, consolidated revenues reached $11.4 million, which represents an 18% sequential increase over the first quarter of this year and a slight increase from $11.3 million of revenue recorded in Q2 of last year. Consolidated revenue for the quarter was led by our USA segment, where revenue reached $6.9 million, a 35% increase from Q1 of 2015, and a slight increase from Q2 of 2014 USA segment revenue of $6.7 million.

I'm pleased to report that due to the strong operational performance during the second quarter we achieved positive adjusted EBITDA of $543,000 in our USA segment. That result also allowed us to record a modest positive consolidated adjusted EBITDA in the second quarter. This marks the first time we've delivered positive consolidated adjusted EBITDA since we embarked on our capital restructuring plan and uplisted to NASDAQ. We expect to build on this positive performance in the coming quarters as we continue to execute our tactical and strategic plans.

When looking at our Brazil segment, on a local currency basis, revenue increased by 35% from BRL10.2 million in Q2 of 2014 to BRL13.9 million in Q2 of 2015. Nevertheless, due to the impact of the currency devaluation in Brazil, US dollar reported Brazil segment revenues for the quarter were essentially flat at $4.5 million year-over-year. While our Irgovel plant now has the capacity to consistently run at or above our target production rate of 300 metric tons per day, the challenging economic and political conditions in Brazil have continued to cause supply chain disruptions and ongoing difficulty in obtaining sufficient raw rice bran, resulting in the plant processing only about 200 metric tons per day.

Q2 results in Brazil also reflect the Company working through the sale of the remainder of the low-quality finished products that resulted from the impact of the nationwide trucking strike in Q1. Despite these challenges, in Q2 2015 our adjusted EBITDA loss in Brazil narrowed to $530,000, representing a 43% improvement from a loss of $923,000 recorded in the first quarter of 2015.

In response to the continuing economic deterioration and supply chain disruptions in Brazil, we implemented a number of initiatives early in the second quarter aimed at aligning our Irgovel cost structure with achievable production levels. I'm pleased to report that based on preliminary unaudited results for the first month of this third quarter, we generated modest positive cash flow for the month of July. We believe we are now positioned to continue to produce positive adjusted EBITDA in Brazil going forward at lower raw bran processing levels of about 200 metric tons per day, without sacrificing our ability to produce at our target rate of 300 metric tons per day when economic conditions improve.

As previously mentioned, USA segment was up slightly from Q1 of this year -- was up significantly from Q1 of this year. Within that overall result we see two important positive trends. First, a continued decline in revenue from large packaged goods companies, due to the well-publicized competition from healthier alternatives, was offset by sales of functional foods. Our strategy for changing our product mix to a higher-margin functional food ingredients and packaged functional foods continues to gain traction. We expect that trend to continue going forward as the consumer progressively moves away from highly processed foods to healthier alternatives.

Second, as a result of the change in product mix and more efficiently operating our facilities, our gross margin percentage increased 8.5 percentage points to 32.7% in Q2 compared to 24.2% last year. This improved gross margin produced $619,000 of additional gross profit dollars in the quarter on a modest increase of revenues of only about $141,000. I'm also pleased to report that we have purchase orders in house expect to ship our first production orders of nutricosmetics in this third quarter. As with all new product category launches, we expect sales to start off modestly and build over the next several quarters. However, we also expect our nutricosmetics offerings to contribute to further improvements in gross margin performance over time. We see the addition of nutricosmetics as another important step as we continue to change our product mix to improve both revenues and margins.

For the balance of 2015 and looking forward to 2016, we remain focused on several key objectives. In our USA segment, we are focused on driving sales in higher-margin categories while managing our supply chain to improve both top- and bottom-line performance. The continued deterioration of revenues from large packaged consumer products companies, offset by growth in functional food sales, may result in less rapid top-line growth in the near-term. Nevertheless, we believe the continued focus on improving product mix will enable us to improve bottom-line results and build a more solid base from which to grow in the future.

In Brazil, we continue to focus on shifting our sales mix toward a higher percentage of exports, developing human ingredient sales derived from the defatted bran stream for both export and domestic sale, and aligning the plant's operational costs to the realities of the raw material availability. Keep in mind that increasing the ratio of exports to domestic sales will not happen overnight and significant improvement in domestic sales in Brazil will be tied, in part, to improvements in the Brazilian economy. Nevertheless, we believe we've taken the appropriate steps necessary to realign production costs at Irgovel in the short term and remain well-positioned to ramp up production quickly when economic and bran supply conditions improve.

Before handing the call over to Dale, Robert, and Mark, I want to make one additional comment about Brazil. We're moving forward to implement our previously announced agreement with Cooperativa Agroindustrial de Alegrete Limitada -- CAAL, C-A-A-L -- to install our proprietary extruders in its rice mill in Alegrete, about 500 kilometers north of Irgovel. We expect to have that project completed and operating before year-end. When complete, this product will give us an additional source of stable, high-quality bran for oil extraction at Irgovel. Importantly, the installation at CAAL will also give Irgovel the option of producing full fat stabilized rice bran and derivatives, the same product families we produce and sell in the US markets for sale in Brazil and perhaps other Mercosur markets. While this option will not bring immediate benefits, since markets in Brazil will need to be developed, this is the beginning of a strategic repositioning of the Brazil business that will allow Irgovel to move into higher-priced, higher-margin human ingredient and functional food products when economic conditions improve.

As mentioned in prior calls, we continuously entertain discussions about possible strategic partnerships across all areas of our business. As we move ahead to launch full-fat bran products in the Brazil market, we are working to identify possible strategic partners that can accelerate our entry into that market. We are also exploring opportunity outside of Brazil to gain access to meaningful quantities of organic raw rice bran for stabilization and distribution through our USA segment. To be clear, we have no agreements in place at this time related to these or other strategic initiatives. However, we will continue to consider opportunities as they present themselves. I'll stop here and pass the call to Dale. After Dale, Robert will update you on operational and supply chain issues, and Mark will update you on sales and marketing activities.

Thanks, John. For the second quarter of 2015, consolidated revenues were $11.4 million. This represents an increase of 18% compared to the prior quarter and up about 1% over prior year second quarter. Consolidated gross profit improved to $2.2 million in the second quarter of 2015. That's a 112% sequential increase in consolidated gross profit in comparison to Q1 of this year and it's an 87% increase when compared to Q2 2014. Overall, our consolidated gross profit percentage increased by 9.1 percentage points compared to Q2 2014. The improved performance in gross profit was a direct result of the two primary issues already noted by John.

One, the continuing emphasis on shifting our USA segment sales mix towards higher-margin products. And two, the cost reduction steps taken in Brazil during the second quarter. When comparing the last year, gross profit percentage for the second quarter improved by 8.5 percentage points in the USA segment and 9.1 percentage points in our Brazil segment. As John mentioned earlier, we continue to face a number of macroeconomic issues in Brazil. In spite of a 35% increase in the local currency revenues in Q2 compared to the same quarter of 2014, Brazil segment revenue was essentially flat in US dollars compared to last year's second quarter due to the continuing decline of the Brazilian real. We believe further decline in that real is possible for the remainder of this year.

From an operational perspective, we believe the major issues confronted at the Irgovel facility that were associated with the plant shutdown and the restart and so on are well behind us. Furthermore, in Q2, we implemented cost-cutting measures and operational changes that, based on preliminary unaudited results, produced positive adjusted EBITDA at Irgovel in the month of July. Our objective is to maintain that positive momentum in the current difficult economic and political environment as we move forward through the second half of this year and into 2016.

Our consolidated operating expenses declined by $393,000 to $3.8 million in the second quarter of 2015 compared to $4.2 million in the 2014 period. The decline is attributable simply to the following factors: decreases in USA segment salary, wages, and benefits; decreases in amortization and depreciation expense in both operating segments; and the impact of lower operating expenses recorded in the Brazil segment due to the decline in value of Brazilian currency. We continue to work diligently, as always, to tightly manage our expenses in all of our reporting segments.

In the second quarter of 2015 we recorded positive consolidated adjusted EBITDA of $13,000 as compared to a loss of $1.6 million in the first quarter of 2015. In Q2 of 2014, we reported a consolidated adjusted EBITDA loss of $1.1 million. While we were only marginally positive on a consolidated adjusted EBITDA basis in the quarter, we are diligently focused on continuing to build on this momentum in the second half of the year. And I should point out that a reconciliation of adjusted EBITDA can be found on our website.

In Q2 2015 we recorded a net loss attributable to shareholders of $3.5 million, which is $0.38 per share based on approximately 9.2 million weighted average shares outstanding. This is an $11.6 million improvement from the $15.1 million loss, or $3.52 per share, recorded in the second quarter of 2014. With regard to our other expenses, we reported an expense for loss on extinguishment during the quarter. This expense is a non-cash charge that represents the unamortized debt discount associated with the extinguishment of outstanding subordinated notes and the fair value of warrants that were issued as part of the replacement notes.

As previously announced in May, we entered into a new senior credit facility with Full Circle Capital. As a condition of entering into that debt facility, we modified the terms of our existing subordinated notes and were required under accounting rules to treat the old notes as an extinguishment. From a balance sheet liquidity perspective, we ended the quarter with $2.6 million in cash and cash equivalents compared to $3.6 million as of the end of last year. Those of you who listened to our May conference call in the first quarter of this year know that we received an award from a Brazil arbitration panel related to the 2008 acquisition of Irgovel.

Including interest and arbitration cost, the arbitration award currently totals approximately BRL7.7 million. The award cannot be appealed and it accrues interest at a 14 (technical difficulty) per annum interest rate until it's paid. With this positive outcome, we filed a motion in US District Court seeking a court order to release the $1.9 million of restricted cash held in an escrow account at a US bank. We're confident that we will be able to recover those funds which, if received, will be used to support ongoing operations. We believe these cash resources, combined with operational improvements in the coming quarters, will provide us with adequate cash resources to deliver on our business plan.

With that, Robert, I will turn this over to you.

Thank you, Dale. Throughout the second quarter our operational team has worked on the development and implementation of strategic initiatives to address and improve a number of supply chain issues in both of our operating segments to maximize profitability as we grow our business. In California, where drought conditions remain at unprecedented levels, we have taken several steps to ensure adequate bran supply. First, we have connected our existing stabilization equipment to a second mill at one of our existing facilities to increase availability of raw rice bran for stabilization. We saw this opportunity as the fastest and the most cost-effective way to increase bran availability in the short term. We also secured an additional 16,000 square feet of warehouse space in West Sacramento to allow us to increase inventories of stabilized bran, to avoid supply chain disruptions at our West Sacramento distribution center. We continue to pursue the installation of additional stabilization equipment at our third -- at a third milling facility in the Sacramento Valley. We expect that that project to proceed in the coming quarters to build additional raw rice bran availability as we head into 2016.

In order to further bolster our supply chain in the Midsouth, we have reopened part of our Lake Charles, Louisiana, facility to provide an additional 8,000 square feet of warehouse space for stabilized bran produced at Mermentau. This has allowed us to take a higher percentage of bran during milling and build the strategic inventory, which has previously been limited by storage capacity at Mermentau. These strategies have thus far enabled us to avoid any of the product shortages we experienced last year, which led to decreased revenue and other -- and order cancellations in our USA segment in the second half of 2014. While we believe these measures will provide sufficient additional stabilized bran to support our planned business growth for the remainder of 2015 and beyond, it remains unclear what the overall impact of the California drought may ultimately be for this year's harvest and for the future years.

Turning to our Irgovel facility, we implemented a number of actions in Q2 in response to the continued economic and political turmoil in Brazil, aimed at reducing costs in line with reduced raw bran availability levels in an effort to deliver positive cash flow from our Brazilian operations while this difficult environment persists. Specifically, we reduced staff at Irgovel by a total of 15% in May and June and made other operational changes that, based on preliminary results, allowed us to produce the positive cash flow last month in July. This is the first positive EBITDA result at Irgovel since we started the expansion project at the plant. We see this as a very positive and encouraging result.

I'll stop here and pass the call over to Mark to update us on sales.

Thank you, Robert. Our second quarter saw strong results from several key existing customers, as well as first-time orders shipping to several new customers. During the second quarter we manufactured approximately 3 million single-serving nutritional drink bottles, as well as close to 1 million single serving pouches from our new pouch and stick pack line. Single-serving functional beverage is a large and growing business. Consumers want convenience, ease of use, and low shipping costs, and our single-serve bottles and single-serve pouches fill that need. RiceBran Technologies invested capital in early 2015 to expand capacity at both Dillon and Healthy Natural. We are beginning to see the benefits from those investments.

We continue to create formulas based on our proprietary and patented rice bran raw materials that result in unique selling propositions to our customers. We are excited about the purchase orders we have received from new customers in nutricosmetics and look forward to building this aspect of our business in the future in both the US and key international markets. As we mentioned last quarter, a key strategic initiative in 2015 has been to increase our tradeshow participation and ingredients sampling program to potential new customers.

During the first six months of 2015, we acquired 56 new customers, double the pace of 2014. These new customers are a direct result of that effort, as well as our marketing program with Teak Media, which resulted in eight different unpaid media placements in major industry publications, including Food Business News, Supplier Innovations, Snack Food and Wholesale Bakery, Beverage Industry Magazine, CULINOLOGY Magazine, the Organic and Non-GMO Report, the Clean Label Conference, and Snack Food and Wholesale Bakery. These publications are genuinely interested in what we as a company are doing, highlighting our clean label and Healthy Natural raw materials.

This effort has helped us highlight the introduction of our expanded line of Proryza products. Our Proryza family of Healthy Natural products now consists of five ingredients based on stabilized rice bran in combination with our patented derivative products. These include Proryza Platinum, a nutritional bulking agent targeted to manufacturers of protein powders and meal replacement shakes; Proryza Crisps, a healthy rice bran crisp extruded using our patented RiFiber ingredient; Proryza Brew, a RiceBran ingredient designed to enhance the hops flavor of beer and bring out extra flavor in coffees and teas. These three new ingredients complement our existing Proryza P-35 rice bran protein and its process stream partner Proryza PF-20/50.

In addition to the increased presence at trade shows and in marketing, we have recently added three new sales reps to our team. Patrick Kuruc comes from the food ingredient industry and is our new Vice President of Sales for Contract Manufacturing and Bulk Ingredient Blends. Stan Odroniec and Mark Hayes are independent sales representatives that also joined the rest of our team. Our expanded team gives solid representation in the food ingredients base, as well as the contract manufacturing and sports nutrition markets. Our increased focus on sales and marketing supported by strong operational performance was key to achieving the best quarter in Company history in the USA segment in the second quarter of 2015.

At this time, I would like to pass the call back to John.

Thanks, Mark. Before taking questions, I want to take a few minutes to comment on one other recent significant event and to summarize our results and share where we see the Company headed the future. Some of you may have seen that concurrent with the filing of our Form 10-K this afternoon we also filed a Form 8-K, noticing several material changes to our agreements with our partner in Brazil, Alothon Group. As you'll see in the 8-K, we advanced an additional $2 million to Irgovel in Q2 in anticipation of recovering the $1.9 million that sits in an escrow account in a bank in San Francisco.

In exchange for advancing those funds, we were able to agree several important changes to our contracts, as outlined in the 8-K. Some of the key changes include the elimination of Alothon's accruing yield on its equity investment -- you may recall that was a 4%/8% toggle; a reduction in Alothon's exit preference from 2.3 times their investment to 2 times their investment; an extension to January 1, 2018, of Alothon's for sale rights; and increased payout flexibility in the event of a strategic transaction. There were other significant concessions as well, and you can find full details in the executed documents attached to the Form 8-K that was filed today. Alothon has been a great partner to our Company through a difficult period in Brazil and continues to work together with our team to achieve the financial performance we all know is possible at Irgovel.

Regarding our operating results, you are all aware that we faced some dramatic and on for seen headwinds over the past year, including the persistent California drought and the parade of horribles in Brazil. We've responded to these short-term challenges with the tactical initiatives described on this call while maintaining our strategic focus to ensure that we are well-positioned to grow profitably when the economy turns around. This focused approach should allow us to reach what we see -- allowed us to reach what we see as a major inflection point in our business by achieving strong positive adjusted EBITDA in our USA segment as well as positive consolidated adjusted EBITDA for the quarter for the first time.

We will not provide formal financial guidance for the remainder of 2015 due to the significant uncertainties related to the expected, continued deterioration of Brazil's economy and currency. You may have noticed that Moody's downgraded Brazil to Ba2 today, near junk status. Nevertheless, based on the progress we've already made in achieving positive EBITDA at Irgovel in July, we believe we can continue to improve performance in our Brazil segment despite the current macroeconomic challenges. In our USA segment, we expect the slower sales to traditional packaged consumer goods companies to continue to be offset by positive improvements in functional food sales. While the combined impact of these two opposing trends may result in a somewhat slower revenue growth trajectory than originally planned, we expect positive net revenue growth to produce continued improvement in gross profit dollars and adjusted EBITDA as we move into 2016.

In summary, we see our tactical and strategic business plans and initiatives beginning to deliver improved performance. We are on course to improve on last year's top-line performance and we've repositioned our cost base to achieve sustained consolidated positive adjusted EBITDA as we move into 2016. That concludes our prepared remarks. Operator, at this time, please open the call for questions. Note that we'll limit callers to one initial question and one follow-up.

(Operator Instructions). Anthony Vendetti, Maxim Group.

Just a couple quick questions. Did you actually give the FX adjustment for the quarter?

Anthony, let me try to answer your question. We didn't -- it's obviously included in the Q and the various filings, but the negative impact on US dollar revenues for the quarter was $1.7 million. So, instead of moving from $4.5 million to $6.2 million, we are stuck at $4.5 million. So the 35% increase that we experienced in local currency revenue was fully offset by a 35% devaluation in the currency.

Okay. And is there a press release with the full financial stuff or is the Q coming out soon? What should we expect?

Anthony, everything has been filed and issued. The Q is filed, the press release with those details is filed, and the 8-K related to the renegotiation of contract terms with Alothon is also filed. We've also put the adjusted EBITDA calculation up on the website, as we always do.

Awesome. So lastly, as Mark was talking about, some of the new end products; you have products in stage I, stage II, stage III. As we look out, John, over the next couple of years, right now I assume animal feed is still about two-thirds of your revenues. Can you talk about what the opportunity is to move into more of these higher-margin, stage III products? And share with us a little bit the strategy to do that and how do you see, in round numbers, the percentage of your business breaking out from animal feed to all the way down the line to the end-stage nutricosmetics and products such as the end-stage products?

Sure. Anthony, if you -- when I joined the Company a little more than five years ago, the business was predominantly animal feed, with a smaller portion of human ingredient. Since then we have been migrating the business. The mantra for the first couple of years was convert feed to food. Not to say we are getting out of the animal nutrition business, because it's actually very important to run large quantities of product across the plants for absorption of overheads. But as we have migrated the business, first converting feed to food, and then over the course of the last couple of years converting human food ingredient to first functional food ingredients, and then with the acquisition of Healthy Natural to packaged functional foods, what we've seen is a major change in mix.

And of course, the -- if you look at the buildup, animal nutrition; lowest margin family human ingredient next; functional food, significant step-up; and packaged functional food, even a bigger step up. There is a chart on one of the presentations we did, I'm going to say at the Markham conference, that's on the front page of our website. And it describes the evolution just from 2013 to 2014 and you can see a major change in mix. But if you look today as we go into 2015, animal nutrition represents -- I'm looking across the table at Dale, 12%?

Well, in our 10-Q, if I recall correctly, I believe in the USA segment that the human nutrition revenues represent 80-something percent of our USA segment revenue.

Yes, so there's two pieces of the mix here, Anthony. One is on USA segment we've change that mix dramatically, from 86% or 87% to 12% or 13%, 14% (multiple speakers, right. And down in Brazil, however, we still have a large portion of the product going to animal nutrition. And one of the things you may recall is that some of the money we put into Brazil was to build a new animal nutrition facility, and this spring we launched a whole line of higher quality, higher priced animal nutrition products down in Brazil that have been very well received.

So, if we look across the business, US and Brazil -- and I apologize that I haven't done this math, and I'm trying to do it in my head right now -- but I'm going to say we are probably 70%/30%, 75%/25% with the 70% or 75% being on the human ingredient side, including the oil out of Brazil, and the 25% to 30% being animal nutrition. If you think about the animal nutrition component in Brazil coupled with the animal nutrition component in the US. We don't actually look -- think through it that way, Anthony. So I can get back to you with the real number. But that's roughly where we show it at.

And maybe just as a follow-up on some of these end products, what's the maybe expected -- in nutricosmetics, in that line, what's the expected contribution or growth? Or is it too early to say as you are moving in there? Or can you talk about -- we've discussed getting some of these stage III products in energy bars or cereals or other end products like that. Just an update on how that's going.

Yes, so let me talk about both of those things briefly. On the nutricosmetics side, of course the cosmetics market is a higher dollar value market and it has significant margin opportunities. So, Mark, is it fair to say -- I don't want to quote percentages here, Anthony. But I will tell you that the nutricosmetics piece will be the highest margin piece of the business by a good stretch. And so, if you look at the -- there is a chart, page 12 or 13 in that Markham presentation that we did, that gives some indicative margin ranges for product families.

We did not include nutricosmetics in that chart. So add another layer on the top of that chart which becomes nutricosmetics at higher initial margins. It's very attractive business for us. We are excited about the launch. We mentioned last time that we had initial test orders coming in from a very large, small-footprint retailer that has about 4,000 stores across the US. And we're just launching right now production orders into about 10% of the stores, Mark? With the expectation that we'll roll out to the rest as we get into the first quarter of next year.

All right, great. Thank you very much.

Anthony, what I think is important is to remember that -- and I always look at everything from a sales standpoint, but when I go to talk to a customer or when one of the members of our team go to talk to a customer, we are looking for a message or a hook that interests them. And RiceBran Technologies has these great, great ingredients and true proprietary technology in terms of what we produce. So when we talk about nutricosmetics, we are talking about rice bran oil and we're talking about our facility in Brazil.

That's a unique story that not many people offer. Same with functional foods. When we talk about functional foods, we are talking about our rice bran derivatives as a key component to the functional foods. And that's why I have always been so bullish about the combination of what we have here at RiceBran Technologies, because the uniqueness of our raw materials is the hook that establishes the interest from the customer.

Okay, I'll hop back in the queue. Thanks.

(Operator Instructions). It appears there are no further questions at this time. I would like to turn it back to management for closing comments.

Perfect. Okay, well, we appreciate everyone joining the call. We are not satisfied with where we are, but we are pleased to have produced our first consolidated EBITDA positive quarter. And everyone on the management and sales, marketing, operating teams at the Company here is very, very focused on continuing to drive growth in profitable sales and increased margin. We appreciate the support and we'll look forward to talking to you at the end of next quarter. Thanks very much.

Thank you. Ladies and gentlemen, this concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.