RiceBran Technologies (RIBT) 2022 Q2 法說會逐字稿

Good day, everyone, and welcome to the RiceBran Technologies Second Quarter 2022 Financial Results Call. (Operator Instructions) It is now my pleasure to turn today's program over to Robert Fink SK. Please go ahead.

Thank you, operator. Good afternoon, and welcome to the RiceBran Technologies' Second Quarter 2022 Financial Results Conference Call. Hosting the call today are Peter Bradley, Executive Chairman; Todd Mitchell, RiceBran's Chief Operating Officer and Chief Financial Officer.

I want to remind everyone that during today's call, management's prepared remarks may contain forward-looking statements that are subject to risks and uncertainties. Management may also 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 on today's conference call, 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 11, 2022, and the company assumes no obligation to update these projections in the future as market conditions change.

This webcast and certain financial information provided on the call, including reconciliations of non-GAAP financial measures to comparable GAAP financial measures are available at ricebrantech.com on the Investor Relations page.

At this time, I'd like to turn the call over to Peter. Peter, the call is yours.

Thank you, Rob, and good afternoon, everyone. We had a very strong quarter for our core SRB and milling businesses that was otherwise marred by issues in production at our value-added SRB derivatives business, resulting in unmet demand and unexpected losses. With this issue now behind us, we expect to rebound quickly and to generate substantially better performance in the second half of the year.

Let's start with the core. Our core SRB business is experiencing double-digit sales growth not seen in years, and we expect the recent addition of new customers to accelerate this growth further. Importantly, this month we added a significant new customer in the pet food business. This is an important win for us, representing a breakthrough into a higher added value, higher volume segment of the companion animal market, where we see an opportunity ultimately for the business to be much larger than our core acquiring sector.

It is also important because it should drive increased sales, improved capacity utilization and expanded operating leverage in the second half, which should allow us to turn -- which should in turn support stronger overall financial results. Having worked hard over the past year to improve operations at MGI and Golden Ridge, I'm very pleased to report that both facilities rose to the occasion in the second quarter by meeting strong demand for high quality, domestically sourced grains, generating mid double-digit revenue growth and improved contribution to gross margin.

In particular, MGI generated solid year-over-year improvements even while working through operational challenges due to capital improvements executed in the quarter. Now nearly completed, these improvements have significantly expanded capacity and should allow the mill to continue to grow off a much larger revenue base.

That being said, I indicated last quarter that I believe it was in the company's best interest to exit the primary rice milling business. And while we're not ready to announce anything specific as yet, I can assure you we have made significant progress to moving towards that goal.

With our core SRB and milling businesses firing on all cylinders, gross losses in the second quarter can be attributed entirely to our value-add SRB derivatives business, where production issues resulted in significant business disruption. To be more specific, variances in our organic feedstock and a forced raw material change came together in a perfect storm. Efforts to adjust our production techniques to address these issues were unsuccessful on multiple occasions, resulting in a significant amount of product that did not meet our standards for our customers. As a result, we lost nearly 6 weeks' worth of sales and we're forced to take significant product write-downs during the quarter.

While unexpected and disappointing, this can happen occasionally when applying a complex production process to a variable agricultural feedstock. Most importantly, we believe these issues have been resolved. We have gotten our organic supply to make changes to the feedstock that we're providing us, and we have completed testing this feedstock with the other raw material changes of the raw materials we were forced to change.

As a result, we are now producing and shipping organic SRB derivatives that meet our standards. With this episode now past us, the team is working hard to catch up, and I'm pleased to say that our customers are delighted to finally see their orders fulfilled. Importantly, this isolated challenge we saw in our value-add derivatives business during the quarter does not diminish our optimism and confidence that we have built a platform for profitable growth. Strong growth in our core SRB business and MGI in the second half of the year, supported by new customer wins and largely completed capacity expansions, a return to normal operations for our value-add derivatives business, and the potential for a strategic solution to Golden Ridge should drive significant improvements in our financial results in the second half, positioning us for further improvements in 2022 -- 2023 and beyond.

Now let me turn the call over to Todd to review the quarter in more detail.

Thank you, Peter. Good afternoon, everyone. We continue to see strong top line growth in the second quarter, an encouraging trend. But as Peter highlighted, overall results were marked by production issues for our SRB derivatives business. .

Specific highlights for the quarter include, first, we generated over $10 million in revenue for the second quarter in a row. Second quarter revenue was up 35% year-over-year despite a significant decline in SRB derivative sales. Second, excluding our SRB derivative business, revenues and gross profits for all other businesses improved year-over-year in the second quarter. Third, we're able to end the quarter with $5.1 million in cash, even with a significant drop in commodity payables, and we've taken steps to reduce costs and preserve liquidity as we ramp new businesses and get our SRB derivatives business back to normal in the second half of the year.

With that, let's look at the second quarter's numbers in greater detail. Revenue. Total revenue was $10.2 million in the second quarter, up 35% from $7.6 million a year ago. Strong growth in the quarter was driven by double-digit growth for our core SRB sales, and even stronger results for both MGI and Golden Ridge, while value-add SRB derivative sales saw a 30%-plus decline year-over-year.

Gross losses. Gross losses were $477,000 in the second quarter compared to a gross profit of $153,000 a year ago. Across our core SRB and milling business, price increases and higher volumes are providing the operating leverage to offset higher input costs. Virtually all of the decline in gross margin year-over-year was due to production issues and product write-downs for our derivative -- SRB derivatives business. In total, this business has seen a $1 million drop in adjusted EBITDA year-to-date versus last year, with most of this decline in the second quarter.

SG&A. SG&A of $1.7 million in the second quarter declined 12% from a year ago. We continue to see upward pressure on several fronts, but we have been able to offset these increases with higher productivity. We've also taken steps to preserve liquidity in light of second quarter's results. This includes curtailing operating expenses, cutting cash compensation, including directors' compensation and successfully subletting our corporate headquarters.

Operating losses. Operating losses grew 15% in the second quarter to $2 million, from $1.8 million a year ago. The increase was a result of the swing to negative gross margins in the quarter, offset in part by lower SG&A and $147,000 gain on the final insurance settlement for Lake Charles, which is now back online and reconfigured to better support our expanding companion animal business.

Net loss. Net loss for the second quarter was $2.6 million or $0.05 per share, compared to a net loss of $1.9 million or $0.04 a share a year ago. The net loss -- the increase in net losses outstripped operating losses due to a $471,000 noncash charge to revalue a warrant liability.

Adjusted EBITDA. Adjusted EBITDA loss was $1.3 million in the second quarter compared to a loss of $828,000 a year ago. This decline reflected the year-over-year drop in gross margin and increase in operating losses due to the underperformance of our SRB derivatives business.

Cash and liquidity. Total cash was $5.1 million at the end of the second quarter, down modestly from $5.6 million at the end of the first quarter. Overall, liquidity was positively impacted by $1.8 million in short-term borrowing capacity, offset by an increase in operating losses and negative working capital in the second quarter due to the timing of payments on certain grain contracts.

With that, I'll turn it back to Peter for closing comments. Peter?

Thanks, Todd. Sorry about that, everyone. It has been 2 years since we decided RiceBran needed a change in strategic direction. And during that time, I believe we have successfully put the company on a path to sustainable success.

Demand for our ingredients is growing rapidly. And in the past 2 years, we've nearly doubled revenue organically by operating better, bolstering our sales channels and operating -- and opening new higher-margin markets. We said we would get the mills to profitability through better operations, and we did. We said that we removed the systemic issues that have made profitability so elusive for the company by breaking into new high-volume categories for our core SRB business, and we did.

We said we would shift our emphasis to becoming a high added value specialty ingredients company, and we are. As difficult as the past few months have been for us, it has -- it was a tremendous learning experience for our derivatives facility and the staff that work there. So while this quarter's bottom line results are disappointing, I would add that the overall trend is encouraging. In fact, we're in a much stronger position today than we were just 1 year ago and certainly than we were 2 years ago.

I believe that results will rebound fairly rapidly off this quarter and I'm optimistic about the future. I thank you for your support. With that, we will now be happy to answer any of your questions.

(Operator Instructions) We'll take our first question from Connor Jensen of Lake Street Capital Markets.

This is Connor Jensen for Mark Smith with Lake Street Capital Markets. My first question was just to kind of walk through again what exactly caused that issue with the production in the derivative business? And kind of what's giving you guys confidence that those kind of issues are behind you?

I really think they were 2 things. One, we were getting variability on our organic feedstock. So there were changes there around the crop change. And then secondly, we were using those products, you're probably aware are enzyme treated. And the enzyme we were using lost its organic certification, so we had to make a change. So we've got two big changes coming together. That's what caused these issues.

And yes, it's disappointing in the second quarter, but to get it fixed within a 6 to 8 week period, I think, is quite an achievement. We're back producing now. We've changed our processes. We've got the right other raw materials in place. So we expect to be continue to be back in normal production through the rest of the year.

Okay. Glad to hear that's behind you guys. I saw in the release, you talked about having a new large customer. I was wondering if you could maybe quantify what that means to the business?

Todd, do you want to take that one?

Yes, sure. We've added a new customer in the pet food space. We've sort of alluded to this. We've been working on this a long time. They will be using our core SRB product as part of the [Palatin] for dry pet food.

I think that this customer will scale to become potentially one of our -- potentially our largest customer. And that the category itself, as Peter alluded to, could ultimately eclipse the equine business.

Okay. Great. And then lastly, I know you guys are probably getting sick of being asked this question, but obviously, EBITDA wasn't really (inaudible). Do you have any thoughts on when you maybe you could turn that EBITDA positive or kind of goals for your outlook?

Yes. I mean I don't think we're going to guide, as we've said before, but I would think about it two ways. If you reference our comments, year-over-year, the cutback at the SRB derivatives business has cost us about $1 million in adjusted EBITDA. So if you remove that from the year-to-date results, you can see we're pretty much bouncing around just a little bit breakeven.

I think going into the back half of the year, adding significant volume in the SRB business will give us enhanced operating leverage, addressing some of the structural challenges that we've had being in the primary rice business would be additive to that. So I don't think we're far off is what I'm saying at these revenues.

And our next question comes from Gary Golchell, a private investor.

Hello. This is now about the 30th call I've spent time on, and once again, disappointed that you haven't made a dime. I'm even confused as to what your business is currently. You seem to change it every year.

And finally, what are you doing to prevent you from being delisted from the NASDAQ because you're now currently somewhat delinquent in having your stock price above $1?

Well, Gary, I can appreciate your comment. I think we've been pretty clear that over the last 2 years, the goal of the company is to move towards higher value ingredients derived from our core SRB base. And I think we continue to move in that direction.

The SRB derivative challenges that we had in the quarter, I think, are isolated and largely -- and the losses associated with them, largely onetime in nature. I think you'll see us continue to emphasize that operating leverage in the core SRB business and the higher value products.

With regards to the listing, it was disclosed that all of the shareholder proposals were approved at our annual meeting. And I think that the Board will take the appropriate steps to preserve our listing.

Our next question comes from Charles Robinson from Dawson James.

Can you comment on the progress of the expansion of the Louisiana Mermentau and MGI Grain facilities expansion? How is that going?

Very well. At Mermentau, we have done 2 primary things. And first was we added a fifth extruder, which will now allow us to fully take the output of our partner mill and significantly increase or decrease disruptions for downtime. And we were also able to reconfigure Lake Charles, which if you remember correctly, was damaged during Hurricane Laura. We used the insurance proceeds there to reconfigure it so that we can better service our new companion animal customers, in terms of what they want from us maintaining an inventory buffer, having certain specs and testing that and the format that they wanted to deliberate in. So all of that is now in place and online and ready to ramp.

At MGI, we have replaced the main hauler, which is the core milling device. That mill has always had latent capacity that we were not able to leverage. With this new device, we'll now be able to run what they call both sides of the mill, the soup side and the cut side at the same time. So you could virtually double the capacity.

We have plenty of storage. We have plenty of load-out capacity there to meet that. There was a couple more items that we need to do, but I think it will support continued growth at that facility. I think that facility has the conventional to be a much larger business than it is now. And it's frankly a much larger business than when we bought it.

Fantastic. I appreciate the answer. And just a follow-up to one of the previous questions, the significant new customer. Is that a multiyear contract?

Our intention is to service the customer for multiple years. I don't want to get into the specifics of the business deal, but what they're looking to do is lock down volumes and a steady flow of capacity. We are uniquely positioned in that we have that capacity at industrial scale. So we are working very close together to fulfill one another's needs. And so I think if you look at our core equine business, some of those customers are 5, 6 years. I would expect the same sort of constructive relationship with this customer.

Good enough. And your Equine business was previously the largest portion of your business, correct?

Yes.

Okay. And if this is going to be -- if you expect this to be larger, then could we read into that, that, that could get you closer to the EBITDA positive number? .

I think it provides us a real opportunity for volume growth. And as you see what we've done down in the delta with Mermentau and Lake Charles, we've been preparing for this to happen.

Just to reference back your previous question, this is the use of SRB for this customer is not replacing somebody else, this is a formula change. And so formula changes are done very carefully. And I wouldn't expect there to be a quick switch back. It's not going to be an in and out formula for SRB.

So I see that -- the one thing we didn't mention on the call is that even our equine business, while it performed very well, we had one customer who had operational issues as well. It seems that the second quarter of '22 was the quarter of operational issues throughout the food industry, and we suffered as well.

The last question comes from Martin Mack, an investor.

Gentlemen, you listen carefully to the -- some of the previous callers. The gentleman who said he listened to 30 conference calls. Well, I've listened and been with this company for almost 20 years. And while every conference call tends to be very positive in what comes from management, the results don't always seem to be of optimism.

Is there any chance at all that during the next several months, you will give temporary guidance as to what's going on? It's very difficult to wait for 3 or 4 months every time to find out what the progress of the company is.

I'm hesitant to report intra-quarter results. I think one of the things that we've been trying to do is to be more proactive in our communication strategy. Before we went into our quiet period we started communicating about some of the capital improvements that we've been making.

We've now have an active presence on social media. And I do think that, to your point, we will be more proactive in releasing news about what's going on in the company. I don't think we would go so far as to offer intra-quarter financial performance though.

Well, I don't expect you to give that kind of guidance. I don't expect you to come out and say we're going to earn $0.01 a share or $0.02 a share. What I'd simply like to hear from time to time is that business is going very well, and we expect to have a good -- very good report that comes out.

I mean I've been waiting 20 years for a statement like that, and I still haven't had it. As far as the reverse split goes, I heard you carefully what you said and the fact that you intend to make sure we don't lose our new listing means that we will have reversed split shortly. Is there any indication that you can give now as to what the number on that reverse split will be?

No, not as yet. I mean we haven't got board agreements on it this year.

I lived through the last one, which is on for 100. So it's never a pleasant thing when it goes on, but I understand it's necessary, and I know it has to be done. And I agree with it being done. I just must tell you guys, I cross my fingers. It's I believe in this company so much. It's been 20 years with my investment as you can understand the loss is exorbitant.

But I still believe in the products you're making, I'm just hoping that sooner or later, it will turn into the fruition of the belief that I have in it. That's really all I have to say, and thank you for listening.

We appreciate very much appreciate your comments, yes. I think we're headed in the right direction, the ingredients of why I'm involved with the business is that the ingredients can play an increasing role in the food supply chain. And I think that focusing on being ingredients rather than in rice milling will help propel the company forward.

It appears we have no further questions at this time. I will now turn the program back over to Peter Bradley for any additional or closing remarks.

Thanks, everyone, for your attention. Yet tough quarter. Issues we didn't see coming, but we've resolved them, and I think we can look forward to better results than the rest of the year. Thanks again for your support.

Thank you, ladies and gentlemen. This concludes today's conference. You may now disconnect.