RiceBran Technologies (RIBT) 2020 Q2 法說會逐字稿

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the RiceBran Technologies Second Quarter 2020 Financial Results Conference Call. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to introduce your host, Mr. Richard Galterio of Ascendant Partners. Please go ahead.

Thank you, operator. Good afternoon, listeners. Once again, welcome to RiceBran Technologies Second Quarter 2020 Financial Results Conference Call.

With us today are Brent Rystrom, Chief Executive Officer and President of RiceBran Technologies; Todd Mitchell, Chief Financial Officer; and Peter Bradley, Executive Chairman.

Before I turn the call over to Brent, 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 12, 2020, 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 would like to turn the call over to Brent Rystrom, CEO and President of RiceBran Technologies. Mr. Rystrom, please go ahead.

Thank you, Rich, and good afternoon, everyone. RiceBran Technologies faced several challenges in the second quarter of 2020 related to the COVID-19 pandemic. Initial fears of inadequate food supplies caused a surge in demand for rice as consumers engaged in widespread pantry stocking. This demand accelerated milling for several months, which caused shortages in the supply of paddy rice, the rice that comes into rice mills as a raw material, which drove prices from $12 per hundredweight in early 2020 to a peak that was over $23 per hundredweight in late May and early June. The higher prices and reduced supplies impacted our ability to operate at Golden Ridge, especially in the back half of the second quarter.

The shutdown of much of the economy due to COVID-19 restrictions also slowed new customer development as most of the prospective customers we were pursuing shut down product development and research labs. In fact, many of them are still closed. In spite of this, we were able to add new customers in equine, pet food and human products in the second quarter. And after weakness in the beginning of the year, we have seen remarkable increases in demand for products from our derivative facility in Dillon, Montana, which should have a favorable impact on results in the second half of 2020 and into 2021.

As a result of these top line challenges, financial results in the second quarter were weaker than we expected with adjusted EBITDA losses of $2.9 million compared to losses of $2.8 million in the second quarter of 2019 and losses of $2 million in the first quarter of 2020.

As we move into the second half of 2020, the current rice crop looks excellent. Louisiana had completed about 50% of its rice harvest as of last Sunday, and the crop looks to be large and of high quality. This bodes well for our stabilized RiceBran facility in Mermentau, Louisiana. The rice harvest will probably start in Arkansas in a few weeks, and the crop there also looks large and of high quality. This should provide significant benefits to Golden Ridge in Wynne, Arkansas.

Reflecting this large and healthy crop, rice prices are now trending sharply lower with the price for September rough rice futures contracts presently near $11.70 per hundredweight.

I would like to close my comments by noting that Friday of this week will be my last day as CEO of RiceBran Technologies and that Peter Bradley will succeed me as Executive Chairman of the company. I will be available to Peter and the rest of the management team for several months to assist in his new role and look forward to watching their progress.

We have built a valuable platform at RiceBran Technologies and Peter is well positioned to lead our company in its efforts to maximize that value. His strong senior management and sales leadership background in a highly successful ingredient companies will be invaluable in helping us expand the opportunities in our high-margin ingredient business to drive future growth. Peter joined our Board in 2019. And since then, I've had the opportunity to see skills and capabilities that I believe will serve RiceBran well in the future.

In closing, I would like to thank the leadership and employees of RiceBran Technologies for all their efforts while I was with the company, especially this year with the economic and COVID-19 impacts.

Peter will now provide some introductory thoughts, and then Todd will give the financial report. Peter, please go ahead.

Thanks, Brent. Firstly, on behalf of the Board of Directors, myself, particularly, I would like to thank Brent Rystrom for his contribution and commitment to RiceBran Technologies in challenging circumstances, none more than the disruption caused to the business by the COVID pandemic. We all wish him every success in his future and his continued contribution during this transition period.

Having spent the better part of my career in the ingredients business, I firmly believe RiceBran and its derivatives, in particular, deliver excellent nutrition and functional benefits in a wide range of products, either for human food or companion animal or equine feed systems. That is what drove me to drive -- to join the Board of Directors back last year and what compels me to have taken the helm of the company at this time.

Unlike crops such as soy, corn and wheat, rice derivatives have been underutilized in food processing, which represents a compelling opportunity for the company. But in order to understand and realize the potential of the platform we have built, our first order of business is to conduct a strategic review of all of our business and implement sound action plans to maximize shareholder value as we work through this process, as Todd will expand upon later on the call.

A proper review will ensure we have the right product technologies, produce using the optimum assets supported by a robust supply chain. This will ultimately enable us to chart the best course for our company and its shareholders.

I will now pass the call over to Todd, who will provide you further detail.

Thank you, Peter. As Brent highlighted, the past few months have been very challenging for us. This COVID-19 pandemic created dislocations that led to rapidly escalating rice prices and in turn, shortages in rough rice supply. However, we've built a valuable asset infrastructure over the past several years. And like so many other companies, the challenge we have faced recently have prompted us to look inward, to review and to build upon our strengths while striving to mitigate our weaknesses.

This has hardened our resolve to transform RiceBran Technologies into a stronger, more nimble, more competitive and more profitable company. And because of this process, I think you'll see a lot of changes, changes for the better in the coming months.

You'll note from our press release that we've identified a host of structural changes, which should reduce our overall cost structure by another $2 million annually and better align costs with current operating levels. You'll also note that we've engaged BMO Capital Markets to review our strategic options, help us maximize the value of our assets and to better pursue opportunities in our higher-margin ingredient businesses. Ultimately, this is a process of driving to the core values that will make it a successful company for all of our stakeholders.

Going forward, we're going to strive to be a company that executes flawlessly, whether it be in satisfying our customers or running our mills. We're going to strive to be a company that does less -- does more with less. We'll strengthen our ability to make and deliver on our customer commitments while streamlining our operations. We'll use technology and tools to work smarter and do it with fewer people. And we'll be a company that generates solid and positive gross margins and ultimately, positive EBITDA and free cash flow. And when we do, we'll generate significant value for shareholders.

Now let me take you through the numbers for the quarter with a little color. Revenue. Total revenue in 2Q was $5.9 million, down from $8.3 million in 1Q and $6.2 million a year ago. The decline in total revenue in 2Q from 1Q reflected a significant drop in revenue in Golden Ridge, which, as we highlighted, slowed production for about 6 weeks due to an inability to acquire rough rice at economical prices. Results were also impacted by an expected seasonal drop in revenue from MGI. Lower revenue from Golden Ridge and MGI in 2Q vis-à-vis 1Q was offset in part by a sequential increase in rice bran revenue.

That being said, the year-over-year decline in total revenue reflected a drop in rice bran revenue, but to a far lesser degree than in 1Q. In 1Q, we saw a few large customers for our products in human consumption pull back due to their own challenges. In 2Q, we saw strong demand for animal feed customers, and we actually added a few new human-grade customers. Human-grade business was still far from strong in 2Q. But with the addition of new human-grade customers, we expect it to pick up in the second half of the year significantly.

Gross profit. Total gross losses were $1.2 million in 2Q compared to gross losses of $405,000 in 1Q and gross losses of $244,000 a year ago. Total gross losses increased in 2Q from 1Q due to lower gross profits from rice bran and MGI, while gross losses for Golden Ridge were roughly flat with 1Q levels. The year-over-year increase in total gross losses was due to lower gross profits from rice bran and a year-over-year increase in gross losses from Golden Ridge. Versus the prior quarter, lower gross profit contribution from MGI was purely volumetric, while the drop in rice bran's gross profits mirrors the shift in mix towards lower-margin animal feed customers. With the strengthening in demand for products for human consumption expected in the back half of the year and strong volumes from Golden Ridge and MGI, this trend should reverse itself pretty significantly.

SG&A. Total SG&A was $2.6 million in 2Q, up modestly from $2.5 million in 1Q, but down from $3.4 million a year ago. Excluding approximately $300,000 in noncash asset write-downs, SG&A for the quarter was $2.3 million, in line with our target for cost cuts for the quarter. In 2Q, we challenged ourselves to rethink the structure of the company at its core. As a result, we believe we have a path which will allow us to take another $2 million in cost out of the business, with much of this running through SG&A. If we are successful with these initiatives, we should see SG&A in 2021 that's roughly half of 2019 levels.

Net income and EBITDA. Net loss for 2Q was $3.9 million compared to a net loss of $3.7 million in 2Q '19. EBITDA losses were $3.2 million in 2Q, flat with a year ago, as reductions in SG&A have been offset by higher gross losses from operations. After adding back $394,000 stock comp and other expenses, adjusted EBITDA losses were $2.9 million in 2Q compared with $2.8 million a year ago.

Liquidity. Finally, I want to assure you that capital resources and operating with liquidity remain adequate. We ended the quarter with over $3.3 million in cash, and we added an incremental $2 million in borrowing capacity after the end of the quarter. And importantly, as Golden Ridge rebound in a more stable environment, we should be able to find significant additional liquidity in a higher borrowing base from our factoring facility and the ability to reinflate our commodities payable balance.

In closing, as we move through the second half of 2020, we know we have significant opportunities to drive growth in our ingredient business, while we better align costs with operating levels. The challenges we faced at Golden Ridge are moderating, and we expect the new rice crop to help us put things on the right track in 4Q. We're also confident that the strategic evaluation of our business and the subsequent opportunities that will be identified from this analysis will help to maximize values for our shareholders moving forward.

Operator, that concludes our prepared remarks. You may now open the call for questioning.

(Operator Instructions) Our first question comes from [Martin Mac].

This is [Martin Mac] speaking. Who am I speaking to?

This is Todd Mitchell.

Todd, this is [Martin Mac]. I spoke to Brent previously, and I've spoken to Richard a few times over the years, and they are familiar with who I am. I'm a long suffering stockholder. Been with the company 16 years and I've listened to more conference calls than you have hairs on your head, and I cannot tell you how absolutely disappointing this call is. I mean I don't want to talk about colleges. But the first thing I learned in Wharton, when we dealt with manufacturing and production, was you better have a damn good supply on hand in case things go bad. Why didn't we have a supply of rice bran?

I think that our ability to source rice in the quarter was determined by the macro as much as our lineup of having the future supply. I think when you saw the surge in demand, basically, the market goes up, and it had been a lean crop. And at the end of the quarter, we came up short on our supply and the prices that were aligned were not economical for us. We have subsequently moved into a strategy of putting a futures contract in that will give us a regulated price that we will go into every 2-month futures period, so that we'll have rice lined up, and we'll know our price both on the short and on the long side going forward.

Our next question comes from [Mark Kaufman, Third Day Associates].

I was just wondering if you can comment about how the Golden mill is actually running now. I know it's had some issues in the past, is up and running again. Any comments on that?

Mark, this is Brent Rystrom. We're starting the mill more actively, and we're working through some of the latencies in rice. I'd say, so far, we're seeing some encouraging signs on how the mill is running, but we need some more data. We need a higher volume of rice, which we're hoping to see over the next couple of weeks.

Is that the new priced rice, I guess, is one way to describe it?

Not really. It's kind of in between priced rice, if you think about it. So the next tranche of rice pricing is based off a September contract, which basically is rice that comes due in mid-September where it becomes available. And we're kind of right now in a market that's in between where that futures contract is and where rice was, say, 30, 40, 50, 60 days ago.

How has the mix been between the better rice and, let's say, the lower quality? If you have any comments on that?

Say that one more time, sorry.

The different qualities of rice that you get in as far as what you'd expect the yields to be. How is that looking?

Well the crop this year looks very good. So the size of the crop, in particular, in Arkansas, looks like it's going to be up some place in the high 20s to maybe the low 30% year-over-year growth in volume. So size looks good. Quality generally looks good. There's still some time yet before Arkansas gets harvested. And there are some things that can happen in the last few weeks, but it looks like it's going to be a large and healthy crop. I'm not sure if that's quite what you're asking, Mark?

I think that is. I understand you have different shipments that you get in from on the raw rice, the quality varies. So it's good to hear.

Next question comes from Mark Smith with Lake Street Capital Markets.

Can you guys talk at all about the last handful of weeks really since the quarter ended through today, what volumes have been like at Golden Ridge?

They've been relatively minor, Mark. Essentially, as rice supplies got tighter and tighter, it became tougher and tougher to mill. As we're getting closer to the new crop being harvested, the grain companies and the farmers who are still holding grain are now actually starting to let some grain go, and we're seeing more and more grain being offered with the pricing still a little bit high. And there's -- it's old rice. It's not only is it end of the season from last year, but it's also possibly a rice that could be 2 seasons old. But we are definitely seeing more rice being offered, and the mill has been more active the last couple of weeks than it had been earlier.

Okay. And then maybe for Todd, can you quantify at all, I think, you guys talked a little bit about some fees on some unfulfilled contracts. Can you quantify how big that number was?

In the second quarter, we paid about $200,000 to satisfy delivery penalties on contracts we couldn't fulfill.

Okay. And is it safe to say that there's some continued penalties that continued into Q3?

Yes, we will probably incur some more penalties as we go into Q3.

Okay. And then just as we look at customers, it sounds like there were some delays with current customers as well as potential customers just as people kind of worked from home or unable to kind of kick tires and see facilities and rice. Is that a fair assessment? And then how is that kind of new lead business looking today maybe versus during the quarter?

Mark, this is Brent. As you see, Mark, from a customer perspective, we had a lot of things that we were working on January, into February. And by March, most of the customers that we are working with sent most of the corporate staff home and shuttered their R&D and their product development facilities or at least minimized the activity there. Some of them are coming back in and getting active, but others are still out. And it could be months or longer before we see that fully returned to a normal level of activity.

Okay. And then the last one for me. I don't know if Peter, if you want to take this or if you can or want to comment on it at all. But just as we look at this strategic review process, can you tell us, is there anything that's really not on the table here, including asset sales or even a sale of the entire company?

I think we're really early into the process, and we've not come to any conclusions. But as we stand today, there's nothing that's not on the table.

Next question comes from Paul Sonz with Sonz Partners.

This is a variation on what was just asked. First of all, how much you're going to pay BMO for this strategic review?

I think that our engagement is based upon outcomes.

I see. And in terms of -- the business is a relatively simple straightforward business. So my question is, what can be other outcomes besides selling the whole business? Because -- I mean, it's all kind of stitched together.

I think that what we'd like to do is emphasize and possibly grow our higher-margin ingredient business. I think there's a number of ways that we could do that. It doesn't just mean selling off the entire business. I don't know if that's even selling off part of the business. So I think we're looking at all of the opportunities that are out there for us.

So this would be sort of a reshuffling of the deck where you might sell off California, but keep Mermentau and GR? I'm just trying to get a sense of what the potential upside can be at this point.

At this point, I wouldn't want to speculate on the outcomes.

Thank you. I would like to turn the floor over to Todd for closing comments.

Thank you, everybody. Look, we look forward to getting back to you next quarter. If there's any updates in the interim, we'll make sure that we stay in front of you. Thank you for your time.

This concludes today's teleconference. You may disconnect your lines at this time.