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spk01: Good day, everyone, and welcome to the Rice Brand Technologies second quarter 2022 financial results call. At this time, all participants are in a listen-only mode. Later, you will have an opportunity to ask questions during the question and answer session. You may register to ask a question by pressing star and 1 on your touchtone phone. It is now my pleasure to turn today's program over to Robert Fink, FNK. Please go ahead.
spk03: Thank you, Operator. Good afternoon. Welcome. to the Rice Brand Technologies Second Quarter 2022 Financial Results Conference Call. Hosting the call today are Peter Bradley, Executive Chairman, Todd Mitchell, Rice Brand Chief Operating Officer, and Chief Financial Officer. I want to remind everyone that during today's call, management prepared remarks may contain forward-looking statements that are subject to risk and uncertainty. Management may also make additional forward-looking statements in response to your questions today. Therefore, the company claims its protection under the 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 ricebrands.com on the investor relations page. At this time, I'd like to turn the call over to Peter. Peter, the call is yours.
spk02: Thank you, Robin. Good afternoon, everyone. We had a very strong quarter for our core SLB and milling businesses that was otherwise marred by issues in production at our value-added SLB 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 SL 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 in 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 equine sector. It is also important because it should drive increased sales, improve 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 demands for high-quality domestic resource grains, generating mid-double-digit revenue growth and improved contribution to gross margins. In particular, MGI generated solid year-over-year improvement, 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 believed 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 move in towards that goal. With our core SLB and milling businesses firing on all cylinders, gross losses in the second quarter can be attributed entirely to our value-add SLB 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 overwhelming. 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 six weeks' worth of sales and were 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 suppliers to make changes to the feedstock they were providing us, and we have completed testing this feedstock with the other 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 SLB business and MGI in the second half of the year, supported by new customer wins and largely completed capacity expansion, a return to normal operations for a value-add derivatives business, and the potential for a strategic solution to Golden Ridge should drive significant improvement in our financial results in the second half, producing us with further improvements in 2022, 2023, and beyond. Now let me turn the call over to Todd to review the quarter in more detail.
spk06: 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 marred 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. 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 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 funds, 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 director's 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 price by lower SG&A, and a $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 5 cents per share compared to a net loss of 1.9 million or 4 cents a share a year ago. The net loss, the increase in net losses outstripped operating losses due to a $471,000 non-cash 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 a 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?
spk02: Thanks, Todd. Sorry about that, everyone. It has been two years since we decided Ricebrand 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 two years, we've nearly doubled revenue organically by operating better, bolstering our sales channels, 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'd remove the systemic issues that have made profitability so elusive for the company by breaking into new high-volume categories for our core SLP 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 was a tremendous learning experience for our derivatives facility and the staff that worked there. So while this quarter's bottom line results are disappointing, I would argue the overall trend is encouraging. In fact, we're in a much stronger position today than we were just one year ago, and certainly than we were two years ago. I believe that results will rebound fairly rapidly off this quarter and are optimistic about the future. I thank you for your support. With that, we will now be happy to answer any of your questions.
spk01: At this time, if you'd like to ask a question, please press the star and 1 on your touchtone phone. You may remove yourself from the queue at any time by pressing star 2. Once again, that is star and 1 to ask a question. We'll take our first question from Connor Jensen of Lake Street Capital Markets.
spk08: Hey, guys. This is Connor Jensen for Mark Smith with Lake Street Capital Markets. Thanks for taking my questions today. 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?
spk02: I really think there were two 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 got two big changes coming together, and that's what caused those issues. Yeah, disappointing in the second quarter, but to get it fixed within a six- to eight-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 back to continue to be back in normal production through the rest of the year.
spk08: Okay, nice. Glad to hear that 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 for the business.
spk02: Todd, do you want to take that one?
spk06: Yeah, sure. We've added a new customer in the pet food space. We 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 palatant 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.
spk08: Okay, great. And then lastly, I know you guys are probably getting sick of being asked this question, but obviously EBITDA wasn't really liked. Do you have any thoughts on when you maybe could turn that EBITDA positive or kind of goals for your outlook?
spk06: Yeah, 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 setback at the SRB derivatives business has cost us about a million dollars 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 of a break even. I think in 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, you know, I don't think we're far off. is what I'm saying, uh, at these revenue levels.
spk08: Okay, great. Thanks. That's all I have for today.
spk02: Thanks.
spk01: And our next question comes from Gary Goldschild from a private investor.
spk04: Uh, hello. Uh, this is now about the 30th call I've, uh, spent time on. And, uh, 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 a dollar?
spk06: Mm-hmm. Well, Gary, I can appreciate your comment. I think we've been pretty clear that over the last two 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 they're isolated and largely in the losses associated with them largely one time in nature. You know, I think you'll see us continue to emphasize that operating leverage in the core SRB business and the higher value product. 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.
spk01: Our next question comes from Charles Robinson from Dawson James.
spk07: Hi, guys. Thanks for taking my question. Can you comment on the progress of the expansion of the Louisiana Mermontaw and MGI grain facilities expansion?
spk06: Sure.
spk07: How's that going?
spk06: Very well. At Mermontaw, we've done two primary things. 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 met, and the format that they want it delivered in. So all of that is now in place and online and ready to ramp. At MGI, we have replaced the main huller, 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 loadout capacity there to meet that. There's 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 convention to be a much larger business than it is now, and it's frankly a much larger business than when we bought it.
spk07: Fantastic. I appreciate the answer. And just to follow up to one of the previous questions, the significant new customer, is that a multi-year contract?
spk06: 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, you know, I think if you look at our core equine business, some of those customers are five, six years. I would expect the same sort of constructive relationship with this customer.
spk07: Good enough. And your equine business was previously the largest portion of your business, correct?
spk03: Yes.
spk07: 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?
spk02: I think, you know, I think, you know, provides us a real opportunity for volume growth. And you see what we've done down in the Delta with Murmantown and Lake Charles. We've been preparing for this to happen. And just to reference back your previous question, you know, this is, you know, 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, you know, a quick switchback. 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 a quarter of operational issues throughout the food industry, and we suffered as well.
spk00: Good enough. Thank you.
spk01: Our last question comes from Martin Mack, investor.
spk05: Yes. Gentlemen, I listened carefully to some of the previous callers. The gentleman who said he listened to 30 conference calls, well, I've 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 positive. 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 three or four months every time to find out what the progress of the company is.
spk06: 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 now have an active presence on social media. And I do think that, to your point, we will be more proactive in 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.
spk05: 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 make a penny a share or two cents a share. What I'd simply like to hear from time to time is that business is going very well. We expect to have a 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 in what you said, and the fact that you intend to make sure we don't lose our listing means that we will have reverse split shortly. Is there any indication that you can give now as to what the number on that reverse split will be?
spk02: No, not as yet.
spk05: No. Okay.
spk02: We haven't got board agreements on it as yet.
spk05: I lived through the last one, which was one for 100. 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. I believe in this company so much. It's been 20 years of my investment. As you can understand, the loss is exorbitant. but I still believe in the product 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.
spk02: We very much appreciate your comments, yes. You know, I think we're headed in the right direction. The ingredients, why I'm involved with the business is that the ingredients can play an increasing role in the food supply chain. I think that Focusing on being ingredients rather than in rice milling will help propel the company forward.
spk01: 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.
spk02: Thanks to everyone for your attention. Yeah, tough quarter. issues we didn't see coming, but we've resolved them, and I think you can look forward to better results in the rest of the year. Thanks again for your support.
spk01: Thank you, ladies and gentlemen. This concludes today's conference. You may now disconnect.
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