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spk01: Good morning, everyone. Welcome to Rubicon Organic's third quarter 2021 financial results conference call. As a reminder, this conference call is being recorded on November 17th, 2021. At this time, all participants are in a listen-only mode. Following the presentation, we will conduct a question and answer session. Instructions will be provided at that time for research analysts to queue up for questions. I will now turn the call over to Mark Chabay, Investor Relations. Please go ahead, Mark.
spk00: Thank you, Operator. Good morning, everyone, and thank you for joining us today. Rubicon Organics' third quarter 2021 financial results were released this morning. The press release, financial statements, and MD&A are available on CDAR, as well as on the company's website, rubiconorganics.com. Before we begin, I'll refer you to slide two of our presentation, which contains Rubicon Organic's caution regarding forward-looking statements. I am joined on the call today by Jesse McConnell, Chief Executive Officer, and Margaret Brody, Chief Financial Officer. I'll now pass the call over to Jesse.
spk03: Thank you, Mark, and good morning, everyone. We have been steadfast in our mission to grow the best cannabis on Earth and for the Earth, and we are beginning to reap the benefits of that focus. Quarter three was a breakthrough quarter for Rubicon Organics, as we achieved record revenues and gross profit, made significant market share gains, and established Simply Bare Organic as the number one premium brand in Canada in flour and pre-rolls. As the cannabis industry matures beyond mere production and distribution, we are beginning to see the emergence of durable consumer brands and the loyalty associated with them. Consumers and bud tenders alike are singing the praises of Simply Bare Organics, and that chorus is growing louder. Consumers are looking for brands that resonate with them, and on slide three, we can see the result of their search. Simply Bare Organics has emerged as the number one premium brand in Canada for flower and pre-roll, with a whopping 8.3% of the national premium market. We've made strong gains in the three largest markets, securing the number one position in Quebec, and maintaining our pole position in our home province of beautiful British Columbia. Together, the flower and pre-roll market make up over 70% of the total market, and it continues to grow. But it is the performance of the pre-roll segment that has been the most impressive, with year-to-date growth in 2021 compared to 2020 an astounding 77%. Pre-rolls are particularly appealing to the new legal market entrant who's often less price sensitive and prefers pre-rolls for the convenience. In the premium pre-roll segment, Simply Bare Organic has an impressive 18.5% market share nationwide. And even more impressive, in our home province of British Columbia, home to some of the most discerning cannabis consumers in the world, we command over a quarter of the premium pre-roll market with a 26% share. The recognition of Simply Bare Organic as Canada's number one premium cannabis brand reveals its latent potential when you consider that cannabis markets are only now beginning to open up globally. There's been a lot of buzz in the premium market in Canada as of late. We've seen some M&A. We've seen some large LPs indicate they are planning to increase share in the space. We've also seen some smaller craft LPs come to market with decent product. Establishing brand recognition in the premium space takes a lot more than good intentions. You need a facility that is designed to produce high quality product profitably with a great genetic library. You need a strong marketing team to design and align the brand architecture and strategy with consumer insights. You need a supply chain team that can ensure the product is packaged properly at scale. and is consistently available on the store shelf. You need a strong sales team to gain points of distribution, in-store brand placement that maximizes the shopper's journey, the communication of the brand's value proposition to the relevant stakeholders, such as buyers and bud tenders. And ideally, you have a portfolio of brands so that the buyers are able to leverage their relationship with you to fulfill some of their needs outside of the premium segment. All of this takes significant working capital and time. This is why we are so bullish on Rubicon's positioning. We have the right size facility to generate significant operating leverage. We have the perfect suite of brands to optimize margins across all of our cultivation. We understand the various consumer segments, and our consumers in particular. We are expanding our brand umbrella to include our recently launched 2.0 product innovation in hash and live rosin, both of which I had mentioned have garnished rave reviews. We have now been in market long enough that consumers are getting to know and love our brands and our company. The rest of the world is looking at the Canadian market as a testing ground for their own regulated cannabis markets. As the cannabis industry evolves into a global marketplace, there is a tremendous opportunity for Rubicon to build brand recognition and to create meaningful differentiation through our focus on organic production and sustainably marketed products. A recent four-year NYU Stern study of consumer purchase behavior reveals that sustainably marketed products delivered 7.1 times faster growth than products not marketed as sustainable and enjoyed a significant 39.5% price premium. This was particularly true for upper-income, college-educated urban millennials who represent a large target segment for Rubicon Organics. In a global marketplace, There's every reason to believe that these macro consumer trends will apply equally to the cannabis industry. On slide four, you can see that in the organic flower and pre-roll market in Canada, Rubicon has the dominant brand portfolio in every province for which we have reliable data. Organic isn't just a stamp we place on our product. It's more than the story of sustainability that underpins it. Organic production creates real physical attributes that translate into a premium value proposition. Savvy consumers report an enhanced and longer-lasting experience, better flavors and aromas from the elevated terpene profiles, and smoother vaporization. It is the coming together of these characteristics, along with emerging consumer values, that create leadership in the premium sector. We continue to explore how to best position our brands in the international markets, and as we previously indicated, we built EU GMP capability into our facility. We are currently awaiting inspection from the German auditors and we anticipate receiving our certification in the second quarter 2022. In addition to Germany, we're exploring other international markets in the EU and elsewhere and expect to make an announcement to that effect in the first quarter of 2022. Rubicon had an outstanding quarter, registering record net revenue growth of 54% sequentially over quarter two 2021 and over double the net revenue from this time last year coupled with this was an increase in gross profit of nearly 2.2 million from the previous quarter which demonstrates how significantly we benefit from operating leverage as we drive the top line a big part of these results is what we've worked so hard to achieve this past year which is the national rollout of our good, better, best brand portfolio strategy. This enables us to optimize margins across all the products we produce. In the upcoming quarters, you'll see the implementation of the next phase of our strategy, where we will focus on increasing our flour production and the percentage of the product and brand mix that is sold through our premium brands. In early quarter three, We had 1964 Supply Co., our premium brand, and Homestead, our mainstream brand, accepted for listing at a number of large provinces. And we rolled those out over the course of the quarter. In Ontario, by far the largest cannabis buying market in Canada, 1964 hit the shelves in September and Homestead in October. Subsequent to Q3, with our entire portfolio of brands in market and with coast-to-coast distribution, we became a top 10 LP with a national market share of 2.2% for the three months ended October 31st. And we've achieved this by producing at a single facility with our own sales and marketing team and without any wholesale sales. On slide five, we can see some of the brand assets that we send to the provinces. Going forward, we are focused on increasing our yield with a plan to deliver an 11,000 kilo run rate by fourth quarter 2022. You can also expect to see a number of line extensions under our existing brand portfolio as we introduce exciting new high THC and high terpene strains like our recently launched Island Pink Kush Insiders Cut with a range of 24 to 26% THC and nearly 5% terpenes. All of which will be strategically positioned relative to our brand value propositions and to the buying preferences of different regions. And of course, we will never stop innovating. We continue to push the boundaries of quality, flavor, and format, and are aptly named DreamWorks Theater, from which we have already dropped small batches into the market of some of the best, if not the best, live rosin available. In early 2022, we anticipate bringing new products to market, like infused pre-rolls and live rosin vapor cartridges. Our strategy, staying focused on the premium segment, with a vision to build a portfolio of global premium cannabis brands is paying off with record revenues, gross profit, and consumer recognition. With that, I will pass the call over to Margaret.
spk02: Thank you, Jesse, and good morning, everyone. I'm very pleased to report that in the third quarter of 2021, Rubicon Organics reported record net revenue of $7.1 million. This is a 54% or $2.5 million sequential increase relative to Q2 and 124% or $3.9 million increase over Q3 in 2020. The month of September 2021 was Rubicon Organic's highest ever month of revenue achieved. As compared to 2020, the increase in our net revenue is attributable to our expanded SKU count for our super premium brand, Simply Bare Organic, the rollout across Canada of the premium brand 1964 Supply Co. and the launch of our mainstream brand Homestead in a number of provinces. Just as important as the increase in brands and SKUs was that in Ontario, retail stores have begun returning to more normalized buying patterns. We also made tremendous improvements towards profitability in Q3. On net revenue of $7.1 million, we reported $1.8 million in gross profit before fair value adjustments. This is a quarter-over-quarter improvement of $2.2 million. This calculates to a gross margin of approximately 25%. Our accounting methodology of expensing and not capitalizing our production costs allows for significant operating leverage, and this is clearly evident in Q3 2021. Consistent with what I have said in the past, our cost of goods sold are expected to remain relatively fixed as compared to the current levels with the gross margin coming in from increased net revenue and throughput of our facility. We are focused on bringing products to market that drive higher gross margin under our Simply Bare Organic and 1964 Supply Co. brands. We reported an adjusted EBITDA loss of $600,000 in Q3 2021, a substantial improvement of $2.8 million versus Q2 2020. The improvement in profitability reflects the operating leverage we realized on the growth profit line and a full quarter impact from the restructuring we announced in May. We ended the quarter with approximately $12 million in cash. and $23 million in working capital. We are feeling very confident in our financial position, especially given the way revenue is trending over the midterm and our very tight cost base. From a capital perspective, we have recently taken delivery of six new HVAC units, of which three are fully installed, the last just yesterday. The remainder are expected to be installed by the end of January 2022. These HVAC units are part of our strategic plan to deliver an 11,000 kilo production rate by Q4 2022. The next significant budgeted project is the BC Hydro grid connection, expected to be completed by the end of the second quarter of 2022. The BC Hydro connection is expected to reduce operating costs by over $1 million annually and drive us towards meeting our ESG goals. Turning to our financial objectives, I am very proud to say that we hit our goal of becoming monthly adjusted EBITDA positive for the first time in September of 2021. This leads to the question of whether we will be adjusted EBITDA profitable in Q4. As of today, we do not think we'll be quite there as we are experiencing a transition period and some timing lags between when our new genetics for Simply Bare Organic and 1964 Supply Co. become available on shelves. as well as the impact of our new CAPEX installation. Continuing on our positive trajectory, we forecast being cash flow neutral in Q4 as we see cash unlocking from our investments in working capital over the last year. Our outlook is bright for 2022. Next year, we have a plan to achieve 11,000 kilo run rate at Delta while continuing to cultivate the best cannabis on Earth and for the Earth. We expect to see revenue growth and increasing margins from having our whole brand portfolio in market. We will be introducing more product SKUs and innovations under our SimplyBear Organic and 1964 SupplyCo brands, and all while our operating cost base is expected to remain essentially flat, enabling us to continue to deliver operating leverage. On the international front, We are in close communication with our German audit partners and with COVID travel restrictions easing, we are expecting to receive our EU GMP onsite audit in the near term. In parallel with that, we are expecting to announce other international routes to market. The details of which will be released soon with our first deliveries expected in the first half of 2022. All told, we expect that Rubicon Organics will be adjusted EBITDA and cash flow positive in 2022. It has taken a lot of hard work to develop our brand, optimize our cultivation, and remain vigilant in allocating our financial resources. But we are, and I am, thrilled to be in the position where we can say with confidence that we plan on achieving adjusted EBITDA and cash flow profitability next year. So with that, operator, please open the line for questions.
spk01: Ladies and gentlemen, if you'd like to add a question, please press star 1 on your telephone keypad. We'll pause for just a moment to compile that Q&A roster. And your first question comes from the line of Raul with Raymond James.
spk05: Morning, Jessie, Margaret. Thanks for taking my questions, and congratulations on this really strong quarter. Really well done.
spk03: Thank you, Raoul.
spk05: So my first question really is focusing on that top line or staying with that top line. We saw an announcement from one of your much larger competitors this morning driving hard in the super premium segment and obviously likely putting some of the weight of their balance sheet behind it. Now that you have been a significant player and continue to be a more and more significant player in the super premium space, this is becoming a more and more competitive space. A lot of your peers are recognizing that margins are much higher here. And so given the growth that you've seen, how do you plan on not only defending your existing market share, but also continue to expand it given the competition?
spk03: Thanks, Raul. That's a great question. We've been saying for quite some time that we believe in the premium segment and that that is where the margin is. We also believe that over time, the premium segment is going to continue to grow with the maturation of consumers' taste preferences. We've seen that in other marketplaces. So there would be no surprise that we would see that in the Canadian marketplace as well. Further to that, what I'd say is I think it's difficult in this space to build the mainstream Coca-Cola of cannabis. What we see is a fairly fragmented marketplace where quality and brand recognition is standing out and many of the consumers are looking to identify with smaller LPs, smaller to mid-size LPs where they can manage the quality more easily and where you know akin to what you see in things like craft beer so I expect to see that segment growing. I'm sure we'll see some additional competitive pressures in there, but we're very confident with the position we have of Simply Bare. And our point of difference here, both in terms of the physical attributes of organic production and our focus on sustainability, I think is going to stand us apart from the more traditional hydroponically conventionally produced products.
spk05: Great. That's the color. Thanks, Jesse. So as a follow-up and sort of moving, looking further down, you mentioned that you are looking to balance inputs into your Homestead 9064 and simply bear as a way to optimize your cost of goods and as a result margins. So can you maybe give us a little bit more color there in terms of what that strategy is, how you're doing that? And also, just kind of as a part two to that question, how do you expect the product split? What is the contribution of SimpleBear today and how do you expect the contribution from each of these three different verticals to play out over the longer term?
spk03: Another great question. Well, the Sell through in quarter three for us and the use of Homestead is tactical. We've always talked about a good, better, best strategy, but our resources are focused on Simply Bear in 1964. Homestead is a great avenue to move some of our slower moving products or products that don't meet the quality standards and our expectations for our other two brands. And we can very quickly cycle through that. Going forward, we're not anticipating having as our quality has improved significantly over the last two quarters on the aggregate. Um, we won't have the same level of production available, uh, for homestead, uh, the 1964 and simply bear, which are currently supply constrained. We'll, um, we'll take up the majority of that production. Uh, and then as for market mix, I really see that mirroring what we see in the marketplace today. You know, Simply Bear, as a super premium position brand, has outsized market share relative to the size of the super premium market. But I would, if I was to put a number behind it, reluctantly, being that I can't predict the future, that Simply Bear would have approximately 20% to 25% of the sales of 1964, about a third. So look, something between that and 40%. It's really difficult to predict that right now, given the amount of time that 1964 has been in the marketplace, but we've seen tremendous uptick for it. And if we can, I apologize for the honking in the background, if we can maintain the production needed for the demand in 1964, then that's about what you can expect, you know, two-thirds, one-third mix.
spk02: And I think I would add to that, Raoul, we have no intention of cultivating for homesteads. We cultivate for specific strains for 1964, and we cultivate for Simply Bare. So we are targeting a much lower percentage of homesteads going forward, which means for consumers, it will be a limited time.
spk05: Right, right. And that's a perfect color. And then just a final sort of quick question for you, Margaret. You mentioned that the essentially incremental sales, marketing costs, and and some CapEx in Q4 would probably be the rate-limiting step to getting to EBITDA positive. Can you give us a sense of what we should expect there, what we should be calculating there for our models in those incremental costs, but particularly in what we should be expecting for CapEx in Q4? And I'll leave it there.
spk02: Yeah, so we have some timing issues in Q4 coming up, and actually not helped by what we found out in the last two days, which is Vancouver is effectively an island. So we are going to be hit by some additional shipping costs as well to air freight our product to the east, obviously not being able to go down through the US like other products can. And the rail and trucking lines out of Vancouver at this stage are shut down and look to be for a while. In terms of the actual crop availability, it's just a timing issue. So we believe that The crops that we have coming down will be really available in Q1, and it's timing with the product on with listings with the provinces as well. With CAPEX and the HVAC and various things happening at site, obviously, if you're working overhead of plants, we don't want anything going into any plants, so We take a safety approach. So it will hit us a little bit in this quarter. We're working on identifying exactly what that is. And we'll come back to you, Raul, and we can speak after this as well about some of the details on that.
spk05: Great. Thanks so much. I'll leave it there. And congratulations again on the quarter. Thank you, Raul. Appreciate your calls.
spk01: And your next question comes from John Chu with Desjardins Capital.
spk06: Hi. Good morning. So, can you maybe just talk about these timing factors into a bit more detail here? I mean, is there a risk it's going to spill into the first quarter of next year?
spk03: The timing issues, and good to hear from you, John. The timing issues really have to do with the installation of our HVAC. As Margaret mentioned, we've got three of the six very large HVAC units installed on site and commissioned now. Put in perspective for callers, they're the size of the school bus. So, as we commissioned and installed these, we saw some delays sequentially on each crop. So, let's say there's a two-week delay approximately for each one of those installations. The result of that is some of those crops, by the time they are fully hang dried, trimmed, and available for the consumer, some of those crops are going to slip into quarter one. And I think the exacerbation of that is that the recent news here in Vancouver of the extreme flooding that we've experienced, not at our site, to be clear. There's no issues on our site. But as Margaret mentioned, Vancouver is legitimately an island. We're assessing this. And the U.S. border officials don't take kindly to tractor trailers of cannabis coming over the border to get around those issues. So it looks like we'll be air freighting along with everybody else here in Vancouver. So there's that issue. The issue of some of the timing of the crops. And then with the OCS listings that we achieved and we spoke about in our operational update and the updates prior to that, the OCS then went and pushed back a lot of the timing of those listings. So the product that we expected to have on shelves in December is now going to be landing in January. And there's an impact to that from the OCS.
spk02: Effectively, we'll have cultivated and the sale comes a bit later.
spk06: Okay, great. Maybe just a little bit more details on the pipeline of new products you have coming in? I think you said infused pre-rolls, but can you maybe talk about what else you might have coming down the pipeline and timing of that?
spk03: Yes. So we spend a lot of time working on innovation. And as you've seen with the achievement of our Capturing the first place in premium and flower and pre-rolls, as you can imagine, we spend a lot of time working on genetic innovation. We have literally gone through hundreds of trials with our various genetics, and some of those are beginning to come to fruition. Just to give you an example of that, if you test 50 genetics, you'll find one of those genetics that you think all the attributes of the consumers are looking for while still having the characteristics to drive revenue and profitability through their yields and pressure resistance. So you'll see a lot of new genetics coming in in quarter one and quarter two, the latter half of quarter one. As to the 2.0 innovations, Things like infused pre-rolls, or what we like to call the Jeffrey, is something we've been working really hard on. We spend a lot of time working on stability of our products. We hear from consumers time and time again that things like live rods and cartridges work for a week and then they stop working. So we spend a lot of time working on our stability, ensuring that the consumer experience is going to be excellent. So you'll see a variety of live rosin products come to market. You see the infusion, some pre-rolls, and there's a few other things that I'd rather just hold back right now and surprise you later or in one quarter too.
spk06: Okay, great. And then just last question, maybe as a follow-up to one of the earlier questions, maybe just talk about the market size of the premium flour and the premium pre-roll market. I know the pre-roll market has been getting a lot of momentum, but maybe just talk about the premium market as a whole. Are you finding that that category is gaining market share in the industry or is it maybe in certain pockets of across Canada?
spk03: Well, I mean, of course, there's going to be different regional aspects of it. But the macro trend we've always held is the same. It mirrors all of the other markets in cannabis. And frankly, this is just a trend in CPG is the move toward premiumization. So. I don't want to get into specifics on the premium market share versus the total market share because you have access to that data in the same way I do, John, and exactly how one wants to define premium is always a question here. But if we look at some of the industry leaders and where they've talked to that, you know, Canopy coming out today talking about the – Canadian premium flower market began to grow, accounting for more than 25% of all recreational market sales in quarter two, with volume increase over quarter one of 12%. We're expecting to see this segment continue to grow. It's in line with the transfer of consumers coming out of the black market, many of which who were premium consumers and weren't in the legal market, frankly, because of the lack of available quality and choice, and the natural evolution of consumers' taste preferences. As a consumer becomes more accustomed to the product, the first time they try it, they're likely not going out and paying for that super premium experience. As they become more adept in the categories, we're looking to enhance that experience in the same way we see things like wine and other consumer packaged goods. So we're very bullish in the premium segment. I'm expecting to see it continue to grow, and I am expecting to see a little bit of competitive pressure in that space as other LPs realize that that is the future of margin and of the flower category.
spk06: Okay, great. That's it for me. Thank you.
spk01: Thank you, John. Your next question comes from the line of Colin George with Haywood Securities.
spk04: Good morning, Jesse, Margaret, and thanks for taking my questions. Morning, Colin. Just maybe building off one of the prior questions there relating to gross margins, when you take a look at inventory expense as a portion of sales, that's been relatively constant at 43, 44% quarter over quarter. You would have maybe thought that might've been a bit of a drag with homestead introduced to the market, but doesn't seem to be the case there. And with your kind of target split, do you think this is a level that's maintainable around like low 40% or will there be a bit of a compression as you get more homestead sales and there's more competition in the market? Understanding this volatility on a quarter to quarter basis.
spk02: You know, frankly, we actually think that we're going to see that number decrease as a percentage. Throughput is absolutely key. So operating leverage and the increased amount that we are going through will be more efficient. We're also seeing, you know, improvement because we've now been operating for longer. So we're able to grind in and look at optimization of processes. So I believe that percentage will start to reduce.
spk04: Okay, thank you. And then maybe just another question here with regards to your restructuring done. It looks like it's paid dividends pretty quickly, run rate down by almost $2 million annually. Is there more optimization that could be done there, or do you think that this is probably the new level to build off of as the business expands here?
spk02: Can you just ask that again and clarify it a little bit more?
spk04: So your SG&A costs have came down quite a bit.
spk02: Yeah.
spk04: So it looks like the about 2 million annually in savings already realized from the restructuring done. Do you think this is the appropriate level to build off of? Or is there more synergies and optimizations that could be made?
spk02: I actually think what we're going to see is SG&A changing, increasing a little bit with some of the economic pressures that we're seeing. We obviously see significant inflation in wages. And that pressure is coming in this industry as well. And we're seeing increased costs in things like insurance. While we significantly de-risked the business, our quotes and coverage continues to get lower with higher fees. So, you know, if we can hold fire or grow moderately, I think that's a win.
spk03: Um, that a little bit more color to that, Colin, the, uh, we're not anticipating increases in the SG&A through headcount increases in any significant way. We are, we are built for significantly higher revenues. Uh, in fact, you know, that restructuring we did two quarters ago was precisely a result of the impacts of COVID and, and having been geared because our philosophy is, uh, hire early, get people aligned, and then have that team that is ready to continue to drive at the rate that we're looking to drive this business. So we're not adding a lot of head counts, but exactly to Margaret's point here, there is some inflationary pressures out there that are real around wages. And then the, some of the specifics of operating this industry and the joys of increased insurance premiums are some of the things that are going to come through in the same way that they'll come through for all of our competitors.
spk04: Okay, thank you. Yeah, that makes sense, and that's all very helpful. Maybe just one last one for me with regards to the timing in Q4 and the trajectory there. Is it more so just a temporary stall in growth in Q4 and then return to growth in 2022, or is it possible that we could see just a slight decline in the last quarter just due to the timing and shipping issues we spoke about?
spk03: Yeah, if we were a private company, we wouldn't be talking about a decline in the growth rate. This has got to do with timing issues on how crops fall and when they're expected to be in market. So as an example of that, we're pushing and working with the OCS to try to get more product in before Christmas, as you can imagine, with great sales on a seasonal basis. But if the labs are overloaded right now as that big push is on, so we wouldn't be surprised to see some of those things slip into January. But it's very much a tactical timing thing, not a trajectorial thing. Okay.
spk04: Thanks for taking my questions, and congrats on a really strong quarter here.
spk03: Thank you very much. Appreciate it.
spk01: Again, if you would like to ask a question, please press star one on your telephone keypad. We have no further questions in queue. Do you have any closing comments or remarks?
spk03: I'll make one comment here. I'm really proud of the team for the delivery of this quarter. This really is accumulation of a lot of hard work, getting our good, better, best strategy into marketplace, seeing the reviews, for Simply Bare in 1964 and actually, frankly, for Homestead, I think has really been tremendous for the team and really impressive that in such a short period of time with a company that has raised significantly less capital than our competitors, we've been able to secure the number one spot in flour in the country in premium. That's really a testament to the vision, the focus, and the quality of the product out there and the hard work of everybody in Rubicon Organics to secure that. So, I really just want to say thank you to the Rubicon Organics team for a job well done.
spk01: This does conclude today's conference call. Thank you for your participation. You may now disconnect your lines.
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