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spk00: Good morning, everyone. Welcome to Rubicon Organic's fourth quarter 2021 financial results conference call. As a reminder, this conference call is being recorded on April 19, 2022. At this time, all participants are in a listen-only mode. Following the presentation, we'll conduct a question and answer session. Instructions will be provided at that time for research analysts to queue up for questions. Before we begin, I will refer you to slide two of our presentation, which contains Rubicon's caution regarding forward-looking statements and non-GAAP measures. Today's presenters will be Jesse McConnell, Chief Executive Officer, and Margaret Brody, Chief Financial Officer. I will now turn the call over to Jesse McConnell for the presentation.
spk04: Thank you, Operator, and good morning, everyone. We have been unwavering in our mission to grow the best cannabis on Earth and for the Earth. We continue to invest in our people, facility, and cultivation systems, resulting in a progressive reduction in our production costs and an increase in yield and quality of our products, helping us to grow our margins and deliver on our brand promises to the consumer. Building premium brands that consumers love and are loyal to begins with a culture that prioritizes quality. Our efforts to deliver that promise have seen Simply Bare Organic remain the number one premium brand in Canada in flower and pre-rolls, with a 7.6% market share of the premium segment for the year ended December 2021. We are proud to have maintained market share in the premium segment, which is outpacing growth of the overall market. During quarter four, we operated with our entire portfolio of brands in market and with coast to coast distribution. We held a 1.8% and 2.1% market share across all categories for the 12 and three months ended December 31st, 2021, respectively. And we have achieved this using our own sales and marketing team without any wholesale sales. Rubicon had an outstanding year recognizing 141% and 43% growth in net revenue for the 12 and three months into December 31st, 2021, respectively, as compared to 2020. A big part of our success relates to the national rollout of our good, better, best brand portfolio strategy. This enables us to optimize margins across all the products we produce. For the time being, I'll pass the call over to Margaret to share some specifics about our financial performance, and I will update you after our three-pillar strategy for 2022.
spk01: Thank you, Jesse, and good morning, everyone. I am very pleased to report that in the year ended December 31, 2021, Rubicon Organics reported net revenue of $22.6 million. This is 141% or $13.2 million increase over 2020. Rubicon realized increasing operating leverage throughout the year, achieving gross profit of $1.5 million, or 22% on $6.8 million in net sales in the three months ended December 31st. We continue to see positive gross profit from operations in the fourth quarter as we operate with our full portfolio of brands and markets, and we are getting closer to our target of positive adjusted EBITDA. The company also continues to maintain a healthy cash position and working capital positions, allowing flexibility to fund growth, handle sales volatility, and take advantage of other opportunities. 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 Cannabis Supply. As I communicated at our third quarter earnings call, we expected the fourth quarter to be a transitional period with some chunky timing on revenue and the impact of our CapEx installation. And we can see that with a slight reduction from Q3 to Q4 2021. Consistent with what I have said in the past, our cost of goods sold are expected to remain relatively fixed as compared to current levels, with the growth in gross margins coming from increased net revenue and throughput of our facility. We have also refocused on finding additional efficiencies within our operations to further drive down our cost base and expand production volumes to spread costs over a larger output. In combination with bringing higher price point products to market under SimplyBear and 1964 brands, we expect notable margin gains in the latter half of 2022. We reported an adjusted EBITDA loss of $600,000 in the fourth quarter of 2021, a substantial improvement of 2.4 million versus Q4 2020. Most importantly, as we had forecast in our third quarter release to be operating cash flow neutral in the fourth quarter, we have now seen the results of our investments in working capital with our first ever quarter of positive operating cash flows of half a million dollars. This positive cash flow from operations is a 6.8 million improvement over the comparable quarter in 2020 and a 1.7 million improvement over the third quarter of 2021. The improvement in cash flows reflects the operating leverage we realized on the gross profit line, access to sell our product cultivated across the entire portfolio of brands, and the continued impact from the restructuring we announced in May 2021. From a capital perspective, we have installed six new HVAC units. These HVAC units are part of our strategic plan to deliver 11,000 kilos of production run rate by Q4 2022. The next significant budgeted project is the BC Hydro grid connection, which is expected to be completed by the end of the second quarter of 22. This project is expected to reduce our operating costs by well over a million dollars annually and drive us towards meeting our ESG goals. The company continues to maintain a healthy cash and working capital position, and as of March 31, 2022, we had a cash balance of $8.5 million. Furthermore, we are in discussions to either extend our debt facility or refinance to a longer-term facility the debt on our balance sheet. I would now like to turn things back to Jesse to share more about our 2022 outlook. Thank you, Margaret.
spk04: To meet our goals of sustainable profitability in the second half of 2022, we have developed clear priorities for the business, which consist of a three-pillar strategy focused on yield and quality from our production facility, improving product mix to optimize margin, and launching international products. Each of these three we expect will have a positive impact on our profitability and cash flow. Our first focus is to hone our production processes at the Delta facility to increase yield of our super premium cannabis. We have completed facility upgrades, invested in process improvements, and continue to identify cost inefficiencies. The company installed new climate control systems, most critical being the dehumidification units, and refined its cultivation system which it expects will enable a run rate of 11,000 kilograms of super premium cannabis by the end of 2022. Maintaining high quality flour with greater THC content from each crop continues to be a priority, and we anticipate our improved product offerings to enter the market in quarter two. Our Delta facility is expected to also benefit from the upgrade to the BC Hydro grid, resulting in further production cost savings in the second half of 2022. Our next pillar is to implement our commercial strategies within the Canadian domestic market to maximize the gross profit for each unit produced from our Delta facility, which coupled with delivering increased quality of flour and higher THC levels, is expected to drive more volume and rate of sale into our Simply Beer Organic and 1964 Supplyco brands. The premium cannabis market is gaining momentum and outpacing the growth of the total market, which should bode well for the premium product innovations we are bringing to market in 2022. 2022 is also expected to be the first full year with all five of Rubicon's wholly owned and licensed brands in market with national distribution. Future innovation in flour, pre-roll, and 2.0 products are expected to be launched under our existing brand portfolio, which is increasingly gaining recognition among bartenders and consumers. Our final strategic pillar is to create access to international markets by obtaining key certifications and agreements, enabling our launch into Israel and Europe with our first exports expected to occur in the second half of 2022. Rubicon believes that the combination of new brands and key Canadian markets and increased product offerings enable us to capitalize on our momentum. And coupled with a continued increase in quality and yield from our production, we expect strong top line and margin growth in 2022. The company realized a significant milestone in quarter four, achieving positive operating cash flows for the first time. The company's current expectation is to be operating cash flow positive and adjusted EBITDA profitable in 2022. We believe that despite any market volatility in 2022, our focus on our three key priorities, coupled with our brand portfolio expansion achieved in 2021, will position Rubicon to continue to deliver on its commitments and win in the premium cannabis market. Thank you. We would now like to open the line for questions. Operator, please open the line.
spk00: Thank you. At this time, to ask a question, you will need to press star followed by 1 on your telephone keypad. Again, that is star 1 to ask a question. To withdraw your question, just press the pound key. Please stand by while we compile the key in your roster. Your first question comes from the line of Neil Gillimer from Haywood Securities. Your line is now open.
spk03: Thanks very much and good morning. Morning, Neil. I wanted to start maybe on your second pillar of your strategy for 2022. And maybe if you could just expand a little bit on how you see that unfolding over the course of the year and what sort of levers you can pull for that to drive that margin growth that you referred to in that pillar. Certainly.
spk04: So the second pillar is all about finding margin inside of our existing portfolio. So a couple of examples of things that we've done there. If we look at our lowest tier, our good brand, which is Homestead, each marketplace, we have a limited amount of supply for that. Each marketplace we receive a different net sales value for. So we are prioritizing the marketplace in which we get the highest net sales value. Another example of that would be We understand that the consumer is very keyed in on THC and the correlation between that and price. So when we have higher potency products, we are creating tiers inside of our existing brands to be able to take incremental price. 1964 is coming out with its secret menu series, which has incremental price but the same production cost as of the existing brands. So even inside of the tiers we're creating the brands, we're creating subcategories inside of those brands When we have outstanding crops or unique genetics or other reasons that we believe the consumer would be willing to pay more, we're able to take incremental margin there.
spk03: Okay. All right. Thank you for that. Second question for me would be you're calling to get to 11,000 kilos by the end of this year. Can you give us any sort of sense of sort of what your sort of annualized run rate at right now and what's the cadence of achieving that? Because I think you referenced either in the MD&A or the press release respect to selling everything you can produce in the facility. So just trying to get a sense of, you know, you're not going to be at 11,000 for this year, but trying to get a sense of where you're at now and how you grow into that for 211,000.
spk04: Yeah, that's a critical question. Last year we had a production run rate of approximately 6,500 kilos. And coming into the beginning of this year, with all of our new HVAC installed, the process improvements, decisions that we've made on genetics, we're coming out of quarter one, not at our 11,000 kilo run rate yet, but we'll be pushing somewhere in the neighborhood of around 9,000 kilos as a run rate. So we are indicating that quarter four will be when we attain that run rate. Of course, we're doing everything we can to hit that run rate in advance of that.
spk03: Fair enough. If I can sneak one last one in, just your comment in the press release on some Q1 factors with respect to COVID, I think in January and February, and then you said March was normalized sales. Can you give us any sort of sense on what your overall view on revenue in Q1 on a sequential basis? Are we looking at sort of flat because of those disruptions, or are we still able to achieve a little bit of growth despite those disruptions?
spk04: I think in quarter one we'll see a dip. There's a number of factors coming into play there from the provincial mandates for the stores to some absenteeism that we experienced in our own facility as a result of COVID. And then as we transitioned with all the commissioning being done with HVAC, there was those first two months we didn't have as much supply coming offline available for sale in the marketplace. Typically, we see a seasonality effect of around 15 to 20%, and then we had our own effects on top of that with some of that absenteeism, some of that supply. And then we saw the return to normalization in March. I think the other thing that the industry is starting to understand is timing for when provincial distributors run their inventories down and do their year-ends. So we're seeing sort of outsized seasonality impacts in January, February as they run those inventories down for their March year-ends. And then they said they returned to normal buying patterns in March.
spk03: Right. Okay. All right. Thanks for taking my questions, and congrats on the operating cash flow positive in Q4.
spk04: Thanks, Neil. Appreciate the questions.
spk00: Again, to ask a question, please press star 1. Your next question comes from Michael Freeman from Raymond James. Your line is now open.
spk02: Hi, Jesse. Hi, Margaret. Thanks so much for taking our questions, and congratulations on finishing the year strong. I'm going to follow on Neil's question there on the annualized run rate coming out of 2022 targeting 11,000 kilograms. Based on your current and anticipated product mix, what sort of revenue level might we anticipate for full capacity, fully realized Rubicon operations? What might that yield?
spk04: Well, there's a number of factors at play there, Michael. That's a great question, by the way. As we look across where that product is landing, one of the big questions that is not entirely clear to us right now is the impact of international on what that revenue line could look like. So I think if we exclude the international possibility Um, I'm wary of giving you revenue guidance there, uh, but what would you, do you have a sense of where you think we want to say this question?
spk01: I think that's a very good question. Um, look, I, I think firstly, looking at 23, um, we're going to, we're going to run up to that run rate. Um, I'm going to be less bullish always, um, than Jesse and saying, you know, as, as we, as we hit things, we need to make sure that we, um, We have a market for everything that we're selling. And to be clear, one point of clarification, which is we can grow 11,000 kilos right now in the facility if we want to. Our focus is growing super premium products in our facility, not just throwing cannabis in there and growing it and dumping it into the market because we're focused on driving margins. So if we were at 11,000 kilos, I think what we need to look at is you can probably do a – a nice calculation of where last year's revenue was based on what last year's production was. And Jesse's indicated both of those and do an extrapolation of that. But then I would imagine we're looking at somewhere between zero and 30% of our business going internationally because the demand for BC organic product is very high. And the margins and the revenue numbers on that, we have not yet signed contracts. Obviously those would be announced when they are, but they'll be quite considerable. So I think that will be a very big boost on our top line. I don't know if that's helpful.
spk02: It was. It is helpful. Thank you very much. I totally appreciate the issuing guidance.
spk01: I think the question we've got is what happens with price compression in Canada? We are seeing the premium market growing in Canada, which is exciting, and that's been let off of the trend in some of the more mature markets. In Colorado, while the overall market grew the premium market after a few years started to grow faster than the overall market because consumers legacy consumers came into the premium market in the legal stores but also new consumers and consumers got more educated on the benefits of premium the terpene profiles etc in the plant and the experience the improved experience so i expect that we'll see the canadian market grow overall and we'd like to take a big big bite out of all of that as well terrific thanks very much um
spk02: So next question. You guys are pulling all the levers looking to achieve profitability, including adjusting your own wages, which is commendable. What needs to go right for Rubicon to reach your aim of second half profitability this year? That's a great question.
spk04: You know, what we have put in place over this quarter, including adjusting our own compensation, is we've taken a fair bit of cost out of the business. The way we are approaching the rest of the year is to target a lower level of break-even than we had initially targeted. The key pieces that needed to come through for us is the quality and the yield. When we look at the other pillars, if international doesn't come through, if that turns into a total zero, which we don't believe will be the case, we think it will be fairly significant by the end of the year, but if we call that a zero and we were unable to approve any margin mix, which is also very unlikely, based on the yield alone with the new THC numbers that are coming through, we can see what those rate of sales look like in the marketplace. If we continue the existing run rate that we are currently doing in our facility, we will achieve profitability this year. If that one thing goes right, then we can achieve profitability. If any of the others come true and we get increased margins through some of our domestic premiumization strategies or we land international contracts, those are other ways that we can achieve profitability. But on quality and yield alone, we're going to get there.
spk01: And this is just the info thing. We're going to say we expect and plan and anticipate.
spk02: Fabulous caveats. If I could squeak one more in, we've seen the introduction of infused pre-roll products into the market. I trust Rubicon's looking at this category kind of closely, but would be interested in your view of the pretty egregious cost and taxation structures applied to infused pre-rolls, whereas tax on milligram THC on a relatively high-volume product, and how companies can enter this popular category while remaining profitable and having positive contributions. That's another...
spk03: That is a great question.
spk04: You know, it's actually something that we looked at extensively, and as you said, the infused pre-roll category is growing significantly. And then I think you have to ask yourself, what are the assumptions behind that growth? Is it because individuals are looking for an experience that has flour and concentrate together, or are they just looking for a high-potency experience? Because typically, the flour-only pre-rolls have lower potencies than flour. We are in a strong position when you look at our own pre-rolls. We've actually been able to drive potency pretty significantly inside of the pre-roll category. So arguably, some of our pre-rolls as dried flour are already high or higher than some of the infused pre-rolls that are being offered in the marketplace today. We certainly have, and one of the reasons that we are one of the top producers and sellers of pre-rolls in the country. When you look at the infused pre-roll, the excise tax as a percentage basis is 300% what it is in the flour category, and egregious is an excellent term there. So we continue to investigate that and look at that, assuming we can charge the appropriate premiums for that. But I think in the value category of infused pre-rolls, you'll see Rubicon stay away from there because the excise tax is just too egregious. And we believe that our high-potency flower-only pre-rolls offer a very comparable experience for the consumer for a much more competitive price.
spk02: All right. Thank you very much, Jesse and Margaret. I'll jump back in the queue. And all the best with 22.
spk00: Thank you, Michael. Again, to ask a question, please press star 1 on your telephone keypad. I am seeing no further questions in the queue. Presenters, you may continue.
spk04: Thank you everyone for joining our call for our year end today. We appreciate your continued support of Rubicon and thank you to the analysts for your poignant questions. Have a great day everybody.
spk00: Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.
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