Rubicon Organics Inc.

Good morning, ladies and gentlemen, and welcome to Rubicon Organics Q2 Earnings Conference Call. At this time, online is in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. If at any time during this call you require immediate assistance, please press star 0 for the operator. This call is being recorded on Thursday, August 15, 2024. I would now like to turn the conference over to Margaret Brody. Please go ahead.

Thank you and good morning, everyone. Today, I'll provide an update on Rubicon Organics and the performance in Q2-24, highlighting our progress as the premium leader in Canadian cannabis and discuss our growth and unique opportunities for 2024 and beyond. Rubicon has achieved another robust quarter, recording a historic high in net revenue and marking the return to positive adjusted EBITDA and operating cash flow following a subdued Q1. As the leading premium licensed producer, Rubicon continues to hold a strong market share in premium flour and pre-rolls, premium edibles, and the topical market. We anticipate further growth in 2024, supported by our successful vape launch of two SKUs in May, with a further genetic launch in July, as we aim to capture our share of the almost $900 million Canadian vape market. We've maintained our number one premium market position in Canada across all categories, holding 6.5% of total premium market. This includes the 5.7% national market share in premium flower and pre-rolls. We continue to expand our presence across other categories, leveraging the strength of our leading premium house of lands. In Q2, we captured 27% share of the topical market, up 4.5% year-over-year, despite the tremendous amount of lower-priced competition entering the segment. Despite only launching in Q2 of last year, we have already captured 30% of the premium edibles market. In Q3 of 23, we had market share of only 5%, and by Q1 24, it was up to 22.5%. And as I said, now it's at 30%. I'm extremely proud of the execution made by our team on our entry into the edibles category and believe this strong market share Capture is proof of our ability to leverage our leading premium house of brands to successfully launch new products and enter new product categories. And now we have delivered the high-quality experience we feel confident is top shelf in market, and in Q2 24, we've released our premium vape offering. We are focused to capture our proportionate share of the premium vape market. I will touch base on this more shortly. Looking at our financial results for the three months ended Q2, 24, Lubicon delivered 12.1 million in net revenue and 3.7 million in gross profit before fair value adjustment, resulting in an adjusted EBITDA of $860,000. We achieved a significant milestone in May when our growth potential and strong presence in the Canadian market was recognized by AdvisorShares ETF YOLO, our first ETF investment. To our biggest growth driver in 24, I'd like to discuss our vape launch to date. In 23, the vape category grew to 800 million and was the fastest-growing significant segment in the Canadian market. Rubicon appeared to take our share. Vape quality depends on the caliber of input flour, and we have combined that with the best-in-class hardware. Our high-quality, true-to-flour, full-spectrum extract resin vapes appear to be resonating with customers who trust our brand. Outperforming our launch expectations and are among the highest distributed SKUs from the Rubicon portfolio, we've already achieved over 40% national distribution in just two months since launch, despite only launching in BC, Alberta, and Ontario, and we have high expectations for the future. Rubicon has debuted our baseline that are best-selling in consumer-loved cultivars, Comatose and Blue Dream, and as of last week, our third Strange Gelato 41 began shipments. By the end of 24, we plan to have five-season market, all utilizing strains that our customers know and love, and we estimate that in 2025, this could generate growth over 20% on our 23 net revenue. As you may be aware, the vape market continues to grow, and in Q2 24, makes up 16% of total Canadian cannabis sales. While the total cannabis market grows, we also expect the vape market to grow to approach 30% of total Canadian market sales and mirror established U.S. markets such as California, where it's 27%, and Colorado, where it's 29%, according to headset data for 23. And the interest of Gen Z and millennials in this category is driving real demand. In Q2, leveraging the strength of our premium house of brands, we've continued to expand our product lines by launching new products under each of our flagship brands with some examples as follows. For Simply Bare Organic, our super premium cannabis brand targeting the cannabis connoisseur, we launched new and novel genetics such as our BC Organic Kraken and BC Organic Cement Chews. These are ultra-flavorful, quad-level flower offerings that are only chosen for Simply Bare if they meet all criteria and truly deliver a best-in-class experience. We are extremely specific with what we release under our Simply Bare portfolio and maintaining an unyielding commitment to our brand promise. Under 1964, in addition to our vape launch previously mentioned, we have launched two new exciting flower strains with much-loved legacy cultivars, LA Kush Cake and Stinky Pinky. I am particularly enthused by LA Kush Cake, a special cut that will resonate with nostalgic consumers. This one has the potential to be added to one of our core strains. Our flagship wellness brand, Wildflower, continues to lead in innovation in the wellness space. This quarter, We made our first move into the sports segment with the launch of our sports stick, and we also introduced our first CDC and CBD edible, further expanding our product line. A strong leading genetic strategy is vital for leadership in premium cannabis. Our strategy is to launch new and unique offerings, and you can see here from some of our previous launches, and those underway are planned for 24. Our focus on genetics and new offerings is similar to other premium leaders in the U.S., such as Cookies and Alien Labs, and in our view, it's essential to maintaining our leading premium house of brands. I will now pass the call over to Janice, who will share some specifics about financials. Thank you, Margaret, and good morning, everyone. We achieved a record high net revenue for a single quarter, totaling $12.1 million, and the second highest consecutive six-month net revenue of $21 million. This success comes despite a softer Q1 base influenced by typical seasonality and lingering weak consumer sentiment from 2023. Importantly, even with our investment in ERP in the first half of 2024, we've returned to positive adjustability, now achieving this for seven out of the last eight quarters, and we've maintained positive operating cash flow for six of the last seven quarters. Our gross profit for the quarter stands at $3.6 million, with a gross margin of 30%. While this is down compared to Q2 2023, due to market trends that began in the second half of last year, such as price compression and a shift towards lower price, larger format. We have adapted by innovating our product lineup to meet consumer demands, albeit with lower margins. Following the trend of declining prices, we are beginning to feel more confident with the stabilizing of prices in the market and are seeing early signs of supply starting to tighten. Our vape launch from making the first sale mid-May 2024 has delivered promising results, and we're optimistic about the performance of these products over a full quarter in the market. We've also invested half a million dollars in our ERP implementation project, which is crucial for future growth, but has depressed our adjusted EBITDA both quarters this year. Cash flows for Q2 improved, resulting in 1.1 million operating cash flow for the three months, compared to $900,000 cash out in Q1 2024, bringing year-to-date cash flow to $0.2 million. Q2 2024 free cash flow came in at $740,000. The improvement in cash flow is driven by better operational results and a lower level of working capital investment, which was concentrated in the first quarter of the year. We have started to see the impact of this working capital investment, which is setting us up for the rest of 2024 and beyond. While quarter ones adjusted EBITDA and operating cash flow were lower than in recent periods, these investments were necessary to position us for continued growth. We remain confident in our outlook for continued net revenue growth, an increase in adjusted EBITDA compared to 2023 when you exclude the ERP investment, and positive operating cash flow for the year, as evidenced by our Q2 results. Our working capital position continues to support our plans, and we are in progress to refinance our long-term debt. Our current debt carries a favorable interest rate of 7.5% compared to the current Canadian prime of 6.7%. We are actively discussing refinancing options at similar rates and expect to finalize this in the second half of 2024. I want to take this opportunity to confirm that we continue to be current with all of our excise tax obligations. In the Premium Canada segment, we've seen a decline from Q2 2023 to Q2 2024, which impacted sales for Simply Bear. However, we're now witnessing a return to growth for the brand over the last three and six months, achieving our highest net revenue since 2022. This growth has been broad-based, with both the flour and pre-roll segments benefiting from new and unique genetic launches, along with innovations in the capsules and edible segments. For flour, BC Organic Fruit Roots has been especially well-received, and we look forward to consumers trying our recently launched BC Organic Cement Shoes and BC Organic Kraken. 1964 has been impacted by tough market conditions and pricing pressures. Q2 saw mixed performance, with a growth in the flower and pre-roll segments compared to the previous quarter, but at a decline from last year due to the later timing of new genetic launches in 2024. Still, innovation continues to push 1964 forward with strong growth in edibles and the launch of vapes in Q2 2024, contributing to overall company revenue growth. Recently, we refreshed our flower portfolio with the introduction of LA Kush Cake and Stinky Pinky, which we anticipate will bring renewed energy to our flower sales in the second half of 2024. Wildflower continues to excel in the wellness category with net revenue growth fueled by the extension of our range. This includes the new Wildflower Sport Stick and the recent launch of Wildflower Minor Cannabinoid Gummies. The trend of declining growth profit before fair value adjustments is primarily due to factors we've previously discussed. Price pressures in the flower categories and adverse product mix shift towards larger, lower-price formats and innovation in lower-margin categories. We also saw large-scale success in some product formats that are produced outside of our Delta facility, requiring us to sacrifice some margins, but the strategy lays the foundation for future growth. The uptick of gross profit in quarter two 2024 is a result of our efforts to attract the consumer back to our more profitable products. We remain confident that 2024 will deliver another profitable year as reflected in our Q2 results. I would now like to turn the meeting back to Margaret. Thank you, Janice. Despite the distress in many parts of the Canadian industry, there are some foundational pieces of good news, including the ongoing growth of the legal market, cupping off record legal sales over $5 billion in 2013. In addition, the black market remains an estimated 40% of total markets, implying a total market of $8 billion. There are many Canadian cannabis companies struggling to operationally execute, and debts are piling up, and almost $300 million in excise taxes is in arrears with CRA. In light of that, what is Rubicon Organics' unique positioning? We are Canada's number one premium LP with a house of premium brands that has proven a launch plan for new products exhibited by holding two of the top three most recommended brands by bud tenders in Simply Bare Organic and 1964 Supply Co., reaching the number one premium edibles position in the country with 30% market share within a year of launch, achieving 40% national distribution for our dates in under two months. Rupicon holds unique IP and is now positioned as the world's leading scaled certified organic cannabis company with an extensive genetics library. We are disciplined operators delivering consistent premium quality to distributors, retailers, and consumers. Part of this means we are a trusted and top-ranked supplier with provincial distributors, and this is important as they hold the decisions on product listings available for retailers. We're also focused on improving our in-house processes, building a handbook for repeatability and readiness for the future. We're taking our operations to the next level with leadership in genetics, ensuring we stay ahead of the competition. and we continually evolve to stay number one. We have national brand distribution across all key provinces, where we cover 97% of the addressable Canadian cannabis market and are regularly receiving calls for demand for our products internationally. And our business operates with disciplined financial management, which has contributed to our delivering of two fiscal years of positive adjusted EBITDA, and we are one of the few profitable publicly traded cannabis companies. We maintain a solid balance sheet, that will be stronger in the coming months as we expect to refinance our debt for the long term at similar rates to our current venture, sitting at 7.5% interest rate. We are starting to see supply dynamics tightening from indebted operators going out of business and large operators shutting facilities and going to asset light. In the coming quarters, we anticipate ongoing pressure on companies to settle excise payments. Some may navigate through receivership and reemerge, while others may cease operations permanently. We've already observed a decline in the total number of LPs in market over the year. We have achieved and continue to work on our key strategic projects in 24. And in the near term, we are looking to deliver a full launch of our FSE resin vape line under 1964 that we expect will demonstrate the power of our brand positioning and flower input quality. Our ERP implementation to ready Rubicon for growth. And lastly, refinancing of our debenture due December 31 for long-term financing around the same interest rate as the existing terms. With our premium House of Brands solid balance sheet and positive trajectory, we expect to deliver continued growth in net revenue accompanied by adjusted EBITDA for the full year as well as positive operating cash flow. We would now like to open the line for questions for analysts. Operator, please open the line.

Thank you. Ladies and gentlemen, if you would like to ask a question, please press star 1. To withdraw your question, press star 2. One moment, please, for your first question. Your first question comes from Neil Gilmer from Haywood Securities. Please go ahead.

Thanks very much, and good morning. You know, you're looking at a little over 30% growth in revenue lines quarter over quarter. It took away from your prepared remarks. It was sort of broad-based, but is there any sort of product format or province where you felt, you know, sort of helped have an outsized contribution to that sort of sequential growth that you experienced?

Thanks, Neil. Good morning. Actually, it was pretty consistent across the mark. And as Janice remarked in terms of what actually happened within our brand, you know, 1964 wasn't as strong as we expected, but Simply Bare has really rebounded. We've got the right genetics and had a really good impact It was largely consistent across the country in terms of our growth, particularly happy with our strength in BC and Ontario, I would say, our home province, and then the largest consumption province.

Thank you. And then you commented the past couple of quarters have been impacted on the EBITDA line from your ERP implementation. quantify how much that impacted Q2, and can you remind us when the ERP implementation will be complete?

Yeah, absolutely. Thank you. So in quarter one, we spent about $270,000, and in quarter two, it was a further $200,000, so just shy of $500,000 for the year to date. This is actually slightly behind our expectations. We have decided to slow down our project a little bit and make sure, with all ERP projects You know, you learn as you go, and we want to make sure that we do it right. So we have decided to slow it down a little bit and are now looking more for go-lives of early 2025. So our guidance remains the same, that we expect to spend about a million dollars across 2024. That's now just with some different phasing than we originally expected.

Okay, great. Thanks very much.

Wonderful.

Ladies and gentlemen, as a reminder, if you would like to ask a question, please press star 1. And there are no further questions at this time. I will turn the call back over to Margaret for closing remarks.

Well, thank you all for joining us today. Rubicon Organics remains the number one premium licensed producer in Canada, and we look forward to continuing a strong, profitable performance in our premium house of brands. Watch for our products in store, and you'll find our dates easily. And if you're shopping for flour, I particularly recommend Simply Bear Organic Fruit Loops. Thank you.

ladies and gentlemen this concludes your conference call for today you may now disconnect thank you