RiceBran Technologies' CEO Discusses Q4 2012 Results - Earnings Call Transcript

Apr. 4.13 | About: RiceBran Technologies (RIBT)

RiceBran Technologies (NASDAQ:RIBT)

Q42012 Earnings Call

April 4, 2013 4:15 pm ET

Executives

Alan Sheinwald - Investor Relations, Alliance Advisors, LLC

John Short - President, Chief Executive Officer, Director

Dale Belt - Chief Financial Officer, Chief Accounting Officer, Executive Vice President, Secretary

David Hutchinson - Senior Vice President - Operations

Robert Smith - Senior Vice President - Business Development

Analysts

Peter Trapp - Bifrost Capital Partners

Operator

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the RiceBran Technologies 2012 year-end financial results conference call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be open for questions. (Operator Instructions).

I would now like to turn this conference over to Mr. Alan Sheinwald of Alliance Advisors. Please go ahead, sir.

Alan Sheinwald

Thank you and good afternoon. Welcome to RiceBran Technologies 2012 year-end earnings conference call. With us today are W. John Short, CEO and President, Dale Belt, Chief Financial Officer, Robert Smith, Senior VP of Business Development, David Hutchinson, Senior VP of Operations.

Before I turn the call over to John, I would like to remind listeners that during the call, management's prepared remarks may contain forward-looking statements which are subject to risks and uncertainties. Management may make additional forward-looking statements in response to your questions today. Therefore the company claims protection under Safe Harbor forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. Actual results may differ from results discussed today and therefore we refer 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 today as of April 4, 2013. The company is in no obligation to update these projections in the future as market condition change. This webcast has certain financial information provided in this call is available at www.ricebrantech.com on the Investor Relations page.

At this time, I would like to turn the call over to John Short, CEO and President. John, please go ahead.

John Short

Thanks, Alan and thanks to everyone who has joined our call today. We are extremely pleased with the announcement that we made yesterday about the agreement we signed with Wilmar International Ltd, Asia's leading agribusiness group. So I will discuss this major milestone before turning the call over Dale to provide a brief overview over 2012 results. After Dale's remarks, I will ask Robert and Hutch to update you on some of their key activities.

As you may have seen in yesterday's press release, we entered into an alliance with Wilmar to introduce and develop our technologies in the People's Republic of China. Wilmar is a $45 billion agribusiness powerhouse with tremendous vertically integrated operations in the PRC. They have covered the entire value chain from grain processing all the way through to retail in soy, wheat, rice and other grains. They are China's largest protein manufacturer and view RiceBran products including rice bran protein as a major opportunity.

I urge our listeners to get on Wilmer's website to get a better sense of the scope of their operations in China and throughout Asia. This can provide some additional perspective on the magnitude of the opportunity that our Wilmar alliance represents for RiceBran Technologies. I returned from Singapore late yesterday after completing and signing that deal.

I have to tell our listeners that partnering with Wilmar in the world's largest market for rice, and therefore for RiceBran is an extremely exciting opportunity for our company in the medium term. China is the world's largest producer of rice with about one third of global rice production. Wilmar currently has a dozen rice knows across the rice growing regions of China and has plans to significantly increase its milling presence.

By adding our proprietary and patented technology to Wilmar's large operating base, we believe our joint venture with Wilmar will have the ability over time to develop a very large rice bran business in premium animal nutrition, human ingredients, nutritional supplements and especially in rice bran protein for the benefit of both partners. There are current shortages of protein in the China market that are forecasted to increase significantly by 2020.

An important feature of our alliance with Wilmar is that our company has the right to co-invest with Wilmar in manufacturing facilities that they establish to exploit our patented and proprietary technologies. Our ownership interest can range from 25% up to 45% depending on the timing of our investment. This is a significant future opportunity as we partner with Wilmar to lunch of products in the PRC.

I suspect there may be questions about our newly signed alliance with Wilmar after our prepared remarks. So let me he pass the call to Dale now. Dale?

Dale Belt

Thanks, John. Excuse me. With the filing of our annual report on form 10-K on Monday and the associated press release that went out one Tuesday, I will assume that everyone on this call has had a chance to read those documents. So instead of repeating the numbers verbatim, I will focus on a few important highlights that I think are worth noting. Consolidated revenues for the year ending December 31, 2012 totaled $37.7 million, compared to $37 million for the same period of the prior year. That’s an increase of 2.1% in U.S. dollar terms.

Brazil segment revenues were $26.3 million in 2011 and $25.1 million in 2012. However there was a 14% devaluation of the Brazilian Real year-over-year. In local currency terms, Brazil segment revenues increased from approximately BRL 44 million to BRL 49 million in 2012.

USA segment revenues increased 18.1% to $12.6 million in 2012. In the USA segment, animal feed product revenues increased $0.7 million and human nutrition product revenues increased $1.5 million.

Consistent with our strategy of focusing on growing higher margin human ingredient products sales, Brazil segment revenues experienced a shift from bagged animal feed products to lower margin bulk DRB due to the shutdown of our animal nutrition plant. During the year, the animal plant was intermittently shut down for about three months while a 30-year-old facility was replaced with a new state-of-the-art plant that now allows us to make both wet blended and dry blended compounded animal feeds. We will begin to see the benefits of that investment in 2013 and beyond.

Rice bran oil revenues experienced a shift from crude RBO to higher margin refined oil. Again, this is consistent with our strategy to focus on higher margin human grade products while still growing our animal nutrition business. The worst drought in the U.S. in the last 80 years caused demand pressure for soybean, corn and other alternative animal feeds, which increased animal feedstock prices generally, and specifically it increase raw rice bran prices in 2012. Our Brazil segment passed along most of higher prices for raw rice bran on DRB and bagged animal feed prices during 2012, but still experienced a negative margin impact.

Consolidated gross profit for 2012 was $6.1 million compared to $7.6 million in 2011, a decrease of 4.4%. Gross profit margin remained relatively unchanged at 29.2% in the USA segment despite significantly higher raw bran prices in 2012. In our Brazil segment, gross profit decreased $2.1 million and of that decrease $0.4 million was attributable to the currency devaluation. The balances of the decrease is a combination of higher raw bran costs and plant inefficiencies related to the capital project.

I want to call out the impact on gross profit margins of decreased plant efficiency over last year, while the capital expansion project was underway at Irgovel. We expect performance to exceed historic performance levels and demonstrates significant improvement once all of our Phase 1 projects are fully online.

Again, with those highlights, I will stop here and turn back over to John.

John Short

Thanks, Dale. For those of you who may be listening for the first time, in early 2012 we strengthen our management team with the appointment of Dr. Robert Smith to the newly established position of Senior Vice President of Business Development. Robert's responsibilities also include overseeing research and development and our intellectual property portfolio. In addition, David Hutchinson was promoted to Senior Vice President of Operations, responsible for all plant operations in the U.S. and Brazil. Robert and Hutch were instrumental in successfully completing our rice bran protein development project, as well as several other initiatives related to project completion and product launches at Irgovel.

I would like to ask Hutch to give us an update on Irgovel and then ask Robert to share the results of our rice bran protein development efforts and other key development efforts that are positively impacting sales. Hutch, will you go first?

David Hutchinson

Sure. Thanks, John. 2012 has been an incredibly busy year for us in South America. Those listening to this call may know that we have initiated significant operational changes at Irgovel. We have orchestrated the installation of nearly $15 million worth of state-of-the-art equipment. These changes and investments are occurring in almost every area of that 40-year-old facility and are producing substantial increases in production capacity and in several cases have yielded new products that are now being sold.

One example is our animal feed pelleting system, which is fully operational and has seen an increase in capacity of some 60%. In addition to the increase capacity, we now have the ability to produce high-end compounded animal feeds tailored specifically to the high end equine markets, like those for competition horses.

Another example of new product offering is our food grade rice lecithin that launched also in 2012. Rice lecithin is available for sale because we have added the skill sets and engineering capacity necessary to capture this underutilized and often discarded byproduct. Rice lecithin is used as an emulsifier in chocolates to help keep chocolate creamy and smooth. It is also have been used in products like powdered coffee creams which help keep other ingredient in suspension and (inaudible).

Companies are looking to reduce or eliminate soy based ingredients in their products. We now have hypoallergenic, gluten free and non-genetically modified rice as an alternative. The fine-tuning involved in producing lecithin (inaudible) multiple target customers. It’s a major accomplishment that we now operate a facility in South America that is one of only a handful of facilities in the world that can create such a valuable food product.

In some areas of Irgovel, we have focused on improving the productivity and reliability of existing equipment. To this end, we have completed the installation of a new boiler system that will carry us through decades of future operation, providing the steam required to produce edible oils and drive other processing areas of the facility. The additional steam has allowed us to reliably increase the capacity of a distilled fatty acid system by some 50% this year.

Of course the extra steam requires extra water and as a part of the Phase 1 projects, we have installed our own water wells and a water treatment systems allowing us to continue operations should there be any issues with city water supply. That water system also supports a new fire protection systems for the entire plant. That new fire protection system is competed this year and is designed primarily to protect our facility from damage and also to protect our employees.

Our infra red analyzer is a success story that has allowed us to track the quality of incoming raw bran from our suppliers in near real time. this allows us to source raw bran from those suppliers we have the highest quality and allow us to work with other suppliers on improving the quality of the bran we purchase from them.

2013 looks to be just as busy of a year for us operationally as was 2012. We have worked to complete the last of our Phase 1 expansion projects later this year. Yet to be installed is the new raw rice bran preparation system which is designed to support raw rice bran processing capacity increase from the current 72,000 tons per year in to an excess of 120,000 tons per year. Extraction will also be expanded to process that level of additional raw bran.

We have decided to postpone the installation of these two remaining systems until the end of this year in order to minimize the downtime during our prime animal feed sales season which is the Southern Hemisphere winter, June, July and August, a time when natural pasture is at its lowest and our animal nutrition sales are at their highest. This timing also coincides with the South American rice industry slowdowns for annual maintenance and keeps us in phase with our raw rice bran suppliers.

In summary this approach minimizes the financial impact of being shutdown for approximately six weeks. It also allows our equipment suppliers to have all of the equipment ready and ancillary support staff in place to see these projects through the completion on a timely basis.

Now I will stop here and return the call back to John.

John Short

Thanks, Hutch. Now let me turn now to new product development and specific growth areas for our products. I will ask Robert Smith, our SVP of Business Development to comment first on developments with rice bran protein products and second, since Colin Garner is at a tradeshow selling to comment on specific areas of growth for some of our existing products. Robert?

Robert Smith

Thank you, John. On March 14 of this year we announced the successful completion of our nearly two-year R&D project focused on developing methods to extract and concentrate protein from rice bran. A key target of that project was to develop methods that extract protein from rice bran with minimal processing while maintaining the inherent nutritional benefits of these proteins and providing the favorable organoleptic profiles for the products. It generally means the flavor.

We successfully accomplished these goals using innovative technologies applied at our Stage 2 facility in Dillon, Montana with a company that currently manufactures other rice bran derivatives. We view the completion of this program as an important milestone in our continuing efforts to expand our offering of value-added RiceBran products and as a first step in introducing a premium vegetable protein from rice bran into the market.

Based on the success of these and other development efforts, on March 30 we announced the launch of two new RiceBran protein-based products under the trademark PRORYZA. Pro for protein and Oryza, the Latin for rice. Products to be commercialized under the PRORYZA brand will be natural, gluten-free, non-GMO, and hypoallergenic premium proteins.

First to market in the PRORYZA portfolio of rice bran protein products will be PRORYZA P-35, that’s a 35% water dispersible rice bran protein extract suitable for beverage applications. This will be followed by from PRORYZA PF-20/50, 20% protein and 50% insoluble dietary fiber product that will initially be targeted to the natural health food industry as a premium rice bran protein and fiber ingredient. RiceBran Technologies will continue to innovate and we anticipate expanding our PRORYZA portfolio of RiceBran protein products in the future by introducing higher concentrations of our protein extract.

We expect significant interest in our rice bran protein products from the natural food, hybrid and ground meat markets, which brings me to the second topic of discussion, growth of existing products. The meat industry continues to be an area of high interest for the use of our stabilized rice bran products or SRB as a functional food ingredient. Having finally penetrated the ground meat sector in the U.S. late last year, we are currently experiencing significant traction with major comminuted or ground meat manufacturers. We believe that the processed meat industry will be a very big part of our future growth both domestically and internationally. Efforts are currently underway to market stabilized and defatted rice last for the sizable meat industry in Brazil and other South American countries through our Irgovel subsidiary and we expect to quickly enter the meat ingredient business in Asia working through our newly announced strategic partner, Wilmar International.

With that I will turn the call back to John.

John Short

Thanks, Robert. In addition to strengthening the management team in 2012, we saw significant changes at the board level that began in March with the appointments of approved Baruch Halpern and Henk Hoogenkamp.

Baruch is a founder and principal of Halpern Capital, a boutique investment banking firm. In addition to sharing the experience in capital markets and financing transactions, Baruch has made significant personal investments in our convertible notes.

Henk Hoogenkamp is a widely published author and a recognized expert in global authority on vegetable proteins. Henk spent many years as the head of strategic product development for vegetable protein at Du Pont and has nine books and hundreds of articles on vegetable protein, whey protein and other protein sources to his credit.

We welcome the experience knowledge and skills that these two very talented gentleman bring to our board.

In October 2012, two retiring directors were replaced, Robert Schweitzer, who holds the post of Chairman of the Board of NASDAQ listed PetMed, Inc. joined us in October and was subsequently elected Chairman of our board of directors RiceBran Technologies.

David Goldman joined at the same time as Bob and was appointed to chair our audit committee. David has over 35 years of experience in public accounting at Deloitte Touche with over 20 years as partner.

We welcome both of these gentlemen who bring broad business acumen and judgment in addition to their many years of public company experience.

Before I open the floor for questions, I want to leave you with a final thought. As I look at the remainder of 2013 and beyond, I am excited about our opportunities. We have align ourselves of world-class partners like Wilmar and BENEO-Remy and are positioned for significant growth in each of our operating segments. We will need to raise capital to support these exciting initiatives and will be making appropriate recommendations to our board in that regard in coming weeks.

This concludes our prepared comments and at this time I would like to open the calls for questions. Camille, if you could start the Q&A portion of the call, please?

Question-and-Answer Session

Operator

Our first question is from the line of Peter Trapp with Bifrost Capital. Please go ahead.

Peter Trapp - Bifrost Capital Partners

So, I guess congratulations are in order for the Wilmar transaction. I am curious, on that transaction that you have the opportunity to make investments or co-investments with Wilmar but I don’t see, or maybe it has just not been published that they will make an investment in RiceBran in the stock of RiceBran. That’s one of my questions.

The other question is that you mentioned that they have a dozen rice mills, so that you have the ability, and they are buying, i think it was two extrusion machines. I am wondering if the two and the 12 have any relationships or whether in fact two to start and then more?

John Short

Peter, how are you.

Peter Trapp - Bifrost Capital Partners

Fine, thank you.

John Short

Good, John here. We will be filing an 8-K this afternoon or tomorrow morning before the market opens and the agreements will be attached today to the 8-K. So everybody will be able to dig into them in great detail. There are several documents and there are broad range of relationships with Wilmar, as you will see. One is a joint investment in the company holdings, some technology, the other is the sale of, as you said, a couple of our proprietary extruders initially so that we can get started with producing rice bran at one of their facilities in China.

We expect that that will expand over time and each time Wilmar uses one of our technologies including our extruder technology to establish operations at one of those mills that operation will be dropped down into a subsidiary and we will have a right to co-invest in that subsidiary. So, Peter, I don’t know if that answers your question or not but that is at a very high level of the nature of the relationship.

I think I should also say Wilmar is an enormous company with tremendous penetration in the China market. I want everybody to understand that as we introduce our products and technologies into the market, we will have the same kinds of challenges we have here in introducing a product into an R&D group in a Chinese company or in the Chinese operations of multinationals that we currently deal with. There will be a process to build sales.

What we expect to happen is that we will be selling from the U.S. certain of our products as they are introduced into the market. We can imagine SRB and protein being among the first. Then as facilities get built in China, the source of those products will transition to the Chinese facilities. So Peter, let me stop there. It’s a big complicated deal that maybe you need to dig through some of the documents but let me stop there and see if that answered your question.

Peter Trapp - Bifrost Capital Partners

Well, I think that’s a beginning. I think the bigger thing that you are putting money up in to the joint venture and it sounds as though Wilmar is doing the same thing but by having an agreement with Wilmar, as they are a $45 billion company and obviously RiceBran is not, it would serve me a great purpose and a vote of approval, if they, in their agreements or in the 8-K that they said that they would be buying some stock or making investment in RiceBran. After all, its not as though there is not a lot of stock around for them to buy. That’s one of the points I am trying to make or I am asking about is are they not going to invest in RiceBran?

John Short

That wasn’t discussed and that is the nature of our agreements with them, Peter. What they are doing and you will be able to see this in the documents is, we just completed a two year joint research and development agreement related to protein. We have established a subsidiary to hold the IP rights related to that protein and Wilmar is taking a 50% share in that joint venture. As part and parcel of that they are making an investment that we will in turn use to pay DSM.

So they will have co-ownership of those protein right and they will have an exclusive for the application of those rights in China and we will use the proceeds of their investment to pay DSM.

Peter Trapp - Bifrost Capital Partners

I am sorry, you said you will use the proceeds to?

John Short

We will use the proceeds, Peter, to pay the true-up amounts that we owe to DSM under the joint research and development agreements.

Peter Trapp - Bifrost Capital Partners

I see.

John Short

A separate agreement, they will be acquiring some extruders from us. The proceeds of that investment will come into the co-op company as operating capital and we will first get those extruders set up in one of their mills just to teach them how to use them. After we get them set up and we start producing bran domestically in China, we will look at the opportunities for expanding production capacity of SRB into their other mills.

Peter Trapp - Bifrost Capital Partners

Okay, so in that case you will end up putting up money. I think I read also that you would be taking the funds from that extruders and using some of it to pay down debt.

John Short

Peter, let me try to clarify. What I was just trying to describe. There are two separate transactions that are all part of the overall package, with one of those transactions is the investment by a Wilmar subsidiary. a Wilmar company and the IP holding company that will hold the rights to protein that come our joint research and development agreement. That money will be used to pay the true-up balance to DSM. And I think on the March 1, we issued a press release and filed an 8-K with the description of the completion of the JRDA agreements.

So the amount that we are due under that agreement will be paid by the investment from Wilmar. Separately, separate Wilmar company, separate agreements, we will be selling extruders to a different Wilmar company, that’s an operating company in China. That operating company in China will receive and we will help them set up and put into operation some of our extruders for purposes of entering the PRC market on the food ingredient side initially.

Peter Trapp - Bifrost Capital Partners

And the proceeds from those extruders?

John Short

We will use in operations in the company here.

Peter Trapp - Bifrost Capital Partners

Okay. I thought I saw somewhere it was to pay down debt.

John Short

It’s the DSM cost.

Peter Trapp - Bifrost Capital Partners

No, I think there is a confusion.

John Short

Okay.

Peter Trapp - Bifrost Capital Partners

But you still haven’t addressed the point as to whether they are going to buy stock in RiceBran. I guess the answer is no.

John Short

Well, Peter, I thought I said that was not discussed as part of these transactions.

Peter Trapp - Bifrost Capital Partners

Okay, I didn’t hear that. Sorry. Thank you.

John Short

Yes. Camille, can we take the next question?

Operator

(Operator Instructions) I am showing no further questions at this time. I would now like to turn the call back over to management for closing remarks.

John Short

All right. If we don’t have any additional questions, then we will wrap up the call and thank you to everyone for joining us.

Operator

Ladies and gentlemen, that does conclude the RiceBran Technologies 2012 year-end financial results conference call. Thank you for your participation. You may now disconnect.

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