RiceBran Technologies (NASDAQ:RIBT) Q1 2019 Earnings Conference Call May 9, 2019 4:30 PM ET
Richard Galterio - Ascendant Partners
Brent Rystrom - Chief Executive Officer
Dennis Dykes - Chief Financial Officer
Conference Call Participants
Mark Smith - Lake Street Capital Markets
Paul Sonz - Sonz Partners
Good day, ladies and gentlemen, and thank you for standing by. Welcome to the RiceBran Technologies’ First Quarter 2019 Financial Results Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded.
I would now like to introduce our host Mr. Richard Galterio of Ascendant Partners. Please go ahead, Mr. Galterio.
Thank you, operator. Good afternoon, listeners. Welcome again to RiceBran Technologies' first quarter 2019 financial results conference call. With us today are Brent Rystrom, Chief Executive Officer and President of RiceBran Technologies; and Dennis Dykes, Chief Financial Officer.
Before I turn the call over to Brent, I want to remind listeners that during the call, management's prepared remarks may contain forward-looking statements that 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 for 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 you to a more detailed discussion of these risks and uncertainties in the Company's filings with the SEC. In addition, any projections as to the Company's future performance represented by management including estimates as of today, May 9, 2019, and the Company assumes no obligation to update these projections in the future as market conditions change.
This webcast and certain financial information provided in this call, including reconciliations of non-GAAP financial measures to comparable GAAP financial measures are available at www.ricebrantech.com on the Investor Relations page.
At this time, I would like to turn the call over to Brent Rystrom, CEO and President of RiceBran Technologies. Mr. Rystrom, please go ahead.
Thank you, Rich. Good afternoon, everyone. I am pleased to welcome you to RiceBran Technologies conference call for the first quarter of 2019. Our results were mixed in the first quarter of 2019, revenue was up sharply, mainly due to revenue from the recently acquired Golden Ridge Rice Mills. However, the growth at Golden Ridge Rice Mills was short of our expectations due to rice supply issues and also because of the impact of the debottlenecking efforts that we are carrying out there, somewhat limiting our production.
Our rice bran business grew modestly during the quarter. We are planning on adding several major new customers this year and remain confident in this expectation. However, penetrating large consumer facing brands is proving more time consuming than we previously had assumed. Our adjusted EBITDA of $1.9 million was flat sequentially, a negative $1.9 million.
Earlier this week, we received our first rice bran order for use by a large and interesting application in the Companion Animal market. We won this business because of the functional capabilities of our products, the benefits our products bring to the manufacturer, in this case, the elimination of yeast removing a contaminant that a lot of food manufacturers want out of their facilities and competitive pricing.
We think this is the first of many major wins in the Companion Animal market for our rice bran products since these attributes appear to have significant application appeal in products for that segment. We also expect several additional major new customer adds over the next 150 days in our other customer segments. This one new customer will expand our rice bran volumes and sales by about 6% on an annualized basis. So adding another three to five similarly sized customers would have a major impact on our growth and push towards profitability.
In the first quarter of 2019, we identified quality and cost issues with a large portion of the rice supply at Golden Ridge Rice Mills which caused the mill to sustain negative gross profit margins and adjusted EBITDA in January despite sales that were near our expectations.
We determined that we had to reject some of our rice supply as it would not yield the quality and quantity of product we needed in an economic fashion and immediately made changes to the operations and management structure at Golden Ridge Rice Mills as a result.
Securing sources of higher quality rice supplies took several months to complete, and this caused our monthly sales to drop in February to April. However, our adjusted EBITDA performance improved considerably in these months because we were a million better quality overall rice with higher yields.
We did this by building relationships with several regional grain elevators and working directly and expanding pool of farmers near our plant. Long-term, these supplies, especially working directly with farmers should help improve the profitability of Golden Ridge Rice Mills.
In the second quarter of 2019, we're focused on catching up on unfilled contracts that are remaining from this time. We hired Josh Ward as General Manager for Golden Ridge Rice Mills late in the first quarter of 2019 and we were already pleased with the progress Mr. Ward is making. He has over 25 years of experience in rice milling and a variety of plant leadership roles.
We believe the combination of our debottlenecking efforts, catching up on delayed rice milling contracts; the addition of stabilized rice bran sales from this facility, and the strengthening of our leadership team will further markedly grow sales and deliver meaningful adjusted EBITDA at Golden Ridge Rice Mills starting in the third quarter of 2019.
We're reviewing plans for expansion of Golden Ridge, which we expect to start the summer and complete by the end of the second quarter of 2020. We plan to more than triple, our milling capacity at this site by adding a second mill, which should allow us to sharply increase the volume of rice, rice products, raw bran for our stabilized rice bran production, all of that location.
We also plan to produce new rice bran product SKUs in that expanded footprint, including a new product with unique technical aspects that we believe will have an eventual market demand that exceeds 100 million pounds. Given our total sales of rice bran and have been just over 30 million pounds in recent years, we're excited to position for these opportunities.
Later in the call, I had a few comments about the impact that we think this expansion could have on our business. The integration of the MGI Grain is processing well. Our sales team is now selling the product line and we would expect incremental growth starting in the second half of 2019 at this business.
The opportunity for leverage at MGI Grain as substantial as it is generating 3 million in sales and meaningful EBITDA despite utilizing only about 35% of its production capacity. Cross-selling products and leverage and our sales force will be a focus for us this year.
We have a team of six people working with over 100 customers and 100s of prospective customers. Historically, our team has been limited to just a handful of products from our rice bran business, particularly three, our stabilized rice bran, rice valuables and RiFiber.
In contrast ingredients, salespeople typically sell a portfolio of 100 or more SKUs. Golden Ridge Rice Mills added over a dozen SKUs to our offering an MGI Grain recently had another two dozen. There is not a single overlapping customer of the three businesses we now operating, the legacy RiceBran business, Golden Ridge, and MGI Grain.
The cross-selling will not only leverage our sales force, but also our production facilities and our customers. We are starting to realize success in our cross-selling efforts modestly in the first quarter and more substantially in the second.
I will now turn the call over to Dennis Dykes to provide the financial update.
Thank you, Brent. Revenue in our bran business had single-digit growth in the first quarter of 2019, while consolidated revenues grew 79%, primarily due to the addition of revenues from Golden Ridge Rice Mills when compared to the same period in 2018.
Our gross profit margin results for the first quarter of 2019 narrowed considerably to 5.4% from 26.9% when compared to the same period in 2018. The primary drivers for the decrease in gross profit include first, the change in product mix; Golden Ridge Rice Mills has lower margins.
Second challenges during the Golden Ridge Rice Mills transition including difficult rice milling margins as Brent previously described. Third, the cost of raw bran increased 4.6%. And finally, an increase in production costs at our Dillon plant due to the timing of our drum dryer CapEx project.
Our SG&A expenses expanded in the first quarter of 2019 to $3.3 million from $2.9 million, an increase of approximately $0.4 million or 17.1% compared to the same period in 2018. The increase was primarily related to corporate expenses.
We incurred approximately $0.3 million in non-capitalized acquisition-related expenses and an additional $0.1 million in share-based compensation in the first quarter of 2019 compared to the first quarter of 2018. Our loss from operations in the first quarter of 2019 increased approximately 58% to $3.0 million when compared to the same period in 2018.
For the first quarter of 2019, our adjusted EBITDA was a negative $1.9 million compared to a negative $1.4 million in the same period of 2018. As a reminder, we use adjusted EBITDA, which is a non-GAAP measure as a means to measure the Company's performance. We include a full reconciliation of adjusted EBITDA to our net loss within our press release and on the Investor Relations portion on our website.
Now onto our balance sheet. Cash and cash equivalents balance increased by $6.2 million at the end of the first quarter of 2019 to $13.3 million compared to $7 million balance at December 31 2018. The increase in cash was primarily the result of an equity offering in March 2019, where we issued and sold approximately 3 million shares of common stock for $3 per share and a pre-funded warrant exercisable into approximately 1 million shares of common stock for $2.99 per share, bringing in $11.6 million in net proceeds.
In addition, we had cash exercises of warrants for the purchase of 600,000 shares of common stock at $3.30 per share during the first quarter of 2019, which brought in approximately $2 million in additional cash, more than offsetting our cash burn.
Our shareholders' equity balance at the end of the first quarter of 2019 was $34.5 million, up from $23.7 million at December 31 2018. The increase in equity is primarily related to the equity offering in March and the exercise of the warrants previously mentioned.
Considering our cash position, shareholders equity and our debt level, we continue to believe we have a strong balance sheet and we're well positioned to successfully execute our strategy to build value for our stockholders.
I will now turn the call back to Brent Rystrom to provide some additional thoughts on how we see our business operating in 2019.
Thank you, Dennis. Our debottlenecking projects at Golden Ridge should help our results in several ways starting in the third quarter of 2019. First, completion will eliminate the disruption, the various projects have caused around the mill as we're working. Second, we believe our production capacity will increase by at least 30% as a result of the projects, both in terms of throughput and on stream rates. Third, it should better leverage costs and sharply improve margins.
We are also noting that we completed the acquisition of MGI Grain in early April and that we have previously communicated that MGI Grain generates annual sales near $3 million and has positive EBITDA.
For modeling purposes, we would note that MGI Grain’s largest customer does about 23% of their sales all in the first and second quarter. So the third and fourth quarters typically are smaller than the first and second.
We believe the sales growth rate will accelerate in our rice bran products as the year progresses, which combined with the above mentioned actions that Golden Ridge Rice Mills and the addition of MGI Grain should help us sharply improve our adjusted EBITDA performance by the end of 2019. We are excited for this transformation. We remained focused on attaining sales of $37 million to $40 million for 2019 and positive adjusted EBITDA by the end of the year.
Finally, I will close with a quick overview on our expectations for the capacity that we planned to add at Golden Ridge. Our expansion will more than triple the production capacity of this business and add a high value new rice bran processing facility. We believe that applying current market pricing to the planned production capacity of this expansion would yield incremental annual revenue of $67 million to $75 million and adjusted EBITDA of $6 million to $10 million once this capacity is fully utilized.
Operator, we are now ready for our Q&A session.
Thank you. [Operator Instructions] We will now take our first question from Mark Smith of Lake Street. Please go ahead.
Hi, guys. First off, Brent, just looking at the debottlenecking process here, can you just give us any more insight into kind of where you are in the process and kind of how that work is proceeding?
Sure. Thank you, Mark and hello. The first major project that we worked on was creating a capacity to hold finished product. So we put in three outbound product tanks, each of them holds about eight truckloads of product. Prior to putting these in, basically the mill had about four truckloads of product and then it had to start filling trucks. So what would happen is overnight, for example, you'd have to have people there to unload trucks all night long. Otherwise you'd run the risk of the mill filling up. So that's the first one.
We are waiting on one additional part, we're using it, but one additional part, which actually arrived today and that's a metal detector, a new medical – a metal detector for that process and we'll get that installed in the next week or two.
The next project that we're working on is what's called the Husker Sheller and this is something that's in the front line of the milling process it's where – what's called the paddy rice or the rough rice. As it comes into the mill, it starts to break off that the whole, the outside part of the rice kernel. That's something that's happening now and will take probably a week, week and a half to complete. We're mainly doing that on weekends and so it shouldn't be too disruptive to operations.
The third thing we're doing is installing a length grader, which we have on site, and then screener that will replace a couple of sectors that we have. This will make the backend of our processing faster and more efficient. The screener is going to take probably another three months to get here. We'll do both of those probably in late June, early July is kind of the timing.
Fourth, we are looking; although we don't have to do this to really lift our capacity for most of our products. We're also looking at adding either a new break to the system or a new piece of equipment at a break. So that's the furthest out project that's now on this necessary to get the 30% capacity increase. But it's another one that we're considering.
Okay. And then just looking at the timing of the things that you walked through here, does that push back anything as far as the expansion of Golden Ridge or do you feel like you're still on schedule for June or maybe July on that project?
Yes. Good question. So the expansion is likely going to be in a separate building or if it's attached, it will be attached to the east of the existing building. So the expansion should have no impact on the day-to-day operations of the milling, should operate just fine while we're under construction.
Okay. Excellent. And then you talked about a new customer and Companion Animal for RiceBran that was added, I know these things take some time. When do you expect to start generating some revenue from that? Is that pretty immediate or is there still kind of a lag before you start to generate inbound shipping?
The first truckload ships, I believe on Monday.
Excellent. And then last one for me. As we look at the Meat substitute market, it's been in the news lately with beyond Meat, Tyson talking about entering the market, lots of announcements going on in that space. Can you just talk about any opportunities that you guys feel like you have in that segment?
Yes. Our traditional rice bran business, probably the greatest opportunity is as a part of the mix of what will be going into those types of products. So one of the physical attributes of rice bran that works well is that it's a very good binder and it's a good water carrier.
So when you're looking at creating something like a plant-based Meat or a Meat analog, you need something to help hold it together and then you need something to hold particularly, wet ingredients together. And we believe there's going to be a very good opportunity for our products to be part of a solution in that market. The inclusion would not be real high. It would typically be 1.5% to 2% of the overall weight going into a product like that that we think it's going to be a big opportunity.
A second area that we're just starting to learn about, we'll be to leverage the assets that we have up in East Grand Forks, Minnesota that we got through MGI Grain. MGI Grain is located really in the heart of the U.S. based ancient grain and pulses, a production area, which is heavy in Montana, North Dakota, Minnesota and South Dakota.
And that supply will put us right into the flow for supplying those types of ingredients into plant-based meat. So those are two different ways that we think we will be able to access that market.
Great. Thank you.
Our next question comes from Mr. Paul Sonz of Sonz Partners. Please go ahead, sir.
Hi. My first question is what kind of increase in sales, do you think you can get in the crossover customers?
It's a good question. It's a little difficult to answer. What I would tell you is that, it's going to really vary by customer. The first couple of customers we've had, the first one we had that that we've been really happy with is has been a customer that's gone from basically a truck in the quarter to now almost a truck every week.
And the benefit that that creates is most of Golden Ridge historically has been focused on supplying really into the wholesale market. And by reaching down to a customer as opposed to the wholesale market, we're getting better pricing. So it's partially growth, but it's also partially a significant opportunity for us to capture margin.
Yes. I mean that's good because I was just thinking if you can organically grow sales without having to go out and get new customers and just exposing current customers, that's a great advantage?
And we're hoping to have certainly 5, 10, 15 of these over the next year and we could have more.
Okay. When you talked about the new customer increasing 6%, I wasn't quite sure 6% of which number? So I was just trying to think, is this – that 6% that equal to $1.5 million revenue, am I thinking it wrong?
Kind of – so the reference I was making, Paul was to our core bran business.
So in our bran business, we've shipped 30 some million pounds last year. This customer will represent about a 6% increase on that base. And then in that business, we had revenue last year, let's call it $14 million and again, that this customer would or increase that by about 6% by itself.
Okay. That's what I was going to put – on the higher labor cost; do you expect those to be transitory?
Yes. So there's a…
So the product with the rice supply?
Well there's a couple of labor issues then if with you put it that way. There was one actually that it has to do with CapEx. Actually two per CapEx projects that we're doing. One in particular is in our facility in Dillon, Montana where we're getting very close to finishing drum dryer refurbishment project that Dennis talked about in his comments.
And the shortage of dryers, we have their causes us to have to run more, we have to use more labor to produce the amount of products we need until we get our final drum dryer back and get back to full capacity.
So right now we're running with the higher than normal labor rates to do a similar amount of business. Actually the business is growing, but not to match with the labor rates have done. As we get the drum dryers back up and running all four in the system, we'll be able to scale that back and see a normal run rate on labor there. The other side is labor rate at Golden Ridge, which has been negatively impacted by the sales that basically we chose to delay until we can find better quality rice to mill.
And as we're cycling back into that million, we're seen better absorption of that.
Okay. One of the questions you talked about adding a new customers within 150 days and I just thought well that's kind of a funny number to take 150 days, five months. Any particular reason why you picked that as opposed to think by the end of the year or by the end of the third quarter?
Yes. I mean, we have customers that we're targeting that we expect throughout the end of the year, but we have a series of large opportunities that we've been working on and almost every one of them is targeted to come to some sort of conclusion by let's say the end of September.
Okay. And then one last thing. In the past you've had some of the rice bran issues with China and people taking material going over there and forcing the prices here. Has that changed or are you still seeing shipments to China?
So it's a good question because there's some data out there about some of the tariffs, how – tariffs on rice bran as an ingredient in products coming into this country will now have some tariffs that get added. I don't think the exporting of rice bran or raw bran has diminished too much. Some of it I believe maybe going to China, we don't really have the visibility, if it is or how much? But a large amount of it's going to Latin American countries as well.
And I don't see that changing. We have not seen any substantial decrease in bran prices in California or Louisiana, which are the main places that the exports are coming from. Prices have stabilized, so we don't see the prices going up like they were, but we've not seen any diminishment in those prices over the last couple of weeks or couple of months.
Okay. And then is the – I know in the past delays in fulfilling orders has caused some irritation with customers. Has that been an issue now on this latest – delay a little bit to fulfill orders?
We're actually in pretty good shape if you're asking us. What we've really done this year, Paul, after our experience last year of having production issues at our plants. We've spent a lot of time developing a strategy for both Louisiana and for our facilities in California and then working with our mill partners there.
And we've been actually building safety stock inventory. So we went through just today as part of our weekly management call, kind of an overview of where we are with our safety stock in both of those facilities.
In California, last year we felt we really would have benefited from having a three to four weeks safety stock going into the summer season. And the summer season there the risk is the brownouts, the mandatory shutdown of the mills during the day because of electric savings, stuff like that. We need that excess inventory. As of today, we're at about three week’s excess inventory. We think by the time we get to the end of June, we will hopefully be at about four weeks and I think we'll be in excellent shape.
More importantly in Louisiana, we're getting good message from our partner there that they feel like they're going to have very minimal downtime this year. We've got on hand excess inventory of about 40 truckloads. We plan to build that up over the next, call it the next seven, eight weeks to probably 55 to 60 truckloads. And we think that should suffice to get us through any shutdowns we have in that market over the summer.
Last year, we had to ship well over a 100 trucks from California at added cost of $4,000 per truck. It was a significant cost to the business and it looks like we're going to be in very good shape to avoid that this year.
So for the current – you said you have to catch up on orders that the current delays, that's not a problem that customers haven't gotten, aren't disappointed because you haven't fulfilled on time or might…?
No you're seeing the right thing Paul, but the orders that were behind on where the rice mill orders at Golden Ridge. And we're working with our customers there and they'd like us to get it done as quickly as we can and we're doing that. But the way rice milling works is the quality of rice that we were milling wasn't going to grade out to their specifications.
And so the last thing they want us to do is to mill 150 trucks and have them all get rejected because the quality doesn't meet what they're looking for. So they understand the delay we've taken and we're now rapidly shipping that to customer, but it was a large order and we're working our way through that. We’re probably 45 trucks into 140, 150 truck orders.
Operator, I think that may have been his last question. I don't know if we have anybody else in the queue.
Yes. We will now take our next question from [indiscernible]. Please go ahead.
Thank you. Brent, I must say that I've been a stockholder in this company for 16 years, so you can imagine the angst I’ve gone through over that period of time. I was very pleased with your ascendancy to your position because I felt you are one of the few people at the company employed that could take us in the right direction, and I have been pleased with the way we're going, but I'm not pleased with though is the lack of understanding on the new product.
The stock, as you know, is up for almost 30% for the past six or seven weeks. And I believe it's because after the last conference call with the teasing of this new product, no information was forthcoming with that lack of information, as you know, there's a lack of interest in buying, so every time somebody sells two shares it drops $0.05. Can you give out any further information on this new product that you're developing?
I'd like to give out more information. I can give a few things for you, what I would say, and I appreciate your question and I understand the interest in it. It's a very proprietary product and it's a very large, we think eventually it could be a 200 million to 300 million pound market opportunity for us.
I'm concerned about talking too much detail about it too early because I don't want to alert other people and where we're going. I don't want to open up competition when we could actually start with this product with no competition.
So what I will say is that it's a higher tech version of what we do. It delivers certain capabilities and certain functional attributes that really compete well with other alternative products and dozens of companies have told us that they feel they're going to have a substantial need for this product.
Is there anyway you can project out or give a projection on when the original shipments of this new product might take place?
Sure. So we will not have the capability to produce this product until we complete the expansion. So we're targeting to have the expansion complete in the second quarter of 2020 and the product will be available at that time.
All right, I came in a little late. Was there any forecast for the sales for 2019?
We reiterated that we're focused on 37 million to 40 million that we had discussed in the previous call.
Okay. Bear in mind, I've listened to dozens upon dozens of NutraCea and RiceBran Conference Calls. There's aspect to all of them, which is consistent and that is, I won't use the word – I’ll use the kind word which is explanation. There seems to always be an explanation for why sales weren't met? Why earnings weren't met? Why something wasn't met? Why shipments weren't met? Do you feel this Company is in a different position than what I just talked about historically?
Yes. I would understand what you're saying and I believe actually there's some – it’s been a company that's had a long history of trying to perform and limited success. I think we're at now is significantly different than where the company had been a year-ago, two years ago, five years ago. And the primary difference is a couple of things.
First of all, we have a sales team that actually has significant access to large market opportunities that we did not have when I joined the company two years ago. So that's a major difference. We had a couple of very good salespeople at that time. They're still with us and doing quite well. But as the team has been built out, we've gained so much more access and so much more visibility.
The second thing that I think will help, it will be particularly in Arkansas to build greater scale there. So we have more control, particularly in the rice bran business of our supply. But then also we're much closer to where a lot of the customers are in the industry. We're competing against a lot of agricultural products. Rice bran market is the substitute against soybeans, against wheat, sometimes against corn or sorghum or other things.
And when most of that is produced in the Midwest, in our productions in California or Louisiana, we have to competitively price to reflect that geographic distance. So I think we're poised to really capture business as well from simply getting into better geography and controlling a better amount of our bran supply.
I understand. I certainly hope that in the next conference call, which I intend to participate and I've been in the background for too many years and not questioning people over there. Everything sounds good for the future.
But again, as you know, we just discussed, the Company has a history previous to your ascendancy of not producing. Hopefully we will produce, will produce exactly what you're talking about and all of the shareholders will see some rise in their equity. And with that, I'm going to say thank you and I'll come off the phone.
I appreciate your question. And we and management also are looking forward to producing. We think the second quarter is going to show some significant improvements, and as the year progresses, we'll see growth as well. So thank you.
This concludes today's question-and-answer session. I would now like to hand the call back to Mr. Brent Rystrom for any additional or closing remarks.
Thank you very much. We appreciate everybody's time and attention today. We will be attending the Oppenheimer Emerging Growth Conference next week, Tuesday in New York. Then we have our Annual Meeting in June, and we look forward to reporting our second quarter results in early August. Thank you.
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.