RiceBran Technologies (RIBT) CEO Brent Rystrom on Q2 2019 Results - Earnings Call Transcript

Aug. 13, 2019 9:03 PM ETRiceBran Technologies (RIBT)
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RiceBran Technologies (NASDAQ:RIBT) Q2 2019 Earnings Conference Call August 13, 2019 4:30 PM ET

Company Participants

Richard Galterio - Ascendant Partners

Brent Rystrom - Chief Executive Officer

Todd Mitchell - Chief Financial Officer

Conference Call Participants

Mark Smith - LakeStreet Capital

Operator

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the RiceBran Technologies’ Second 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.

Richard Galterio

Thank you, operator. Good afternoon, listeners. Welcome again to RiceBran Technologies' second quarter 2019 financial results conference call. With us today are Brent Rystrom, Chief Executive Officer and President of RiceBran Technologies; and Todd Mitchell, 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 include estimates as of today, August 13, 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.

Brent Rystrom

Thank you, Rich. Good afternoon everyone. I'm going to start with a few highlights, Todd will follow with a more in-depth look at our quarterly results, and I will finish with some thoughts on our strategic plans and focus on growth and improving EBITDA. In the second quarter, we concentrated on three initiatives to increase sales and improve profitability.

First, growing sales in our traditional rice bran products, which were up nearly 20% in the second quarter. Second, acquiring and integrating MGI Grain, which was completed in early April and accretive to second quarter results. Third, working through difficult production issues and continuing in our debottlenecking project at Golden Ridge which should be completed next month.

So far in the third quarter, we are seeing an acceleration of new customer wins form our sales team and are excited by the scale of the business we’re pursuing. We’re starting to see the benefit of the expanded product offerings from Golden Ridge Rice Mills and MGI Grain provided to our sales team and customers.

And we're preparing to integrate a significant portion of our stabilized rice bran production to a mill owned by us, which will greatly improve our operating model. We are focused on driving further sales growth for the remainder of the year and driving sharply improved EBITDA in late 2019 and 2020.

I would like to now turn the call over to Todd for a more in-depth look at our financials.

Todd Mitchell

Thank you, Brent. You should have all have had a chance to review our press release by now. Needless to say, it was a challenging quarter; however, I'm relatively confident we've reached the nadir and trends should improve.

In regards to the numbers, the revenues for the quarter were 6.2 million, up 94% year-over-year, but down modestly from the first quarter. While gross losses were 224,000 in the quarter, which compares to gross profit of 663,000 a year ago and 343,000 in the first quarter.

As Brent mentioned, we saw double-digit growth in our core rice bran business in the quarter, gross profits here were up year-over-year as well. MGI also made a meaningful contribution to revenue in the quarter and was accretive to both gross profit margins and EBITDA margins.

Results for the quarter were negatively impacted by our Golden Ridge Rice Mills operation. Revenue for this business was down sequentially and gross profit margins were again negative in the quarter, holding back overall results.

As we highlighted last quarter, the negative gross profit contribution from Golden Ridge came from a large, unfavorable contract, entered into by the former manager of the mill, exacerbated by the fact that it's for a grade of rice that the mill is just not well configured to process. We're trying to get past this as quickly as possible, which is compounding its impact on our overall results.

This dynamic will continue into the first part of the third quarter, but we expect to get past this issue by September, and overall, we expect the negative impact from the mill to lessen in the third quarter.

Despite these challenges, we remain confident that the strategic rationale for acquiring the mill remain sound, and as we get past this unfavorable contract and complete our debottlenecking project, the mill will become a significant contributor to our transition to positive EBITDA in the next few quarters and then to growth in both revenues and EBITDA in 2020.

Total operating expenses were $3.4 million in the quarter, which was up 21% year-over-year, mostly due to higher expenses associated with our acquisition. It was up modestly from the first quarter as well. This increase was primarily due to higher legal expenses and professional service fees in the quarter.

Reducing the overall operating expense is a huge focus for Brent and myself. We're targeting at least 1 million in annualized savings in place by the beginning of the fourth quarter. Frankly, I'm relatively confident this is achievable and it may prove to be conservative effect.

Putting these items together, adjusted EBITDA losses were $2.8 million in the quarter versus losses of $1.8 million a year ago and losses of $1.8 million in the first quarter. Cash was $7.2 million at the end of the quarter, down from $13.2 million at the end of the first quarter. Outflows included about $4 million all-in for the purchase of MGI and another $1.5 million for capital expenditures.

We are completing a capital expenditure cycle for our core operation, and as a result, capital expenditures will be about the same in the next 3 to 4 months, with most of this in the third quarter, but after that, our capital estimates will trail off very significantly.

I'm going to refrain from giving any specific guidance this quarter, other than to say that our prior outlook for revenues of $37 million to $40 million and a transition to positive EBITDA in 2019 will likely prove to be too optimistic.

That being said, I would expect trends to improve significantly and sequentially in the back half of the year with specifics dependent on the timing of new business plan. And I'm confident that, we should be able to ramp into positive EBITDA in the first half of 2020.

I have to say, I'm excited about this new role. I think RiceBran Technologies has a bright future. The thesis for rice bran and other specialty ingredients we're bringing to market is strong. We have a great management group focused on driving shareholder value, and I'm very impressed with the finance team I joined.

I'll turn it over to Brent now for a more qualitative update.

Brent Rystrom

Thanks Todd. RiceBran Technologies is focused on becoming a leading supplier of value-added ingredients in food products made from grains, pulses, and other crops. We believe we are now positioned to start sharply growing sales and improving our EBITDA performance. The core of the strategy is based on RBT's established dominance in the markets for stabilized rice bran and derivative ingredients.

We designed, built and use proprietary extruders to make our unique stabilized rice bran product portfolio and our fractionation facility in Dillon, Montana make highly specialized products from our stabilized rice bran. Our efforts to grow sales of these products are starting to result in important and sizable wins as demonstrated by near 20% growth in our rice bran product sales in the second quarter of 2019.

And we are pleased with our new customer win so far in the third quarter and excited about additional opportunities we're pursuing. We are seeing customer wins and opportunities proliferate in companion animal, equine, snack and baked goods and a variety of protein applications and other customer segments.

Companion animal is an interesting example of how our business might grow. We're seeing a few application wins leading to significant opportunities to replace soy and wheat in a variety of products and uses. And we think companion animal is just the tip of the iceberg for us in replacing these ingredients with an eventual food opportunity that doors what we are seeing so far in companion animal.

In recent weeks, we have won significant new business for our right sizeable ingredients to use in the healthy dog treat. We won another significant customer engagement for products used in making a food condiment, and we're successfully working to develop a major new customer in a new application floor.

We see exceptionally strong sales momentum going into late 2019 and all of 2020. Golden Ridge Rice Mills which we acquired in late last year represents an important step for RBT in two ways. First, it provides us an integrated rice mill that will allow us to fully control a portion of our bran production, improving the security of our product supply, and providing us with attractive production costs. This complements the production sites of our other partners as well, giving us a strong national production footprint.

Second, Golden Ridge Rice Mills provided us with a major expansion of our product offerings, adding approximately 20 new products to our portfolio. We are focused on leveraging the opportunity provided by our Golden Ridge acquisition by adding customers through the stabilized rice bran production available at Golden Ridge and believe most of our current stabilized rice bran capacity from that facility will be sold out to new customers in the next few months.

Our sales team is also focused on leveraging this opportunity by driving growth for new products Golden Ridge add to our portfolio, and this is beginning to lead in positive rewards. In the last few weeks, we won a new product engagement for new rice co-product that will enter production in the fourth quarter of 2019.

We expect to complete our debottlenecking efforts at Golden Ridge Rice Mills by mid-September. When we purchased this business, we identified several projects that we believe would significantly improve capacity, productivity and EBITDA. We believe the debottlenecking will allow us to drive sharply higher production revenue and improve the EBITDA starting in the fourth of 2019.

We have put in place new outbound finished product tank and load out capability, and we are currently installing new husker shellers, new whiteners and water polishers, and a new length grading and screening system. All of these should improve our capacity by several 100 percent from our recent run rate. It will help us to improve our product quality and consistency in addition to driving revenue and EBITDA.

We have subsequently identified additional projects, which will follow the debottlenecking and should expand production capacity even further in 2020. Golden Ridge Rice Mills easily represents our biggest opportunity to drive materially better EBITDA. We placed new management to the mill a few months ago and we're pleased with the operational improvements they have delivered.

New customer relationships are proliferating and the occasion is proving to be important for us to gain customers in the central U.S. for our stabilized rice bran product. In long-term, we believe significantly sailing Golden Ridge provides our largest opportunity for long-term EBITDA growth.

Early in the second quarter, we acquired MGI Grain, a grain processing facility based in East Grand Forks, Minnesota. That produces in market barley and oat ingredients. MGI Grain provides us a complementary product line of more than 15 SKUs, which are typically purchased by the same buyers as our rice products.

MGI also give us a milling presence in the middle of the key production area in the U.S. for ancient grains and pulses. The business is profitable just by utilizing just 35% of our production capacity. Our sales team is focused on driving sales expansion to improve productivity, which will significantly increase its contribution to our overall EBITDA.

We now have a diverse product portfolio at RBT including our gluten-free and non-GMO stabilized rice bran, derivative, rice and other rice co-products, and an emergent presence in ancient grains and pulses, and we continue to look to for new customer and product addition.

All this activity and investment over the past 18 months has positioned us to sustainably grow sales and thereby sharply improve the EBITDA. Growth in our core stabilized rice bran and derivative facilities will improve absorption, margins and EBITDA especially as we add customers to our new stabilized bran facility at Golden Ridge Rice Mills.

As I mentioned, we had a major win in the second quarter in this product segment and we are pursuing other opportunities in this area and expect it to lead the incremental business in the second half of 2019. We will also be able to open new market opportunities for our stabilized rice bran because of the productive and the attractive production cost to Golden Ridge Rice Mills.

And we can drive margin improvements for this business from supplying stabilized rice bran to our fractionation facility in Dillon, Montana from Golden Ridge. The completion of debottlenecking at Golden Ridge should also sharply improve the absorption, margins and EBITDA.

In fact, we believe our production capacity in the rice portion of our business at Golden Ridge will increase materially post debottlenecking with a minimal proportional increase in operational expenses. There seems strong interest in the production expansion Golden Ridge provides us from a large base of customers and potential customers.

And incremental sales at MGI Grain will drive additional capacity utilization and absorption and enhance this business' contribution to overall EBITDA. Our sales team is early in the process of selling this product and we are excited by the growth opportunities we have identified.

As Todd mentioned, we are focused on controlling our spending throughout our business including operating costs, SG&A expenses and outside and professional fees. We are clearly focused on obtaining stronger cash flows and managing our balance sheet. Our strong financial position provides us optionality as we work our way forward on these efforts and we evaluate our next steps for growth.

Finally, I would like to note that we completed a settlement agreement with the sellers of Golden Ridge Rice Mills that removes 340,000 shares from our original purchase and eliminate the final 358,000 that were due to pay later this year. We are pleased with this settlement and think it positions Golden Ridge Rice Mills for a successful future.

We are excited by the activity and trends that we're seeing and we look forward to our future. We would like to close the call by thanking our shareholders for their investments in RiceBran Technologies.

Operator, we would like to now open the call to our question-and-answer session.

Question-and-Answer Session

Operator

At this time, we’ll be conducting a question and answer session. [Operator Instructions] Our first question is from Mark Smith of LakeStreet Capital. Please proceed with your question.

Mark Smith

First off looks like you had solid sequential improvements in your core rice bran sales. Was that all from new customers or where there other things going on in that core business?

Brent Rystrom

Hey, Mark. It's Brent. It was a combination of new customer activity that was quite strong as well as reasonably strong existing customer growth.

Mark Smith

And then can you just give us a little more insight into how much of the unfavorable rice contract was left at the end of the quarter? And maybe an update on approximately how much of that has left today?

Brent Rystrom

Yes, I don’t have the exact number at the end of the quarter, Mark. But as of today, it's less than a third of the contract. Say, over the vast majority of it.

Mark Smith

Okay, and I think that you guys had said that by was it September or something that you feel like you will work through that?

Brent Rystrom

We've planned to have this contract completed in September. To be honest, I don’t want to have it all done until we get to the bottlenecking done because I want to run some of the median grain post the bottlenecking to judge the changes that we've made into the debottlenecking and judge our ability to know median grain going forward. So, we’re purposely going to save about 10 loads to be in September post of bottlenecking and then we’ll complete the contract at that point.

Mark Smith

Okay, and then I think the last one from me, you've talked about a quite bit on the call. But can you give us any more insight into kind of the debottlenecking process and end up I guess potential impact on profitability and earnings? And how this is going to flows through?

Brent Rystrom

Sure, when you look at the money that mill is losing right now, most of it is related to really just the price between rice, our raw material and what we’re selling for. So, when you look at to the bottlenecking, it’s going to impact us in different ways and it’s not going to have that as an overhead issue. So, one example would be that earlier I talked about, one of the things I mentioned as we're putting in new length grading and screening system.

So, when you look at the rice that we mow right now and the rice that was mowed traditionally at this location, the rice basically goes through the milling process and at the end of milling, you have a series of things available to you. You have bran, you have your mowed rice to your head rice, and then you have your brokens and brewers. Each of those sells at a different price point. So, for example the rice may sell for so much per pound and then broken sells for a discount to that and then brewers sells to a discount to that price, with the brewers being the least valuable of those three things.

The mill itself is not very well set up to separate brewers and brokens, so on 20 some million pounds per year, we're going to now be able to separate those two and instead of selling everything at $0.13 a pound, we'll now be able to sell the brokens at $0.17, which is ready to market it. So just on that 100,000 dollar investment, they're putting some length grading and screening that probably pick up 400,000 to 500,000 per year of EBITDA from that is one thing. That would be one example.

Mark Smith

Okay. That's helpful. Thank you.

Brent Rystrom

Thanks Mark.

Operator

[Operator Instructions] We have reached the end of the question-and-answer session and I would like to turn the call back over to Brent Rystrom for closing remarks.

Brent Rystrom

Thank you very much. We would like to thank everyone for the participation today as we look forward to updating people as the quarter progresses on the progress, particularly with the bottlenecking, and we look forward to our third quarter release which should be sometime in the first few days of November. Thank you.

Operator

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.

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