Rubicon Organics (OTC:ROMJF) Inc. (CSE: RUBI), a leader in certified organic cannabis, has reported a record high in net revenue for the second quarter of 2024, alongside a return to positive adjusted EBITDA and operating cash flow.
The company's strong performance is attributed to its market share in premium cannabis products and successful product launches, including a vape line that achieved over 40% national distribution in just two months. Despite industry challenges, Rubicon Organics' strategic positioning and disciplined operations have set it apart as Canada's top premium licensed producer (LP).
Key Takeaways
- Rubicon Organics achieved a historic high in net revenue and returned to positive adjusted EBITDA and operating cash flow in Q2 2024.
- The company has a strong market share in premium flower, pre-rolls, edibles, and topicals, with successful new product launches.
- Rubicon's vape launch under the brand 1964 has seen rapid distribution growth, hitting over 40% national coverage in two months.
- The company holds two of the top three recommended brands by budtenders and the #1 position in premium edibles in Canada.
- Rubicon Organics anticipates a tightening supply in the Canadian market, with some operators expected to exit the market.
- They are implementing an ERP system and plan to refinance their long-term debt by the end of the year.
Company Outlook
- Rubicon Organics projects continued growth in net revenue, adjusted EBITDA, and positive operating cash flow.
- The company is preparing for future product launches and strategic projects, including a full line of FSE resin vapes under the 1964 brand.
- The ERP system implementation is aimed at supporting anticipated growth and is expected to complete in early 2025.
Bearish Highlights
- The Canadian cannabis industry faces challenges, including pressure on companies to settle excise payments.
- There is an anticipated decline in the total number of LPs due to market pressures and financial constraints.
Bullish Highlights
- Rubicon Organics maintains a solid balance sheet and is one of the few profitable publicly traded cannabis companies.
- The company's disciplined operations and premium brand portfolio position it uniquely in the market.
- Revenue growth has been consistent across key provinces in Canada.
Misses
- The ERP system implementation has impacted EBITDA, with an approximate spend of $500,000 year-to-date and an expected total spend of $1 million in 2024.
Q&A Highlights
- Management expressed confidence in their premium brands and the quality of their flower input for the new vape line.
- The company invited customers to experience their products firsthand in stores, signaling a strong focus on consumer engagement.
Rubicon Organics' strong Q2 2024 performance and strategic initiatives signal a robust outlook for the company amidst a consolidating Canadian cannabis market. With a focus on premium products and efficient operations, Rubicon is positioned to navigate industry headwinds and capitalize on growth opportunities.
Full transcript - Rubicon Organics Inc (ROMJF) Q2 2024:
Operator: Good morning, ladies and gentlemen, and welcome to Rubicon Organics Q2 Earnings Conference Call. [Operator Instructions] This call is being recorded on Thursday, August 15, 2024. I would now like to turn the conference over to Margaret Brodie. Please go ahead.
Margaret Brodie: 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 a return to positive adjusted EBITDA and operating cash flow following a subdued Q1. As the leading premium licensed producers, Rubicon continues to hold a strong market share in premium flower and pre-rolls, premium edibles and the topical market. We anticipate further growth in 2024, supported by our successful late launch of 2 SKUs in May with a further genetic launch in July as we aim to capture our share of the almost $900 million Canadian-based market. We maintained our #1 premium market position in Canada across all categories, holding a 6.5% of total premium market. This includes a 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 brands. In Q2, we captured 27% share of the topical market, up 4.5% year-over-year, despite a 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 in 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 3 months ended Q2 '24. Rubicon delivered $12.1 million in net revenue and $3.7 million in gross profit before fair value adjustments, resulting in 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'm going 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 appear to take our share. Vape quality depends on the caliber of input flower, and we've combined that with best-in-class hardware. Our high-quality true-to-flower 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 2 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-led cultivars, Comatose and Blue Dream, and as of last week, our third strain GLTO #41 began shipments. By the end of '24, we plan to have 5 [indiscernible] 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 cannabis -- Canadian cannabis sales. While the total cannabis market grow, we also expect the vape market to grow to approach 30% of total Canadian market sales and near 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 Organics, 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 Shoes. 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. As for 1964, in addition to our vape launch previously mentioned, we have launched 2 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 class that will resonate with nostalgic consumers. This one has the potential to be added to 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 CBC and CBD edible, further expanding our wellness 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 or 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, is essential to maintaining our leading premium house of brands. I will now pass the call over to Janis, who will share some specifics about financials.
Janis Risbin: 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 6 months net revenue of $21 million. This success comes despite a softer Q1 base influenced by typical seasonality and lingering weak consumer sentiment in 2023. Importantly, even with our investment in ERP in the first half of 2024, we've returned to positive adjusted EBITDA, now achieving this for 7 of the last 8 quarters. And we've maintained positive operating cash flow for 6 of the last 7 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-priced larger formats, we have adapted by innovating our product lineup to meet consumer demand, albeit with lower margins. Following the trend of declining prices, we're 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 $0.5 million in our ERP implementation project, which is crucial for our 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 3 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 1's 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 investments, 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 cannabis segment, we've seen a decline from Q2 2023 to Q2 2024, which impacted sales for Simply Bare. However, we're now witnessing a return to growth for the brand over the last 3 and 6 months, achieving our highest net revenue since 2022. This growth has been broad-based with both the flower and pre-roll segment benefiting from new and unique genetic launches, along with innovations in the capsules and edibles segments. For flower, BC Organic Fruit Loopz 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 a mixed performance with the growth in the flower and pre-roll segment 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 continue 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 new Wildflower Sports Stick and the recent launch of Wildflower minor cannabinoid gummies. The trend of declining gross 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-priced 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 margin, but the strategy lays the foundation for future growth. The uptick of gross profit in quarter 2 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.
Margaret Brodie: Thank you, Janis. 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, cutting off record legal sales over $5 billion in '23. 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, there's Rubicon Organics' unique positioning. We are Canada's #1 premium LP with a house of premium brands that has proven launch plan for new products, exhibited by holding 2 of the top 3 most recommended brands by budtenders in Simply Bare Organics and 1964 Supply Co, reaching the #1 premium edibles position in the country with 30% market share within a year of launch, achieving 40% national distribution for our vapes in under 2 months. Rubicon holds unique IP and is now positioned as the world's leading, scaled, certified organic cannabis company with an extensive genetic library. We are disciplined operators, delivering consistent premium quality to distributors, retailers and consumers. Part of this means we're trusted and top client 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 hand-off 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 #1. 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 2 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 debenture 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 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.
Operator: [Operator Instructions] Your first question comes from Neal Gilmer from Haywood Securities.
Neal Gilmer: You're looking at a little over 30% growth in revenue lines quarter-over-quarter. I took away from your prepared remarks it's sort of broad-based. But is there any sort of product format or a province where you felt sort of helped tag an outsized contribution to that sort of sequential growth that you experienced?
Margaret Brodie: Thanks, Neal. Actually, it was pretty consistent across the mark. And as Janis remarked in terms of the -- what actually happened within our brands, 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.
Neal Gilmer: And then you've commented in the past couple of quarters, you've been impacted on the EBITDA line from your ERP implementation. Any way to quantify how much that impacted Q2? And can you remind us when the ERP implementation will be complete?
Janis Risbin: Yes, absolutely. Thanks, Neal. So in quarter 1, we spent about $270,000, and in quarter 2, 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 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 live at early 2025. So our guidance remains the same, that we expect to spend about $1 million across 2024. That's now just with some different phasing than we originally expected.
Operator: [Operator Instructions] And there are no further questions at this time. I will turn the call back over to Margaret for closing remarks.
Margaret Brodie: Well, thank you all for joining us today. Rubicon Organics remains the #1 premium license 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 vapes easily. And if you're shopping for flower, I particularly recommend Simply Bare Organic Fruit Loopz. Thank you.
Operator: Ladies and gentlemen, this concludes your conference call for today. You may now disconnect. Thank you.
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