Rubicon Organics Inc. (ROMJ) Earnings Call Transcript

Good morning, everyone. Welcome to Rubicon Organics Second Quarter 2026 Earnings Call for the 3 and 6 months ended June 30, 2026. As a reminder, this call is being recorded. [Operator Instructions] Before we begin, please refer to Slide 2 for our caution regarding forward-looking statements and non-GAAP measures. Today's presenters are Margaret Brodie, CEO; and Glen Ibbott, CFO. I will now turn the call over to Margaret.

Good morning, everyone. Thank you for joining us to review our second quarter results and provide an update on our progress in '26. Rubicon is proud to remain Canada's #1 premium licensed producer, and this quarter reflected execution on many fronts. Our second quarter results demonstrate the strength of Rubicon's premium focused strategy, and the progress we are making across our expanding operating platform. We delivered record Q2 net revenue of $18.5 million, representing 23% growth year-over-year and 35% growth sequentially, while continuing to gain market share in the premium category. Importantly, growth was achieved primarily through improved execution at our Pacifica facility. Targeted operational initiatives drove approximately 20% higher per crop yield in the first half of 2026 compared to the prior year, supported by increased product availability across our portfolio. Growth was realized across all 3 of our key brands in Canada, while international markets also contributed to our continued momentum. Our new Cascadia facility also achieved several meaningful milestones during the quarter, namely, hitting 1964 brand quality earlier than expected, and we were able to realize $0.5 million of revenue from Cascadia-derived products. While initial yields remain below our long-term targets, yield optimization is a normal part of ramping up the cannabis cultivation facility, and we continue to refine cultivation practices, environmental controls, and genetic selection to support further improvement through the balance of the year. The yield growth that we've been able to achieve at Pacifica indicates to us that our goals at Cascadia are achievable. Internationally, our Cascadia facility has now received its IMC-GAP certification. Both of our facilities now have the required international certifications, strengthening our readiness to serve regulated international medical markets as we build momentum from the April 1964 branded launch in the U.K. and support our broader strategy of bringing Rubicon's premium brands and genetics to a growing global customer base. Overall, we continue to review 2026 as a tale of two halves. Our first half reflected the significant improvement of our Pacifica facility and the remaining investment required to bring Cascadia online and support our next phase of growth. As production volumes increase and operating efficiencies reach our expectations, we expect the benefits of our expanded platform to become more visible through the second half of the year and notably into 2027. With that, I'll turn the call over to Glen to review the financials.

Thank you, Margaret. Good morning, everyone. Revenue for Q2 2026 was $18.5 million, a record quarter for us, up 23% year-over-year and 35% sequentially. The disruption that we saw in Q1 from the lingering effects of the late 2025 BC distribution strike and the typical industry seasonality appear to be in the rearview mirror. This revenue growth was driven by our increasing ability to supply the existing demand across our premium brand portfolio. In Q2, this was mainly supported by higher production yields at Pacifica, which were up 20% on average in the first half of 2026 compared to H1 2025. Importantly, for future quarters, Cascadia has begun to move from a pre-revenue investment phase to a revenue-generating part of our platform with its initial revenue contribution of $450,000 realized late in the second quarter. Q2 revenue growth year-over-year was driven across both 1964 and Simply Bare by a mid-teens percentage increase in dried flower and over 40% growth in pre-rolls as well as international sales, a revenue channel that did not exist for Rubicon in Q2 of 2025. For Q2 2026, 1964 delivered 64% of our revenue. Simply Bare contributed 25%, Wildflower was 6%, and international sales accounted for 4%. The launch of 1964 in the U.K. during the second quarter represents an important step in expanding our premium brands beyond Canada. We expect international revenue to continue to grow in the second half of 2026 and to average approximately 10% of total revenue for the whole of fiscal '26. Gross margin before fair value adjustments was 30% in Q2. Excluding pre-revenue Cascadia operating costs, gross margin would have been approximately 36% in Q2, our best gross margin since Q4 of '24 and demonstrating the strong operating leverage of the business as we add top line growth. SG&A in Q2 '26 was $6.9 million, up by $2 million compared to Q2 of last year and $900,000 sequentially, reflecting planned investments in talent, brand development in Canada, international initiatives, and growth-related regulatory and insurance costs. Of the $900,000 increase from Q1 to Q2 of 2026, 74% was marketing and sales initiatives and Health Canada fees, both a direct function of revenue growth. Adjusted EBITDA was positive at $1.1 million in Q2 compared to $1.4 million in the prior year period. This result reflects the costs associated with operating a larger platform ahead of realizing the full revenue contribution from Cascadia. Regarding liquidity, we ended the quarter with $3 million in cash and $20.9 million in working capital. We spent approximately $2.6 million on CapEx projects in the first half of 2026, all directed at achieving manufacturing efficiencies and yield and capacity increases. Looking ahead, we believe we are well positioned to continue growing Rubicon's revenue as our ability to supply existing demand in both domestic and international markets improves. As we move into the second half of this fiscal year, with the additional capacity available from Cascadia, we expect revenue and adjusted EBITDA to progressively ramp through Q3 and Q4 of '26. Steadily strengthening our gross margin remains a key area of focus and attention for Rubicon's leadership team. 2026 initiatives include ongoing work to increase cultivation yields at both Pacifica and Cascadia, expanding manufacturing efficiencies through projects such as pre-roll automation recently completed, and bringing our hydrocarbon oil production in-house by December, and finally, optimizing our product portfolio. Central to our margin approach is leveraging the increased scale from our growing operations to more efficiently absorb our fixed production costs over the entire production volume. We expect these initiatives to contribute meaningfully to margin expansion and EBITDA growth as we move through the remainder of 2026 and into 2027. With that, I'll turn the call back to Margaret.

Thanks, Glen. Rubicon maintained its leadership in the second quarter of '26 as Canada's #1 premium licensed producer as supported by Hifyre market share data along with continued recognition from both consumers and industry participants. Our brands are building trust. We continue to perform well across multiple categories. In premium flower, we achieved #1 national market share at 10% for the quarter, up nearly 2 points compared to the same period last year. Despite the total premium category declining year-over-year, Rubicon is growing on a dollar basis and taking a larger share of dollars. In premium pre-rolls, our market share increased 5% for Q2 '26, up 2% from the prior year. This segment is one of continued growth for Rubicon and the entire market. During the quarter, 1964 was again recognized as Brand of the Year at both the 2026 High Buds Club Award and the 2026 Grow Up Industry Awards, reinforcing the strength of the brand with consumers and budtenders across Canada. Our performance in flower continues to be driven by what we believe is one of the industry's leading genetic libraries, which we view as a key competitive advantage. Throughout 2026, we have continued to expand and refine our brand portfolios with new genetics and formats designed around consumer preferences for distinctive cultivars, premium quality and consistent brand experiences. Our 2-facility platform allows us to leverage our genetics program advantage more effectively than ever before. By matching cultivars to the cultivation environment where they perform best, we can continue improving yield, terpene expression, quality, and consistency on a cultivar-by-cultivar basis. While our vape category performance has not yet met our expectations, revenue continued to grow year-over-year. We're also continuing to refine our position within the vape category with a clear focus on delivering premium quality, relevant formats, and strong value for consumers. We expect recent portfolio and pricing adjustments to enhance our competitiveness and support improved performance through the balance of '26. Turning to operations. We've been investing in our business in 2026, and we continue to make progress across several initiatives designed to improve efficiency, support future growth, and strengthen profitability through '26, setting us up for '27 and beyond. Both our cultivation facilities are in the middle of multiyear improvements. At Pacifica, these initiatives have already delivered meaningful results, contributing to a 20% year-over-year improvement in yields during the first half of '26. This progress has been driven by a combination of cultivation enhancements, infrastructure upgrades, and process improvements with additional initiatives currently underway. At Cascadia, optimization efforts remain ongoing. As a reminder, the facility was operationalized on budget and on schedule. We are encouraged by our results from our initial harvest, which are meeting premium quality standards required for our 1964 brand. In cannabis, there is a significant lead time between planting, harvesting, processing, securing listings, and ultimately realizing revenue. As a result, many operational improvements take time to work their way through the system and become visible in our results. At Cascadia, we are currently tracking below planned yield capacity, but we continue to assess our genetic library for the best cultivars suited for that facility, and we believe that the genetic assessment and full ramping process will last the remainder of the year. Along with adjustments to our cultivation plan, we've implemented a number of additional yield improvement initiatives, including a new lighting project currently underway to transform the facility into LED lights. This project is expected to be completed in the coming weeks, and we expect to see the benefits in crops as soon as this fall. We have clear visibility into the actions required to close the gap in yield expectations, and in time, with the right genetics and amendments to our existing infrastructure, we expect to surpass initial capacity expectations. Our current annual production capacity is approximately 15,500 kilos across both facilities, but we see a clear pathway to increasing our output to 20,000 kilos over the next 18 to 24 months as our investments continue to mature, and we believe there remains significant opportunity to improve performance. We look forward to sharing more details on some of these programs later this year. At Pacifica, we have recently completed the expansion of our pre-roll automation program. Pre-rolls remain one of the fastest-growing categories in cannabis, and these investments are helping us lower labor costs, improve throughput, and enhance gross margins. The return on our initial automation investments supported the addition of further equipment, which is now fully operational and contributing to production. We are also excited about our in-house hydrocarbon extraction project, which we expect to see benefit into our vape profitability in the first quarter of '27. Bringing this important manufacturing capability in-house is expected to reduce our reliance on third-party processors, significantly lower per unit cost for concentrates and vapes, and provide greater operational flexibility and innovation opportunities as those categories continue to grow. Overall, we have made meaningful shifts in our operations in '26, whether through automation, manufacturing in-sourcing, or cultivation optimization, these initiatives are all focused on the same objective: increasing efficiency, supporting growth, and positioning Rubicon for stronger margins and profitability. The benefits of these investments have not yet been seen in our financial results, but we expect to see the impact as we move through the latter part of '26 and most significantly into 2027. For the remainder of 2026, our growth strategy continues to be anchored on 3 core drivers: yield, international expansion, and genetics. Yield remains at the top of that list. For several years, demand for our premium flower products have consistently exceeded available supply. With Pacifica now delivering higher yields and Cascadia now contributing to production, we are beginning to unlock additional yields needed to support new and undersupplied SKUs, increased international sales, and larger supply commitments. Importantly, increased production volumes also create the opportunity to better absorb operating fixed costs and drive margin expansion over time. Internationally, we are building on the launch of 1964 in the U.K. and now have the certifications in place across both facilities necessary for international exports. What we consistently hear from international customers is a desire for premium Canadian cannabis that delivers quality on a consistent basis. As regulated medical markets continue to develop and grow at pace, we believe Rubicon is well positioned to leverage its brands, genetics, and cultivation expertise to capture these opportunities. Underpinning both of these growth drivers is our genetics platform. Genetics remain one of Rubicon's most important competitive advantages and is foundational to everything we do. It supports new product development, drives cultivation performance, strengthens consumer loyalty, and allows us to optimize production across both Pacifica and Cascadia. As we continue to scale, we expect our genetics library to play an increasingly important role in both revenue growth and margin expansion. More broadly, Rubicon is entering an exciting new phase where the focus of the business is beginning to shift from building additional capacity to maximizing the value of the multiyear investments we have already made. We have cultivation facilities, premium brands, proprietary genetics, certifications, and operational infrastructure required to support the next phase of growth. Taken together, these drivers reinforce our confidence in Rubicon's growth trajectory, building on the momentum established in '25 and supporting our expectations for continued growth in the second half of '26 and more significantly into '27. With that, let's move to questions.

[Operator Instructions] And your first question is from Neal Gilmer from Haywood Securities.

Congrats on the quarter. Maybe I'd like to start with the Pacifica facility. If you did $0.5 million in revenues from Cascadia, that means $18 million from Pacifica, which obviously is a significant jump from where you used to be running at that facility. I know you talked about the 20% yield improvement, but maybe just sort of elaborate a little bit more on how you've sort of been able to tune that and get that much production out of the facility.

Thank you. A couple of things. Yes, it's not all Pacifica biomass. We do have a vape portfolio and edibles, but the large portion and the largest driver of our increase was Pacifica yields. How have we done it? 18 months ago, a new team has come in. We have been working on several initiatives. They include cultivation enhancements in terms of our process infrastructure upgrades. I won't go into all the details because some of them are proprietary and really process improvements. But in addition to that, it's the genetic program that we've been working on and getting the right genetics out of -- into the facility that are -- that consumers love that we can deliver consistent premium beautiful quality from, but also that yield very well. We have more to come from Pacifica. And we will -- as we get a bit further in the progress, we will update the markets, but we like to make sure that we are being clear and consistent and have it locked and loaded before we're releasing. We do believe that Pacifica has the ability to increase yield even further. As I said, together with Cascadia, we have in our sights 20,000 kilos over the next 18 to 24 months in our target. They will -- it will require some capital improvements, and that's what we're currently assessing.

That's great. It's interesting you can get that much more yield out of the 2 facilities. That's great. On the gross margin side, you commented that the gross margins, excluding the Cascadia pre-revenue cost, 36%. I believe last quarter was 29% on the same metric. So it's a decent increase on a quarter-over-quarter basis. Glen, your comments suggested you have even sort of more room to grow from that. Maybe if you could just jump in a little bit more on, sort of, where you think you can take it and the time frame you think you can get it there.

Yes. Thanks, Neal. Yes, there's a few things going on here. One, we've talked in the past about the operating leverage that we've built in the company. We've got largely -- particularly the way we report our cultivation costs, largely a fixed cost structure in our cost of goods. I mean, there is obviously some variable costs there. But the more we put on the top line, the more that our gross margin will increase simply because we're getting -- we're spreading those costs over more volume. So just adding to the top line will drive our gross margin up. But in addition to that, we've also talked about a number of initiatives to drive our gross margins. Further, Margaret and I both have targets that start with the 4. It takes a little bit of time to get there. But surely, some of the manufacturing efficiencies, we've got 3 automated pre-roller machines now in production. That's all new this year. We talked about the hydrocarbon project, [indiscernible] it ourselves internally, we'll move our margins and our vapes up significantly. And then finally, and you keep hearing us harp on this, but it's so impactful to a company like ours is the yield initiatives. And so all of those things working together, they're all a major point of focus for the organization. But all of them working together, we do expect our gross margins to continue to improve over the next number of quarters. Quarter-to-quarter, of course, there will be some variation. Finally, I'll say one thing that the commercial team is working on is just fine-tuning the portfolio and just making sure we're allocating the right amount of product to the right SKUs. Absolutely, we've got lots of demand for our product. So we can be, I'm going to say, a little bit choosy in how much we allocate into certain channels and certain SKUs. And obviously, there's quite a difference even in a flower SKU in terms of a large pack format versus a smaller pack format in margin. So lots of levers, Neal, and some of them underway and more yet to come.

Great. Appreciate that detail. Maybe just the last one for me. You're talking about various different things to improve those margins. What sort of comments on capital expenditures do you have for the balance of 2026?

Glen, I'm going to pass that one over to you again.

Yes. The major projects, Neal, we mentioned hydrocarbon, that's kind of in flight. I don't want to talk about specifically all the projects we've got underway because I think, as Margaret said before, I don't want to give away all the secrets that we've got in terms of driving up yield and efficiencies. But they're directed in those 2 areas, yield and manufacturing efficiencies as the focus on the CapEx. I think in terms of Cascadia, there's a bit more that's underway in terms of lighting intensity and a few things like that. But for the most part, there will be ongoing fine-tuning of that facility, but we've put in a significant amount of CapEx that we had expected to.

Your next question is from Pablo Zuanic from Zuanic & Associates.

Congratulations on the quarter. Margaret, maybe this is a bit of a broad question, but can you talk about what's happening in the premium flower category? The Hifyre data shows some brands of your competitors falling by quite a bit. And I wonder that's a function of production issues, consumer taste changing or people allocating more broadly internationally. There's also a macro view that the premium consumer is being squeezed. So maybe there's an impact on the category also, but you're gaining share there. But just your read in terms of what's really happening in premium flower.

Thank you, Pablo. The premium category is very competitive and remains competitive, and we believe it's a very attractive segment. But you need to build trust with brand, consistent product quality, and be disciplined. A number of people and a lot of craft have come in and out, which tend to be less consistent to build that trust. It's often reliant on certain key individuals, and rather than building a team that can consistently deliver time and time again. And I believe that's what Rubicon has done well. Whilst we're seeing total dollars down in the Canadian premium category, I believe actually we're starting to see more brand loyalty begin to emerge at the early stages because there's been so much of that fluctuation that I just referred to. We are seeing the international patient begin to appreciate premium in a new way. And I do think that's a draw, but I don't think that's what's happening in the Canadian market. I think the macro probably is impacting it. We expect to continue to grow. We're growing all of our brands in dollar terms, not just growing share in the premium category. I do expect -- we look at the long term, we're going to have 2 to 4 premium and super premium brands in Canada, and I expect we will be 2 of them.

Just a follow-up. Just to remind in terms of, obviously, in standard pre-rolls, you're doing quite well and growing there. That's what the Hifyre data shows. But are you also going to go after IPRs or it's mostly just standard pre-rolls? Just a quick answer.

Infused pre-rolls, just for those who aren't aware. We found a sweet spot with pre-rolls. Our pre-rolls are fully made with flower. We've developed and delivered a consistent format there. Consumers love it. It's a great price point. Notably, when the consumer is feeling tighter with their pocketbook, a pre-roll price point is very appealing. And pending the mix, we really like it from a profitability perspective. So IPRs are an important segment of the market, but it's not our bread and butter. We're always looking at improving our products, but we do expect to see continued pre-roll growth. We now have 3 pre-roll machines automated and operating. I could see a situation where that is expanding even further. And we are going to have more biomass available for pre-rolls. So I think you'll continue to see us compete heavily in that segment. The consumer [indiscernible]...

A couple more, if I may. Yes. That's good color. Look, if I can add just one more. Obviously, congratulations on the 20% increase in yields in Pacifica. And I know maybe this is nitty-gritty, but is the yield what I would call like-for-like in terms of your current strains yielding more? Or is it more about an issue of rotating strains and new strains coming in that give you more yields? And then separate from that, if I can add, if you can just talk about, are you also making progress in terms of terpene content, potency, besides yields?