Neptune Wellness Solutions Inc (NEPT) 2014 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to Neptune Technologies & Bioressources' fourth-quarter and fiscal-year earnings call. At this time all participants are in a listen-only mode. (Operator Instructions) As a reminder, today's call is being recorded.

I would now like to turn the conference over to your host for today, Mr. John Ripplinger, Director of Investor Relations. Sir, you may begin.

Thanks, operator. Good morning, everyone, and thanks for joining us today. As mentioned, the purpose of today's call is to discuss the results for the fourth quarter and fiscal year ended February 28, 2014. Joining me on today's call are Dr. Ronald Denis, Chairman of the Board; Dr. Harlan Waksal, also a member of the Board; and Andre Godin, our Chief Financial Officer.

Dr. Denis will be opening up the call with a few introductory comments, followed by Dr. Waksal, who will discuss some of the most recent corporate announcements. After this Andre will provide you with an overview of the results. There will be no Q&A session today.

Before we begin, I want to remind you that today's remarks contain forward-looking information that represent our expectations as of today and accordingly are subject to change. We do not undertake any obligation to update any forward-looking statement, except as may be required by Canadian and US security laws.

A number of assumptions were made by us in preparing these forward-looking statements, which are subject to risks. Results may differ materially. Details on these risks and assumptions are in our filings with the Canadian securities commissions and the SEC. With that, I will turn the call over to Dr. Denis.

Thank you, John, and good morning, everyone. I'd like to begin by commenting on some of the recent events that have taken place in the Company. As you are aware, Neptune's CEO, Mr. Henri Harland, recently resigned from the organization. He, along with Daniel Perry, will also not be standing for reelection to Neptune's Board at our upcoming Annual General Meeting of shareholders.

Recently we announced our director nominees for the Annual General Meeting, including some new nominees that bring excellent experience and perspective to the Board. I believe we have put together a strong slate of directors that will allow the Company to move forward in the next stage of business development. Dr. Waksal will have some more to say on this in just a moment.

In closing, I would like to thank our employees for their commitment to our success; our members of the Board for their active and valued guidance; our customers for their loyalty; and you, our shareholders, for your continued support of the Company and trust in leadership. We will focus on repaying your confidence in our direction by ensuring we continue to build shareholder value through strong leadership and performance.

With that, I'd like to turn the call over to Dr. Harlan Waksal.

Thank you, Ronald, and good morning, everybody. Let me first began by a personal thanks to Dr. Denis for the work that he's done during this transition. This has been a time of change for the Company, and we needed strong leadership. And he has been exemplary in making sure that he represents the Company and shareholders in the changes that have happened.

And let me start by addressing the CEO vacancy. A search for a new CEO is underway. We plan to retain a top-tier executive search firm to assist in the process.

In the interim the business will continue to be overseen by a group that was put together by the Board as a management and operations committee. And this is being done under the leadership of Andre Godin, our CFO. Andre has been with the Company since 2003 and is very well versed in all aspects of the organization. And he, along with this team, are guiding the work that is going forward to make sure we don't skip a beat in our efforts at making sure that we move towards success.

As Ronald mentioned, we have assembled a very strong slate of solid director nominees for our upcoming Annual General Meeting. We believe that this group is comprised of a broad section of individuals with strengths coming from entrepreneurs, executives, doctors, and investors.

The proposed nominations follow an agreement between Neptune and its largest shareholder, Mr. George Haywood. Together we've agreed to work in the best interest of all the stakeholders and shareholders of Neptune.

The nominees bring deep experience in health, nutrition, finance, sales and marketing, and have a strong track record of creating value in their respective areas. They are all well positioned to guide our organization forward. Their successful appointment would increase Neptune's Board of Directors to eight members, seven of whom will be independent. Previously Neptune had six directors, four of whom were considered independent.

The nominees consist of four individuals not currently on the Board. These individuals have been announced. And the ones I just want to emphasize are the new ones that you may be less aware of. In addition to Mr. Jerry Wenker and John Moretz, who have been presently Special Advisors to the Board, it comprises two new director nominees: Mr. Pierre Fitzgibbon -- he is President and Chief Executive Officer of Atrium Innovations, a leader in the development, manufacturing, and marketing of added-value products for the health and nutritional industry; and Mr. Adrian Montgomery, the Chief Investment Officer of Tuckamore Capital, a publicly traded company that has invested approximately $700 million in successful private business since its inception in 2005.

What we are doing is building a stronger company which will be poised for the next phase of development as we prepare to open up our Sherbrooke manufacturing facility and reaffirm our role as a premier krill oil manufacturer. We've laid the foundation for growth, and we now enter a new fiscal year stronger than before.

I'm going to turn it over to Andre to talk about the changes and the results that have taken place. Andre?

Thank you, Dr. Waksal, and good morning, everyone. Thank you for joining us today.

Before we are reviewing our financial highlights, I'd like to take a quick look at some of our achievements over the past year. Fiscal 2014 was a year of progress for the Company in which we laid the groundwork for long-term growth.

Following the Sherbrooke incident, we highlighted three priorities for restoring and ramping up our supply chain, including securing partnership to ensure an ongoing source of krill oil while production was down; establishing third-party manufacturing agreements; and, most importantly, rebuilding our Sherbrooke plant. We were successful on all fronts.

After the incident we actively began exploring and undertaking partnerships to maintain our short-term supply of krill oil. This quick action allowed us to preserve the Neptune name and brand and protect a significant amount of pre-incident sales.

In October 2013 we also announced a major third-party manufacturing and supply agreement, which gives us the right to purchase at a preferred price up to 800 metric tons of krill oil over the next three-year term. This agreement allowed us to realize significantly stronger margins in our fourth quarter.

On top of this positive news, our Sherbrooke plant is expected to reopen in early June 2014. The plant features robust safety measures to ensure the well-being of the employees and state-of-the-art equipment, enabling end-to-end manufacturing practices. We now have a high-tech facility with strong management expertise, which should improve service and encourage innovation and heightened performance -- all for the greater good of our employees, customers, and shareholders.

This new production arrangement significantly increases our capacity and safeguards operation by moving us from a centralized to a decentralized production model. We now benefit from the necessary capacity to meet demand expectation in the fast-growing omega-3 nutraceutical market. Beyond our supply chain we also positioned ourselves financially to support our ongoing strategic initiatives, completing a public offering of CAD28.75 million of common shares and a private placement of CAD2.5 million earlier this year.

Further adding to our strength, in April 2014 we announced the successful conclusion of all outstanding litigation issues before the US International Trade Commission investigation into infringement of Neptune's composition of matter patents. We have now concluded favorable, worldwide, nonexclusive, royalty-bearing license agreements with all 10 respondents named in the investigation, along with nonrefundable settlement payments. These royalty-bearing settlements represent a significant victory for us and clearly reflect the strength, value, and validity of our IP at stake.

On the pharmaceutical side, our subsidiary Acasti also remained active during the year, achieving a number of important milestones. They include announcing positive Phase II open-label trial results on the safety and efficacy of CaPre; moving forward with its Phase II double-blind TRIFECTA trial; and commencing its pivotal US strategy to conduct clinical trials in the US. The number of targeted patients evaluable as per protocol has been reached for a CaPre TRIFECTA study, and trial completion is targeted for the end of the second quarter of calendar 2014.

The PK study remains on track, with trial completion also expected by the end of June. Results are expected to be announced in the following quarter. Concurrently with a PK trial, the Corporation is corresponding with the FDA and has responded to their recommendation regarding Acasti upcoming investigational New Drug Filing for pivotal Phase III clinical trial of CaPre in the US.

The FDA has invited Acasti to formally request and end-of-Phase II, pre-Phase III meeting to allow them to provide feedback on the submission and to address specific questions for which Acasti is seeking a buy-in and final response from the FDA. Acasti intends to do this as soon as TRIFECTA trial results are available. With the FDA's recent decision not to grant authorization to commercialize Acasti competitor's drug in the mild to moderate patient population before the demonstration of clinical outcome benefits, Acasti is reprocessing its clinical strategy and may put a primary focus on a severe TG population.

Our other subsidiary, NeuroBioPharm, also continues to actively develop and validate new product application for the management of neurological and cognitive disorders. Particular focus has been given to the treatment of mild cognitive impairment, addressing memory and concentration along with mood disorders such as anxiety and depression, as well as treatment focusing on ADHD. Although we are still in early stages, we expect to make important progress as we move forward in 2014.

We have laid the foundation for growth, and we are to enter a new year stronger than before. It is an exciting time for the Neptune Group, and we are well placed to capitalize on future opportunities. And we affirm ourselves as a leader in the omega-3 phospholipid nutraceutical market.

Turning now to the financials, I'd like to remind you that our results are in Canadian dollars, and today's remarks may contain forward-looking statements. As well, I would like to highlight that the Sherbrooke incident and the accounting procedures and policy applied following it render, as you realize, difficult analytical comparison between year-over-year results.

My comments today will focus on results for our nutraceutical business. Detailed information on our consolidated results can be found in our press release and Neptune's audited consolidated financial statement and related MD&A, available on SEDAR, EDGAR, and the investors section of Neptune's website.

Turning to the results, fourth-quarter nutraceutical revenues were CAD3.5 million, down from CAD4.6 million the prior year. For fiscal year 2014, revenues came in at CAD19 million versus CAD25.3 million the prior year. The revenue decline from both the quarter and year was due to the plant incident.

For the first time this year, the Company recorded other income of CAD5.5 million for the quarter and year, resulting from royalty settlements with certain third parties up until the end of fiscal year February 28, 2014, to resolve cases related to infringement of the Corporation's intellectual property. During the quarter Neptune also recorded an additional CAD5.6 million in insurance recoveries due to the plant incident. For the year the Company received insurance payment of CAD11.5 million, bringing the total amount since the plant incident to CAD17.5 million.

Gross margin as a percentage of revenue stood at 20% for the quarter, up from 5% at prior-year quarter and 13% for the full year ending February 28, 2014. The margin improvement in the current quarter is due to the product cost reduction following Neptune's krill oil manufacturing and supply agreement with Rimfrost. Going forward, we expect to see stronger margin as we ramp up our manufacturing and supply agreement with Rimfrost and reestablish our Sherbrooke operations.

Adjusted EBITDA for the nutraceutical business in the fourth quarter was negative CAD1.5 million compared to negative CAD3.2 million in the prior year. The year-over-year improvement is largely due to CAD5.5 million of other income relating to royalty settlement, partially offset by higher legal fees and a bad debt expense related to one significant customer.

For the year adjusted EBITDA totaled negative CAD12.9 million versus negative CAD1.1 million in the prior year. The decline is largely due to margin concessions on lower revenues resulting from the plant incident, along with additional legal fees to successfully defend and reinforce the Corporation's intellectual property and the bad debt expense related to one significant customer.

We expect legal fees to decrease in the upcoming fiscal year, given the successful conclusion of patent infringement cases. In the fourth quarter of fiscal 2014, Neptune realized a profit of CAD1.3 million from the nutraceutical segment, up from CAD0.9 million in the prior year. The improvement over last year is largely due to the royalty related income discussed earlier.

The nutraceutical segment generated an annual loss of CAD10.7 million compared to a net loss of CAD12.8 million for the fiscal year ended February 28, 2013. The lower year-over-year net loss for the nutraceutical business is largely due to higher royalty revenues and an increase in insurance recoveries associated with the plant incident. As well, the Corporation recorded higher write-offs of CAD8.7 million in the year ended February 28, 2013, relating to the plant incident. This was partially offset by lower margins, higher stock-based compensation expenses, and an increase in legal fees during the year ended February 28, 2014.

During the quarter our subsidiaries who were actively engaged in clinical studies and research and development collectively reported CAD200,000 of revenue and a net loss of CAD2.6 million. For the year they recorded CAD500,000 in revenue and a net loss of CAD11.5 million.

As at February 28, 2014, Neptune had consolidated working capital of CAD47.6 million and cash and short-term investments of CAD29.5 million, of which CAD23.7 million was from Acasti. The consolidated cash and short-term investment as of the end of April is roughly CAD55 million.

In conclusion, we are at the beginning of a new era for Neptune. It is an exciting time, with a new high-tech facility opening soon and a stronger Board and management team.

We have led the foundation for growth, and we will now focus on strong execution as we reaffirm our rule as a premier krill oil manufacturer. This ends our conference call. I'd like to thank all of you for joining us today. Thank you.

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program, and you may all disconnect. Have a great rest of your day.

Thank you.