Neptune Wellness Solutions Inc (NEPT) 2016 Q1 法說會逐字稿

Good day ladies and gentlemen and welcome to the Neptune Technologies & Bioressources first-quarter fiscal year 2016 earnings conference call.

(Operator Instructions)

As a reminder, this conference call is being recorded. I would now like to turn the conference over to John Ripplinger, Director of Investor Relations. Please begin.

Thank you operator and good morning everybody and thanks for joining us today. As mentioned the purpose of today's call is to review our results for the first quarter ended May 31, 2015.

Joining me today are Jim Hamilton, Neptune's President and CEO, and Pierre Lemieux, Chief Operating Officer of Acasti. Jim will review Neptune's operational and financial highlights and we'll then turn the lines over to you for questions at which time both Jim and Pierre will be available.

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 statements 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 can be found in our filings with the Canadian securities commissions and with the Securities and Exchange Commission.

With that I will turn the call over to Jim.

John, thank you very much and again good morning to everyone. Let's begin with what has been our major priority, manufacturing.

We can now proudly say that we have a superior product offering that meets all product specifications and material handling characteristics and are fully aligned with our customers and Neptune's expectations. Our effective capacity has increased substantially and now stands at over 100 metric tons annually.

Additional improvements are anticipated in the coming quarter. Moreover we're actively working to optimize plant processes further to drive efficiencies and improve cost and increase capacity to our original target of 150 metric tons annually and beyond.

We're gaining increasing confidence in our manufacturing capabilities and accordingly are now placing a heightened focus on business development to ensure customer demand matches these expected increases in supply. Being the krill omega-3 pioneer, Neptune enjoys strong customer and industry recognition and we're actively working to reestablish our position and market presence.

As we move towards a more customer-centric organization we will be better positioned to regain share. Some previous customers have begun returning reflecting our historic ability to produce a superior quality product. And we're encouraged by our second-quarter sales funnel and expect revenues to surpass the CAD4 million level.

In conjunction with this we're working to drive strong financial discipline throughout the business. This includes greater controls over everything: working capital, tighter budgets and culturally an increased accountability. The results are already being seen with the Company realizing notable operating savings during the quarter and we will see some savings variability I believe in the immediate future as these cost reduction initiatives gain full traction.

Based on improving business fundamentals, strong financial controls and a solid focus on manufacturing excellence and sales development we are moving towards a neutral cash flow by fiscal year-end. Moreover based on our current business assumptions we believe we have sufficient liquidity to fund operations during this transition period. And clearly we'll need to maintain a very, very strong financial and operating discipline to deliver on these expectations.

Turning to other encouraging developments, the US Patent and Appeal Board recently upheld their original decision concerning the validity of certain of our claims, the patent -- Neptune's patent '351. By way of background in March 2015, the PTAB originally confirmed the patentability of these claims which in turn set the stage for Aker and Enzymotec to pay royalties to Neptune.

Following this decision both competitors filed a petition requesting a rehearing. On July 8, 2015 the PTAB issued their response denying this request and in their decision the PTAB heightened, highlighted rather that both competitors had not shown any matter was misrepresented or overlooked. And as such the original decision was upheld.

I have a great deal of respect for others in the industry. Clearly we'd like to see a timely resolution to our IP differences and rather than spending energy in the courts it would be better invested I believe in an industry as an industry in building the science and awareness and the benefits of krill omega-3s. This in turn should allow us to increase krill share in the overall omega-3 market.

Moving to our search for the new CFO we are making important progress. As you are aware we're looking for somebody with a strong operational-driven focus that's fully aligned with our market-driven approach. And I look forward to updating all on this progress very, very soon.

Turning to 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 the ongoing issues at our Sherbrooke plant render as you realize difficult analytical comparisons to year-over-year results.

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

As to results the nutraceutical revenues in the quarter were CAD2.7 million compared to CAD3.6 million in the prior year. The year-over-year decrease was largely due to planned production slowdown or a plan to resolve the viscosity issues.

Adjusted EBITDA improved over the prior year coming in at negative CAD3.2 million for the quarter compared to negative CAD3.8 million in the prior year. The improvement is largely due to lower general and administrative expenses which was partially offset by CAD1.6 million of income in the prior year relating to a one-time IP royalty settlement.

Neptune recorded a quarterly loss of CAD4.6 million for the nutraceutical segment versus a net loss of CAD5.7 million in the prior year. And the lower net loss was due to the same factors outlined above along with lower stock-based compensation expenses.

Switching to liquidity, the corporation has consolidated cash and short-term investments of CAD23.7 million as of the end of May. Of this CAD6.5 million was for Neptune, CAD17.2 million for Acasti.

As previously mentioned we do not anticipate any financing needs at this time to fund Neptune's operations while we transition to a stronger cash flow position.

So in closing we're making significant progress in improving our business fundamentals and setting the stage for future growth. We are building a stronger Company and together with our strong, committed employees and committed Board we will build on past accomplishment and capitalize on future opportunities.

John? I'll turn to you.

Thanks Jim. This ends our formal remarks today. I will now turn the call over to the operator for the Q&A portion of the call.

(Operator Instructions) Siew Yeo, Euro Pacific Canada.

Hi, good morning Jim. Just one quick question here on the PTAB decision. So congrats on upholding that decision, so has there since been a deposit in the escrow account by other either of the parties and when are the timelines we could see for more royalty restitution from these two parties here?

Well the licensing agreements that we have with these parties are absolutely clear in this regard. And those royalty payments into escrow should begin immediately. And this is something that we'll be working on very actively to ensure occurs.

I think what's maybe more to the point here on this IP is it's amazing the resources that have been spent on this by Neptune and other companies. And it could have been money far better spent in growing awareness and investing in the science to build the category. I've mentioned in previous discussions in this wonderfully large global omega-3 business at the ingredient level of about 1.7 billion krill, the better omega-3, represents around 7% of the value and it should be much more.

And the way to grow that is by I think the industry, individual companies, and together collaborating to ensure that we work on the awareness and we work on the science to grow it. And I think the industry is primed for less confrontation on IP and more towards investing in growth. And that's what we'd like to see and that's what we're trying to facilitate within the industry today.

Okay, great. Just one more question, so congrats on reaching 100 mega tons annually on your production. So for the rest of the calendar year 2015, could you perhaps provide an idea of where you envision production to be like on the quarterly basis?

Yes, Siew, first of all we announced effective and demonstrated capacity of 75 metric tons last quarter. And now we're communicating effective and demonstrated capacity of beyond exceeding 100 metric tons. We are very, very optimistic that we'll be able to report further gains in the coming quarter again of effective and demonstrated capacity.

And we will look to do a full disclosure on that within the coming months. We've got a couple of trials we're doing right now that we want to verify a few of our ideas. And I think it's also important to add that we've already started scoping plant capacity expansions beyond the original nameplate for minimal investment.

So there's a ton of activity going on there. And we're optimistic that we'll be able to report further gains in the coming short timeframe.

Okay, thanks, Jim. Have a good day.

Robin Cornwell, Catalyst.

Thank you, good morning, Jim. Further on the royalties that are in escrow now how do you plan to disclose that in the case of accruing in your income statement?

Yes, I think I'm looking at our legal attorney Benoit here. The intent as far as I'm aware would be not to reflect that in the income statement.

Now up and until we can get a settlement or actually receive money in the door, so we do not anticipate to reflect that as an asset at this point in time, Rob. But I will tell you that we're very, very motivated to stop the multimillion dollar investment that all parties are spending on this annually and get resolution.

Well, is there any possibility that the escrow would show up somewhere in your income statement or your balance sheet? I guess you're saying no but I guess investors are pretty anxious now to see the magnitude I would say of these potential royalties, or I shouldn't say potential, these royalties.

Yes, Robin, it's a very, very good point. But I think until we can get a final and complete legal settlement we're not going to be able to reflect what those values could be.

Okay.

But what I will say, though, is my ambition is to accelerate that process. I think that process is gone on much too long and is not in the interest as I said earlier I think for Neptune or for others in the industry.

It's inwardly focused in nonproductive energy. And the energy has to be directed outside to growing businesses and growing the total market. And that's what we're going to try and facilitate as soon as we can, Rob.

Okay. My second question is on you made some interesting comments on your plant productivity and enhancing handling characteristics. With all the expertise that you've been focusing on with the plant and getting your viscosity issues settled, have there been other enhancements or collateral enhancements that have come out of this in-depth look at your this whole new plant and its processing?

The answer to that, Rob, is absolutely and I think maybe there's two elements to the response there. One is the product and one is the plant. I think in our statements we said proudly producing and that word I chose very purposely because we and I am very, very proud of the product we are producing.

I believe we're now making the best product in the industry on so many dimensions, activity in terms of happening properties, in terms of its smell. In every dimension we have a superior product right now and I'm very, very proud about that.

Number two, relative to the plant when you really start to dig in you see opportunities and we see opportunities in a number of areas. I've touched on before in this call some opportunities just from a cost-effectiveness in terms of how we manage our byproducts and how we can commercialize or dispose of that in a more economic way, recycling of some of our products we use in the process such as acetone to reduce the purchase of those key raw materials. And we are also looking at very intimate steps within the process to refine the quality of our product better and to make it faster and looking at pathways to expand the plant in very, very economic ways.

So I think what we're seeing with our plant is a leverage in terms of its capabilities now beginning. So I'm very pleased with that too.

Just moving towards the 150 metric ton mark that the plant is designed for, or was expected to be designed for, can you now see -- you seem to be telling us that you can see a pathway to higher plant production without too much capital expenditure.

I see no capital expenditure towards the nameplate capacity, Rob and we can see a pathway. I'm as some have teased me a little bit overly conservative in some of these calls. I'm a believer that I want to see the evidence, I want it demonstrated and that's what we're doing step-by-step, day by day but we have a path there, Rob, and we can see it.

Okay, thank you. I'll requeue.

(Operator Instructions) Richard Schottenfeld, Coyote Capital.

Hey guys, a couple of questions. First of all in your liquidity guidance that you gave in terms of having enough liquidity for the next 12 months, did you assume any receipt of any royalties?

We do have receipt in royalty, Rick. It is I would say classic royalty receipts and not exceptional royalty receipts.

So those royalties, receiving those royalties is assumed in your guidance that you have enough liquidity for the year?

The classic receipts of royalties is what we've assumed and not extraordinary royalties.

Okay. Another question, I guess last quarter we took a write-off and you said that some of the problems at the plant might be due to using old frozen krill versus newer, fresher, frozen or more recent krill. In your experience this quarter have you run any fresh supplies of krill through the plant yet and seeing how that works or is this still capacity improvements with older krill that you've had?

These are quality and capacity improvements with the existing inventory, Rick. We are actually actively sourcing new materials where we have actually samples en route now. And assuming they're of a quality that is acceptable we'll take delivery of those later in the summer.

That is designed mostly just to validate some of our assumptions on the science. And it's sort of a check-the-box validation. We're confident that the outcome will be what it is.

And what's more importantly was I think to your original comment is that we're able to drive this facility with increasingly good quality finished product with the inventories we have on hand.

Last question associated with that is as you've improved the plant do you think that there's any recoveries from the write-downs you took last quarter in terms of krill that might not have been processable that you might be able to process?

You know what, Rick, we're working on that right now. We have an active file with our legal team to look at not only manufacturing interruptions but also raw material impairments consistent with that plant interruption. And that's an active legal file we're working on as we speak.

So you mean you're working towards an insurance recovery for the write-off from the plant explosion but not that that krill could somehow be usable as you improve the plant?

You know what, it's interesting, we're actually working from a legal perspective on the impairment as I mentioned. But as we get increasing insights and experience levering and managing our plant with the existing inventories that possibility does exist that a percent of the write-down could more usable after all but that remains to be seen. And I think we can't really say that can be the case until we get further progress in the months to come.

Okay, thank you.

(Operator Instructions) There are no further questions in queue at this time.

Okay, thank you operator. This ends our Q1 conference call. We'd like to thank everybody for joining us today and we look forward to getting back to you at a future point with further developments. Have a good day.

Thank you. Ladies and gentlemen, this concludes today's conference.

You may now disconnect. Good day.