Neptune Wellness Solutions Inc (NEPT) 2016 Q3 法說會逐字稿

Good day, ladies and gentlemen. Welcome to Neptune Technologies & Bioressources third-quarter FY16 earnings conference call.

(Operator Instructions)

As a reminder, this conference is being recorded. I'll now introduce your host for today's conference, John Ripplinger, Investor Relations. Please go ahead, sir.

Thank you, operator, and good morning, everybody, and thanks for joining us today. As mentioned, the purpose of today's call was to review our results for the third quarter ended November 30, 2015. Joining me today are Jim Hamilton, Neptune's President and CEO, and Mario Paradis, Neptune and Acasti's Chief Financial Officer. As usual, Jim will review Neptune's operational highlights followed by Mario, who will discuss the quarterly financial results. After this, we'll open up the line for questions.

Unfortunately due to a family illness, Pierre Lemieux, Acasti's Chief Operating Officer, couldn't join us today, but during the Q&A, Mario can address any Acasti financial questions and Pierre will be available for any follow-ups upon his return.

Before we begin, I'd like to remind you that all amounts are in Canadian dollars and today's remarks contain forward-looking information that represent our expectations as of today and quarterly 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 can be found in our filings with the Canadian Securities Commissions and the SEC.

With that, I'll turn the call over to Jim.

Thanks, John. Hello and good morning, everybody. I'm pleased to be reporting another quarter of improving financial and operational strength, both on the top and the bottom line. And with our recent acquisition of Biodroga, I believe we're becoming a much stronger Company and an even stronger partner to our customers.

Biodroga allows us to move up the value chain via turnkey product development services such as formulation blending and it's a new growth vehicle and a significantly larger addressable market. The acquisition also brings a super leadership team with some really highly accomplished people in sales, operations, science, innovation and these guys are really expert and have a strong record of success. I've personally been very excited to see the conversations happening amongst our respective teams right from the start. It's very energizing for me.

I'm really pleased also with the great comments we received from the transaction, both from our customers and from the investment community, many of whom I see are on the call today. And we look forward to seeing everybody in coming days and weeks to talk about this transaction and also our year-to-date performance. By the way, for those who were not able to listen in on the conference call last Friday morning detailing the transaction, it is posted on our website and I invite you to listen to that.

Moving to our quarterly results, Mario is here and he will be giving much more details in a second. Total revenues were CAD5.5 million and revenues from sales CAD5.1 million, in line with the preliminary results we announced back in December. Relative to our productivity and efficiency program, Project Turbo, profitability continues to strengthen as we lever these cost reduction initiatives and drive margin improvement. This is resulting in improving bottom line and clearly we need to maintain sales momentum along with this discipline to continue the results as we go forward.

Moving to intellectual property, we continue our efforts there to resolve these outstanding issues as quickly as possible. As many know, it's gone on for a long time. There's no change that we can report today relative to this but we remain very committed to it and very vigilant. In just a small aside there, we had a recent trade show experience where we had a new Asian producer who did not have a license removed from the show and it was a wonderful motivator for conversation across the industry with us in this area.

So Neptune has undergone a significant business transformation these past months. Back at our annual general meeting in July, for those who were there, we discussed our work plan, our agenda, for what we called righting the ship and then moving into the latter half of the year setting the sails. And as we entered the New Year 2016, we would be focusing on racing forward.

To do so, we mentioned back on Friday, both the four key pillars that we will be focusing on. First, we'll continue to strengthen our core krill oil franchise through strong operational excellence. This includes transitioning to even a more sales driven organization, manufacturing excellence, strong financial discipline. Project Turbo is absolutely key driver behind -- or underpinning this. Mario will speak to some of that in a moment.

Second, moving up the value chain, to be a better partner with customers in turnkey solutions and our acquisition of Biodroga will clearly help us in this regard. Third, look for ways to better lever our IP technology globally. It's a valuable asset and we'll be looking for ways to monetize that. And finally, and very importantly, innovation. And we'll be and are looking at ways to expand our specialty portfolio in related spaces. So with that, I'll turn it over to Mario to talk a little bit more detail on the financial results. Mario, please.

Thank you, Jim and good morning, everyone. Before commencing our quarterly review, I'd like to remind you that our results are in Canadian dollars and today's remarks may contain forward-looking statements. As well, [best assured], our Sherbrooke plant render as you may realize, difficult and not difficult comparison between year-over-year results.

My comments today will focus on quarterly performance for nutraceutical business unless otherwise indicated. Consolidated and year-to-date information can be found in our Press Release and the Neptune's consolidated financial statements and related MD&A, available on SEDAR, EDGAR and the Investor's Section on Neptune's website.

Turning to our nutraceutical results, revenues for the third quarter were CAD5.5 million, up 26% over the second quarter of the current fiscal year and 17% better than Q3 last year. On a currency neutral basis, revenue increased by 22% over the second quarter and were stable over last year. Our quarterly gross margin as a percentage of sales also continued to recover coming in at 24%, up 8 points over the 14% recorded in the second quarter of our current fiscal year. This improvement is being driven by stronger revenues and Project Turbo. We expect to see continued margin improvement in the coming quarters as these cost reduction projects gain full traction.

As discussed in the second quarter call, Project Turbo should generate around CAD5 million in savings once fully implemented by fiscal year ended February 17. To date, we have identified and launched initiatives that will allow us to realize 75% of our targeted savings with about 30% of the total expected savings already reflected in our results. Most of the savings are coming from optimizing business processes and reducing general and administrative expenditures, largely through operations and process improvements at our Sherbrooke plant. This includes HR optimizations, warehouse savings and lower by-product disposal costs.

Moving along, adjusted EBITDA should continue to strengthen coming at the negative CAD0.6 million for the current quarter compared to negative CAD1.6 in the second quarter of the current year and a negative CAD2 million in Q3 last year. The year-over-year improvement was largely due to stronger sales and the higher gross margin. Our quarterly net loss was also significantly lower coming in at CAD1.3 million versus a net loss of CAD3.2 million last year. The lower net loss is due to the same factor [applying] for adjusted EBITDA. In addition, during the current quarter, Neptune received insurance recovery totaling CAD0.5 million relating to the 2012 plant incident. As well, the prior year quarter included additional expenses related to plant ramp up costs.

Turning to our liquidity. The Corporation adds consolidated cash and short-term investment of CAD19.2 million as of November 30, 2015. Of this, CAD5.1 million was for Neptune and CAD14.1 million for Acasti. Neptune's quarterly cash balance rose CAD1.7 million over the CAD3.4 million recorded at the end of the second quarter, largely due to the receipt of CAD1.1 million of investment tax credit along with CAD0.5 million previously mentioned for business interruption insurance.

For the full quarter, as previously stated in the second quarterly call, the six-month period ending February 16, should be cash flow neutral. Meaning that we should be approximately at the same level than at the end of the second quarter. We are expecting a slight decrease from the actual cash level related to our working capital and debt repayment needs. Going forward, we will continue to focus on strengthening cash flows and expect ongoing improvement as margin will continue to strengthen.

Turning to Biodroga for a moment. We will be reporting their financials in combination with Neptune nutraceutical operation going forward. For the current quarter ending February 29, 2016, we will commence reporting their financials effective January 8, 2016. As previously alluded, we expect the transition to be immediately accretive for our shareholder.

In closing, we are pleased with our progress and performance in the third quarter. While we still have work to do, we are very excited about the opportunities ahead as our productivity initiatives continue to be rolled out and we put in place our strategies for long-term sustainable growth. I will now turn the call over to the Operator for the question period.

Thank you.

(Operator Instructions)

Our first question comes from Richard Schottenfeld of Coyote Capital.

Hi, guys. Congratulations on a great quarter and the acquisition. You've really done a good job in putting the Company on solid footing here. I want to talk a little bit about the plant. I know last quarter you told us it was operating at around 175 tons annualized capacity. I was wondering where did it run this quarter and I guess in general, are we maxing out the plant? Do we have more upside from here? Can you just talk us through the dynamics around the plant and our capacity to produce?

Rick, thank you. It's Jim and let me answer that. We reported formerly 160 metric tons as the effective capacity. It is a natural product and we see some months that are better than others depending on the raw material mix and a few other things. But it is running at 160. We do have a project I think I've mentioned in prior calls and at meetings to look at expansion possibilities. And there's a whole range of possibilities we can do with a whole range of investments. Those investments, if we would choose to do them, would be relatively minor. That would be in the low single-digit millions if we chose to from a hardware standpoint. There is also some new production pathway technologies that we're looking at that may be even less investment that it could increase the capacity as well. So formerly and effectively, it's 160 metric tons right now and we have projects to look for more.

So was it maxed out this quarter? Can I expect outside of the Biodroga acquisition, can I expect growth on the nutraceutical production side without any CapEx or have we pretty much maxed out now what the plant can do?

The way we're operating today, it's running at max.

Okay now, in terms of the gross margin, when you complete Project Turbo and with plant optimizations, whatever they are on your road map, what do you think our ultimate target margins are on the nutraceutical side?

Rick, it's Mario. So we should be in the range of slightly higher than 40%. As we speak, the third quarter was at 24%. We anticipate a 10 points higher in the fourth quarter. This is based on the production costs that we have seen in the last few months because these production will be sell in the fourth quarter. So that's why we are pretty confident that the gross margin will increase in the fourth quarter by approximately 10 points.

That's great. Also on the IP side. You talked about leveraging your IP, and I'm assuming that means licensing other people to be able to use acetone as opposed to alcohol to render krill. I would assume that infringing on your other patent is just a matter of finishing that process. But could you take us through the steps that are left before we start getting the royalties on the infringers on the using krill as a nutraceutical? And also talk to us about the strategy around licensing the acetone technology?

Yes, Rick, that's a big answer to a big question. I think first and foremost, it's the license, the capability for others to sell in the market. And as you know, we've had a protracted and lengthy discussion with a couple of the major marketers.

The timeline on that would be to resolve through the Federal Courts through the latter half of this year. I would say approximately October, November would be it. The only recourse assuming we're successful, would be for those people to go to the Supreme Court, which is highly unlikely. So we would anticipate resolution on that thing if it goes through the normal process by the end of the year. Although we are motivated to see if we can resolve things sooner.

Now, what that would be with the majors, what we also are seeing is some smaller upstart firms, Asian-based, largely China, that have -- to put their toe in the water. We've clearly reached out to them to tell them what the rules are if one chooses to sell at major markets like US, Canada, Australia, et cetera.

We had invested in an attention getter last Fall where we had one firm physically removed from a trade show. The US marshals showed up in Nevada and took these guys out, tore the booth down and it was a great wake-up call for they and others in the industry that our IP has strength, it has meaning and they need to sit down and talk to us. It was a great conversation motivator and that is happening.

Relative to the acetone, we have a limited IP there. I think it goes on for another year to two, three years, and there is certainly benefits in using acetone with residual solvents, or less product purity, et cetera. There has been one party that's been interested to look at that with us and those dialogues continue. We'll see where it goes.

All right thanks guys. Good job.

Thank you.

(Operator Instructions)

Our next question comes from Robin Cornwell of Catalyst Research.

Hi, good morning and very good quarter. Could you -- maybe you could focus on revenues a little bit in the quarter. Can you give us some idea of the geographical distribution of the revenues; where they're coming from, India, Australia, I guess North America? And I guess -- go ahead.

No, go ahead Robin, please.

And basically, how many different customers do you source your revenues from, like customer concentration?

Okay, two answers there, Robin. First of all, the geographic distribution would be more North American centric than I would like to see. Largely, US and Canada. Less in Asia and we have a desire to reenter, if you will, particularly markets like Australia. In fact, I'll be in Australia in a couple weeks on such an endeavor. So it is largely North American and European centric at this point in time.

In terms of the customer mix, it has been changing and it is growing, it is improving in terms of quality, but it's not where I would personally like to see it, Robin. I like it, you know the analogy is genetics. The greater the gene pool, the happier I am and we're working hard to increase that gene pool right now.

Our goal is to sell to capacity going forward and I'm confident we'll get there. What we wrestle with is the length of time for us to get there, but that's our goal. That's what we're putting in place with our sales plan, our marketing plan, our budgets, et cetera. That's our ambition. And with that, if we're successful, we'll see a much more geographically dispersed and customer dispersed portfolio.

Thank you for that. So based on the -- I guess looking at recurring revenues, how do you see going forward? I'm not -- uncertain here as to how much is initial orders and now recurring. Can you give us some idea there?

Recurring meaning the balance of new customers versus old?

Yes, I guess basically what you might be expecting from your customer base that you currently got and if there has been any recurring orders to date?

Yes, the answer --

It's a little early but--

Yes, I think Robin if I understand the question, maybe I could give some color there. That when you look at last year, largely what was sold here was resold materials. That was done to maintain relationships with certain customers around the world and I think in hindsight, it was a very smart thing to do. Albeit an expensive proposition. It was important to keep that market presence.

I think as we moved in with the new plant and had some of the quality problems, we had exits of customers. I think we've done a good job if you look below the surface and behind the numbers of replacing those customers with either those former relationships or with new relationships. So the quality of the customer base I think has improved and I think those are recurring customers.

I think our challenge now is to continue the building momentum. Again, we have an effective capacity in that plant and our ambition as a team here is to fill it. And that will mean clearly, to build on the base that we have today but also bring new people on board. That's very much our focus going forward. We're very pleased with Biodroga acquisition because the conversation as I mentioned in my comments earlier, it's just great to see the energy and the relationships that expand the conversation about our portfolio with the new communities. So I'm very jazzed about that.

And I guess just to follow-up on that. Is the Canadian dollar impacting sales here with the decline in the Canadian dollar?

Yes, the answer is yes. And as I pointed out earlier, so when we compared to the quarter, same quarter last year. So most of the increase are coming from the weakness of the Canadian dollars as we report in Canadian dollars. But when we look at sequentially, so we still have on a currency neutral growth of 22% in Q3 versus the second quarter this year.

And is the lower dollar getting attention to help future sales?

Of course we are approximately, let's say, 60% of our sale in US dollars and most of our costs, excluding some cost of goods sold component like frozen krill, the raw material and some other component, the impact on the profitability is positive. So again, we do not want to bet on where the Canadian dollar will go versus the US dollar. But as we speak, this has a positive impact on our results and it will continue to have a positive impact for the next probably 12 to 18 months at least.

Okay, great. Thank you very much.

Thank you. I'm not showing any other questions in queue at this time. I'd like to turn the call back over to Management for any further remarks.

This ends our quarterly conference call today. I'd like to thank everybody for joining us and we look forward to speaking with you next time. Thank you.

Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program. You may all disconnect. Everyone have a wonderful day.