Neptune Wellness Solutions Inc (NEPT) 2016 Q4 法說會逐字稿

(Spoken in French)

Good morning, ladies and gentlemen. This is the operator. Welcome to the Neptune Technologies & Bioressources fourth-quarter 2015 earnings conference call.

(Operator Instructions)

Thank you. I will now turn the call over to Mr. Mario Paradis, CFO. Mr. Paradis, you may begin your conference.

Good morning, everyone, and thanks for joining us. As mentioned, the purpose of today's call is to review our results for the fourth quarter and the fiscal year ended February 29, 2016.

Joining me today are Mr. Jim Hamilton, Neptune's President and CEO and Pierre Lemieux, Acasti's COO. Jim will review Neptune's operational highlights followed by a discussion on quarterly financial results by myself and Pierre will be available for the question period.

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 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. Detail on these risk and assumptions can be found in our filing with the Canadian Securities Commission and with the Securities Exchange Commission. I'll now turn the call over to Jim.

Mario, thank you very much and good morning, everybody. There is a short deck posted on the Internet for those who want to follow along with some bullet points and some charts. I just wanted to kick things off on page 4 which is just a few brief comments on the fourth-quarter nutraceutical highlights.

And I think the number one highlight for us, of course, is revenues for the quarter were CAD10 million. This is over 160% growth versus the same quarter last year. And quite some contributions from our newly acquired business, Biodroga.

And it was the first positive quarterly adjusted EBITDA since 2012, CAD658,000. This compared to a loss of CAD7.8 million in the same quarter a year ago. This very truly reflects the continued efforts to improve efficiencies really across the board and also the Biodroga business which was effective January 8, where they came online into the business.

Moving to page 5, a couple of comments to reflect on 2016 overall, specific to the nutraceutical business. For those who were there or read the presentation last July at the annual general meeting, we talked about our focus for the year which we coined the phrase, hoisting the anchor and then setting the sails. What we meant by hoisting the anchor was really establishing the financial operational discipline within the business and upgrade, really, the team and right-size. And moving from there into the latter months of the year we talked about setting the sails for growth and really establishing the focus for the first phase of our voyage forward.

And in that respect we identified four key elements that we're going to focus on strengthening the krill oil franchise. That is a quality cost differentiation growth. Move further up the value chain. I believe very strongly that the closer the consumer you are, the better. Monetizing our IP, levering our IP and then innovation expansion of our specialty portfolio in related spaces and businesses innovation.

And we've identified there in past conference calls and presentations products like taking our byproduct and then going into the agriculture business, levering our site and extraction technologies. And in this respect, I think we have made a lot of strides in all of those four elements. I think of particular note is around the manufacturing capabilities and cost base. We are light years ahead there and we only started. I think we have done a good job reestablishing ourselves in the krill industry in the context of challenging consumer market conditions, especially in the development markets.

And the Biodroga acquisition, really our first major strategic step, one we are really pleased with moving up the value chain and it's just changing the conversation with customers, moving from a product discussion to a solutions discussion, and opening up potentially much greater available markets. And how do we measure success? I think the measure is ultimately bottom line and we had the sequential quarter-on-quarter improvements in the adjusted EBITDA as we moved through the year.

Just moving to page 6 and we just wanted to add a little bit of slide -- one slide here on the solutions business. Mario and I have had a number of questions in our engagements with people on a day-to-day basis; just a couple of comments there. One is just in the market today what we see is the blurring of channels -- the classic channels of the dietary supplement business are moving and eroding. The speed of innovation, as a consequence, is just increasing. The ability for new market entrants is opening up and this is changing the dynamic of the industry.

And what we have been able to do with our solutions business is, this is not a bricks and mortar business; this is a technology services business that delivers and ultimately invoices finished goods ready for market. So if you are an innovative new Internet company, we will deliver ready for market, ready for consumer finished goods and we do so through expertise and regulatory affairs, science, raw material sourcing, manufacturing. And this is really interesting in this changing market dynamic for a large and small customer. If you're a large customer you may not have the competencies or the scale and clearly if you are a medium to large customer you may not have the capacity or the ability and agility to move quickly in what is a rapidly changing environment.

Over 90% of the businesses or the products we sell are formulated finished goods ready for consumers and we're doing so with a greater than 100 customers, virtually all within North America. Although we are starting to expand that footprint beyond with the combined business and legacy relationships we have in the global scale. And a great team there and led by a couple of the industry veterans that know this business in a very good way.

Just moving to page 7, a few comments on NKO and the krill business. This industry in the established markets of North America and Australia, I think, is maturing. And, as such, it does make it more difficult when markets are growing at double-digits. It is always a little bit easier to find space, but it is a more developed market. In that market context I think we have done a tremendous job in improving our operations, our manufacturing cost base, and really not just with krill across the company.

And done a lot of work with growing opportunities with customers with unique product forms. One particular major marketer, in doing with a differentiated form, we have been able to get in the door and start some business there. In fact, in the first quarter this year we have done more business with them than we did the entire year with them last year and we are very, very excited by that.

We're also very excited for our krill business relative to new markets and especially China. This company has worked very, very hard with the Canadian government, both here domestically but also in Beijing to get approval for export into China. And in parallel we have been working very hard with domestic customers there and are very, very happy and excited that we are actually shipping our first orders there as we speak.

And just one comment there relative to the market, a lot of people talk about China but in the consumer market data it is not as clear for that market as we may see in more monitored markets such as the United States. But I think consensus opinion is the omega-3 market today in China is probably bigger than the United States and it is growing at a dramatic rate. And I think the krill segment within omega-3s in China is completely underdeveloped and presents some very, very interesting opportunities for us.

And lastly, we're also looking at an immature market such as Australia; some very, very interesting strategies to reenter that market. And we're looking forward to that as well.

Moving to page 8, some comments on Ocean 03. People have seen we've developed a consumer product. This is sold on the Internet now at www.ocean03.com or www.ocean03krilloil.com, and it is really a test, B2C experience for us, to increase our knowledge on the B2C market. But also open it up to certain wholesale opportunities which we are seeing in certain foreign markets in the Middle East, also in Asia and China.

I think what is interesting here is, also it is helping us with our competencies on how to get to market. And I think if we can demonstrate success there, especially in some of these markets abroad, it could be a pathway that we've developed that we could expand with further products. It is also a very interesting experience in regard to some of the manufacturing capabilities.

Now together with Biodroga, we are able to lever their expertise and enhance the cost of goods in that product. So a few highlights and a few comments there. We will be open for questions momentarily.

But I would like to just pass it on to Mario now with a few of the more detailed financial results. Mario?

Thank you, Jim. Before starting I'd like to remind you that our results are in Canadian dollars and today's remarks may contain forward-looking statements. My comments today will focus on quarterly performance for our nutraceutical business, unless otherwise indicated. Company data and FY16 information can be found in our press release and in Neptune's consolidated financial statements and related MD&A, available on SEDAR, EDGAR, and the investor section of Neptune website.

Turning to our nutraceutical results, revenue for the fourth quarter were CAD10 million, up 161% over last year and 82% over the third quarter of the current fiscal year. Our revenues include sales from our recent acquisition of Biodroga for an amount of CAD5.2 million. Sales for the acquisition are consolidated since January 8, 2016.

For the last 12 months ending February 29, 2016, sales of Biodroga totaled CAD24 million. Our quarterly gross margin as a percentage of sales also continued to improve, with the combination of the Biodroga gross margin contribution. The nutraceutical gross margin came in at 27%, up 3 points over the 24% recorded in Q3 of the current fiscal year.

The improvement is being mainly driven by Project Turbo, and we expect to see continued margin improvement in the coming quarters for our combined businesses, as well as an increase in terms of dollars related to Biodroga solution contribution. As most of you are aware, Project Turbo should generate around CAD5 million in savings once fully implemented by the February 2016 fiscal year-end.

To date, we have identified and launched initiative that will allow us to realize 75% of our targeted savings, with about 50% of total expected savings reflected in the year-end results. This initiative should continue to drive margin improvements. SG&A totaled CAD3.5 million during this quarter. This is slightly higher than last year and the third quarter of the current year of CAD3 million and CAD2.8 million, respectively.

The Biodroga acquisition increase as G&A since the acquisition date, partly offset by a reduction and some marketing and administrative expenses. Due to the nature of the Biodroga business model, SG&A expenses represent a smaller percentage of its total revenues. As a percentage of sales in comparison with the third quarter from the current year, there was a decrease from 55% to 37%.

Moving along, adjusted EBITDA also continued to improve coming into positive territory with CAD0.7 million for the current quarter, compared to a loss of CAD7.8 million in Q4 last year. And CAD0.6 million in Q3 of the current year. This improvement versus last year was mainly related to a raw material inventory write-off and ramp-up cost of CAD4 million and CAD2 million, respectively, as well as better operational efficiencies and Biodroga's contribution.

Sequentially, the quarter-over-quarter improvement was largely due to higher gross margin from operation and the Biodroga contribution. As shown at page 11 of the presentation, there is a continual improvement of the EBITDA or, in other words, a decrease in loss over the last four quarters. Our quarterly net income was also significantly improved, coming in at CAD1 million versus a net loss of CAD9.1 million in the prior year and a net loss of CAD1.3 million in the third quarter. The improvement of CAD10.4 million over last year was primarily due to the same factors applying for our adjusted EBITDA.

In addition, during the current quarter we recorded a tax recovery for an amount of CAD1.9 million as deferred tax assets on tax losses. We were allowed to record these tax assets as, following the Biodroga acquisition, we will be able to use some company's tax losses and R&D credits against the taxable income generated by Biodroga.

Turning to our liquidity, on a consolidated basis the Corporation has consolidated cash and short-term investment of CAD16 million as of February 29, 2016. Of this, CAD3.5 million was for the nutraceutical segment and CAD12.5 million for Acasti. Quarterly cash balance increased by approximately CAD1.6 million from the CAD5.1 million recorded at the end of Q3. Largely due to the starting of the loan reimbursement with investment of CAD0.5 million and investment in our working capital, mainly receivable prepaid and payables.

Presently, on April 18, 2016 we entered into a term loan agreement with PNC Bank for an amount of CAD4 million to support our growth and working capital needs. This loan included 15 months already of capital payments and will be reimbursed over 33 months per year starting in July 2016. Going forward we will continue to focus on increasing cash flow and expect ongoing improvement as revenue and margins straighten.

Finally, our first quarter is practically over and our nutraceutical revenues are expected to reach approximately CAD11 million with a positive EBITDA. As for the fiscal year ending February 2017, for the nutraceutical segment we expect revenues to be greater than the last 12 months? revenue, including Biodroga, of CAD41 million with a double-digit adjusted EBITDA margin.

I now turn the call over to Jim for additional and closing remarks.

Thank you, Mario. Just a last couple of comments here that, as Mario touched on, that we still see benefits coming from our operational efficiencies and cost-saving initiatives, especially as some of these transition costs worked their way through the system. We're quite content with where we are from a financing perspective in the foreseeable future.

There are some growth challenges, I think, in some of the developed markets, I said before, but we also are very excited about the opportunities in new markets for our krill business, such as China. We're very, very pleased with the Biodroga acquisition. I think what's important for me is it opens up the available market to an ocean that is far greater than a simple product perspective. And we're going to continue to focus on growth opportunities across the board -- innovation, expanding our EBITDA, and further acquisitions as soon as we can. With that, Mario, we are open to questions.

Yes. Turn the call to the operator.

Thank you.

(Operator Instructions)

Doug Loe, Echelon Wealth Partners.

Thank you very much. Congratulations on the quarter, gentlemen, particularly on the EBITDA torque you generated in the period. Two things from me. First of all, Mario, just on the Biodroga's contribution to revenue, which you disclosed in the MD&A, was around CAD5.2 million.

On an annualized basis, based on Biodroga's trailing 12-month data, that was quite a bit higher than what we were looking for. So I was just wondering if there were some unique seasonal elements, or some one-time orders or items in there that we should be aware of that might not run through the balance of 2017, 2018. So that's the first thing.

Then the second question for either you or Jim. Encouraged that you are starting to see some traction in the Chinese market and I would assume that is a fairly mature nutritional supplement market, perhaps less so in the omega-3 side.

So Jim, just wondered if you might be able to add a little bit of added commentary on where you see some of the competitive factors relating positively to krill oil adoption in that market. And sort of what sort of headwinds you might encounter there as you are in the US and Australia and how you might be able to overcome those in the medium term. Thanks.

Thank you, Doug, so I will start with your first question. CAD5.2 million on an annual basis, it's not our goal from Biodroga for next year, for sure. January and February were the two best months ever for Biodroga.

So when you look at the last 12 months? sales, at the end of February, they did CAD24 million and, as we mentioned, when we acquired the company we are very confident to deliver double-digit growth for that company. So we don't want to give some guidance precisely on Biodroga since we want to talk about our nutraceutical overall business over time. But I think your starting point should be CAD24 million last 12 months and for the growth rate on that number for the next 12 months.

That is great. Thank you.

It is a million-dollar question relative to China. If you look at some of the marketers in this space, how they are so excited by the potential there as the middle class, of course, grows. Many, as I said earlier, will say that the current market is greater or at the same as the developed North American market, and it is just beginning. There are just so many people embracing health and wellness as they move into the middle classes, so we're excited by that.

When you look at a lot of people in the space, whether that be the recent deal that Nature's Bounty announced or some of the moves that companies in Australia have been a party to, is clearly a market with potential. We are very, very pleased that relative to China to have this approval. Now, what is important is there's only two countries in the world that have the approval to export krill oil into China at this point in time. Canada being one; New Zealand being the other. So we are excited by that. It is an underdeveloped market space. We like that a lot.

We have been working in two channels in that regard. One is, I'll call it, with the as-is oil and some partners there to develop new distribution and food business, as well as going through with our Ocean03 finished consumer product through some of the Internet channels at this point in time.

So they are young relationships, they're very, very intense relationships at this point in time, and clearly a focus for us going forward. I like underdeveloped markets as compared to very mature markets at this point in time.

That?s great. Maybe just one additional question. Jim, you did mention that you have expectations to grow through acquisition. I just wondered if you might, without giving specifics, of course, just what sort of strategic elements you are envisioning for future bolt-on acquisitions.

Maybe just comment on whether you plan on augmenting your existing infrastructure in developed markets or whether developing markets vis-a-vis your initial traction in China might be something you are looking at. Product portfolio diversification or perhaps building on your core omega-3 capabilities.

Any sort of high-level strategic thinking there would be helpful. And I will leave it there.

You sound like one of my Board members, Doug. I think we have to be also realists, that the first year of this Management team and Board -- remember that we have a new Board here at the business -- was really getting the business on its feet and moving and sailing forward.

And I think we made a tremendous amount of progress there; we have a lot more to do. But, clearly, we are motivated to do more bolt-on acquisitions as a business. I don't think we've got a caliber of Board or Management team to steer the business of the size that we have right now. Our ambition is to do much, much more.

We do not have the financial horsepower of a major multi-national to do that. We're going to have to earn our way; we'll have to earn our trust with our financial supporters. And earn the trust even of acquiring companies, that we are good place for them to rest their business.

I will tell you, I think the Biodroga principals, who are now shareholders in Neptune, are pleased thus far with us being a good home for their business. So specific to that, our interests are mostly to lever the existing relationships and confidences we have. Now, that could be products that lever our existing production technologies, infrastructure, or distribution channels.

It also could be moving up further the value chain with more consumer products. Like I said, I like being very close to the consumer. I think the closer to the consumer, the more influence and power you ultimately have, the more stickiness you have as a business. Moving up the value chain as much as we can, Doug. Hope that answers your question.

It does, indeed. Thanks, Jim.

(Operator Instructions)

There are no further questions at this time. I will now turn the call back over to the presenters.

Thank you very much, everyone, and see you in July for our next quarterly call. Thank you.

Looking forward. Thank you.

Ladies and gentlemen, this concludes today's conference call. You may now disconnect.