Neptune Wellness Solutions Inc (NEPT) 2017 Q1 法說會逐字稿

(spoken in foreign language) Good morning, ladies and gentlemen. This is the operator.

Welcome to the Neptune Technologies & Bioressources first-quarter 2016, 2017 earnings conference call. At this time all participants are in a listen only-mode to prevent any background noise. After the speaker's remarks there will be a question-and-answer session.

(Operator Instructions)

I would now like to turn the call over to Mr. Paradis, Vice President and Chief Financial Officer. Mr. Paradis, you may begin your conference.

Thank you. Good morning, everyone, and thank you for joining us. As mentioned in the proposal that today's call is to review our results for the first quarter ended May 31, 2016.

Joining me today is Mr. Jim Hamilton, Neptune's President and CEO. Jim will review Neptune's operational highlights followed by a discussion on quarterly financial results by myself.

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 Securities 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 filing with the Canadian Securities Commission and with the Securities and Exchange Commission.

I will now turn the call over to Jim.

Thank you very much and good morning, everyone. Just some brief comments my side about the business and then we will pass it back to Mario for some detailed look at the numbers.

There is a PowerPoint deck for those who wish to follow along posted on the website and I'm on page 4. Just a few quick bullets on first quarter to kick things off.

The quarterly revenues were CAD11.3 million, significant growth over last year and really with solid contributions from our solutions business which is Biodroga ingredients, krill oil and actually -- and we are very, very pleased that we achieved some of our first sales in China. And this consequented in our second positive quarterly adjusted EBITDA of CAD1.1 million, which compared to not such a pretty number a year prior.

And the positive variance reflects continued improvements really across the board in terms of operating efficiencies and some higher sales volumes both in solutions and ingredients. And we have a new product that we are now rolling out called MaxSimil, and I will speak to that in a moment.

And we are also rolling out new corporate branding, a new vision, mission to reflect a Company that we are changing quite significantly, moving from a singular product Company to a nutrition products Company focused on wellness solutions. And more on that in a minute.

Just a few other bullets on page 5 on krill oil business and NKO, and we are happy with what we saw in the first quarter. We've got some very interesting momentum happening also in the current quarter, which we are pleased by.

And we also like what we are seeing in terms of continued operations in the manufacturing and cost base. Mario will speak to some of those elements such as Project Turbo in a minute.

And as I mentioned, with a lot of work and help from both the Canadian and Quebec government offices in China we were able to get Canada approved as one of only two countries that can export krill oil into China. And we've recently completed our first sales.

If we could just jump over to page 6, I wanted to spend a little bit of time just on our new branding, a new suit if you will, a fresh face, to reflect our evolution from a business that was a singular product Company to today which is much more. And an effort to better reflect who we are to particularly our customers, investors and employees, and our vision, we provide great nutrition solutions that deliver optimal health and wellness and do so by levering our scientific and innovation experience to create and provide our customers globally with the best nutrition products and wellness solutions.

And we think this is important to reflect the fact that we are a much more diversified business and we aspire to be even more in the future. And we are beginning to communicate this in all our platforms whether that be websites, trade shows, business cards, PowerPoint presentations, all the platforms as we continue our journey into a much more diversified business.

And when you look at page 7 this is to reflect that more comprehensive view of what we are now as a nutrition products Company. We are in the B2B space, we are in the B2C space, and we are in the Rx space, more particularly in B2B with solutions through our acquisition of Biodroga.

Specialty ingredients, of course with our original product, NKO, Neptune Krill Oil, but also NKA with feed ingredients. In fact, we expect to commercialize some of that very very shortly.

And new products, consistent with our strategy of expanding in specialty ingredients and related spaces, MaxSimil. And I will speak to that in a moment.

Consumer brands with OCEANO3. And, Acasti, of course, with our 47% share in the Rx space where we are focused on commercializing CaPre in the cardiovascular area. We are very very pleased with the new Board and particularly with the new CEO at Acasti, and we are feeling better about Acasti than ever before.

So a Company that is in multiple areas all committed to wellness solutions.

Moving over to page 8, just a couple quick comments about this new specialty ingredient that we are rolling out. This is a product called MaxSimil which is a novel and patented product that enhances the absorption of lipid-based nutraceuticals, and it mimics the human digestive process. It's pre-digested, if you will, and it's around the Omega-3 fish space.

We've done some early studies and found results that suggest that the EPA and DHA from MaxSimil were absorbed much much faster than regular fish oils through a PK study. More is needed, of course, but we see this as a very interesting product and I think as the data increases we could see a much more broader application of it.

We have the exclusive rights to this for North America, and we are proud to say that our first sales were transacted in the current month. And this is a product, by the way, that came through the acquisition of Biodroga, and one of the things that we spoke of and have spoken about in terms of Biodroga is it's kind of an early radar system, if you will. They have such great exposure to so many customers and suppliers in the business it gets us an early look at innovation, and this is one such product that we are going to work on commercializing, consistent with our strategy, as I mentioned, to expand into related spaces.

Just moving to page 9, I wanted to spend a little bit more time on Biodroga. We are seeing some great performance there. And what's important and what we shared prior is, it really is a business that is allowing us to play in a much, much bigger space. The ocean is very, very broad and deep in terms of the business potential here.

And a few words on the process here where we actually, if you look at number one on page 9, you'll see that we actually sit down with customers and have a conversation. The conversation is not about our products as much as their business and the consumers with whom they want to engage and how best to engage them. And we lever our knowledge of those markets, regulatory, claim science, etc.

And then we move to what we call number two, which would be we have an extensive network of raw material suppliers where we get not only early look at some innovative forms but also a very good access to major forms. And thereby we bring into what we call step three where we arrange really the best manufacturing and the best delivery forms possible and then provide the QC, the quality control.

But it results in number five. And number five is an example of a customer that we do business with called Sealicious, and they are actually delicious, and these are blends of liquid omega-3s that we bottle, we put the label on, we formulate with custom formulas and flavors and deliver to the customer and invoice something that is consumer ready for customers.

So it is a business that levers technology. It is a business that levers networks. It's a business that levers knowledge, and does so in an environment that's never needed it more than today as consumers fragment and the speed of innovation is just moving exponentially.

So Biodroga allows us to play in a bigger space, bigger ocean. It allows us to lever what is happening at the macro-consumer level and we are very, very pleased with the results. And I will come back to this in a moment in my closing comments about how we plan to scale this business further in the future.

With that I'd like to just pass it on to Mario on page 10 because Mario would like to spend a little bit more time on the numbers. So, Mario, please.

Thank you, Jim, and good morning again, everyone. So 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. Consolidated and Q1 fiscal 2006 information can be found in our press release and in our -- Neptune's consolidated financial statements and related MD&A available on SEDAR, EDGAR and under the investor section on our website.

So turning to our nutraceutical results, I'm very pleased to report that our revenue for the first quarter were CAD11.3 million, up by CAD8.6 million over last year and up CAD1.2 million or 12% over the fourth quarter last year. Our revenue includes sales from our turnkey solutions and contribution from the recent acquisition of Biodroga for an amount of CAD6.6 million. We are also pleased with our ingredient krill business, which grew by CAD1.8 million in comparison with last year.

Keep in mind that last year the revenue base was relatively modest considering some operational issues encountered at the Sherbrooke facility. This also had an impact on gross margin.

Our quarterly gross margin as a percentage of sales also continued to improve. The gross margin on sales came in at 31%, up 4 points over the 27% recorded in the fourth quarter last year and in comparison with a negative 43% in the first quarter last year. The improvement is being mainly driven by operating performance and efficiencies as well as by Project Turbo.

In terms of dollars in comparison with the fourth quarter last year, the gross margin increased by CAD0.9 million to reach CAD3.4 million. We expect the gross margin to stabilize within the range of 30% to 35% in upcoming quarters.

As most of you are aware, Project Turbo should generate around CAD5 million in savings once fully implemented by February 2016 fiscal year end. To date we have identified and launched initiative that will allow us to realize our targeted savings, and as of the end of the first quarter about 70% of total expected savings have been reached.

SG&A totaled CAD3.2 million during this quarter. This is slightly higher than last year with CAD3 million but lower than the fourth quarter of last year by CAD0.3 million. The Biodroga acquisition increases G&A, but this increase was offset by a reduction in marketing and administrative expenses in the krill business and in overall corporate expenses.

In percentage of total sales SG&A expenses represented 29% in comparison with 37% in the fourth quarter last year. This is aligned with our expectations.

Moving along, adjusted EBITDA also continued to improve coming to a positive territory for a second quarter in a row with CAD1.1 million for the current quarter compared to a loss of CAD3.2 million last year and an EBITDA of CAD0.6 million in Q4 last year. This improvement versus last year was mainly related to additional sales from our turnkey solution business, the continued improvement on gross margins from better operational efficiencies and also a slight reduction in SG&A versus for the fourth quarter last year.

Our quarterly net loss also significantly decreased, coming to a loss of CAD1.2 million versus a net loss of CAD4.5 million in the prior year. In the fourth quarter last year we reported a net income of CAD1 million.

This improvement of CAD3.3 million over last year was primarily due to the same factor outlined for adjusted EBITDA. When compared with the net income of the fourth quarter last year I'd like to remind you that an amount of CAD1.9 million of deferred tax recovery was recorded and it's related to some companies' tax losses.

Without the above-mentioned tax adjustment last year in the fourth quarter the net loss would have been CAD0.9 million. The increase in financial expenses explain the increase in the net loss from the fourth quarter to the current quarter.

Turning to our liquidity, during the quarter we entered into a term loan agreement with PNC Bank for an amount of CAD3.8 million to support our growth and for working capital needs. On a consolidated basis the corporation had consolidated cash and short-term investments of CAD14.6 million as at the end of the quarter. Of this amount CAD5 million was for the nutraceutical segment and CAD9.6 million was related to Acasti.

Neptune's quarterly cash balance on a standalone basis increased by CAD1.5 million from the CAD3.5 million at the end of the fourth quarter largely due to the term loan received, partially offset by investment in working capital items, mainly in the payables. And in addition CAD2.5 million was used for the repayment of the depth.

Finally, as for the fiscal year ended February 2017, for the nutraceutical segment we now expect revenue to be greater than CAD43 million, up from our previous number of CAD41 million with a double-digit adjusted EBITDA margin. I will now turn the call over to Jim for additional and closing remarks.

Thank you, Mario. Just a few thoughts on looking ahead to build on your comments. We are going to continue to work on driving our growth by, as I said earlier, providing great nutrition solutions to deliver optimal health and well-being.

And we have those four key initiatives that our Phase 1 strategy has called for about strengthening the krill oil franchise, expanding further up the value chain, levering our IP and expanding our specialty portfolio in related spaces. And specifically around that, in our solutions business we are working hard now to look at how we can scale that up and invest in further capabilities to expand that business. This is a business that has a tremendous space to grow.

It is a very, very big industry. And we want to start to expanding our activities there.

Our specialty ingredients portfolio, we have a lot of really interesting work going on in terms of in-house innovation and how we can lever our site capabilities. And as I've mentioned in prior conversations and calls that it doesn't have to be a single-purpose site, it can be a multipurpose site. And the more we have in that site the better the genetics, and we are looking at some interesting things that we can put in the site in addition.

And I'm also always interested in licensing agreements. MaxSimil is an interesting innovation product that actually comes out of one of the local universities here. And our initial sales are in the practitioner channel, and we are very very interested to add products that -- we don't have to invent them ourselves but add products that can take advantage of either our manufacturing and/or sales and marketing capabilities.

And then consumer brands, we have started with our first consumer brand, OCEANO3. We are seeing some -- it's been an interesting path for us. We are seeing some interesting attention in some markets abroad, particularly in China for the product.

But ultimately and consistent with our expanding further up the value chain, it's an area that we are very interested to acquire and expand distribution further. And we are starting to look at that.

Of course, we will never forget about our core products and NKO in particular. We are happy with some of the growth we are seeing. We are happy with the potential that we are seeing in places like China, and we are very happy with what we are seeing that we can achieve just through great external orientation and customer focus.

We are not going to give up, Mario, on our efficiencies, and we call it Project Turbo but we continue to look at driving effectiveness within the organization. And as Mario mentioned earlier, we feel confident that we can revise our guidance for the year, that we'll move it up from CAD41 million to CAD43 million with, of course, a double-digit EBITDA margin on that business as well for this year.

So with that, that would conclude our formal comments. And we would be very open to any questions that people may have.

(spoken in foreign language) (Operator Instructions) Robin Cornwell, Catalyst Research.

Good morning. Congratulations on your excellent revenue.

I have a couple of questions. I guess first, Mario, I just wanted to clarify the SG&A, the run rate you are talking about at roughly 29%, how far forward are you going with that given that Project Turbo hasn't really totally kicked in yet?

Project Turbo, I would say that is mainly related to gross margin although we have some savings that we've done in the SG&A. On a going forward, again we expect that our sales will continue to grow, and in terms of dollars the number that you've seen in terms of this quarter is very close to what we are anticipating on the quarterly basis. So in terms of percentage we are expecting to have a slight decrease over time.

Okay. And then when you talk about the margin improvement, between 30% and 35%, what's your thoughts as to improving it beyond the 35%? And what kind of timing would that be?

With the actual level of business that's what my guidance is referring to. But if we can grow the top line I would say that for the krill business we should see an increase of the gross margin.

And as for Biodroga, as it's more a turnkey solution, again it's not really related to critical mass. And we don't want to disclose strategically this gross margin, but for the turnkey solution it should be more stable. But the nutraceutical and consolidated both business we should see an increase when the krill franchise will improve in terms of sales.

Okay. Thank you. The Biodroga sales, can you give us an idea of what the percentage year-over-year increase was?

Yes. We have a CAGR growth rate of 17% for the last three years.

Okay.

And as we already indicated, we are very confident to continue on a double-digit growth for that business.

Okay. The inventory, finished goods was relatively flat over the quarter. Can you give us an idea what level of production the NKO is at in the plant at this point?

Again, we don't want to disclose the precise number, but what we can say is, we have demonstrated over the past year that this plant can manufacture on a path of 160 tonne. We realize that. Now we adjust because we need to adjust the manufacturing pace with the sales demand, and as such, when the sales demand would continue to increase we will increase the real manufacturing base.

Okay. For Jim I wondered if NKO specifically, the market seems to have tightened up over the last couple of years, in fact probably decreased slightly but seems to be easing up on that now and flattening up. (technical difficulty) Do you have any comments what you currently see for NKO?

Yes, Robin, it would be a pleasure. I think one of the challenges that all of us share in this industry is we tend to look at the business with -- myopically, if you will.

We tend to think US/Canada and we tend to think food, drug, mass. But it is a global business unit and there is multiple pathways to the consumer. And those pathways are expanding exponentially.

Now, as I mentioned earlier with Biodroga, one of the great things I like about that business is we are engaging with a lot of these novel channels and novel customers within those channels. So if one looks at US food, drug mass in the omega-3 space in general, one could say that it is flat. Recent data would suggest it's maybe moving in single digits right now.

I think krill and NKO excels is when you are in a channel where there's a conversation with a consumer. So if you are in the practitioner channel, health food channel, direct-marketing channel, that's where we are seeing growth. I think if you look at the Wal-Mart shelf we are not seeing the same level of growth.

We like being in the channels where there's conversations, Robin. We also like geographies and particularly Asia and particularly what we are seeing in China right now.

Okay. And my last question is on the IP process. I know you said there was basically no further update but I will still ask the question. Is there any further update on the Aker, etc., IP situation?

Robin, no, there's not. I will tell you that we've been working and continue to work very, very hard on it. But we have nothing material to report at this point in time.

Okay. Thank you. That's all for me.

(Operator Instructions) Doug Loe, Echelon Wealth Partners.

Just one thematic question for me. Jim, you actually touched on it in your summary comments. Just with regard to ways in which you might be interested in leveraging your manufacturing processing capacity in Sherbrooke, perhaps not even limited to krill processing.

Just wondered if you might have just some high-level thinking on how you might be seeking to leverage the manufacturing infrastructure that you already have in place, mindful that you are looking to other places to grow the business? And whether or not there might be any additional equipment CapEx that might need to be put in place in order to leverage that facility into other revenue-generating opportunities, using krill perhaps, other -- starting with other marine materials. And I will leave it there, thanks.

Well, Doug, that's an interesting question. (technical difficulty) At a prior employer there used to be a word that was used to describe manufacturing and people love to quote, unquote sweat the assets. I think for us as a Company and reflected in our new branding is that we shouldn't look upon ourselves as only one product, and our manufacturing plant is only one-product plant.

We should be looking at that plant as one that we want to sweat, one that we want to drive hard and do so in a diversified way. We have actually a really top-notch cross-functional team right now looking at that, and it could include a number of different compounds. Ideally in related spaces, as I said before, something that we would sell, but we are also interested in contract manufacturing, as an example.

And so we are looking at it all. The scalability of this plant is very, very interesting, Doug. It wouldn't take much for us to exponentially expand that facility into a much more diverse and a much more larger facility, and in doing so of course it would help -- to Robin's question earlier around margins -- as well. So we are motivated to bring in new products and we are motivated to make that a diversified facility.

Yes, maybe just to build on that a little bit more, Jim. I'm not aware of many other nutritional supplements that rely on acetone extraction from marine organisms as a core process.

So are there any specific -- maybe without getting specific -- any general product categories where you might be able to leverage the existing throughput? Or are we talking about leveraging the space in order to put other processes in place that might require additional capital to expand the infrastructure there?

It's a really interesting question because I think part of the challenge that we have and our employees and our investors even is to look upon this business as not marine-only. Extraction industry is a huge industry, and as such there's many, many different products that we can potentially put through that needs the capabilities of extraction technology.

So we are looking at it. When we go off-line I can give you some more specific examples, Doug, that we are pursuing right now. But it doesn't have to be in the marine/oil space.

That's great. Thanks, Jim.

(spoken in foreign language) There are no further questions at this time. I turn the call back over to the presenters.

So, thank you very much everyone for joining us on this call. And we will talk in three months for the second-quarter results. Thank you very much.

Thank you, everybody.

(spoken in foreign language) This concludes today's conference call. You may now disconnect.