Neptune Wellness Solutions Inc.
Q2 2020 Earnings Call Transcript

Published: 16 Nov 2020

[Operator:]

Ladies and gentlemen, thank you for standing by and welcome to Neptune Wellness Solutions Inc. Q2 Earnings Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. I would now like to hand the conference over to your speaker today, John Mills, Investor Relations. Thank you. Please go ahead, sir.

[John Mills:]

Good afternoon, everyone, and thank you for joining us. This afternoon, we issued a press release announcing our results for the second quarter of fiscal year 2021. We also issued our management's discussion & analysis and consolidated financial statements; these documents have been filed with the Canadian Securities and Regulatory Authorities of the U.S. Securities Commission, and are available on the company's corporate website.

[Toni Rinow:]

Thank you, John. And good afternoon, everyone. Before I comment on behalf of Neptune's Board of Directors, our executive team, and all of our staff, we hope and trust that you and your loved ones remain healthy during this unprecedented time, especially as cases of COVID-19 continue to surge. Neptune is pleased with our second quarter results and strong expansion of our product lines and strategic goals of our distribution channels during what has been a restructuring period over the past three months. We continue on the path to transform our company in order to be best positioned to meet growing consumer demand across the three categories we serve; health and wellness industry, the consumer packaged goods industry, and the projected $130 billion global cannabis market. To that end, it's important to note that 12 months ago the distribution of our consumer product goods represented zero revenue for Neptune; today it is responsible for 70% of our gross revenue. Our second quarter total revenue alone represents 97% October revenues for the full fiscal year 2020; this is proof that our strategic initiatives are working. As you can see from our top line growth and channel expansion during the first six months of fiscal year 2021, Neptune revenues have never been better in our 20-year history as a company. In a short period of time, our newly assembled world-class executive team has executed on our shift from a B2B extraction company to a fully integrated health and wellness platform centered around a dual go-to-market approach that focuses on delivering B2B and B2C products to millions of consumers around the globe resulting in diverse and multiple revenue streams. This approach at Neptune apart from it's competition and is yielding consistent long-term revenue opportunities.

[Michael Cammarata:]

Thank you, Toni, and good afternoon everyone. As we are transforming into a fully integrated health and wellness platform, we are creating and expanding brands that will change the world through state-of-the-art plant-based ingredients, and will have a positive impact on our planet, people and pets. Every day, we can vote for the world we want with the products we purchase. Consumers' preferences go beyond Martha Stewart for stock at Jane Goodall product lines; as consumers demand that brands deliver a broader impact on social and environmental issues. We will always put the consumer first in everything we do. It's not too long ago that people looked at us as only an extraction company. We are leading the transformation in record time to a company with brands in the consumer packaged goods space. This allows us to have unmet product distribution opportunities. In Canada, we will soon have access to more than 80% of the cannabis market. In the United States, we are building, extending and collaborating on brands for some of the largest retailers and global consumer packaged goods companies. In short, Neptune has never been better. We are building a sizable head start on the competition, and are one of the largest third-party cannabinoids product manufacturers. Our extraction capabilities are diverse and we have multiple revenue streams from both our B2B and B2C businesses. We have moved closer to the consumer with our Forest Remedies, Ocean Remedies and Neptune brands, as well as our newly launched Mood Ring cannabis brand, with more brands coming soon. We continue to improve our efficiencies as we move towards the new vision and optimize the bottom line. We are focused and agile and able to respond in real time, which is unique in the industry. When I joined Neptune in July 2019, we were tasked with making the transition from a B2B to a diverse and fully-integrated health and wellness company focused on natural plant based and sustainable brands. To do that we've had to identify opportunities that can be improved by cannabinoids and plant-based ingredients, such as adult recreation, medical but also consumer packaged goods uses. While we still have work to do to accomplish our goals, our B2C business is growing and we remain strong in our B2B initiatives. The dual go-to-market strategy sets Neptune apart from the competition and is yielding results, long-term revenue opportunities for the Company. The time for cannabis is now and the many uses for cannabinoids have the potential to disrupt industries and supply chains for the better. Legalization of cannabis is gaining momentum in the United States, with additional states including Arizona, Montana, New Jersey and South Dakota changing the restrictions in the recent election. We believe the legalization of cannabis has never been closer. Neptune to win in the recreational market, the medical market, and the consumer packaged goods usage for cannabis and cannabinoids extracted from hemp and/or cannabis. As we look to the next phase of growth, Neptune is focused on innovations, the possibilities to call multiple categories and the legal markets within the United States. It's antifungal, antibacterial and moisturizing properties can be used in products from toothpaste that can fight gingivitis, to plant-based deodorants that can compete with clinical-strength top products, to hand sanitizers that are better for the skin. In the coming months, we believe cannabis will be an important part of the strengthening US economic recovery and raising revenues for both state and federal governments. In Canada, Neptune will bring its Mood Ring cannabis brand to more than 534 retail stores, with the opportunity to scale to an additional 582 retailers. This provides Mood Ring with access to 81% of the Canadian market. We will soon be launching a second brand exclusively for Quebec and recently, Neptune has launched its hand sanitizers on Amazon.com in one litre and two ounce 24 packs. Additional sizes and products will be added to the Neptune storefronts in the coming weeks. Some of these products will also be available at Costco, online and in store. You can also expect to see storefronts on Amazon for our other brands coming soon. We remain focused on new product opportunities for hygiene, including sanitation wipes. We have submitted additional products to the FDA and EPA for registration and look forward to making those announcements soon. We remain committed to enhancing lifestyles of people around the world through eco-friendly and ground-breaking products. Together, we can create a more sustainable world that with every purchase makes a difference. And now, I'm going to turn it over to the operator for questions.

[Operator:]

Thank you. Your first question comes from the line of Aaron Grey from Alliance Global Partners. Your line is open.

[Aaron Grey:]

Hi, good evening, and thanks for the questions. So first question for me, I just want to clarify something really quickly, I understand how you're not giving guidance going forward. But just looking back on the guidance you provided for the quarter at ; just given the restatements that you had last quarter. Was that based off, like on apples-to-apples basis, would have been higher if you were still doing the gross versus net? Just want to ask that clarifying question first, and how that guidance was given back then, versus how you reported now?

[Michael Cammarata:]

I think that would go to -- it's Michael Cammarata -- it would go to technical accounting measures related to Canada. So Toni would be more of the expert on to that, but what we're looking for is the amount of products that -- and as you can see with over $100 million in purchase orders, we are starting to pile a nice backlog and we are working the teams around the clock to continue to fill orders, but some of those orders would clarify the profit from, and some of those orders we would classify the revenue and the profit from. That's obviously related to technical measure related to Canada.

[Aaron Grey:]

All right, thanks. And then Mike, as you continue to focus on distribution, specifically within the US, can you talk about the strategy of right now, how you're looking to expand that distribution through the partnerships that you have with the large CPG companies that you guys have announced? And how that really is going to be, as you look at the top-line opportunities and also the margin opportunities, how you're looking to set up to get as much distribution as possible now so you do have scale in shelf space when there is time for you to implement either the plant-based or CBD-type GPG products of your own as you move forward?

[Michael Cammarata:]

So we are actively focusing on our mission and we took a unique approach to try and make sure that we optimize our bottom line, as we're focusing heavily on profitability. So this distribution that we've set up was evident with the hand sanitizer launch, we set up a distribution pipeline that allowed us within weeks to the scale of the brand. And I would also point out that our hand sanitizers, we started off with an international supply chain, and then at the request of US Retail, we actually switched completely to be made in the US and we did that within a matter of weeks, and maybe a month. So our supply chain is robust, fast and contains on dime , and that's something that's very unique and also a lot of our consumer packaged goods companies that we partnered with have also looked at us and optimized, thus fully enhancing their supply chains. So we are in the process right now and enabling different retailers in the drug market, like drug stores, as well as club stores like Costco, we went up to about, in that quarter, 50% of the Costco stores and then had to regroup and then we'll be expanding hopefully in December the rest. We'll also be rolling out one of our CPG partners' products starting December, they move from August to December. So as we are seeing international supply chain, some of our CPG partners are more reliant on global supply chain and whether the --with the new launches of Xbox and HP and a lot of other products happen simultaneously in this holiday season, we've seen an increased shortage of air freight availability and some cargo freight availability. But we are definitely domestically building the supply chain and utilizing our manufacturing capabilities to make sure that we can bring product directly to the consumer as fast as possible. At the same time we're helping our international consumer packaged goods companies enhance their supply chain, again, to bring product quickly to the consumer.

[Aaron Grey:]

I appreciate that color. And just one more quick one from me and I'll jump back in the queue. So congrats on $100 million and first order; I certainly understand that it is not guarantee and there's some uncertainty on timing, but just kind of any insight you can provide in terms of -- like, it will take those six clients, so in terms of the frequency and kind of how big those purchase orders might be, just as we think about how much potential lumpiness we might see in the quarters, if you do get it within one quarter from customers? And then the next, as we look to model up the next couple of quarters? Thanks.

[Michael Cammarata:]

Yes. So, we are -- the size of the orders, when we started to submit a couple of hundred thousand dollars of purchase orders and single order; we're now seeing orders that are in excess of $1 million to $10 million to $25 million in a single order. So there is potential for lumpiness and that's why we want to make sure that we didn't guide specifically anything quarter-to-quarter, because at the end of the quarter, depending on customs and shipping that could affect the -- like we had orders from Q2 that went in the Q3 and so, it's very hard, as we're in this hyper growth mode, to look at it, but it's actually a good spot to be and I think we've successfully gone. I remember when I first went, people would compare to me extractors on a daily basis but I think we've definitely done really good in that peer group and exceeded. And I think now we're starting to gain momentum, especially with our cannabis brand and then, now with the opportunities in the States as we mentioned earlier. We'll be opening up an office in the US to heavily focus on making sure Neptune's in the first position and ready to take advantage of opportunities as we're planning for.

[Aaron Grey:]

Okay, great. Thanks. I'll jump back in the queue.

[Operator:]

Your next question comes from the line of Gerald Pascarelli from Cowen. Your line is open.

[Gerald Pascarelli:]

Hi, good evening. Thank you very much for taking the questions. So I'm going to stick on the top line, as well. I fully understand that given the uncertainty and timing disparities that you're not going to guide anymore, but regarding the large distribution partnership with a CPG company, you did offer the $65 million to $137 million. And so, I guess I think what color you can provide on how you came up with that range and maybe what's embedded in the low end of the expectation versus the high end? That would be helpful.

[Michael Cammarata:]

Yes. So that range would have worked on obviously, by the CPG partner, and with our teams. We did see that they had a product change that they made, that originally was going to launch in August, and then ended up launching over -- as we mentioned, December. We feel very confident in that range and see opportunities to actually expand. But again, as far as we're not serving one product orders and $100,000 purchase orders, these are very large orders through very large customers, as well. One of the unique things that we've even been able to cure is distribution across even professional opportunities, like theme parks and cruise ships, and obviously, the frequency of those when they start kicking in and the cruise ship starts going back, every seven days product is on those ships, and theme parks almost daily. So as we're scaling up our customer distribution capabilities, not only for physical retail in the US, but also for the professional retail, the size of the orders is much larger than a steadied smaller group of purchase orders. So, we feel very confident in the partnership with our CPG customer. They do have more overseas manufacturing utilization. The Neptune has been focusing heavily on building out in North America and specifically, in the U.S. and Canada, so we would hopefully see in the next couple of quarters a steady flow. But again, we are in a hyper-growth mode and we have to make sure that auditors and everybody sign off on the timing of the shipments when we receive the product after they clear customs. We are seeing that used to take a day with customs, we've seen up to 14 days for some large shipments.

[Toni Rinow:]

Great response, Michael. I would also add that there is opportunity for growth well beyond CPG leading company. So that's one of the components, and there is opportunity for growth in our other segments. So growth will accelerate as we now go successfully into the cannabis B2C sector and also expanding further on some other products from the innovation team, so that CPG will be one of the goals segment, and it will contribute to the growth. And there is opportunity beyond that.

[Gerald Pascarelli:]

Got it. That's super helpful. Thank you. My next question, Toni, this is probably for you. It's just on SG&A, obviously, when you provided your business of your operational update, you alluded to cuts. I guess, as we look forward, if you could just maybe give us a cadence of what we could expect in terms of the SG&A line, maybe over the back half of this year that into next year? I think that would be helpful for modelling purposes. Thank you.

[Toni Rinow:]

Okay. So SG&A has been increasing somewhat and as it relates to the talent addition on the innovation team, and that has been showing very good success as proven by the large POs of $100 million that we have been able to secure. So investment into our team has already being successful. However, I also would like to see now more revenue growth that we have internal KPIs, such as revenue per employee. And I would like to see that KPI going over time faster and that's the projection. So if there is growth in SG&A, I need to see proportionately more growth on the revenue side in order to meet the increase in KPI targets that we have.

[Gerald Pascarelli:]

Understood. Thank you very much. I'll pass it on.

[Operator:]

Your next question comes from the line of John Chu from Desjardins Capital Markets. Your line is open.

[John Chu:]

Hi, good afternoon. So, just following up on that $100 million order that you announced. I can appreciate timeframe in terms of shipping, the uncertainty of customs and supply chain, but if all of that were not an issue under the circumstances, can you give us a sense of -- if everything is going smoothly on all of those fronts, what kind of timeframe could you see? And obviously, we know they can spill over several quarters beyond that, but can you give us a sense on ideally what that could look like?

[Toni Rinow:]

What last year would and what makes me -- I see the core is extremely happy, if I have put visibility on getting those orders in. But John, during these times, we just have seen so many variables of things that are affecting this, from raw materials worldwide, challenges from global supply chain, challenges to logistics, cargo, getting on slides, sitting in porch. So it's extremely difficult to get to a normalized scenario, especially knowing that we are in this probably for another, let's say, two or three quarter in the pandemic situation. So it's very hard to predict, but what I can say is, the fact is that we are now securing a purchase order in the aggregate of $100 million, and I would like to qualify that $100 million as conservative, that's really a very strong indicator for the interest into Neptune's innovation product and also its distribution and channel management capabilities.

[John Chu:]

And presumably, when you say that it's not guaranteed and the orders may not actually reach that number, is it a function of just how the products are performing presumably in terms of the demand and obviously, if it's not performing up to standards or the demand should start there, then the customers would effectively go below that number?

[Toni Rinow:]

We have seen a lot with fluidity to NPOs under these circumstances. People are desperately seeking products in the PPE space during the pandemic, so many of our customers that are speaking to -- personally they tell me whatever product we can get, Neptune can get into its inventory and distribute to them, they will take. So the bottleneck during these times, it's not at the consumer end, but it's at the manufacture end. So that provides just a lot of variables. But these $100 million purchase orders, again, are qualified as being conservative, which tells you that I feel pretty comfortable that we can bring them home and hopefully, I don't see any issues with them. But again, these are unprecedented times and we have team that, as the pandemic and as CoVID-19 surges, the economic instability is too increasing, and that would -- it leads me -- us to think about, I have a certain disclaimer on that.

[Michael Cammarata:]

One thing I would add to that too. We are seeing, not just in the PPE, but even with the launching of Mood Ring in Canada, we actually are very fortunate to have a lawn, there is a partner in the capsule; so we're seeing demand on our capsules and our high CBD-based products. So we're seeing demand across the board on different products and I think that, if anything we've had to limit and allocate the amount of products that we have on order and two different customers and retailers, because we are also working with the retailers directly just by prepping and helping them build out their CBD or hemp lines, as well as other product lines that we're working with them in the collaborative way in the United States. And then, like we talked about with Quebec, we're going to be launching an exclusive brand just for that territory. So we have a lot of great initiatives that are going on right now and we have a lot of demand for the products, because we've taken a unique approach, like I would like anybody to go on Amazon and buy our two ounce hand sanitizer because the formulation on that two ounce, which is our latest state-of-the-art, is it's pretty amazing when you look at the performance. And then, followed up by our Dr Jane Goodall hand sanitizers and product line and then our hemp and CBD product lines, we are definitely starting to see heavy demand for high quality products and Neptune has been very fortunate, not only to develop high-quality products and due to affordably, but also have a purpose with each purchase. And I think that's something that sets us apart and we'll also be talking later this year about our ESG and really bringing into market all the initiatives that we do as a company internally and externally, as well. So, I just wanted to add that in.

[John Chu:]

Okay. Can you help me reconcile though, there is a statement in the MD&A about you're seeing lower demand for sanitizer, so is there a risk that for some of the other PPE that presumably that $100 million is focused on that, at some point you're going to see more or less supply…

[Michael Cammarata:]

It's a variable when it comes to demand, like there's different use that have a lot higher demand and it goes up and down. So it's not -- these orders aren't -- we launched these products several months ago. So it's been an up racket, but we definitely do you see that in hand sanitizers there's a change in formulation, people want products and that's why if you go to Amazon and buy the product, you'll see the performance that we use is almost hospital-grade or exceeding it, as well as with the scent and the smells. That's something that we work really closely with IFF on. So we see up and, again, we scale with demand. It does take a couple of weeks to ramp up and a couple of weeks to slow it down, but there's other PPE products and stuff that we're working on with the CPG partners and our other retail partners for their private labels, as well.

[John Chu:]

Okay, thank you.

[Operator:]

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