Neptune Wellness Solutions Inc.
Q1 2019 Earnings Call Transcript

Published: 15 Aug 2018

[Operator:]

[Foreign Language] Good morning, ladies and gentlemen. This is the operator. Welcome to the Neptune Wellness Solutions' 2019 First Quarter Results Conference Call. [Operator Instructions] I will now turn the conference over to Mr. Mario Paradis, Vice President and Chief Financial Officer. Mr. Paradis, you may begin your conference.

[Mario Paradis:]

Thank you. Good morning, everyone, and thank you for joining us. As mentioned, the purpose of today’s call is to review our results for the first quarter results ended June 30, 2018. Joining me today is Jim Hamilton, our President and CEO. 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 represents 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 U.S. 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, and details on these risks 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.

[Jim Hamilton:]

Mario, thank you very much. And good morning, everybody, and welcome. Today is also our Annual General Meeting, which will occur at 10

[Mario Paradis:]

Thank you, Jim. Good morning, everyone, again. 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 the quarterly performance unless otherwise indicated. I also want to remind you that we stopped to consolidate Acasti Pharma after the third quarter of last year. However, the comparative results of our quarterly results of operation in the consolidated financial statement still include Acasti numbers for the three months period ending June 30, 2017. In addition, considering our recent entry in the cannabis industry, we will discuss our two reportable operating segments, being the nutraceutical and the cannabis segments. Corporate, general and administrative expenses, net finance costs and income taxes are not allocated to the segments and they are presented as unallocated costs. Consolidated results for the first quarter fiscal 2019 results can be found in our press release and in Neptune’s consolidated financial statements and related MD&A available on SEDAR, EDGAR and under the Investors section of Neptune’s website. If you look now at Page 7 of the deck, total revenue coming exclusively from the nutraceutical segment for the first quarter were $5.2 million, stable when compared with the same period last year, when we’re excluding the impact of the sale of our krill oil manufacturing business last year in August 2017 of an amount of $1.3 million. Our quarterly gross margin as a percentage of sales was lower by 10% compared with the same period last year at 25%. This decrease was mainly related to higher margins of the krill oil manufacturing business sold last year, as indicated earlier. In terms of dollar, we generated $1.2 million, which is $1 million decrease over last year, mainly related to the decrease in revenues. In terms of EBITDA contribution from the nutraceutical segment, the adjusted EBITDA for the quarter was $0.6 million, compared to an adjusted EBITDA of $1.6 million last year. This variation again is directly related to our exit from the krill oil manufacturing business and the corresponding gross margin reduction. On a standalone basis, nutraceutical adjusted EBITDA was stable. The R& D expenses amounting $1.6 million in the cannabis segment consisted of salary and fixed costs at our manufacturing plant, including the depreciation, in order to prepare the site and start the cannabis oil extraction business in compliance with Health Canada requirements. During this quarter, SG&A in the cannabis segment totaled $0.5 million and consisted mainly of our business development team and the related traveling and representation expenses. The non-IFRS operating loss of the cannabis segment, before taking into consideration the noncash stock-based comp and the depreciation and amortization, was $1.3 million in the first quarter. That represents our investment for the quarter in this cannabis business. Corporate, general and administrative expenses totaled $2.4 million during this quarter compared with $1.6 million in the same period last year. This increase of $0.8 million is mainly due to the increase in compensation, including $0.4 million of noncash stock-based compensation and also to corporate and legal fees related to business development activities. The non-IFRS consolidated operating loss for the quarter was $2.3 million, compared to an adjusted EBITDA of $0.6 million last year, excluding Acasti’s results. This variation is mainly related to our exit from the krill oil manufacturing business, the investment in the cannabis business development and increase of corporate G&A expenses. Turning now to our liquidity at the end of June 2018. Our cash position was $22.8 million, and total debt was $4.3 million. At the end of the quarter, capital expenditure required to complete Phase I and Phase II were estimated at approximately $7.5 million. But we continue to have a strong and healthy cash position to execute our growth strategy. Now I’ll turn the call over to Jim for an update on the cannabis business strategy.

[Jim Hamilton:]

Mario, thank you very much. If I could invite you just to jump to Page 10, for those who were following. And just to remind everybody about our vision, strategy and the opportunity that we see here. And our vision and strategy remains, which is to provide great products and solutions that deliver optimal health and wellness and to do so by levering our scientific and innovative expertise, which we have been doing in this business for decades, and from an opportunity standpoint, clearly, to focus on the categories characterized by a large size in growth. And for those who were with us a year ago, remember that the krill oil company divested krill for this very, very reason. That we, as a management and Board, felt that your investment was better served by us focusing our energies in the right categories for the best possible return. And one of those conclusions was to invest in a cannabis business, which is clearly a market characterized by size and growth potential. And in Canada alone, many estimates have it between $6 billion and $9 billion at retail. And clearly, when you look at this globally, and we believe this is a major global consumer products phenomena, the opportunity in time is much, much larger. And that compares very, very favorably to a product that – we love krill, but clearly, a much smaller category and not characterized by the growth and potential that we see in cannabis. So moving to Page 11. Our objective for this business is to take that plant on the left and convert it and add value, and is to be the world’s leader in extraction, purification and formulation of value-added differentiated products. And looking at Page 12. Our immediate focus, our near-term focus is commercialization. And it’s a 2-phased approach, near term and in the future. But first and foremost, our priority is commercialization of this business. There’s nothing like billing and shipping and being in the business to grow the business. And that will be focused upon extraction, purification and formulation of value-added differentiated forms. And we’re investing and have a tremendous amount of activity going on in terms of value-added delivery systems. As I mentioned, there are some for today and some for what we believe will be for tomorrow once we could be allowed. But as we look forward, we always see ourselves continuing on a B2B business and to collaborate and partner with great companies like Canopy. But we also have a mind towards the consumer and further migration of the value chain. And we like very much those kinds of activities and those kinds of products and businesses that are in the wellness and health space based on these compounds. And quite frankly, as I mentioned, as a global consumer product phenomena, we believe many of the global markets, in fact, will be primarily in the wellness space rather than recreation. And moving to 13. Just to say again that I sometimes get the question from friends and investors, why cannabis? Well, it really is a product of our work of a couple of years ago, looking for what we call adjacent spaces, meaning, what is it that we do with our competence in that we can apply to something that is very, very close to our core competencies? So we would never propose we get into electric cars or rocket ships. But extraction, formulation, purification of health and wellness products for our consumers is what we do. It’s what we’ve always done and what is going to characterize, increasingly, the cannabis business as we move forward. Differentiation is key. Page 14, just a couple of examples. I wanted to remind everybody of most recently a subsequent event, we filed and announced a couple of patents. This is a consequence of extensive laboratory trials that we’ve been doing with our process research team. And they’ve been very, very excited by some of the novel conditions that we can add value for some differentiated forms that we very much look forward to integrating into our site as it comes online. I’d like to remind everyone, too, that we have research trials underway, two at the local university of Sherbrooke. Two interesting elements here in levering our – again our expertise. One is we’ve collaborated with the largest krill oil company in the world to look at omega-3 phospholipid from krill as a potential value-added carrier for CBD and THC, theory being could it, as a carrier oil, provide a more efficacious delivery system. Similarly with MaxSimil, for those who know, a very large product from our nutrition products business that we have the IP on and exclusivity. And again, three times more absorbed than normal fish oils. Could this be an effective carrier for such active compounds to make a more effective product experience for our consumers? And with that data and with this research, we’ve also announced a collaborative research agreement earlier this year with Tetra Bio-Pharma. We’re very impressed by the team and the capabilities of this group. And looking at some collaborative research projects, largely around pain and inflammation in the health and pet – veterinary markets. Moving to Page 15. I wanted to share with you some data. And this is from a research firm called BDS. Recent data just from late June of this year, looking at the U.S. market, in particular, California, and what is suggested in this data is that more than half, in fact, 60% of the products consumed in California are now based on products from extracts. So taking that plant and extracting, purifying and putting it into delivery systems, that is capsules, beverages, topicals, et cetera. Many in this space that I’ve engaged with and talked to as well as, I would say, some of our informal consumer work, suggests that this is probably a minimum. In fact, we expect as new consumers in this space arrive, they will be increasingly looking for these compounds delivered in these regulated, quality-controlled consistent dose experienced products. And I think that 60% will be conservative. In fact, some of the analysts in this space that I’ve spoken to believe it may go as high as 80%. But we like being in the value-added end of this value chain, which will be based on purified extracts and delivered into novel formulations and delivery systems. I’m moving to Page 16. In the context of the market that will be increasingly looking for these value-added extracts and formulations, we thought it would be helpful if we shared with investors what our initial capacity and our potential capacity of our facility here in Quebec would look like. Our Phase I capacity, which is effectively now complete. And remember, the large part of this capacity was for investment and site security and for speed of commercialization with an initial CO2 extraction capability, now complete, and the equivalent of about 30,000 metric tons of process capability. Our Phase II, which we announced last quarter, and we have started the process, scheduled to be completed in the first calendar quarter of 2019, will bring online purification, isolation, also, solvent processes. And the combined capacity will bring us up to about 200 tons of processing capacity. And I think what is important for those who have seen our site and been with us on tour, et cetera, is to know that we have a tremendous capability to expand further and quickly in this site. And we can do so. We’ve done the initial engineering and believe that we could look up to 6,000 tons of processing capability in the site. And we believe we could do so if needed stepwise. But if we were to go the full amount, this would be an investment in single-digit millions at most, at this point in time. And I think what is important is, when you look at the 200 metric tons of capacity – of processing capacity in the Canadian context, that is a significant capacity, which, depending on your assumption for how much of this market will end up being extracts, would give us the capability to process probably half of the market demands. But clearly, we don’t believe Canada alone will be this business. We believe it is a global business. We believe markets, eventually including the United States, will go federally legal. And one will need significant new horsepower to fulfill those demands, and likely very quickly, depending on how the politics develops. So we’re very, very pleased with this initial capacity that is coming online. And we’re very excited by the expandability of that capacity as we move forward. Just moving to Page 17. Just a couple of pictures. Just wanted to – I was at the site last week, and share with people a little bit what it looks like. We’ve shown pictures before of this facility, which is about 50,000 square-foot facility. It’s a cGMP-graded facility. I must admit it’s a little bit intimidating now because it is now being governed under the federal regulations effectively for drugs. So there’s quite an intimidating fence surrounding the facility that one needs to get cleared to pass through. If you look to the right, there’s cameras everywhere. In fact, there’s north of 80 cameras inside and outside the facility, which are, as I think I’ve mentioned in prior calls, are facial recognition, motion-activated, digital-recorded, where we keep the films for no less than two years on file. And it’s quite a sight to see inside the facility, too, for the initial zone for cannabis extraction, biometric security clearances to get into the different rooms of the facility and et cetera. So it’s really impressive to see. And we invite those who would like to come to Canada and Quebec to see the facility. We’d be very happy to show you. Comments on Page 18 on the licensing progress. We are in the late stage of the license process. As I’ve mentioned, we’ve had numerous engagements with Health Canada, which is good. We’re happy about this engagement. We have had, I think, about four clarification requests from them. Most recent one was just about two weeks ago, which would – I think, characterized by just a couple of simple questions. So we are progressing with Health Canada. We’re happy with the progress. And we believe that the progress will coincide well with our commercialization ambitions of commercializing our initial sales before the end of this year. We are now moving to what is called the evidence packages, where we will submit to the government clear examples of processes of how we’ll handle materials, et cetera. So good progress there. We’re very anxious to have this completed. I would say it’s moving in a very good way and to be continued. And we’ll keep you updated on that as we speak. Page 19. Just an event this quarter which was major for us. And we love Canopy. We’ve had detailed discussions with them over months about our capabilities, which they’re very excited by, not just for Canada, but the capabilities for our GMP facility for the world. This is a multiyear agreement to provide them with support. Because they, like us, believe that this market will be characterized by purified extracted forms and delivery systems. This is a major agreement for us. It’s nonexclusive. And I think it’s important to remind everybody that we have target commitments but also minimum commitments through this multiyear agreement we have with them. Now looking to Page 20. We wanted to kind of share a little bit with how that looks, in the context of our progress commercially with Canopy and others, in the context of our capacities. As I mentioned, our Phase I capacity represents about 30,000 kilos, 30 tons of processing ability. And from what we have, either contracted or, I would say, opportunities that we feel are very well developed, we believe our first phase is about 80% contracted at this point in time. And when we look at the combined phases of 200 tons of capacity, we think, in year two, about 24%, 25% of that is now contracted. And in fact, in year three, we think about 40% of it is contracted. And I think what’s important to note here, as you’ll see in the slide, that the first year from commercialization, these volumes will cover our business operation costs and be EBITDA positive. And I’d like to add that it’s our belief that this extraction business, the added variable costs as volumes grow, is minimal. So with that said, I’d like to just go to Page 21 and just summarize a couple of comments here, that we’re very, very pleased with our cannabis business development and the progress from license to construction to commercialization and coming together for what our ambition is, to commercialize late this year. We continue to work closely with Health Canada on the licensing process. And we are not holding them up, we are moving them along as fast as we can. But we’re optimistic we’ll see results there shortly. Our Phase II expansion is, as we announced last quarter, is already underway towards 200 metric tons of effective capacity coming online basically in the first quarter of next year. And our Solutions business remains solid. We’re very happy with the progress on MaxSimil. We haven’t talked a lot about our nutrition business here in this presentation. Let me just say that we’re very, very pleased with the process improvements and the improvements in our team. And I think – Mario and I were just looking at the numbers the other day. And Mario, we haven’t seen a bigger-project pipeline than we have in this business that we have right now. So we’re very, very pleased that business grew nicely last year, and we expect a similar growth happening this year as well. So with that, I would conclude our formal remarks. And we would invite – take a breath here, and invite people should they have any questions. Thank you.

[Operator:]

[Foreign Language] [Operator Instructions] Your first question comes from the line of Doug Loe from Echelon Wealth Partners. Please go ahead.

[Doug Loe:]

Yes, thanks very much, and good morning, gentlemen, thanks for the update on activities at Sherbrooke. Jim, just a quick question on IP. I mean, last week, you’ve indicated that you have two patents filed that relate to cannabis extraction, purification, alluded to that in your commentary here this morning. Just one – the press release wasn’t overly laden with detail and/or any details that would sort of reflect on current means of oil production that use supercritical CO2 or ethanol as extraction solvents. So just what – to whatever extent you can, I’m just wondering what sort of insights have been claimed in the two patents that you referred to, and to what extent they might be relevant to commercial production over the next year or two.

[Jim Hamilton:]

Yes, Doug, thank you very much. And those patents, of course, will become publicly available in due course. Really, two. One, looking at the solvent pathway and the conditions through which it’s used. And that would be based on ethanol Doug. And we’re very – quite, quite impressed by the lab trial results we got using that more of a standard, maybe, approach for us using a solvent. But I’m very, very intrigued and excited by the productivity that those conditions were delivering. Number two is a novel pathway for extraction, which may lend itself towards a, I would call it, a solvent-free claim, maybe more of a green claim, Doug, which might be appealing to certain segments of the consumer marketplace. We believe, and this again I wouldn’t say is based on deep research, but from the research we’ve done and seen, we believe there’s an element of this consumer community that will be very much looking for GMO-free, green and the various claims that go with that. And this could be a pathway for us that’s very effective that could appeal to that community. So a little bit nuanced in both cases. Both bringing potential value and an example of a differentiated technologies.

[Doug Loe:]

Great. Thanks, Jim.

[Operator:]

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

[Jim Hamilton:]

Okay. Well, thank you, everyone, for their attention. I – a lot of talking today, a little bit more perhaps than normal with the presentation. But we felt it very, very important to share with you the progress on our cannabis business and give some more insights in terms of the capacities and our progress commercially. Like I said, we are very, very pleased with the progress in this cannabis business. We are very pleased with the place that we are actively engaged with within the value chain, which we believe is the right one, which is towards the right, which is value-added differentiated products based on science. And that’s our focus, and that’s what we’ll continue to execute against. And we look forward to reporting more as we progress. So on behalf of everyone, I thank you very much for listening. And we look forward to seeing everybody in due course.

[Operator:]

[Foreign Language] This concludes today’s conference call. You may now disconnect.