Neptune Wellness Solutions Inc.
Q1 2016 Earnings Call Transcript

Published: 14 Jul 2015

[Operator:]

Good day, ladies and gentlemen. And welcome to the Neptune Technologies & Bioresources First Quarter Fiscal Year 2016 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to turn the conference over to John Ripplinger, Director of Investor Relations, please begin.

[John Ripplinger:]

Well, thank you Operator, good morning everybody, and thanks for joining us today. As mentioned, the purpose of today’s call is to review our results for the first quarter ended May 31, 2015. Joining me today are Jim Hamilton, Neptune’s President and CEO; and Pierre Lemieux, Chief Operating Officer of Acasti. Jim will review Neptune’s operational and financial highlights and will then turn the lines over to you for questions at which time both Jim and Pierre will be available. Before we begin, I want to remind you that 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 statements except as maybe required by Canadian and U.S. Security Laws. A number of assumptions were made by us in preparing these forward-looking statements, which are subject to risks. Results may differ materially, details on these risks and assumptions can be found in our filings with the Canadian Securities Commission and with the Securities and Exchange Commission. With that, I’ll turn the call over to Jim.

[Jim Hamilton:]

John, thank you very much, and again good morning to everyone. Let’s begin with what has been our major priority, manufacturing. We can now proudly say that we have a superior product offering that meets all product specifications and material handling characteristics and are fully aligned with our customers and Neptune’s expectations. Our effective capacity has increased substantially, now stands at over 100 metric tons annually. Additional improvements are anticipated in the coming quarter, moreover we are actively working to optimize plant processes further to drive efficiencies, improve costs, and increase capacity to our original target of 150 metric tons annually and beyond. We are gaining increasing confidence in our manufacturing capabilities and accordingly are now placing a heightened focus on business development to ensure customer demand matches these expected increases in supply. Being the krill omega-3 Pioneer, Neptune enjoys strong customer and industry recognition, and we are actively working to re-establish our position and market presence. As we move towards a more customer centric organization, we will be better positioned to gain share. Some previous customers have begun returning reflecting our historic ability to produce a superior quality product, and we’re encouraged by our second quarter sales funnel and expect revenues to surpass $4 million level. In conjunction with this, we are working to drive a strong financial discipline throughout the business, and this includes greater controls over everything; working capital, tighter budgets, and culturally an increased accountability. The results are already being seen with the company realizing a notable operating savings during the quarter, and we will see some savings variability, I believe, in the immediate future as these cost reduction initiatives gain full traction. Based on improving the business fundamentals, strong financial controls, and a solid focus on manufacturing excellence and sales development, we are moving towards a neutral cash flow by fiscal year end. Moreover, based on our current business assumptions, we believe we have sufficient liquidity to fund operations during this transition period. And clearly, we’ll need to maintain a very, very strong financial operating discipline to deliver on these expectations. Turning to other encouraging developments, the U.S. Patents and Appeal Board recently upheld their original decision concerning the validity of certain of our claims and patent -- Neptune’s patent of 351, by way of background in March 2015, the PTAB originally confirmed the patentability of these claims which in turn set the stage for Aker and Enzymotec to pay royalties to Neptune. Following this decision, both competitors filed a petition requesting a re-hearing. On July 8, 2015, the PTAB issued a response denying this request, and in their decision, the PTAB heightened, highlighted rather that both the competitors had not shown any matter was misrepresented or overlooked and as such the original decision was upheld. I have a great deal of respect for others in the industry, and currently would like to see a timely resolution to our IP differences and rather than spending energy in the course it would be better invested I believe in the industry, as an industry in building the science and awareness and the benefits of the krill omega-3s. This in turn should allow us to increase krill share in the overall omega-3 market. Moving to our search for a new CFO, we are making important progress. As you are aware, we are looking for somebody with a strong operational-driven focus that is fully aligned with our market-driven approach and I look forward to updating all on this progress very, very soon. Turning to financials, I’d like to remind you that our results are in Canadian dollars in today’s remarks, may contain forward-looking statements, as well the ongoing issues at our Sherbrooke plant render as you realize difficult -- local comparisons to year-over-year results. My comments today will focus mostly on the quarterly results for our nutraceutical business. Consolidated information can be found in the press release in Neptune’s consolidated financial statements and the related MD&A available on SEDAR, EDGAR, and the Investor sections of Neptune’s website. As to the results, the nutraceutical revenues in the quarter were $2.7 million compared to $3.6 million in the prior year. The year-over-year decrease was largely due to planned production slowdown or a plan to resolve viscosity issues. Adjusted EBITDA improved over the prior year coming in at negative $3.2 million for the quarter compared to negative $3.8 million in the prior year, the improvement was largely due to lower general and administrative expenses, which was partially offset by $1.6 million of income in the prior year relating to a one-time IP royalty settlement. Neptune recorded a quarterly loss of $4.6 million for the nutraceutical segment versus a net loss of $5.7 million in the prior year, and the lower net loss was due to the same factors outlined above along with lower base stock-based compensation expenses. Switching to liquidity, the corporation has consolidated cash and short-term investments of $23.7 million as of end of May. This is 6.5 -- of this $6.5 million was for Neptune, $17.2 for Acasti. As previously mentioned, we do not anticipate any financing needs at this time to fund Neptune’s operations while we transition to a stronger cash flow position. So in closing, we are making significant progress in improving our business fundamentals and setting the stage for future growth. We are building a stronger company and together with our strong committed employees and committed board, we will build on past accomplishments and capitalize on future opportunities. John?

[John Ripplinger:]

Thanks, Jim. Well this ends our formal remarks today. I’ll now turn the call over to the operator for the Q&A portion of the call.

[Operator:]

Thank you. [Operator Instructions] And I do the first question is from Siew Yeo of Euro Pacific, Canada. Your line is open.

[Siew Yeo:]

Hi, good morning, Jim. Just one quick question here on the PTAB division, so congrats on withholding that -- of holding that decision. So, has there since been a deposit in the escrow account by either of the parties, and sort of when are the timelines we could sort of see formal royalty restitution from these two parties here?

[Jim Hamilton:]

Well, the licensing agreements that we have with these parties are absolutely clear in this regard. And those royalty payments into escrow should begin immediately, and this is something that we’ll be working on very actively to ensure occurs. I think what maybe more to the point here on this IP is it’s amazing the resources that have been spent on this by Neptune in other companies, and it’s -- could have been monies far better spent in growing awareness in investing in the science to build the categories that I have mentioned in previous discussions in this wonderfully large global omega-3 business at the ingredient level of about $1.7 billion. Krill, the better omega-3 represents about 7% of the value, and this should be much more. And the way to grow that, is by I think the industry individual companies and together are collaborating to ensure that we work on the awareness, and we work on the science to grow it, and I think the industry is primed for less confrontation on IP and more towards investing in growth, and that’s what we like to see and that’s what we are trying to facilitate within the industry today.

[Siew Yeo:]

Okay great. Just one more question, so congrats on reaching 100 megatons annually on your production. So for the rest of the sort of the calendar year 2015, could you perhaps provide an idea of where you envision production to be like on a quarterly basis?

[Jim Hamilton:]

Yes, it’s -- first of all, we announced effective and demonstrated capacity at 75 metric tons last quarter and that we are communicating effective and demonstrative capacity of beyond exceeding 100 metric tons. We are very very optimistic that we’ll be able to report further gainings in the coming quarter, again of effective and demonstrative capacity, and we’ll look to do a full disclosure on that within the coming months. We’ve got a couple of trials we are doing right now, but we want to verify a few of our ideas, and I think it’s also important that we’ve already started scoping planned capacity expansions beyond the original nameplate for minimal investments. So there’s a ton of activity going on there, and we’re optimistic that that we’ll be able to report further gains in the coming short time frame.

[Siew Yeo:]

Okay, thanks Jim. Have a good day.

[Operator:]

Thank you. And the next question is from Robin Cornwell of Catalyst. Your line is open.

[Robin Cornwell:]

Thank you, good morning, Jim. Further on the royalties that are in escrow now, how do you plan to disclose that in case of accruing in your income statement?

[Jim Hamilton:]

Yes, I think I’m looking at our legal attorney, Ben. I -- the intent as far as I’m aware would be not to reflect that in the income statement now, up and until we can get a settlement or actually receive money in the door. So we do not anticipate to reflect that as an asset at this point in time Rob, but I will tell you that we’re very very motivated to stop the multimillion dollar investment that all parties are spending on this annually and get resolution.

[Robin Cornwell:]

Well, is there any possibility that the escrow would show up somewhere in your income statement or your balance sheet, I guess you are saying no, but I guess investors are pretty anxious now to see the magnitude, I would say of these potential royalties, I shouldn’t say potential, these royalties.

[Jim Hamilton:]

Yes and Rob it’s a very very good point. I think until we can get a final and complete legal settlement, we are not going to be able to reflect what those values could be.

[Robin Cornwell:]

Okay.

[Jim Hamilton:]

But what I will say though is my ambition is to accelerate that process. I think that process has gone on much too long and is not in the interest as I said earlier I think for Neptune or for others in the industry. It’s inwardly focused and non productive energy, and the energy has to be directed outside to growing businesses and growing the total market, and that’s what we are going to try and facilitate as soon as we can Rob.

[Robin Cornwell:]

Okay. My second question is on, you made some interesting comments on your plant productivity and enhancing your handling characteristics. With all the expertise that you’ve been, I guess, focusing on with the plant and getting your viscosity issues settled, have there been other enhancements or collateral enhancements that have come out of this in-depth look at your this whole new plant and its processing?

[Jim Hamilton:]

The answer to that, Rob, is absolutely -- I think maybe there is two elements to respond there. One is the product and one is the plant. I think in our statements, we’ve said proudly producing, and that word actually is very purposely, because we and I am very, very proud of the product we are producing. I believe we’re now making the best product in the industry on so many dimensions, activity in terms of handling properties, in terms of its smell. In every dimension we have a superior product right now, and I’m very, very proud about that. Number two, relative to the plant when you really start to dig in, you see opportunities and we see opportunities in a number of areas. I’ve touched on before in this call some opportunities just from a cost effectiveness in terms of how we manage our by-products and how we can commercialized or dispose that in a more economic way, recycling of some of our products we use in the process such as acetone to reduce the purchase of those key raw materials, and we’re also looking at very intimate steps within the process to refine the quality of our product better and to make it faster and looking at pathways to expand the plant in a very, very economic way. So, I think what we’re seeing with our plant is leverage in terms of its capabilities now beginning, so I’m very pleased with that too.

[Robin Cornwell:]

Just moving towards 150 metric ton mark that the plant is designed for, or as I expect it to be designed for. Can you now see -- you seem to be telling us that you can see a pathway to higher plant production without too much capital expenditure?

[Jim Hamilton:]

I see no capital expenditure towards the nameplate capacity, Rob and we see a pathway. I’m as somehow, but tease [ph] me a little bit, a little bit over the conservative in some of these calls. I’m a believer that I want to see the evidence. I want to demonstrate it. And that’s what we’re doing step-by-step, day-by-day, but we have a path there Rob, and we can see it.

[Robin Cornwell:]

Okay. Thank you. I’ll re-queue.

[Operator:]

Thank you. [Operator Instructions] And the next question is from Richard Schottenfeld of Coyote Capital. Your line is open.

[Richard Schottenfeld:]

Hey, guys. Couple of questions, first of all in your liquidity guidance that you gave in terms of having enough liquidity for the next 12 months, did you assume any receipt of any royalties?

[Jim Hamilton:]

We do have receipt in royalty. Rick, it is, I would say classic royalty receipt and not exceptional royalty receipts.

[Richard Schottenfeld:]

So, I’m saying, those royalties, receiving those royalties is assumed in your guidance that you have enough liquidity for the year?

[Jim Hamilton:]

The classic receipts of royalties is what we’ve assumed, they’re not actual ordinary royalties.

[Richard Schottenfeld:]

Okay. Another question. I guess last quarter we took a write-off and you said that some of the proms that the plant might have to be – might be due to using old frozen krill versus newer or fresher frozen or more recent krill. In your experience this quarter, have you run any fresh supplies of krill through the plant add and seen how that works, or is it still capacity improvements with older krill that you’ve had?

[Jim Hamilton:]

These are quality and capacity improvements with the existing inventory, Rick. We are actually actively sourcing new materials where we have actually samples on root now and assuming they are of the quality that is acceptable or take delivery of those later in the summer, that is designed mostly just to validate some of our kind of assumptions on the science and it’s through the check the box validation. We are confident that the outcome will be what it is. And what’s more important it was I think to your original comment is that we’re able to drive this facility with increasingly good quality finished products with the inventories we have on our hand.

[Richard Schottenfeld:]

Last question associated with that, as you’ve improved the plant, do you think that there’s any recoveries from the write-downs you took last quarter in terms of krill that might not have been processeable that you might be able to process.

[Jim Hamilton:]

You know what Rick, we are working on that right now. We have an act [ph] that’s filed with our legal team to look at not only manufacturing interruptions but also raw material impairments consistent with that plant interruptions and that’s an active legal file we are working on as we say.

[Richard Schottenfeld:]

So that’s means you are working towards an insurance recovery for the write-off as – from the plant explosion but not that that krill could somehow be useable as you improve the plant.

[Jim Hamilton:]

You know what it’s interesting we are actually working from a legal perspective on the impairment as I mentioned, but as we get increasing insights and experience levering [ph] and managing our plant with the existing inventories --were that possibility does exist that a percent of the write down Rick could be more useable after all, but that remains to be seen and I think we can’t really say that can be the case until we get further progress in the months to come.

[Richard Schottenfeld:]

Okay, thank you.

[Jim Hamilton:]

Okay.

[Operator:]

Thank you. [Operator Instructions]. And there are no further questions in queue at this time.

[John Ripplinger:]

Okay, thank you operator. Well this ends our Q1 conference call. We like to thank everybody for joining us today. And we look forward to getting back to you at a future point in time with further developments. Have a good day.

[Operator:]

Thank you. Ladies and gentlemen, this concludes today’s conference. You may now disconnect. Good day.