Neptune Wellness Solutions Inc.
Q4 2016 Earnings Call Transcript
Published:
- Operator:
- Good day, ladies and gentlemen. This is the operator. Welcome to the Neptune Technologies & Bioressources’ Fourth Quarter 2016 Earnings Conference Call. [Operator Instructions] Thank you. And I would now like to turn the call over to Mr. Mario Paradis, CFO. Mr. Paradis, you may begin your conference.
- Mario Paradis:
- Thank you. 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 fiscal year ended February 29, 2016. Joining me today are Mr. Jim Hamilton, Neptune’s President and CEO and Pierre Lemieux, Acasti’s COO. As usual, 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 would 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 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 Exchange Commission. I will turn the call over to Jim.
- Jim Hamilton:
- 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 $10 million and 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, $658,000 as compared to a loss of $7.8 million in the same quarter a year ago. And this variance really reflects I think 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. Just moving to Page 5, a couple of comments to reflect on 2016 overall specific to the nutraceutical business and for those who are there or read the presentation last July at the Annual General Meeting, we talked about our focus for the year, which we kind of coined the phrase hoisting the anchor and then setting the sails. And what we meant by hoisting the anchor was really establishing the financial and operational discipline within the business and upgrade really the team and right size. And moving from there into the later months for 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 are going to focus on strengthening the krill oil franchise and that’s quality, cost differentiation, and growth. Move further up the value chain, I believe very strongly that the closer to consumer you are, the better monetizing our IP, levering our IP. And then innovation and expansion of our specialty portfolio in related spaces and businesses innovation. And we have identified there in past conference calls and presentations products like taking our byproduct and going into the aquaculture business, levering our site and extraction technologies. In this respect I think we have made a lot of strides in really all of those four elements. I think a particular note is just around the manufacturing capabilities and cost base and we’re light years ahead there than when we 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 developed 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 would we measure success, well, I think the measure is ultimately bottom line. And we had 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 and 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 was changing the dynamic of the industry. And what we have been able to do with our solutions business is this is not a brick and mortar business, this is a technology services business that delivers and ultimately invoices finished goods ready for market, so if you are a innovative new Internet company we will deliver ready for market, ready for consumer finished goods. And then 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 are 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 are doing so with 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 within global scale and a great team there and led by a couple of the industry veterans that know this business in a very, 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’s always a little bit easier to find space, but it’s a more developed market. In that market context, I think we have done a tremendous job in improving our operations, our manufacturing cost base really not just within 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 of 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 are 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 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, I mean, lot of people talk about China, but the consumer market data 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’s 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 are also looking at in mature markets such as Australia, some very, very interesting strategies that to re-enter that market and we are looking forward to that as well. Moving to Page 8, some comments on OCEAN 03, people have seen we have developed a consumer product. This is sold on the Internet now at ocean03.com or ocean03krilloil.com and it’s really a test of 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 Middle East, also in Asia and China. And I think what’s interesting here is also it’s 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 have developed that we could expand with further products. It’s 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, please take.
- Mario Paradis:
- Yes, thank you, Jim. So, before starting, I would like to remind you that our results are in Canadian dollars and today’s remark may contain forward-looking statements. My comments today will focus on quarterly performance for our nutraceutical business unless otherwise indicated. Consolidated and fiscal 2016 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 Investors section of Neptune website. Turning to our nutraceutical results, revenue for the fourth quarter were $10 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 $5.2 million. Sales for the acquisitions are consolidated since January 8, 2016. For the last 12 months ending February 29, 2016, sales of Biodroga totaled $24 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 dollar related to Biodroga turnkey solution contribution. As most of you are aware project Turbo should generate around $5 million in savings once fully implemented by the February 2016 fiscal year end. To-date, we identify and launch 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 $3.5 million during this quarter. This is slightly higher than last year and the third quarter of the current year of $3 million and $2.8 million respectively. The Biodroga acquisition increased SG&A since the acquisition date partially offset by a reduction in 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 $0.7 million for the current quarter compared to a loss $7.8 million in Q4 last year and $0.6 million in Q3 of the current year. This improvement versus last year was mainly related to a raw material inventory write-offs and ramp up costs of $4 million and $2 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 Neptune’s operations and the Biodroga contribution. As shown at Page 11 of the presentation, there is a continued improvement of EBITDA or in other words a decrease in loss over the last four quarters. Our quarterly net income also significantly improved coming in at $1 million versus a net loss of $9.1 million in the prior year and a net loss of $1.3 million in the third quarter. The improvement of $10.4 million over last year was primarily due to the same factors applying for adjusted EBITDA. In addition, during the current quarter, we recorded a tax recovery for an amount of $1.9 million as deferred tax asset 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 a taxable income generated by Biodroga. Turning to our liquidity, on a consolidated basis, the corporation has consolidated cash and short-term investment of $16 million as of February 29, ’16. Of this $2.5 million was for the Nutraceutical segment and $12.5 million for Acasti. Neptune’s quarterly cash balance decreased by approximately $1.6 million from the $5.1 million recorded at the end of Q3 largely due to the starting of the loan reimbursement with investment in Quebec [ph] on $0.5 million and investment in our working capital mainly receivable prepaid and payables. Recently on April 18, ‘16, we entered into a term loan agreement with BNC Bank for an amount of $4 million to support our growth, amend their working capital needs. This loan included 15 months of capital payment and will be reimbursed over 33 months period starting in July 2016. Going forward, we will continue to focus on increasing cash flow and expect ongoing improvement as revenue and margins strengthen. Finally, our first quarter is practically over and our nutraceutical revenue, are expected to reach approximately $11 million with the positive EBITDA. As for the fiscal year ending February 17, for the nutraceutical segment, we expect revenues to be greater than the last 12 months pro forma revenue, including Biodroga of 41 million with a double-digit adjusted EBITDA margin. I now turn the call over to Jim for additional and closing remarks.
- Jim Hamilton:
- Yes, 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 in cost saving initiatives, especially as some of these transition costs work their way through the system. We are quite contempt 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 as I said before, but we also are very excited by the opportunities in new markets for our krill business such as China. We are 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’s far greater than a simple product perspective. And we are going to continue to focus on growth opportunities across the board innovation and expanding our revenue and further acquisitions as soon as we can. So, with that, Mario we are open to questions. Yes, okay, so….
- Mario Paradis:
- Turn the call to the operator.
- Jim Hamilton:
- Thank you.
- Operator:
- Thank you. [Operator Instructions] Your first question comes from Doug Loe with Echelon Wealth Partners. Please go ahead.
- Doug Loe:
- Yes, thanks very much and congratulations on the quarter gentlemen particularly on the EBITDA torque you generated in the period. Few things for me. First of all, Mario just on the Biodroga’s contribution to revenue which you disclosed in the MD&A was around $5.2 million. That 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, 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/‘18? So, that’s the first thing. And then 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, that’s a fairly mature nutritional supplement market perhaps less so in the omega-3 side. So, Jim, just wonder if you might be able to just 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 over what sort of headwinds you might encounter there as you are in the U.S. and Australia and how you might be able to overcome those in the medium-term? And I will leave it there. Thanks.
- Mario Paradis:
- Thank you, Doug. So, I start with your first question. So, you are absolutely right, so $5.2 million on an annual basis, it’s not our goal with 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 $24 million. And as we mentioned, when we acquired a 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 $24 million last 12 months and with a growth rate on that number for the next 12 months.
- Doug Loe:
- That’s great. Thank you.
- Jim Hamilton:
- Yes, Doug, it’s a million dollar question relative to China. I mean, if you look at some of the marketers in this space, how they are so excited by the potential there is the middle class of course grows; many, as I said earlier will say that the current market is greater or the same as the developed North American market and it’s just beginning. There are just so many people embracing health and wellness as they move into the middle classes. So, we are 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 their moves at companies in Australia have been party too. It’s clearly a market with potential. We are very, very pleased that relative to China to have this approval. Now, what’s important is there is 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 will call it with the [ASIS] [ph] oil and some partners there to develop a new distribution and food business as well as going through with our OCEAN 03 finished consumer product through some of the Internet channels at this point in time. So, they are young relationships. They are 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.
- Doug Loe:
- Well, that’s great. Maybe just one on the line, just one additional question, Jim, you did mention that you have expectations to grow through acquisition, I just wonder if you might – without giving specifics of course is 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-à-vis your initial traction in China might be something that you are looking at a product portfolio diversification or perhaps building on your core omega-3 capabilities, just sort of any sort of high level strategic thinking there would be helpful? And then I will leave it there. Thank you.
- Jim Hamilton:
- You sound like one of my board members, Doug. It’s I think we have to be also sort of realist 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 have 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 the major multinational to do that. We are going to have to earn our way. We will have to earn our trust with our financial supporters and earn the trust even of acquiring companies that we are a good place for them to rest their business. I will tell you I think the Biodroga principals who are now shareholders of Neptune are pleased thus far with us being good home for their business. So, specific to that, I mean our interests are mostly to lever the existing relationships and confidences we have. 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, because I like being very close to the consumer. Because I think close to the consumer, the more influence and power you ultimately have, the more stickiness you have as a business, so moving up the value chain as much as we can, Doug. Hope that answers your question.
- Doug Loe:
- It does indeed. Thanks, Jim.
- Operator:
- [Operator Instructions] There are no further questions at this time. I will now turn the call back over to the presenters.
- Mario Paradis:
- So, thank you very much everyone and see you in July for next quarterly call. Thank you.
- Jim Hamilton:
- Looking forward. Thank you.
- Operator:
- Ladies and gentlemen, this concludes today’s conference call. You may now disconnect.
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