Neptune Wellness Solutions Inc.
Q4 2018 Earnings Call Transcript

Published: 8 Jun 2018

[Operator:]

Good afternoon, ladies and gentlemen. This is the operator. Welcome to the Neptune Wellness Solutions 2018 Annual Earnings Conference Call. At this time, all lines have been placed on mute to prevent any background noise. After the speakers’ remarks there will be a question-and-answer session. [Operator Instructions]. I would now like to turn the call over to Mario Paradis, Chief Financial Officer. Mr. Paradis, you may begin.

[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 fourth quarter and annual results ended March 31, 2018. Joining me today is Jim Hamilton, our President and CEO. As usual, Jim will review Neptune’s operational quarter and annual highlights, followed by myself with a discussion on the quarterly and annual financial results. 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 statement, 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:]

Merci, Mario, thank you very much and welcome everybody. Thanks for calling in. We got a great couple of days with the Board talking about the business and we’re happy to share the progress with you today. There is a deck online for those who would like to follow and just for our agenda today on page 4 to get to begin. Just a few comments on highlights for the fiscal year, I’d like to just say that, in that respect, we’ve been working to make it easier to follow progression on the business and for those of you that have been with us know that our quarters weren’t actually on the quarter, and we’ve been clouded by a lot of things like, such as Acasti what have you. It’s difficult comparing against prior periods or prior quarters because I think last year, Mario, we were 13 months and last quarter was 4 months. Fear not, Mario is here, he’ll help decode all in a moment. But we will take a look at the highlights, a little bit on the Cannabis business, our financials and some looking ahead statements. Just moving to page 5, let’s begin with some of those highlights. So, let me just begin by saying for our Cannabis businesses, really 3 dimensions, which is around the license, the site and the commercialization strategies, and I just wanted to say to everybody that it is all on track, on time and on budget. In fact, commercial activities that we’ve really got hot and heavy on in the last couple of months, we’re very excited by, in fact, I don’t think, I’ve ever seen so much traffic through these doors or through our site’s doors, since I’ve been involved with Neptune. it's a very, very exciting time. I’ll talk about that in more detail shortly. Just on fiscal year reflections, last year came at 26.2 million. We had especially strong sales in nutrition of our MaxSimil product, and in fact, for our Biodroga nutrition business, it was the best sales quarter we’ve ever had. Strategically, don’t forget everybody that we made the call, which was to position this business and segments characterized by size and growth potential, such as Cannabis and as a consequence, we executed on divesting of our krill business, and there’s lot of accounting treatments in the fiscal year there. Mario will speak to that in a moment. Bottom-line though the cash position is strong at 26.7 million, slightly higher than we had forecast largely based on some of the timing on the expenditures at the site, but adequate and absolutely in a good position for us to execute on our plans. Key to our strategy that I’ve shared before is about being value-added differentiated products based on science, and with that, we signed a core development agreement last quarter looking at natural health products and veterinary products targeting pain and inflammation. I’ll just add a little bit of color there. Linked to that is some research projects that we have under way at local university. We should see some results in summer. For those who have been following us know that we did an announcement related to krill. We’re also looking at MaxSimil and some other compounds as carrier oils for active ingredients from Cannabis as an example that could prove to be value-added differentiated in terms of bioavailability. Hey and just while we’re on research, just a comment here on MaxSimil, which has been doing really, really well for us, a colleague of mine shared a recent study in that regard looking at people who are enzymatically challenged, meaning they’ve great difficulty in absorbing because of their enzymatic deficiency, healthy fats, and we saw some very encouraging results. These are actually cystic fibrosis patients who are being fed MaxSimil. We will be investing in MaxSimil and also our team has been very active looking and securing government funding because there’s a quite a significant number of both provincial and federal government programs to help companies, such as ours invest in research and we are taking full advantage of those. So that’s a very exciting development for us. Hey, just flipping page 6, and this is a subsequent event that we’re really, really excited to announce, it’s consistent with our strategy. But based on some really exciting line of sight businesses that we have been working on, we agreed today as a company and as a board to invest in our Phase 2 in this site. This is moving to solvent extraction and purification, including molecular isolation at $4.8 million investment. This is going to deliver about a six-fold increase over our Phase 1 capacities. And also, just on molecular isolation, particularly, we are very excited by that in terms of being available to offer virtually pure forms of the active ingredient. Just moving along to the next page, page 7. Let’s talk in a little bit more detail about our cannabis business, and Mario -- I'm looking at Mario right now, probably the number one question you and I get maybe daily, which is when -- and let me just say, this is a slide by the way, effectively the same slide that we shared back in November in New York, and really there’s three dimensions as I mentioned earlier about the site of a commercialization, about the license and our ambition and our belief that we’ll be in a position to start commercialization of this new cannabis business starting in the latter half of this year and let me just say again, it is our view that we’ll be in a position to commercialize this business in the latter half of this year for what is happening on all three of those dimensions which was our original goal. The -- a lot of the concern, of course or questions we get is around the licensing process and let me just say that in that regard a lot of companies refer to themselves as being in the late stage or active review, that’s absolutely where we are at and we are very encouraged and happy with engagement we’re having with Health Canada. We probably created some expectations when we mentioned that the readiness letter being here in -- earlier in the year and that was probably misguided by us to trust some of the feedback that we’ve got from the regulators in that regard. Having said that, where we are at now with process, the late stage, the active review and the timing with commercialization and with our site construction, again we feel very, very confident we’ll be in a position to initiate commercialization in the latter half of this year. So, having said that, let’s just look to page 8 for a moment and I just wanted to also share the slide version of this, we’ve shared before. And this is where is our focus, I mean classically people ask where to play and how to win. But where we’re playing is in that big box in the middle which is extraction, purification and formulated delivery forms, differentiated value-added forms are based on science. This is what we do today in the blue with our nutrition ingredients business such as MaxSimil. This is what we’ve always done with the krill business. And let me just say that this is absolutely where we’re focused upon going forward. And with that, I’d like to just flip to page 9 to talk a little bit more detail on this site and that investment. Remember the site investment Phase I was largely around compliance site security and for speed reasons the initial CO2 investment began. We believe, and we went on a deep dive on that this week. But we are absolutely on track to deliver that on-time. The Phase II investment, I'll tell you we are really jazzed by this and pleased. Again, based on line of site of business that we are seeing and the need for that capacity combined with the results that we're getting with the solvent. Remember, our legacy our history, our strike zone is insolvent extractions. We're very, very pleased with what we seen in the lab trials. We're very, very happy with this first stage of capacity that will give us. And as I mentioned before includes the molecular isolations. So, this is moving from what classically is done in terms of basic extractions and moving it up to effectively pure product forms which we believe is going to be important in terms of again value added differentiated products that will be formulated in the combinations with other compounds. So, with that, let me just park that there for a moment and invite Mario on the decoding part of the financials and then we'll come back with some closing comments and over to questions. Mario.

[Mario Paradis:]

Yeah, thank you Jim. Good afternoon again everyone. 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 and annual performance for the nutraceutical business unless otherwise indicated. But be careful, when you are looking at our public financial statements, I want to remind you that we start to consolidate Acasti in our balance sheet. And also, on our annual results of operation, these numbers still include some Acasti numbers for the 9-months period starting April 1, 2017 until December 27, 2017. I also like to remind you that as a consequence of our fiscal year-end change last year from February to March, the comparative figures for last year's fourth quarter is for period of 4 months and for fiscal year a period of 13-months. In addition, considering our recent entry in the Cannabis industry, we will present the financial results of our Cannabis project as a separate segment in our financial disclosure. Consolidated results for the full quarter and fiscal 2018 results can be found in our press release and in Neptune's consolidated financial statements and related MD&A available on CDAR, EDGAR and in the investor section of Neptune's website. And now at the page 10 of the deck presentation. Total revenue for the fourth quarter were CAD7 million down by CAD4.8 million or 41% over the 4-month period last year. The revenue decline is mainly due to the divestiture to Aker BioMarine of our krill oil manufacturing and distribution activities in the second quarter. For the quarter the solution business did very well with a 15% increase in comparison with the same 3-months period last year while royalty revenues increased by CAD0.2 million. Our quarterly gross margin as a percentage of sales was stable compared to the same period last year at 25%. In terms of dollars, we generated CAD1.6 million, a 1.3 decrease over the 4-month period last year, mainly related to the decrease in revenue I discussed earlier. The R&D Cannabis business amounted to 1.9 million and represents our investment in the Cannabis business during this quarter. This investment is comprised of business development expenses and also fixed costs for the manufacturing plant, including related salaries, plant expenses and depreciation. For the 4 months [or I guess] last year R&D expenses were mainly related to the krill oil manufacturing business that was sold. During this quarter also, we reversed 1.9 million of R&D tax credit that were recorded last year. This reversal was completely offset by an income tax recovery in order to bring the income tax recoverable to zero. So, this adjustment is a non-cash event. Selling, general and administrative expenses totaled 3.7 million during this quarter, compared to 3.3 million for the 4 months last year, and is mainly due to an increase related to non-cash stock-based compensation, professional and legal fees related to business development activities. The operating loss for the quarter was 1.8 million, compared to adjusted EBITDA of 0.9 million last year, and this variation is mainly related to the exit of the krill oil manufacturing business and also our investment in the Cannabis project. Now let’s take a look at our annual financial result for the 12 months ended March 31st in comparison with the 13-month period last year on page 11 of the presentation. Total revenue for the year ended March 31, ’18 were 27.6 million down by 19.3 million. The revenue decline is due to our exit of the krill oil manufacturing business. The Solutions Business did well in the year with a 7% increase in comparison with the 12 months period last year well over the industry growth rate. Royalty revenue increased by 0.4 million this year, mainly related to the recognition of some different revenues following the termination of the license agreement with BlueOcean in December ’17, as indicated in the last call. Our annual gross margin as a percentage of sales slightly improved compared with the same period last year. The gross margin sales came at 28%, up 2 points over the 13 months period last year. This improvement was mainly driven by product revenue mix. In terms of dollars, we generate 7.2 million, a reduction of 4.5 million over last year in line with the sales decrease. The R&D/Cannabis business amounted to 4.5 million and represents the R&D expenses of the krill oil manufacturing business for the first half of the year. And the investment in the Cannabis business for the second half of the year. The investment in the Cannabis business are comprised of business development expenses and also fixed cost for the manufacturing plant including salary and 1.1 million of non-cash depreciation. Last year R&D expenses were mainly related to krill oil manufacturing business. SG&A totaled 11.9 million during the year compared to 12 million last year. When compared to the same 12-month period last year, we have an increase mainly explained as already indicated in the quarter by the non-cash stock-based compensation expense and professional and legal fees related to some business development activities. The operating loss for the year was $2.6 million compared with an adjusted EBITDA of $4.1 million last year. This represents a variation of $6.7 million and is directly related to our exit from the krill oil manufacturing and our investment in our cannabis project. The annual net income increased significantly by $10.5 million to reach $20.1 million in comparison with a net income of $9.6 million last year. Two items impacted significantly the net income this year. The first one is the gain on the sale of the krill oil manufacturing business to Aker. This transaction resulted in a gain of $23.7 million. The second one was driven by the deconsolidation of Acasti in December ‘17 which resulted in a gain of $8.8 million. Turning to our liquidity, at the end of March 2018, our cash position was $26.7 million and total debt was $4.7 million. The cash level is in line with our expectations considering that we still have some amounts to be paid relating to the Phase 1 investment at out plant in order to be compliant with Health Canada requirements. Now I’ll turn the call over to Jim.

[Jim Hamilton:]

Mario, thank you for all those comments. Just -- page 13, just some comments on looking ahead and the summary, let me say again that the work and the development of the three dimensions related to our cannabis business of commercialization of license and the site are on track and on time for seeing us in this business in the latter half of this year. As per our strategy and line of sight of business, we’re very, very excited about the Phase 2 capacity expansion approval and then we’ll initiate that project immediately and with haste, including molecular isolations, I mentioned you before for Ultrapure products that we believe would be very, very attractive differentiation offer. Solutions business remains very, very solid platform for growth and we particularly like what we’re seeing with MaxSimil and we’re budgeting further development on that business, not just investment in the science but also as we see very, very attractive growth in that value-added differentiated active ingredient. And as I mentioned earlier, solid balance sheet with close to $27 million in cash in the quarter with the money to get it done. So, with that, just that we conclude our formal remarks and we’ll invite any questions or discussions at this point in time. Mario, back to you.

[Operator:]

[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 congratulations, gentlemen, on all recent progress here. Jim, just a simple kind of housekeeping question, could you just add a little bit of granularity on what’s involved with the Phase 2 capacity expansion? You’ve provided some information on size of budget and indicated some [indiscernible] infrastructure and presumably for separated out sort of cannabinoids from bulk oil. But can you give us a little bit of a sense of what’s involved here?

[Jim Hamilton:]

Yes. Thanks, Doug. And great to hear your voice. The -- what we’ve always done is solvent extraction and our site is designed for solvent extraction. We believe solvent extraction is the superior technology. We invested in our Phase I. The majority of that investment was around for compliance reasons, security reasons, access reasons, all the compliance reasons that you know about in this business. And also, CO2, CO2 for purposes of speed for commercialization because there is nothing like being in the business to grow the business. But in parallel, what we've been doing and doing extensively is lab scale trials off site at a license facility, research facility to look at permutations combinations, extraction conditions of every way you can imagine to identify what would be the best pathway for us to go. So, with those conclusions we're very, very excited at the results that we see. And we'll be integrating those results what we call first phase solvent, which will immediately begin that application of those technologies in the site and to bring that online early next year.

[Douglas Loe:]

Okay, that's helpful, Jim. Thanks. And then maybe just kind of shifting forward to more commercial activities later this year and into 2019 with all clients looking at ability to get your license and become operational imminently here. And then you spoke in slide 8 about your intention now is originally to develop cannabinoid nutritional supplement coformulations and that's clearly still an interesting way, how you can differentiate yourself from other oil producers. Are there any sort of initiatives that are ongoing that you might be able to give us some sense of currently as to what sort of coformulations you might be working on and which might be more attractive in your view commercially once you launch?

[Jim Hamilton:]

Yeah, and Doug, that's a very, very interesting question. And as we said before, I think there is a couple of things at least in our minds here, in my mind. That is number one first and foremost fundamentally a consumer products phenomenon that we're seeing developing really around the world. I think many of us tend to be a little bit kind of -- I don’t know the right word is, a little bit kind of a focused if you will, a little bit myopic in regards to the recreation market that's coming. But we believe this is more than that, we believe that this is fundamentally a wellness medical category that's developing globally. And we believe that fundamental medical wellness category will be in complex blends. And these will be complex plains of a number of Cannabis compounds. CBD, THC, others that are specified or lend themselves to things like sleep, anxiety, pain et cetera. So ultimately, we think that's where this business will go. Clearly it won't be there overnight, but it will be going at a stepwise. That's why this ultrapurification we're very, very interested in. Because we believe that is the base through which we can have the compounds to blend and formulate in the ideal combinations. So that's our focus Doug right now.

[Douglas Loe:]

Okay. I mean just kind of addressing and shifting from the general to the specific if you are at liberty to do that. So, I mean you have some sleep anxiety, pain, migraine pain, [indiscernible] cancer pain, although that's more of an Rx-market I guess. So, I'm just sort of wondering what's the rationale combination of cannabinoids and perhaps other molecules that you current sell through retail channels through Biodroga that might sort of make sense here based on any diligence or research you've done at this point?

[Jim Hamilton:]

If you're referring to natural product combinations with cannabinoid products, I think we're interested right now as I mentioned earlier and some of the research trials, we have underway as we speak, which is looking at carrier compounds. So, for example as we mentioned, we licensed the rights for krill oil, an omega-3 phospholipid that could lend itself to better efficacy through bioavailability an example. MaxSimil is another interesting possible carrier as well as others. And that may be where the interface of nutrition products comes with this market, Doug. And as I mentioned these are some of the trials that we have underway as we speak.

[Operator:]

[Operator Instructions]. Your next question comes from the line of Mark [indiscernible] Investor. Please go ahead.

[Unidentified Analyst:]

Yes, 2 questions. Mario could you go back and comment on the last quarter sales specifically excluding the businesses we sold maybe focusing on the solutions business? I was looking for the percent increase or decrease in that business over the last quarter. And then Jim, could you comment more specifically on the capacity we’ll have in Phase 1? Thank you.

[Mario Paradis:]

So, on your first question on the solution business. So sequentially, we did a 10% growth, so compare with the third quarter. Compare with the same quarter, so the same 3 months. So, January to March ’17, we did 15% increase. So, I think that Jim said that was our best quarter ever and we want to continue to build on that quarter, and we have a very, very nice contribution this year with our proprietary patented compound, MaxSimil during all the year.

[Jim Hamilton:]

On the capacity side, it’s, as I mentioned its six-fold increase. Let me say that we have a facility that has the potential to be the largest and most effective facility in the world for this category. And we are debating, Mario and I right now, it’s an interesting question Mark about how much transparency we want to give on that to the industry at this point in time and we haven’t concluded on that. But let me say that we think we’ve got the potential muscle here to be the most effective facility in the world.

[Operator:]

Your next question comes from the line of Bob Johnston from [indiscernible] Research. Please go ahead.

[Unidentified Analyst:]

Jim, I wonder if you might share a few comments elucidating on the difference of the solvent extraction process that you have compared with whatever the other processes that are being used by others and the differences? And how significant is that difference? And how soon might that be available to compete with them directly? I presume that they’re producing now. So, it’s a question or getting a little sense of the timing when you can be in the [BDS] box as well.

[Jim Hamilton:]

I think that’s an interesting question, I think there is a lot of elements to that answer. Let me say, I think there is a couple of things. One is what I have seen out in the market and I’ve been to many operations both in the U.S. and Canada is typically you don’t see scale, you see something that’s really aligned with the local operation and not with something that is broader based, that’s one. So, I think one of our differences will be the scale and the relative effectiveness of that scale. There’s an interesting, very interesting hockey stick as we say when you look at the variable cost of our operations. I think it’s very, very attractive. We also like solvent for another number of reasons in terms of where we think we can go towards the ultimate purity. We are seeing purity levels that we believe will be relatively higher and which is particularly fitting as we go right down the chain to the molecular isolations I mentioned before. So, we like what we see there and we think a combination of the efficiency of solvent combined with the scale will have -- and the purity that we’ll be able to deliver that will have a compelling formula.

[Unidentified Analyst:]

So that purity will draw people to you?

[Jim Hamilton:]

I think it’s the foundation, it’s a differentiator that will allow for -- I think all these -- all markets in my experience search for pure form and then ultimately that pure form in combinations that are tailored for specific needs. And I think when you look at this business, ultimately, we’ll see segmentation of the business and when I say segmentation of the business, we’ve been seeing some very, very interesting consumer research and some of the research that we’re seeing in terms of who are the users and why they take. In fact, at Deloitte, we were just talking about this before. I don’t know if someone is -- have you seen this Deloitte study that came out, they call it the suburban man demographic, which is actually a target audience of what is it 37 to 55, Mario? I think you just conform with that. But I think a lot of the perceptions of who uses and why are being challenged that -- and I think that will be increasingly challenged as the science develops because -- and we are actually seeing some very interesting information relative to a skew towards female consumption and female consumption towards anxiety, relaxation as well as pain. So, I think what we’re just going to see is a lot of diversification of consumer. I think we’ll see a main line consumer come in. And I think those main line consumers and companies that want to pursue this business won’t be necessarily the companies we see in market today in Canada that will be increasingly multi-national companies with capabilities of marketing commercializing products globally. And they are going to look for GMP capabilities. They will be looking for Ultrapure capabilities. They will be looking for formulation, they will be looking for clinical research. And that’s what we do. It won’t be overnight of course by any means. But I think directionally that’s where this is going to go.

[Operator:]

Your next question comes from the line of [Chen Lynn from Lynn Asset Management]. Please go ahead.

[Unidentified Analyst:]

I'm a long-term shareholder from [Indiscernible]. Can you be a little bit more specific on the licensing? I understand you are very confident you’ll get the license second half of the year. Can you be even more specific that which -- what’s that need to be and where you are and what interactions you have with agencies? And also have the question on the Phase 2 expansion, do you need to get agency blessing for the Phase 2 expansion?

[Jim Hamilton:]

Thank you for the question. You sound like one of my Board members on that question. Let me just say on the licensing, we’ve always believed and we still believe very strongly, it is absolutely not a question if it is when. Remember that the majority of these applicants, whey they’re submitted they are dead on arrival and rejected. We were immediately accepted and start complete and compliant. Moreover, the engagement we've had with Health Canada has been very constructive, and I'm looking at Mario right now. I think the first engagement we or first response was at 100 pages of based on 6 pages of questions, and more recently and they came back with 1-page questions of or 1 page that had 2 questions on it. So, we've made a tremendous amount of progress with them. And again, we feel very, very, very confident where this is going. And the dialogue is very constructive. And let me also add, that we are not new to the regulatory environment. We've been a long term approved facility where CGMP, Canadian Health Food inspected facility. We know the government people. So, we're very, very confident on that. We wish we control the agenda of Health Canada. And of course, I think publicly will be good, more comfort to people. But we are very happy with how it's progressing and we very confident it will not impede whatsoever our commercialization timeline. On Phase II, there will be an element of compliance that is needed always when you add capacity and enhance your operations. But I think, once you're there that is a question of more amending what you have rather than new dossier, if you will. So, neither are fears of us, is the only question is the time. And again, just to summarize I guess, I'm being repetitive here in this regard, but we think consistent with our macro timeline and commercialization site construction and licensing that will have convergence that allows us to deliver on time and on track.

[Unidentified Analyst:]

Thank you, Jim.

[Operator:]

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

[Jim Hamilton:]

Wonderful. On behalf of Mario, we just would like to thank everybody for calling in, listening in and for the questions. Again, we are completely jazzed by our next phase investment. We're very, very jazzed by the line of sight commercially we're seeing on this business. And we look forward to continue to execute to transform and grow this business forward. So, thank you, and we'll be in touch soon. All the best. Bye, bye.

[Operator:]

This concludes today's conference call. You may now disconnect.