Neptune Wellness Solutions Inc.
Q2 2017 Earnings Call Transcript
Published:
- Operator:
- Good afternoon, ladies and gentlemen. This is the operator. Welcome to the Neptune Wellness Solutions Second Quarter 2016/2017 Earnings Conference Call. [Operator Instructions] I would now like to turn the call over to Mario Paradis, CFO of Neptune. Mr. Paradis, you may begin your conference.
- Mario Paradis:
- Thank you. Good afternoon everyone and thank you for joining us. As mentioned, the purpose of today's call is to review our results for the second quarter ended August 31, 2016. Joining me today is Mr. Jim Hamilton, our President and CEO. As usual, Jim will review Neptune's operational highlights followed a discussion on quarterly financial results by myself. 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 maybe required by Canadian and U.S. securities law. 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 filings with the Canadian Securities Commission and with the Securities and Exchange Commission. I'll now turn the call over to Jim.
- Jim Hamilton:
- Mario, thank you very much. Good afternoon everybody, and for those who are celebrating a very happy holiday. We have a short PowerPoint presentation that can be found online both through MarketWire as well as our website under Investor Relations, and you can find that under neptunecorp.com. So let's just begin. Our focus today of course is on the nutraceutical business. This is excepting Acasti. And let me begin by saying that, although there's a lot of work to be done, let me say we have done a lot. Neptune today is a very, very different company. It is much stronger than a year ago in really all dimensions
- Mario Paradis:
- 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 for our nutraceutical business unless otherwise indicated. Consolidated second quarter fiscal 2017 information can be found in our press release and in Neptune consolidated financial statements and related NDA, as well as [ph] on CEDAR, EDGAR and under Investor section on Neptune website. So, turning to our nutraceutical results, I'm pleased to report that our revenue for the second quarter were CAD11.6 million, up by CAD7.2 million over last year, and up CAD0.2 million or 2% over the first quarter of this year. Our revenues include strong sales from our specialty ingredients business and the contribution from our recent acquisition of Biodroga for an amount of CAD5.7 million. We are also pleased with our ingredient Krill business which grew by CAD1.3 million in comparison with last year, representing an increase of 32%. Our quarterly gross margin as a percentage of sales also continue to improve compared with the same period last year. The gross margin on sales came in at 20%, up 6 points over the same quarter last year. The improvement in comparison with last year is being mainly driven by the contribution of Biodroga, IO sales volume in specialty ingredients, and by overall improved operating performance and efficiencies as a result of the Project Turbo. In terms of dollars, we generate CAD2.3 million, an increase of CAD1.7 million over last year. When we compare sequentially with the first quarter this year, the second quarter margin was impacted by the usual Sherbrooke facility shutdown for vacation, plant maintenance, and some innovation and R&D testing, and finally, by temporary operational issues with our asset-owned recycling project which is part of our Turbo project initiative. As indicated, these issues were temporary and are now under control. Considering our cost structure and fixed costs, these events had an impact of approximately CAD800,000 on our gross margins during the second quarter, of which approximately 50% could be considered as non-recurring. In addition, Biodroga's product mix was favorable in the first quarter and returned to a more normal levels in the second quarter. Going forward, we expect gross margins to be in the range of 30% in the upcoming quarters. A few words on our Turbo project. Initiatives continue to drive operating performance and efficiencies, and we are expecting that our CAD5 million target will be achieved by the end of this fiscal year. SG&A totaled CAD2.5 million during this quarter. This is slightly lower than last year with CAD2.8 million and lower than the first quarter of this year by CAD0.7 million. When compared with last year, the Biodroga acquisition increased the SG&A expenses but was more than offset by a reduction in marketing and administrative expenses, more specifically in lower compensation expenses, as a result of Turbo Project. Moving along, adjusted EBITDA continued to be in a positive territory for the third -- for the second quarter -- excuse me, for the third quarter in a row, with CAD0.8 million for the current quarter, compared to a loss of CAD1.6 million in the second quarter last year and an adjusted EBITDA of CAD1.1 million for the first quarter this year. The improvement versus last year was mainly related to additional sales from our turnkey solution business, continued improvement on gross margin from better operational efficiencies, and also from a slight reduction in SG&A. On a sequential basis, the decline is adjusted EBITDA reflects lower gross margins, partially offset by a decline in SG&A expenses. We expect adjusted EBITDA in dollars and in percentage of sales to improve in the third quarter over the second quarter, mainly due to expected higher gross margins as discussed earlier. Our quarterly net loss also significantly decreased, coming in at a loss of CAD0.7 million versus a net loss of CAD1.9 million in the prior year. The improvement of CAD1.2 million over last year was primarily due to the same factors outlined for adjusted EBITDA and also a foreign exchange gain of approximately CAD400,000 related to our debt denominated in British pounds. Talking about our debt denominated in pounds, we entered during this quarter into a cross-currency swap in order to convert this debt into U.S. dollar. So interest expenses from the U.S. dollar debt will partly act as a natural hedge against our revenue denominated in U.S. dollars and the debt itself against our receivable in U.S. dollar. Turning to our liquidity. On a consolidated basis, the corporation has consolidated cash and short-term investments of CAD15.3 million as of the end of the second quarter. Of this amount, CAD7.1 million was for the nutraceutical segment, or Neptune, and CAD8.2 million was related to Acasti Pharma. Neptune's quarterly cash balance on a standalone basis increased by CAD2.1 million from CAD5 million at the end of first quarter. The operation including working capital generated CAD4.6 million during this quarter, less the finance cost of CAD0.5 million and debt repayment of CAD2 million. Finally, in fiscal 2017, for the nutraceutical segment, we're now expecting annual revenues to be greater than CAD45 million, up from our previous number of CAD43 million, with a double-digit adjusted EBITDA margin. I'll now turn the call over to Jim for closing remarks.
- Jim Hamilton:
- Great. Mario, thank you very much. As I mentioned before, Neptune is a very, very different business, much stronger business than a year ago. We are in the business of wellness solutions and we're going to keep working to drive growth by providing great wellness solutions that deliver health and well-being, with a particular focus on growth on our turnkey solutions business, and we're going to invest in scaling and the capabilities of the business, and specialty ingredients, in terms of considering to lever our capabilities there as well. And ultimately, we're motivated to look at acquisitions that complement not only our solutions, specialty ingredients, but perhaps also consumer brands. In the near term, we're also going to be looking at strengthening our position, our cash position, and optimizing our debt structure. And for fiscal 2017, for the nutrition segment, we expect revenues now around the CAD45 million, with double-digit EBITDA margin for the year. And with that, we'd be pleased to open it up to any questions.
- Operator:
- [Operator Instructions] Your first question comes from the line of Doug Loe of Echelon Wealth Partners. Please go ahead.
- Doug Loe:
- Yeah. Thanks very much, and congratulations on the quarter, and thanks for the granularity on the quarter. Mario, I just wanted to start with revenue allocation. Thanks for providing the granularity on Biodroga versus Krill-related revenues. It's basically what I calculated, and you stated the numbers explicitly, so, thanks for that. Just wondered if there was any sort of revenue reallocation that would have led to any perceptions of Biodroga sequential softness down to CAD5.7 million in the quarter versus our calculation for Krill Oil revenue being basically at the same number, which is a little bit more than what we were looking for. I just wondered if Biodroga, Krill, or Omega-3 related revenue has now been allocated into Krill-related revenue, so that's the first question. Second of all, maybe a question for Jim. I was just wondering if, you know, post quarter you had that solid patent cross-licensing agreement with Aker which did lead to some cash flowing from Neptune back to Aker, I was just wondering if you could provide any insights as to what Aker's patent portfolio provides for you and how you might be able to leverage that in future product development opportunities. I mean I understand what your IP entails as it relates to their ability to operate in the U.S. and elsewhere, but just wondering if you could maybe reflect on what specifically comes back to you on the IP side. And then thirdly, thanks again for indicating that you still are on pace to achieve annual EBITDA cost savings of CAD5 million that should be fully realized by end of year on an annualized basis. I assume that that doesn't include any reduction in legal expenses related to settling your patent litigation with Aker. I was just wondering if you might be able to quantify what additional savings and reduction in legal expenses might introduce into future quarterly EBITDA. And I'll leave it there, thanks.
- Jim Hamilton:
- All right, Doug. That's all? Mario, do you want to start, and I can --
- Mario Paradis:
- Yes, okay, I'll start. Thank you, Doug. So as for Biodroga, it's true that sequentially it's a reduction compared with the first quarter, but again Biodroga's business is not a straight-line business along with the four quarters. So there could be some bump here and there between quarters, and when we compare with the same period last year, Biodroga effectively grew. So we're not worried about that, so we're all -- it's also related to pipeline filling, inventory filling of the -- of our customer. So the third quarter, we have a good start and it will be stabilized over the upcoming quarters.
- Jim Hamilton:
- I mean, maybe we could take this one by one and I could just add to that, Doug. Look, I think we're about half a year into the Biodroga being part of Neptune. And what is very, very normal, in fact we had this discussion at the Board today, what is very normal is a certain element of distraction and integration. I would say that we were ahead of the curve on a lot of our expectations in terms of the integration and in terms of customer retention. And again, we feel this business is immensely scalable and we would not put out our predictions in terms of how we can grow this going forward. Our limiting capability here is people and process, and we're investing that right now. We feel very good about this business.
- Doug Loe:
- Great.
- Jim Hamilton:
- You want to take number two, Mario, or?
- Mario Paradis:
- Number two -- I'll take --
- Jim Hamilton:
- Let me -- on the Aker. Yeah, look, we can't get into a lot of detail in terms of what specifically was and was not licensed and for how long, Doug. But let me just say that Aker has invested in a lot of innovations over the years. And our primary motivation here is freedom to operate and to stop litigation and stop the conflict where we could As I said earlier, build a platform where the companies could collaborate for the better of the industry and not be challenging one another on individual items of specific IP. So, I can't get into the detail, but let's just say that it clears any potential conflict for us in the foreseeable future. We feel very good about that.
- Doug Loe:
- Okay. Maybe specifically what I was sort of wondering about without asking it explicitly was whether there was any obligation on their side or perhaps with their U.S. partner, Reckitt Benckiser on perhaps infusing a bit more capital into promoting MegaRed or Superba just as a way to kind of bolster the profile for Krill Oil as an Omega-3 category, or I suspect that -- yeah, I don't know whether you can't comment on that, but that was just sort of a thought I had that might have been with the obligation back to you, might -- the obligation for you back to them might be on -- as reflected in your cash payment.
- Jim Hamilton:
- Yeah. Let's just say that it clears the air and creates I think an atmosphere that is conducive to those kinds of conversations as an industry, and we feel good about that going forward.
- Doug Loe:
- Okay. Thanks.
- Mario Paradis:
- And the third one, Doug, we're not totally finished with our litigation. As you may know, Aker was with Enzymotec for that court case. So we -- our intention is to restart discussion with Enzymotec. And if we're unable to settle before, so we will have this, still this court case by the end of this year. So it's really difficult to put in numbers as to what is our expectations in terms of reduction of legal fee. But certainly there will be a reduction.
- Doug Loe:
- That's good stuff. Thanks guys.
- Jim Hamilton:
- Thanks, Doug.
- Operator:
- [Operator Instructions] Your next question comes from the line of Robin Cornwell of Catalyst Research. Please go ahead.
- Robin Cornwell:
- Hi. Good afternoon and congratulations on your many successes in the quarter. Two questions quickly for Mario. I know everyone's, at least my clients, are very interested in the production level of NKO. Can you give us some idea where, what level production you're at?
- Mario Paradis:
- Yeah, again, we already confirmed earlier that our plant demonstrated the capacity to manufacture 160 tons a year, but now we have reduced that pace because the demand is not there, so we do not want to confirm on which phase we are. But let's say that we are actually manufacturing what we are selling. So it's just a good allocation of our money right now and we are confident to increase our demand and of course we have some room to come back to the 160 tons.
- Jim Hamilton:
- Yeah, I think I'd just add to that, Mario, that we are seeing an increase in volume sales as compared to prior year, helped in part through innovative products like Omega Plus. The facility is not running at full capacity right now. We would love to fill up with demand with Krill. But more importantly, and as I've mentioned in prior calls, we're also working, and this was some of the work we're doing in the summer, is to look at alternate compounds that we could use and decide to manufacture. Ultimately I'm happiest when we have a mixed-use highly-utilized facility, and we're motivated to do that. But it's not going to happen tomorrow. We're going to have a lot of work there to do to pull that off.
- Robin Cornwell:
- Well, that's interesting. That kind of leads me to another question I have on China. You mentioned sales. But we discussed it last quarter as well. Has there been any additional sales since in the quarter or further penetration into the Chinese market?
- Jim Hamilton:
- Absolutely. And we've recorded our first sales there in the second quarter as well as in the third quarter. I think that the interesting thing about China is we see it really as white space, as an opportunity to grow. If you look at the Omega-3 category in general in China, it's on fire. And so we're very optimistic. And only two countries can export material, western countries, can export material into China, and that would be from a facility such as ours in Canada or New Zealand. We're working hard in China to find the right method there to rapidly commercialize and we hope to talk about more of that in the near future, Robin.
- Robin Cornwell:
- Okay. And back to the Aker transaction, you've, you know, now you have a working relationship, because you both have I guess, as you say, different products and different patents, et cetera, that you can work with. Does this agreement allow Neptune to have direct transactions or discussions with Reckitt, possibly even Schiff [ph], even though Schiff [ph] has a long fairly negative history, but is there any possibility of getting sales from Reckitt?
- Jim Hamilton:
- Well, let me say, we don't like to talk about individual customers publicly because the relationships are confidential. I would add though that we're -- we know Reckitt Benckiser's people very, very well. I think they're very committed to the space and spent literally tens of millions of dollars in promotion and development of the market globally. We don't -- we see their continued commitment there, and we're going to work hard to be a good partner for them going forward.
- Robin Cornwell:
- And I guess finally, the -- your expanded distribution rates for MaxSimil. This kind of implies that you've had some fairly obvious success with it. Is this the case and have you been highly encouraged that you'll be successful with MaxSimil?
- Jim Hamilton:
- You know, Robin, I hope so. I mean it always remains to be seen. I think here's the great news. I mean the great news is, because we're - our interface is primarily with the innovative companies in the space, and this radar system is bringing us ideas such as MaxSimil, that's the great news. How well it commercializes, let's see. But, you know, this is a novel compound and this industry is calling for differentiation and innovation rapidly, and it's a compound and it's a science that is young but is absolutely resonating in the conversations that I've been witness to. And so we're going to see where this goes. It is a differentiated product. I don't envision that this product being necessarily competing in the bargain basement, you know, Dollarama or Walmart shops, but I do see it, whether it's an engagement with the consumer through practitioners, you know, through doctors, through health food store, because where there's a conversation and when you have a person that is challenged with some digestive issues, you know, price is not the issue. And it's going to be a product they're going to embrace. So let's see. We're jazzed by it and we're going to work to commercialize this not only locally but globally.
- Robin Cornwell:
- Okay. Thanks very much.
- Operator:
- There are no further questions at this time. I will turn the call back over to the presenters.
- Jim Hamilton:
- Well, good. Just thanks everybody for your attention and support. And we're going to continue to transform Neptune into a great nutrition products business focused on wellness solutions. And Mario, thanks for all your support too today.
- Mario Paradis:
- Thank you.
- Operator:
- This concludes today's conference call. You may now disconnect.
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