Neptune Wellness Solutions Inc.
Q4 2015 Earnings Call Transcript
Published:
- Operator:
- Good day, ladies and gentlemen. And welcome to the Neptune Technologies & Bioresources’ Fourth Quarter 2015 Earnings Call. At this time, all participants are in a listen-only mode. Later we’ll 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 call over to Mr. John Ripplinger. Sir, please go ahead.
- John Ripplinger:
- Well, thanks, Operator, and good morning, everybody, and thanks for joining us today. As mentioned, the purpose of today’s call is to review our results for the fourth quarter and fiscal year ended February 28, 2015. Joining me today are Jim Hamilton, Neptune’s President and CEO; Pierre Lemieux, Chief Operating Officer, Acasti; and Leendert Staal, will provide consulting services in connection with our Sherbrooke plant and as announced yesterday he is also our Neptune Board Nominee. Jim will review Neptune's operational and financial highlights, Leendert will provide a detailed update on our plant situation and Pierre Lemieux will discuss Acasti’s operating highlights. We’ll then open up the lines for questions. Before we begin, I’d like 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 are in our filings with the Canadian Securities Commissions and the SEC. With that, I will turn the call over to Jim.
- Jim Hamilton:
- John, thank you very much, and good morning, everybody. It’s good to be here. I just wanted to share with you some opening comments and then will pass the gavel over here to Leendert and Pierre shortly. Let me begin by just saying that our number one priority has been manufacturing. Our plant is the foundation that will be building our business and our primary objective is to ensure that we can optimize the output in the cost effective manner. And I am very pleased to report that we are making significant progress and are currently able to deliver a premium product to our customers. By way of background, Neptune has modified its manufacturing process to improve product handling characteristics or viscosity. Currently, we are running at an operating annualized capacity of 75 metric tons. We are working hard to keep that momentum and expect to reach an effective capacity of 100 metric tons very, very shortly. So we have got the right team in place, addressing this challenge and are doing so, I believe in a very timely manner. And as mentioned earlier, Leendert, will participate in the call today and share with us few more insights in regards to our manufacturing. In addition, I am very encouraged by our sales funnel. This has enabled, of course, by the performance we are seeing in manufacturing. Accordingly, we expect significant improvement in our second quarter revenues and beyond. Based on these improving fundamentals, we believe cash levels should be sufficient to fund operations over the next 12 months. But let me add, we have made very reasonable assumptions here, it will be a challenge nonetheless and we need as a team, management and the Board to execute on all levels. Turning to some intellectual property news, somebody may have read recently that the Australian Patent Office completed their review of our Australian composition patent coming favor of Neptune and triggering our royal payments to us by Enzymotec. In their examination the Patent Office found all Neptune claims are patentable and as you may recall, Enzymotec’s royalty obligation in Australia were dependent upon outcome of this review. I should add that re-examine of this patent has no impact on Neptune’s license agreement with both Rimfrost and Aker. Moving to our Board, yesterday, we also announced a solid state of Director nominees for upcoming Annual Meeting, along with the establishment of independent boards for both Neptune and for Acasti. Over the past year we have seen significant strengthening of our leadership team and new Director nominees, and we are -- I am really, really happy with the business experience and perspectives they would bring. Let me begin by Leendert Staal, a little bit of background. I’ve personally worked with Leendert for a number of years and have a tremendous respect for him. He is a very seasoned and accomplished executive, strong record of value creation in the nutraceutical space and pharmaceutical space. And I would like to add a big believer in omega-3. So most recently he was CEO of the world’s largest nutrition ingredient business at DSM and just for reference, DSM is a $36 billion turnover business globally with sites really around the world and a tremendous leader in science. And Leendert, I would say, was instrumental in the investments DSM made in the omega-3s with Mortek Bioscience and Ocean Nutrition, which I was very happy to work with him on and also a consumer of krill himself. But I’ll let Leendert speak to that in a moment. Also joining us will be Katherine Crewe, strong and a provocative leader, I believe, and a track record for success both in manufacturing and business processes. Thirty years in the medical device, pharmaceutical manufacturing space, sales, distribution spanning the globe and previously worked at both Mallinckrodt and Cryocath Technologies. We are very happy to have Katherine join us. And in addition, Francois Roy, extensive experience and executive in both the private and public sectors previously CFO with Télémedia, and Executive Vice President at Quebecor, both very, very large corporations and currently sits on the board of Caisse de depot which, for reference, is one of the larger asset management organizations at over $225 billion in management. So tidy sum at the case. So on behalf of the board and management team, I would like to thank all our outgoing board members for their years of service. And with that, I’d like to get back to focusing on our business and manufacturing in our Sherbrooke plant and invite Leendert to say few comments and I’ll come back with some more business perspectives in a moment. So Leendert please, the floor is yours.
- Leendert Staal:
- Thank you, Jim and good morning everyone. Well, let me start by saying, I’m excited about joining Neptune’s board and also I'm excited about the opportunities ahead. Neptune has a strong foundation in science, intellectual property and entrepreneurship but also it has seen some temporary setbacks. So I asked the question or I get asked the question, why I’m here? Well let me tell you it’s first and foremost because I believe in Jim Hamilton He took on the leadership of Neptune at a difficult time because he believes he could make a difference and I wanted to support him in his mission. Secondly and already mentioned by Jim, I’m a very big believer in omega-3 and more recently in krill oil in particular and yes, Jim, I take krill oil in the morning. Now, thirdly, when I look at Neptune, I see nothing that cannot be fixed. So in summary, I’m very excited. Initially, I was asked to assist Neptune’s with its production issues. And what I found was state-of-the-art plant with built-in expansion capacity. I’ve been in the industry for many years and I’ve seen many plants and I’m actually very impressed with what I’ve seen at Neptune. Looking closer at production, let’s start with some background information. As you are aware, upon completion of ramp-up period, this Sherbrooke plant was operating at an annualized capacity of 150 metric tons and all production specifications were being met. However, soon we became aware of challenges relating to product handling characteristic, let’s say viscosity which were not in line with what customers were expecting and frankly not in line with what Neptune was expecting for the premium oil. And to address the issues, production was slowed in order to reprocess the oil to reduce its viscosity and enhanced its product handling characteristics. At the same time, various studies were undertaken to determine the source of the viscosity issues and to identify cost effective solution. As part of the initial investigation, a detailed assessment was made looking at the differences between the original and the new plant, particularly, that may affect product quality. Of course, there are differences between old and new plant such as design capacity, future expansion capabilities and degree of automation. However, they were not enough to suggest that the new plant was the root cause of the production issues. So as a result, we turned our attention to raw materials being used, frozen krill. Now, frozen krill is a natural product with natural variability, actually surprisingly, huge variability depending on the season. Lipid concentrations and lipid compositions really strongly vary depending on the season. Neptune sources carefully, with strict quality guidelines during actual harvest, including onboard freezing and cold storage. There are quality assurance procedures in place for subsequent shipping in cold storage. Nevertheless we have to conclude that frozen krill ages over time. Neptune has considerable inventory of deep frozen krill, some dating back to the old times. And it has become apparent that not all of it is suitable for use and a write-down of certain age, non-usable inventory was incurred during the quarter. Let me turn to production and to the link between production and krill characteristics. During normal operation, the process parameters are adjusted to address the natural variation of krill. However, with the current inventory, we need to make additional process modifications to control the oil viscosity so that it fully meets customers’ expectations. The process has been now at in place, is robust, but does result in reduced plant output. We continue to work on this. Going forward, we are confident that we will identify more efficient process combinations and that effective plant capacity will return to our original preliminary objectives of 150 metric tons annually. On top of this during our investigations, we have also identified a number of opportunities for future process improvements. These include debottlenecking and general cost reductions, which we are starting to address now. In closing, I would like to highlight that we are currently producing and selling oil that fully meets customers’ expectations. Let’s also remind ourselves that production start-up issues are not uncommon. Fortunately, we have the right team, the right plans and the right result. And with that, I would like to turn the call back over to Jim for discussion of Neptune’s financial highlights. Jim?
- Jim Hamilton:
- Yeah. Thank you very much, Leendert. I should probably add as far as Leendert’s resume that he is actually a scientist, a Ph.D. in Chemistry and his early phase of his career of highly-highly active process research and operations and what has been so helpful is not only Leendert’s capabilities relative to our manufacturing challenges, but is also his ability to tap into his network of subject experts globally that we’ve been able to bring to Pierre and his problem. And I think we have witnessed the success we’ve had with the traction we are getting into the site right now, so Leendert, thank you very much for that. Turning to financials, let’s just remind everybody that our results are in Canadian dollars and these remarks contained forward-looking statements as well as the ongoing issues of Sherbrooke plant rendered, you will realize that it’s difficult to always have comparisons on your results. My comments today will focus mostly on quarterly results of the Nutrition business and consolidated and annual information can be found in the press release of course and Neptune's consolidated financial statements, the related MD&A and this is all available on SEDAR, EDGAR Investor sections of the Nutrition website. So turning to results. Revenues for the third quarter were $3.8 million. This was up from $3.5 million in the prior year. And revenues for the current quarter are and will be impacted by viscosity issues that we’ve identified. The consolidated gross margin as a percentage of revenues was 26% for the quarter, up from 20%. The adjusted margin for the current quarter excludes certain costs included in cost of goods related to manufacturing issues of $2 million and $4 million for impairment of inventory. This cost issue of the plant has been linked to some of the krill inventory and stock and therefore was necessary to take the write-down on certain of this inventory. And it’s important to say that we do not anticipate further needs for inventory write-downs at this time given our very extensive work that we are doing in the site right now. Moving over to nutraceutical, EBITDA -- adjusted EBITDA was negative $7.4 million for the quarter, compared to negative $1.5 million in the prior period. Year-over-decline in adjusted EBITDA was largely due to higher cost of goods described earlier along with lower income from royalty settlements. As to the nutraceutical net loss, Neptune recorded a quarterly net loss of about $8.6 million versus a net loss of $1.3 million in the prior year. The higher net loss is due to the same factors outlined in EBITDA, as well as the prior year Neptune received insurance recoveries related to the 2012 plant incident. This was partially offset by decrease in stock-based compensation expenses. By the second quarter, however, we do expect a significant sales increases linked to our improved plant performance and product availability. Switching to liquidity, the corporation has consolidated cash and short-term investments of $27.6 million as of February. $9.2 million of this is Neptune and $18.4 million on the books for Acasti. Let me just say before I hand over to Pierre that in the last few months, much has been done to strengthen Neptune both for today and the future. I’m pleased with the positive momentum, especially that we are seeing in the plant. I’m very, very pleased with what we are seeing developing our sales pipeline. And as I mentioned earlier, as a consequence, we are expecting stronger sales in second quarter ending August 31. There are no shortage of challenges here as Leendert touched on. And I knew this would be the case in joining this company but like Leendert said, none of these is not beyond flexibility and we are working hard to do that now. And I’m very excited by this. I’m very excited by the team we’re building here and I’m very, very excited by the capabilities that we’re bringing online with some of our new Board members. So far we are making progress. With that, I’d like to pass over to Pierre Lemieux for some comments on Acasti and then we’ll open up for questions. So, Pierre, takeaway?
- Pierre Lemieux:
- Thank you, Jim and good morning everyone. As announced yesterday, Acasti continues to focus of course on the clinical development of CaPre. Following receipt of data for our Phase I PK study and Phase II clinical trials, COLT and TRIFECTA, we provided the data package to the U.S. Food and Drug Administration, so called FDA to receive direction and confirmation on our requirements for our phase -- pivotal Phase III trial. The trial is to be pursued of course on there and amended an IND application. Acasti is corresponding with the FDA to determine next steps in the clinical development of CaPre and obtained a required authorization to proceed with such steps including initiating a Phase III clinical trial. Such correspondence is meant to allow the FDA to provide feedback on Acasti submission and to answer specific questions on such filings. Prior to a final response from the FDA, any exchange with them can take the form of a written correspondence, discussions and potentially face-to-face meetings. The company is working to respond to FDA feedback and will be working with them to determine resolution and direction needed to advance to a Phase III trial. As mentioned in our last quarterly call, I would like to highlight that developing a new drug candidate is a long-term commitment that is not without challenges and constraints. Moving from our clinical testing stage to marketplace will require that safety and efficacy as confirmed. We still need to meet a number of material clinical and regulatory milestones ahead. That said, with the strong management team and experts in the field, along with an impressive slate of Director Nominees, including two new candidates for election at our next Annual Meeting, we are well equipped to continue with our clinical development plans. The new Director Nominees include Dr. Roderick Carter, MD, is a physician with significant experience developing and commercializing nutraceuticals and pharmaceutical products and successfully lead clinical research and business development strategies for cardiovascular and inflammation related disease. Notably, our Dr. Carter was Vice President of Clinical Development at Reliant Pharmaceuticals, which develop the omega-3 cardiovascular drug called Lovaza, which is today a wholly owned subsidiary of Glaxo. Our other Board nominees is well known to all of us, Jim Hamilton. In addition to Neptune's ownership in Acasti we have close ties through the associated benefits Krill Oil brings for both nutraceuticals and pharmaceuticals applications and we look forward to Jim’s participation, of course. Together with the other Board nominees, they are well-positioned to help support management in its growth initiatives. With that, I’ll turn the call back over to John. Thank you.
- John Ripplinger:
- Well, thanks, Pierre. This ends our formal remarks for today. I’d like to now turn the call back over to the operator for the Q&A portion of the call. Operator?
- Operator:
- Thank you. [Operator Instructions] And our first question comes from the line of Rick Schottenfeld from Coyote Capital. Your line is open. Please go ahead.
- Rick Schottenfeld:
- Hey, guys. I got two questions. The first one is and I might have missed the very beginning of the call, if you said this, I apologize. But in terms of the write-down of the frozen krill that wasn’t useable? Is there a possibility for insurance claims against that as it went bad because the plant took fallen up and was no longer usable?
- Jim Hamilton:
- Rick, its Jim, and thanks for the question. The answer that is absolutely, yes, it’s on our list and we’re now developing that right now, so we’re looking into that as we speak.
- Rick Schottenfeld:
- And then also in terms of sales momentum, can you talk a little bit about what’s going on in your order pipeline?
- Jim Hamilton:
- Yeah. Thank you, Rick. Again, I mean, I’m very, very encouraged there and it’s really a two components. One component is some tremendous traction we’re getting with some major marketers in this area and we’re looking forward to starting commencing a new relationship in that regard. Number two would be the reality of our inability in past to deliver quality product on time. I have essentially taken the position with some of our key relationships and these are -- many of them are friends -- personal friends of mine, who say, we are not ready for you today. When we are ready we will come back. And the answer I have got from some those friends us, when you are ready, Jim, the doors will be opened and those conversations are now beginning. So I’m confident that we will be able to deliver on a much more robust second quarter sales number than we have been able to deliver given availability and viscosity issues of past.
- Rick Schottenfeld:
- All right. Thank you.
- Operator:
- Thank you. Our next question comes from the lines of Doug Loe from Euro Pacific. Your line is open. Please go ahead.
- Doug Loe:
- Yeah. Thanks very much, and good morning, gentlemen. Thanks for the update on the business and your Board reconfiguration for both firms. Just a couple of things for me, so first of all, I appreciate the feedback on what some of the challenges might have been on both physical properties of oil that you have been manufacturing in the new facility, would not have guessed a priority that alterations of frozen starting material would have been the problem though. So without getting too technical for the general audience, I just be kind of interested on how that could conceivably be one of the possible reasons for why that was giving you some challenges on end product? So that’s the first thing. And then second of all, just reflecting on some general macro economic parameters in the overall industry, just noting from one of your peers, Aker, as an example that there are krill oil support of production has been generally flat over the last three or four quarters and I just don’t mean for this question to be in a fairly Aker specific but just wondering to what extent you might see that as reflecting on overall global krill oil demand and just what sort of trends you’re seeing on how phospholipid ester formulation and krill oil derived products specifically is gaining traction in the marketplace? And how specifically you believe that it can be positioned, sort of, capture growing market share in the overall omega-3 free space? Just a general comment on macro market parameters would be helpful there. I’ll leave it there. Thanks.
- Jim Hamilton:
- Yeah. Doug, both great questions, I would look to Leendert comment firstly on the inventory.
- Doug Loe:
- Happily do so.
- Leendert Staal:
- Yeah, I understand your question. Surprised that there is a link between krill characteristics and product quality, well, if you’ve been in this industry for a period of time then this is not a surprise. This is actually to me, it was a surprise to see variability in characteristics of an oil depending on seasonality. It’s well known and adjustments are being made. And if I say on the day-to-day basis, I’m probably overstating it somewhat but adjustments are made depending on the lipid composition that exists in the krill. Now those lipid compositions can also be -- show some variability depending on etching and have similar impact that was indeed somewhat surprising. And without getting too technical, I have not only that I want to be not too technical but also you probably appreciate that’s -- there is maybe opportunities for intellectual property here. Definitely this is something that’s definitely not ready to talk about today.
- Doug Loe:
- Okay.
- Jim Hamilton:
- Hey Doug, Jim. Just on the market and this is where ultimately this organization and our investor should be focused upon. This market depending on the estimates you look at from past experience and external sources is anywhere between $1.5 billion and $1.7 billion in total. This would be the, call it the DHA, EPA space. This business call it krill, total market is about 7% of the value, probably mid-single digit. I think the challenge for this organization and others in this business is to find ways to make sure that krill has its rightful place within the total omega-3 category and that’s what we will definitely be focused upon. We also have to execute on the ground level and that is making sure that we have our fair share of the existing total market and that’s also our things. So two things, we got to execute at customer level to make sure that we got our rightful share and then ultimately we need to grow into the bigger omega-3 space.
- Doug Loe:
- Okay. That’s helpful. Thanks, Jim.
- Operator:
- [Operator Instructions] Our next question comes from the line of Larry Palmer from Sun Life Financial. Your line is open. Please go ahead. I apologize it looks like he did remove himself from the queue. And at this time, I am showing no further questions.
- John Ripplinger:
- Okay. Operator, well, thank you very much. I, with that, end the call for the day then. Thank you everybody for joining us. Have a good day.
- Operator:
- Ladies and gentlemen, thank you for participating in today’s conference. This does conclude the program and you may all disconnect. Everyone have a great day.
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