Neptune Technologies & Bioresources' CEO Discusses F3Q13 Results - Earnings Call Transcript

Jan.17.13 | About: Neptune Technologies (NEPT)

Neptune Technologies & Bioresources Inc. (NASDAQ:NEPT)

F3Q13 Earnings Call

January 17, 2013 4:30 PM ET

Executives

Henri Harland – President and CEO

Andre Godin – CFO

Mike Timperio – VP, Global Sales

Benoit Huart – Director, Legal Affairs

Analysts

Chuck Mounts – UBS

William Jordan – Allied Law

Ray Gaurav – National Securities

Robin Cornwell – Catalyst Equity Research

Bert Hazlett – Roth Capital

Operator

Good day ladies and gentlemen, and welcome to the Neptune Technologies & Bioresources Third Quarter 2012 Earnings Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session with instructions following at that time. (Operator Instructions).

And now I’ll turn the conference over to President and CEO, Henri Harland. Please begin.

Henri Harland

Thank you. Ladies and gentlemen, welcome to today’s conference call. Just a quick reminder that today’s call is being recorded. At this time, I’d like to turn the conference call over to – sorry, I missed paragraph, to Mr. Harland, which is me.

So, thank you everyone for joining us today. My name is Henri Harland, I’m the President and CEO of Neptune Technology & Bioresources. And joining me today are Andre Godin, Neptune’s Chief Financial Officer and Mike Timperio, Vice President Global Sales as well as Benoit Huart, Director of Legal Affairs.

Joining this call, Andre Godin will discuss Neptune’s third quarter results for the interim ended November 30, 2012, which will be perceived by an update on our action plans to resume operation and supply customer. Michel Timperio will also give an update on supply customer, as well as procurement.

Before we begin, I would like to remind everyone that during this call, we will make statements containing forward-looking information including without limitation those regarding Neptune’s ability to successfully execute its action plan. And please keep in mind that forward-looking information is based on a number of assumptions and is subject to a number of risks and uncertainties many of which are beyond Neptune’s control, which could cause actual results to differ materially from those that are disclosed and implied by such forward-looking information.

Additional information about this assumptions and risks and uncertainties is contained in Neptune amended and restated annual information form dated September 11, 2012. And its Press Release announcing its action plan dated November 26, 2012. And its other public securities filings available on Sedar and Edgar. Participants should not place undue reliance on forward-looking information. And any forward-looking information provided in the context of today’s discussion represents Neptune’s view only as of today date and is subject to change. Neptune does not undertake to update any forward-looking information except as required by applicable Securities Law.

We can now continue with our call. We should all also keep in mind and remember that the treasury of our company, faced on November 08, 2012, which continues to have a significant impact on our activities. Neptune’s primary focus has been concentrated on supporting its employees in the families affected by the incident and supporting through the tragedy.

As we speak, more than $224,000 has been invested in Neptune’s victim, fund put in place in order to cover the payment of the affected employee salaries in the period of November 08 to November 21, 2012. To answer some of the most urgent requests addressed by the victim family, including transportation to (inaudible) expenses and also to respond to certain long-term demands from the employees in need and their families.

So, I shall take this opportunity to inform the business community and the individuals touched by this tragic incident that can send donation to Neptune’s victim funds by mail at Neptune head office located in Laval, Quebec.

Following, as I’ve been said, the date, following the incidents we put in place the five following committees, Human Resource and Communication, Sales & Marketing, Trans Reconstruction, Finance and Strategic Committee overseeing potential strategic opportunities and coordinating the efforts of all committees, all of which are promising to avert their sales objective.

As per the indication of our action plan going forward, I will now provide you general update basis on the information we currently add in them. The first item I would like to address is Neptune plan reconstruction and entrance recoveries. Our dismantlement plan for the building that was destroyed has been approved by the authorities and dismantlement work is underway. We intend to reconstruction an operational plant using the existing exponential facility and are – we are in the process of selecting the assertive role and engineering firms in-charge of cementing the new construction plan.

Once obtained, this plan around with the respective schedule of work should provide us with more information on the delays we are facing. First of all, I’m pleased to announce the nomination of Mr. Dominic Labelle, who recently joined our company as Director Industrialization. Mr. Labelle is an engineer accumulating more than 20 years of industrial experience. His appointment was further strengthened our management team and our ability to execute our plan and manage the reconstruction process.

Planning for the reconstruction remains uncertain and will depend on a range of factors including the land and results of the investigation currently underway to determinate the cause of the incident, corporation or governmental or to it is with respect to the reconstruction plan, and timing for obtaining the required permits.

Based on the incomplete information currently – we currently expect reconstruction to begin in March 2013, Neptune though cannot determinate at this time the exact amount of time it will take to finalize the construction and have a fully operational production facility.

We have state a general expectation that the new plant maybe operational within a range of six to nine months from the announcement of our action plan. But at this point, we view a period in the vicinity of nine-month as likely being within that range.

We will be in a position to provide further and more precise update on timing, when the reconstruction work will be underway. We can of course assure you that employee safety will always remain one of the Neptune sub priority in the reconstruction of the state-of-the-art facility.

Our intimate goal for this year in fact is to reach production level by the end of the current fiscal year combining production both at the new plant into third manufacturing arrangement, for our comparable manuscripts to those that would have been in 2013 with a fully expanded operational facility.

Also, I would like to indicate you that Neptune has received confirmation from its insurance that it will receive a first interim payment of $6 million. We welcome this first payment giving the importance of our insurance recovery, pursuing our action plan to resume production.

This brings us to the next item I would like to address which cover arrangement with strategic partners in the actual commercialization of our products. We are actively pursuing our efforts to conclude partnership with one or more strategic partners for the outsourcing of production of Neptune krill oil product, both as an interim reserve to ensure certain level of production prior to our new plant being fully operational and as a longer term strategy to diversify a source and means of production.

We have met an interim into confidentiality agreement with a few potential strategic partners and are considering various alternatives. Interim reserves have been taking to make sales during a transition period and we are evaluating our long-term action to work with one or more partner that will best hit our production.

Our sources production is being considered in any one or more Neptune market in Canada, the United States, Europe and Asia. And as previously disclosed, any plans to outsource Neptune production to long-term strategic partners will take into account a number of factors as disclosed in our MD&A. We are confident that such arrangement should be concluded in the best possible delay.

Now, please let – I would like to introduce you Mr. Andre Godin, who will present a summary of Neptune’s third quarter financial results. Please Andre.

Andre Godin

Thank you Henri, good afternoon everyone. Thank you again for joining us. I will go through the results of the third quarter as previously communicated on January 15, in our Press Release. First I will start with the consolidated revenue. Our consolidated revenue for the quarter was $7,027,000, it’s an increase of 37% compared to the third quarter of last year.

For the nine months, the consolidated revenue increased by 55% to $21,273,000 compared to $13,756,000 achieved during the corresponding period last year. This increase in our revenue has been mainly attributable to the sustained penetration of American, Canadian and Asian markets of NKO and EKO for the first three quarters of the current fiscal year.

On the consolidated loss for the group of the companies, Neptune nutraceutical, BioPharm, we realized consolidated net loss of $12,437,000 for the quarter. The loss is mainly attributable to the write-offs required by accounting principles under IFRS rules and is composed of estimated impairment losses and cost related to the explosion that destroyed one part of the corporation production plant on November 08, 2012 for the amount of $8,465,000 yes.

And also the derecognizing of differed assets in the amount of $1 million and the long term investment tax credits recoverable in the amount of $1.2 million at November 30, 2012.

Our consolidated adjusted EBITDA increased by $114,000 to negative $629,000 compared to $743,000 negative for the corresponding three-month period a year before. And by 35% for the nine-month period to negative $1.190 million up from $1,818,000 obtained during the corresponding period last year. This improvement is mainly attributable to the increased revenue and gross profit in the nutraceutical segment. The nutraceutical segment, our revenue increased by 29% to $6,603,000 for this quarter, up from $5,120,000 achieved during the corresponding period ended a year before.

And we also increased by 50% to $20,598,000 for the nine-month period up from $13,750,000 achieved during the corresponding period of 2011. This increase in our revenue is mainly attributable as mentioned previously to the sustained penetration of American Canadian and Asian markets.

Our net loss from nutraceutical business reached $10,882,000 for this quarter compared to net income of $869,000 for the corresponding period ended a year before. The nutraceutical loss is due in most part as mentioned previously to the write-off costs related to the plant explosion for an amount of $8,465,000, the reassessment of recoverability of differed tax for an amount of $1 million and the reassessment of recoverability of investment tax credit recoverable for an amount of $1.2 million for the period ended November 30, 2012.

The adjusted EBITDA from the nutraceutical business of Neptune for the last quarter was lower than the corresponding period in 2011 but remained at a positive level of $432,000. Adjusted EBITDA from nutraceutical business for the nine-month period decreased to $2.2 million to $5 million down from $2.5 million obtained during the corresponding period a year before.

Now, our consolidated working capital and insurance payments. As of November 30, 2012, Neptune’s working capital is $42.5 million. And the cash on hand is slightly over $34 million. In addition, to these amount and as previously disclosed, Neptune has received confirmation from its insurer that they will receive a first insurance payment of $6 million further to the explosion that destroyed Neptune’s production plant, which should offset most our impairment losses previously discussed.

Neptune’s plant for operation and product sales during this transition period until its new plant is operational or until longer term production arrangement are concluded with one or more strategic partners may help in balancing cash flow and more importantly on meant to serve the strategic objectives of maintaining key customer relationship and market share.

However, how previously disclosed, Neptune’s operation for the foreseeable future, particularly during the transition period are expected to yield significantly lower margins compared to the usual sales margin prior to the incident.

Now, I would like to turn the call to Mike Timperio, who will provide you with an update on our commercialization and customer supply.

Mike Timperio

Thank you Henri and Andre. As the company reported before, we are in clients with engineers. We have therefore deployed our efforts to maintain key customer relationships. Clients have adapted and addressed it well. The situation is showing great openness, so the situation is showing great openness and understanding, this providing time to Neptune to address as well. This is as well a clear indication of strong market positioning with an appreciative brand and solid customer relationships.

In order to meet customer demand, we have in the short term recovered some our existing inventories and secured some older stuff from customers and partners. While working for the company – for the company to work on third party production partnership and the result in our home production. Our strategies serve us well and we are confident in maintaining our market presence. Thank you.

Henri Harland

Thank you Mike and thank you Andre. Again, I would like to thank shareholders for their support and tell you that Neptune would be relentless in its effort to bounce back even stronger. And we are now entering the question-and-answer session portion of the conference call. Mr. Andre Godin, CFO, Mike Timperio, VP Sales and myself as well as Benoit Huart, Director of Legal Affairs will answer any questions you may have. Please.

Question-and-Answer Session

Operator

(Operator Instructions). Our first question is from Chuck Mounts of UBS. Your line is open.

Chuck Mounts – UBS

Can you hear me?

Henri Harland

Yes.

Chuck Mounts – UBS

How is the development of the Neptune subsidiary, is it still on track?

Henri Harland

Yes, there is – Neptune subsidiary are not affected by Neptune’s treatment.

Chuck Mounts – UBS

So, that’s still on track?

Henri Harland

That is still on track.

Chuck Mounts – UBS

Okay. Now, with regard to your patent infringement and you IT portfolio, how aggressively do you have to be in this industry and how much a year are you going to spend to protect that?

Henri Harland

Thank you for your questions. Benoit, can you answer this question please.

Benoit Huart

Yes, thank you Henri, this is Benoit Huart. The tragic events of November 08, 2012 has not changed Neptune’s strategy with regards to our IT, and the different infringement lawsuits we have filed. It is Neptune’s intentions to maintain and continue the prosecution of our patent applications and we will continue to enforce our patents again infringers.

Chuck Mounts – UBS

Thank you.

Operator

Thank you. Our next question is from William Jordan of Allied Law. Your line is open.

William Jordan – Allied Law

Yes, thank you. How important are the lawsuits we’ve been reading about, can you – are you in a position to be – are you able to comment on them?

Henri Harland

Yes, Benoit, can you answer that?

Benoit Huart

Yes, again, this is Benoit Huart. Well, first of all we have not been served with any lawsuits. The US Securities Class Act, that has been filed against Neptune is the kind of claim that is not a typical when a public company faces particular challenges, particularly the United States where there is a greater tendency to launch these claims – these kind of claims.

Secondly, we believe that the claim is completely without merit and that Neptune adds substantial and valid legal and factual defenses which we intend to pursue vigorously. Neptune is well surrounded by the right professionals to address the claims and defending the claim will not take away Neptune’s focus on executing its business plan.

William Jordan – Allied Law

I’m satisfied, thank you.

Henri Harland

Thank you.

Operator

Thank you. Our next question is from Ray Gaurav of National Securities, your line is open. Pardon me, Ray, your line is open.

Ray Gaurav – National Securities

Sorry about that guys, Happy New Year first and foremost and hopefully you guys continue the success that we’ve seen this recent quarter with the expansions of the revenues gone forward. Can you guys talk to us a little bit about the – the cash position of the company, I’ve noticed there are some articles out regarding the cash position waiting for insurance payments, and whether you guys have any intention of raising any capital?

Henri Harland

Yeah, thank you for your question, Andre do you want to address this one?

Andre Godin

Yeah. About the cash position, we obviously just disclosed that Neptune right now has more than $34 in cash. There is no reason for us to raise any money, we have significant amount and sufficient amount to realize our action plans were hopefully we’ll try in the future to respect or to at least use the money within the use of proceed that we initially demonstrated to the best of our capabilities. And as I mentioned, we also received or we will receive in the next few days $6 million from the insurance so that will place the cash figure of above $40 million for the time being.

Ray Gaurav – National Securities

Okay, I’m very satisfied with that, thank you.

Operator

Thank you, our next question is from (inaudible). Your line is open.

Unidentified Analyst

Yes, thank you. Just a follow-up or two on the lawsuits, the way that the lawsuits are I guess one of the reasons through theirs – because of the acetone levels. In the past you’ve said that they weren’t above limits, could you just expand that for a minute?

Henri Harland

Yes, Benoit will…

Benoit Huart

Yes, Benoit Huart again, well, with regards to the acetone levels, I think this question has been answered previously and we mentioned that before that we have complied with all the regulations and Neptune has made a clear demonstration that acetone levels stored inside it’s distributable plant or used in production did not at any time exceed the levels permitted by the Quebec Ministry of Environment. Neptune had obtained the required construction permits for expansion and was in the process of obtaining the required environmental permit for the expansion.

Neptune is collaborating with the Ministry of Environment and other authorities and will continue to be transparent and dissatisfied with the process thus far, so going back to the lawsuit that as we said before, we believe that we have a valid defense and we will act accordingly

Unidentified Analyst

Okay, thank you. Just a follow-up, you announced that the Ministry would be trading on NASDAQ, do you have a date on that or is that just a plan for future announcement?

Henri Harland

Yes, I can see the ministry has been trading for almost a week now.

Andre Godin

A week now.

Henri Harland

And Andre, first of all ACST.

Unidentified Analyst

I’m sorry, could you give me that again.

Henri Harland

ACST.

Unidentified Analyst

ACST, okay, great, wonderful. All right, thank you guys.

Henri Harland

Thank you.

Operator

Thank you. And next question is from Robin Cornwell, Catalyst Equity Research. Your line is open.

Robin Cornwell – Catalyst Equity Research

Good afternoon. I was – my question is directed at your potential partnerships and we all know that these partnerships can be complex and including outsourcing partners. How realistic is it that you can complete negotiation and actually get production going within the timeframe of six to nine months.

Henri Harland

The time, I think I have an execution of the timeframe that it can be now with the execution that we do have on them to restore the plant as well as resume production. We foresee around nine months from now on, that’s the first strength. We are confident on the possibility of concluding agreement as we did present within the same timeframe. As per the rest of your question, I think if we – everything being within – if it’s still on processing and its around process Mr. Robin. And as you know we’re all looking forward to achieve it within the best possible time. But we work hard to award it.

Robin Cornwell – Catalyst Equity Research

What’s the – with the potential outsourcing you have to negotiate, first of all I guess the contract, then how long is it that you expect before they can convert their plant and actually start producing your product?

Henri Harland

This is still within the same timeframe because we – enforcing and are in discussion with companies already working with solvent.

Robin Cornwell – Catalyst Equity Research

I see. So, the plant would – an outsourcer would have to do substantial changes to their plant or is it minor adjustments in order to begin production?

Henri Harland

This is still done, yes, Mr. Robin, as per now – so I cannot answer right away to that question.

Robin Cornwell – Catalyst Equity Research

Okay. My second question is basically how do you fulfill distributor demand without a plant, what’s the process, could you describe the process whereby you have been converting – your Krill oil or secure source of the krill oil and then refine it to your standards to supply to your distributors? Can you…?

Henri Harland

Yes, we’d like Mr. Timperio, Mike to answer this question.

Mike Timperio

Thank you. Yes, as I explained before, short term was recovered some of our existing inventories and secured some stocks, some over stock from existing customers and partners. So, that’s basically what we did.

Robin Cornwell – Catalyst Equity Research

I see. So, what is the maybe for Andre, what is the inventory that you have as at the quarter end which is about $9 million of inventories, is that what you’re referring to or is that something separate?

Andre Godin

Yeah, yeah, this is what we’re referring to. We also since we are answering in the fishing season, we do have to start buying frozen krill for next season because obviously when the plant reopens whether it’s through a strategic alliance or and/or Neptune plant insure work, we need to have supply. So, we’re starting solely building some inventory as well.

Robin Cornwell – Catalyst Equity Research

Okay. Thank you.

Operator

Thank you. Our next question is from Bert Hazlett of Roth Capital. Your line is open.

Bert Hazlett – Roth Capital

Thanks, congratulations on your progress, it’s been a challenging time for you. And you’ve made a lot of progress. I just have a quick question, it’s a follow-up to the prior one, and the prior several. Long-term, do you prefer to engage in partnerships for potentially redundant capacity to what you were currently contemplating and expansion at Sherbrooke or do you prefer to actually consider to build at an alternate site, again this is longer-term thinking, is it or a partnership or would you consider building your own at an alternate site?

Henri Harland

Thank you for your question. We will maintain production, we will resume production in Sherbrooke, looking forward for the full capacity as well as concluding partner and mainframe factory manufacturing our product. So, it’s going to be a combination of both to expand.

Bert Hazlett – Roth Capital

Thank you for your answer, I appreciate it.

Operator

Thank you. Our next question is from Susan (inaudible) & Company. Your line is open.

Unidentified Analyst

Hi, thanks for taking my question. Andre, you already that sets me insurance coverage, my question is what is the balance that you are looking for in terms of insurance?

Andre Godin

It’s a little bit difficult to say at this time. What we know is that the Neptune is covered for roughly $20 million. But that includes business interruption that includes as well as damages, loss in equipment and building. But basically it will depend along we’ll stay interrupted for the business interruption coverage. We need to submit claims on the path loss, so basically every two, three months or so we will be submitting claims to basically capture the loss on business interruption.

For damages, on equipment and loss of equipment and building we will be submitting probably in February. So, I think we’ll be getting money on an ongoing basis until we resume production. But depending on the loss, depending on the business interruption, we’ll know at the end how much money will have got. But basically we can go – we could potentially get to an emergent if we capture all coverage that we have right now.

Unidentified Analyst

Thank you.

Andre Godin

You’re welcome.

Operator

Thank you. This ends the Q&A portion of today’s conference. I’d like to turn the call over to management for any closing remarks.

Henri Harland

Thank you again. An archive of this call will be posted on Neptune website. And if you have any other questions please don’t hesitate to call us, or Dave Burwell from the Howard Group. Thank you.

Operator

Ladies and gentlemen, thank you for your participation in today’s conference. This concludes the program. You may now disconnect. Have a wonderful day.

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Neptune Technologies & Bioressources (NEPT): Revenue of $7.03M (+37% Y/Y) misses by $1.1M. (PR)