Neptune Technologies & Bioressources' (NEPT) CEO Jim Hamilton on Q3 2016 Results - Earnings Call Transcript

| About: Neptune Technologies (NEPT)

Neptune Technologies & Bioressources Inc (NASDAQ:NEPT)

Q3 2016 Earnings Conference Call

January 13, 2016 08:30 am ET

Executives

John Ripplinger - Investor Relations

Jim Hamilton - President, Chief Executive Officer, Director

Mario Paradis - Chief Financial Officer

Analysts

Richard Schottenfeld - Coyote Capital

Robin Cornwell - Catalyst Research

Operator

Good day, ladies and gentlemen, and welcome to the Neptune Technologies & Bioressources' Third Quarter Fiscal Year 2016 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session and instructions will be given at that time. [Operator Instructions] As a reminder, this conference is being recorded.

I would now introduce your host for today's conference, John Ripplinger, Investor Relations. Please go ahead, sir.

John Ripplinger

Well, thank you, operator. Good morning, everybody, and thanks for joining us today. As mentioned, the purpose of today's call is to review our results for the third quarter ended November 30, 2015.

Joining me today are Jim Hamilton, Neptune’s President and CEO; and Mario Paradis, Neptune and Acasti's Chief Financial Officer. As usual, Jim will review Neptune's operational highlights, followed by Mario, who will discuss the quarterly financial results. After this, we will open up the line for questions.

Unfortunately, due to a family illness, Pierre Lemieux, Acasti's Chief Operating Officer, could not join us today, but during the Q&A, Mario can address any Acasti financial questions and Pierre will be available for any follow-ups upon his return.

Before we begin, I would like to remind you that all amounts are in Canadian dollars and today's remarks contain forward-looking information that represent our expectations as of today and accordingly are subject to change. We do not undertake any obligation to update any forward-looking statement except as maybe required by Canadian and U.S. Security Laws.

A number of assumptions were made by us in preparing these forward-looking statements, which are subject to risks. Results may differ materially, details on these risks and assumptions can be found in our filings with the Canadian Securities Commissions and the SEC.

With that, I will turn the call over to Jim.

Jim Hamilton

Thanks, John, hello and good morning, everybody. I am pleased to be reporting another quarter of improving financial and operational strengths both, on a top-line and bottom-line, and with our recent acquisition of Biodroga, I believe, we are becoming a much stronger company and even stronger partner to our customers.

Biodroga allows us to move up the value chain via turnkey product development services, such as formulation blending and it is a new growth vehicle and significantly larger addressable market. The acquisition also brings a super leadership team, with some really highly accomplished people in the sales operations, science innovation and these guys are really expert and they have a strong record of success and I personally been very excited to see the conversations happening amongst our respective teams. Right from the start it is very energizing for me.

I am really pleased also with the great comments we received from the transaction both, from our customers and from the investment community, many of whom are here on the call today and we look forward to seeing everybody in the coming days and weeks to talk about this transaction and also our year-to-date performance.

By the way, for those who were not able to listen in on the conference call Friday morning detailing the transaction, it is posted on our website and I invite you to listen to that.

Moving to our quarterly results, Mario is here and he will be giving much more details in a second. Total revenues were CDN $5.5 million and revenues from sales are CDN $5.1 million, in line with the preliminary results we announced back in December.

Relative to our productivity and efficiency program, Project Turbo, profitability continues to strengthen as we lever these cost reduction initiatives and drive our margin improvement. This is resulting in improving our bottom-line, and clearly we need to maintain sales momentum along with this discipline to continue the results as we go forward.

Moving to intellectual property, we continue our efforts there to resolve these outstanding issues as quickly as possible. As many know, it has gone on for long time. There is no change that we can report today relative to this, but we remain very committed to it and very vigilant and just a smaller side there, we had a recent tradeshow experience, where we had a new agent producer who did not have a license to remove from the show and it was a wonderful motivator for conversation across the industry with us in this area.

Neptune has undergone a significant business transformation these past months. Back at our annual general meeting in July to those who were there, we discussed our work plan, our agenda for what we call, riding the ship and then moving it to latter half of the year setting the sales. As we entered the New Year 2016, we will be focusing on racing forward. To do so, I have mentioned back on Friday, about the four key pillars that we will be focusing on.

First, we will continue to strengthen our core krill oil franchise through strong operational excellence and this includes transitioning to even a more sales-driven organization, manufacturing excellence, strong financial discipline. Project Turbo is actually a key driver behind or underpinning this. Mario will speak to some of that in a moment.

Second, moving up the value chain, to be a better partner with customers in turnkey solutions and our acquisition of Biodroga will clearly help us in this regard.

Third, look for ways to better lever our IP technology globally. It is a valuable asset and we will be looking for ways to monetize that.

Finally and very importantly innovation and we will be and are looking at ways to expand our specialty portfolio in related spaces.

With that, I will turn it over to Mario to talk - detail on financial results. Mario, please.

Mario Paradis

Thank you, Jim, and good morning everyone. Before commencing our quarterly review, I would like to remind you that our results are in Canadian dollars, and today's remarks may contain forward-looking statements. As well show [ph] at Sherbrooke plant render as you may realize difficult analytical comparison between year-over-year results.

My comments today will focus on quarterly performance of our nutraceuticals business unless otherwise indicated.

Company related year-to-date information can be found in our press release and the Neptune's consolidated financial statements and related MD&A, available on SEDAR, EDGAR and the investor section on Neptune's website.

Turning to our nutraceutical results, revenues for quarter were CDN $5.5 million, up 26% over the second quarter of the current fiscal year and 17% better than Q3 last year. On a currency-neutral basis, revenue increased by 22% over the second quarter and were stable over last year.

Our quarterly gross margin as a percentage of sales also continued to recover coming in at 24%, up eight points over the 14% recorded in the second quarter of our current fiscal year. This improvement is being driven by stronger revenues and Project Turbo.

We expect to see continued margin improvement in the coming quarters as these cost reduction projects gain full traction.

As discussed in the second quarter call, Project Turbo should generate around CDN $5 million in savings once fully implemented by fiscal year ended February 17. To-date, we have identified and launched initiative that will allow us to realize 75% of our targeted savings, with about 30% of the total expected savings already reflected in our results.

Most of the savings are coming from optimizing business processes and reducing general and administrative expenditures, largely through operations and process improvements at our Sherbrooke plant. This includes HR optimizations, warehouse savings and lower byproduct disposal costs.

Moving along adjusted EBITDA also continued to strengthen coming at the negative CDN $0.6 million for the current quarter compared to negative CDN $1.6 million in the second quarter of the current year and a negative CDN $2 million in Q3 last year. The year-over-year improvement was largely due to stronger sales and the higher gross margin.

Our quarterly net loss was also significantly lower coming in at CDN $1.3 million versus a net loss of CDN $3.2 million, last year. The lower net loss is due to the same factor outlined for adjusted EBITDA. In addition, during the current quarter Neptune received insurance recovery totaling CDN $0.5 million relating to the 2012 plant incident. As well, the prior year quarter included additional expenses related to plant ramp up costs.

Turning to our liquidity, the corporation had consolidated cash and short-term investments of CDN $19.2 million as of November 30, 2015. Of this CDN $5.1 million was for Neptune and CDN $14.1 million for Acasti.

Neptune's quarterly cash balance rose CDN $1.7 million over to CDN $3.4 million recorded at the end of the second quarter, largely due to the receipt of CDN $1.1 million of investment tax credit, along with CDN $0.5 million previously mentioned for business interruption insurance.

For the fourth quarter, as previously stated in the second quarter, the six-month period ending February 16 should cash flow-neutral, meaning, that we should be approximately at the same level that at the end of the second quarter. We are expecting a slight decrease from the actual cash level related to our working capital and debt repayment needs.

Going forward, we will continue to focus on strengthening cash flows and expect ongoing improvement as margin will continue to strengthen.

Turning to Biodroga for a moment, we will be reporting their financials in combination with Neptune nutraceutical operation going forward. For the current quarter ending February 29, 2016, we will commence reporting their financials effective January 8, 2016. As previously highlighted, we expect the transition to be immediately accretive for our shareholders.

In closing, we are pleased with our progress and performance in the third quarter. While we have still have work to do, we are very excited about the opportunities ahead as our productivity initiative continue to be rolled out and we put in place our strategies for long-term sustainable growth.

I would turn the call over to the operator for the question period.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] Our first question comes from Richard Schottenfeld of Coyote Capital. Your line is open.

Richard Schottenfeld

Yes. Hi, guys. Congratulations on a great quarter and the acquisition. You have really done a good job in putting the company on solid footing here. I want to talk a little bit about the plan. I know last quarter you told us it was operating at around 175 tons annualized capacity. I was wondering, you know, where did it run this quarter, and I guess in general you know, are we maxing out the plant? Do we have more upside from here? Can you just walk us through the dynamics around the plant and our capacity to produce?

Jim Hamilton

Yes. Rick, thank you. It is Jim, and let me answer that. We reported formally 160 metric tons as the effective capacity. It is a natural product and we see some months that are better than others depending on the raw material mix and a few other things, but it is running at 160 metric ton.

We do have a project and I think I have mentioned in private calls and at meetings to look at the expansion possibilities and there is a whole range of possibilities we can do with the whole range of investments, so those investments, if we were choose to do them, would be relatively minor and that would be in the low single-digit millions if we chose to from a hardware standpoint.

There is also some new production pathway technologies that we are looking at that may be less investment that it could increase the capacity as well. Formally and effectively it is 160 metric tons right now and we have projects to look for more in it.

Richard Schottenfeld

Was it maxed out this quarter? I mean, can I expect outside of the Biodroga acquisition? Can I expect growth from the nutraceutical production side and without any CapEx or have we pretty much maxed out now what the plant can do?

Jim Hamilton

The way we are operating today it is running at max.

Richard Schottenfeld

Okay. Now, in terms of the gross margin, when you complete Project Turbo, and with plant optimizations, whatever they are on your roadmap, what do you think our ultimate target margins are on the nutraceutical side?

Mario Paradis

Rick, it is Mario.

Mario Paradis

Yes. Rick, it is Mario, so we should be in a range of slightly higher than 40%. As we speak, the third quarter was at 24%. We anticipate 10 points higher in the fourth quarter. This is based on be production cost that we have seen in the last few months, because these production will be will be so in the fourth quarter, so that is we are pretty confident that these gross margin will increase in the fourth quarter by approximately 10 points.

Richard Schottenfeld

That is great. Also, on the IP side, you talked about leveraging your IP, and I am assuming that means licensing other people to be able to use acetone as opposed to alcohol to render krill. I would assume that infringing on your other patent is just a matter of finishing that process, but could you sort of take us through the steps that are left before we start getting the royalties on the infringers on using krill as a nutraceuticals and also talk to us about the sort of strategy around licensing the acetone technology?

Jim Hamilton

Yes. Rick that is a big answer, big question, I think, first and foremost, it is the license, the capability for others to sell in the market and as you know we have had a protracted and lengthy discussion with a couple of major growth of marketers. The timeline on that would be the result through the federal courts. Through the latter half of this year, I would say approximately October-November, would be the only recourse assuming we are successful would be for those people to go to the Supreme Court, which is highly unlikely, so we would anticipate resolution on that thing, if it goes through the normal process by the end of the year.

Although we are motivated to see if we can resolve things sooner, now with that we would be with the majors. What we also are seeing is some smaller upstart firms, Asian-based largely China that have put their toll in the water and we have clearly reached out to them to tell them what the rules are if one chooses to sell in major markets like U.S. Canada, Australia, et cetera, and we had invested in an attention getter last fall where we had one firm physically removed from a tradeshow. The U.S. marshals had showed up in Nevada and took these guys out, tore the booth down and it was a great wakeup call for they and others in the industry that our IP has strength, it has meaning and they need to sit down and talk to us, so it was great conversation motivator and that is happening.

Relative to the acetone, we have a limited IP there. I think it goes on for another year or two, three years and it certainly benefits in using acetone with the residual solvents or less product purity, et cetera, and there has been one party that has been interested to look at that with us and those dialogs continue. We will see where it goes.

Richard Schottenfeld

All right, thank you guys. Good job.

Operator

Thank you. [Operator Instructions] Our next question comes from Robin Cornwell of Catalyst Research. Your line is open.

Robin Cornwell

Hi. Good morning and very good quarter. Maybe you could focus on revenues a little bit in the quarter. Can you give us some idea of the geographical distribution of revenues, where they are coming from, Asia, Australia, I guess North America? I guess, go ahead.

Jim Hamilton

No. Go ahead, Robin, please.

Robin Cornwell

Basically, how many different customers do you source your revenues from, like customer concentration?

Jim Hamilton

Two answers there, Robin. First of all, the geographical distribution would be more North American-centric than I would like to see largely U.S. and Canada. Less in Asia and we had a desire to reenter, if you will, particularly markets like Australia. In fact, I will be in Australia in a couple of weeks on such an endeavor, so it is largely North American and European-centric at this point in time.

In terms of the customer kind of a mix, it has been changing and it is growing. It is improving in terms of quality, but it is not where I would personally like to see it. Robin, I would like it - you know, the analogy is genetics, you know, the greater the gene pool, the happier I am and we are working hard to increase that gene pool right now.

Our goal is to sell to capacity going forward and I am confident we will get there, what we wrestled with is the length of time for us to get there, but that is our goal. That is what we are putting in place with our sales plan, our marketing plan, our budgets etcetera and that is our ambition.

With that, if we are successful, we will see a much more geographically dispersed and customer-dispersed portfolio.

Robin Cornwell

Thank you for that. Based on, I guess, looking at recurring revenues, how do you see going forward? I mean, we are, I guess, uncertain here as to how much is initial orders and now recurring. Can you give us some idea there?

Jim Hamilton

Recurring meaning through the balance of new customers versus old, is that what…

Robin Cornwell

Yes. I guess basically what you might be expecting from your customer base that you currently got and if there has been any recurring orders to-date? It is a little early, but…

Jim Hamilton

Yes. The answer is - Yes. I know, I think, Robin, if I understand the question maybe I could give some color there. When you look at last year, largely what was sold here was resold materials and that was done to maintain relationships with certain customers around the world and I think in hindsight it was a very smart thing to do, albeit an expensive proposition, it was important to keep that market presence.

I think as we moved in with in with the new plant and had some of the quality problems, we had exits of customers and I think we have done a good job if you look below the surface and behind the numbers of replacing those customers with either those formal relationships or with new relationships, so the quality of the customer base I think has improved and I think those are recurring customers.

I think our challenge now is to continue the building momentum. Again, we have an effective capacity in that plant and our ambition as a team here is to fill it and that will mean clearly to build on the base that we have today, but also bring new people on board and that is very much our focus going forward.

We are very pleased with Biodroga acquisition, because the conversations as I mentioned in my comments earlier, it is just great to see the energy and the relationships that expand the conversation about our portfolio with new communities, so I am very jazzed about that.

Robin Cornwell

I guess, just to follow-up on that; is the Canadian dollar impacting sales here with the decline in the Canadian dollar?

Mario Paradis

Yes. The answer is yes, and as I pointed out earlier, when we compared with the same quarter last year, so most of the increase are coming from the weakness of the Canadian dollars as we report in Canadian dollars, but when we look at sequentially, we still have a on the currency-neutral growth of 22% in Q3 versus in the second quarter this year.

Robin Cornwell

Is the lower dollar getting attention to help our future sales?

Mario Paradis

Of course, we will have approximately - let's see, 60% of our sales in U.S. dollars, so and most of our costs, excluding some cost of goods sold component like frozen krill, the raw material and some other component, the impact on the profitability is positive, so again we do not want to bet on where the Canadian dollar will go versus the U.S. dollar, but as we speak, this has a positive impact on our results and it will continue to have a positive impact for the next probably 12 months to 18 months at least.

Robin Cornwell

Okay. Great. Thank you very much.

Operator

Thank you. I am not showing any other question in queue at this time. I would like to turn the call back over to management for any further remarks.

Jim Hamilton

Well, this ends our second quarterly conference call today. I would like to thank everybody for joining us and we look forward to speaking with you next time. Thank you.

Operator

Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program. You may all disconnect. Everyone, have a wonderful day.

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