Neptune Technologies & Bioresource's (NEPT) CEO Jim Hamilton on Q1 2017 Results - Earnings Call Transcript

| About: Neptune Technologies (NEPT)

Neptune Technologies & Bioresources, Inc. (NASDAQ:NEPT)

Q1 2017 Earnings Conference Call

July 12, 2016 08:00 ET

Executives

Mario Paradis - Chief Financial Officer

Jim Hamilton - President and Chief Executive Officer

Analysts

Robin Cornwell - Catalyst Research

Doug Loe - Echelon Wealth Partners

Presentation

Operator

Good morning ladies and gentlemen, this is the operator. Welcome to the Neptune Technologies & Bioresources First Quarter 2016/2017 Earnings Conference Call. At this time, all participants are in a listen-only mode to prevent any background noise. After the speaker’s remarks, there will be a question-and-answer session. [Operator Instructions]

I would now like to turn the call over to Mr. Paradis, Vice President and Chief Financial Officer. Mr. Paradis, you may begin your conference.

Mario Paradis

Yes, thank you. So, good morning everyone and thank you for joining us. As mentioned in the purpose of today’s call is to review our results for the first quarter ended May 31, 2016.

Joining me today is Mr. Jim Hamilton, Neptune’s President and CEO. As usual, Jim will review Neptune’s operational highlights, followed by a discussion on quarterly financial results by myself.

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 Commission and with the Securities Exchange Commission.

I’ll turn the call over to Jim.

Jim Hamilton

Hey Mario, thank you very much and good morning everyone. Just some brief comments my side about the business and then we’ll pass it back to Mario for some detailed look at the numbers.

So there is a PowerPoint deck for those who wish to follow along posted on the website. And I’m on page four, just a few quick bullets on the first quarter to kick things off of the quarterly revenues were $11.3 million, significant growth over last year. And really with solid contributions from our Solutions business which is Biodroga, Ingredients Krill Oil and actually, and we’re very, very pleased that we achieved some of our first sales in China.

And this consequented in our second positive quarterly adjusted EBITDA for $1.1 million which compared to not such a pretty number a year prior. And the positive variance reflects continued improvements really across the board in terms of operating efficiencies and some higher sales volumes both in Solutions and Ingredients.

And we have a new product that we’re rolling out called MaxSimil, I’ll speak to that in a moment. And we’re also rolling out new corporate branding, new Vision, Mission to reflect company that we’re changing quite significantly moving from a singular product company Nutrition Products company focused on Wellness Solutions and more on that in a minute.

Just a few other bullets on page five on Krill Oil business and NKO, and we’re happy with what we saw in the first quarter. We’ve got some very interesting momentum happening also in the current quarter which we’re pleased by and we also like what we’re seeing in terms of continued operations in the manufacturing and cost base. And Mario will speak to some of those elements such as project turbo in a minute.

And as I mentioned, with a lot of work and help from both the Canadian and Quebec government officers in China we are able to get Canada approved as one of only two countries that can export Krill Oil into China, and we’ve got recently completed our first sales.

If we could just jump over to page six, I wanted to spend a little bit of time just on our new branding, a new suite if you will or fresh phase to reflect our evolution from a business that was singular product company to today which is much more. And efforts to better reflect who we are to particularly our customers, investors and employees. And our vision, we provide great nutrition solutions deliver optimal health and wellness and do so by levering our scientific and innovation experience to great and provide our customers globally with best nutrition products and wellness solutions.

And we think this is important to reflect the fact that we’re a much more diversified business and we aspire to be even more in future. And we are beginning to communicate this in all our platforms whether that’d be a websites, trade shows, business carts, PowerPoint presentations, all the platforms as we continue our journey into a much more diversified business.

And when you look at page seven, this is to reflect that sort of more comprehensive view of what we are now as a Nutrition Products company. We are in the B2B space, we’re in the B2C space and we’re in the Rx space, more particularly in B2B with solutions to our acquisition of Biodroga. Specialty ingredients, of course with our original product NKO, Neptune Krill Oil but also NKA with the feed ingredients, in fact we expect to commercialize some of that very, very shortly. And new products, we’re consistent with our strategy of expanding in specialty ingredients and related spaces MaxSimil and I’ll speak to that in a moment.

Consumer brands with OCEAN 03 and Acasti of course with their 47% share in the Rx space where we’re focused on commercializing [indiscernible] in the cardiovascular area. We’re very, very pleased with the new board and particularly with the new CEO at Acasti team and we’re feeling a better about Acasti than ever before. So a company that is multiple areas all committed to Wellness Solutions.

So moving over to page eight, just a couple of quick comments about this new specialty ingredient that we are rolling out. This is a product called MaxSimil which is a novel and patented product that enhances the absorption of lipid-based nutraceuticals. And it kind of mimics the human digestive process, it’s pre-digested if you will. And it’s around the Omega-3 fish phase. We’ve done some early studies and found results that suggest that the EPA+DHA from MaxSimil were absorbed much, much faster than regular fish oils through PKE study, more is needed of course, but we see this as a very interesting product. And I think if the data increases we could see a much more broader application of it. We have the exclusive rights to this for North America and we’re proud to say that our first sales were transacted in the current month.

And this is a product by the way that came through the acquisition of Biodroga and one of the things that we spoke off and has spoken about in terms Biodroga is it’s kind of an early radar system if you will. They have such great exposure to so many customers and suppliers in the business that gives us an early look at innovation and this is one such product that we’re going to work on commercializing consistent with our strategy as I mentioned to expand into related spaces.

Just moving to page nine, I wanted to spend a little bit more time on Biodroga. We are seeing some great performance there and what’s important, and what we shared to prior is it really is a business that is allowing us to play in a much, much bigger space. The Ocean is very, very broad and deep in terms of the business potential here.

And just a few words on kind of the process here where we – actually if you look at number one on page nine, you’ll see that we actually sit down with customers and have a conversation. And the conversation is not about our products as much as their business, and the consumers with whom they want to engage and how best to engage them. And we leave our knowledge of those markets, regulatory, claim, science etcetera.

And then we move to what we call number two which would be, we have an extensive network of raw material suppliers where we get not only early look at some innovative forums but also a very good access to major forums. And thereby we bring it into what we call step three where we arrange really the best manufacturing and the best delivery forms possible and then provide the QC and the quality control, but it results in number five. And number five is an example of a customer that we do business with called Sea-Licious, and they are actually delicious and these are blends of liquid Omega-3s that we borrow. We put the label on, we formulate with custom formulas and flavors and deliver to the customer and invoice something that is consumer ready for customers.

So it is a business that levers technology, there is a business that levers networks, it’s a business that levers knowledge. And does so, in an environment that’s never need it more than today as consumers are fragment in the speed of innovation is just moving exponentially.

So Biodroga allows us to play in a bigger space, bigger ocean. It allows us to lever what is happening in the macro consumer level and we’re very, very pleased with the results. And I’ll come back to this in a moment in my closing comments about how we planned to scale this business further in the future.

Now with that, I’d like to just pass it on to Mario on page 10, because Mario would like to spend a little bit more time on the numbers. So Mario, please.

Mario Paradis

Thank you, Jim, and good morning again everyone. So I’d like to remind you that our results are in Canadian dollars and today’s remark may contain forward-looking statements. My comments today will focus on quarterly performance for our nutraceutical business unless otherwise indicated. Consolidated and Q1 fiscal 2016 information can be found in our press release and in our Neptune’s consolidated financial statements and related MD&A, available on SEDAR, EDGAR and under the Investors section on our website.

So turning to our nutraceutical results, I’m very pleased to report that our revenue for the first quarter were $11.3 million, up $8.6 million over last year and up $1.2 million or 12% over the fourth quarter last year. Our revenue include sales from our turnkey solutions and contribution from the recent acquisition of Biodroga for an amount of $6.6 million. We’re also pleased with our ingredient Krill business which grew by $1.8 million in comparison with last year. Keep in mind that last year the revenue base was relatively modest considering some operational issue and compared that the Shorebrooke facility. This also had an impact on gross margin.

Our quarterly gross margin as a percentage of sales also continued to improve. The gross margin on sales came in at 31%, up 4 points over the 27% recorded in fourth quarter last year and in comparison with a negative 43% in the first quarter last year. The improvement is being mainly driven by operating performance and efficiencies as well as by project Turbo. In terms of dollars, in comparison with the fourth quarter last year, the gross margin increased by $0.9 million to reach $3.4 million. We expect the gross margin to stabilize within the range of 30% to 35% in the upcoming quarters.

As most of you are aware project Turbo should generate around $5 million in savings once fully implemented by February 2016 fiscal year end. To-date, we identify and launch initiative that will allow us to realize our targeted savings and as of the end of the first quarter about 70% of total expected savings have been reached.

SG&A totaled $3.2 million during this quarter. This is slightly higher than last year with $3 million, but lower than the fourth quarter of last year by $0.3 million. The Biodroga acquisition increased SG&A that this increase was offset by a reduction in marketing and administrative expenses in the Krill business and in overall corporate expenses. In percentage of total sales, SG&A expenses represented 29% in comparison with 37% in the fourth quarter last year, this is in line with our expectations.

Moving along, adjusted EBITDA also continued to improve coming to a positive territory for the second quarter in a row with $1.1 million for the current quarter compared to a loss $3.2 million last year and an EBITDA of $0.6 million in Q4 last year. This improvement versus last year was mainly related to additional sales from our turnkey solution business. The continued improvement on gross margins from better operational efficiencies and also a slight reduction in SG&A for the fourth quarter last year.

Our quarterly net loss also significantly decreased coming to a loss of $1.2 million versus a net loss of $4.5 million in the prior year. In the fourth quarter last year we reported a net income of $1 million. This improvement of $3.3 million over last year was primarily due to the same factors applying for adjusted EBITDA. When compared with the net income of the fourth quarter last year, I’d like to remind you that an amount of $1.9 million of deferred tax recovery was recorded and is related to some company’s tax losses. Without the above mentioned tax adjustments last year in the fourth quarter, the net loss would have been $0.9 million. The increase in financial expenses explains the increase in the net loss from the fourth quarter to the current quarter.

Turning to our liquidity, during the quarter we are turning to a term loan agreement with BNC Bank for an amount of $3.8 million to support our growth and for working capital needs. On a consolidated basis, the corporation had consolidated cash and short-term investment of $14.6 million as of the end of the quarter. Of this amount $5 million was for the Nutraceutical segment and $9.6 million was related to Acasti. Neptune’s quarterly cash balance on a standalone basis increased by $1.5 million from the $3.5 million at the end of fourth quarter, largely due to the term loan received partially offset by investment in working capital items mainly in the payables. And in addition, $2.5 million was used for the repayment of the debt.

Finally as for the fiscal year ended February 2017, for the nutraceutical segment, we now expect revenue to be greater than 43 million, up from our previous number of 41 million with a double digit adjusted EBITDA margin.

I now turn the call over to Jim for additional and closing remarks.

Jim Hamilton

Yeah, thank you Mario, just a few thoughts on looking ahead to build on your comments. We’re going to continue to work on driving our growth by as I said earlier, providing great nutrition solutions, deliver optimal health and well-being. And we have those four key initiatives that on our Phase I strategy that’s called for but strengthening the Krill Oil franchise, expanding further the value chain, levering our IP and expanding our specialty portfolio and related spaces. And specifically around that in our solutions business, we are working hard now to look at how we can scale that up and invest in further capabilities to expand that business. This is a business that is, has a tremendous space to grow. It is a very, very big industry and we want to start expanding our activities there.

Our specialty ingredients portfolio, we have a lot of really interesting work going on in terms of in-house innovation and how we can lever our site capabilities. And as I’ve mentioned, in prior conversations and calls that it doesn’t have to be a single purpose site, it can be a multipurpose site. And the more we have in that site, the better the genetics and we’re looking at some interesting things that we can put in the site in addition.

And I’m also always interested in licensing agreements, MaxSimil is an interesting innovation product that actually comes out of one of the local universities here and our initial sales are in the practitioner channel and we are very, very interested to add products that we don’t have to invent them ourselves but add products that can take advantage of either our manufacture and or sales and marketing capabilities.

And then consumer brands, I mean we have started with our first consumer brand OCEAN 03, we’re seeing some – it’s been an interesting path for us. We’re seeing some interesting attention in some markets abroad, particularly in China food product, but ultimately in consistent with our expanding further up the value chain is an area that we’re very interested to acquire and expand distribution further and we’re starting to look at that. Of course, we’ll never forget about our core products and NKO in particular. We’re happy with some of the growth we’re seeing, we’re happy with the potential that we’re seeing in places like China, and we’re very happy with what we’re seeing that we can achieve just to break extra orientation and customer focus.

So we’re not going to give up Mario on our efficiencies and we call project Turbo but we continue to look at driving effectiveness within the organization. And as Mario mentioned earlier, we feel confident that we can revise our guidance for the year and that we’ll move it up from $41 million to $43 million with of course a double digit EBITDA margin on that business as well for this year.

So with that, that would conclude our formal comments. And we would be very open to any questions that people may have.

Question-and-Answer Session

Operator

[Operator Instructions] And your first question comes from the line of Robin Cornwell from Catalyst Research. Please go ahead.

Robin Cornwell

Hi, good morning. Congratulations on your excellent revenue. The – I have a couple of questions, so I guess first Mario, I just wanted to clarify the SG&A. The run rate you’re talking about at roughly 29%, how far forward are you going with that given that project Turbo hasn’t really totally kicked in yet?

Mario Paradis

Yeah, project Turbo is I would say that is mainly related to gross margin, although we had some savings that we’ve done in the SG&A. Ongoing forward, again we expect that our sales will continue to grow and in terms of dollars, the number that you see in term in this quarter is very close to what we are anticipating on the quarterly basis. So in terms of percentage we are expecting to have a slight decrease over time.

Robin Cornwell

Okay. And then when you talk about the margin and improvement, what between the 30% and 35%, what’s your thoughts as to improving it beyond the 35% and what kind of timing would that be?

Mario Paradis

Yes, with the actual level of business that’s what my guidance is referring to. But if we can grow the top line I would say that for the Krill business we should see an increase of the gross margin. And as for Biodroga as it’s more a turnkey solution, again it’s not really related to a critical mess. So, and we don’t want to disclose strategically this gross margin but for the turnkey solution it should be more stable but the nutraceutical and kind of consolidated both business we should see an increase when the Krill franchise will improve in term of sales.

Robin Cornwell

Okay, thank you. The Biodroga sales, can you give us an idea of what the percentage year-over-year increase was?

Mario Paradis

Yes. We have a CAGR growth rate of 17% for the last three years.

Robin Cornwell

Okay.

Mario Paradis

And as we already indicated, we are very confident to continue on a double digit growth for that business.

Robin Cornwell

Okay. The inventory finished-goods was relatively flat over the quarter. Can you give us an idea what level of production in the NKO is at in the plant at this point?

Mario Paradis

Again, we don’t want to disclose the precise number but what we can say is, we have demonstrated over the past year that this plant can manufacture on a pace of 160 ton, we realized that. Now we adjust because we don’t want – we need to adjust the manufacturing pace with the [phase] demand. And as such, when the [indiscernible] demand would continue to increase, we’ll increase the real manufacturing pace.

Robin Cornwell

Okay. For Jim, I wondered if you could just expand on a little bit, as much as you can anyway on new possible Krill clients, NKO specifically. The market seems to have I guess tightened up over the last couple of years, in fact probably decreased slightly but seems to be easing up on that now and flatting off. Do you have comments what you currently see for NKO?

Jim Hamilton

Yes Robin, it’d be a pleasure. I think one of the challenges that all of us share in this industry is we tend to look at the business with myopically if you will. We tend to think U.S., Canada and we tend to think food drug mass. But it is a global business and there is multiple pathways to the consumer and those pathways are expanding exponentially. Now as I mentioned earlier with Biodroga, one of the great things I like about that business is we’re engaging with a lot of these novel channels and novel customers within those channels.

So, if one looks at U.S food drug mass in the Omega-3 space in general, one could say that it is flat. Recent data would suggest it’s maybe moving in single digits right now. We’re I think Krill and NKO excels is when you’re in a channel, whether it’s a conversation with the consumer, so if you’re in the practitioner channel, health food channel, drug marketing channel that’s where we’re seeing growth. So I think if you look at the Wal-Mart shelf, we’re not seeing the same level of growth.

We like being in the channels for this conversations, so Rob, we also like geographies and in particularly Asia and particularly what we’re seeing in China right now.

Robin Cornwell

Okay. And my last question is on the IP process, I know you said that basically there is no further update but I will still ask the question. Is there any further update on the [indiscernible] IP situation?

Jim Hamilton

Robin, no there is not. I will tell you that we’ve been working and continue to work very, very hard on it, but we have nothing material to report at this point of time.

Robin Cornwell

Okay, thank you. That’s all from me.

Operator

[Operator Instructions] Your next question comes from the line of Doug Loe from Echelon Wealth Partners. Please go ahead.

Doug Loe

Yes, thank you very much and good morning, gentlemen. Just one sort of thematic question from me, Jim you actually touched on it in your summary comments. Just with regard to ways in which you might be interested in leveraging your manufacturing processing capacity in Shorebrooke, perhaps not even limited to Krill process. And I guess wanted a few – you might have just some high level thinking on how you might be seeking to leveraging the manufacturing infrastructure that you already have in place, mindful that you’re looking to other places to grow the business. And whether or not there might be any additional equipment CapEx that might be to put in place in order to leverage that facility into other revenue generating opportunities, perhaps in using Krill, perhaps other – starting with other marine materials. And I’ll leave it there, thanks.

Jim Hamilton

Yes. Well Doug, that’s an interesting question. At a prior employer there used to be a word that was used to describe manufacturing and people loved to “sweat the assets.” I think for us as a company and reflected in our new branding is that we shouldn’t look upon ourselves as only one product. And our manufacturing plant is only one product plant. We should be looking at that plant as one that we want to sweat, one that we want to – but drive hard and do so in a diversified way. We have actually a really top-notch cross functional team right now looking at that, and it could include a number of different compounds ideally in related spaces I said before something that we would sell, but we were also interested in contract manufacturing as an example. And so we’re looking at it all.

The scalability of this plant is very, very interesting Doug, I mean it wouldn’t take much for us to exponentially expand that facility into a much more diverse and much more larger facility. And in doing so, of course it would help to Robin’s question earlier around margins as well. So we’re motivated to bring in new products, we’re motivated to make that a diversified facility.

Doug Loe

Yes, well maybe just a little bit more Jim, I mean I’m not aware of many of the nutritional supplements that sort of rely out which you want extraction from marine organisms as sort of a core process. So I’ll just – are there any sort of specific, maybe without getting specific, any general product categories that where you might be able to leverage the existing throughput or are we talking about sort of leveraging the space in order to put other processes in place that you might require additional capital to sort of expand the infrastructure there?

Jim Hamilton

Yes, you know Doug it’s really an interesting question because I think part of the challenge that we have in our employees and our investors even is to look upon this business is not marine only. Extraction industry is a huge industry and as such, there is many, many different products that we could potentially put through that needs the capabilities of extraction technology. So we’re looking at it. When we go offline I can give you some more specific examples Doug that we’re pursing right now, but it doesn’t have to be in the marine oil space.

Doug Loe

That’s great. Thanks Jim.

Operator

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

Mario Paradis

So, thank you very much everyone for attending this call. And let’s talk in three months for the second quarter results. Thank you very much.

Jim Hamilton

Thank you everybody.

Operator

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