Neptune Technologies & Bioressources Inc. (NASDAQ:NEPT) Q3 2017 Results Earnings Conference Call January 12, 2017 5:30 PM ET
Jim Hamilton - President and CEO
Mario Paradis - CFO
Doug Loe - Echelon Wealth Partners
Good evening, ladies and gentlemen. This is the operator. Welcome to the Neptune’s Third Quarter 2016/2017 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there’ll be a question-and-answer session. [Operator Instructions]
I would like to turn the call over to Mario Paradis, CFO of Neptune. Mr. Paradis, you may begin your conference.
Thank you. So, good afternoon everyone and thank you for joining us. As mentioned, the purpose of today’s call is to review our results for the third quarter ended November 30, 2016. Joining me today is Jim Hamilton, our 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’d 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 required by Canadian and U.S. securities laws.
We have made a number of assumptions in preparing these forward-looking statements, which are subject to risks. Results may differ materially and details on these risks and assumptions can be found in our filings with the Canadian Securities Commission and with the Securities Exchange Commission.
I’ll now turn the call over to Jim.
Mario, thank you very much. Good afternoon; happy New Year, everybody. Welcome.
As Mario mentioned, just some reflections from me on the results; Mario will get into much more of the detail and then just some comments from me as we look forward to some of the things we’re working on.
First of all, I would also invite too that there is a presentation posted on our website for those who want to follow along, and I am on page four right now. To start with, we achieved some excellent results, record results for the Company at $12.3 million, that is 122% over prior year. The contribution is coming both from our specialty ingredient business and turnkey solutions Biodroga. Fourth consecutive positive adjusted EBITDA results, totaling $1.3 million, the delta on that is almost $2 million when you compare to the operating loss of about $600,000 a year ago, and we’re of course maintaining our guidance for double-digit adjusted EBITDA on the year.
Net income, wow, $11.2 million compared to a loss of $1.3 million last year. Now, this is reflective of one-time royalty revenues net of legal fees from our settlement with Aker Biomarine. Mario will detail this out in a minute. And I think it’s important to say that there’s a difference between when we reflect the income and when the cash is in the bank, and we’re pleased to talk about that, as I mentioned in more detail shortly. But continue to taking that away, continue to improving the gross margins related to higher volumes as well as improved efficiencies within the organization. Cash around $6.8 million at the end of the quarter, which compares nicely to what it was a year ago. And it’s important to say, it excludes any proceeds from any settlements that we’ve been working on.
Just moving along, as I mentioned, a strong performance in our specialty ingredients business, 26% growth over prior year. And looking at krill oil specifically, it was our best quarter in four years in terms of volume. So, we’re very pleased with the job our people are doing there as well the differentiated quality of our products with some particular customer applications.
And innovation, starting to get some traction there in terms of value-added product forms, first sales of NKA; this is a high-protein feed ingredient where in essence we’re taking what was once a very costly waste stream and turning that into sales revenues. And as we mentioned in the quarter, we also announced that we have expanded the distribution rights for a new product globally that we’re now starting to get some sales traction on.
So, just moving to page six and this is a chart that I shared before, and I’d just like to share it again because it shows who Neptune today is. And we are a growing nutrition products company and we’re focused as we’ve said many times on providing great wellness solutions to deliver health and well being. And we’re a very-very different company today, focusing on these turnkey solutions, supported through our acquisition of Biodroga, specialty ingredients, which are now expanding, example Omega Plus, new NKA form, MaxSimil, value-added Omega 3, NKA, the feed ingredients business as well as the consumer brands. And as a model and as a business platform, we like this because there is fundamental synergies amongst all three. And our ambition is to grow this not only organically but in future also through acquisitions.
I’ll come back to make some comments on some of the things we’re working and going forward but just moving to page eight, I’d like to invite Mario to detail out some of the numbers for everybody. Mario, please?
Thank you, Jim, and good afternoon again everyone. I’d like to remind you that our results are in Canadian dollars and today’s remarks may contain forward-looking statements. My comments today will focus on quarterly performance for our nutraceutical business unless otherwise indicated. Consolidated and third quarter and fiscal 2017 information can be found in our press release and in Neptune’s consolidated financial statements and related MD&A available on SEDAR, EDGAR and in the Investors section of Neptune’s website.
I’m now at the page eight of the deck presentation. I’m pleased to report that our revenue for the third quarter were $12.3 million up by $6.8 million or 122% over last year and up $0.7 million or 6% over the second quarter of this year. Our revenues include strong sales from our specialty ingredients business of $6.4 million, which is the best quarter in terms of krill sales volume over the past four years, representing a 26% organic growth and also includes a contribution from the January 2016 acquisition of Biodroga for an amount of $5.5 million.
Let me now take few minutes to talk about the accounting treatment of the IP settlement with Aker Biomarine. As you may recall, we announced on October 4th that we concluded an agreement that would bring to Neptune a revenue of US$10 million or an equivalent of CAD$13.1 million. Taking into account the conditions of the settlement, according to the accounting principal, we have to consider this transaction as an equivalent of an intellectual property sale and consequently 100% of the amount is recorded under other income in the statements of earnings in the current quarter.
Furthermore, the US$4 million that Neptune invested in rights to use Aker Biomarine’s select krill oil-related patent portfolio is recorded as an intangible asset in our balance sheet and is amortized on a straight line basis over a period of 12 years. The net amount of US$6 million will be received in three equal amounts of $2 million through the next 12 months. Finally, we incurred non-recurring related legal fees of US$1,200,000, which were recorded in SG&A in the third quarter.
Our quarterly gross margin as a percentage of sales also continued to improve compared with the same period last year. The gross margin on sales came in at 26%, up 2 points over the same quarter last year. And the improvement was mainly driven by higher sales volume in specialty ingredients, and by overall improved operating performance and efficiencies as a result of the Turbo project. In term of dollars, we generated $3.1 million, an increase of $1.9 million over last year, and $0.8 million over the second quarter this year. We are still expecting gross margins to be in the range of 28% to 30% in upcoming quarters.
A few words on our Turbo project, which identified initiatives to drive operating performance and efficiencies. We are pleased to report that we reached our objective of $5 million in cost savings. On a prospective basis, we can conclude that the full impact will be included in our upcoming quarter results.
SG&A expenses excluding the IP litigation related legal fee, discussed before, totaled $3 million during this quarter. Despite a more than two-fold increase in revenues, SG&A expenses increased by only $0.2 million over last year. The SG&A expenses related to the Biodroga acquisition were almost entirely offset by a reduction in marketing and administrative expenses.
Adjusted EBITDA excluding the settlement litigation amount and the related legal fees continued to be in a positive territory for a fourth quarter in a row with $1.3 million for the current quarter compared to a non-IFRS operating loss of $0.6 million in the third quarter last year and an adjusted EBITDA of $0.8 million in the second quarter of this year. The improvement of $1.9 million versus last year is in line with our expectations and is mainly related to additional sales from specialty ingredients with continued improvement on gross margins from better operational efficiencies.
Our quarterly net income of $11.2 million represented a significant increase when compared to the net loss of $1.3 million in the prior year. This quarter included an amount of $11.6 million coming from the IP litigation settlement with Aker Biomarine net of related legal fees.
Now when looking at, what I would refer to as an adjusted net loss for the nutraceutical segment, the net loss would have been $0.4 million, an improvement of $1.4 million over the last year adjusted net loss of $1.8 million, which was adjusted by an insurance recovery of $500,000 last year. The improvement of $1.4 million was primarily due to the same factors outlined for adjusted EBITDA, partially offset by additional financing expenses.
Turning to our liquidity, on a consolidated basis, the corporation has consolidated cash and short-term investments of $12.6 million as of November 30, 2016. Of this amount, $6.8 million was for the nutraceutical segment, or Neptune, and exclude any proceeds from the settlement agreement with Aker, and also $5.8 million was related to Acasti Pharma. Neptune’s nutraceutical quarterly cash balance on a standalone basis slightly decreased by $0.3 million from the $7.1 million at the end of the second quarter. The operations including working capital items generated $1.4 million during this quarter, while we used $0.5 million for finance cost and debt repayment of $1.2 million.
Finally, as already announced, our fiscal 2017 will end on March 31, 2017. Consequently, the fourth quarter will have four months with a full year period of 13 months. That being said, we’re now expecting annual revenues for the 13 months period to be approximately at 48 million, up from our previous number of 45 for a 12-month period and still with a double-digit adjusted EBITDA margin. This guidance excludes any settlement litigation agreement.
I now turn the call over to Jim.
Hey, Mario, thank you very much.
Just a few thoughts here on page 12 for those who are looking at the deck, in terms of the horizon and some of the things that we’re focusing upon. As I touched on earlier, clearly, we’re going to continue to work in this platform, this ecosystem of ingredient solutions and brands, and driving the opportunities and synergies that exist amongst them and both -- two levels, one is organic growth and also through acquisitions.
Organically, we’re going to continue to invest there and we’re particularly focused and working to develop in China in our specialty ingredients business right now, but also acquisitions. We would love to see a business join a family here that checks off at least two and ideally three of the boxes of brand solutions and the specialty ingredients. Improving cash position, as Mario has touched upon and balance sheet is opening up opportunities for us to optimize our debt structure. We have a patchwork of legacy financings that gives opportunities for the business if we can consolidate that and refresh that in a way that is more reflective of the performance of the business that will contribute I believe towards the overall behavior and result.
We also, as I mentioned, we concluded the Aker litigation settlement. We are continuing to work there and our ambition has not changed. We believe that it’s much more productive to be focused as a company and as an industry on growing business and working with customers through litigation and we’ll continue to work on that.
Mario touched on the fact that our year will be a little bit modified as we’ve got 13 months. And I am happy we are doing it. This maybe a little bit painful as we go through that process but it’s been very painful having a quarter that has ended on not a calendar quarter. So, we’ll try and clean that up; we have a lot of feedback from investors; it would make everyone’s life easier to be on a cleaner quarter.
Just one last comment from my side relative to Acasti. Acasti Pharmaceuticals, as many of you know, we hold 47% of the shares of that business. Acasti is in the process of doing a fundraise for their business to continue to invest in the development of the drug candidate CaPre. We’re very supportive of Acasti. We wish them nothing but success. We would love to see that business grow; we’d love to see that product successful, but we’ve also made a decision as Neptune that funding drug development and the time horizons is not strategically in our interest. Our commitment and our interest are in developing nutrition products business in terms of solutions, specialty ingredients and brands. And as a consequence, we’ll not be participating in the fundraise, but we’ll be very, very happy to remain a very major shareholder of Acasti, and look forward and we’ll continue to support them in the development of that business.
So, with that I think we could maybe conclude the formal comments, and we would welcome any questions at this point in time.
[Operator Instructions] Your first question comes from the line of Doug Loe with Echelon Wealth Partners. Your line is open.
Thanks very much and congratulations on the strong quarter gentlemen, including but not limited to the sizeable recognition of payment from Aker. Congratulations on that. And maybe just a little bit of a housekeeping question for Mario just on revenue guidance. You indicated that your revised guidance for top line of $48 million includes a month of revenue in March for the forthcoming -- four-month period. So, accordingly that full year guidance with your trailing nine-month revenue of $35 million implies Q4 revenue will be around $13 million, and that looks a little bit low to me on considering that you just did Q3 revenue of $12.1 million. It implies that your March revenue will be in and around $1 million and that sounds unusually low. So, I’m just wondering if your revised guidance is more of a base case than a reasonable case and if you can maybe just sort of flush out what the inputs were for revising your revenue by the kind of the small amount that’s implied by that analysis there. That’s the first question.
And then second of all, maybe just for Jim, I know that you’ve chatted in the past about ways to enhance your capacity utilization at your facility in Sherbrooke by expanding into manufacturing other nutritional supplements perhaps isolated from marine bio oils or other things, maybe leveraging the extraction technology that you have in place but not necessarily so. So, just sort of wondering what initiatives, qualitative you want to answer that that you might be exploring as ways to sort of expand your product portfolio just by leveraging the capacity you have in Sherbrooke beyond NKO. I’ll leave it there. Thanks.
So, thank you Doug for the question. So, on the revenue guidance, so our previous number was $45 million. And again, we don’t have a lot of visibility in our specialty ingredient business. And on the other part, on the solution business, normally the fourth quarter is the higher quarter but we didn’t want to change this $45 million guidance and we just had what we think the month of March could be. So, we just simply added a month and added $3 million to our previous guidance.
Okay. That’s helpful. Thanks.
Doug look on the site, we actually had our Board meeting this morning and our site manager was presenting on so many initiatives that we have going on this site and we’re all commenting about how far we have come in terms of where we were even 12 months ago with the performance and capabilities of that facility. Clearly, our ambition as with any manufacturing site is to, as they say sweat the assets and lever as best we can. We are pleased with the development of our krill oil business and the load that’s putting on the site but we have ambition to add other products. We have a number of developmental projects on line right now. I would say it’s premature to say that these are commercialable, I don’t know if that’s a word Doug, but products that we would see in the market in the short term. But we’re -- if we can work it out, it can be very, very attractive for the site. So that’s to be continued and hopefully a positive news on it in future calls.
Okay, that’s great. Thanks very much, guys.
[Operator Instructions] There are no further questions in queue.
Operator, thank you very much, and thank you. We have a great attendee list, we see on the screen here. And we appreciate everybody calling in. And we’ll look forward to more individual discussions in the coming days, Mario and I. Thank you very much. Have a great evening everybody.
This concludes today’s conference call. You may now disconnect.
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