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Edited Transcript of NTB.TO earnings conference call or presentation 14-Aug-19 12:30pm GMT

Q1 2020 Neptune Wellness Solutions Inc Earnings Call

Laval Aug 24, 2019 (Thomson StreetEvents) -- Edited Transcript of Neptune Wellness Solutions Inc earnings conference call or presentation Wednesday, August 14, 2019 at 12:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* John Morris Moretz

Neptune Wellness Solutions Inc. - Chairman

* Mario Paradis

Neptune Wellness Solutions Inc. - VP & CFO

* Martin Landry

Neptune Wellness Solutions Inc. - Chief of Corporate Development & Strategy

* Michael Cammarata

Neptune Wellness Solutions Inc. - CEO & Director

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Conference Call Participants

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* Ryan Macdonell

GMP Securities L.P., Research Division - Analyst

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Presentation

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Operator [1]

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Good morning. My name is Jessa, and I will be your conference operator today. At this time, I would like welcome everyone to the Neptune Wellness Solutions 2020 First Quarter and Fiscal Year Results Conference Call. (Operator Instructions) Thank you.

Mr. Martin Landry, Chief of Corporate Development and Strategy, You may begin your conference.

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Martin Landry, Neptune Wellness Solutions Inc. - Chief of Corporate Development & Strategy [2]

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Thank you, Jessa. Good morning, everyone, and thank you for joining us. Earlier today, we issued a press release announcing our results for the first quarter of fiscal year 2020. We also issued our management's discussion and analysis and consolidated financial statements. These documents are available on the company's corporate website and will be filled -- filed with the Canadian Securities and with the U.S. Securities and Exchange Commission.

Before we begin, I'd like to remind you that all amounts discussed today are in Canadian dollars and that today's remarks contain forward-looking information that represents our expectation as of today and accordingly are subject to change. We do not undertake any obligation to update any forward-looking statement except as may be required by Canadian and U.S. securities laws.

A number of assumptions were made by us in preparing these forward-looking statements, which are subject to risk. Hence, 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 Canadian -- the Securities Exchange Commission.

Joining me on the call today, we have Michael Cammarata, our President and Chief Executive Officer; Mario Paradis, Neptune's Vice President and Chief Financial Officer; and John Moretz, Neptune's Chairman. Mario will begin with a review of our corporate highlights and our Q1 results, our Chairman will follow and introduce our new CEO, and then Michael will present his vision and strategy for Neptune.

I will now turn the call over to Mario.

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Mario Paradis, Neptune Wellness Solutions Inc. - VP & CFO [3]

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Thank you, Martin. Good morning, everyone. Let me start with some corporate highlights for the first quarter.

During the first quarter, we announced 2 great commercial agreements with 2 of the largest company -- companies of our industry in Canada -- TGOD and Tilray -- for more than 250,000 kilogram of biomass to process over the next 3 years. More importantly, we -- with TGOD, we offer turnkey solutions where we formulate, manufacture and package various form of products.

We also received in June the green light from Health Canada to perform encapsulation and to use our cold ethanol extraction technology, which will bring our total extraction capacity to 200,000 kilogram of biomass annually. We also announced an investment of CAD 11 million to expand our packaging capability as well as the capacity to manufacture different delivery forms and also to expand our extraction capacity by 1,200 metric tons, which will bring our total capacity to 1,500 metric tons. Finally, subsequent to quarter end in July, we successfully completed a private placement for gross proceed amount of USD 41 million, from which a portion was used to close the SugarLeaf Labs acquisition, previously announced in May 2019.

If we look now at the financial results for the fourth quarter -- for the first quarter, you'll find the details of these financial results in the appendix of the deck. For the cannabis segment, during the first quarter, we continue our ramp-up of Phase 1 with our CO2 extraction technology and also initiated our testing and commissioning of our ethanol technology. On June 17, in connection with our Phase 2, we received a confirmation from Health Canada for an amendment covering additional rooms to perform cold ethanol extraction and encapsulation.

Due to some operational and capacity constraints, revenue were lower than anticipated during this quarter with $30,000 -- $38,000 and a negative gross profit of $2.1 million related to salaries, fixed costs and overhead at the Sherbrooke plant. As we speak, many of these issues encountered in the first quarter have been addressed.

R&D and SG&A expense related to the cannabis segment were in line with our expectations with $250,000 and $349,000, respectively. For the first quarter last year, salaries, fixed cost and overhead, including the depreciation at our manufacturing plant in Sherbrooke to prepare the site and start the cannabis oil extraction business in compliance with Health Canada's requirements were recorded in R&D and totaled $1.6 million last year. The EBITDA of cannabis segment was negative $1.6 million compared to $1.3 million negative last year, and the increase is mainly related to employee and overhead at the plant.

As for the nutritional segment, total revenue for the first quarter, including royalties revenue, were $4.3 million, down by $0.9 million over the first quarter last year. Total revenue declined mainly due to the loss of some customer and the timing of orders. For the second quarter, we're expecting a double-digit increase on a sequential basis over the first quarter.

Our quarterly gross margin as a percentage of sales were stable compared with the same period last year at 25%. In term of dollar, we generated $1.3 million compared to $1.5 million last year mainly related to lower sales.

The SG&A were stable in comparison with the same quarter last year, and the adjusted EBITDA for the quarter was $0.5 million compared to the adjusted EBITDA of $0.6 million last year. And again, the variation is mainly related to lower sales.

The corporate G&A for the quarter was $4 million in comparison with $2.3 million last year, and the increase of $1.7 million is mainly coming from litigation legal fees for an amount of $800,000, and another $800,000 is related to SugarLeaf acquisitions and severance expenses. The consolidated quarterly EBITDA loss for the quarter is $3.6 million compared with a loss of $2.3 million last year, and it's mainly related to additional investment in the cannabis segment for the first quarter and the litigation legal fees for the quarter.

The quarterly net loss increased by $2.4 million to reach $6.5 million in comparison with a net loss of $4.1 million last year, and the increase in the net loss is mainly related to additional corporate G&A expenses for the quarter and the additional investment at the Sherbrooke plant in the cannabis segment.

Turning to our liquidity. At the end of June 2019, our cash position was $5.4 million with a total debt of $4.6 million, including the operational credit margin. Subsequent to the quarter, we closed a private placement for gross proceed of USD 41.4 million or CAD 55 million.

On a pro forma basis, taking into account the net proceeds of this private placement and the cash payment and related expenses for the SugarLeaf acquisition, which was closed on July 24, we end up with a pro forma cash position of CAD 39 million. This cash level will support our growth strategy that we are actually putting in place. Furthermore, we're still in discussion to establish nondilutive credit facilities, and we are confident to have a positive conclusion in that respect very soon.

As you all know now, this will be my last conference call. I'm very proud of what we have achieved at Neptune over the past 4 years. We have moved the business away from a small and mature market to where we are today. I would like to thank all my colleagues and my former CEO, Jim Hamilton, for their exceptional contribution in this room.

Now I'll turn the call to John.

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John Morris Moretz, Neptune Wellness Solutions Inc. - Chairman [4]

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Thank you, Mario, and let me extend our thanks to you for all your diligence and hard work during these last 4 years. You've really helped make a difference for all the associates there, our employees and investors, and left a positive mark for us to build on from here. Thank you very much.

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Mario Paradis, Neptune Wellness Solutions Inc. - VP & CFO [5]

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Thank you, John.

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John Morris Moretz, Neptune Wellness Solutions Inc. - Chairman [6]

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Also like to thank Jim Hamilton, our outgoing CEO, who is also remaining as an adviser to the Board. During the same time, he and Mario and the team led us through getting our facilities back up and operational after the tragic explosion and took us then into a transition from our krill business to the cannabis business that we're in today and bring us to this major opportunity we have today. And we thank Jim, Mario and all the team for helping make that happen.

Today, it's a pleasure to introduce our new CEO, Michael Cammarata. It's very -- known by many people, his successful entrepreneurial abilities and identifying trends best known, of course, for being cofounder of Schmidt's and founder of Schmidt's Naturals. What isn't as well known is that he has a great passionate leadership style. His commitment to excellence and all the core competencies in the business required to be successful uniquely qualify him to be the next leader of Neptune and take us to the next level.

So it's my great pleasure to introduce Michael Cammarata.

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Michael Cammarata, Neptune Wellness Solutions Inc. - CEO & Director [7]

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Thank you, John. Since I joined Neptune, I spent a lot time looking at key stakeholders and evaluating the company. And we've made some actions. We've moved our B2B extraction business from preparation to implementation. We expect revenues in that business to ramp up beginning in the current quarter. We've also raised a $41 million private placement. We've closed on our SugarLeaf acquisition on July 24, which will enable us to participate in both B2B and B2C CBD and hemp markets in the United States.

Cannabis is well-accepted across generations. And I believe we are standing on the edge of a dynamic shift in the consumer preference and adoption. We are already seeing consumers driving demand for plant-based natural products, and cannabis is no exception. Neptune's extraction expertise in pharmaceutical and biotech positions us to transform the cannabis ecosystem and identify new uses for the cannabis whole plant. I intend to use my experience in the consumer space to support the company in this dynamic market.

We are also launching Neptune Ventures, a strategic investment arm and technology incubator, which is expected to stimulate innovation and partnerships in the cannabis and wellness industry. Neptune Ventures will support Neptune's growth into the consumer market as well as our customers.

So in summary, I'm thrilled to join Neptune and excited by the opportunity ahead. With that, I will turn the line back over to the operator for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from the line of Ryan Macdonell from GMP Securities.

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Ryan Macdonell, GMP Securities L.P., Research Division - Analyst [2]

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Welcome, Michael, to the conference call. It'll be a pleasure working with you. And Mario, it's been a pleasure working with you thus far, and I wish you all the best in your next venture. So I was just wondering maybe to begin, could you guys provide a little bit of additional color on your expectation to increase capacity to 200 tonnes in September, just given that the equipment was licensed in June, maybe what has been sort of the delays in bringing it online?

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Martin Landry, Neptune Wellness Solutions Inc. - Chief of Corporate Development & Strategy [3]

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Ryan, it's Martin. The equipment is ready to go as we've mentioned in the press release. We're going to do the commissioning next week and the start-up on the week of August 26. So we think we're going to be hitting our full stride in September with the ethanol production.

The -- there hasn't been any delays. But there's been long lead times to receive some equipments that prevented us from being fully operational on day 1 of receiving our amendment from -- for our license. But as we speak, we're confident in our ability to scale up that equipment. And we're quite excited, and it's going to relieve our capacity constraints that we've had to deal with in the last quarter.

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Ryan Macdonell, GMP Securities L.P., Research Division - Analyst [4]

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Excellent. Okay. Thank you for the color there. It sounds like you expect to be able to achieve the 200 tonnes or have available the 200-tonne capacity towards the beginning of September then? I'm just wondering maybe if this is the case and if you have any color on -- or maybe how the cannabis segment could perform or has been performing so far in Q2?

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Martin Landry, Neptune Wellness Solutions Inc. - Chief of Corporate Development & Strategy [5]

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Yes. So -- no, we're going to start up operations, as I mentioned, on August 26. So it's going to take probably couple of weeks, maybe to -- for us to reach our full capacity. So I think it'd be prudent to maybe assume that we're going to run at the full 200 tonne run rate maybe by October 1. And in terms of revenues or any guidance for the coming quarter, I think we'll refrain from indicating anything of that nature.

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Ryan Macdonell, GMP Securities L.P., Research Division - Analyst [6]

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Okay. Maybe just turning one for Michael. Just wondering, Michael, if you maybe could summarize for us maybe in 3 to 5 points what might be your priorities in your new role?

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Michael Cammarata, Neptune Wellness Solutions Inc. - CEO & Director [7]

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I think #1 was making sure that we go from preparation to implementation on the cannabis processing. And I think there's been a couple delays that we had with Health Canada and [Atrilla], but we've been -- since I joined, we've been able to go into implementation and really start ramping up production. So as we start ramping up production and we expand our product lines and offerings, I think that's where we're going to be heading. It's just possible. So number one was operations, number two was making sure the teams are agile and we can be adapting for the changing market and at the same time starting to future-proof the business as we start moving to different markets.

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Ryan Macdonell, GMP Securities L.P., Research Division - Analyst [8]

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Okay. Cool. And maybe another one for Michael or whoever else on the team. Just over to Neptune Ventures. Simply sounds like a very interesting initiative. Could you provide some additional color on things like how the ownership structure of the developed IP will look like? Like it could just take the form of maybe a joint venture potentially like 50-50 ownership. Additionally, would this be predominantly focused in a particular geography, maybe Canada or the U.S. or just broadly across the globe? And lastly, if there's any initial product categories that would be the focus?

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Michael Cammarata, Neptune Wellness Solutions Inc. - CEO & Director [9]

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So the focus on Neptune Ventures is North America initially but expanding it globally as we continue to grow and acquire entities. I think Neptune Ventures is really important for us to not only increase the stickiness of our customers with creating great IP and working alongside of them. There's a lot of companies in the cannabis sector focused on more the commodity side. And we really want to own the relationship between extraction all the way to the consumer on the shelf. So as we -- and focusing on brands and investing with our customers to expand that footprint, at the same time looking at IT and technologies that can help us innovate and future-proof the business and ability to give us the -- that agileness to be able to do joint ventures with different customers as well as opportunities that come our way. I think that's something that we're really focusing on. And I think it'll be able to give us ability to act quicker and more efficiently.

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Operator [10]

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(Operator Instructions) Your next question comes from the line of [Alex Bergman] from [Coyote Capital].

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Unidentified Analyst, [11]

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Just a couple things to clarify. So you talk about this potential for the existing facilities to support in excess of $450 million in revenues and the [56 pass-through]. I know you don't want to like give too much guidance, I get that. But any sense of like the slope of that ramp or timing of -- And how much of that potential revenue is actually in theoretical backlog or something like that? Just any color you could provide would be great.

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Martin Landry, Neptune Wellness Solutions Inc. - Chief of Corporate Development & Strategy [12]

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[Alex], it's Martin here. I think that the idea and the spirit when we put these numbers out was to give investors some visibility as to the earnings power that our 2 facilities can achieve. And in terms of giving timing and indication of ramp, I understand that's something that a lot of people would like to have. But on our end, putting these numbers out, we made some assumptions, and it includes some moving parts that are out of our control. So at this time, I think we'll leave it there, and we're not going to put a time frame to achieving these numbers.

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Operator [13]

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Your next question comes from the line of Ryan Macdonell from GMP Securities.

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Ryan Macdonell, GMP Securities L.P., Research Division - Analyst [14]

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Just back for a couple more here. Just maybe following up on my colleague's comments there. Just wondering maybe do you have any color you could provide us with potential geographic mix of revenue say in your fiscal 2021 or -- and beyond? Just maybe how you see the U.S. CBD and hemp opportunity relative to the Canadian opportunity? And maybe any other geographies you'll look to pursue?

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Michael Cammarata, Neptune Wellness Solutions Inc. - CEO & Director [15]

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Well, I think, that we're -- it's Michael Cammarata. I think that we're definitely excited about the geographical expansion in the States when it comes to -- potentially in the brand size of the topicals being so frequently used. So I think in SugarLeaf, what it gives us the ability to do is to tap into that personal care and home-care market, and when you look at the consumption that's used by the consumers on topicals, it's going to be expanding very rapidly. So I wouldn't be surprised that the stages start ramping up in time line with our existing business that's in Canada. So it's a really unique position as we expand into multiple categories. That will give us the ability to future-proof the business, at the same time, give us more stable and long-term objectives to be more efficient by going into the personal care and home care and allowing us to expand our copackets and our relationships there.

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Ryan Macdonell, GMP Securities L.P., Research Division - Analyst [16]

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Okay. Are you willing to disclose how much revenue SugarLeaf is currently generating just to get a sense of the base that it's at now.

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Martin Landry, Neptune Wellness Solutions Inc. - Chief of Corporate Development & Strategy [17]

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Ryan. So SugarLeaf has been generating revenues since the beginning of the year as the operations are doing well. Most of the revenue mix right now is tolling, and we're going to move towards more finished product forms later on this year. So -- and if you look at our disclosure in Canada, we've announced large contracts, and you may be wondering a little bit why there hasn't been any announcement in the U.S. Well, as the -- the dynamic of the U.S. market is a little different. The tolling agreements are shorter term and smaller in nature, which is why we haven't announced anything. But the facility is running. The operations are generating revenues. And we're currently in discussions with large nutraceutical partners for us to evolving to finished product forms. So overall, things are progressing really well at SugarLeaf, and we're quite pleased with that acquisition.

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Michael Cammarata, Neptune Wellness Solutions Inc. - CEO & Director [18]

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I'll also add that we're starting to see revenues expecting to start ramping up in the next quarter and continuing especially in Canada. And then in the States, obviously, in September, we're looking at the guidelines that are going to be posted just to make sure that we're ramping up. And I think after September, we'll have more visibility into the product mix that our customers will be offering, and I expect that to have a more clear vision after that point.

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Ryan Macdonell, GMP Securities L.P., Research Division - Analyst [19]

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Okay. And maybe one more from me just on the transition of the CFO role. Any initial expectations of when this may be concluded?

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John Morris Moretz, Neptune Wellness Solutions Inc. - Chairman [20]

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Well -- this is John Moretz. We're doing that as we speak. As again, Jim will remain as adviser, but effectively, Michael is the full CEO at this point in time, and Jim is advising as needed and much appreciated. So I would say, we're in full implementation as we speak.

And again, I can assure everyone that Michael was very impressive from the diligence and the tenacity that he has over all the core competences. I say that because a lot of times an entrepreneur and a product person, consumer product isn't as much back-end and financial and operationally motivated, and Michael is all of that in a fabulous way. So I think the -- he is a quicker, take-start person than maybe even I would've anticipated. So he is fully CEO at this point and moving everything in right directions and very instrumental in getting our operations at Sherbrooke running 24/7 at this time. And again, that's the reason Q2, and then as we go to Q3 and Q4, I believe everybody will see some exciting things.

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Ryan Macdonell, GMP Securities L.P., Research Division - Analyst [21]

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Thank you, John, for the color there. How about any [input] for Mario's role as the CFO, any maybe guidance as to when you may find a successor there?

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John Morris Moretz, Neptune Wellness Solutions Inc. - Chairman [22]

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Well, we'll just start a search. But Mario is staying on and working an orderly transition. There's no particular time line. He is not in any hurry to go. And -- so we're just going to work an orderly transition that works for the company and him. And -- so we have plenty of time to make that happen, and we feel there'll be a lot of great candidates out there for this opportunity, particularly, as Michael states, that now -- we're now in North America with our SugarLeaf acquisition -- opens the door to a lot of possibilities not only in business but in talent and skill-based for our management team. And so we feel very comfortable there. And again, having Mario with us during that transition is very comforting, and we know nothing will be dropped at all.

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Operator [23]

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There are no further questions at this time. I turn the call back over to the presenters for closing remarks.

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Martin Landry, Neptune Wellness Solutions Inc. - Chief of Corporate Development & Strategy [24]

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Thank you, Jessa. Just a reminder for everybody that we're having our AGM today at 10:30 at the McCord Museum in Montreal, so we're looking forward to see you there. Thank you very much, and have a good day.

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Operator [25]

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Thank you. This concludes today's conference call. You may now disconnect.