Q4 2022 Neptune Wellness Solutions Inc Earnings Call

Speaker 1: The.

Speaker 2: Good morning, Ladies and gentlemen, and welcome to the Neptune wellness solutions Inc. fourth quarter and fiscal 2022 earnings conference call. At this time, all lines are nillison only mode. Following the presentation, we will conduct a question and answer session.

Speaker 2: If at any time during this call, you require me to the assistance, Please press our zero for the operator. Also note that the call is being recorded on monthday, July eleventh 2022, and I would like to turn the conference over to Moore brown, Vice President Investor Relations for Neptune wellness solutions. Please go ahead, sir.

Speaker 3: Thank you operator, and hello everyone. Thank you for joining us today for the Neptune wellness solutions fourth quarter and fiscal 2022 earnings conference call. With me today are Michael camarada, President and Chief Executive Officer, and Randy weaver, interim Chief Financial Officer.

Speaker 3: All amounts discussed today are in U's dollars and our remarks may contain forward-looking information representing our expectations as of today and may be subject to change. Today's conference call contains non-GAAP measures, specifically adjusted EBITDA to provide investors with the supplemental measure of our operating performance and thus highlight trends in our core business that may not otherwise be apparent when relying solely on-gaap financial measures.

Speaker 3: Management also uses adjusted EBITDA in order to facilitate operating performance comparisons from period to period, prepare annual operating budgets and assess our ability to meet our capital expenditure and working capital requirements.

Speaker 3: Adjusted EBITDA is not a recognized, defined or standardized measure under GAAP. Our definition of adjusted EBITDA will likely differ from that used by other companies, including our peers, and therefore comparability may be limited. non-GAAP measures should not be considered a substitute for, or in isolation from, measures prepared in accordance with GAAP. Investors are encouraged to review our financial statements and disclosures in their entirety and are cautioned not to put undue reliance on non-GAAP measures and view them in conjunction with the most comparable GAAP financial measures.

Speaker 3: We do not undertake any obligation to update any forwardlooking statement, except as may be required by Canadian and U's securities laws. Assumptions were made in preparing these forward-looking statements, which are subject to risk, as laid out in our public filings found on SEDAR and EDGAR. I'll now turn the call over to Michael. Thank you mury, and hello everyone. This morning, we reported our fiscal fourth quarter and the full 2022 results for the period and in March 30 first 2022, before providing further details related to our financial and operational highlights.

Speaker 4: Company as part of that plan, we intended to reduce costs, refine the current focus of the company and ultimately put us on a accelerated path to profitability and enhanceced shareholder value. The strategic plan has culminated in two primary actions so far: 1- the plan divestiture of our canvas business in Canada and. 2- the realignment of our focus and operational resources towards our portfolio of good for you and good for the planet. Consumer branded products that have large addressable markets and categories were.

Speaker 4: Resulting in a 50% reduction in the workforce and over 30% reduction of the total payroll cost and an estimated annual savings of four point four million. We have also enacted additional inital cost cuts at the corporate level. This included reduction in the corporate headcount and external consultant. Headcount at the corporate level has been reduced by 16%, which we expect to result in a savings of one point two million in payroll cost. We have reopened our strategic review and will continue to look for synergies and additional savings across our Corp.

Speaker 4: 16 million. This includes five point six million of payroll costs reductions for the cannabis and corporate announce in the last month. These are difficult decisions when they involve valued employees. However, we believe this is the prudent decision to make to ensure Neptune is financially positioned to achieve its long term goals and increase shareholder value. Before I move on to our operational highlights, I'd like to invite Julie philips, Chair of our Board, to say a few words.

Speaker 4: About the recent appointments we've made to our Board and executive team. Thank you, Michael and holo, everyone. As Michael shares, we have made two strategic appointments to the leadership of Neptune over the last several weeks. First, at post quarter end, we welcome Philip sanford to the Board as audit Chair. Philip poll deep financial and commercial advisory experience as well as firsthand knowledge of Neptune brands as a former Chairman of the Board of Sprout organics.

Speaker 5: The addition of Phil further bolsters the Board's expertise for the next stage of our growth path and we are already seeing the positive impact of his guidance as we navigate this next stage of growth for Neptune. In addition, to further support the execution of our strategic shift, we were very pleased to recently announce the appointment of Raymond silpac as Neptune's Chief Financial Officer, which will take effect on July 20. fifth thousand and 20 two.

Speaker 5: bray brings more than 25 years of CFO experience across both public and private companies, particularly in the area CPG. He has a strong track record of leading companies through strategic transitions and is well positioned to achieve further cost efficiencies and helped drive the performance of Neptune for long-term success and growth. On behalf of the Board and the management team, I'd like to say a warm welcome to Ray and offer him the opportunity to say a few words.

Speaker 6: Thank you for those kind words Julie, and good morning again, everyone. I am delighted to be joining the Neptune team at this pivotal momentand in the company's history and look forward to working closely with the entire team once I become a CFO . I also expect that once on board I'll be speaking to many of you on this call as well. So with that I'll turn the call back to Michael camarat.

Speaker 4: Michael. Thank you Ray, and welcome to the team. Turning to our operational highlights, we have made significant progress on our path to become an a CPG company.

Speaker 4: With growth year-over-year and on a trajectory to profitability, which our Board and management team remained laser focused on. The achcheating during Q4, we continued to make significant strides in positioning our core business areas for continued growth, including: 1- sproutch organics, our primary baby and todler food brand. two by drogger, our B two B Personal Care and beauty brand. Starting with our organic food and beverages. The fourth quarter was very exciting for our Sprouts brand.

Speaker 4: With our focus being on growth margin and innovation. Importantly, the may Nielsen data shows that Sprouts outperforming their category across the Board for all time periods measured from the last four weeks to the full 52 weeks. These share gains illustrate the power of our brand and our value proposition in the category, along with the execution of the team at Sprouts, who have worked hard to maintain in stocks during a challenging period for the supply chain. I want to personally thank each member of the Sprouts team for their hard work during.

Speaker 4: Lost management. 2- the full year of price increase. 3- improve product mix for the realization of certain volume discounts with the level of sales increasing. With this infrastructure in place for strong growth in the baby food categories, we believe we can now confidently expand into the up a meal market, where the data shows gross profit margins in their 30% range. According to Nielsen data, sales from Sprout in their organic toder meals.

Speaker 4: Have grown on the accelerated rate to September 2020, outpacing the growth for the organic baby food category as a whole. uppage meals represent a $3.6 billion retail category, more than double the size of the baby food market. Our expansion efforts in this sector and parallel with our cost effective strategy to scale will allow our products to disrupt their organic food market at a higher level without decreasing our castperoid.

Speaker 4: Sprouts was pleased to launch a first ever cobranded product line of children's food with COA melon in wal Mart nationwide with Sprouts and coaomel an products released on wal Mart com and Mart and a rollout to approximately 900 wal. Mart stores already achieved with this expansion into wal Mart Sprouts organics is now available in over 90% of the organic baby food market Sprouts organics and coomel. An products are also available on direct to consumer on the Sprouts organics website and on Amazon. Their initial revenue impact from.

Speaker 4: one rated cage attainment and educational show in the world and the partnership allows sproutch and COA melon to educate, promote food with real organic ingredients. Their product lines released are showing strong sell through, with sales surpassing the initial projections across several SKUs and performing one hundred fifty 1% over Walmart expectations. It was great to add additional products to our offering and further increase our opportunity for revenue growth.

Speaker 4: In Q4 we were not immune to supply chain challenges being experienced across the industry, which has caused shipping costs to remain inflated and some delays with the product movement. Despite this sout mantenants to maintain strong fill rates consistent with seed trends, we were also able to partially offset increased shipping costs by some price increases across our product portfolio. The international rollout of Sprouts from Canada into soly's, Metro and London drug stores has also progress, with positive initial res from these stores.

Speaker 4: Moving to Personal Care and beaututy, during the fourth quarter we've made significant progress at by druer R B to B Personal Care and duty brand. We have simplified byadruger supply chain to remove a middle distribution step, allowing by druer to take more ownership and control within its process and mitigate some of the delays. As a result of cost saving measures coming out of our strategic review, byadruer has achieved decreased spend in Q4 compared to the prior quarters. byadruger has also brought more soft gel andwe.

Speaker 4: In addition, BA drug's agile network of Co manufacturers allows for flexibility So that we are seen by our customers as one of the few brand that still delivers within 90 days. Sales leads achieved from trade shows attended in prior quarters are starting to translate into sales. The momentum from their pipeline growth achieved in the prior quarters flow through to Q4 and is resulting an increased number of customers as well as expanded product lines for existing customers. Ba drug are also be launching new products and Q1.

Speaker 4: With its partners to continue to grow our portfolio of offerings. We expect this increase in the pipeline activity to drive revenue growth in the fiscal 2023. bioroer has been focused on growing its industry presence and undertaking clinical studies to fortify the curentials of our underlying Maximal technology. For example, our recent study on Maximal K two showed Maximal increase that bioavailability of vitamin K two seven to 11 times.

Speaker 4: Compared to the standard fish oil. These positive results enable us to further differentiate and communicate about our Maximal technology and its unmatched effectiveness in increasing absorption. biodrroga is also expanding its current offering into additional products providing dedicating lines for Pacific customer segment. As part of this overall strategy, biodrroga has recently launched a product portfolio of kids products, including the launch of new supplement products formulated for kids.

Speaker 4: Moving to forece remedies. In March we announced the launch of force remedies' multi-omega supplements made with ahi fourer oil in Sprouts farmers' market stores nationwide. ahi flower oil is a plant-based vegan attorive official oil which is proven to be up to four times more effective than flaxy oil. The product has been recognized as a finalist for the product of the year for the neuttra ingredients USA awards in the Omega three category. The initial feedback from the rollout in Sprouts farmers' market is positive.

Speaker 4: And we expect us to flow through to revenue growth in the fiscal 2023. in addition, we have recently launched force re ies into 800 CBS stores and expect to see healthy growth from this launch. This is another example of how Neptune is rolling out for re ies across both smaller regional and larger national retailers. With that, I will now turn over the call to Randy to discuss the financial results in more detail. Thank you, michagoldtonen. Hello everyone.

Speaker 3: Before I recap the fourth quarter, I wanted to note a couple of of changes. Effective March thirty-first 2022, we've changed our reporting currency from Canadian dollars to U's dollars and we're reporting in GAAP instead of our IFRS nowadays.

Speaker 3: The change in reporting currency and GAAP has been applied retrospectively So that all the amounts in the consolidated financial statements that are included in this filing and the accompanying notes are expressed in U's dollars in GAAP. For comparative purposes, historical consolidated financial statements are recast in dollars by translating assets and liabilities at the closing exchange rate in effect at the end of the respective periods. Expenses in cash flows used the average exchange rate in effect for.

Speaker 3: For the respective period and equity transactions are converted at historical change rates. There are a number of translation gains and losses. Those are included as part of accumulate forward and currency translation adjustment and is reported as a component of shareholders equity under accumulated other comprehensive loss. Turning now to the fiscal 2022 fourth quarter results, Neptune reported fourth quarter 2022 revenue of 11.5 million, a slight decrease of three point one million from our third quarter revenue of 14.7 million. There were some timing factors that impacted revenue, particularly a Biodroga.

Speaker 3: 38% compared to the 35.4 million revenues in fiscal 2021. As Michael is spoken to, we've made significant strides over the past year in our transition to a refoccus CPG company. We expect the refined growth strategy that we've adopted to drive growth, higher margins and improve our pap to profitability.

Speaker 3: Sprout organics, our organic baby food brand, reported revenue fromof $26.2 million for the year. Revenue was slightly impacted by timing of shipments and continuing supply chain challenges, but we anticipate the revenue from delayed shipping a flow into fiscal 2023 first quarter and we have seen that in fact happen. We expect throughout to post revenues in Q1 in the range of six point eight to $7.2 million. On the gross margin in front. We expect this prout margins to continue to build, driven by the factors. Michael mentioned this.

Speaker 3: Product lines. The cannabis segment, which we are in the process of divesting, recorded $7.8 million of revenue for the year. Last year is really not comparable- is less than a million dollars because we've only been an operation per a quarter. We're continually focusing on reducing expenses and several actions we have taken since the end of 2021 have already cut costs very significantly throughout the business. For example, in January brought all our legal services in the house, reducing our overall corporate spend.

Speaker 3: Subsequently, initiatives announced in June build upon these measures to cut expenses further. The intended divestment of Neptune' cannabis business will greatly simplify our overall structure and enable us to focus on the parts of the business we believe hold the most potential for profitability and growth. To expedite cost savings, Neptune is winding up its cannabis operations. The divestiture of the cannabis division will achieve a 50% reduction in the workforce, over 30% reduction in total payroll costs and an estimated annual cost savings of $5.8 million, resulting in significant cost savings and improved operational efficiencies.

Speaker 3: We also expect to gain further cost reduction from lowweer corporate overhead costs and professional fees related to the cannabis business.

Speaker 3: In addition to the financial impact of the canvas divestiture, we've also taken further measures to reduce corporate expenses, including production in corporate headcount of 16%, as well as cutting back on vendors and outside consultants. These measures are expected to achieve a further $1.2 million in cost savings for the fourth quarter, as gna expenses, net of subsidies, were $10.2 million compared to $18.2 million for the same period the prior year, a decrease of seven point six million.

Speaker 3: Or 43 per cent, is a result of the cost savings and business stream Ling measures we've already implemented over the past 12 months. Our adjusted EBITDA loss during the quarter was 15.2 million and improvement of two point six million versus our adjusted EBITDA loss of 18 million year ago period. The improvement in adjusted EBITDA is mainly attributable to our increased revenue and lower expenses year-over-year on our balance sheet. We ended the year with eight point seven million in cash on hand. We've also taken decisive actions to improve the company's balance sheet position.

Speaker 3: And ensure we have sufficient working capital to invest in the growth of the business in the near term, while continuing to drive towards margin expansion and our path to profitability. In June , we announced a $5 million registeter direct offering, following a $8 million registeter direct offering in March.

Speaker 3: Neptune intends to use the net proceeds from these offerings for working capital and other general corporate purposes. With this bolstered financing, we are better positioned to execute on a recently announced strategic priorities: that divesting our cannabis business, focusing on our consumer package goods strategy and further accelerating cost savings throughout the company. While we continue to explore additional financing options, including debt, to ensure long-term financial stability, the measures taken thus far allow Neptune to meet its funding requirements in the immediate term where our fiscal 2023 outlook.

Speaker 3: Has improved our financial position and best plac an Neptune to add value for our shareholders, and I'll turn the call back over to Michael now, Thank you. Thank you, Randy. We have made great progress on our strategic priorities are striving to much profitability, reducing costs and continuing to grow. As you know, the last few years have been challenging for neptkin.

Speaker 4: What we pulled off. We pulled off at a very difficult time, to put it moilddly.

Speaker 4: We could not have anticipated, in 2019, the market realities we would be presented with.

Speaker 4: But we took the view that we should continue with our strategy of becoming a CBG company.

Speaker 4: Rather than weit, because the future we are heading towards looks the same, whether we're prepared for it or not: a future where consumers not only want to choose good for the planet products, a future where they must. In order to be ready for that future, this change was required. Our mission is to become a modern C P g company with products that are not just good for you, but are also good for the planet. Sustainability is a value, not just a sales tool. We think consumers need option.

Speaker 4: That are built with that goal in mind from the ground up. That's why what we're doing is important. To change from a B two B extraction company to a CPG company in the wake of a global pandemic was even harder than we thought, but ultimately necessary. Finally, we are in their position to see the light at the end of the tunnel.

Speaker 4: With the completion of our $5 million raises and the announcement of the divestiture of our cannabis business, we are prepared and excited for what our brands can do. We are sad to be exiting our cannabis business. We are so proud of them but ultimately they are proven to be two capital intensive for Neptune in a time of macroeconomic un.certainty. The regulatory, legal and insurance pressures they put on our Central business is ultimately disadvantageous to our other brands.

Speaker 4: We look forward to watching mourdering and panas grow, even though they will no longer be part of the Neptune family. All of our actions here are intended to support neptunes path the profitability and position it for growth as a consumer packagageed, good company that is prepared for the future, where the products we buy are sustainable and healthy for the world we live in. Our products are now available in some of the country's largest retail changeins. We are also maintaining customers relevance by pursuing the right strategic partnerships for co-branded product lines.

Speaker 4: And expanded our product offerings in key categories, and we have a new CFO joining the company with a 25 year track record of growing strategically in possitioning CPG companies for success. I recognize though, that this cannot have been done without the challenges we have gone through, and I appreciate everyone who got us here: our teams, our brands, our consumers and crucially, our shareholders who, I know, felt the difficulty of this transition. To everyone who is stuck with us, we thank you and we look forward to sharing our future with you.

Speaker 4: Operator you may now open the lines for questionsthank you, sir. Ladies and gentlemen, if you would like to ask a question at this time, Please press star, followed by 1, on your touchdown phone. You will then hear a three D prompt acknowledging a you request. And if you would like to withdraw yourself from the queue, Please press star, followed by two.

Speaker 2: And lastly, if you're using a speak of phone, you will need to please lift the handset before pressing any Keys. Please press star one now. If you have a question, and your first question will be from Aaron gray at alliance global partners, Please go ahead.

Speaker 7: higood morning and thank you for the questions.

Speaker 8: So first question for me, just on Sprout, just Lin King, at the noncontrolling interest in trying to kind of back in.

Speaker 8: To four Q for that. uh looks like it was about seven point two million. So then, going off of what you.

Speaker 8: Think guide for one Q, the six point eight to 7.2. I just wanted to get some further color in terms of some of the growth you were speaking towards and I know I might be. There might be something I lessess up there because you switch from C, D to U's dollar now for the 10-K. but Sean, give some further colorin terms of how sout performs sequentially in four Q and then how that one Q guide relative is. Saw you at that first thing?

Speaker 7: Thanks for the question, Aaron. We're expecting to see continued growth in Q1.

Speaker 3: Q1 of 2023, we were seeing strong shipments.

Speaker 3: It's always subject to the supply chain challenges. We've talked about with shipments and all that but we are continuing to see that growth. I don't have the numbers that my fingertips.

Speaker 3: I don't have the numbers at my fingertips are exactly where we're going to wind up or the preliminies through the Q1, but we do expect that growth make throughout the year.

Speaker 8: Okay just SCO, if y that you gave polllymer. I believe you said of 6, 27.2 for Sprout, correct?

Speaker 3: Yes I, I believe that's correct. Yes, that's that's what we just said and I believe in the. I just trying to figure out what that compares to four Q. I guess that' because you don't I, I don't have a hard for Q. no yeah.

Speaker 3: yeah let me see if I could look that. I I'm going to follow up later it that be fine.

Speaker 3: yeah okay, So that would be preferable that I don't have the Q4 number in my fingertips at the momentokay.

Speaker 8: fantast secondly first prout and.

Speaker 8: On the profitability right. So thanks for that target, I think the 24% by four Q, just more on the near term can you talk about? You know where Sprout kind of stood today. You know further, for the fourth quarter at least. On the gross profit again, looking at the Nugget joint it does look like you know gross profit lost, you know worsened.

Speaker 8: For the fourth quarter relative to nine months prior. Again doing some translation here from C a, the U's D but 1- to know in terms of whether something on the timing increased- you know cost dent to inflation that had a near term impact and whether or not you still see some of you know that. When do we start seeing a gradual improvement to get to that 20 20, 4% for 4, Q? Where's go being more of a big uptick? Maybe in the third or fourth quarter where we get there? Thank you.

Speaker 7: I think you're going to continue to see gradual improvement. There's not going to be huge.

Speaker 9: Huge changes automatically and part of the challenges that we're having. We put some price changes through, some price increases through. We're not getting a full impact of those yet, even in fully in Q1, but you'll continue to see the impact of those.

Speaker 9: As we get through fiscal 2023 and you'll see the continuing benefit of some of the new products that Michael mentioned.

Speaker 9: This remarks great thanks. And last' on for Sprout. May more of a mic question here can talk about some of the streetes who said: obvious, you had, you know, a lot of top line initiatives with the COA, melon and Sprout partnership and now you're moving into the tod meals. So it's kind of highlight, you know, how do you think about you know, kind of focusing on those kind of few key skys, especially as you doing the broader distribution, and then also adding on these produ product lines that're seeing now for thetod meals.

Speaker 8: And a couple months a for the snack bar. So how do you kind expos to between you know, deepening yourself for existing SKUs and then also adding on news sks, especially during a time where liquidity something else need to consider in terms of the cost stat new partct lines. Thank you.

Speaker 10: yeah So I think when we're looking at like the topt meals we've been having in a market and had great results already against the gerber and others.

Speaker 4: We're going to be entering the uppage meals, which you know a three point six billion of a market and that will actually expand our margins because the gross profit margin profile in that category is much higher. When you look at like, if you look at some of the retailers, that's about 50% of the offerings in some of them at our organic. When it comes to baby meals.

Speaker 4: It's leaeven less when you go from baby food to baby meal. The uppage meals like, for instance, up age meals. It's in one category had like 10% organic offerings. So we feel that going into up age meals is a huge opportunity for us to win at grocery, to be able to expand when it comes to our supply chain. We've simplified it in Sprouts So we ve, from a lot of different vendors all over the world, an ingredients from all over it to the North American supply chain with a handful of coackers that we appointed with.

Speaker 4: And being able to exit the. The cannabis side of the house has enabled us to give additional support from some of our strategic stakeholders and the sout brand, which allow us to support that growth and open up additional tritional banking opportunities.

Speaker 4: So we do see that going in from baby food to break out a baby fluidtiile, upaage meals to then evbentually into other categorie, S is part of our rollout over the next couple of years. That is time to use our exting footprint and supply chain at the same time as expand our margin profile. So while we're taking price increases in the current core SKUs, we also renn in categories with higher margins, with less competition in organic, and that's going to give us a competitive edge utilizing the COA melon.

Speaker 4: Branding in some of these categories strategically when partnership with our retailers. So we kind of have a map as we're walking a brand through its transition and breaking down of the baby aisle into certain Keys, while we're expanding the margin.

Speaker 4: And that's something that we've been working on for a while and we've ready start, like in the top meals we've already seen very good success which starting to get into the me, the uppage meals, and we'll continue to monitor that. And then also, as we get the price increases that we've already taken and start hitting the the, the results will also be helpful and also the uptake distribution. Like in September we're going to be in 2500 stores just in the Walmart loan with a special coamomeme promotion.

Speaker 11: Great great, Thank you.

Speaker 8: And then, just kind of last, some question for metersjust all on the cannabis wind up and sale. Just any further color you can give 'becauseuse? Kind of doing both that once right now. So, in terms of the wind up, we think about the timing of that wind up, potentially in the know legacy inventory you might have, and then you know any color micro B to provide in terms of the process on the sale and the timing of that potentially bring on some new capital. Thank you.

Speaker 4: We're actively in it and go through the process now steeple and we're cognizant of trying to move as quickly as possible for all stakeholders to continue to support those brands and that new fooodting with the new acquisitions.

Speaker 8: qu great and last one for me, just in terms of the timing, you know additional capital and different financing options you're considering. You mentioned debt you know still being considered. I know something that you know we've talked about previously as well: you re. You know disclos in the 10-K in terms of you know the current. You know balance for to operate the business kind of go forward. So just can you talk about the timing of that debt financing and then whether the avenues might have to look to to ensure that you have capital for the business going?

Speaker 4: It reduces a cash needs. So we definitely, very cognizant of that, we've been working with our partners and different levels to be able to accommodate that growth. But we definitely, you know, wouldn't have the business that we're moving towards, you know, supportedthe buy drug, which is already profitable, and then Sprouts, which is on a fast track. We definitely are working with our partners then.

Speaker 4: Un for getting out of the cannab beside is definitely open the opportunities for us in a moreefficient way and allowed us to reduce the corporate and overall burns into an area which is more suitable for us.

Speaker 4: Definitely open the opportunities for us in a moreefficient way and allowed us to reduce the corporate and overall burns into an area which is more suitable for us and.

Speaker 8: Y greatthanks for the call. I'll going turn back to the queuethank youue.

Speaker 2: And at this time we have no further questions. Which concludes today's conference. Thank you for attending and at this time, we do ask that you please disconnect your lines. Enjoy the rest of your day.