Q1 2023 Neptune Wellness Solutions Inc Earnings Call
Announce with the strategic review in fall of 2021, our strategic review is ongoing and we continue to look for synergies and additional savings across our corporate structure and business unit. We believe these actions are the prudent choice to ensure that Neptune is well positioned to achieve profitability and increased stakeholder.
Values in line with this strategy, we have made two important appointments to napkins leadership during this quarter we.
We were very pleased to announce the appointment of Raymond Silcock at Chief Financial Officer, which took effect on July 25, 2022, you will be hearing from Ray shortly to discuss in more detail the financial results for the first quarter, but he has over 25 years of CFO experience across both public.
Private companies with particular experience in areas of CPG with an extensive track record of leading companies through strategic transitioned. He is well suited to drive performance of Neptune for long term success and growth while continuing to achieve cost efficiencies in may we announced Philips Sanford Adam.
New Board member and audit chair as a formal chairman of Sprout Philip holds deep financial and commercial advisory experience as well as firsthand knowledge of Neptunes brands. The addition of fill further bolsters the napkin sports experience for the next stage of our growth and we are grateful for his guidance as we navigate this next phase.
<unk> of growth for Neptune, we have also recently taken several important actions to improve our capital position in June we closed a $5 million registered direct offering which we plan to use for working capital and other general corporate purposes post quarter end, we announced that sprouts had entered into an amendment and expansion of the <unk>.
<unk> secured promissory notes led by a $3 million investment from Morgan Stanley . The amendment of the sprouts existing secured promissory note expanded notes from $22 5 million to a maximum of $37 5 million. The expanded facility shows confidence in Neptune strategic shift towards becoming a.
Pure play CPG company as well as the opportunity for growth for sprouts.
We believe the results achieved in the first fiscal quarter of 2023 with sprout and by drove both delivering a multi year records for revenue demonstrates that our renewed focus on our core business areas are the best choice for napkin going forward now moving to our operational highlights starting with our food and beverage brands sprout.
The first fiscal quarter of 2023 was a successful period for sprouts with several exciting milestones and strong sales growth. The sprouts brand recorded a record $8 2 million in revenue in Q1 of fiscal 2023, its largest net sales quarter. Yet this was largely driven by innovative product releases combined with its successful.
Launch into Walmart in recent quarters, which has resulted in market share growth higher sales and improved gross profit margins year over year. We expect this to continue into Q2 and throughout the fiscal 2023 gross margins improved over the year ago period, gaining double digits on a percentage basis we.
Expect sprouts gross margins to increase to 22% by 2024, largely driven by four key drivers one the improvement of the distribution and warehousing costs as a result of the move to a full turnkey model as well as improved logistical cost management to a full year price increase three.
An improved product mix and for the realization of certain volume discounts with the level of sales increasing.
Recent Nielsen data shows that sprouts grew sales, 40% versus the 15% overall for the category in the latest four weeks of Nielsen data for the period ending June 18th 2022, outperforming the product category in all time periods measured when we looked at the sprouts distribution growth over the past year.
<unk>. It is clear that we have made great headway in expanding our retail partner network Sprouts now has access to 90% of the organic baby food market up from only 50% when we acquired controlling interest in this wraps brand in terms of store count Sprouts products are now in 27000 doors for us.
18500 doors, a year ago with some of the newest stores expected to show up in Nielsen data soon over the past year sprouts secured several distribution gains with leading retailers, including target Walmart and major supermarket chains, and the largest national pharmacy chain in.
The United States and 5000 of their 9900 doors and now is shipping direct to consumer through the sprouts website. How it is also available in all 50 U S States as well as Canada Sprouts continued to add new products to our offerings in the first quarter and further increase our opportunity for revenue growth.
In May sprouts launch co branded sprouts, cocoa Mellon organic snack bars for toddlers available online and at select retailers nationwide.
We have also been adding displays featuring the cocoa Mellon co branded products at 2500, Walmart doors in August and September and exciting milestone.
In March Sprouts was delighted to launch a first ever co branded product line of children's food with Coco Mellon, including our entry into Walmart stores and on Walmart Dot Com, we have already achieved a rollout to approximately 900 Walmart stores. The product line's released so far are showing strong sell through with.
Sales, surpassing the initial projections across several skus and performing 156% to walmart's expectations. We expect the revenue impact from the Walmart launch to further build throughout fiscal 2023 as perhaps now offers 90 skus versus the 74 Skus. This time last year.
And we plan to continue expanding our product offering into high demand areas beyond just the baby food category for the first time since sprouts inception, it will now be able to extend its lifetime value, providing healthy organic and convenient options as children grow.
We are launching new up age meal products meals, a line of organic heat and serve bowls further older children with a full serving of vegetables. We are thrilled that sprouts now has broken out of the baby aisle Nielsen data reviews that prepared foods is a $3 6 billion retail category with more than double.
The size of the baby food market, and we anticipate 30% gross profit margins with the infrastructure in place for strong growth in baby food categories. We believe we can now leverage our brand power to expand into the upper age meal market meals is expected to ship to customers in the fall and we expect to see this.
<unk> into revenue growth in the fiscal 2023. In addition, sprouts is also exploring further category expansion. Some examples include cereal and estimated $21 billion market size vitamin into an estimated $7 billion market size and beverage, which has an estimated $124 billion market size all according to Nielsen data.
We intend to release new products into categories, where we see the potential for <unk> to capture sales demand in high growth markets with accretive margin profiles by leveraging our expertise and our unique partnerships. We seek to continue to strengthen our position and brand as a leader in the organic food sector and beyond sprout.
<unk> remained focus on improving core margins sprouts, a streamlined its supply chain to focus on fewer strategic partnerships, reducing the overall number of vendors. It works with from 55 down to 22. This has allowed sprouts to improve supply chain efficiency and reduce costs, while maintaining fill rates and <unk>.
Addition, sprouts has continued to find cost savings throughout the business to ensure operational efficiencies and drive margins. We're focused on scaling cost effectively while expanding to disrupt their organic food market. While we are not immune to supply chain challenges that continue to impact the industry.
<unk> has managed to maintain strong fill rates and partially offset increased shipping cost by some price increases.
I'm very proud of the progress the sprouts team has made in a short period of time to achieve these results and I am excited for the future of scrap turning now to personal care and beauty, including by drug we have generated the largest revenue quarter in over two years in personal care and beauty at $5.
$1 million the solid growth as a result of steps taken in the past few quarters to increase by a drug is brand presence throughout the trade show attendance effective marketing promotions and our success of our new website launch new leads generated as well as the new product lines for existing customers translated to sales and revenue growth in the first fiscal quarter.
We expect this to continue throughout the fiscal 2023.
It is important to note while the strong revenue was partly due to the timing related to Q4 supply chain delays. It still would have been the best quarter for personal care and beauty in two years, even removing the roughly $1 million timing benefit that shifted into Q1 from Q4, five yogurt continues to innovate and expand our offerings for customers with new lines.
Products being developed in line with this strategy buyer Droga has recently launched a portfolio of <unk> products that are already in bringing new opportunities for <unk> with its customer base and new customers buyer Droga is expected to launch additional new product capabilities in Q2 to continue to grow its portfolio of offerings for both <unk>.
<unk> partners and new customer groups, which will drive revenue growth going forward via Droga is also undertaking an important clinical studies to bolster its credentials of our maximal technology.
We have completed additional human clinical trial studying the impacts of maximal when combined with curcumin. The results showed a significant increase in absorption when curcumin is combined with maximal compared to taken alone by drug expects to begin a human clinical study on maximal combined with looting in the near future aimed at maintaining good.
Cognitive and IHOP. This new study will examine both improvements in eye health and cognitive function. Meanwhile, forest remedies are personal care and beauty brand also continued success in the first quarter. The forest remedies multi Omega three six to nine I E oil supplement and elderberry immune supplements that were long.
And sprouts farmers market stores nationwide in Q4 are showing a week over week growth in consumer demand in Q1. The Ie flower supplement was also launched in 650 stores at one of the largest pharmacy chains in the United States and 70 fresh thyme stores, we expect to see.
Solid growth from the launch of this product throughout fiscal 2023 per spins data through July 10th Forest remedies is showing a 97% growth in dollar sales over the last 12 weeks first the prior 12 weeks. We are also currently working on developing a new product pipeline for forest remedies and example of this.
As the forest remedies, multi Omega kids gummies, the formulation for which has been developed and we are currently planning to launch in the first quarter of calendar 2023, while sector wide supply chain issues continue to be felt across both by Droga and forest remedies measures. We have introduced have helped to mitigate the.
<unk> of the supply chain delays. These actions have included an improved supply chain network expansion with co manufacturers has increase our agility and control over the process, while ensuring we maintain strong fill rates. In addition, we continue to work on reducing costs and streamline operations throughout the business to ensure that buyer droga enforced.
Remedies can operate as efficiently as possible to conclude we are pleased with our operating results from the first fiscal quarter of 2023, the strategic actions. We have taken over the past few quarters are intended to drive neptunes path to profitability and position us for growth as a pure play CPG company. We believe these decisions are in the best interest of.
The company and stakeholders, especially when taking into consideration the challenging macro economic environment. We have already made great progress in recent quarters on our strategic priorities. Our products are now available in many of the country's largest retail chains and we are disrupting high growth.
Areas with the right strategic partnerships for co branded product lines and expanding our product offerings. Thank you to the Neptune team our brand our consumers and our stakeholders with that I will now hand, the call over to Ray to discuss our financial results in more detail.
Thank you Michael and good afternoon, everyone.
I'm very excited to be joining Neptune as CFO . During this pivotal time for the company.
I can already see the impact that recent strategic changes.
At June transitions to a consumer packaged goods company with a good for us good for the planet brands.
We still have work to improve neptunes financial position, but I believe we are well positioned to achieve growth and improve stakeholder value going forward.
Although we only recently joined the company I will do my best to answer all your questions during the Q&A session.
But I will get back to you offline with any of those I don't have here.
During today's call.
Turning to our fiscal first quarter 'twenty three financial results. Please note. The first fiscal quarter was the three month period ended June 32022.
I'll also note that all numbers are in U S dollars and U S GAAP.
The company reported Q1, 2023 revenue of $16 3 million a meaningful increase from the $10 1 million reported in the same period, a year ago and also up from.
From the Q4 revenue.
11 5 million.
While industry wide supply chain issues continue to have an adverse impact.
We're pleased with our ability to navigate these challenges and to post such.
Strong revenue growth during Q1.
As Michael explained the steps, we are taking to transition to a focused pure play CPG company are translating to revenue growth and support that we are on the right track with our strategic shift.
Moving now to our organic children's food brands Sprouts, we reported revenue of $8 $2 million for sprouts in the first quarter.
Largest net sales quarter on record.
Market share gains continued in the quarter and we are seeing no pushback from consumers to our previously instituted price increases.
The underlying initiatives driving these results include innovative product releases combined with sprouts successful launch and Jo Walton in recent quarters.
We expect these trends to continue in Q2 and for the balance of fiscal 2023.
Gross margins improved materially as compared to the first quarter of fiscal 2002.
Digits on a percentage basis.
As Michael said earlier, we expect gross margins to improve through 2023, and then into 2024, when we expect to reach 22% gross margin primarily as a result of the four key drivers Michael already went through.
Moving on to our beat to the personal care and beauty segment, which includes bio drove forest remedies.
We were pleased to report sales of $5 $1 million.
Just revenue quarter in over two years the.
Personal care and beauty seven.
70% compared to the same period year ago.
This improvement was driven primarily by the fulfillment of orders in Q1 from previously acquired leads as well as from expansion into new product lines.
While approximately $1 million of the revenue increase in Q1 came from timing related to our Q4 supply chain delays, even without that Q1 was still the best quarter for personal care and beauty in two years.
Other factors that contributed to this growth included the steps taken in prior quarters to increase bio drove this brand presence through the trade show attendance effective marketing promotion and bio grow this successful new website launch.
These new initiatives as well as new product lines for existing customers all translated to significant sales growth in the first fiscal quarter, which we expect to continue through fiscal 2023.
Finally, the cannabis brands, which we are in the process of divesting recorded $2 $7 million in revenue for the first fiscal quarter last year's first fiscal quarter revenue of zero point $9 million in cannabis is not comparable as the branded cannabis business was only just bigger.
Getting to scale this time last year.
Moving now to corporate costs and the balance sheet as Michael said earlier, we continue to be laser focused on reducing expense throughout the business.
Many of the measures implemented since the end of 2021 and reduced our internal cost substantially.
The cost at the corporate level cost cutting both during and after the end of Q1 have included reductions in corporate head count and the elimination of some external consultants.
<unk> across corporate and the business units have reduced total headcount was 170 to 56 or 67% reduction and reduced payroll expenses by $7 6 million or 49%.
In total since beginning the strategic review last fall, we have reduced our operating expenses by approximately $18 million on an and.
Annualized basis. This includes $7 $6 million of payroll cost reductions, but candidates incorporate.
In addition.
So the $10 million of cost cuts announced with the strategic review, we continue to look for additional cost improvement opportunities as our strategic review of business efficiencies and operational streamlining continues for the first quarter total SG&A expenses net of subsidies.
<unk> were $10 $5 million.
Compared to $16 million for the same period last year, a decrease of $5 5 million 34%.
As I explained this is a direct result of our cost saving and business streamlining measures.
That have been implemented over the past 12 months.
Adjusted EBITDA loss during the quarter was $9 8 million.
An improvement versus our adjusted EBITDA loss of $12 9 million in the comparable year ago period, and from the $14 $2 million loss, we incurred in fiscal Q4 2022.
This is the improvement in adjusted EBITDA is primarily from increased revenue.
With lower expenses year over year looking at the balance sheet, we ended the quarter with $6 $2 million in cash on hand.
Post quarter end, we announced the sprouts and entered into an amendment and expansion of sprouts secured promissory notes led by a $3 million of investment from Morgan Stanley .
The amendment of scraps existing secured promissory notes expanded the notes from $22 5 million.
So a maximum of $37 $5 million the expanded facility shows confidence in Neptune strategic strategic shift towards becoming a pure play CPG company as well as the growth opportunity of sprouts.
Okay.
Also recently announced voluntary delisting from the Toronto stock exchange effected effective at market close on August 15th 2022.
This was a strategic decision to streamline our professional and administrative efforts.
Trading on the exchange represented a small percentage of our overall trading volume and came with additional fees and administrative burdens for our finance and legal teams.
To conclude we will continue to focus on cost savings the sale of our Canada business and continued market share gains in our core brands and products.
We expect our newly refined growth strategy to continue to drive growth higher margins and improve the.
Profitability throughout fiscal 2023. This has already translated to growth in our key focus areas.
In the first fiscal quarter of 2023.
Look forward to working.
CFO .
Net tune team.
Moving forward as we continue to strive towards profitability and stakeholder value creation.
Operator, please can you open the line for questions.
Thank you Sir.
Ladies and gentlemen, if you would like to ask a question. Please slowly press star followed by one you touched on phone you will then hear a suite of them prompt acknowledging your request and if you would like to withdraw yourself from the question queue. Please press star followed by <unk> and.
And lastly, if youre using a speakerphone please lift the handset before pressing any keys. Please go ahead and press Star one now if you do have any questions.
And your first question will be from Aaron Grey.
Lyons Global partners. Please go ahead.
Alright, Thank you for the question.
Wanted to talk about spot a little bit I know there was a good amount of growth during the quarter.
And a record quarter for you guys.
How do we think about the growth going forward.
For that segment line, particularly as you have expanded distribution how it flows through particularly on the P&L because I know there can be some timing issues in terms of.
It flowing through to the actual stores is actually hitting the P&L, we had some sales a little bit range bound in the past three quarters. So good to see some pickup in the growth this quarter, but just wanted to get a better understanding of how we see that going forward. Thanks.
Yes.
And then Michael can Robyn.
I think that with the <unk>.
Recent gains in distribution, we obviously saw that effect.
Hey, Glenn happening this quarter and go into Q2, and then probably expand.
Or what additional distribution in Q3 and Q4, so I think as we get towards the end of the year, we should start being able to capture all of the distribution gains that we've made.
Okay.
Okay. Thanks.
And then how do you think about the timing of the cannabis assets being sold and then the revenue that youre going to generate from them in the interim came in a little bit ahead of where I was looking for it so.
I know youre kind of tailing off.
Operations Theyre selling off existing inventories. So just in the interim as you guys are selling out how do we think about the sales for that business line.
We have been.
This is ray Silcock.
Have been.
<unk> inventory.
So to accommodate our expectation that we set it all three.
That said.
Margin impact in Q1, our module would've been breakeven without that write down.
But.
As we go forward.
The modest are fairly modest.
Got it.
Sure.
The effect of the remaining kind of its impact on our business is likely to be modest.
Okay great.
And for the Nutraceutical. So that came in ahead of where you guys guided.
And your last earnings call.
And a pretty notable record quarter there.
Was there anything we should think about in terms of timing you guys have called out some timing in fiscal <unk>. So did that kind of swing back this quarter and how do we think about that kind of norm does it normalize outside kind of like $4 million level, we had seen historically on a quarterly basis.
Yes, I wouldn't say there was $8 million I'm sorry.
I just wanted to call out $1 million.
The million dollar impact from Q4 Q1.
But if you even take out that $1 million impact you still saw.
Good solid growth with new products coming out in Q2, we should expect to see some growth on that score.
Okay.
Okay. That's helpful.
Alright, and then just lastly, you guys mentioned on the gross profit right. So.
Pretty much breakeven when you take out the inventory.
All hit in the quarter.
Is it fair to say kind of normalize going forward you expect for that to be more normalized gross.
Profit margin.
Well, we certainly that would be our expectation.
We're going to see.
The full effect until the FERC as we go forward I think Michael talked about getting to 22% margin.
2024, so I think we.
We expect to make progress there.
It's not going to be a step function is going to be a gradual increase as possible as we go forward.
Okay, Great. That's proud design sprouts as price increases realized into the P&L over the coming quarters and continue to be effective.
We will start seeing as sprouts will go to that.
'twenty two.
And obviously by Droga already has positive gross profit margin.
So I think as those start hitting the P&L.
Some of the fact that the cannabis business.
But to see that improve over time.
Alright, great. Thanks for color jump back in the queue.
Thank you any further questions Mr. Greg.
No I'm, all set and jump back in the queue. Thank you.
Ladies and gentlemen at this time there are no further questions.
I'd like to thank you for attending today's call.
Those conclude your event.
And have a good evening.
Thanks Robert.
[music].
Okay.
Okay.