Q4 2023 Neptune Wellness Solutions Inc Earnings Call
Speaker 1: And 1: one
Speaker 2: Good afternoon ladies and gentlemen and welcome to the Neptune Wellness Solutions Inc. 4th quarter 2023 earnings conference call. At this time all lines are in listen only mode. In the presentation we will conduct a question and answer session.
Speaker 2: If at any time during this call you require immediate assistance, please press star 0 for the operator. I would now like to turn the conference over to Valter Pinto, Managing Director, KCSA. Please go ahead.
Speaker 3: Thank you, operator, and hello, everyone.
Speaker 3: Thank you for joining us today for the Neptune Wellness Solutions fiscal fourth quarter and full year 2023 financial results conference call. With me today are Michael Camrata, President and Chief Executive Officer, and Raymond Silcock, Chief Financial Officer. Thank you for joining us today.
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.
Speaker 3: Today's conference call contains non-GAAP financial measures, specifically adjusted EBITDA, to provide investors with a supplemental measure of our operating performance and thus highlighting 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. The EBITDA is not a recognized, defined, or standardized measure under GAAP.
Speaker 3: Our definition of adjusted EVADA will likely differ from that used by other companies, including our peers, and therefore comparability may be limited.
Speaker 3: 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.
Speaker 3: public filings found on CEDAR and Adigar. I'd now like to turn the call over to Michael.
Speaker 4: Thank you, Valter, and hello everyone. Today we reported our fiscal fourth quarter and full year 2023 results for the period ended March 31, 2023. I am very pleased with the progress we have made across a number of key areas over the course of our fiscal year.
Speaker 4: We are successfully transitioning and refocusing the business to emerge as a pure play consumer packaged goods company focused on lifestyle brands. In doing so, we grew our two leading brands, Sprout and Biodroga, year over year while also driving margin expansion. Additionally, we took several important steps to improve the quality of our products and our products.
Speaker 4: to improve our capital position through the management expenses and corporate costs, beginning with the divestment of the cannabis business, which resulted in significant cost savings and streamlining of our operations towards a more simplified corporate structure. The move away from cannabis also allowed us to open up new opportunities to seek less dilutive financing options.
Speaker 4: in greater detail shortly. As a result of the decisions taken over fiscal 2023, Neptune is now a growing CPG company with a portfolio of good for you, good for the planet growing brands. Sprout and Biodroga continue to innovate with exciting new product skews.
Speaker 4: and we are excited about the opportunities for our leading brands going forward.
Speaker 4: I will now take a deeper dive into the results of Sprout and Biodroga achieved over fiscal 2023. Starting with Sprout, our leading organic children's food and snack brand, over fiscal year 2023, we continued to develop innovative products for our customers, add additional skews to our product portfolio, and expand beyond the baby food aisle to top...
Speaker 4: We focused on growing sales and margins while also reducing costs. We expect gross margins for Sprout to grow in Fiscal 24. And in Fiscal 25, we have taken several steps to optimize the supply chain for Sprout, which we are confident will result in significant cost savings.
Speaker 4: We have restructured production planning, which we expect to achieve 2.6 million in savings for the remainder of the 2023 calendar year. We are adding stability to Sprout's supply chain by looking to dual source products where possible. In addition, we are combining our volume power in contracts with our suppliers and packaging suppliers to reduce the cost of goods.
Speaker 4: We have continued to progress our strategy of growing our offering and presence within the addressable market and bringing nutritional pouches and snacks to a larger consumer base. The Coco Melon product launch, in conjunction with the rebranded existing products, contributed $2 million in incremental sales over the past fiscal year.
Speaker 4: Of the 2 million, 0.6 million came from the rebranding of our existing Sprout products, and 1.4 million was derived from newly launched Sprout and Cocomelon, co-branded products. Our efforts in collaboration with Cocomelon have led to a 65% increase in sales revenue for those SKUs.
Speaker 4: Compared to the 12 month sales that were recorded pre-coco melon rebrand, over the fiscal year, Sprout launched nine new SKUs overall, signifying a milestone that breaks us out of the baby food aisle with four Big Kid Meals products. We remain laser focused on ensuring the success and growth of our Sprout products.
Speaker 4: and are working with our retail partners on optimization efforts like shelf placement and marketing promotions. It is an incredible achievement to now have Sprout products available in 90% of the market in all 50 US states, Canada, as well as shipping direct to consumers through the Sprout website.
Speaker 4: We have partnered with several major retailers including Target and Walmart, leading supermarket chains and both of the largest national pharmacy chains in the United States. Recently, we announced that four of Sprout's most popular Cocomelon co-branded organic toddler pouches had been picked up by Target and are now available in select stores nationwide.
Speaker 4: 300 stores per item and the addition of five new items bringing the total to 10 items. Items now available at Walmart include Coco Melon pouches, Coco Melon banana bar, Coco Melon waffles, Coco Melon curls, and Sprout toddler meals.
Speaker 4: Sprout continues to increase its presence in market through the addition of new distribution on cocoa melon pouches and bars, Sprout peanut butter puffs and PVA's, as well as two upcoming features in the major retailers. Sprout also continues its successful expansion into Canadian retailers, recently launching into Loblaws, the largest grocer in Canada, for total store count.
Speaker 4: Sprout's distribution growth has reached nearly 29,230 doors in the United States and 3,000 doors in Canada, totaling 32,230 doors in North America. Reviewing the Nielsen data from 13 weeks ending March 31, 2023.
Speaker 4: Sprout sales outperformed the category, defined as total shelf stable baby food, by showing growth of plus 11%. This growth was largely driven by the categories of toddler meals, snacks, and cocoa melon pouches.
Speaker 4: According to Nielsen data, Sprout is now the number one organic toddler meal brand in grocery U.S. food with a 41% dollar share. Across all channels, Sprout organic meals have the fastest growth and strongest sales velocity in the segment.
Speaker 4: Our toddler snacks are growing 29%, which is above the category average. Additionally, our Cocomelon partnership has proven highly incremental to our growth, with our Yes Yes Veggie becoming our number one selling pouch in our Total Pouch portfolio. Sprout Strong Fill Rate of 81%
for the fourth fiscal quarter, and 90% to date was another key driver in its revenue growth. Looking at full year performance year over year, Sprout has outperformed the organic category, growing plus 18% compared to plus 13% for total organic baby food. As a result, Sprout has gained plus 0.2 points of dollar share among organic.
over year sales and margin growth over fiscal year 2023. Biodroga's leading product, Max Simmel, has seen continued success, doubling sales to its largest customer in fiscal 2023 and growing its overall top line by 18%. Biodroga is expanding further into existing overseas markets.
with MAC's symbol showing growth in Mexico with its existing products, while growing into new markets such as South Korea and India, with its first sales expected in the first quarter of fiscal year 2024. We are exploring opportunities to expand BioDroga's international reach further in the coming quarters, with advanced discussions already underway with potential new partners.
Although growth in the overall nutraceutical market is plateauing, the popularity of BioDroga's unique ingredient, Maximal, is allowing us to beat global market trends. Our continued strong results show the strength of BioDroga's brand and strong relationships with customers, both old and new.
We continue to develop innovative new product SKUs for customers, showing the flexibility of BioDroga's offering and supply chain to align with changing customer demand. During the quarter, we developed a new probiotic supplement using our patented MaxSimil technology, which offers complete omega-3, prebiotics, and probiotics in a revolutionary three-in-one system.
Clinical studies have proven that taking the right amounts of probiotics is highly effective for supporting overall vitality. The combination of probiotic strains with omega-3 fatty acids may provide additional health benefits to when either supplement is administered alone, such as improvements in composition and diversity of gut microbiome.
Our new unique formula developed with clinically proven shelf stable probiotic strain allows people to take just one supplement for digestive health, immune support, and other wellness benefits. Over fiscal year 2023, BioDroga was focused on actively managing costs where possible to mitigate supply chain challenges.
being felt across the sector. Biodroga generated an annual cost of sales improvement as a percent of sales year over year, despite the ongoing inflation and supply chain costs. To conclude, fiscal 2023 was key for Neptune as we become a CPG-focused company.
We are pleased with the results already achieved and the trending we expect to continue through next year. We have continued to improve our liquidity position as well as focus on managing expenses and curbing corporate costs. Sprout and Biodroga, our leading consumer brands, are achieving positive results and continue to develop innovative products in response to shifting customer demand.
We would like to thank our investors, customers, and other stakeholders for your continued support. I will now hand over to Ray to discuss our financial results in greater detail. Thank you.
Thank you Michael and good afternoon everyone.
I am pleased today to present Neptune's financial results for the fourth quarter and full year ending March 31, 2023.
All numbers are in US dollars and US GAAP.
Consolidated net revenue for fiscal 2023 totaled $52.6 million, an increase of $3.8 million or 7.8%, as compared to the $48.8 million reported for fiscal 2022.
Fiscal Q4 revenue was $12.1 million as compared to $11.5 million for the same period prior year, an increase of 5.3%. These increases were led by our shift over the course of Fiscal Q23.
to focus on our organic food and beverage and nutraceuticals businesses. Consolidated gross margins improved from negative 15.4% in fiscal 22 to negative 4.7% in fiscal 23.
As Michael has discussed, we took significant steps over the past year to realign our businesses, corporate structure and resources towards becoming a pure play CPG company.
This resulted in margin improvement and we expect to see further positive impacts on large revenue and margins as we continue to grow both sprouts and biodroga.
Sprout, our organic children's food brand, achieved net revenue of $33.9 million in fiscal 23, up from $26.2 million in the same quarter prior year, an increase of 29%. In Q4, Sprout net revenue totaled $9 million.
as compared to $6.5 million for the same period prior year, up 38%.
Inventory issues identified in Q4 adversely impacted our fill rate in the quarter, hurting our sales growth and margin.
rate to pick up in the subsequent quarters of this fiscal year. We anticipate our fill rate improving to 90% in the second half of the year, primarily as a result of supply chain stabilization. During the fiscal year, Sprout continued to broaden its distribution through leading retailers like Walmart, Albertsons, Target and others.
in Q4
sprout gross margins were minus
1% including a $3.2 million write down of out of code finished goods inventory.
Excluding the impact of the inventory losses, Sprout Gross Margin for the fourth quarter would have been greater than 22%, which was above our target and which we expect to maintain at around the same level into Fiscal 24.
During fiscal 23 we implemented several key operational measures to improve sprouts cost and expand margins.
we moved to a new distribution center which resulted in approximately $1 million in annualized savings.
We also changed transportation providers and added three new contract manufacturers. And we found other ways to improve our margins.
For example, we transitioned our curls products from being packed in a canister to a bag, improving our gross margin on this item alone by 30% points.
Moving on to biodrogue or our nutraceuticals business.
Biodroga net revenue for fiscal 23 totaled $15.1 million, an increase of 11% as compared to the $13.6 million we reached in fiscal 22. Net revenue for Q4 amounted to $3.3 million, an increase of 48% as compared to the same quarter prior year.
Biodraga gross margin for fiscal 23 was 28% as compared to 25% for the prior year. This margin improvement is attributable to our success in scaling up the Biodraga platform based on our key product Maximil, while expanding into new markets but keeping our overall expenses flat.
Moving to corporate, consolidated SG&A expenses for fiscal 23 amounted to $46.4 million compared to $60.5 million for fiscal 22, a decrease of $14 million or 23%, primarily due to the benefits from our continuing to evaluate and change our budget.
23.
to 39.7 million loss as compared to 53.3 million loss.
loss for fiscal 22, as I said that would be an improvement of 13.6 million dollars.
Consolidated adjusted EBITDA loss for Q4 increased by $200,000 or 1.6% to $13 million compared to $12.8 million for Q4 2022. Our net loss for fiscal 23 totaled $88.8 million.
compared to $84.4 million if fiscal 22, and improved in the net loss of 4.4 million or 5%.
Improving our balance sheet and optimizing our cost structure remain our top priorities. During fiscal 23 we took several key strategic steps, including divesting our cannabis business in November a significant milestone.
This allows us to focus all our energies and resources on our two growth businesses, Sprout and Biodroga. The sale of the cannabis assets helped us realize significant cost savings by streamlining and simplifying our corporate SG&A structure. It also permitted us to pursue relationships with a broader range of investors, corporations and banks.
In April 23, Sprout extended the maturity of its $13 million secure promissory note with Morgan Stanley expansion capital until December 31, 2024.
In May 2023, Sprout increased its accounts receivable factoring facility to $7.5 million, of which around $3 million is currently drawn. Also in May 2023, the company closed on a public equity offering for $4 million. These measures allow Sprout to execute on its strategic plan.
and continue to expand its organic baby and toddler food brand. The company's liquidity position as of March 31, 2023 amounted to $2 million.
To sum up, the steps we have made over the past year have made Neptune into a CPG-focused company. We are pleased with the progress we have made to grow revenue and margins, all while focusing on reducing corporate costs and expenses.
We are continuing to raise capital both to grow our businesses and to enable us to achieve additional cost savings and operational improvements.
That concludes our prepared remarks today. Thank you for joining us and I will now ask the operator to open the line for any questions.
Thank you. Ladies and gentlemen, should you have a question, please press the star followed by the one on your touchtone phone. If you'd like to withdraw your question, please press the star followed by the two. If you're using a speakerphone, please leave the handset before pressing any keys. One moment please for your first question.
Your first question comes from Aaron Gray from Alliance Global Partners. Please go ahead.
Hi, good evening. This is Remy Smith on for Aaron Gray. So my first question is without Sprouts distribution contribution. So you mentioned you launched into Lobcrawl Grocer and you were expecting incremental Walmart distribution you know more than doubling to 2,000 stores. Obviously 4Q was impacted.
by those inventory measures not meeting the fill rate that you were expecting. So just looking forward, how much of an impact now should this have, the distribution gains in 4G or 1Q24? And then also could you speak a little bit about when we should expect?
target to benefit sales as well. Yeah, so the inventory out of code issue was addressed and written off in Q4 in the end of the year. When it came to Walmart, we started off with 900 doors and now we're over 2,500 doors, but we've also added additional SKUs into it.
We expect to start seeing growth continue into Q2 and onward into our fiscal 2024. So we've been optimizing our supply chain and really looking at how we fine-tune Sprout. And we've definitely taken steps in Q4 and really fine-tuned in Q1 and Q2.
The fill rates have improved, especially with the demand that we're seeing across the categories, specifically in baby, we're seeing a lot of demand and our peers have had a lot of fill issues. So we've been able to perform a little bit better than our peers on the fill rate, which has gained us additional distribution, and we do expect that to continue to be steady growth but we really wanted to focus moving into fiscal 2024.
on proving the bottom line in cash flow management as we're looking to different ways to optimize the business to start creating value in other areas and for other stakeholders.
And so moving into fiscal 2024, we feel like the supply chain adjustments, the distribution gains that we have should give us some steady growth. But at the same time, we've also been fine tuning our margins such as improvements that we've made in packaging and an alignment of which skews that we're focusing on. And which ones were bringing the broader distribution, which at the same time continuing to grow. Yes, sir. I'm sure that
are from six months to over 16 key in the food and beverage area to really up in the up-age meals. So we've definitely made a lot of improvements in Q4. Going into Q1, we've adjusted the supply chain to match what we believe fiscal 2024 will be and we've also improved our portfolio mix.
and also our customer distribution to really focus on the margins and also driving bottom line improvements. Great, that was helpful. And then just kind of going back to Sprouts gross margins, I know you mentioned before the right data finished goods. So was that just to confirm isolated to this previous quarter of 4Q?
You mentioned kind of without it, they'd be at around 22%. So can we kind of look more towards that in forward year? In Q, is that kind of just more kind of later in forward year 2024?
I think the majority of it was in Q4. There may be a little bit of hangover into Q1, but we start to see improvements in our margins onward into the rest of the second half of fiscal 2024 and Ray can add commentary if you want to on that. But that was definitely seemed to be an isolated issue with, as we saw, the feedback from the retailers and what skis we won.
We saw higher demand on certain skews than anticipated. So we've adjusted our production to match our sales demand. And based on Nielsen data and the wins that we've seen at Target and expansion, we feel like that should level out starting Q2 and onward. But we definitely feel like the big amount of that write-off was obviously in Q4.
and it should be lesser and hopefully by Q2 everything is synergized. And I want to point out that the margin goal is plus 22 percent so we do hopefully hit that and exceed that once everything is worked through the system. Got it. That's really helpful.
And then I guess kind of sticking with Sprout, on profitability targets before you mentioned hopefully being profitable by the end of Ford year 2024 for Sprout, is that still kind of the guidance? And then just a confirmation question, that $2.6 million in savings, is that a good thing?
Is that primarily just related to COGS for your gross margin? So that's sort of a composite question there.
So I think with respect to your first question about the timing of the profitability, you know, we still anticipate that we will be profitable, break even to profitable by the end of the fiscal year. Although I think there's a possibility we could exceed that, I don't think we're ready to embrace.
much better than that right now. As Michael has said, we may have some hangover from the Q4 inventory write down that we haven't seen yet, so we're just being cautious. But we are seeing a big improvement in our...
supply chain and reduction of cost but our cost reductions whilst they're heavily in the supply chain which I think was the second question.
There are other costs that costs improvements that we're Focusing on in our admin costs too, so Mainly I'd say the answer to the second part of your question if I understood it correctly is the savings are mainly in COGS But there are savings on the admin side cost side too that we're endeavoring to
to tap into. Great, yeah that answered my question. Mostly kind of the split between COGS and SG&A. But it was really helpful. I'll just head back in the queue. Thank you.
Thank you. Ladies and gentlemen, as a reminder, should you have a question, please press the star followed by the one.
Once again, if you'd like to ask a question, please press the star followed by the one. There are no further questions at this time. Ladies and gentlemen, this concludes the conference call for today. We thank you for joining and you may now disconnect your lines. Thank you.