Neptune Wellness Solutions Inc.

Good afternoon, ladies and gentlemen, and welcome to the Neptune Wellness Solutions, Inc. First Quarter 2023 Earnings Conference Call. At this time, all participant lines are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. If at any time during this call you require immediate assistance, please press star-zero for the operator. Note that this call is being recorded on Monday, August 15, 2022. And I would like to turn the conference over to Maury Brown, Vice President, Investor Relations for Neptune Wellness Solutions. Please go ahead.

Thank you, Operator, and hello, everyone. Thank you for joining us today for the Neptune Wellness Solutions Fiscal First Quarter 2023 Earnings Conference Call. With me today are Michael Camerata, President and Chief Executive Officer, and Raymond Silcock, Chief Financial Officer. 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 a supplemental measure of our operating performance and thus highlight trends in our core business that may not otherwise be apparent when solely relying on GAAP financial measures. 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. 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. We do not undertake any obligation to update any forward-looking 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 Cedar and Edgar. I'll turn the call over now to Michael.

We reported our fiscal first quarter 2023 results for the period ending June 30, 2022. Fiscal 2022 was a year of tough strategic decisions to refocus our business on a path to growth and profitability. The results achieved in the first fiscal quarter of 2023 reflect the impacts of these decisions and begin to outline our path to becoming a leading consumer packaged good company with a portfolio of good for you and good for the planet consumer branded products like Sprout. Sprout is a perfect example of our ability to take leading consumer brands in high growth sectors and leverage our platform and core expertise to grow revenue while improving margins. We have also continued to focus on cost reductions internally. We have hired Stifel GMP, who is actively pursuing the sale of the cannabis business. We have also listed the factory for sale and are selling their equipment. We have enacted additional cost cuts at the corporate level, both during and after the quarter. At the corporate level, including reductions in corporate headcount and external consultants, in total across corporate and all business units, we have reduced the headcount from 170 to 56, a 67% reduction. and reduced payroll expenses by $7.6 million, or 49%. Building upon our initial strategic review from late 2021, the actions announced in June are the final step of our transition to a pure-play, purpose-driven CPG company. It simplifies our overall structure, enabling us to hyper-focus on those areas of the business we believe are best positioned for profitability and growth. In total, since the beginning, the strategic review last fall, we have announced reduction spend of approximately $18 million. This includes the $7.6 million of payroll cost reductions for the cannabis and corporate, in addition to the $10 million of cost cuts announced 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 units. We believe these actions are the prudent choice to ensure that Neptune is well positioned to achieve profitability and increase stakeholder values. In line with this strategy, we have made two important appointments to Neptune's leadership during this quarter. We were very pleased to announce the appointment of Raymond Silcock as 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. Ray has over 25 years of CFO experience across both public and private companies with particular experience in areas of CPG. With an extensive track record of leading companies through strategic transitions, 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 Philip Sanford as a new board member and audit chair. As a former chairman of Sprout, Philip holds deep financial and commercial advisory experience, as well as firsthand knowledge of Neptune's brands. Their addition of Phil further bolsters the Neptune Sports experience for the next stage of our growth. and we are grateful for his guidance as we navigate this next stage 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 Sprouts secured promissory notes, led by a $3 million investment from Morgan Stanley. The amendment of the Sprouts' existing secured promissory notes expanded the notes from $22.5 million to a maximum of $37.5 million. The expanded facility shows confidence in Neptune's 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 Bidroga both delivering a multi-year record for revenue demonstrates that our renewed focus on our core business areas are the best choice for Neptune going forward. Now moving to our operational highlights, starting with our food and beverage brand, Sprout. The first fiscal quarter of 2023 was a successful period for Sprout with several exciting milestones and strong sales growth. The Sprouse 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 Sprout's 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. Two, a full year price increase. Three, an improved product mix. And four, the realization of certain volume discounts with the level of sales increasing. Recent Nielsen data shows that Sprouts grew sales 40% versus 15% overall for the category. In the latest four weeks of Nielsen data for the period ending June 18, 2022, outperforming the product category in all time periods measured. When we looked at the Sprouts distribution growth over the past year, it is clear that we have made great headway and 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 the Sprouts brand. In terms of store count, Sprouts products are now in 27,000 doors versus 18,500 doors a year ago, with some of the newest stores expected to show up in Nielsen data soon. Over the past year, Sprouts has secured several distribution gains with leading retailers, including Target, Walmart, and major supermarket chains, and the largest national pharmacy chain in the United States in 5,000 of their 9,900 doors, and now is shipping direct to consumer through the Sprouts website. Sprouts is also available in all 50 U.S. states as well as Canada. Sprouts continue to add new products to our offerings in the first quarter and further increase our opportunity for revenue growth. In May, Sprouts launched the co-branded Sprouts Cocomelon organic snack bars for toddlers, available online and at select retailers nationwide. We have also been adding displays featuring the Cocomelon co-branded products at 2,500 Walmart doors in August and September, an exciting milestone. In March, Sprouts was delighted to launch a first-ever co-branded product line of children's food with Cocomelon, including our entry into Walmart stores and on walmart.com. We have already achieved a rollout to approximately 900 Walmart stores. The product lines released so far are showing strong sell-through with sales surpassing their 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. Sprouts 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 upage meal products, Meals, a line of organic heat and serve bowls for the 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 plus percent 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 upage meal market. Meals is expected to ship to customers in the fall, and we expect to see this translate into revenue growth in the fiscal 2023. In addition, Sprouts is also exploring further category expansion. Some examples include cereal, an estimated $21 billion market size, vitamins, an estimated $7 billion market size, and beverage, which is 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 Sprouse 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. Sprouts has remained focused on improving core margins. Sprouts has 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. In addition, Sprouts has continued to find cost savings throughout the business to ensure operational efficiencies and drive margins. We are 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 industry, Sprouts has managed to maintain strong fill rates and partially offset increased shipping costs by some price increases. I am 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 Sprout. Turning now to personal care and beauty, including By Droga. We have generated the largest revenue quarter in over two years in personal care and beauty. At $5.1 million, this solid growth is a result of steps taken in the past few quarters to increase By Droga's brand presence, throughout the trade show attendance, effective marketing promotions, and our success of our new website launch. The new leads generated as well as the new product lines for existing customers translated to sales and revenue growth in the first fiscal quarter, and we expect this to continue throughout the fiscal 2023. It's 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. Biodroga continues to innovate and expand our offerings for customers with new lines of products being developed. In line with this strategy, Biodroga has recently launched a portfolio of kids products that are already bringing new opportunities for Biodroga with its customer base and new customers. BioDroga is expected to launch additional new product capabilities in Q2 to continue to grow its portfolio of offerings for both existing partners and new customer groups, which will drive revenue growth going forward. BioDroga is also undertaking important clinical studies to bolster its credentials of our Maximal technology. We have completed an 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 taking alone. Beidroger expects to begin a human clinical study on maximal combined with lutein in the near future, aimed at maintaining good cognitive and eye health. This new study will examine both improvements in eye health and cognitive function. Meanwhile, Forest Remedies, our personal care and beauty brand, also continued success in the first quarter. The Forest Remedies Multi-Omega-369 Aji Oil Supplement and Elderberry Immune Supplements that were launched in Sprouts Farmers Market Stores nationwide in Q4 are showing week-over-week growth in consumer demand. In Q1, the Aji 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 versus the prior 12 weeks. We are also currently working on developing a new product pipeline for Forest Remedies. An example of this is 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 2021. calendar 2023. While sector-wide supply chain issues continue to be felt across both Bidroga and Forest Remedies, measures we have introduced have helped to mitigate the impacts of these supply chain delays. These actions have included improved supply chain network expansion with co-manufacturers, has increased 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 Biodroga and Forest 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 Neptune's 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 macroeconomic 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 brands, our consumers, and our stakeholders. With that, I will now hand the call over to Ray to discuss our financial results in more detail.