Neptune Wellness Solutions Inc.

Good afternoon, ladies and gentlemen, and welcome to the Neptune Wellness Solutions, Inc. second quarter 2023 earnings call. At this time, all 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. This call is being recorded. on Friday, December the 16th, 2022. I would now like to turn the conference over to Valter Pinto, Managing Director, KCSA. Please go ahead.

Thank you, Operator, and hello, everyone. Thank you for joining us today for the Neptune Wellness Solutions Fiscal Second Quarter 2023 Earnings Conference Call. With me today are Michael Camrada, President and Chief Executive Officer, and Raymond Silcott, 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 supplemental measure of our ongoing performance and thus highlight trends in our core business that may not otherwise be apparent when relying solely 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 comparably may be limited. Non-GAAP measures should not be considered a substitute 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 risks, as laid out in our public filings found on CDAR and EDGAR. I'd now like to turn the call over to Michael.

Thank you, Walter, and hello, everyone. Today, we reported our fiscal second quarter 2023 results for the period ended September 30, 2022. During our fiscal second quarter of 2023, we experienced continued growth mainly driven by our organic baby and toddler food brand, Sprout. These results demonstrate that our strategy to focus on consumer packaged goods is yielding financial benefit and we are confident that this trend will continue. Because of our hard work over the last few years, we are now a leading consumer packaged goods company with a portfolio of Good For You and Good For The Planet consumer branded products. Sprout Organics is a top five organic baby food brand that is currently outperforming the category in sales growth. We have recently made a successful expansion out of the baby aisle into a new product category, toddler meals. Biodroga is also performing well with new product offerings and new client relationships. I will go into both of these, as well as operational highlights, right now. Let's start with our organic children's food and snack brand, Sprout. According to Nielsen data, Sprout is the fastest growing brand out of the top five brands in the organic shelf stable baby food category, growing 26% in the last year outpacing Gerber Organics and Happy Baby Organics. Nielsen data lasts 52 weeks, week ending October 8, 2022. Specifically, within the latest quarter, updated Nielsen data shows that Sprout sales grew 18.6% versus 10.7% for the overall category, Nielsen data lasts 13 weeks, week ending October 8, 2022. Our Cocomelon partnership has proven highly incremental to the category. Cocomelon snacks are turning 79% above the category average in the last 13 weeks. Pouches are selling 40% above the category average of all pouches. Nielsen data lasts 13 weeks, week ending October 8, 2022. Sprout has the three fastest-growing organic meal items nationally and the highest velocity in the segment. Nielsen data lasts 13 weeks, weekending October 8, 2022. While we experienced quarter-over-quarter sales growth, our everyday fill rate fell to 57% in Q2 due to supply chain challenges. Our biggest supply challenges were our Stage 3 pouches and toddler meals, and our waffle supplier, which experienced a fire at the facility and unexpectedly caused out of stocks. With ingredients already back in stock, we are catching up on this, as is evident in our October fill rate, which is back up to 81%. Sprout continued to roll out new SKUs during the second quarter, further increasing our opportunity for revenue growth. Last quarter, we announced the addition of a new display featuring the Cocomelon co-branded product at 2,500 Walmart doors in August and September. which was a major contributor to an approximate 31% increase in net sales for the first half of this year versus the same time period during the prior year. We are gearing up for distribution expansion in Q4 as we are doubling our SKU count and more than doubling our door count. From 900 to 2,300 doors with a major retailer, Sprout's distribution growth in terms of store count has reached nearly 28,000 doors, We are now available in 90% of the market partnering with leading retailers. Target, Walmart, major supermarket chains, and both of the largest national pharmacy chains in the United States. We are also shipping direct to consumers through the Sprout website. Sprout is now available in all 50 states and continues to expand in Canada. In Q2, Sprout expanded beyond the baby food aisle and continues to show upward trends, strengthening our potential to disrupt growing addressable markets. For the first time since Sprout's inception, it will now be able to extend its customer lifetime value, providing healthy, organic, and convenient options as children grow. The launch of our new Big Kids Meals, a line of organic heat and serve bowls for children four and older, is a key milestone toward the company's plan of extended market penetration Beyond the Baby Aisle. The launch includes four flavors, each with a full serving of veggies, and represents our potential to disrupt a retail category more than double the size of the baby food category. Big kid meals have already begun shipping to retailers, and we expect to report revenue growth in upcoming fiscal quarterly reports. The second fiscal quarter of 2023 saw a continuation of Sprout's growth path With several exciting milestones and sales levels achieved, the Sprout brand recorded $8.4 million in revenue in Q2 of fiscal 2023, outperforming Q2 in fiscal 2022 by 19%. We saw improvements while pulling back on promotions. The first half year over year trade rate was reduced by 10 points. We made significant improvements in gross margin this quarter and expect fluctuation in future quarters as we progress towards our plan of 22% in 2024, largely driven by the following four key drivers. One, improvement of the distribution and warehousing costs as a result of the move to a full turnkey model as well as improved logistics cost management. Two, continued price increases effective November 1st, 2022. Three, An improved product mix, 4. The realization of certain volume discounts with the level of sales increasing. As well, we are gearing up for distribution expansion in Q4 as we are doubling our SKU count and more than doubling our door count, from 900 to 2,300 doors with a major retailer. A key element of Sprout's strategy focuses on accessing the growing organic food and beverage market, with Nielsen estimating market size of $124 billion and $21 billion for beverages and cereal, respectively. We continue to seek relevant opportunities to launch new products into categories where we see the most potential. Our expertise and partnerships with retail leaders gives us the foundational position toward becoming a leader in the organic food sector and beyond. We are focused on scaling the Sprout business in a cost-efficient way while also growing and innovating within the organic food market. I am very proud of the momentum the Sprout team has continued over the second quarter, and we look forward to continuing this through fiscal 2023. Turning now to personal care and beauty and Biodroga. Steps we have taken over the past year to increase product lines and grow sales leads have continued to translate to positive sales in the second quarter that we expect to continue through fiscal 2023. This was achieved by amplifying Biodroga's brand presence through trade show attendance, implementing effective marketing strategies, and our launching of a successful new website in prior quarters. We have continued to innovate and grow Biodroga's product lines for both existing and new customers, which will further drive revenue going forward. Our Maximal Omega-3 products have also maintained significant popularity and customer demand, with a new customer secured in the second quarter for a whole new portfolio of products to be launched shortly. Biodraga also continues to undertake clinical studies to further build the credentials of our Maximil technology, which we believe is an incredibly strong asset for the company. Maximil is a game-changing piece of biotechnology that will help grow Biodraga and increase its market presence long-term. Maximil's technology has been successful in making fish oil 3.5 times more absorbable than standard fish oil and we hope that with our ongoing studies, we will be able to expand Maximal into more nutraceutical products. We're tremendously excited for what's ahead for Biodroga and look forward to seeing continued growth from them. Our consumer personal care brand, Forest Remedies, also continued its path of growth during the second quarter. Product launches of Forest Remedies into large retail chains nationwide have translated to positive sales growth, which we expect to continue through fiscal 2023. In particular, launches into sprouts, farmers' markets, fresh thyme, and a large pharmacy chain in prior quarters have translated to week-over-week growth and strong customer demand. In addition, Neptune is working on the development of innovative new SKUs in the product pipeline for forest remedies. For example, we are planning to launch Forest Remedies Multi-Omega Kid Gummies early next year, the formulation for which has already been developed. While we continue to experience sector-wide supply chain issues over Biodroga and forest remedies, we have been aggressive in implementing, streamlining, and efficiencies to mitigate these challenges and ensure cost saving. Biodroga continues to expand its manufacturing network by developing strong partnerships across North America, and during Q2, Biodroga launched its first product from a new soft gel manufacturer in the U.S. Product quality remains a key pillar for Biodroga, so the selections of new co-manufacturers are carefully managed by our quality team. To conclude, Neptune made significant progress over the second fiscal quarter to execute on its consumer packaged goods growth strategy and improve our path to profitability. Our progress has been demonstrated by sales growth across both our organic foods and beverages and personal care and beauty. We are well placed for growth and believe these decisions are in the best interest of Neptune and its stakeholders. Thank you to all our teams at Neptune, as well as our stakeholders. The last few years have been hard on us all, but finally, there's a light at the end of the tunnel. By exiting cost-intensive businesses that were championed by our prior boards and leadership, we are now finally able to say that we believe we will be on the path to profitability quicker. Slimming down, starting to simplify the organization, and focusing on consumer packaged goods is the company's future. I will now pass the call over to our Chief Financial Officer, Raymond Silcock, to discuss our financial results in more detail. Ray has had a successful career improving sales and profit performance for leading public and private equity-owned companies, including Campbell's Soup and Diamond Foods. We are pleased to have him join us. Ray?