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spk00: Good morning, ladies and gentlemen, and welcome to the Neptune Wellness Solutions, Inc. First Quarter 2024 Earnings Conference 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. I would now like to turn the conference over to Valter Pinto. Managing Director KCSA, please go ahead.
spk02: Thank you, Operator, and hello, everyone. Thank you for joining us today for the Neptune Well and Solutions Fiscal First Quarter 2024 Earnings Conference Call. With me today are Michael Camerata, President and Chief Executive Officer, and Lisa Gainsbourg, Interim 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 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. 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 under 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.
spk04: Thank you, Walter, and hello, everyone. Thank you for joining us today for our fiscal first quarter 2024 financial results conference call for the period ending June 30th, 2023. During the quarter, our team focused on driving margin expansion and operational efficiency. Our core brands, Sprout and Biodroga, generated steady revenue while expanding margins year over year. Both brands also continued to develop innovative products and expand into new markets. Let me first discuss Sprout, our leading organic children's food and snack brand. Over the first fiscal quarter, we continued to expand distribution across North America, grow our product portfolio, and deliver innovative new SKUs for our customers. During the quarter, Sprout surpassed expectations by achieving a gross margin of 26% in Q1, outperforming our fiscal 2024 target of 22%. A pivotal element in our margin profile is our strategic inventory management. We've positioned the right personnel, fine-tuned our production plans to align more closely with demand, and implemented enhanced processes. These measures aim to mitigate the write-offs we encountered in the past. Over recent quarters, we have implemented several measures to manage costs. These efforts have yielded positive results evident in both our margin improvement and the reduced expenses recorded for Q1 at Sprout. However, there is still more work ahead. In particular, we have made significant changes to optimize the supply chain for Sprout, which we believe will result in $2.6 million in savings for the remainder of the 2023 calendar year. We have restructured production planning, and in Q1 we continued to progress this plan with further cuts to savings made. This has added further stability to Sprout's supply chain by dual sourcing products where possible. In addition, we are reducing the cost of goods by combining our volume power in contracts with our suppliers and packaging suppliers. We've also refined our processes to enhance the precision and efficiency of our tracking and forecasting systems, ensuring a better understanding of evolving customer needs. We continue to focus on ensuring the success and growth of our Sprout products by working with our retail partners on optimization efforts through on- and off-shelf placement and marketing activation. During the first quarter, Sprout was awarded several off-shelf features on key product lines with several major retail partners. In Q2, we expect to see positive upside from the feature of Cocomelon Pouches, Cocomelon Waffles, Sprout Crinkles, and Sprout Big Kids. We are proud that Sprout products are available in 90% of the market. in all 50 US states, Canada, as well as shipping direct to consumers through the Sprout website. This is impressive growth since the 50% of market coverage that Sprout had when we first acquired the majority stake in 2021. Sprout store count has reached nearly 29,340 doors in the United States and 3,000 doors in Canada, for a total of 32,340 doors in North America. We have achieved this reach through our partnerships with many leading retailers, including Target and Walmart, major supermarket chains, and both of the largest national pharmacy chains in the United States. New retail partner additions include Brookshire Brothers Grocery, while existing retail partners such as Demola Supermarkets added incremental SKU count in Q1. Sprout also launched two club pack offers onto online retail platform, SAMS.com. Last quarter, we announced that four of Sprout's most popular cocoa melon, co-branded organic toddler pouches had been selected for distribution by Target. These items are now available on shelves in select stores across the country, as well as Target.com. Kiwi Banana Spinach is currently the number one pouch in the Target Cocomelon assortment. All pouches continue to show positive momentum in sales growth since launching in March 2023. Sprout's partnership with Walmart also continues to grow. with an increased store count average of 2,300 versus 900 previously. Sprout was awarded distribution of five new items, bringing our total to 10 items, including cocoa melon pouches, banana bars, waffles, curls, and Sprout toddler meals. We are pleased that Sprout's portfolio at Walmart is showing strong sell, through which is meeting projections. The Cocoa Melon Banana Bar has achieved number one product ranking in the last 13 weeks in Sprout Snacks category at Walmart. Nielsen Data Total USAOC, latest 13 weeks week ending June 17, 2023, shows that some of the new Sprout products are beating average performance in their category. Toddler Meals, Waffles, and Cocoa Melon Bars are performing especially well. Toddler Meals recorded 22.7% growth for the recent period versus 11% of the total category, while Sprout Snacks showed 28.8% growth versus 19.4% growth of the total category. This was driven by waffles, which achieved 52.8% growth in the latest 13 weeks, and Sprout Bars, which ranked second in the Sprout Snack portfolio in the latest four-week read. This demonstrates that many of the new products launched and the expansion into new baby and toddler categories was a right strategic pivot for Sprout and Inline with shifting customer demands. Our Cocomelon partnership also continues to perform as standout products in the Sprout range. The Yes! Yes! Veggie Pouch has maintained the number one pouch in unit sales in Sprout's Cocomelon portfolio, while the Cocomelon Banana Snack Bar is number one in dollar and unit sales in the Cocomelon snack portfolio. Sprout's fill rate sits between 80 to 90 percent, but our goal is to maintain a level above 90%. Sprout is focused on managing supply chain processes to continually improve the fill rate. Moving now to Biodroga, our nutraceutical brand. Biodroga continued to maintain strong margin growth for the first quarter of 2024 of 28%. This was achieved in spite of continued pressure on raw material procurement. While sales softened slightly in Q1 from Q4 strong results, We expect sales to improve through Q2 because Biodroga is a B2B business. Sales per quarter can fluctuate depending on large client orders. Q2 sales are expected to pick back up as we have seen improved growth momentum during the current quarter. Our Maximal brand and the monoglyceride superior fish oil grade, Biodroga's leading product and technology, saw continued success in Q1 and is receiving pleasing order levels so far in Q2. We are rolling Biodroga and the monoglyceride technology out into new international markets, increasing its brand reach and addressable market. During Q1, we launched the monoglyceride technology into South Korea, with the first shipment of raw material to our South Korean partner taking place in Q1. Biodroga also reported growing sales of its Maximal brand in Mexico, with our local partner doubling sales demand over the first quarter. In Q2, We are starting to ship to the new market of India. We are also in progress discussions with new clients in Taiwan and Singapore, demonstrating increased demand in Maximil and its monoglyceride technology across new Asian markets. We have also continued to implement cost-saving initiatives and improve operational streamlining throughout the Biodroga business. This is one of the key factors behind the margin growth we have maintained. A recent example of measures we are implementing is the consolidation of warehouses in Western Canada. To sum up, as the demand increases, we have more to do, but Sprout and Biodroga are making steady progress, but more importantly, becoming more operationally efficient. I will now hand the call over to Lisa to cover our financial results in detail.
spk01: Thank you, Michael, and hello, everyone. be presenting Neptune's financial results for the fiscal first quarter of fiscal 2024 for the period ending June 30, 2023. All numbers are in U.S. dollars and U.S. gas. Consolidated net revenue for Q1 2024 totaled $10.6 million compared to $16.3 million for Q1 Q1 of fiscal 2023. This includes a decrease of $2.7 million in cannabis revenues from the now divested cannabis business. Compared to Q4 of fiscal 2023, consolidated revenues grew by $1.5 million, or 13%, which was mainly attributable to timing of shipping of nutraceutical products as well as decrease in royalty revenues partially offset by an increase of 0.4 million in food and beverage revenues. The consolidated gross profit increase of 16.2% for Q1 2024 compared to a decrease of 17.8% for the same period in Q1 23, an increase of 34 basis points. This significant increase is a result of the steps we have taken over the past year to manage costs and drive sales. Throughout during the quarter, achieved gross margins of 26% in Q1, ahead of our previously guided target of 22% for fiscal 2024. As Michael has already spoken to, the key factors of our margin improvement is the management of our inventory. We have put the right people and processes in place to ensure that we do not experience the write-offs that we had in Q4 and Q1, and we are continuing to actively manage this. We have taken several steps throughout Sprouts business over the past year to manage costs, and this has shown results in both margin improvement and in the lower level expenses recorded for Q1. We expect to see full savings on these measures recorded in Q2. In particular, we are confident that the significant changes we have made to optimize the supply chain for Sprout will result in $2.6 million in savings for the remainder of the 2023 calendar year. In addition, we have also refined our accounting processes to ensure tracking and forecasting systems are more detailed and more efficient at understanding customer needs. Moving to our B2B nutraceutical segment, including our leading brand, Biodroga. Biodroga continued to maintain strong margin growth for the first quarter of 2024 of 28%. This was achieved in spite of continued supply chain challenges. We have also continued to implement cost savings initiatives and improve operational streamlining throughout the Biodroga business. This is one of the key factors behind the margin growth that we have maintained, as well as reduced cost of sales. Moving now to corporate. Consolidated SG&A expenses for Q1 2024 amounted to $10 million, compared to $9 million for the same period the prior year. This is a decrease of $1 million, or 10%, primarily due to the benefits of the strategic review and continued cost controls. We remain focused on improving our balance sheet and operating cost structure. This week, we announced we had entered into a binding term sheet with Morgan Stanley for Sprout, providing Neptune with an option to exchange its existing Sprout debt for Sprout equity on or prior to November 13, 2023. This would substantially reduce Sprout's debt. The term sheet further provides for amendments to remaining Sprout promissory notes, extending the maturity date to June 30, 2025. In Q1, Sprout extended the maturity of its existing 13 million security promissory notes with Morgan Stanley Extension Capital. Sprout also secured an accounts receivable factoring facility for Sprout for up to 5 million. These actions allow Sprouts to execute on its strategic plan to continue with its growth path for its organic children's food brand. Additionally, during the first quarter, Neptune closed a public offering of $4 million. We are also prioritizing measures to actively control operating expenses. Consolidated adjusted EBITDA improved by 4.1 million or 36% for the first quarter to an adjusted EBITDA loss of 7.3 million. This is compared to 11.4 million for the first quarter of the year prior. The decrease in adjusted EBITDA loss for the quarter ended June 30, 2023, compared to the quarter ended June 30, 2022, was driven by an improvement in loss of operating activities of $7.1 million, offset by a reduction of impairment losses of $0.8 million, and an add-back of SG&A expenses, including depreciation equity classified stock-based compensation, non-employee compensation, related to warrants of $2.2 million. Net loss for the quarter amounted to 6.4 million compared to 6.5 million for the prior corresponding period. This is an increase of 0.1 million or 1.6%, which was driven by the increase in gross profit of 7.3 million, the decrease in R&D expenses of 0.2 million, the reduction in impairment loss of 0.8 million, offset by the increase in SG&A expenses of 1.1 million, the increase in finance costs of 0.9 million, foreign exchange loss of 1.6 million, and gain on the fair value of derivatives of 4.6 million. Looking at the balance sheet, the company's liquidity position at June 30, 2023 consisted of cash and cash equivalents of 1.4 million. To sum up, Neptune achieved strong margin growth for the first quarter of fiscal 2024. We are focused on reducing corporate costs and expenses to achieve additional cost savings and operational improvements. We also remain focused on improving Neptune's capital position and are continuing to review options to shore up capital. That concludes our prepared remarks. Thank you for joining us today, and I will now turn the call back over to Michael.
spk04: Thank you, Lisa. Recently appointed as interim CFO, you have been a critical team player for Neptune, and I am happy to see you step into this important leadership role. Now, I'd like to share some significant developments regarding Sprout, our leading organic children's food and snack brand. We've entered into a binding term sheet with Morgan Stanley's NH Expansion Credit Fund holdings. This agreement provides us with an option. Over the next 90 days, to exchange our existing debt in Sprout for equity. If we decide to take this route, our stake in Sprout could increase to approximately 89.5%, which would significantly reduce Sprout's debt. Should this exchange come to fruition, there will be modifications to the remaining Sprout promissory notes. Their maturity date will be pushed to June 30, 2025, and the existing guarantee by Neptune will be terminated. This term sheet also sets the stage for the possibility of Sprout becoming an independent trading entity down the line. However, I'd like to emphasize that these are ongoing plans, and there's no absolute certainty that the exchange or the subsequent transaction will be completed. We recently announced the next phase of our strategic review process, which will include a comprehensive review and evaluation of strategic options for the company. We believe that this comprehensive evaluation of our strategic options acts as a step toward allowing us to fully leverage our assets and deliver value for all our stakeholders. The Board anticipates it will conclude this review and announce the strategic plan by Q2 fiscal of 2024, with the intent to take action before the end of the calendar year. We want to extend our sincerest gratitude to our investors, retail partners, customers, and all stakeholders. We fully acknowledge the challenging conditions we are currently navigating. Your patience, understanding and belief in our vision, even amidst these complexities, mean more to us than words can convey. Thank you for your support. Operator, please open a line for questions.
spk00: Thank you. Ladies and gentlemen, should you have a question, please press the star followed by the one on your touch-tone phone. If you'd like to withdraw your question, please press the star followed by the two. If you're using a speakerphone, please lift your handset before pressing any keys. One moment, please, for your first question. Your first question comes from Aaron Gray from Allianz Global Partners. Please go ahead.
spk03: Hi, good morning, and thanks for the questions. First one for me, for Sprout, sales were up year over year but down sequentially. So in terms of some of the distribution growth you've spoken to, when do you think that we might see some more of that into the P&L? And then can you comment on e-commerce trends and how that might be impacting overall sales trends? Thanks.
spk05: Thanks, Aaron. And to Michael, I'll take that question. Sprout, during Q1, and obviously we're experiencing growth in distribution. We also had a shift in customer demand, like stage three in our curls. Stage three particularly, we've had a lot of cuts related to that, and the curls had a manufacturing issue. So at those points, it did affect sales for Q1, and we anticipate a little bit in Q2. We are addressing that on the supply chain and expect that to start regaining hopefully in Q3. But we definitely are seeing the shift to also on a customer level and the retail partners. We're seeing a lot of customers that are starting to go towards more Target and Walmart versus traditional grocery to try and save economics. So we are adjusting to with the overall market trends.
spk03: Okay, great. Thanks. And had some nice improvement on the gross margins in the quarter. Do you think that's a good base to kind of go forward in terms of You know, the now skewed rationalization that you've had. Do you think now we're at a good point for Biodroga and Sprout to kind of see these levels of gross margin for the remainder of the year?
spk05: Yeah, I think the gross margins may fluctuate a little bit in the coming quarters, but our focus was always at 22%, and we're already exceeding that. So, we have made improvements, and we're really hyper-focused on margin as we're trying to focus on, you know, eliminating costs and getting the profitability in all the units as soon as possible.
spk03: Okay, great. Thanks. And any way you can quantify some of the additional cuts and savings you mentioned in the prepared remarks?
spk05: Yeah, so we have in savings on the production plan, so we were able to start now focusing on resetting our production plans in more real time as customers are switching between phases two, three, as well as the new products that are coming online. So we had about $2.6 million in savings just by right-sizing the production runs to match what we anticipate the customer demand to be currently. And we continue to monitor that and we'll be active on it. So we did save on that. On the Sprouts level, we also restructured some of the teams, which we anticipate additional savings on in the Sprouts level, as well as in corporate.
spk03: Okay, thanks. And then lastly for me, just on the binding terms agreement that you guys announced. So just helping to separate kind of some of the debt, the Sprouts and Epto, and then also the promissory to Morgan Stanley, and then maybe some of the considerations that you have within the next 90 days that might come. you know, cause you to then exchange that debt for equity and how we might be able to be looking towards, because it sounds like you might also be training independently with Sprout as well. So just any more call on that would be appreciated.
spk05: Yeah, so Neptune's always focused on this platform, you know, looking at the opportunity for brands that are between $10 to $70 million in that revenue, being able to acquire control and grow them to hopefully eventually over 100 million net revenues. And then either in a best case scenario, which we believe we may have with Sprouts, to be able to go and bring it into potentially its own publicly traded vehicle. In other scenarios, potentially exit or hold them long term based on the strategic value to the platform that we're building. And I think with Sprouts, we've definitely grown the distribution. We've became way more efficient on the operation to continue to even have opportunities to improve. So that's something that we're considering as part of the phase two strategic review. Phase one was really focusing on where do we want to be long term and what assets do we have that are part of that. And then looking at are those assets going to bring profitability to the organization and in a reasonable time period. So we made the structural changes in phase one. And now in phase two of the strategic review, we're focusing with the board on how to better monetize the assets as well as look for value to be able to create for all stakeholders. And that's now that we have the core assets that we're focusing on and where we're going long term. Now we're going to be realigning the assets to create value for all stakeholders that we believe will benefit. hopefully be able to give clarity and be able to announce something in Q2 with the goal of wrapping that up by the end of the year.
spk03: Okay, great.
spk01: Thanks for the call. I'll jump back in the queue.
spk00: There are no further questions at this time. Ladies and gentlemen, this concludes your conference call for today. We thank you for joining, and you may now disconnect your lines. Thank you.
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