Neptune Wellness Solutions Inc. (NASDAQ:NEPT) Q1 2023 Results Conference Call August 15, 2022 5:00 PM ET
Company Participants
Morry Brown – Vice President, Investor Relations
Michael Cammarata – President and Chief Executive Officer
Raymond Silcock – Chief Financial Officer
Conference Call Participants
Aaron Grey – Alliance Global Partners
Operator
Good afternoon, ladies and gentlemen and welcome to the Neptune Wellness Solutions Inc. First Quarter 2023 Earnings Conference Call. [Operator Instructions] Also note that the call is being recorded on Monday, August 15, 2022.
And now I would like to turn the conference over to Morry Brown, Vice President, Investor Relations for Neptune Wellness Solutions. Please go ahead.
Morry Brown
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 Cammarata, 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 maybe subject to change.
Today’s conference call contains non-GAAP measures, specifically adjusted EBITDA to provide investors with the supplemental measure of our operating 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, comparability maybe limited. Non-GAAP measures should not be considered as 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 maybe 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 SEDAR and EDGAR.
I’ll turn the call over now to Michael.
Michael Cammarata
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 package 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 peer 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 Formal Chairman of Sprout. Philip holds deep financial and commercial advisory experience as well as firsthand knowledge of Neptune’s brands. The addition of Phil further bolsters the Neptune’s board 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 close 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 Sprout had entered into an amendment and expansion of the Sprout’s secured promissory notes led by a $3 million investment from Morgan Stanley. The amendment of the Sprout’s existing secured promissory notes, expanded 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 Biodroga, both delivering a multi-year records 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 Sprout brand recorded at 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 the 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 Sprout’s distribution growth over the past year, 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 the Sprouts brand.
In terms of store counts, Sprouts products are now in 27,000 doors versus18,500 doors a year ago with some of the newest doors expected to show up in Nielsen data soon. Over the past year, Sprout 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 Sprout’s website. Sprout 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 Sprout 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 Sprout’s 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, Mealz, a line of organic heat and serveables for their 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 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 Up-Age meal market. Mealz 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 explained further category expansion. Some examples include cereal and 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 Sprouts 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 our organic food market. While we are not immune to supply chain challenges that continue to impact the industry, Spout 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 Biodroga. We have generated the largest revenue quarter and 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 Biodroga’s brand presence throughout the tradeshow attendance, effective marketing promotions and the 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 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 MaxSimil technology. We have completing additional human clinical trial studying the impacts of MaxSimil when combined with Curcumin. The results showed a significant increase in ex absorption when Curcumin is combined with MaxSimil compared to taking alone. Biodroga expects to begin a human clinical study on MaxSimil combined with Glutin 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-3-6-9 Ahioil 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 Ahiflower supplement was also launched in 650 stores at one of the largest pharmacy chains in the United States, and 70 fresh time stores. We expect to see solid growth from the launch of this product throughout fiscal 2023.
Per SPINS data through July 10, 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 calendar 2023.
While sector-wide supply chain issues continue to be felt across both Biodroga 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 a call over to Ray to discuss our financial results in more detail.
Raymond Silcock
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 have had Neptune transitions to a consumer package goods company with a good for you good for the planet brands. We still have work to improve Neptune’s financial position, but I believe we are well positioned to achieve growth and improved stakeholder value going forward. Although I 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 answers I don’t have during today’s call.
Turning to our fiscal first quarter ‘23 financial results. Please note, the first fiscal quarter was the three month period ended June 30th, 2022. And 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 the Q4 revenue of $11.5 million. While industry-wide supply chain issues continue to have an adverse impact, we were 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 brand, Sprout. We reported revenue of $8.2 million for Sprout in the first quarter, Sprout’s largest net sales quarter on record. Market share gains continued in the quarter, and we have seen 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 into a Walmart in recent quarters. We expect these trends to continue in Q2 and for the balance of fiscal 2023. Gross margins improve materially as compared to the first quarter of fiscal ’22, up double digits on a percentage basis. As Michael said earlier, we expect Sprout’s gross margins to improve through 2023 and into 2024 when we expect to reach 22% gross margin, primarily as a result of the four key drivers Michael already went through.
Moving onto our B2B personal care and beauty segment, which includes Biodroga and Forest Remedies, we were pleased to report sales of $5.1 million, our largest revenue quarter in over two years for personal care and beauty, up 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 a million dollars 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 of a personal care and beauty in two years.
Other factors that contributed to this growth included the steps taken in prior quarters to increase Biodroga’s presence through trade show attendance, effective marketing promotion, and Biodroga’s 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 $0.9 million in cannabis is not comparable as the branded cannabis business was only just beginning to scale this time last year.
Moving now to corporate costs in 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 have reduced our internal costs substantially. At the corporate level, cost cutting both during and after the end of Q1, have included reductions in corporate headcounts and the elimination of some external consultants. Reductions across corporate and the business units have reduced total headcount from 170 to 56, a 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 annualized basis. This includes $7.6 million of payroll cost reductions for Cannabis and Corporate in addition to 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 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. 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 that Sprout entered into an amendment and expansion of Sprout’s secured promissory notes led by a $3 million investment from Morgan Stanley. The amendment of 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 growth opportunity for Sprouts.
We also recently announced our voluntary delisting from the Toronto Stock Exchange, effective at market close on August 15, 2022. This was a strategic decision to streamline our professional and administrative efforts as 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 cannabis 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 our profit profitability throughout fiscal 2023. This has already translated to growth in our key focus areas in our first fiscal quarter of 2023. I look forward to working as CFO with the Neptune team moving forward as we continue to strive toward profitability and stakeholder value creation.
Operator, please, can you open the line for questions?
Question-and-Answer Session
Operator
[Operator Instructions] And your first question will be from Aaron Grey at Alliance Global Partners.
Aaron Grey
I just want to talk about Sprout a little bit. I know there was a good amount of growth during the quarter record quarter for you guys, how do you 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 going to be some timing issues in terms of it flowing through to the actual stores and actually hitting the P&L? We had seen sales a little bit range by the past three quarter, so good to see some pickup in the growth of this quarter, but I just want to get a better understanding of how you see that going forward?
Michael Cammarata
I’ll jump in, this is Michael Cammarata. I think that with the recent gains and distribution, we obviously saw the fact starting to happen in this quarter and go into Q2, and then probably expand more with 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 the distribution gains that we’ve made.
Aaron Grey
And then how do you think about the timing of the cannabis assets being sold and then the revenue that you’re going to generate from them in the interim came in a little bit ahead of where I was looking for. So I know you’re kind of tailoring off operations there, sung off existing inventory. So just in the interim, as you guys are selling it, how do we think about the sales for that business line?
Raymond Silcock
Yeah, we’ve been — we have been, this is Ray Silcock. We have been writing down inventory to accommodate our expectation that, we can’t set it all through. That’s hurt our margin. In fact, in Q1, our margin would’ve been a breakeven without that writedown. But as we go forward, it’s a fairly modest [indiscernible] we don’t go to the future, but the effect of the remaining cannabis impact on our business is likely to be modest.
Aaron Grey
And for the nutraceutical, so that came in ahead of where you guys guided in 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 4Q, so did that kind of swing back this quarter? How to think about that kind of norm — does it normalize out to that kind of like $4 million level we had seen historically on a quarterly basis?
Michael Cammarata
Yes, I think there was a million —
Raymond Silcock
I’m sorry —
Michael Cammarata
Go on, Ray. I think — a million impact from Q4 to Q1. But if you even take out that million dollar impact, you still saw a good solid growth in with new products coming out in Q2, we should expect to see some growth on that core.
Aaron Grey
Okay. That’s helpful. And then just lastly, so you guys mentioned on the gross profit, right, so pretty much breakeven when you take out the inventory hitting the quarter. Is it fair to say kind of normalized going forward, we expect for that to be more normalized gross profit margin.
Raymond Silcock
Well, we certainly that would be our expectation. I mean, I don’t think we’re going to see the full effect until we in the first — as we go forward. I think Michael talked about getting to 22% margin in 2024. So I think, we expect to make progress there, but it’s not going to be a step function, it’s going to be a – a gradual increase of the margins as we go forward.
Michael Cammarata
Yes. Great. And I think as Sprouts’ price increases you start realizing them into the P&L over the coming quarters and continue to be effective. We’ll start seeing as Sprouts will go to the 22%, and obviously Biodroga already has positive gross profit margins. And so I think as those start hitting the P&L, and then we remove some of the effect of the cannabis business, we expect to see those improve over time.
Operator
Any further questions Mr. Grey?
Aaron Grey
No, I’m all set. I’ll jump back on the queue.
Operator
Ladies and gentlemen, at this time there are no further questions. We would like to thank you for attending today’s call. This does conclude your event. Thank you, and have a good evening.
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