Neptune Wellness Solutions (NASDAQ:NEPT), in its Second Quarter 2024 Earnings Conference Call, outlined its strategic progress, including a major restructuring and equity spin-out of Sprout Organics. The company also emphasized its commitment to the dietary supplements industry, via its Biodroga Nutraceuticals brand, and disclosed plans for future acquisitions. Despite reporting a decrease in net revenue and gross profit, Neptune pointed to cost-saving initiatives and improved operational efficiency as key financial performance indicators.
Key takeaways from the call include:
- Neptune is undergoing a significant restructuring, spinning out a majority of their equity interest in Sprout Organics.
- The company is committed to strengthening its role in the dietary supplements industry through Biodroga Nutraceuticals.
- Neptune reported a decrease in net revenue and gross profit but highlighted cost savings and improved operational efficiency as key factors in their financial performance.
- The company converted debt in Sprout to equity and prepaid senior secured notes, reducing annual interest expense.
- Neptune plans to enhance its market position through acquisitions.
- Biodroga achieved strong margins, implemented cost-cutting measures, and diversified its supply chain management.
- Biodroga is expanding into international markets, with significant growth in South Korea, Taiwan, Singapore, and Mexico.
Neptune's consolidated net revenue for Q2 2024 was $8.7 million, a decrease compared to the previous year. The consolidated gross loss amounted to $0.6 million, while consolidated SG&A expenses decreased by $12.1 million. The company improved its capital position by converting a substantial portion of its debt into Sprout equity and prepaying its senior secured notes. It also closed a public offering of $4.5 million. The consolidated adjusted EBITDA loss increased to $3.2 million.
Biodroga Nutraceuticals, Neptune's dietary supplement brand, implemented cost-cutting measures, achieved strong margins, and diversified its supply chain to mitigate industry challenges. The brand expanded its market presence internationally, particularly in South Korea, Taiwan, Singapore, and Mexico, with a Mexican customer quadrupling its business orders for MaxSimil products.
On the other hand, Neptune acknowledged a dip in Sprout brand's revenue due to production issues and out-of-stock situations. The company is adjusting its production plan to meet consumer demand and resolve these issues. Neptune also noted an increased demand for their snack products and aims to deliver faster and more efficiently.
The company is focusing on reducing corporate costs, improving its balance sheet, and exploring capital options. The proposed spin-out of Sprout is expected to enable growth and agility, while Biodroga aims to expand internationally and unlock growth opportunities.
InvestingPro Insights
Our InvestingPro data and tips provide additional insights into the financial standing and performance of Neptune Wellness Solutions.
InvestingPro data shows that as of Q1 2024, Neptune has a market cap of $3.33M USD and a negative P/E ratio of -0.009. The company's revenue stands at $46.97M USD with a decline of -14.58% over the last twelve months. The gross profit for the same period is $4.82M USD, resulting in a gross profit margin of 10.25%.
InvestingPro Tips highlight that Neptune operates under a significant debt burden and may struggle to make interest payments on this debt. This aligns with the article's mention of Neptune's efforts to convert debt into Sprout equity and prepay its senior secured notes. The tips also note that Neptune is consistently increasing its earnings per share, which could be a positive sign for investors despite the company's current financial challenges.
Moreover, the stock is in oversold territory according to the Relative Strength Index (RSI), and the company's stock price movements are noted to be quite volatile. This suggests that potential investors should exercise caution and closely monitor the stock's performance.
For more detailed insights and additional InvestingPro Tips, consider exploring our InvestingPro product. We provide a comprehensive range of metrics and tips to help you make informed investment decisions.
Full transcript - NEPT Q2 2024:
Operator: Good morning, ladies and gentlemen. And welcome to the Neptune Wellness Solutions Inc. Second 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. [Operator Instructions] I would now like to turn the conference over to Valter Pinto, Managing Director, KCSA. Please go ahead.
Valter Pinto: Thank you, Operator, and hello, everyone. Thank you for joining us today for the Neptune Wellness Solutions fiscal second quarter 2024 earnings conference call. With me today are Michael Cammarata, President and Chief Executive Officer; Lisa Gainsborg, Interim Chief Financial Officer; Nicki Pacheco, President of Sprout Organics; and Cedrick Billequey, President of Biodroga Nutraceuticals. 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 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 or 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’d now like to turn the call over to Michael.
Michael Cammarata: Thank you, Valter, and hello, everyone. I appreciate your participation in today’s call to discuss Neptune’s fiscal second quarter 2024 results, ending September 30, 2023. Our conversation today centers on both financial and operational developments. First and foremost, we wish to highlight Neptune’s strategic evolution. Our dedication to guiding the company through a transformative phase is both strong and deliberate. As we approach the completion of our strategic review, we have made critical decisions that resonate with the best interests of our stakeholders. A pivotal aspect of this strategy is the Board’s approval of a significant restructuring, the spin-out of a majority of our equity interest in Sprout. Subject to shareholder consent and specific conditions, Neptune plans to redistribute most of its Sprout equity to our current shareholders, retaining an approximate 10% to 15% interest. This strategic move follows our agreement with Morgan Stanley to convert our Sprout’s debt into equity. This endeavor aims to empower Sprout to operate independently, unlocking its full potential. Simultaneously, Biodroga, our esteemed nutraceutical brand, continues to be a vital part of Neptune’s portfolio. We are committed to strengthening our role as the preferred partner for retailers and CPG companies in the competitive dietary supplements industry. This anticipated spin-out is a strategic initiative to streamline Neptune’s operational costs and minimize our debt exposure, thereby bolstering our financial strength and enhancing cash flow. We will keep you updated as we finalize the specifics of this transaction. I encourage our shareholders to understand the strategic importance of the Sprout spin-out. Your support is crucial in strategically repositioning both Neptune and Sprout for enduring growth and success. In recognizing our financial journey, we have made significant strides in fortifying our fiscal position, yet there remains more to accomplish. The recent conversion of Neptune’s debt in Sprout to equity is a strategic turning point, increasing our ownership stake from 50.1% to about 89.5%. This move not only enhances the strategic positioning of both entities, but also reduces financial burdens paving the way for Sprout’s independent operation, subject to required consents. Moreover, we have proactively settled our obligations with CCUR Holdings Incorporated and Symbolic Logic Incorporated by prepaying our senior secured notes. This decisive step significantly reduces our annual interest expense. As we delve into a detailed financial analysis, I will first pass the floor to Nicki Pacheco, President of Sprout Organics. Following Nicki, Cedrick Billequey will provide an insight into Biodroga’s performance, and then Lisa Gainsborg, our Interim CFO, will wrap up before we open the floor for questions. Lastly, I want to address the inherent risks and opportunities ahead. As always, business endeavors carry inherent risks and we are actively evaluating these as part of our strategic planning. In parallel, we are exploring opportunities for acquisitions, with the support of Morgan Stanley, to bolster both Neptune and Sprout’s market position. Stay tuned for more updates in this exciting phase of our journey.
Nicki Pacheco: Thanks, Michael. During the second quarter, Sprout continued to develop innovative new SKUs to expand our adjustable market, broaden our distribution growth and strengthen our supply chain management and expense control. Building on significant changes made over the recent quarters, Sprout further bolstered its supply chain, inventory management and accounting processes in Q2. We expect these measures to reduce the inventory write-offs that we experienced in Q4 and achieve significant savings of over $2 million for the rest of the calendar year of 2023. While we have seen the results from the operational improvements already, we are focused on further reducing and streamlining supply chain and inventory management further, as there are still gains to be made. Sprout has also recently extended the shelf life on all pouch products. Following conclusive research, we also aim to apply this across the snack category. This will help reduce waste on products that are still fresh and further alleviate inventory management pressures. During the second quarter, Sprout continued to work with our retail partners to optimize product assortment on shelves with the goal of driving sales and brand awareness. Some key initiatives that we focused on with our customers included shelf placement of key Sprout products and targeted marketing activation. I am proud to report that Sprout products are now available in 90% of the market in all 50 U.S. states, Canada and are also shipping direct to consumers through the Sprout website. These statistics are remarkable, especially considering when Neptune acquired majority of the stake of Sprout in 2021, Sprout had only market coverage of just 50%. Looking at store count, Sprout has reached nearly 29,000 doors in the United States and 30,000 doors in Canada, for a total of 32,000 doors in North America. This reach has been achieved through our significant partnerships with our leading retailers, such as Walmart (NYSE:WMT) and Target, major supermarket chains and both of the largest national pharmacy chains in the United States. In Q2, Sprout continued to build upon current distribution through new and existing retail partnerships, including new partnerships such as WinCo and SafeMart, and the addition of new items and door count increases with Publix. Through Sprout’s partnership with Walmart, Sprout products continue to perform well in the second quarter. CoComelon pouches continue to perform well and were on a feature in Walmart stores from the last week of July, achieving a 40% lift in sales over the 11 weeks to the end of September. Sprout’s product line is in approximately 2,300 stores with a total of 10 items, including CoComelon pouches, CoComelon Banana bars, CoComelon waffles, CoComelon curls and Sprout’s toddler meal. Earlier in the year, we announced that four of Sprout’s most popular CoComelon co-branded organic toddler pouches had been selected for distribution by Target. These items are now available on shelves in stores across the country, as well as target.com. In Q2, Sprout expanded its portfolio with Target through the addition of our popular PB & Yayz and Peanut Butter Puffs. The latest Nielsen data shows that some of the new Sprout products are beating average performance in their category. In particular, Sprout toddler meals and bars are performing impressively. The toddler meal category recorded 24.3% growth over the recent 13-week period, while bars doubled in sales versus the prior 13-week time frame. This continues to verify that Sprout’s strategic expansion into additional baby and toddler food categories was the right decision for Sprout and in line with shifting customer demands. I also want to highlight our CoComelon partnership, whose products continue to perform as standouts in the Sprout range nationally. The CoComelon Banana snack bar is number one in dollar and unit sales in the CoComelon Snack portfolio, while the Yes, Yes Veggie Pouch has maintained the number one pouch in dollar and unit sales in Sprout’s CoComelon portfolio. Building on our success in expansion into up-age meals in recent quarters, Sprout is focused on developing innovative new SKU lines and growing our total addressable market outside of the baby food and into older children’s snacks and meals. We are working on reallocating investments to areas that will help support future growth in areas that our research has identified as high demand categories. We have taken learnings from where we have seen particular success in the market with new products and are seeking to build upon this success trajectory further. Sprout looks forward to releasing innovative new SKUs in most product lines in the coming quarters. Next, I’ll turn the call over to Cedrick to go into more detail on Neptune’s other business segment, Biodroga, our leading B2B nutraceuticals brand.
Cedrick Billequey: Thank you, Nikki. Over the second fiscal quarter, Biodroga’s sales showed strong rebounds in growth compared to Q1. This was mainly driven by repeat orders of MaxSimil, our proprietary fish oil, particularly from customers in our new market of South Korea. Biodroga also experienced strong demand for our chewable softgel technology products intended for kids, sales of which have picked up heavily in Asian markets. Biodroga was able to capitalize on a market shortage of chewable softgel in Asia and has gained market share while cutting production lead times to ensure on-time stock replenishment for our customers. Margins over the second quarter were stable from last quarter. We’ve continued to implement operational streamlining to achieve cost cutting across Biodroga, which has delivered strong margins for several consecutive quarters. In addition, the measures we have executed to diversify our supply chain management have mitigated the challenges currently being experienced across the industry, which are causing raw material price increases. Biodroga has managed to successfully achieve the partial offsetting of raw material prices by adopting an aggressive inventory position on some key raw materials. Biodroga is also expanding its market presence internationally, which is subsequently growing its total addressable market and revenue potential. As previously mentioned, we have recently expanded into the Asian market, with South Korea now established as a significant market for MaxSimil technology. We are also currently in progress discussions with Taiwan and Singapore, as well as finalizing logistic details with our Indian partners to facilitate the importation of our MaxSimil products. Our current customer in Mexico continues to develop the market for MaxSimil and increase its demand. This growth is continuing to follow an uptrend in demand over the past six months, which saw this customer quadruple its business orders for MaxSimil. We look forward to further increasing the topline contribution coming from Asian and Latin American markets in the coming quarters. And with that, I’ll turn the call over to Lisa for a review of our financial results.
Lisa Gainsborg: Thank you, Cedrick, and hello, everyone. I’m pleased to be presenting Neptune’s financial results for the second quarter of fiscal 2024 for the period ending September 30, 2023. All numbers are in U.S. dollars and U.S. GAAP. Consolidated net revenue for Q2 fiscal year 2024 totaled $8.7 million, a decrease of $3.2 million, compared to $12 million for Q2 of fiscal 2023. Food and beverage revenues decreased $2.8 million in comparison to the three-month end of September 30, 2022, and nutraceutical revenues represented a decrease of $0.2 million when compared to the three-month period ended September 30, 2022, which was primarily due to timing as nutraceutical B2B sales are not quarterly linear. In addition, there was a decrease of $0.1 million in cannabis revenues from the now divested cannabis business. The consolidated gross loss for the three-month period ended September 30, 2023, amounted to $0.6 million, compared to a $1.1 million gross profit for Q2 fiscal year 2023, a decrease of $1.7 million due to reduction of revenues offset by the reduction in cost of sales. As Michael has already spoken to, the key factors of our cost savings are 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 prior quarters and we are continuing to actively manage this. We have taken several steps throughout Sprout’s business over the past year to manage costs, we expect to see full savings on these measures recorded in Q3. We have also refined our accounting processes to ensure tracking and forecasting systems are more detailed and more efficient at understanding customer’s needs. Moving to our B2B nutraceutical segment, including our leading brand, Biodroga. 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 we have maintained, as well as reduced cost of sales. Moving now to corporate. Consolidated SG&A expenses for fiscal Q2 2024 amounted to $3.8 million, compared to $15.9 million for the same period of our year. This is a decrease of $12.1 million primarily due to the benefits of strategic review and continued cost controls. We remain focused on improving our balance sheet and operating cost structure. As Michael has spoken to, we recently effectively converted a substantial portion of Neptune Sprout debt into Sprout equity. In accordance with the terms of the exchange option announced in August of 2023, Sprout debt would successfully exchange for Sprout equity, resulting in Neptune having increased Sprout ownership from 50.1% to approximately 89.5%. The debt exchange will significantly improve the strategic positioning for both entities, decreasing expenses, removing Neptune as guarantor for Sprout’s promissory notes and subject to third-party consent, Sprout becoming the independent trading entity. In October, we also announced we had prepaid in full the company’s senior secured notes with CCUR Holdings, Inc. and Symbolic Logic, Inc. after payment of approximately $2.3 million. The senior secured notes had original principal amount of $4 million and bore a fixed interest rate of 16.5% per annum. Additionally, during the second quarter, Neptune closed a public offering of $4.5 million. Consolidated adjusted EBITDA loss for the three-month period ended September 30, 2023, increased by $10.5 million to an adjusted EBITDA loss of $3.2 million, compared to $13.7 million for the three-month period ended September 30, 2022. The change in adjusted EBITDA loss was driven by an improvement in loss from operating activities of $32.2 million, a reduction of impairment losses of $24.6 million, offset by an add-back of SG&A expenses including depreciation, equity classified stock-based comp, non-employee compensation related to warrants of $3.1 million. To sum up, we are focused on reducing corporate costs and the 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 my prepared remarks. I will now turn the call back over to Michael.
Michael Cammarata: Thank you, Lisa. In closing, we anticipate the proposed changes to positively impact Neptune. I appreciate our stakeholders’ support and look forward to your consideration of the Sprout spin-out proposal. I will now hand the call over to the Operator. Thank you.
Operator: Thank you, ladies and gentlemen. [Operator Instructions] Our first question comes from the line of Aaron Grey from Alliance Global. Please go ahead.
Aaron Grey: Hey. How’s everything going? Thanks for the questions here. First question for me is on a holistic view. So talk about how you’re looking at everything going forward. So it’s kind of in layman’s terms now. You’re looking to spin out Sprout’s own separate pub co and then on the other side here for Neptune, Biodroga, and then you mentioned potential acquisition. So you guys just talk about the strategies there, potentially with the two separate entities at a high level? Thanks.
Michael Cammarata: Thanks, Aaron. It’s Michael. I’ll take that question. We’re basically looking at how to optimize our positions with our current assets and the goal with Sprout is really to enable growth and be more agile, to be able to really jump into the opportunities as we’re seeing demand shifting in certain areas and we’re expanding in snacks and the markets, giving us some opportunities and we really want to be able to allow our shareholder bases to really get hyper focused. So allowing our CPG investors to really double down into Sprout and building that platform out so we can acquire other brands and grow them and taking advantage of an opportunity, we believe that the market has shifted in the CPG’s landscape that the strategics are looking for larger companies. And so there’s a lot of mid-sized brands that historically would have been acquired by strategics that we can actually partner with and use that footprint that we’ve built out with Sprout to grow those brands and then potentially strategically partner with some of the strategics on them. And then with Biodroga, we’ve started expanding international and also adding the different technologies and it’s really hyper focused. It has huge customers that are already major CPG globally, such as Nestle’s, the Swanson, to all the different across the Board. We want to really unlock growth and give them more tools that we can partner with those brands on. So not just the formulation, the delivery and I think it’s a very unique position that Biodroga’s in because a lot of retailers in the U.S., their minimum orders are 250,000 units and they’ve been looking for opportunities to buy products at like a 10,000-unit minimum. So Biodroga getting hyper-focused on that, really doubled down on the B2B, offering additional services and technology to support that business and those companies, but also being able to enter into the retailers and be able to say, hey, we can offer you vitamins and nutraceutical products and instead of what the prior person having to have 250,000 minimum orders, we can do 10,000 minimum orders. So it’s a very dynamic and efficient way to be able to deliver products to our partners. So we wanted to really give the opportunity to expand Biodroga as we -- when we started this journey, Biodroga had a negative profitable stat. Now it’s highly profitable and growing and we’re seeing a demand all over the world and we also have seen the requests from retailers to do private label and so we’re going to be expanding that and really want to give that an opportunity for success. At the same time, looking at the cost structure on how do we optimize best to lower the overall SG&A. We’ve done a lot of work on that since exiting the cannabis industry and we still have things that are rolling off our balance sheet from that, but we really want to look at how can we drive to profitability sooner. And at the same time, how can we get the business units back in the hyper growth mode and that’s where we’re at on a global level.
Aaron Grey: Okay. Great. No. Appreciate that color there, Mike. Second question for me just on Sprout, right? So, talking about the growth there, a lot of things that have been prepared and 90% of the market versus 50% was first acquired. 29,000 doors in the U.S., I think, 32,000 overall, including Canada. But just revenue looks to have been down a bit, sequentially at about 5.7, it had been around, about 8.5 average past five quarters before that. So any specifics in terms of why the dip in the quarter now and kind of how we get to a return to growth, because it sounds like you got a lot of new products you’re offering, some good placement at Walmart that you mentioned with CoComelon as well. So just some color there would be appreciated. Thanks.
Michael Cammarata: Yeah. So I’ll add cover on that. But also, Nicki can add in if she wants. But the biggest thing that we’ve seen is we’ve seen a shift in a little bit of the SKUs. Like we have some velocities that have gone very high and we’re trying to keep the on shelf availability in stock and we’re seeing a lot of out of stocks in those. So we’re shifting the production plan to match the consumer demand and we did have a couple production issues with our co-mans [ph] that we’re working through and resolving, including we had a small co-man that was in Israel. But we have adjusted the schedule. We’re adding redundancies in the co-mans and we’re aligning our inventory with the consumer demand. So we’ve seen like an uptick in demand from retailers and consumers and snacks. We’ve seen some of our product lines that are flying off the shelf that we’re trying to keep the demand on and to minimize cuts to make sure we’re able to deliver faster and more efficiently. So we’re kind of adjusting our production to align with the demand of the consumer and the shift in the market with a couple co-man issues that we had to deal with.
Aaron Grey: Okay. Great. Thanks. Appreciate the color, Michael. Thank you.
Operator: Thank you. There seems to be no further questions at this time. Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines. Have a lovely day.
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