Tuesday, 23 October 2012

Neptune CEO - We See More Demand Than Availability

Neptune Technologies & Bioressources
TSX: NTB - NASDAQ: NEPT
Basic Shares: 48.2 million
Fully diluted: 53.9 million
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Neptune CEO, Henri Harland opened up the post second quarter conference call with an apology that the decision was his, not to hold the event in conjunction with the October 15th release of the financial results. He said the decision was taken in context of some concerns about "strategic and competitive" issues.

He did commit that calls would be held in the future.

Over the past week the stock has fallen from the $4.00 range to its close today at $3.42 (Cdn) and $3.45 on the U.S. market.  

While the top line surged to just over $8 million in Q2/F13 (Aug.) and $14.25 million in the first half of Fiscal 2013, there were concerns about margins and losses that weren't addressed until today's call.
Mr. Harland said margins were squeezed because of re-processing costs. It appears rising demand for the higher grade krill, NKO, forced Neptune to upgrade inventory of EKO krill thus driving up the per kilo production costs.
  • He added that Neptune now has the material and equipment that is necessary as there was wastage during the re-processing but this was a "quarter specific" issue and has now been resolved.
  • Margins were also impacted as distributors were offered initial discounts to expedite Neptune's presence in markets. 
  • An interesting point raised was that NKO now accounts for 70% of sales volume compared to the lower priced EKO. Last fiscal year NKO was 56% of volume.
  • Mr. Harland came back to the following point several times that Neptune, on its own, would keep as its objective; a minimum 20% EBITDA margin. Consolidated financial results, which includes Acasti Pharma and NeuroBioPharm, are obviously impacted because of the heavy R & D component.
  • Neptune is pushing hard on the Sherbrooke, Quebec plant expansion to move annual krill oil production from 150 thousand kilograms to 300 thousand kilograms and the impact on top line results should start showing up in Q1/F14 (May).
  • When asked if Neptune could maintain an $8 million dollar top line in the 3rd and 4th quarters of the current fiscal year while the expansion is underway, Mr. Harland said he "doesn't see a problem maintaining it". Should that be the outcome for the last half of Fiscal2013 then sales would be approximately $30 million. Fiscal 2012 revenues were $19.1 million.
  • When asked about keeping up with demand, he said that Neptune is already planning increasing annual production capacity to 600 thousand kilograms even before it reaches the 300 thousand kilograms because "what we see is more demand than availability".
  • The $4.6 million loss in Q2 and $6.3 million for the first half brought the response that just over $3 million in Q2 and $4.6 for the first half was directly related to stock based compensation, which is a non-cash item.
  • On the question of expansion plans in China with its JV partner SKFC, Mr. Harland was pretty clear that he has concerns because, "they're pushing us more than we're pushing them. The deal could be done but...it's a work in progress".    
Neptune stated in the conference call news release that it would have the audio recording available on its web site sometime this evening.