Preparing Your Business for Crisis

Preparing Your Business for Crisis: Lessons Learned from the Neptune Disaster

<p>Neptune was not fully prepared for the tragedy that occurred at its Quebec, Canada facility, but smart and timely business actions taken before the explosion and focus on the important tasks following the catastrophe may help it move forward successfully.</p>

Imagine your house burns down when you are thousands of miles away. Rushing back, you have to sit on a plane for hours, without any word on what is developing back home, on what exactly awaits your return. As you travel, perhaps your thoughts race back and forth between worrying about your family potentially caught in the disaster, and what will or won't be left standing when the smoldering subsides. Perhaps you stumble between levels of disbelief, shock and grief.

Executives from Neptune Technologies and Bioressources faced a scenario like this on Nov. 8, 2012, when they got word during SupplySide West in Las Vegas that their krill production facility in Sherbrooke, Quebec, had just exploded. It was clear there were injuries, but at the time, it was not clear the extent of the tragedy. "Our focus is to find out how our colleagues are doing and to monitor the extent of this catastrophe," they said, as they hurried from the trade show.

As the situation unfolded, it was apparent there were fatalities and many workers at the plant were taken to the hospital with severe burns and other injuries. Due to the presence of acetone tanks, firefighters and environmental officials monitored the area for toxicity from the smoke, which could be seen from all over the city. It wasn't toxic, but when the smoke cleared, the devastation was obvious. Three workers died from the explosion and fire, 18 were injured, and the plant was decimated. Neptune faced tragedy at every angle.

To sleep: perchance to dream: ay, there's the rub.

"We lost about a full week of sleep right after it happened," said André Godin, Neptune's chief financial officer. "It was almost impossible to sleep. After I finally did get some sleep, I woke up and realized this was not a dreamyou go to the office and find nothing, no production, no plant. We are still exhausted."

Human resources, looking after survivors and their families, was priority number one, but Godin pointed out the duties of public companies such as Neptune are well-defined and regulators still expect filings on required timelines; management had to start to look forward while heeding the need for comfort and grief.

The only cure for grief is action. - George Henry Lewes, 19th Century English Philosopher

After the incident, Godin and his fellow Neptune executives had to look after the survivors, shareholders and employees. "We had to address quickly the plan to move forward," he said. "We had to plan for the future, including revenues, outsourcing production, rebuilding Sherbrooke." He said the CEO gathered all the executives into a room, where they spent the weekend looking at near-term, short-term and long-term issues.

You have lost too much, but you have not lost everything.  - Bill Clinton

Neptune's sequestered management came up with an action plan, released to the public on Nov. 26, 2012. In essence, Neptune said despite all its losslife, assets, inventory, revenuesthere was a strong path forward. They would focus on the employees and families affected by the tragedy, supporting them via establishment of a charitable fund and a nonprofit organization to manage and distribute donations. However, tough decisions had to be made concerning the size of its workforce. "Without any production, we had no need for quality assurance (QA) and quality control (QC), which were big departments for us," Godin explained. After letting go about half of its staff, Neptune had around 50 or 60 employees remaining, including 30 Sherbrooke employees (10 full time and 20 part time). The company cut salaries for those remaining, realizing short-term cash saving.

After the company rebuilds and recommences operations, it intends to rehire many of the laid off employees, including plant workers. "We probably won't need all of those we let go, as we will have only one line operating, but we will certainly need QC, QA, R&D and others," Godin said.

Before the explosion, Neptune had pretty much completed its Sherbrooke expansion, adding a second line of production. This expansion survived the blast because of an explosion-proof wall erected  between the old and new sections. Godin reported this expansion, which had twice the capacity of the existing production, was preparing to go online, but it was to rely on the original Sherbrooke production line for input. Thus, the expansion line will now need some rebuilding of the original line to be a fully stand-alone production line. "We might only need 20 to 30 percent or so of the old Sherbrooke plant," he said. "We might realize some savings here, since we don't need to rebuild the whole plant."

The expansion was only one of two fortunate moves Neptune made before the Sherbrooke incident. In September 2012, the company held a common share offering, raising about $30 million. "It would be very difficult to raise cash right now," Godin confirmed. However, he reported management vowed to try not to use those funds for rebuilding, but instead reserve the proceeds for their original intentkrill sales, marketing and inventory; the Sherbrooke expansion; support for its Acasti and NeuroBio omega-3 pharmaceutical development businesses targeting cardiovascular and neurological health, respectively; and clinical trial, product development and regulatory affairs for Neptune. "We might need to use some [offering proceeds] in the interim and replace them later," he added.

In addition to savings and proceeds, Neptune is finding ways to generate revenue, even in a time when it has no production. "Currently, we have managed to and will continue to supply our distribution network," Godin assured. "I can't be specific on how we are doing this, but we are doing pretty wellwe should even see revenue in the next quarter." There were reports the company had some frozen krill held in another location, but Godin did not provide specifics. He said these interim revenues would maybe be about half or better of the revenues the company generated before the disruption to operation.

Expected insurance claim funds will also be a needed boost, not just to the coffers for rebuilding production, but also to the company's reputation. In the blurry moments following the explosion, many people recognized the krill facility possessed acetone-filled tanks for extraction, and there was said to be an investigation into the amount of acetone Neptune had on-hand relative to what regulations allowed. There was concern over whether this investigation could impact insurance claims, but Godin assured there was no violation, and Quebec environmental officials had backed off their inquiry. "It was bad press coverage, most of which was false, especially the accusations about acetone storage violations," Godin said. "Never, at any time, did we violate our certificate of authorization concerning acetone storage.  There were big storage tanks for the new expansion that were mistakenly thought full by some people outside the company; they were in fact empty." He noted people jumped to conclusions, but when the insurance company initiates its first claims payment, it will demonstrate there were no issues. In fact, Neptune announced Jan. 15, 2013, it had received its first insurance payment of $6 million, which Godin said would offset most of the monetary losses incurred due to the explosion.

Having the right insurance coverage for unforeseen events is essential to weather any storm. Neptune had coverage for property damage, general liability, business interruptionhaving business interruption coverage allows a company to retain key employees, Godin explained. "You can never predict this kind of disaster, but we review coverage every year," Godin said. "I believe our coverage was sufficient; we were very well insured." Not needing to rebuild 100 percent of the Sherbrooke plant eases the cost burdens insurance payouts need tackle.

One reason why Neptune may only need to rebuild certain aspects of the facility lost is because management decided to diversify production, so the bulk of its inventory and production are not in one location, which otherwise makes them more susceptible to total production disruption. As outlined in its action plan, Neptune is forging partnerships with large industrial companies all over the globe.

"Sherbrooke in five years might be about 10 to 15 percent of total production," Godin predicted. "Hypothetically, we will be growing from outsourcing." He said management had started down this path well before the explosion, as it never saw itself as a large manufacturer of krill, but rather a biotech developer focused on intellectual property (IP) and commercialization. It had previously decided to invest and expand Sherbrooke as a short-term, efficient way to expand production and lower the cost of goods sold, but management was already eyeing outsourcing deals and were in discussions with potential partners, according to Godin. Now this priority has moved to the top of the list.

Godin noted the diversification will not only be in production and inventory storage, but also in the company's product line. "We have two products, both krill products," he said. "The new products may or may not include krill oil, but they will be scientifically supported."

A tragic situation exists precisely when virtue does not triumph, but when it is still felt that man is nobler then the forces which destroy him. - George Orwell

Godin reported the spirit at Neptune is good, considering how difficult a situation this was. However, nothing prepared them fully for the scope of this tragedy. "I didn't learn in university how to manage this situation, really," he reflected, adding undergoing such an experience is the only way to learn fully how to manage it. "No book can tell you how to react or address issues related to such a situation." He said the loss of life was the most difficult aspect. "These were good people we cared about, and who cared about and were committed to Neptune. These were great employees."

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