Jamieson Wellness Inc.

Good afternoon, everyone. Welcome to the Jameson Wellness Conference call to discuss financial results for the fourth quarter and full year 2020. At this time, our participants are in a listen-only mode. Later, we'll conduct the question and answer session and instructions will be given at that time. Please be advised that reproduction of this call in whole or in part is not permitted without written authorization from the company. As a reminder, today's call is being recorded. On the call today from management are Mark Hornick, President and Chief Executive Officer, Mike Pilato, President of Jameson Canada, and Chris Snowden, Chief Financial Officer and Corporate Secretary. Before I turn the call over to Mr. Hornick, please note that a press release covering the company's fourth quarter and full year 2020 financial results was issued this afternoon, and a copy of that press release can be found in the investor relations section on the company's website. Please note that the prepared remarks, which will follow, contain forward-looking statements, and managers may make additional forward-looking statements in response to your questions. These statements do not guarantee future performance and, therefore, undue reliance should not be placed upon them. We refer you to all risk factors contained in Jameson's press release issued this afternoon and in the filings of the Canadian Securities Administrators for more detailed discussions of the factors that could cause actual results to differ materially from those projections and any forward-looking statements. The company undertakes no obligation to publicly correct or update the forward-looking statements made during the presentation to reflect future events or circumstances except as may be required under applicable securities laws. Finally, we would like to remind listeners that the company may refer to certain non-IFRS financial measures during this teleconference. A reconciliation of these non-IFRS financial measures was included with the company's press release issued earlier today. Also, please note that unless otherwise stated, all figures discussed today are in Canadian dollars and are occasionally rounded to the nearest million. I'll now turn the call over to Mr. Hornick to get started. Please go ahead, sir. Well, thanks, James, and good afternoon, everyone. Thank you for taking the time to join us for our Q4 and full year 2020 financial results call. Before we begin, as you might expect, I'd like to take the time to address our leadership transition, which we announced concurrently with Ernie this afternoon. I'm very pleased to announce that on June 1st, Mike Pilato will become president and CEO of Jameson Wellness upon my retirement from the company. Early retirement has always been a personal goal. And with the planning that the board, myself, and Mike have been able to do together, the timing is now right on all fronts. Over the past two and a half years, we've worked with Mike to prepare him in a way that not only will result in a seamless transition, but a significant upside for our business in the future. I know most of you have already had the chance to interact with Mike, but I met Mike in 2017. And from our first meeting, it was very clear to me that he'd be a perfect fit for our company. He joined us the following year, and since then he's shown phenomenal performance and capabilities in progressive leadership roles, ultimately leading the strategy and operations as the president of Jameson Canada. He came with an extremely strong background, including being the president of Clorox Canada for four years prior to coming to Jameson. His increasing responsibilities here over the past three years have prepared him to be uniquely positioned to balance the continued execution of our winning strategy, which he helped develop, and also being able to adapt to future changes in our environment. The fundamentals of Jameson Wellness have never been stronger, and Mike has the respect and support of our entire team, which ensures that we are well positioned to build on our progress to date and then take Jameson to the next level. Mike and I are going to finish our transition over the next three months. I've thoroughly enjoyed my seven years here at Jameson, and I am thrilled with the continued momentum we are sure to see. Now let's go on to Q4 results. As you might expect, I am very proud to record such a strong finish to a challenging year for everyone. The COVID-19 pandemic made health and wellness a top priority for consumers in 2020, and Jameson Wellness was there to support them. Our existing consumers increased their daily compliance and added more vitamins and supplements to their routines. We also engaged many new consumers as shoppers looked for quality brands they could trust during an uncertain time. The COVID-19 pandemic has also tested our Jameson team's ability to navigate unprecedented challenges in a constantly changing environment. I'm incredibly proud of how our team pulled together to ensure uninterrupted supply of products when our consumers needed them most. while doing everything possible to maintain a healthy and safe working environment for our people. Now, let me walk through some financial highlights of the first quarter. During the quarter, we saw a continuation of the strong trend we experienced earlier in the year, reporting a revenue of $120 million, while presenting growth of nearly 17% from the fourth quarter of 2019. Adjusted EBITDA increased almost 16% to $29 million, and adjusted EPS was $0.42, which is an increase of 17% versus the year earlier period. The Jameson brand segment revenue increased nearly 14%. We benefited from the underlying strength in the overall VMS market, the power of our brand, supported by our winning marketing and innovation strategy, and solid executions. This is led to another consecutive quarter of increased market share, of which I'm very proud. Similarly, the breadth of our business continues to impress as we experience solid performance across all of our major categories and all of our channels. We have a new expanded consumer base coming out of 2020 globally that we look forward to growing from in 2021. In the fourth quarter, our international revenue increased nearly 15%. and when combined with the timing of shipments in previous quarters, resulting in a full-year international revenue growth of 50%. Consumer demand remains strong and in this broad-based category across different geographies, including China, Eastern Europe, and the Middle East. In the fourth quarter, the pace of growth on a year-on-year basis normalized compared to the third quarter, which benefited from earlier shipments of crop and coal products in anticipation, of course, of accelerated demand. Our strategic partner segment had another strong quarter with revenue increasing 25%, consistent with the rate of growth we experienced in the third quarter. Of course, timing again is a factor as order fulfillment was more back-end rated in 2020. In summary, we have solid momentum in all of our business and remain well-positioned to continue driving strong growth in 2021. Before I turn the call over to Chris and then Mike, to discuss our financials and guidance, I want to stress that the health and wellness and safety of our employees, customers, and communities remains our top priority at Jameson. In addition, we continue to accelerate our investment plans in our manufacturing facilities to increase production capacity to ensure we have the ability to meet increasing consumer demand for our products that our consumers trust and rely on. And with that, let me turn the call over to Chris to discuss the fourth quarter's financial results.

Thank you, Mark, and good afternoon, everyone. As Mark discussed, our business continues to perform very well and grow steadily, reflecting elevated demand, stemming from our customers' ongoing focus on their health and wellness. In the fourth quarter, revenue increased 16.6% to $120.4 million, driven by strong growth in both reported segments. In Jameson Brands, revenue increased 13.9%, to $89.7 million, consisting of 13.7% growth domestically and 14.8% growth internationally. We gained share domestically as point of sale growth consistently demonstrated expanded consumption and the development of a broader consumer base. International growth reflected timing of shipments to China realized in the preceding quarter We continue to experience strong demand in each of our primary international markets, resulting in fourth quarter shipment growth in Eastern Europe and the Middle East. Revenue in our strategic partners segment increased 25.3%, reflecting timing factors as well as higher soft gel volumes, offsetting lower powder volumes in the quarter. Gross profit margin decreased 300 basis points to 35.3%, including 130 basis points primarily from the impact of transition costs associated with our move to a third-party logistics provider. Normalizing for this impact, gross profit margin declined by 170 basis points, including 110 basis points from the impact of higher costs to maximize output and ensure supply continuity. and 60 basis points due to segment mix attributable to higher strategic partner volumes as a percentage of our overall revenues. In the Jameson brand segment, gross margin decreased by 260 basis points to 43%, including 180 basis point impact from the transition and startup costs as we adopt a new third-party logistics model to make room for capacity Expansion projects in our roads in Scarborough facility. On a normalized basis, gross margin in the Jameson brand segment decreased 80 basis points, reflecting higher supply continuity costs, including our COVID-19 health and safety measures, partially offset by gains from promotional efficiency and increased volume. Strategic partners segment gross margins declined by 170 basis points to 12.9%. as efficiency from higher soft gel and tablet volumes were offset by increased supply chain costs and a reduction in volume and efficiency at our powder processing facility. Selling general and administrative expenses increased by $1 million from a year earlier to $18.6 million. Excluding the impact of specific costs related to COVID-19 and business integration, Normalized SGN expenses increased by $1.4 million to $18.1 million. The majority of this increase was attributable to the Jameson brand segment, with increased headcount to support worldwide and e-commerce expansion, higher variable compensation, and increased marketing investments. Operating income increased $2.4 million to $22.7 million, and operating margin decreased 80 basis points to 18.9%. On a normalized basis, operating income increased $3.7 million to $24.9 million, and adjusted operating margin increased 10 basis points to 20.7%. Adjusted EBITDA increased 14.6% to $29.4 million, and adjusted EBITDA margin was 24.4% versus 24.8% in the year earlier period. The modest decline in adjusted EBITDA margin reflects segment mix and internet incremental costs to maximize output, secure supply, and the costs associated with COVID in our operating facilities. This was offset by a reduction of selling in general and administrative expenses as a percentage of revenues. Interest in financing costs were $1.4 million compared to $2 million, reflecting reduced borrowings and lower interest rates compared to the year earlier. Our effective tax rate in the fourth quarter was 25.5% compared to 27.6% in the fourth quarter of 2019. This is due to the impact of non-deductible share-based expenses relative to higher earnings. Our reported net income was 15.4 million in the fourth quarter compared to 13.2 million in the prior year, an increase of 17%. On an adjusted income basis, net income increased 23.6% to 17.6 million and adjusted diluted EPS increased by 16.7% to 42 cents. All of the adjustments to net income are described in today's press release and included in the adjusted net income reconciliation table at the end of the release. Turning now to the balance sheet and cash flow. We generated cash from operating activities before working capital considerations of $22.2 million, a $4 million increase from the prior year primarily due to higher earnings in the quarter. Cash invested in working capital decreased by $1.7 million due to the timing of payments and significant shipments in the quarter. Capital expenditures during the fourth quarter were $4.2 million, and we paid approximately $5 million in dividends. We ended the quarter with over $127 million in cash and available operating lines. Additionally, the board of directors of the company have declared a cash dividend in the fourth quarter of 2020 of 12.5 cents per common share, or approximately $5 million in aggregate. The dividend will be paid on March 15 2021. To all common shareholders of record at the close of business on March 5 2021. Now with that, let me turn the call over to Mike to discuss our guidance.

Perfect. Thank you, Chris. Good afternoon, everyone, and thank you, Mark, for your comments at the top of the call. They are very, very much appreciated. It has been a great, great privilege to work alongside you for the past few years, and it's something that I will take some lessons with me from you for the rest of my life, so thank you for that. Before we discuss 2021 guidance, I just want to say I am honored to have been chosen to lead this incredible company and this passionate, driven team. I'm grateful to Mark and the board of directors for their support and confidence, and I'm looking forward to continuing this great story and this great track record of success here at Jameson. I'm fully committed to continuing to execute on our proven growth strategy and committed to staying ahead of consumer trends around the world to continue driving strong growth and market leadership. 2020, as you just heard, was an incredible year for Jameson, building on what was already multiple years of branded business growth, driven by our world-class marketing and innovation initiatives. We are driving accelerated brand growth pre-COVID, and we believe the strength of 2020 has bolstered our 2021 growth prospects and the future of this company. We continue to see points of consumer data and business results that indicate we are now operating off a new elevated base of consumers and a step change for our category and for our brands from which we will continue to grow. Health and wellness in vitamins, minerals, and supplements We're seeing sustained growth as a global megatrend pre-COVID. It has accelerated during COVID, and we are confident it will continue to see sustained growth post-COVID as consumers continue to drive towards healthier lifestyles, preventative healthcare solutions, and self-care. Based on this, we are initiating our 2021 guidance and anticipate the following. Net revenue in the range of $421 million to $438 million. representing top-line growth in the range of 4.3 to 8.6%. This compares to $404 million in revenue for 2020, reflecting consumer concern for their health and wellness, driving demand for our branded products both domestically and internationally. We expect adjusted EBITDA in the range of $95 million to $100 million, or 8% to 13.6% growth over fiscal 2020, adjusted EBITDA of $88 million, and adjusted diluted earnings per share of between $1.24 and $1.32. Revenue in the Jameson Brands segment is expected to increase between 4% and 8% compared to fiscal 2020, driven by growth in the following categories. Domestic branded revenues are expected to grow between 2% and 5%, including the impact of both pricing and volume expectations while lapping surge COVID-19 demand realized early on in the pandemic. We plan to expand our market position by continuing to focus on innovation and consumer education while increasing investment in digital commerce. We expect our international growth to continue to be strong at 20% to 30%, excluding a 5% headwind resulting from strengthening Canadian dollar. Our guidance reflects strong growth in China while sustaining a higher baseline demand in our remaining international markets. We will increase our marketing investment in China to build brand equity and accelerate our long-term growth in the region. Revenue in the strategic partner segment is expected to increase between 5% and 10%, reflecting the higher demand of our customers' branded products. The foregoing financial outlook is based on the following assumptions for fiscal 2021. Normalized FG&A expenses will increase by approximately 9% to 13% as we continue to expand in our e-commerce capabilities, and we grow marketing investments, including approximately $3 to $4 million investment in marketing, primarily to support our long-term international growth opportunities. Depreciation will be approximately $10.5 million, reflecting the acceleration of capital additions and our third-party logistics platform. Interest expense of approximately $5.5 to $6 million, based on our estimated borrowing and prevailing rates. Income tax rates of approximately 27%, and a fully diluted share count of between 41.5 and 42 million shares. A complete discussion of our outlook and factors impacting our expected performance in 2021 is included in the outlook section of our MD&A that will be filed today. With that, now let me turn the call back to James for Q&A. Thank you. If you'd like to ask a question, please signal by pressing star 1 on your telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off to let us know to reach our equipment. Again, press star 1 to ask a question. And we'll take our first question today from Sabahat Khan with RBC Capital Markets.