Jamieson Wellness Inc.

Good afternoon, everyone. Welcome to the Jameson Wellness Conference call to discuss the financial results for the second quarter of 2021. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session and instructions will be given at that time. Please be advised that the 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 Mike Pilato, President and Chief Executive Officer, and Chris Snowden, Chief Financial Officer and Corporate Secretary. Before I turn the call over to Mr. Pilato, please note that the press release covering the company's second quarter 2021 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 management 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 filings with the Canadian securities administrators for a more detailed discussion 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 it 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 will now turn the call over to Mr. Pilato to get started. Please go ahead, sir.

Thank you, Nora, and good afternoon, everyone. We appreciate you taking the time to join us today to discuss our second quarter 2021 financial results. I'm honoured to be on the call with you today for the first time as the President and CEO of Jameson Wellness. Before I share some highlights from a strong second quarter, I'll turn the call over to Chris to provide some in-depth financial results and guidance. I'd like to take a moment to thank the incredible Jamison Wellness team for continuing to deliver strong results and staying extremely focused through the second quarter and the third wave of the pandemic. Our entire team continues to work tirelessly during these times to ensure we are doing everything possible to meet the consumer's health and wellness needs. And for this, I am extremely proud and extremely grateful. I also would like to take a moment to remind you of our strategic initiatives, which are driving our strong performance to date and will continue to do so for the long term. We have three key growth pillars. The first is to continue to maintain and grow our market-leading share in the domestic Canadian market. The second is to grow existing and new opportunities in our international markets. And third is specifically building our business in China, which we believe to be our largest organic growth opportunity. Each of these pillars is supported by the continued global trend and consumer focus on health and wellness, which was growing before the onset of the pandemic accelerated through the pandemic and will continue to grow as consumers continue to regularly engage and participate in the category. Our best-in-class marketing and consumer insights ensure we continue to educate and engage both new and existing consumers, supporting them on their health and wellness journey. We continue to innovate, introducing new products such as our new apple cider vinegar gummy. We engage with Health Canada to develop the safest high-potency vitamins. as with our first-to-market vitamin D 2500 IU, for example. We also continue to build our e-commerce channels and expand our distribution footprint both domestically and internationally, ensuring that our products are available everywhere the consumer gives them permission to be. In support of our growth in China earlier in the quarter, we announced the addition of Mei Ye to our board of directors. Mei is a management consultant based in Shanghai, and her extensive experience assisting brands with their China entry and growth will be an asset as we strive to realize our potential in this very important market. Also supporting these pillars is the potential to acquire brands to help grow our footprint in more mature and international markets. We continue to review and assess opportunities for acquisition in markets such as the U.S. and Western Europe, looking for brands with quality reputations to help accelerate our geographic growth. We are very excited about the opportunities ahead of us and continue to believe in the strength of our strategy, our ability to deliver long-term growth. Now turning our strong Q2 results. Second quarter revenue rose by nearly 19% to $111 million. An adjusted EBITDA increase that is similar to over $22 million. In the Jameson brand segment, second quarter revenue increased 11% to over $82 million with domestic growth of plus 12%. This was due to inventory replenishment supporting our consumer demand. pricing and timing of orders from retailer and distributor partners ahead of our third quarter seasonal demand and promotional calendar. International continued to show strong growth and was up nearly 22% on a constant currency basis and up 8% in Canadian currency when accounting for the strengthening Canadian dollar. This was driven by orders ahead of our seasonal demand and order replenishment for unique international products. Strategic partners revenue increased 49% to over $28 million, mainly due to production timing of customer products throughout the year. In addition to strong top line growth, we drove solid gross margin expansion in both our branded and strategic partner segments, despite the impact of incremental costs related to safety measures in our facilities, such as rapid COVID testing and higher temporary logistics costs being realized industry-wide. In the second quarter, Jameson Brands gross improved by 70 basis points, with the gross margin and strategic partners increased 100 basis points. We saw a slight decrease in consolidated gross margin, reflecting the timing of and proportional growth related to our strategic partner segment in relation to our branded growth. At the consumer level, pricing and volume trends domestically have remained consistent with our expectations. Consumption through Q2 showed strength versus the panic buying period last year, as consumers have continued to remain in the category and expand usage from immunity to other categories. We saw continued strength of vitamin D for immunity in other categories, such as sleep, stress, and beauty from within. Our capital investments are progressing well. We have added tablet manufacturing and packaging capabilities to our facility in Scarborough and significantly expanded our blending and tablet compression capacity at our Rhodes Drive facility in Windsor. providing the production capacity to meet our long-term customer and consumer needs. The proactive approach, dedication of our team, and the safety measures we have implemented to date have been critical in allowing us to continue to service our customers. We are expanding our full-year performance expectation for 2021 by increasing the midpoint of our revenue and earnings guidance. Our results would not have been possible without the incredible efforts of our team to push through this third wave of the pandemic and ensure we continue to drive our brands forward. We remain focused on the health and safety of our team and our communities as we continue to work towards our vision of improving the world's health and wellness. With that, I'm going to turn the call over to Chris to discuss the second quarter's financial results in more detail. Chris, over to you.

Thank you very much, Mike, and good afternoon, everyone. As Mike mentioned, we had a very strong quarter of growth as consumers remained focused on their physical and mental well-being. In the second quarter, revenue increased 18.6% to $110.6 million, driven by continued growth across our Jameson Brands and Strategic Partners segments. Revenue for the Jameson Brands segment increased 10.9% to $82.4 million, including 11.7% growth in domestic revenue, reflecting inventory replenishment to support continued consumer demand, pricing, and the timing of orders ahead of our third quarter seasonal demand. International revenue for Jameson brands increased by 21.6% on a constant currency basis, or 7.8% on a reported currency basis. International distributor customers accelerated order timing ahead of seasonal demand and continue to replenish non-immunity and unique international products. As implied, our reported international revenues were impacted by a significant increase in the strength of the Canadian dollar. Revenue in our strategic partner segment grew 48.9% to $28.2 million due primarily to production timing of our customer branded products. In each of our segments, gross profit and gross profit margin improved year over year due to increased volumes and including capital-related operating efficiencies. These gains were partially offset by incremental health and safety measures and increased ocean freight and logistics costs. Consolidated gross profit margin decreased by 60 basis points to 34.7% due entirely to segment mix. and the timing of higher strategic partner revenues. In the Jameson brand segment, our second quarter gross profit margin was 70 basis points higher than the prior year due to volume-driven efficiencies partially offset by increased transportation costs, ongoing operating costs of our new third-party logistics provider, and the additional safety measures and business continuity costs as we continue to manage the risks and challenges of operating in a COVID-19 environment. In the strategic partner segment, volume driven efficiencies drove a 100 basis point margin increase. Gelling, general and administrative expenses were $21.2 million in the second quarter, up fractionally on a reported basis. Normalized SG&A was $19.7 million 16.5% higher, reflecting additional resources to support our strategic initiatives and international marketing, primarily focused on brand building in China. Normalized SG&A excludes specified costs related to COVID-19, which were $20.5 million lower than the second quarter of the prior year. Specified costs in the second quarter of 2021 were $1.6 million lower primarily due to COVID safety measures implemented at our facilities during the third wave, including a voluntary two-week closure of our Scarborough facility, the establishment of rapid testing programs at each of our manufacturing facilities, wage premiums, and donations in support of our frontline workers. Second quarter operating income increased by 50.3% to $16 million due to higher revenue and gross profits. operating margin improved by 300 basis points to 14.5%, normalized for specified costs in both the current and prior period. Second quarter adjusted operating income increased by 19.9% to 17.8 million. while adjusted operating margin improved by 20 basis points. Reported EBITDA increased 52.8% to 19.4 million, while our adjusted EBITDA increased 17.6% to 22.3 million during the second quarter. Adjusted EBITDA margin declined by 20 basis points to 20.2%, as margin improvement in both segments were impacted on a consolidated basis by the timing and proportion of strategic partner volumes realized in the quarter. Net earnings of $11.5 million increased 90% from a year ago due to higher revenue and contributions. Adjusted net earnings, which excludes specified costs and foreign exchange, increased 21.8% to $12 million. Our earnings per diluted share was $0.28 and adjusted earnings per diluted share was $0.29 for the second quarter of 2021. A reconciliation of adjusted EBITDA and adjusted net earnings is provided at the end of today's press release announcing the second quarter results. Turning to the balance sheet and cash flow, we generated $5.1 million in cash from operations during the second quarter compared to $14.4 million in the year earlier period. Cash from operating activities before working capital considerations of $16.1 million was $6.3 million higher due to increased earnings in the quarter. Cash invested in working capital increased by $15.6 million, driven by higher international branded and strategic partner sales which carry longer trade terms as well as the timing of tax installments. These amounts were partially offset by accelerated inventory purchases earlier in their year, resulting in lower purchases during the second quarter of 2021. Capital expenditures during the second quarter was $6.7 million. As we continue to expand our tablet manufacturing and packaging capabilities, and capacities to meet higher demands. We distributed approximately $5 million in dividends during the second quarter, and we ended the quarter with over $109 million in cash and available operating lines. Based on our strong cash position and earnings growth, today we have announced a 20% increase in our dividend from 12.5 cents to 15 cents per common share for our upcoming quarterly distribution. This increase reflects our target payout ratio of between 40 and 50% of adjusted net earnings. Now turning to guidance. The company is increasing its outlook for fiscal 2021 and anticipates net revenue of between $435 million and $445 million. This compares to $421 million to $438 million previously announced, representing top line growth in the range of approximately 8 to 10%. Adjusted EBITDA is expected to be between $97 and $100 million, narrowed from our previous range of $95 to $100 million, reflecting growth of approximately 10 to 13.5%. Adjusted earnings per diluted common share is expected to be $1.27 to $1.32 compared with $1.24 and $1.32 previously announced. Our updated guidance reflects higher demand for domestic branded and strategic partner sales, which are partially offset by reduced efficiency from enhanced temporary safety measures as a result of the third wave of the pandemic in Canada and supply chain premiums currently experienced globally. Revenue in the Jameson brand segment is expected to increase between approximately 4% and 7% compared to a very strong fiscal 2020 and reflects the expected impact of a strengthening Canadian dollar on our international sales, which are primarily denominated in U.S. dollars. Domestic branded revenues are expected to grow between 3% and 6%, and we expect our international volume growth to continue to be strong at 20% to 25% growth on a constant currency basis. Revenue and strategic partners segment is expected to increase between 20% and 25%, while normalized SG&E expenses are expected to increase by approximately 8% to 12%. In spite of incremental COVID-19 costs and the impact of health and safety measures on our production efficiencies, we anticipate to grow our gross profit margins in fiscal 2021 in both our Jameson-branded and strategic partner segments. Each of our segment growth margins are expected to increase by approximately 100 basis points, largely due to our ongoing capital investments and volume-driven efficiencies. We will realize further margin expansion in future years as the pandemic risk subsides and we're able to scale back on temporary COVID-19 safety measures and when commodity-related cost increases subside. Focusing on the third quarter, we expect the following factors to impact our results. We expect domestic Jameson brand segment growth between 3 and 5% in the third quarter of 2021. Reflecting the timing of inventory replenishment at retail and our distribution partners in the second quarter of 2021. Our international branded volumes are expected to be consistent with the third quarter of 2020 on a constant currency basis, reflecting strong replenishment and the timing of shipments earlier in 2021. We expect strategic partner revenues in the third quarter of 2021 to increase between 15% and 20%, reflecting demand for our customers' branded products. Normalized SG&A is expected to increase between 5% and 10% in support of our strategic initiatives and international marketing efforts. In closing, I would like to thank the entire team here at Jamison Wellness for their unwavering commitment to ensuring our consumers' needs are met. Continuing to manage the risk and challenges in this COVID environment, their dedication has been very inspiring and a key driver in our success to date. With that, let me turn the call back to the operator, Nora, for Q&A.