Jamieson Wellness Inc.

Good afternoon, everyone. Welcome to the Jameson Wellness Conference call to discuss the financial results for the third quarter of 2022. 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 a press release covering the company's third quarter 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 in 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. Palato to get started. Please go ahead, sir.

Thank you, Rachel, and good afternoon, everyone. Thanks for taking the time to join us today to discuss our third quarter financial results. I'll begin with some high-level comments about the quarter, but focus most of my prepared remarks on the key strategic actions we've taken over the past several months. These have set the stage for our continued leadership beyond our 100-year anniversary as we leverage the power of our brands and platform on a global scale. Chris will follow with a more detailed view of the financials and will then open up the call for your questions. Our third quarter results reflect the ongoing strength of our branded business, including our strong leadership position in the Canadian market, along with continued consumer demand, building off the new baseline of consumers now engaged in the category. Total revenue increased nearly 24%, consisting of approximately 16% growth from our acquisition of Utheory in the third quarter and entry into the United States, which is the world's largest vitamin, mineral, and supplement market. Organically, we grew 8% from our base business, including our domestic branded business, which grew nearly 12%, and our China business, which increased by almost 30%. Adjusted EBITDA was up 16% to $29.5 million, as our higher revenue and contributions were partially offset by increased marketing and investment in resources to grow our international business. Our base international branded revenue rose 8.5% as our strong performance in China was partially offset by the current geopolitical conditions and the resulting economic impact in Eastern Europe. Strategic partners revenue was essentially flat versus last year, largely due to timing factors relative to order rates and program changes. Today, we announce that we have made a strategic acquisition in China to accelerate our growth in this important market. This is the next step in our evolution to drive vitamin, mineral, and supplement leadership well beyond our 100th anniversary, and enables us to now focus on our four key growth pillars, which are as follows. Number one, Canada, our domestic market, where we hold a strong category leadership with opportunities to continue to expand through our world-class products, marketing, and innovation pipeline, driving increased household penetration and usage across multiple categories. Number two, the USA, where we closed the acquisition of the U Theory brand in quarter three and are well on our way to a successful integration. With this brand, we acquired some great go-to-market capabilities, which we will expand and drive growth in the world's largest vitamin, mineral, and supplement market by leveraging our best-in-class operating capabilities and portfolio. Number three, our growth in China, where we will now have control and ownership over our business in this key global market. We view the acquisition of our Chinese distribution partners' assets as a step toward what we anticipate will be a significant brand expansion in the world's second largest vitamin and mineral supplement market over the next several years. Over the past five years, we have worked with our distribution partner and directly with our global partners in China to build a strong foundation in the country. The transition of our go-to-market approach in China from partner to a company-owned model has always been in our long-term plan. And given our current momentum, now is the perfect time to formalize this important change. With control of the value chain, we will accelerate brand investments in China to drive growth and unlock new opportunities, allowing us to engage directly with Chinese consumers. This will further strengthen our brand by ensuring consistent messaging across our go-to-market platforms and unique portfolio of products. The acquisition will close in early fiscal 2023 with our distribution partner continuing to provide support during the transition and through July 1st, 2023. We previously established a legal entity in China and have been building our team and planning for the potential transition over the past few years. We are confident in our team's ability to take this business to the next level. And our fourth pillar for growth is our international business, where we leverage strong distributor partnerships to access over 45 countries and key markets across Southeast Asia, Eastern Europe, the Middle East, and other key and potential new countries around the world. I also want to give a quick update on our youth area acquisition that closed in mid-July. Early results, subject to some timing, have been consistent with our expectations, and we are making good progress integrating this business into the larger Jamison Wellness organization and laying the foundation for future growth. Our near-term focus is to drive revenue through innovation and channel expansion, with plans underway for 2023. We are also focused on leveraging our best-in-class operating capabilities to unlock margin-enhancing cost synergies, with many opportunities already identified and project plans actively being developed. We've embedded some key Jameson talent on the ground at Utheory to aggressively pursue every opportunity, and while still early days, we are encouraged by the progress we've made to date and remain confident in the strategic significance of this important acquisition. In summary, the two strategic acquisitions we've announced over the past few months have set us up to drive continued leadership as a global brand beyond our 100th anniversary and to take full advantage of our scale and best-in-class capabilities. We have made clear choices to directly invest in Canada, the U.S., and China while continuing to leverage strong distributor partners in other key regions and countries around the world. The entire Jameson team continues to execute exceptionally, and we are on track for a strong finish to our 100th year. I'm thankful for our team's hard work, their energy, and their passion to improve the world's health and wellness. With that, I'm going to turn the call over to our CFO, Chris, to discuss the second quarter financial results in more detail. Chris, over to you.

Thank you, Mike, and good afternoon, everyone. In the third quarter, revenue increased to $138.9 million, driven by continued growth in our Jameson brands, partially offset by an anticipated decline in strategic partner revenues Jameson brand revenues increased 31.8% to $112.2 million in the third quarter. The acquisition of you theory in the quarter added the United States, the largest VMS market in the world as a key growth pillar in our strategic plan. This transaction contributed $17.5 million or 20.6% of incremental branded revenue. Additionally, we realized domestic revenue growth of 11.7%, reflecting consumer demand, pricing, and the timing of fourth quarter promotional shipments. International revenue for Jameson Brands increased by 8.5%, compared with the prior year period, driven by growth in China of 29.2%, reflecting a recovery after the COVID-19 related lockdowns in the second and third quarters, along with a strengthening of our U.S. dollar offset by a modest 7.8% decline in the rest of the world as a result of geopolitical pressures in Eastern Europe impacting the macroeconomic environment. Our strategic partner revenue declined slightly by 1.9% to $26.7 million, reflecting order timing and the anticipated strategic exit of certain programs. Gross profit margins decreased by 140 basis points, reflecting the impact of the lower margin profile in the acquired businesses in the Jameson brand segment, partially offset by increased margins in our strategic partner segment. Within the Jameson brand segment, gross profit margins declined by 400 basis points to 40.3%, reflecting lower gross profit margin of U Theory, higher depreciation, and product mix. Gross profit margin in the strategic partner segment increased by 80 basis points to 12.3%, impacted by favorable customer mix, and pricing offsetting higher supply chain and input costs. Selling, general, and administrative expenses were $30.9 million on a reported basis, an increase of $11.6 million versus last year, including $7.2 million of specified costs. mainly comprising of acquisition and IT system improvement and implementation costs. Normalizing for the impact of these specified costs and the acquisition impact view theory, SG&A increased by a half a million dollars versus a year ago, reflecting higher costs to support strategic initiatives, which were partially offset by the timing of our 100-year celebration and marketing investments, which were more heavily weighted toward the beginning of the year. Third quarter operating income decreased by 20.8% or $4.3 million due to the specified costs realized for our acquisition of U3 and our IT system improvements. Offsetting higher revenue contribution and our top line growth in the quarter. Operating margin declined by 660 basis points to 11.7%. On a normalized basis, third quarter operating income increased by 12.9%, while our operating margin decreased by 160 basis points to 16.9% on the margin profile of the U-theory acquisition. Reported EBITDA decreased by 12.3% to $21.7 million, while adjusted EBITDA increased by 15.9% to $29.5 million. driven by higher volume and contribution. Adjusted EBITDA margin decreased by 150 basis points to 21.2%, reflecting margin profile in the acquired business and a slight decline in Jameson's brand margin, partially offset by favorable margins within our strategic partner business. Net earnings decreased by 23.8% to $10.9 million in adjusted net earnings, which excludes specific costs in foreign exchange, increased by 1.2% to $14.2 million. Our earnings per diluted common share were 26 cents, and adjusted earnings per diluted common share were 34 cents, consistent with the prior year. Performance on a per share basis was impacted by the seasonal characteristics of the youth theory acquisition, as volume and contribution acquired in the quarter were offset by incremental borrowing costs. Planned accretion attributable to the acquisition will be realized in the seasonally stronger fourth quarter. A reconciliation of adjusted EBITDA and adjusted net earnings is provided at the end of today's press release announcing the company's third quarter results. Turning to the balance sheet and cash flow. We used $20.6 million in cash in the quarter from operations compared to generating $10.1 million in the year earlier period. Cash from operations before working capital considerations of $16.4 million was $2.8 million lower as a result of costs associated with the acquisition completed in the quarter. Cash invested in working capital increased by $28 million, driven by an investment in new theory working capital, higher inventories to maintain continuity of supply, and the timing of revenue and collections during the quarter. Capital expenditures during the quarter were $3.3 million, and we distributed approximately $7.1 million in dividends during the quarter. We ended the quarter with approximately $102 million in cash available operating lines. Based our strong cash flow position and earnings, today we have announced a dividend of 17 cents per common share, or approximately $7.1 million in aggregate. The dividend will be paid on December 15, 2022 to all common shareholders of record at the close of business on December 1, 2022. Now turning to guidance. We have narrowed our outlook for fiscal 2022 and now anticipate the following. Net revenue in the range of $550 to $560 million. narrowed from our previous range of $550 to $565 million, reflecting the acquisition of Utheory and continued strength in the Canadian branded volumes, offset by slightly lower international growth. This includes revenue growth of between 6% and 8% in our base business, plus acquired revenue growth from our acquisition of 16%. Adjusted EBITDA in the range of $122 to $124 million, narrowing from our previous range of $120 to $125 million, reflecting our expected revenue and operating synergies. Adjusted earnings per fully diluted common share of $1.52 to $1.56, compared with our previous range of $1.52 to $1.60, reflecting our updated earnings and higher prevailing interest rates. Additionally, I would like to note some assumptions to assist you in your modeling for the fourth quarter. We expect Canadian domestic revenue to increase between four and 7.5% compared with the fourth quarter of 2021, reflecting the timing of shipments realized in the third quarter and improved customer fill rates and strong on shelf availability at retailers, enabling us to effectively drive volumes through innovation, promotional activities, and our 100th year anniversary marketing campaigns. Internationally, we expect 15 to 35% growth compared with the fourth quarter of 2021, reflecting approximately 20% growth in China and 10 to 20% growth in the rest of the world. Strategic partner revenue is expected to increase by up to 30% in the quarter. Reflecting order timing, pricing and available production capacity in the prior year. We expect normalized SG&A to increase by approximately 52% in the fourth quarter compared to the same period in the prior year due primarily to our acquisition of youth theory and the timing of our investments in international markets and long term growth opportunities. Lastly, we expect an annual exchange rate of approximately $1.30 Canadian per US dollar. A complete discussion of our outlook and fourth quarter and full year fiscal 2022 results as well as factors impacting our expected performance is included in the outlook section of our MD&A filed this evening. In closing, I would like to thank the entire Jameson team for their tireless efforts and continued work ethic as we continue to make progress on our strategic plans and pave the way for future growth. With that, let me turn the call over to the operator, Rachel, for Q&A.