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spk01: 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.
spk10: 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.
spk03: 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.
spk01: Thank you. If you would like to ask a question, please signal by pressing star 1 on your telephone keypad. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, please press star 1 to ask a question. Our first question comes from Sabahat Khan with RBC Capital Markets. Please go ahead.
spk07: All right, great. Thanks very much. I guess, you know, you talked a little bit about on the call, but just, I guess, you know, longer term, how are you thinking about, you know, your focus or investments or in the U.S. versus China? Kind of how are you thinking about your international opportunities over the next kind of two to three years? And, you know, where should a kind of investor focus be in terms of, you know, where China could be in a few years versus some of the progress you're making in the U.S.? I just want to kind of understand how you're prioritizing the two and kind of the investments behind both.
spk09: So thanks, Saba.
spk03: It's really a three-pronged approach. We're going to continue to invest in the Canadian market to drive faster-than-market growth in Canada, returning to pre-pandemic growth rates in Canada with that 3% kind of industry growth rate, plus innovation and other strategies driving growth beyond that benchmark growth rate. In the US, it's really about investing in both resources and infrastructure to grow the Utheory brand, to continue to grow the Utheory brand both in Costco and across e-comm and food drug mass. as well as using our regulatory resources to bring the UCRE brand to international markets. Now, a lot of that takes time. It's not going to be a tap that we turn on, but certainly in terms of specifics around long-term growth, particularly growth in fiscal 2023, we're going to have to wait until February before we provide specific guidance. As it relates to our acquisition of our Chinese distributor, certainly that brings in a new complexity to our reporting. So instead of selling into China, it will be sell out in China. We will add all of the promotional activity, existing marketing and infrastructure spend. So there is a significant investment in that, both the operation as well as an investment in sales and marketing to drive performance in that market. Certainly, from a guidance perspective, we're going to be conservative for 2023 as we get through the transition and we staff up our own operations to take over all of the existing functions currently held through our distributor.
spk07: Okay. So, I guess on the last comment, should we assume sort of potentially a margin impact until that is sort of ramped up, and then I guess you would collect the distributor margin? I guess over the next year of investment, can you share some color on the benefit of eliminating the middleman versus those investments, maybe just the puts and the takes? Should we expect it to be a net trade?
spk03: I think we've talked a lot in the past about the benefit in terms of focus, where our existing distributor has done a great job getting us to where we are, but it's been highly transactionally focused. And when we look at our long-term opportunity there, it really is about bringing our best-in-class marketing, focusing on that 360 of consistent messaging across all of our touchpoints between ourselves and our consumers, focusing on building activities and driving the consumer trial and awareness, really ringing more loudly the fact that Jameson has a 100-year heritage that we have the most natural sources and trusted procurement and quality is our absolute number one priority. Bringing that message, driving the consumer to our brand is really what it's about. And we will be investing beyond the levels we've been investing today to really make that come to a reality.
spk07: Okay, great. And then just last one for me, I guess, you know, a lot of investors focus on the macro backdrop. You know, the category should be stable through the cycle. Can you maybe talk about the conversations you're having with customers, whether it's in Canada, and I guess now in the US in terms of, you know, how they're just thinking about the macro and their expectations and your expectations for more so the category growth, not, you know, trying to get your 23 outlook, but how do you expect, you know, the VMS space trends through the cycle?
spk10: Yeah, thanks for the question. You know, we've been talking about this for a few quarters, actually a couple of years now, where we saw increased adoption of new consumers into the vitamin mineral supplement category. We've seen those consumers continue to participate for two and a half years now at elevated rates, and we continue to see them participate through the last quarter and anticipate them participating into the future. In the recent times, I'd say the last quarter, you know, there is a little bit of lumpiness just as we cycle off of a wave four last year across most of the world, of which we're cycling against. But that's being offset now by getting back to what are traditional flu and cold seasons, which are driving some incremental consumption. So what we're seeing in the market is a return back to historical growth rates as anticipated. Based on historical data we have during financial downturns, we expect the category to hold up. We expect this to be pacing at traditional or historical growth rates. I think everyone involved in the category is expecting the same thing. However, I do preface that or caveat that by saying we are monitoring it every day. We are trying to understand the impact of what's going on in the macro world every day to see if there will be a change to what we're seeing and what we believe will happen. But right now, we're quite confident that we will get through any economic downturn quite fine.
spk07: Great.
spk09: Thanks very much for the call. Thanks, Trevor. Thanks, Trevor.
spk01: Our next question comes from Andrew Leno with National Bank. Please go ahead. Hi.
spk06: Good evening. Thanks for taking my questions. I'll actually start with one of your last comments, Mike. You mentioned that you've seen consumers return to their historical patterns, especially when it comes to the flu and cold season. We've seen some reports, and there's a potential we get a strong flu season in Canada. I mean, are you seeing any higher demand initially as you go through Q4, or is it business as usual, or any kind of more interest, be it from consumer or be it from your customers?
spk10: Yeah, thanks, Andrea. I mean, we're definitely seeing cold and flu season come back to the category where it was not in the category for the last few years as COVID took over. You know, in our guidance, you can see what we're calling for the rest of the year. That would build in our expectations based on what we're seeing in cold and flu season. I think it's tracking at traditionally where we see cold and flu. It does feel like it's picking up out there from people getting cold and flu. So we'll continue to monitor it. We feel quite quite confident in what we delivered in Q3 and what we've guided for Q4 to account for that. Again, it's off of a new consumer base though, right? I mean, there's all these new consumers engaged in the category that we picked up through COVID as new consumers came into the category, and we're now seeing them participate in cold and flu season as well.
spk06: That's good color. Thank you. The other question, I'll go back a bit to your theory and a couple of questions there. First, I mean, it was your initial goal to, you know, expand to bring in new products and to kind of, you know, expand where you distribute. Are there anything you can share there? I mean, any kind of early successes and also the same thing for the margin improvements that you expected there? Anything that you can share on how you're tracking?
spk10: Yeah, I'll talk very qualitatively because it is very early days, but we have embedded a very strong number of our team down there in the United States, also working with a very capable team that we got with the acquisition down there. We are actively working on innovation and pipeline plans. They're actually worked on daily. There's a team that meets every day on it as we try to plan out where we're going with this in 2023. There's definitely some exciting things in the pipeline. We've also had some very positive early conversations with some potential retail partners in the United States who know the brand, like the brand, and understand the Jameson capabilities and where we can help take this brand and how we can help grow it. I don't really want to get into too many specifics for competitive reasons. I would hate to flag any competitors where we plan on going and what we plan on going with, but as we do get things to market through time and over time, we'll make sure that we talk about them on these calls. I think the first step that we're taking is definitely trying to move quickly in the channel of e-commerce, leveraging some of our great capabilities quickly because that's a channel we can move really quick. So we are actively pursuing some growth opportunities in our e-commerce channel so we can hit the ground really running through the end of Q4 and early into Q1.
spk06: That's great. Thank you. The other question, and it might dig a little bit into 2023 commentary, and I know you'll provide that later, but whatever it is you can share in terms of what you're seeing out there in raw material costs. I don't know if you're in discussions yet to secure those for next year, but kind of any early insights. Do you see inflation picking up there? Are they similar to where they were? Anything you can share on that regard?
spk03: We actually feel like we're in a very good position exiting fiscal 2022 from a pricing perspective. There's been some specific ingredient inflation. There's been a number of offsets. So the jury's really still out to understand the overall impact to the continuing or the current inflationary environment. Obviously, there's a lot of a lot of factors and a lot of dynamics currently at play. So those negotiations are ongoing and we haven't made any decisions around pricing or final read on inflation exiting 2022.
spk06: Great. And one last one for me. In China, there's been some kind of increased lockdowns that we've seen lately. Are you seeing any kind of impact there? And as a broader question to that, I mean, how do you expect that potentially impacting you trying to scale up as you're setting up a new team there?
spk10: I think as you've seen the last two quarters in our results, Andrew, we have weathered lockdowns quite well. Most of our business is sold through digital platforms, which are still shipping and are able to get to a majority of the consumers. We do hear of various lockdowns by regions or neighborhoods throughout some of the cities, but still a lot of China is not locked down. And again, most of our sales are through e-commerce platforms and they're able to get to consumers. So for us, we continue to see strong results through the year. We've guided for some good results in Q4 and we're quite pleased with how our business is doing in China and the subsequent announcement we made to take a step further into China with the acquisition of some assets of our key distributor.
spk06: Okay, that's great.
spk09: Thank you. That's it for me. Thanks, Andrew.
spk01: Our next question comes from George DeMay with Skillshare Bank. Please go ahead.
spk05: Hi, guys. I think we took some pricing in the quarter. Can you maybe comment on how much? And have you seen any negative volume response or trade down, I guess, even within Jameson as a result of the pricing or general environments?
spk10: Yeah, so we did take some pricing at the beginning of Q3. It was a pretty low pricing increase. George, I think we talked about before low single digit increase. So that is in market that is being reflected. Our understanding is the market has also reflected price increases at similar times based on their cost structures as well. We have not seen any trade down. We have not seen any trade down within the brand or within the category. You saw our strong results on the quarter. Things continued to sell. Things continued to pace well. And you've seen our guidance for Q4. So anything that we would expect or would be seeing is built in there. And it's nothing at this point.
spk05: Okay, thanks. And the rest of the world saw about an 8% decline. Just wondering, did that progressively get worse through the quarter? And how much of that is related to the war in Ukraine versus maybe other issues out there?
spk10: Yeah, it's hard to say if it got worse through the quarter because the way we ship international, the timelines are like big shipments, you know, a few times a quarter to get shipping efficiencies and cost down as we ship it around the world. So it's hard to look at, you know, beginning of quarter to end of quarter. What I would say is almost all of the offset, you know, China had a strong quarter. You saw us call down off of that growth, a report off of that growth because of some issues in Eastern Europe. All of the declines at this point have been driven by the war in the Ukraine. And again, we've had no business in Ukraine. We have no business in Russia. It's just the surrounding or neighboring countries that are undergoing just unbelievable economic and geopolitical issues right now and have just really focused on purchasing necessities at this point and dealing with humanitarian crisis of the refugee crisis. So again, it's a continuation of quarter two. It's really a macro and economic environment, and it's built into our guidance for the rest of this year into Q4.
spk05: Okay, thanks. Just one last one, if I may. You guys called out additional strategic partnerships to accelerate and strengthen our position in China. Can you maybe give us a flavor of what those might be?
spk10: Well, I don't want to say too much about what they will be, but what I'll say is that as we go direct in China, we're building out a team on the ground there of highly capable people. We've been building out that team now for well over a year and we'll continue to build out that team. We continue to talk to various partners on the ground that can help accelerate our growth. You know, everything from distributor partners to 3PL partners to anything, you know, commercial partners. retail partners, all kinds of various conversations going on about how we can expand growth, accelerate growth, and really run this business from on the ground in China with experts in China that fully understand the market, fully understand the consumer, and can leverage our best operating practices and our best in-market products and quality to really grab onto the opportunity ahead of us.
spk09: Great. Thanks for answers. Thank you. Our next question comes from John Zamparo with CIBC.
spk01: Please go ahead.
spk02: Thanks. Good evening. I wanted to start on the domestic business, and I wonder how you think you're positioned for a recessionary environment. And when you look at the loyalty data from your retail partners and also your own e-com data, what is it you're seeing from consumer behavior compared to the prior quarter?
spk10: Yeah, I mean, again, you see our results in the domestic market. We continue to see strong growth. We're continuing to see growth across multiple categories. We're continuing to see the resilience of the immunity category, especially through the cold and flu season. You know, we're really not seeing any impact of any economic pressure at this point. We have built in anything that we would see in the Q4. But again, John, it's a reason, you know, We can model what we've seen in the past, which is very minimal impact during economic downturn. We can model based on what we're seeing in market in recent days. We can project that forward, which we've done into all of our modeling and our guidance for Q4, and then the guidance that we'll give in February for 2023. But we are monitoring it every moment, every day. Our entire insights team is keeping a very close eye on what's going on across the board, across categories, and frankly, around the world to ensure if we have to make any, if we see anything, we have to make any adjustments, we will do that. History is on our side here in the category, but again, we will not take our eyes off of what's going on and make sure we don't maneuver and protect ourselves in any way possible moving forward.
spk02: Okay, understood. And on the China business, can you put some goalposts around what your investments are expected to be, what you're paying for these assets, and just generally what kind of capital this is going to require over the next year or so?
spk03: So from a purchase price perspective, a significant portion of it is working capital. So that number will not be known until the actual transaction closes. It will not be what I would consider a significant number from an investment perspective. But we will obviously disclose that at the point in time from a reporting perspective. So I'll be able to give you more information at that point in time.
spk02: Okay, fair enough. And ultimately, what gave you the confidence to kind of go at your own in China? It's not a market where you have as much history. It's maybe a little bit outside your area of expertise on the domestic side. So I'm wondering why you wanted to own more of this process rather than selecting a new partner.
spk10: I think a couple of things. I think, one, you've seen our growth over the last few years we've been able to build a business that we're quite proud of. And we know that our brand almost perfectly meets the five top perfect purchase attributes of the Chinese consumer. And the demand the consumer has shown for our brand has been quite extraordinary, considering we've had limited channel distribution or access, and we've made limited marketing investments in the business. So we're very confident that with our best in market capabilities, with our ability to expand into channels, with our ability to invest in marketing, with our talent that we've been able to hire on the ground in China, we can expand this business to a much larger size than it is today. And we can take the full value chain into our P&L to help fund some of that incremental investment we'll be making to grab onto that. So that's where our confidence comes from. Again, we have seen our business grow substantially in this market based on consumer demand and consumers resonating with what we stand for, which is quality and trust, transparency, high quality ingredients, all of the things that we bring to the table that are important to the Chinese consumer. And we feel confident that now is the time with the momentum we have to take this on in a direct ownership position and really focus on scaling it to another level.
spk03: I think the one thing I'd add to Mike's comments is we're not going to be running China from Canada. It's really about driving and acquiring the talent on the ground that's going to lead both the strategic thinking as well as execution in a locally relevant way.
spk02: Understood. That's helpful, thanks. Just one more for me on the housekeeping side. I don't know if you have it in front of you, but the near 30% growth in China, can you say approximately what growth figure you're lapping from last year?
spk09: From last year? No. I'll have to look that up. I'll catch up with you after on that one.
spk02: Okay. Yeah, we can follow up on that. All right.
spk09: That's all from me. Thank you very much. Thanks, all.
spk01: Our next question comes from Derek Lussard with TD Securities. Please go ahead.
spk11: Yeah, good evening, everybody. Just most of my questions have been asked, but maybe just, again, on China, just curious about the – if some of the management team in China is coming from the asset you're buying?
spk10: It is not. We have had a general manager in China for some time now that has helped us manage that relationship, has also helped us grow into some of our retailers, our global retailers. We have direct relationships. We do have a portion of the business that we manage directly, which also gives us confidence in China, as for the last question. So we do have a general manager on the ground there. We have been hiring some great local talent around him and we do have the management team of the distributor partner with us through the transition period which includes a three month period to start the year prior to us taking full ownership and then a three month period after at which they'll help us transition the business smoothly. So we're quite confident we have the talent in place. We're quite confident we have our distributor partner attention through six months, and we'll get through this quite successfully.
spk11: Okay. And maybe just back on today, the 30% growth in China. Was any of that, I know you said, you know, coming back from COVID, but any of that boosted by shipment for, I guess, their Double 11 shopping event in Q4?
spk10: Yeah, I mean, I think it's, I mean, if you look at our last two quarters, if you combine them, we've had strong growth despite the lockdowns. And some of that shipment would be definitely to prepare for 11-11. And for what we're expecting to see over the next couple of weeks is that promotion really is huge. It really is more than one day in China. And we're quite excited about what we can do this year at 11-11. Okay, thanks. That's it for me.
spk09: Thank you.
spk01: Once again, if you would like to ask a question, please press star 1. Our next question comes from Justin Keywood with Stiefel. Please go ahead.
spk04: Hi, good afternoon. Thanks for taking my call. On the working capital investment for Utheory at $28 million, was that a function of perhaps some capital constraints for the company prior to Or is there anything particular that is driving that number? And what would be a good line of estimates for the working capital going forward?
spk03: So, and just to be clear, about half of that investment was Jameson related, half of it was U3 related. So we continue to drive both higher working capital, both in Jameson as well as from a U3 perspective. You know, the company was private before Jameson acquired it. So as a private company, they had different working capital and cash flow needs than Jameson does. We are going to operate the business from a risk management and efficiency perspective. That is going to increase working capital both in fiscal 2022 and in fiscal 2023 as we drive strategic opportunities into the business that's going to unlock efficiency, margin, and de-risk our supply chain. I think from a guide perspective, you'll see working capital investments come down in Q4, as Q4 is typically the low watermark from a working capital investment perspective, in the tune of probably between $15 and $20 million. So that gives you an indication of kind of where we'll end from a global Jameson perspective exiting fiscal 2022.
spk04: Understood. That's helpful. And then we understood that there is the opportunity to cross-sell Jameson SKUs into the U.S., but I'm wondering if there's any Utheory SKUs that could potentially sell well in Canada or even China. I understand that there are collagen products are quite strong and if that's an opportunity.
spk10: Yeah. So on your first part of that question, Justin, I think we talked about this last quarter. We're looking not to expand the Jameson brand into the United States, but leverage the Utheory brand and the portfolio of products we have. So one of the projects going on is what would be the next in line categories that we could expand Utheory in leveraging the Jameson portfolio of products and categories? So we will be the Utheory brand in the United States, but leveraging our portfolio as we continue to grow and expand down there. In Canada, Utheory is already here. They have some pretty good distribution in the club channel. They have some limited distribution in the food and drug mass channel. We will continue to look for opportunities to grow that business in Canada now that we own it and now that we know the domestic market inside out and backwards and are the market leader here with our Jameson brand. Our team will dig into that and are digging into that to build plans for 2023 to continue to build that brand in Canada. In China, we will look to bring that brand to China. You are 100% correct. There is an engaged consumer into the collagen market and into some of the categories U Theory sells in. We think that the brand will play well in China. And now that we have full control of the value chain and have taken over or will be taking over the role of the distributor, we can bring that brand into the market after we close that deal and work some plans there.
spk04: That's helpful. Thank you for taking my questions.
spk08: You're welcome. Thank you.
spk01: Our next question comes from Ty Collin with 8 Capital. Your line is open.
spk00: Hi. Thanks for taking my question. Congrats on the quarter, guys. I'm going to start with one on the balance sheets. Obviously, net leverage sitting a little bit above your typical comfort zone after the U-theory transaction. Just wondering when you expect to kind of see that return to the two times, two and a half times comfort level, given the China acquisition and some of the investments you're making in the U.S. platform.
spk03: Yeah, so we will probably invest less in capital in fiscal 2023 than We will generate cash and obviously invest less in fixed capital as well as working capital. So we'll probably generate between $20 and $30 million, and that includes the investment for our China operation in fiscal 2023. So that gets you kind of to the mid, when you include revenue, sorry, when you include EBITDA growth, and a slight pay down in debt, then you'll put yourself in a position where you're almost two and a half times exiting fiscal 2023.
spk00: Okay, really appreciate the color there. And then, Chris, also appreciate the comments you made earlier on the, you know, the puts and takes in terms of input costs, inflation, and ingredient pricing for Jameson heading into 2023, kind of holding off on a pricing decision for now. I'm wondering what the thinking is on input costs and pricing for Utheory specifically, assuming there's maybe a bit of a different set of suppliers and input costs there, at least for the time being.
spk03: So if you're talking specifically about Utheory, we're looking through – we have synergy execution plans, and what that includes is going through their entire supply chain and looking for options to scale up. with either existing Jameson suppliers or scale their suppliers up to include Jameson volumes. So any specific inflation would be offset by an economies of scale from a procurement perspective as we introduce best practices to their supply chain and procurement processes. So we expect to deliver synergies in that business. with which we will continue to invest in resources and infrastructure to execute on the strategic plan of growing both channels and internationally for that brand.
spk09: Got it. Thanks for the question, Pat. Anytime.
spk01: Thank you. And our next question comes from Peter Sklar with BMO Capital Markets. Please go ahead.
spk02: Good evening. basis points decline you had in the gross margin for Jameson Brands. How much of that was just due to bringing in youth theory with its lower margin profile?
spk03: 300 basis points.
spk02: Okay. And what was the rest? You talked about a lower margin profile in the Jameson Brands group. What does that mean?
spk03: That's well, that's just that's the load lower margin profile of you theory coming into James friends. And then the other the other the other factor is really about, you know, last year in Q3 our facilities were at virtual capacity. So this year we had a slightly different mix and we had a slightly different throughput volume. which reduced the amount of efficiency realized in the quarter. So those are the two factors impacting the quarter.
spk02: Okay. And, Chris, when was the closing date for Utheory that you started consolidating it?
spk03: July 19th.
spk02: July 19th. And what do you think the annual run rate and revenues is for Utheory now?
spk03: I think from a – when we put out the performant numbers, I think we said about $150. $20 million.
spk09: Let me just check that.
spk03: Our guide for fiscal 20, sorry, our guide for the stub period is between 68 and $72 million. That's for kind of the five and a half months. It's seasonally weighted, obviously, to December. And then from a full year perspective, I think the original pro forma for fiscal 2022 was about $115 million. I'll confirm that.
spk02: Sorry, $115 million?
spk03: It was in the press release. It was in the original New Theory press release.
spk02: Okay. And then when this guidance you provided for the fourth quarter, you talked about Canadian domestic 4% to 7.5%, international 15% to 35%. Like, where is Utheory in that? Are you putting Utheory in the international part?
spk03: Sorry, Utheory is separate from that. That's not including Utheory. That's just including our traditional international business.
spk09: Okay, I see. Okay, thank you. Thank you, Peter. It appears there are no further questions.
spk01: And I will turn the call back to Mr. Palato.
spk10: Perfect. Thank you so much. It is an exciting time to be a part of Jameson as we drive towards our vision of improving the world's health and wellness. We've taken some great steps forward, and we're very optimistic about our future. I hope you all got everything you needed today. We thank you all for coming this evening, and we look forward to speaking to all of you again soon. Have a great night. Thanks again, and we'll talk to you soon.
spk01: Thank you for today's call. Thank you for your participation and you may now disconnect.
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