Jamieson Wellness Inc.

Good afternoon, everyone. Welcome to the Jameson Wellness Conference call to discuss the financial results for the fourth quarter and full year 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 of 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 fourth quarter and full year 2022 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, under-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. Palato to get started. Please go ahead, sir.

Thank you, Cynthia, and good afternoon, everyone. Thanks for taking the time to join us today to discuss our latest results. I'll begin with some high-level comments about the year and quarter, then provide deeper context around our key strategic areas of focus for 2023 and beyond. Chris will then follow up with a more detailed view of the financials, and then we'll open it up for questions. 2022 is a transformative year for Jameson Wellness as we celebrated our 100th year in addition to announcing major strategic actions that set us up to significantly advance our category leadership globally in the future. Throughout 2022, we saw consistent growth in our brands in Canada, as our elevated base of Canadian consumers continued to trust Jameson for their health and wellness needs. In July, we closed on our acquisition of the U Theory brand, providing us with a strong platform and premium brand offering in the United States. And in November, we announced the pending acquisition of our Chinese distributors assets, which will help us get closer to the consumer and take control of the full value chain in the world's second largest vitamin mineral supplement market. In the fourth quarter, our results continued to be driven by the strength of our branded business, And total revenue was up nearly 49% versus prior year period to $193 million. Jameson Brand's segment revenue increased 56% overall, including 6% growth in Canada, driven by strong consumer demand and higher retailer orders for the cold and flu season. In the U.S., our U Theory brand contributed nearly $51 million to the top line, as higher promotional activity was partially offset by moderating retailer inventory levels, as a key customer adjusted stock levels in advance of an upcoming product improvement launch we are looking forward to bringing to market in 2023. In China, we saw further acceleration as the lifting of zero COVID policies resulted in strong consumer demand for immunity products and led to a nearly 42% increase in sales. In other international markets, revenue was down year over year largely due to geopolitical and economic pressures in Eastern Europe, and delayed entry into certain markets as a result of regulatory changes. Finally, in our strategic partners business, revenue was up over 22% due to pricing and timing of customer orders through the year. Adjusted EBITDA in the fourth quarter of 2022 was up 45% to $48.9 million as our higher revenue was partially offset by increased marketing for our international business and the occlusion of Utheory, which has a slightly lower EBITDA margin profile than our base business. Next, I want to provide some commentary on our key strategic growth initiatives, including context for how you should view these going forward. As a reminder, we have four primary pillars that comprise our growth agenda. Number one, Canada. Two, the United States. Three, China. And four, international, which refers to approximately 45 other countries and regions in which we have branded product distribution outside of the U.S. and China. Beginning with Canada, our core domestic markets. The key elements of our approach will remain largely consistent. We will continue to leverage our category leadership position through product innovation, marketing, and increased distribution to ensure we are everywhere our consumers want us to be with the products they want and need for their health and wellness. Collectively, we expect our domestic initiatives to consistently produce annualized growth in the mid-single-digit range. In the U.S., growth will be driven by the Utheory brand we acquired in Q3 last year. Integration continues to progress well with no major deviations from our expectations relative to long-term potential. We see multiple pathways to grow revenue and improve profitability at Utheory. On the top line, we are focused on leveraging innovation and channel expansion opportunities across e-commerce and traditional brick-and-mortar retailers. On an annualized basis, our U.S. business is expected to deliver consistent double-digit growth. In addition, as we continue to integrate this business and align operational practices with our existing business, we expect the margin profile to improve. In China, as we move from a distributor go-to-market model to full ownership, we'll now control the entire value chain, opening up significant potential for future expansion in the second largest vitamin mineral supplement market in the world. We built a strong foundation in the country over the past five years and will now accelerate brand investments to drive growth and unlock new opportunities by engaging directly with Chinese consumers. One of these investments is our new partnership with DCP Capital, which we announced concurrently with our results today. DCP is a leading international private equity firm with a track record of success in greater China and broader Asian markets. We will work with the DCP team to leverage its deep local knowledge and network, exceptional track record of growing leading consumer and health brands, and proven operational capabilities to further strengthen our organic growth. DCP has noted that Jameson's 100-year history product quality, and reputation as a trusted brand has made it a sought-after brand in the country, and they believe strongly in our potential for growth. As part of the partnership, DCP is taking on a minority ownership position in our business in China, in addition to making an investment in the overall business of Jameson Wellness, details of which Chris will discuss a bit later. This is an exciting step in our long-term growth plan for China, as we expect it to consistently produce the highest average growth rates relative to other geographic segments, and we are all looking forward to working with DCP to achieve this accelerated growth in this key market. Finally, in our other international markets, our playbook will remain relatively consistent. We will continue to invest in marketing and innovation and leverage our strong distributor partnerships across over 45 countries and regions in existing key markets. We'll also continue to monitor the landscape for expansion potential in new markets around the world. In summary, major strategic actions defined our centennial year and have placed us in a strong position for accelerated growth as we enter another century of helping consumers around the world improve their health and wellness. The new dimensions we've added to our model, including a major platform in the U.S. and a much more forward-leaning GOAT approach in China, has transformed our business. As we enter this next stage of growth, we will continue to be focused on delivering profitable growth and driving value for all stakeholders. I also want to take a moment to thank the entire Jameson team for another successful year and for all the hard work they put into delivering 2022 and for setting us up for success in 2023 and well beyond. I am so proud of this entire team. I'm proud to work with every member of the team, and I am privileged to lead it every day. With that, I'm going to turn the call over to Chris to discuss the fourth quarter results in more detail. Chris, over to you.

Thank you, Mike, and good afternoon, everyone. In the fourth quarter, revenue increased by 48.5% to $192.8 million, driven by growth in Jameson Brands and strategic partner revenues. Jameson Brand revenues increased by 56.3% to $156 million in the fourth quarter. Utheory contributed $50.6 million of incremental branded revenue as a result of seasonally higher promotional activity offset by lower retail inventory as a specified partner reduced stock on hand in support of our 2023 innovation plans. Domestic Canadian revenue grew by $5.3 million, or 6.3%, reflecting continued consumer demand higher average retailer inventories in conjunction with a severe cold and flu season and in-year pricing. In international markets, we saw exceptional 41.5% growth in China, reflecting strong consumer demand as the COVID-19-related lockdowns were eliminated in the quarter. And our other international markets declined by 21%, driven by geopolitical and economic pressures in Eastern Europe and delayed entry into new markets. Our strategic partner revenues increased by 22.4%, or $6.7 million, reflecting pricing to maintain existing margins and volume changes of customer products. Gross profit margins decreased by 120 basis points, reflecting the impact of the lower margin profile in the acquired business in the Jameson brand segment. as well as a higher proportion of strategic partner sales. Within Jameson Brands, gross profit margins declined by 340 basis points to 41.9%, reflecting the lower gross profit margin profile of the Utheory brand. Excluding the impact of the acquisition, gross margin within the Jameson Brands segment remained relatively flat, as operating efficiencies were offset by higher facility costs from our capacity improvements in prior periods. Gross profit margin in the strategic partner segment increased by 170 basis points to 15.9%, impacted by favorable customer mix, while pricing offset increased supply chain and input costs. Selling general and administrative expenses increased $13.2 million versus last year, including $4.6 million of specified costs, mainly comprised of Utheory acquisition and our IT system development and implementation costs. Normalized for the impact of these specified costs, SG&A increased by $8.8 million versus a year ago, reflecting both baseline and additional resources in the acquired Utheory business and investments in Jameson Brands to support strategic initiatives and marketing. Fourth quarter operating income increased by 28.5% or $8.2 million due to higher contribution and our top line growth in the quarter, offset by specified cost realized for our acquisition and our IT system improvements. On a normalized basis, fourth quarter operating income increased by 46.2%. Reported EBITDA increased by 27.9%, while adjusted EBITDA increased by 44.7% to $48.9 million, driven by higher volumes, partially offset by lower operating margins. Adjusted EBITDA margin decreased by 60 basis points to 25.4%, reflecting the lower margin profile of the acquired youth theory business included in Jameson Brands. Net earnings increased by 9.4 percent to $22.1 million, and adjusted net earnings, which exclude specified costs in foreign exchange, increased by 30.6 percent to $26.8 million. Our earnings per diluted common share was 52 cents, and adjusted earnings per diluted common share was 62 cents, an 8.3 and 26.5 percent increase, respectively, compared to the prior year. A reconciliation of adjusted EBITDA and adjusted net earnings is provided at the end of today's press release announcing the company's fourth quarter results. Turning to the balance sheet and cash flow, we generated $40.8 million in cash in the quarter from operations compared to $43.3 million in the year earlier period. Cash from operations before working capital considerations was $4.5 million higher due to increased earnings in the current quarter. Cash generated from working capital increased by $1.9 million in the quarter, driven by the timing of payables and accelerated inventory purchases realized earlier in 2022. Capital expenditures of $2.6 million were relatively conservative during the quarter, and we distributed approximately $7.1 million in dividends during the quarter. We ended the fourth quarter with approximately $126.2 million in cash and available operating lines. Based on our strong cash flow position and earnings today, we have announced a dividend of 17 cents per common share. The dividend will be paid on March 15th, 2023 to common shareholders of record at the close of business on March 3rd, 2023. As Mike discussed earlier, this afternoon we announced a new partnership with DCP Capital. to help accelerate our strategic growth initiatives in China. DCP brings 30 years of successful investing, local market expertise, and consumer brand experience in China, combined with our high-quality product portfolio and industry-leading capabilities, will allow us to maximize our potential in this fast-growing market and bring us closer to a broad base of consumers in China. There are a number of components to this partnership as follows. DCP will contribute approximately $47.4 million or $35 million U.S. dollars in capital in exchange for 33.3% ownership share of our company's Chinese operations. In support of Jameson's global health and wellness strategy, DCP will subscribe for approximately $101.6 million or $75 million U.S. of preferred shares in Jameson Wellness. DCP has the option to redeem the preferred shares between the second and fifth anniversary of their purchase. Lastly, DCP will subscribe for warrants to purchase 2,527,121 common shares of the company at an exercise price equal to a 10% premium to the 20-day volume weighted average share price, subject to an adjustment pursuant to the rules of the Toronto Stock Exchange. The warrants are exercisable between the second and fifth anniversary of the date of their issue. The transactions are subject to customary closing conditions and approvals. We expect these transactions to close concurrently in the second quarter of 2023. Now turning to guidance, we are introducing our outlook for fiscal 2023 and anticipate the following. Net revenue in the range of $670 to $700 million, reflecting annual growth of 22 to 28%. Adjusted EBITDA in the range of $140 to $146 million, an increase of 13 to 18% compared to the prior year. and adjusted earnings per fully diluted common share of between $1.62 and $1.72, an increase of between 5% and 11% compared to the prior year, and including a fully diluted share count of approximately 43 million shares. Additionally, I would like to note the following guidance assumptions. Jameson brand segment revenue growth of 24% to 30%, driven by the following. an increase in Jameson Canada revenues of 3% to 6% compared with fiscal 2022, reflecting continued consumer demand, marketing plans, innovation, and the impact of prior year pricing. U Theory revenue of between $145 and $155 million, reflecting almost 12% to 19% growth on a pro forma basis, driven by product innovation, expanded e-commerce initiatives, and distribution gains in traditional accounts. An increase in China revenues of 65% to 70%, reflecting a transition to an own distribution model and the related step up in distributor pricing. This represents approximately a 25% to 30% growth on a pro forma basis. with consumer demand in cross-border e-commerce and distribution gains in domestic retail channels. Our other international revenues are expected to grow between 5 and 20%, reflecting entry into new markets and expansion across the Middle East. Strategic partner revenue growth of between 15 and 20% in fiscal 2023, reflecting new programs and the impact of pricing in that segment. and an outlook for adjusted EBITDA growth and adjusted diluted earnings per share growth as follows. On a full year basis, gross profit to remain consistent with prior year as expected declines in the Jameson Brands margin is offset by favorable consumer and product mix within the strategic partner segment. Jameson Brand margins will be approximately 100 basis points lower impacted by the inclusion of the lower margin profile of the Utheory business in the first six and a half months of 2023, and the second quarter transition to an owned distribution model in China. We expect normalized SG&A to increase by approximately 35 to 40% in fiscal 2023, reflecting the acquisition of Utheory and an accelerated investment in marketing resources and infrastructure, to support our long-term growth opportunities in both the United States and in China. Based on the margin profile and the acquired business impact in gross margins and accelerated margin investments and revenues and infrastructure primarily made to drive long-term growth in the United States and in China, adjusted EBITDA margins are expected to decline by 175 basis points in 2023. In the first quarter of 2023, we anticipate consolidated revenue in the range of approximately $120 to $130 million, reflecting branded revenue growth of between 17% and 24% and strategic partner revenue growth of 20% to 30%. We expected adjusted EBITDA in the range of between $21.5 and $22.5 million, reflecting higher volumes offset by lower adjusted EBITDA margins in the acquired business and infrastructure and resource investments required to see future growth in China and in the United States. A complete discussion of our outlook for the first quarter and full year fiscal 2023 results, as well as factors impacting our expected performances included in the outlook section of our MD&A filed this evening. Thank you for joining us this afternoon. It is a privilege to share our results and our milestones with you. And on behalf of the entire Jameson team, we continue to work together to advance our vision of improving the world's health and wellness. With that, let me turn the call over to our operator, Cynthia, for Q&A.