Jamieson Wellness Inc.

Good afternoon, ladies and gentlemen, and welcome to the Jameson Wellness Second Quarter 2023 Financial Results Conference Call. At this time, all lines are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. If you have a question, please press star then 1 to enter the queue. If at any time during this call you require immediate assistance, please press star 0 for the operator. This call is being recorded on Thursday, August 3, 2023. I would now like to turn the call over to Mike Palato, President and Chief Executive Officer. Please go ahead.

Thank you, Daryl, and good afternoon, everyone. Thanks for taking the time to join us to discuss our latest results. I'll begin with some high-level comments about the quarter and provide an overview of our key strategic initiatives. Chris will then follow with a more detailed view of the financials and provide updates on our guidance. We will then open it up for questions. In the second quarter, we continued to execute on our growth strategy and leverage our global platform to deliver another solid quarter. Total revenue increased nearly 50% to $168 million, reflecting 52% growth in our Jameson brand segment and 43% growth in our strategic partner segment. Continued strong consumption trends remain a key driver of success as consumers continue to prioritize their health and wellness. In Canada, Q2 revenues increased 2%, with consumption significantly outpacing shipments in both units and dollars. In the US, our Utheory brand drove revenue of $42 million, driven by our strong innovation plans. Additional factors that helped to propel Utheory growth in Q2 included further strength in e-commerce and some distribution expansion. Our China business unit continued to evolve this quarter. In mid-May, we completed two key strategic growth initiatives. the transition to an own distribution model in the country, enabling us full control of our value chain and future in the world's second largest vitamin mineral supplement market, as well as the closing of our partnership agreement with DCP Capital. Our Q2 revenue in China increased 63%, driven by cross-border e-commerce and new distribution, coupled with the step-up in pricing tied to the transition to our own distribution model. On a pro forma basis, our China revenue was up 21% versus prior year, and continues to reflect very strong consumer demand. Our revenue in international markets was $8 million, lower than previous year's revenue of $10 million. Factors contributing to the decline include timing of customer inventory replenishment, as well as regulatory approvals at the government level taking longer than normal in some markets due to post-pandemic related backlogs. We continue to work in these countries to get approvals through the pipeline and get our products to market as soon as we can. There remains a continued positive consumption trend across many of our international regions that we're happy with, including stabilization and growth of plus 5% in Eastern Europe. Strategic partners revenue was up 43%, driven by pricing, production capacity, and timing of orders scheduled in the prior year. Adjusted EBITDA of $31 million was up 27% versus prior year. As expected, revenue grew at a faster rate than adjusted EBITDA, reflecting strategic investments in brand building activities and our expansion in the US and China while continuing to grow our domestic leadership position. We are now more than halfway through 2023 and have made significant progress on the transformational activities we began in 2022. Our US business has continued to advance integration efforts as planned, and we continue to capture synergies we have realized from day one to continue to drive growth and profitability. We are expanding distribution and leaning into our strong innovation pipeline with the Utheory brand's first low-sugar gummy SKUs and the renovated Tumerk SKU hitting the market in Q2 and showing early positive signs of success in market. We continue to expect performance at Utheory to show steady progress over the near term, as reflected in our strong guidance for Q3 and remain committed to our long-term revenue growth and margin expansion. In China, we continue to see strong momentum in the market and we are well positioned to capitalize on the significant long-term potential with our new operating structure, which puts us in full control of our brand and the value chain. We have ample manufacturing capacity to support anticipated growth for the next several years and are leveraging DCP's deep expertise in the Chinese market to strengthen and accelerate our opportunities. In the immediate term, we continue to focus on strengthening our brand awareness and building out our on-the-ground team and infrastructure. In summary, the step change we realized in scaling our business globally over the past several quarters continues to show significant progress. All our core strategic growth initiatives are on track and our results have enabled us to once again increase our quarterly dividends. As the world continues to recalibrate post-COVID-19, we continue to monitor and adapt to this macroeconomic environment. Although we delivered another strong quarter in quarter two and consumption continues to show strength and resilience in Canada, meeting our expectations, we are starting to see some inventory adjustments at the retail level due to higher cost of capital. This combined with the post-COVID product registration backlog and a few international markets have caused us to trim the high end of our full-year guidance from plus 28% to plus 26% on revenue, and plus 18% to plus 16% on adjusted EBITDA, while still delivering a strong year of growth and a year of global transformation. We are also pleased to announce today an increase in our quarterly dividend based on continued strong results. Chris will walk us through more details shortly. In closing, our ability to navigate and deliver results in a changing post-COVID-19 environment on a global scale is a testament to the strength and resilience of our strategy and our team. I want to thank the Jamison team for their commitment and passion for helping advance our mission of becoming the world's most trusted health and wellness company and delivering another good quarter. With that, I'm going to turn the call over to Chris to discuss our second quarter results and guidance in more details. Chris, over to you.

Thank you, Mike, and good afternoon, everyone. In the second quarter, revenue increased by 49.6% to $167.6 million. driven by our youth theory acquisition and growth in both our Jameson brands and strategic partner segments. Jameson brands revenue increased by 51.5% to $132.9 million. Domestic Canadian revenue grew by 2%, reflecting strong consumer consumption, which significantly outpaced shipments in the quarter in both units and dollars as the consumer continues to be highly engaged in the category. Our youth theory segment contributed $42.1 million of branded revenue, driven by the initial shipments of our new and improved Tumorex SKU, continued strength in e-commerce, and distribution gains in the quarter. In China, our transition to an own distribution model helped drive revenue growth of 63%. On a pro forma basis, China revenue increased 21%, reflecting the timing of the transition to our own distribution model, continued strength in cross-border e-commerce, club channel sales, and new distributions in Chinese retail. In our international business unit, revenue declined by $2.2 million due to timing of customer orders for unique international SKUs, offsetting the full impact of the decline in Eastern Europe in the prior year's second quarter. Shipments in the second quarter of 2023 were impacted by the government regulatory slowdowns in a few key markets, impacting innovation in existing markets and our entry into new markets. Consumption remains strong across many geographic regions, including 5% growth in Eastern Europe. Our strategic partner business increased by 42.8%. to $34.7 million, reflecting quarter-over-quarter impact of higher pricing, timing of orders scheduled in the prior year. Gross profit margin decreased by 370 basis points on a reported basis and was down 230 points on a normalized basis, reflecting the inclusion of Ute Theory's lower gross profit margin profile on our consolidated operations. Reported gross margin included $2.3 million adjustment to increase the fair value of inventory related to our Chinese distributor acquisition and transition to our own distribution model. Within the Jameson Brands, gross profit margin declined by 580 basis points to 37.4%, or by 410 basis points on a normalized basis. to 39.1%, reflecting the inherently lower gross margin profile and seasonally high volume of U theory in the quarter. Gross profit margin in strategic partners segment increased by 310 basis points to 14.8%, reflecting customer and program mix as well as volume-driven operating efficiencies, with pricing offsetting higher input costs. Selling general and administrative expenses increased by $9.8 million compared to the prior year. Excluding the impact of specified costs and the addition of U Theory, SG&A increased by $4.9 million, or 24.5%, largely for reflecting global expansion initiatives by adding resources, marketing, and infrastructure to support our growth in the US and China. specified costs of $3.6 million in the quarter, comprised of transaction-related costs and IT system implementation expenses. Second quarter operating income increased by 27.6% to $18.6 million as a result of higher revenue and gross profit, neutralizing higher investments in SG&A. On a normalized basis, second quarter operating income increased by 25.5%, and EBITDA increased by 18.6% to $22.3 million, reflecting higher revenue gross profit, partially offset by investments in SG&A. Adjusted EBITDA increased by 27.1% to $31.1 million. Adjusted EBITDA margin decreased by 330 basis points to 18.5%, reflecting lower margin in the Jameson brand segment driven by the inclusion of E-theory. Excuse me. Net earnings decreased by 28.6% to $7.2 million and adjusted net earnings which excludes specified costs and foreign exchange increased by $13.6 million. Our earnings per diluted common share was 17 cents and adjusted earnings per diluted common share was 32 cents. flat compared to the prior year, as increased net earnings has been impacted by the additional borrowings in support of our U-theory and distributor acquisitions, plus higher prevailing interest rates and the timing of cash flows associated with our DCP partnership in the quarter. A reconciliation of adjusted EBITDA and adjusted net earnings is provided in today's press release, announcing our second quarter results. Turning to the balance sheet and cash flows, We generated $11.7 million in cash from operations in the quarter compared to $13.3 million in the prior year. Cash from operations before working capital considerations was $4.2 million lower due to a decrease in earnings, including the realized acquisition and system improvement costs previously mentioned. Cash invested in working capital decreased by $2.5 million in the quarter driven by the timing of counts receivable collection and changes in payables in the quarter. In the quarter, we invested $25.8 million to acquire certain assets of our former distribution partner in China and invested $2.8 million in other capital and intangible expenditures. We distributed approximately $7.1 million in dividends, and we ended the quarter with approximately $246.2 million in cash and available operating lines. Based on our strong cash flow position and earnings today, we have announced a dividend of $0.19 per common share, or approximately $8 million in aggregate. This represents a $0.02 or 11.8% increase compared to the second quarter dividend. The dividend will be paid on September 15, 2023, two common shareholders of record at the close of business on September 1st, 2023. Now turning to guidance. Consumer consumption continues to be strong across the organization, and we are maintaining our previous growth expectations within our most strategic growth pillars in the United States and China. In Canada, consumer consumption of more than 8% year date continues to outpace shipments while retailers have begun to reduce their investments in working capital. With lower shipments in Canada and regulatory timing impacting our international business, we have decided to trim the top end of our revenue and adjusted EBITDA guidance ranges. For fiscal 2023, we now anticipate the following. Net revenue in the range of $670 to $690 million. reflecting annual revenue growth of 22 to 26% compared to our previous range of $670 to $700 million. Adjusted EBITDA in the range of $440 to $144 million, an increase of 13 to 16% from a previous guided range of $140 to $146 million. And adjusted earnings portfolio to common share of $1.56 to $1.63 compared to a previous range of $1.62 to $1.72, reflecting the anticipated change in adjusted EBITDA and our revised interest expectations due to higher prevailing interest rates and the timing of funds received from our partnership in China. Additionally, I would like to note the following guidance assumptions. Jameson Brand segment revenue growth of 24% to 28%, compared to our previous range of 24% to 30%, driven by the following updates. An increase in Jameson Canada revenues of 2% to 4%, compared to our previous stated range of 3% to 6% growth, reflecting continued consumer demand, marketing plans, innovation, and the impact of prior year pricing. These growth drivers are offset by reduced inventory levels within our customers and distributor partners as they lower working capital investment in response to higher costs of capital. International revenue expected to be flat or up to 10% growth from our previous stated range of 5 to 20% growth, reflecting a post-COVID-19 government slowdown of processing product registrations in new and existing markets. Our revised outlook continues to be driven by marketing, innovation, and the timing of distribution into new markets. Consumer consumption remains strong in Canada and in the United States, and as such, our guidance remains unchanged at 25% to 30% pro forma growth in China and 11.5% to 19% growth on a pro forma basis in the United States. Normalized SG&A, including marketing expenses, are expected to increase 31 to 35 percent, updated from our previous guidance range of 35 to 40 percent, reflecting the prioritization of brand and resource investments. Full-year growth is based on the acquisition of youth theory and an accelerated investment in marketing resources and infrastructure spending. to support long term growth opportunities in the United States and in China. A complete discussion of our third quarter and full year fiscal 2023 outlook, as well as factors impacting our expected performance, are included in the outlook section of our MD&A filed this afternoon. In closing, I would like to thank the entire Jamieson Wellness team for their continued commitment and hard work as we continue to deliver high quality brands that consumers trust while executing on our strategic plans. With that, let me turn the call back to our operator, Darrell, for Q&A.