Jamieson Wellness Inc

TSX:JWEL

Earnings Call Transcript 2018-Q2

[Operator]

Good day, ladies and gentlemen. Welcome to the Jamieson Wellness Conference Call to discuss financial results for the second quarter of 2018. [Operator Instructions] Please be advised that reproduction of this call in whole or in part is not permitted without the written authorization from the company. As a reminder, today's call is being recorded. On the call today from management are Mark Hornick, President and Chief Executive Officer; and Chris Snowden, Chief Financial Officer and Corporate Secretary. Before I turn the call over to Mr. Hornick, please note that a press release covering the company's second quarter 2018 financial results was issued this afternoon, and a copy of that press release can be found in the Investor Relations section of 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 Jamieson's press release issued this afternoon and in filings with the Canadian securities administrators for more detailed discussions 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 may be required under applicable security laws. Finally, we would like to remind listeners that the company may refer to certain non-IFRS financial measures during the teleconference. A reconciliation of these non-IFRS financial measures was included in 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 would now like to turn the call over to Mr. Hornick to get started. Please go ahead, sir.

[Mark Hornick, President, CEO & Director]

Thanks, [ Devon ]. Good afternoon, everybody. It's my pleasure to speak with you today. We're pleased to report another quarter of revenue growth led by significant sales momentum for our international brand, and very robust Strategic Partner revenue as well. As we announced today, we have received our first Orange Hat product approval in China and are expecting to see incremental approvals later this year. We've also registered a legal entity in China to expand our go-to-market strategy with our global partners. Given the international strength and continued strong business trends, we are raising our 2018 revenue outlook, as Chris will discuss in a moment. Let me run you through the quarterly highlights. So, second quarter revenue increased 8%. As I noted, the growth was driven by strong international sales, which grew 79% versus prior year, along with a 27% increase in Strategic Partner revenue. While we continue to track very favorable consumer sales in Canada, reported branded revenue was modestly below last year in Q2, as consumer purchases have significantly outpaced shipments, which has led to a decline in retailer inventory. This is normal in our business from time to time, and we continue to be fully confident in our year growth projections, as our year-to-date consumer purchases from our food, drug and mass partners are tracking ahead of expectations versus prior year. We anticipate distributor and retailer inventory level to normalize over the coming 2 quarters, which should alleviate the timing issue that's impacted the second quarter domestic branded sales.In the Health Food channel, we saw some improvement during the quarter, following the consolidation of our salesforce and distribution operations over the past 6 months. Our integration process is now complete, and we've turned our attention to continuous innovation and expanded distribution for our Health Food brand. We're also pleased with the performance of our Essentials plus Protein launch during this quarter, which has fully met our innovation sales and contribution expectations.It's been a year since our IPO, so I'd like to take a moment to address our dividend policy. I'm pleased to announce a 12.5% increase in our quarterly dividend, from $0.08 to $0.09 a share. This reflects our continued confidence in achieving our business objectives, including a strong level of projected free cash flow that enables us to fund the increase with no material impact to our future capital allocation options.Let me take a moment to expand on the trends we're seeing internationally and the enhanced efforts we have announced in China. As we noted at the beginning of the year, we have been very encouraged by the number of international growth opportunities we have for 2018. We're currently exploring several new geographies, including opportunities in markets such as Mexico, India, and Southeast Asia. But in particular, let me highlight China. So we're very pleased to report that we've received our first Orange Hat registration certification from China's Food and Drug Administration. This, along with our 3 existing Blue Hat registrations, provides the opportunity for Jamieson to launch into both the Chinese domestic e-commerce and Chinese domestic retail channels. The completion of our first Orange Hat registration is also expected to allow us to accelerate future registration, shortening the application and approval timeline. We anticipate having up to 20 Orange Hat registrations by the end of 2019, and to support this growing opportunity, we've extended our distribution agreement with our long-term partner for an additional 5 years, which incidentally includes the right for Jamieson to acquire that distributor at the end of the agreement.Our Chinese partner maintains the exclusive right during this time to distribute Jamieson-owned brands through cross-border e-commerce, as well as domestic and online channels.In addition, we've established our fully-owned foreign entity in China, now to better service global retail partners currently excluded from our Chinese distribution license. We've secured office and warehousing space in Shanghai and we're currently recruiting for general management and quality positions at this location in order to support our initiatives in China.To give you a reference point, to date our distributor has been selling 50 Canadian-made products in China through the cross-border e-commerce channel, which is, as we've mentioned before, basically a virtual duty-free store. We can now enter the much larger domestic market, both online and at retail, as well as selling to global players directly from our Chinese operation. This significantly expands our future opportunity in China and is consistent with our long-term international growth strategy. We look forward to updating you as the market develops.With that, let me turn the call over to Chris to discuss the second quarter financials in greater detail.

[Christopher Snowden, CFO & Corporate Secretary]

Thank you very much, Mark, and good afternoon, everyone. We remain pleased with the underlying trends in the business and anticipate strong growth in the second half of 2018. Let me run through the financial highlights. Revenue increased 8.2% to $77.1 million, driven by growth in our Jamieson brands and Strategic Partner segments. By segments, Jamieson brands revenue increased 3.5% to $58.6 million. As Mark mentioned, we had a very strong quarter in international, with revenues increasing 79.2%, led by growth in Asia from both new and existing markets, and offsetting the impact of timing in Q1.Domestic branded volumes were impacted by the timing of shipments, as Mark noted, and we anticipate sales growth to normalize in the second half of the year. Innovation contributed $1.5 million in sales, as Essentials plus Protein continued to expand distribution after initial shipments in the first quarter.Revenue in our Strategic Partners segment increased 26.6% to $18.5 million. This increase was primarily due to the timing of expanded activity from existing Strategic Partners, partially offset by volume transition from another partner who previously acquired manufacturing capabilities in order to bring volume in house.As we noted last quarter, our Strategic Partner production cycle and shipment cycle is dependent on our customers' sales and inventory management cycles. As such, these sales can be very lumpy quarter to quarter, as we've seen with the decline in the first quarter followed by growth in the second quarter.Total gross profit increased 4% to $26.3 million, and gross margin decreased 130 basis points to 34.2%. A decrease in gross margin percentage was primarily driven by sales mix, impact of higher strategic partner volumes in the quarter. By segment, gross margin increased 140 basis points year-over-year in Jamieson brands, primarily due to last year's amortization of inventory adjustments from our acquisition early in 2017. In the Strategic Partners segment, gross margin declined by 830 basis points year-over-year, as last year Strategic Partner gross margin benefitted from favorable pricing and margins on specific products produced for our partner during the first half of 2017. This was not expected to continue in 2018. This change is expected to impact our strategic partner margins by approximately 300 basis points annually compared to 2017, and was factored in to our initial 2018 guidance.Selling general and administrative expenses increased 19.9% to $15.8 million. The increase in SG&A was as a result of $600,000 in public company costs, $500,000 shift in marketing to support the launch of our Jamieson Essentials plus Protein, and $1.4 million in nonrecurring costs associated with Health Food business integration, professional fees, and international market expansion.Excluding nonrecurring costs, SG&A as a percentage of revenue would have been consistent with prior year, at 18.6%, notwithstanding the planned SG&A increase in the current year related to public company costs and the timing of our marketing spend.Operating income decreased 4.9% and operating margin decreased 180 basis points to 13.2%. Operating margin for Jamieson brands was consistent with prior year, at 15.3%, due to the 140-basis-point increase in segment gross margin, partially offset by planned increases in SG&A.Operating margin for strategic partners decreased 800 basis points to 6.4% as a result of the decrease in profit margin previously mentioned, partially offset by lower SG&A expense as a percentage of revenue. Adjusted EBITDA decreased 6.1% to $14.2 million, and adjusted EBITDA margin decreased 280 basis points to 18.4% due to the proportion of strategic partner volumes and timing of domestic branded sales during the quarter.Interest expense and financing costs were $2.2 million in the quarter compared to $8.1 million of income in the prior year's quarter. The difference was primarily due to the discharge of our note payable to Jamieson Finco, and the company's pre-IPO reorganization in the second quarter of 2017, combined with lower borrowing levels in the second quarter of 2018. Our reported net income was $4.8 million in the second quarter compared to a net loss of $7 million in the prior year. On adjusted basis, net income decreased 12.3% year-over-year to $6.9 million, or $0.17 of diluted EPS. The adjustments to net income in the current quarter include $0.2 million of foreign exchange, $1 million of termination benefits related to the cost associated with the integration of our Body Plus and LVHS operations, $1.1 million of nonrecurring business integration costs associated with the Health Food channel integration, and $500,000 in other expenses, including the costs for international market expansion, as well as $800,000 in related tax effects.Turning to the balance sheet, in cash flow we generated $8.5 million in cash from operations during the second quarter, compared to generating $3.1 million in cash in the prior year. The key driver was cash -- of change was cash used in working capital, partially offset by cash generated in operating activities before working capital. Capital expenditures during the second quarter were $2.5 million, mainly for capacity expansion, and we paid $3 million in dividends in the quarter.We ended the quarter with $7.5 million in cash and equivalents and total debt of $173.1 million, and had almost $31 million in available cash for our revolving lines.Now let me turn to guidance. We are increasing our 2018 revenue outlook while maintaining our prior ranges for adjusted EBITDA and EPS. We anticipate the following. Net revenue in the range of $330 million to $340 million, up from $325 million to $335 previously. The revenue guidance reflects stronger sales to strategic partners and higher international revenue growth, and strong growth in sales of Jamieson-branded products and our Canadian food, drug and mass customers. Adjusted EBITDA in the range of $67 million to $69 million, and earnings per fully diluted share in the range of $0.83 to $0.87. We have maintained both our adjusted EBITDA and EPS guidance, as we plan to invest contribution generated from higher sales to support our e-commerce initiatives and international growth, particularly with our new go-to-market operations in China. Additionally, I'd like to note some additional assumptions for modeling. Our revenue range is now based upon the assumption of CAD 1.30 per USD exchange rate. Please note that the higher U.S. dollar is expected to positively impact international sales in both segments, offset by an [ equal ] increase in input costs with minimal impact on gross margin and EBITDA as a result of our U.S. dollar hedging programs.We continue estimate a fully diluted share count of approximately $39.8 million, and we anticipate 2018 interest expense in the range of approximately $9 million to $9.5 million, which provides room for potentially higher borrowing rates at the end of 2018. Finally, we are assuming an income tax rate of approximately 28%.With that, I would like to turn the call back to the operator for Q&A.

[Operator]

[Operator Instructions] Our first question comes from the line of Peter Sklar with BMO Capital Markets.

[Peter Sklar, Analyst]

This decline you had in your domestic brand business, could you explain that a little further? You talked about purchases outpacing shipments. It's not quite clear to me.

[Mark Hornick, President, CEO & Director]

It's simply a function of the regular lumpiness that we have from time to time with the delay between consumer sales and inventory replenishment in retail. Maybe for people who are new on the call, we don't sell directly to the consumer, we sell through distributors, wholesalers, and then finally retailers, and they order in chunks. And so, we typically experience lumpiness, we would call it, when it comes to the flow of sales as they relate to consumer purchases. So to give you some color context, our consumer sell out, the store retailer selling direct to the consumer of Jamieson products, that level of sales is higher than we would have expected year-to-date, significantly higher I would say. And as a result, there's been a lag factor in catching up with shipments, and so retailer inventories have been reduced. Based on the pace of those consumer sales, which are largely impacted by our marketing efforts, which have been pretty successful year-to-date, we see then that inventory catching up in Q3 and Q4. Just to give you some color on that, just as, you know, with international in the quarter up 79% and Strategic Partners are up 27%, so that's an example of lumpiness. In July, our domestic branded Jamieson sales are up 30% in the month, indicating, as we said, the trend for retailer inventories to match back up to consumer sales over time. So that's what we're really trying to say, is that this is a timing issue. It's normal for our business and it's not a concern for us at this time.

[Peter Sklar, Analyst]

So when you say sales are up 30%, is that the retailer sales or your sales?

[Mark Hornick, President, CEO & Director]

That's the shipments, so that's an example of the shipments catching up to the sell out by the retailers, and retailers ordering in inventory to replenish their stock.

[Peter Sklar, Analyst]

Yeah. And how do you know? Like you know what your shipments are, but how would you know what your retailer sales are and how do you know that their sales are --

[Mark Hornick, President, CEO & Director]

We have a database that we collect the retailer sell out with a 2-week lag, or about 80% of all the retail sales in Canada, and we report that by retailer by SKU to ourselves on a weekly basis. We also then buy AC Nielsen data to complement that, which also gives us the sales of our competitors as well. So when we look at the whole picture, we're pleased with the evolution of the brand. We're fully committed to our guidance for 2018, and I can tell you that our Jamieson domestic brand has never been in better shape than it is now.

[Peter Sklar, Analyst]

Okay. Last question. On the Orange Hat certification, so let's say your plan does unfold and you do have 20 Orange Hat certifications by the end of next year. From a practical perspective, what does that mean when it comes to sales?

[Mark Hornick, President, CEO & Director]

So, we need to evaluate through in-market experience how the Chinese consumer now is going to gravitate to our new products. So these will be brand-new products for the Chinese consumer, and incidentally, we could have received the first Orange Hat of any company globally. Based on the data we have, that seems to be the case.So it'll be an initial period of really learning and seeing how the Chinese consumer reacts to these new products and our marketing efforts, so it's difficult at this time to say what that sales trajectory will be. But as we gain the in-market experience from it, then we'll of course have a better idea, then we can give you guidance on that. But all we can say right now is that it's fully in line with our strategy to expand our brand in China. We're really pleased with being able to receive this first certification. It would indicate now that our future certification should go quicker and a lot smoothly as we work through the process and gain credibility with China FDA. And so, now it's a matter of getting through the certification process quickly, getting these products into the market, and getting the learnings. But we're very optimistic about what this means for the future of the brand.

[Peter Sklar, Analyst]

Mark, I take it, though, that the Jamieson brand has no consumer awareness in China, so I would think it would be a very slow ramp, because you have to develop a brand in the country.

[Mark Hornick, President, CEO & Director]

Well, interestingly enough, Peter, we have been in the Chinese market in major cities, so what we would call tier 1 and tier 2 cities. So those are cities with more than 10 million inhabitants, which gives you a significant access to the economic demographics of people that would be predisposed to buy a foreign brand. So we've been there 15 years, and we did a market survey 2 years ago, and our brand awareness in those cities is over 20%, which puts us in the realm of a top-5 international brand. And on top of that, amongst our users, we have the highest propensity or net promoter score for someone using our product to then recommend it to someone else.And so, for consumers who are using our product, which there's a significant number, they also have a very high propensity to recommend it to someone else. So we're actually in a pretty good situation overall to expand the brand, and we have more awareness [indiscernible] than you would think.

[Peter Sklar, Analyst]

Yeah, but if you didn't have your Orange Hat, what was the basis on which -- or your Blue Hat, what's the basis on which you were selling in China with their different regulations?

[Mark Hornick, President, CEO & Director]

Yes. So, we had been in the bricks-and-mortar retailers and on domestic e-commerce prior to 2015. But I would say probably in and out. The regulations in China have changed several times, and so we had periods where we were distributed and periods where we were not, similar to our international competition. And so, since 2015, no international brand without a registration has been able to sell in either the domestic e-commerce or the domestic bricks-and-mortar. So this now represents the first new products that can now be marketed in those channels. And so, we are pretty excited to have if not the first, amongst the first one approved.

[Operator]

Our next question comes from the line of Sabahat Khan with RBC Capital Markets.

[Sabahat Khan, Analyst]

Just following up on some of the China questions. I guess once you do get the approvals, at least in the domestic brick-and-mortar channel, how does it work in terms of getting listings? Are you already in discussions for listings? Is that something your distributor's working on, just getting these products on shelves.

[Mark Hornick, President, CEO & Director]

Exactly what you're saying, Sabahat. So, the advantage we have is that the majority of these retailers have stocked Jamieson brand in the past, and they're familiar with the brand. Our distribution partner will now begin marketing the brand for relaunch to all of those partners. We will produce the Orange Hat product this quarter, and we will ship it to China. It will begin distribution in Q4. And then as products become available with further and further Orange Hat registrations, we will add them to the portfolio and they'll get distributed into the market.Our distribution partner has very good capabilities for both bricks-and-mortar and e-commerce. They have [indiscernible] arms to their distribution company, both of which have some significant experience. And the distribution partners themselves have an excellent reputation in the marketplace. And so, we anticipate that, although we'll have to work through the normal Chinese retail process, we should be well positioned to be able to get the products redistributed in bricks-and-mortar in short order.

[Sabahat Khan, Analyst]

And then if I recall correctly, maybe in the regulatory chain, the products were still being sold through the cross-border e-commerce channel, correct?

[Mark Hornick, President, CEO & Director]

Yeah, but it's going to be a different set of products. So, through the cross-border e-commerce, those are Canadian products that comply to Canadian standards that are sold through the cross-border e-commerce. Orange Hats are formulated products to meet Chinese regulations, so they are unique. They carry a symbol on them that looks like an Orange Hat, similar to the Blue Hat, and they are specific to the Chinese market. So those are new products.They're going to be significantly lower cost to the Chinese consumer, but they are significantly lower potency as well. So I'll give you an example. So we currently sell vitamin C 500 milligrams through cross-border e-commerce. Our vitamin C that we're selling through Orange Hat is 40 milligrams. So, the product is lower potency, but it's a lower price as well, which should give us access to a much larger segment of the market with the Chinese formulated product. But that remains to be seen once we get some experience in the market. Again, we've never launched a product like this before, so it's early days.

[Sabahat Khan, Analyst]

Okay, and then just on the line of kind of cost and revenue. How are you thinking about the margin profile buildup in China? I guess you're investing somewhat in that market, but you're also going through a distributor, so maybe you don't need to put up a big I guess infrastructure there. Should we assume contribution starting in I guess at some point 2019 to the EBITDA line as well, or how do you see the margins ramping up in that market over the next few years?

[Christopher Snowden, CFO & Corporate Secretary]

All of our incremental sales into China will be margin-accretive, both from an EBITDA and a contribution -- well, maybe not a gross profit perspective, but certainly from an EBITDA perspective. The fixed cost, we'll disclose in our SG&A [ roles ] if they become material, so you'll be able to parse out the key numbers as we move forward.

[Sabahat Khan, Analyst]

Okay, and then just kind of along those lines, in terms of CapEx, how are you thinking about CapEx for kind of the next few years in terms of establishing this platform? Should we still think in the $6 million to $7 million range, or is that higher now?

[Christopher Snowden, CFO & Corporate Secretary]

Yeah, I think we're going to probably end the year closer to $9 million or $10 million. We're going to accelerate our capacity expansion plans over the next couple of years to ensure that we've got the capacity available to distribute internationally in a bigger way.

[Sabahat Khan, Analyst]

Okay, and then just one last one for me. On the branded shift of sales, was that a particular product or a particular customer, or was it broad-based?

[Mark Hornick, President, CEO & Director]

It's broad-based, particularly in wholesalers. But it was broad-based.

[Operator]

Our next question comes from the line of Lennox Gibbs from TD Securities.

[Lennox Gibbs, Research Analyst]

So with respect to the domestic brand performance on the quarter, what I think I'm understanding is that it was inefficient inventory management at your retail partners or wholesalers that created the drag. The question is, is this a standard level of inefficiency or choppiness that we should expect going forward? That's the first question. And then secondly, if you could share what level of visibility you have into the inventory management strategies at the retailers and wholesalers.

[Mark Hornick, President, CEO & Director]

So, given that our retail partners and our wholesalers carry a fairly significant level of inventory, they themselves would probably not see this as any kind of big deal. So, for them, they would say to us that we are selling ahead of their expectations. The inventory had declined a little quicker than they thought, so they're going to reorder and get themselves back to their normal levels across the product. And for them, given the shelf life on our products as well as the sales, this is not something that to them is of material concern. And as I've mentioned, we've already seen a lot of this volume coming back in in July as the cycle kind of corrects itself.Just to reiterate, this does happen frequently. Neither our wholesalers nor our retailers manage things so tightly quarter to quarter that this for them is a major issue. And so, for them when they see the levels of inventory dropping below their normal safety stock levels, they just increase their orders. So it is very much -- the ebb and flow of this is very much a part of the legacy nature of our business. And through the IPO process as well as through getting to know investors as well as analysts, we've kind of tried to reiterate this, that our business is very predictable from an annual basis, but it is not as predictable from a quarter-to-quarter basis. For us, we have contracts with our distributors, our wholesalers, and we have joint business planning objectives with our key retailers, all of which allow both us and them to make sure that the business is managed well from an annual basis. But the quarter-to-quarter flow of inventory and sales can be lumpy. In this particular case, we're selling ahead of our expectations, which is great news. They need to catch up with their inventory, and all indications are they're going to do that.

[Lennox Gibbs, Research Analyst]

Is there ever any sort of a seasonal overlay to that, just in terms of how we might think or what we might expect going forward?

[Mark Hornick, President, CEO & Director]

In terms of the lumpiness part?

[Lennox Gibbs, Research Analyst]

Yes, yes. I understand it's not the case this go-around, but generally --

[Mark Hornick, President, CEO & Director]

It does happen frequently. I'm just looking at [indiscernible].

[Christopher Snowden, CFO & Corporate Secretary]

Normally, from innovation, we would ship ahead of shipments. And in this case, we delivered $1.5 million of innovation and delivered behind shipment. So typically in Q1 and Q2, we would be shipping ahead of POS, and that would normalize through the rest of the year because of the innovation calendar. In this particular case, even with our front half innovation, we are behind shipments from a consumer sales perspective.

[Mark Hornick, President, CEO & Director]

Yeah, and I'm just trying to think, Lennox, in terms of your question about the predictability, there's not really a pattern to it. It just happens from time to time. And it could happen both ways, so sometimes they can take on too much inventory and then our sales would lag and then that corrects in the next quarter. So, for us, so I could tell you as pretty tight managers of this business, based on what we're seeing and with the strength of our sellout to the consumer, for us, this lumpiness in this quarter is a normal day-to-day business thing and it's not a concern.

[Operator]

[Operator Instructions] Our next question comes from the line of George Doumet with Scotiabank.

[George Doumet, Analyst]

Maybe looking at this thing from an EBITDA margin standpoint, I think we're just above 18% year-to-date. The guidance I think implies 20% or so at the midpoint level, at least the new guidance. That's about just under 200 basis points of expansion. Could you maybe help us understand the buckets there over the next couple quarters and maybe a timing as to when we expect that margin to improve?

[Christopher Snowden, CFO & Corporate Secretary]

Yeah, so it really revolves around the fact that the seasonal volume impact of the amount of product delivered in the third and fourth quarter. As you add volume to our existing infrastructure, that SG&A as a percentage of overall revenue significantly declines. So if you look at the quarterly progression last year, we're not far off that same track this year, excluding the impact from a Strategic Partner perspective that was expected to impact the first half of 2018.So you'll see in Q3 and Q4 margins that exceed from an EBITDA perspective that target 21% full-year margin amount. Q4 is typically always our highest EBITDA margin quarter because it is our highest volume quarter.

[George Doumet, Analyst]

Okay, great. So from a seasonality standpoint, you would expect Q4 to be a lot bigger than Q3.

[Mark Hornick, President, CEO & Director]

Yeah, if you go through our historical results, you'll see that that's the case, that it's fairly significant.

[George Doumet, Analyst]

Okay, great. And just kind of shifting over to China, just wondering about your expectations around those 20 Orange Hat approvals, how you expect them kind of to trickle through. Are they going to be mainly at the end of 2019, or just kind of the progression you expect to get those approvals.

[Mark Hornick, President, CEO & Director]

Well, based on the way we submit them, we would hope that we would get kind of an orderly flow. And they can only evaluate so many things at once. The procedure is quite significant, so beyond the paperwork we ship hundreds of samples of each product to China FDA for evaluation, so it does take them some time. But given the pace, we would expect that by the end of 2019 that we would have about 20 products approved, and that should be a fairly kind of one-by-one [indiscernible].

[Christopher Snowden, CFO & Corporate Secretary]

Yeah, we have about another half dozen going in for certification now, so we expect the next time we talk about this, we'll have more than -- it's not going to be every month, we get 1. They should come in batches. But we've never been through the process other than the 1, so it's a learning process for everyone.

[George Doumet, Analyst]

Great. And one last one if I may. Looks like we'll be [indiscernible] the year just under 2.5 turns of leverage based on your current guidance. Could you maybe remind us of your comfort zone and kind of what your preference is right now from a capital deployment standpoint?

[Christopher Snowden, CFO & Corporate Secretary]

So, given with the dividend increase in the quarter, we're going to be paying out approximately 40% of our normalized cash flow from operations this year. Our target payout ratio is going to be between 30% and 40%, and that saves a significant amount of free cash flow to invest in capital, as well as to pay down debt and de-lever. We want to keep our balance sheet relatively clean if that golden M&A opportunity were to come about, but in terms of de-leveraging, if we get too de-levered without an M&A opportunity, then we'll look at other ways to return capital to shareholders. Whether it's an accelerated dividend or a special dividend or a share buyback, we're open to a number of different ways.

[Operator]

Our next question comes from the line of Endri Leno with National Bank.

[Endri Leno, Associate]

First one, it's on the CapEx. You mentioned that you expect a bit of a tick-up to $9 million to $10 million for 2018, and is that something to look at going forward as well, or do you expect to revert to the $7 million say for 2019 or even beyond that?

[Christopher Snowden, CFO & Corporate Secretary]

Yeah, if I look at that 5-year trajectory of $6 million to $7 million over the 5 years, that total number is still what we're targeting. We're just going to accelerate some of our capacity expansion capital into the next three years to get ahead of the demand, and that way that'll allow us to monopolize on any international growth opportunities as they come our way so that we have the capacity available to satisfy.

[Endri Leno, Associate]

Great, thanks. And you mentioned an investment into expand e-commerce infrastructure investment. Can you expand on that a little bit? Is it more for Canada or international or China, or what's your thoughts on that?

[Mark Hornick, President, CEO & Director]

It's about what is the best way for the Jamieson and our Health Food brands to reach the consumers through the e-commerce channel. So, that's anything from how do we partner with the existing e-commerce sites in order to optimize the consumer purchase experience of the Jamieson brand, how do we establish Jamieson and other brands on new e-commerce sites or in new markets where we may elect to skip the bricks-and-mortar route and go straight to e-commerce in order to have a much more efficient trial and awareness building strategy, as well as how do we make sure that our website and our digital communication efforts in Canada are optimized to be able to reach our consumers. And so, that whole package of opportunity is what we are looking at in terms of ramping up our e-commerce efforts. We've hired a new VP of e-commerce, who has a very significant pedigree of e-commerce experience. His name is Matt Nelson. He was the chief e-commerce officer of Canada Goose, Sears Canada, Hudson Bay. He's got significant e-commerce experience over the past 20 years and so we've acquired his talents in order to help shape our go-to-market e-commerce approach to optimize the growth of the brand.

[Endri Leno, Associate]

Great. Thanks very much for that. Just next question is the relation to China. So I was wondering when does the extended distribution agreement end, how established is the distributor there, what type of other product do they distribute, and finally on that, does the acquisition option have any predetermined multiples at this time?

[Christopher Snowden, CFO & Corporate Secretary]

So it's 5 years, starting at the beginning of 2018, so the end of 2022 I believe is the end of the agreement. We're not disclosing the terms of a buyout at this point in time. It is an option, so we will evaluate that when the time comes. What was the other part of the question?

[Endri Leno, Associate]

How long have they been in business, what else do they do.

[Christopher Snowden, CFO & Corporate Secretary]

Oh, so they've been our partner for more than 5 years now, I think 6 years in China. They have taken over from another partner that previously represented the Jamieson brand. They have a full-on infrastructure of -- do you know how many employees? Is it like 30 employees?

[Mark Hornick, President, CEO & Director]

Just dedicated to Jamieson.

[Christopher Snowden, CFO & Corporate Secretary]

Yeah, it's like 30 employees -- my estimate is about 30 employees dedicated to the Jamieson brand, and right now that's focused on e-commerce or the cross-border e-commerce channel. But they have previously represented us in the offline channels prior to the change in regulation, and do have relationships with those bricks-and-mortar retailers as well.

[Mark Hornick, President, CEO & Director]

But they are a subsidiary of a public company in China, but their people only deal with Jamieson.

[Endri Leno, Associate]

Okay, thank you. And the last question, you mentioned that you had established a wholly-owned foreign entity to service global retail partners. Can you expand on that a little bit? Like which ones would be excluded from the [indiscernible] distribution agreements and what does it encompass?

[Christopher Snowden, CFO & Corporate Secretary]

So there are a couple of retailers that we deal with that are global in nature, and that global relationship supersedes our distribution relationship in China. So that component is scoped out. Can't tell you exactly who that is, but suffice to say that we are -- in servicing that agreement, we need to sell to them directly in China, and that requires us to have a Chinese legal entity and a Chinese operation to satisfy those requirements.

[Mark Hornick, President, CEO & Director]

And suffice to say that we believe the opportunity long term is sizable enough that we would go through the mechanics of getting all this set up.

[Operator]

Ladies and gentlemen, this concludes our question-and-answer session, and I would like to turn the call over back to Mr. Mark Hornick for closing remarks.

[Mark Hornick, President, CEO & Director]

Okay, thanks, [ Devon ]. Thanks very much for joining us, everyone, to discuss our second quarter results. As you've heard, we remain very confident in our positioning in the Canadian and global VMS industry and are very confident in our 95-year history of focusing on improving the world's health and wellness. It's that focus that continues to drive our business and build value for our shareholders. We look forward to speaking with you on the next earnings call. Thanks very much.

[Operator]

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.