Jamieson Wellness Inc

TSX:JWEL

Earnings Call Transcript 2022-Q2

[Operator]

Good afternoon, everyone, and welcome to the Jamieson Wellness conference call to discuss the financial results for the second quarter of 2022. [Operator Instructions] 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 second quarter 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 a more detailed discussion of the factors that could cause actual results to differ materially from the 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 occasionally rounded to the nearest million.

I will now turn the call over to Mr. Pilato to get started. Please go ahead, sir.

[Michael Pilato, executive]

Thank you, Melinda, and good afternoon, everyone. Thanks for taking the time to join us today to discuss our second quarter financial results. I'll begin with some high-level comments about our business, provide a brief overview of our second quarter results and close with additional thoughts on the youtheory acquisition, before turning it over to Chris for more details.

We are very pleased with our second quarter results as we again delivered on our commitments and strategic priorities in the face of a volatile geopolitical and economic environment, including closing on a transformational acquisition with the youtheory brand. The operational excellence, flexibility and speed which we have embedded through our culture continues to drive this forward during these unprecedented times, and I continue to be impressed and thankful for our team's hard work and dedication.

Total revenue of CAD 112 million was up over 1%, driven by 6.5% of branded growth and led by a plus 8% increase in our domestic branded revenue. Adjusted EBITDA was up almost 10% to CAD 24 million. Strong demand remains the key driver for our domestic branded business as consumers continue to prioritize health and wellness based on strong point of purchase activity. International branded revenues were consistent with prior year and saw continued growth in China despite recent lockdowns, offset by softness in Eastern European -- Europe as consumers purchase patterns shifted in countries neighboring the Ukraine.

As anticipated, Strategic Partners revenue decreased almost 14%, reflecting the timing of orders, while lapping a significant plus 49% increase in last year's second quarter. Gross margin increased 160 basis points on a normalized basis, led by segment mix and branded margin improvement, which Chris will talk about. We have increased our outlook for 2022 to reflect the impact of the youtheory acquisition that closed on July 19. Our top and bottom line expectations for the core Jamieson business are largely unchanged despite current market volatility. Higher growth assumptions for our domestic branded business have offset slightly lower expectations for international revenue as conditions in Eastern Europe are expected to remain challenging due to the economic and geopolitical situation there.

The addition youtheory is a major strategic milestone for Jamieson Wellness, so I do want to spend a few minutes providing a deeper overview. First and foremost, I want to once again welcome the youtheory team to the Jamieson Wellness organization. It has been a pleasure getting to know everyone, and it is already evident that we have so much we can learn from each other over the weeks and months ahead. This acquisition creates a strategic platform for expansion in the United States, the world's largest vitamin market. youtheory has a strong and growing presence that will be amplified by our scale, our consumer insights and our operational excellence. The youtheory brand occupies a premium position in the market with a product assortment that is innovation-driven and highly complementary to the Jamieson Brands portfolio.

From a cultural standpoint, youtheory is also closely aligned with Jamieson's values with a strong commitment to quality, emphasizing the purest ingredients along with maintaining rigorous standards of production. The acquisition also provides us with another state-of-the-art manufacturing facility with available capacity that will further enhance our overall capabilities, including 2-piece encapsulation and sample pouch packaging.

Channel expansion and diversification is another benefit of this transaction as youtheory has very strong momentum in club and specialty channels and is poised for growth in food, drug, mass and e-commerce. We'll be able to leverage Jamieson's product portfolio, innovation expertise, consumer insights and commercial expertise to accelerate growth in the United States. In addition to this U.S. opportunity, there is significant potential to leverage Jamieson's regulatory expertise and distribution partnerships to grow the youtheory brand internationally in all of our global -- in our global countries. Long term, we expect to realize future synergies by leveraging our combined capabilities across manufacturing, procurement, innovation and e-commerce. And finally, the transaction is highly accretive, with youtheory expected to contribute revenue of CAD 66 million to CAD 74 million in fiscal 2022 and adjusted EBITDA of CAD 12 million to CAD 13 million.

In summary, our business continues to perform well, and we are well positioned for the future with a strong portfolio of brands and a leverageable platform. We remain confident in our outlook and ability to deliver significant growth and long-term value for shareholders. Again, I'm thankful to our entire team for their hard work, their energy and their passion for helping to improve the world's health and wellness.

With that, I'm going to turn the call over to Chris to discuss the second quarter financial results in more detail. Chris, over to you.

[Christopher Snowden, executive]

Thank you, Mike, and good afternoon, everyone. As Mike discussed, consumer demand remains the primary driver of our second quarter results. In the second quarter, revenue increased to CAD 112 million, driven by continued growth in our Jamieson brands, partially offset by an expected reduction in our Strategic Partners revenues. Jamieson brand revenues increased 6.5% to CAD 87.7 million, with domestic revenue growth of 8%, reflecting continued strong consumer demand and point of purchase growth, reflecting consumers' prioritization of their health and wellness.

International revenue for Jamieson Brands remained consistent with prior year, driven by a temporary shift in consumer behavior in Eastern Europe as a result of the economic and geopolitical situation surrounding Ukraine, offsetting continued growth in China in spite of COVID-19 lockdowns in Shanghai and Beijing. Strategic Partner revenue, as expected, declined by 13.8% to CAD 24.3 million, reflecting order time while lapping prior year's front-loaded production planning, which resulted in significant growth of almost 49% in last year's comparative quarter. On a normalized basis, gross profit margins increased by 160 basis points as a reflective improvement in Jamieson Brands segment margins and favorable segment mix, partially offset by lower margins in our Strategic Partners segment.

Within the Jamieson Brands segment, normalized gross profit margins improved by 120 basis points to 43.2%, driven by mix and efficient trade investment offsetting elevated global supply chain and transportation costs. Gross profit margin in the Strategic Partners segment decreased by 200 basis points to 11.7%, impacted by expected volume production timing and higher global supply chain costs. Selling, general and administrative expenses were CAD 25 million on a reported basis, an increase of CAD 3.8 million versus last year and including CAD 4.9 million in costs associated with the acquisition of youtheory and our IT system improvements. Normalized for the impacts of the specified costs in both the current and the prior year, SG&A was CAD 20.1 million or CAD 0.4 million higher than a year ago, reflecting expenses related to strategic growth initiatives and the timing of marketing campaigns associated with our 100-year anniversary and international brand presence.

Second quarter operating income decreased by 9.1% to CAD 14.6 million due to specified costs associated with our recently announced acquisition and system improvements, offsetting higher income from increased volume, gross profit and margin improvements. For these reasons, operating margin declined by 150 basis points to 13%. On a normalized basis, second quarter operating income increased by 9.8%, while our margin -- our operating margin improved by 130 basis points to 17.4%.

Reported EBITDA decreased by 3.3% to CAD 18.8 million, while adjusted EBITDA increased 9.5% to CAD 24.4 million, driven by higher volumes and contribution margins. Adjusted EBITDA margin increased by 160 basis points to 21.8%, reflecting margin improvements in the Jamieson Brands segment, along with the favorable segment mix impact.

Net earnings decreased by 12% to CAD 10.1 million and adjusted net earnings, which excludes specified costs and foreign exchange, increased by 11.4% to CAD 13.4 million. Our earnings per diluted common share were CAD 0.24 and adjusted earnings per diluted common share of 32% -- sorry, 30%, an increase of 10.3% versus prior year. A reconciliation of our adjusted EBITDA and adjusted net earnings is provided at the end of today's press release announcing the company's second quarter results.

Turning to the balance sheet and cash flow. We generated CAD 13.3 million in cash from operations during the second quarter compared with CAD 5.1 million in the year earlier period. Cash from operations before working capital considerations of CAD 16.8 million was CAD 0.7 million higher due to increased earnings in the quarter. Cash invested in working capital decreased by CAD 7.6 million, driven by the timing of receivable collection and payables offsetting the current year inventory build to maintain the continuity of supply.

Capital expenditures during the second quarter were CAD 4.5 million, mostly related to investments in manufacturing and packaging to continue to expand our capacity and we distributed approximately CAD 6.1 million in dividends during the quarter. We ended the quarter with CAD 143.1 million in cash and available operating lines. Following the quarter end and in connection with the close of our youtheory acquisition, we successfully amended and restated our credit facilities while extending its maturity to July 2027. The new agreement provides for availability of up to CAD 500 million under our revolving credit facilities and expandable according -- and an expandable accordion feature providing up to CAD 250 million in additional availability for future growth opportunities.

Based on our strong cash flow position and earnings growth, today, we have announced a dividend of CAD 0.17 per common share, a 13.3% increase for upcoming quarterly distribution. This increase remains consistent with our targeted dividend payout ratio of 40% to 50% of adjusted net earnings, providing sufficient capital to organically grow our business and pay down our credit facilities over time.

Now turning to guidance. We are increasing our outlook for fiscal 2022 to reflect the recent acquisition of youtheory that closed on July 19th, and we anticipate the following: net revenue in the range of CAD 550 million to CAD 565 million, reflecting annual revenue growth of 5% to 9% in our base business plus revenue growth of approximately 14.5% to 16.3% from the acquisition. Adjusted EBITDA in the range of CAD 120 million to CAD 125 million, an increase of 20% to 25% compared to the prior year, and adjusted earnings per fully diluted common share of between CAD 1.52 and CAD 1.60, an increase of between 15.5% and 21.5% compared to the prior year, and including a fully diluted share count of approximately 42.5 million shares.

Additionally, I would like to note some assumptions to assist you in modeling your third quarter expectations. We expect domestic revenues to increase by 8% to 10% compared with the third quarter of 2021, reflecting pricing, promotional timing and consumption growth. Internationally, we expect between 153% and 174% growth on a reported basis, reflecting the impact of the acquisition of the youtheory brand included in above is the international growth of approximately 10% based on the geopolitical and economic situation in Eastern Europe, and a transition away from our Jamieson brand e-commerce expansion in the United States in favor of increased focus on the acquired youtheory brand in the United States.

Strategic Partners revenue is expected to decline by up to 5% in the quarter, pushing all of our strategic partner growth into the fourth quarter, driven by order timing and volume changes. We expect normalized SG&A to increase by approximately 30% in the third quarter of 2022, reflecting the youtheory acquisition and increased investments in international markets and our long-term growth opportunities in China. Lastly, we expect an average annual exchange rate of CAD 1.27 per U.S. dollar. A complete discussion of our outlook for the third 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. Our MD&A was filed this evening.

In closing, I would like to join Mike in welcoming the youtheory team and thank the entire Jamieson Wellness team for their hard work and extreme efforts helping deliver on this key strategic milestone for the company and another very successful quarter.

With that, let me turn the call over to our operator, Melinda, for Q&A.

[Operator]

[Operator Instructions] And we'll take our first question from Sabahat Khan with RBC Capital Markets.

[Sabahat Khan, analyst]

Just, I guess, starting off with the transaction that you closed and kind of the outlook for the rest of the year, is just I guess what are your assumptions just in terms of kind of the market outlook and kind of how the end consumer is doing in the U.S.? And just along those lines, could you maybe provide a bit of a description on the typical youtheory consumer relative to the Jamieson consumer here in Canada, how similar or different they might be?

[Michael Pilato, executive]

Yes. Thanks, Sabahat, for the question. I'll take that. We're very excited about the acquisition. It's a very big strategic pillar that we're able to bring into our company and something that we really think can be transformational for our company moving forward. As we look at the U.S. market, we continue to see -- the consumer behaviors that we've talked about around the world over the last couple of years, it's a new consumer base that was built to an all-time high through the pandemic. And that consumer base continues to stick in the market from all the data points that we have and continues to be highly engaged in the vitamin mineral supplement category and in this segment and it continues to drive the health and wellness as a priority in their lives.

As we look specifically at the youtheory consumer, one of the things we liked about them was there were a big component of their consumer that lines up to the Jamieson consumer, that being a commitment to quality, a commitment to high-quality production, to pure ingredients, a consumer that wants to pay for quality and is willing to pay a premium price versus other mainstream VMS brands for that quality. So we like that. The second thing I would say is their consumer is probably a little more receptive to early on innovation than Jamieson consumer. That brand is built on -- has been built on bringing some innovative products to market with speed, and we plan on learning from that brand to ensure that we embed that in the rest of our organization. So for the most part, the consumer is aligned. I would say that's the one nuance.

[Sabahat Khan, analyst]

Okay. And then I guess just along those lines with the kind of products and innovation, I think one of the strategies that sort of expand the offering at youtheory, is there any particular categories or product types that you think maybe that brand is well positioned in or that you want to initially focus on?

[Michael Pilato, executive]

Well, we're in the middle of compiling all of our plans for what we want to launch in the U.S. I don't think we want to talk about publicly today what categories we want to bring to the youtheory brand. What I would say, though, is that in the Jamieson portfolio, we have about 1,000 products globally that we sell. We play in dozens of subcategories. We play across multiple brands via Jamieson brands or our Specialty Brands. We have a lot of innovative products. We have a lot of high-quality formulas and a lot of high efficacy products that we can bring to the U.S. consumer through the youtheory brand. So we're working through those plans as we formulate them and get them to market, we'll talk about them more publicly.

[Sabahat Khan, analyst]

Great. And then just one last one for me. One of the questions that we've been getting generally on the consumer space is just kind of the health of the consumer and trade down. Can you maybe share with us your thoughts on what you're seeing so far? Maybe just a bit of color on both Canada and the U.S. given your presence there in terms of how is the VMS category been performing as a whole? And have you seen kind of a trade down whether as to non-branded stuff across both markets? Or how is that trending?

[Michael Pilato, executive]

Yes. We don't -- so we -- I'll talk to the domestic market here in Canada. We don't have a ton of domestic market -- domestic -- sorry, data on the U.S. consumer yet. But from the market data we have, the category continues to hold strong in the U.S. I was at a nutrition conference last week, and they shared a lot of U.S. data that showed that the category continues to be strong and they continue to project strong growth in the category over the upcoming years.

What I would say across all of the countries that we play in around the world, including the domestic market, is it is playing out how we talked about it over the last couple of years, which was we're going to see this increase through COVID, which we realize is accelerated growth. We're going to have a new baseline of consumers of which are embedded and now committed to the category. And we're going to start to see the category get back to historical growth rates on this new consumer baseline. We're starting to see that.

What we are not seeing in the domestic market, for sure, based on the growth rate that we just talked about at about 8% growth for the second quarter is trade down. We continue to outpace our market growth here in Canada. We continue to build a strong baseline here, and we continue to take share from some of the discount players and the private labels of the world. So we feel really strong that the consumer is not in a state of trade down right now in this category. And history would tell us that in economic downturns, we don't traditionally see it in an economic downturn. We do monitor every day, though we are all over -- we're watching it closely. We keep a very close eye on that. It's very important that we continue to understand what's going on out there, but that's how it played out in Q2 and that's how we see it playing out for the rest of this fiscal.

[Operator]

Next, we'll hear from Endri Leno with National Bank.

[Endri Leno, analyst]

I'll start, or continue rather a little bit with the youtheory acquisition. And Mike, you talked about taking some Jamieson products under the youtheory brand in the U.S. Is there any plans or any thoughts you can share or perhaps -- or perhaps expanding their footprint in Canada outside of club?

[Michael Pilato, executive]

Yes. I think we have a lot of products that we can bring down to the U.S. or internationally under the youtheory brand if we choose to. We also are committed to continue to innovate under the youtheory brand with new products as well that aren't in our portfolio that we can launch in the U.S. first under youtheory and then bring to Canada under whatever brand it fits in here or around the world. So the innovation is going to go both ways, in a deal like this where we're sharing capabilities and sharing thoughts.

I would say that there definitely is some plans to grow the brand in Canada outside of its current channel structure. I would say though, Endri, like we'll do that. And for sure, that's in the plans. But the top priority right now for this business is to grow this in the United States and to grow it into international markets where it's not today. Those are the top 2 priorities from a revenue perspective. And the Canadian business will grow it along with that. But those are the top 2 priorities that we are laser-focused on. That's where the big opportunity is, and that's where we'll continue to drive this acquisition to a really, really great place for us.

[Endri Leno, analyst]

Okay. Sounds great. And then if you can expand a bit on the international market where they might not necessarily have a strong presence, is China along those lines? Or is there -- or is there any other ones that you're looking at?

[Michael Pilato, executive]

I think -- I mean, I think there are a few that we're looking at as high potential markets for youtheory. For sure, we do see China as a top priority for them. They currently are not in the Chinese marketplace. We think the brand plays out well there for the consumer, and we know that the consumer in China is highly engaged in some of the categories in which -- in which youtheory plays. So it definitely is on the priority list for us, and we are formulating plans to grab onto those opportunities over the upcoming periods and years.

[Endri Leno, analyst]

Okay. And I'll continue with international, a couple of questions there. We'll first start with the Chinese market. I mean, you mentioned that, that you've seen growth there and I know you haven't broken down by country, but any kind of in price and how is the performance in the Chinese markets offsetting the Eastern European one? And what are you seeing now in terms of kind of the reopening, especially I mean, Shanghai and in Beijing, wherever there have been lockdowns in China.

[Michael Pilato, executive]

I mean we -- as we stated in the comments, we don't break out the data, but we continue to see growth in China through Q2 despite some challenging times with lockdowns. There were points in time where even e-commerce had some lockdown restrictions on it, but we continued to grow and saw good growth in China as they came out of those lockdowns and delivered a good quarter for that Chinese business. We're quite proud of it.

When it comes to the Ukraine, obviously -- or sorry, Eastern Europe, it obviously is a very challenging situation with what's going on in the Ukraine. We don't do business or have business in the Ukraine. However, we do have a good presence, as everyone knows, in Eastern Europe, and most notably in the neighboring countries around Ukraine. We have seen some shift in consumer consumption patterns as you would expect as some of those consumers are focused on just some other priorities right now in terms of buying necessities, a bit of fear in those marketplaces, like hyper, like this is a different level and type of inflation that we're seeing anywhere else in the world, and that's having an impact on what and when and where they're buying things across a plethora of categories. It's just an unusual shift based on an unusual or abnormal situation, unfortunately. So that's what we're seeing out there. Other than that, all of the other countries we're in, all the other regions, we continue to see this new consumer baseline that we talk about stick in the market and continue to see various levels of growth across markets.

[Endri Leno, analyst]

Okay. And one last one for me and I'll jump in the queue. Any thoughts on that distribution agreement in China that you can share?

[Michael Pilato, executive]

There's nothing at this point that we can share. What I would say is we continue to get closer and closer to making our decisions on what our go-to-market strategy to get closer to the consumer and the customer in China will look like. We still have a few months to go before that distribution agreement is wrapped up. We continue to work on it every day with a lot of focus and really, really ensuring that we have the right plan for China to accelerate the growth. We have no new news to share today. But as soon as we do, we'll make sure that we announce and get that out to the market.

[Operator]

And moving on, we'll hear next from George Doumet of Scotiabank.

[George Doumet, analyst]

I find you saw something pretty interesting Mike earlier about the manufacturing footprint of Nutrawise and the ability maybe to build stuff there. So can you talk a little bit about that opportunity, a little bit further can you expand?

[Michael Pilato, executive]

Yes. I mean, we bought -- I like to talk to, George. We bought a facility with this acquisition in Irvine, California. It does -- it is a nice facility, high tech quality facility. It doesn't make tablets. It makes [ 2-piece ] encapsulated products, and it does have some good packaging around some samples and sachets, which we've been interested in getting into. I think the best way to think about it is -- it is an underutilized facility for sure, there's capacity there.

As we look at our long-term growth aspirations over the next 3, 5, 7 years, we'll work this facility into our network of manufacturing facilities and ensure that we're maximizing efficiency and effectiveness across all of our plants. So it's another -- it's a fourth plant in our manufacturing network. Right now, we're laser-focused on growing the youtheory brand. We are laser-focused on finding some synergies across our business. And I'm sure, over time some of those synergies will come by, making some production choices across various facilities. We're probably ways out on locking that, but that possibility is there.

[George Doumet, analyst]

Okay. And maybe continuing along the line of synergies, like Nutrawise, their margins are about 400 basis points below ours. So structurally, how high do you think they can get with a little bit of our health?

[Michael Pilato, executive]

Well, do you want to take that, Chris?

[Christopher Snowden, executive]

Yes. So hey, George. There is no reason for youtheory margins to be any different than the Jamieson margin based on the consumer environment. Based on their channel concentration, you would expect them to be naturally lower at the gross profit margin level, but still remain very strong in the EBITDA margin level. So as we explained to other channels, that gross profit margin will increase as will the investment in SG&A and resources to point that. So we are very pleased with the overall profitability from an EBITDA perspective, but we will look to drive overall EBITDA margin and gross margin, targeting kind of that 25% long-term target that we have for Jamieson for both the youtheory business and the Jamieson business over time.

[George Doumet, analyst]

Okay, and just one last one for me. Can you just maybe clarify a little bit of what's meant by the transition of the U.S. test to focus on youtheory? I mean that was the reason that was cited for the lower international revenue goalpost. So can you maybe talk a little bit on that?

[Michael Pilato, executive]

Yes. So we -- as we've been talking about for the last couple of years, we've had a U.S. test going on in -- U.S. e-com test going on to see if building the Jamieson brand organically will something that would have a high return on investment. I think as you can tell by our acquisition, we noted that, that probably is not the best use of capital or best use of return on investment. It is better to acquire a brand and a platform for which to grow at.

In the back half of this year, we had planned to do a digital expansion into a customer in the United States that had some revenue attached in our guidance since the acquisition and in speaking with that strategic customer, we've made the decision to not do that and to drive the growth and the business opportunity through youtheory brand instead. So the guidance essentially has come out of the international business based on that strategic decision as we focus on the youtheory brand growth in the United States and not an organic Jamieson brand growth strategy.

In the overall scheme of things, George, I mean the number is not real material, but when you have it into the international number, it does take a few points off of that international guidance.

[George Doumet, analyst]

I'll ask maybe one more. I'll -- you may not answer, but I'll ask it. The 10% to 20% guidance that you guys put out on for the U.S. -- sorry, for international, like would you expect China to grow at a higher clip than that?

[Christopher Snowden, executive]

China is certainly delivering their more than their share of that growth. So we continue to be on track with our expectations in China full year, in spite of the softness in other areas that we have noted.

[Operator]

Next, we'll hear from John Zamparo of CIBC.

[John Zamparo, analyst]

I'll continue on youtheory. And I think part of the attractiveness of this deal, and you've mentioned that both when you announced the deal and today, you seem to have multiple levers for revenue growth when you talk about innovation channels, international expansion, I kind of wonder what's the order of operations on these? And where can you make the most immediate gains?

[Christopher Snowden, executive]

So I think, as Mike mentioned before, it's really about expanding in the U.S., number 1. So it's expanding -- like number of categories they participate in or adjacency within the same categories. That would be the most near term. Following that, would be channel expansion, moving more definitively into food, drug and mass. And then following that, based on registration timing and barriers to entry in international markets, the international would really be something that we would expect to start to deliver on in 2023.

[John Zamparo, analyst]

Okay, that's very helpful.

[Michael Pilato, executive]

Just one thing I would add -- one thing I'd add to that, John, is we look at it kind of in 2 buckets. We look at it in revenue opportunities and synergies and of course, cost synergies to drive margins to George's question earlier. The #1 priority out of the gate is the revenue opportunities. Those revenue opportunities are quite vast. There's a lot of levers as you've noted. And by growing that top line, we will build scale, we'll build efficiency, we'll be able to help drive those margin expectations that we have on the business. And at the same time, we'll be looking for cost savings. But really, this is -- I mean this is a revenue opportunity, first and foremost, followed by a cost synergy opportunity that we'll be chasing.

[John Zamparo, analyst]

Got it. Okay. When you talk about it being -- the youtheory brand being underpenetrated in traditional channels, the retailers that I think of in those channels, whether it's CVS or Walgreens or others, I presume those aren't existing relationships or strong relationships at the moment for you. So I guess, correct me if I'm wrong, but how are you thinking about getting into the larger traditional brick-and-mortar channels?

[Michael Pilato, executive]

Yes, so they actually -- there actually is some distribution into these channels that we talk about. It just hasn't been a strategic focus for the company to date. It's something that they want to do. It's something that they've been -- they've had in their strategic purview, they just haven't been able to do it. They didn't have the resources or time to do it. It's not the largest -- it's not a big team down there. So we are already in conversations with some of these customers. We have added and will continue to add some capabilities into the U.S. marketplace.

We will probably leverage a combination of our own capabilities that we add to the organization as well as broker -- a possible broker relationships that we have down there. We have embedded some people down there from Jamieson. We have 2 people down there right now focused on the expansion. And what I would tell you is, it’s some of our top talent in the organization here, and we're quite happy to see them down there starting to build on the strategy. So one of the strategies is to do that within our thesis of the investment, it was going after those channels by adding some capabilities.

[John Zamparo, analyst]

Okay. Understood. And then my last question. I'm impressed we've gotten this far into the call without talking about inflation in detail. But your pricing has adequately covered increased costs so far. I wonder what you're seeing on cost inflation in Q2 and subsequent to the quarter, and how it's trended on a year-over-year basis compared to Q1?

[Christopher Snowden, executive]

So as you have learned from previous calls, we lock the vast majority of our input costs at the beginning of the year. So from a raw material input perspective, the environment remains strong. You've seen some of those prices increase earlier in fiscal 2022, and those increases have tailed off more recently as thoughts of inflation and higher interest rates that creep into the discussion from an economic environment perspective. We are not seeing any material increases going into 2023 at this point in time. But we'll say a final judgment on that for our final negotiations exiting 2022.

The one area where we've continued to experience inflation is fuel and transportation. We still believe that, that's impacted by geopolitical events, and it's not necessarily permanent in nature. So we will continue to cover those costs with our efficiencies as we drive forward in fiscal 2022 and decide at some point in the future when and if we need to pass those costs on to the consumer. One thing I will note is that you've seen margin improvement in the first half of fiscal 2022. That has been impacted by the timing and volume of production as well as segment mix. And when you add youtheory margin structure to the business, we have guided for some softness in our margin structure, both from a gross profit and an EBITDA margin perspective when you bring the businesses together in the back half. So take a close read of our guidance as it talks to gross profit and EBITDA margin, as we set new benchmarks for those going forward with which we will then grow on.

[Operator]

And moving on, squeeze Ty Collin of Eight Capital.

[Ty Collin, analyst]

Just kind of tag in with another youtheory question here. In terms of the U.S. growth strategy going forward, do you expect that you'll be looking around for other brands to kind of tuck in to the youtheory platform? Or is the focus just going to really be on growing organically at this point and putting Jamieson products onto that platform?

[Michael Pilato, executive]

Yes, thanks, Ty, for the question. I think -- I'll answer it on 2 ways. In the short term, we're really focused on youtheory. We're focused on finding the revenue growth. We're focused on finding these cost synergies we're talking about. We're focused on accelerating the growth across the United States and the international markets and integrating this into the Jamieson Wellness world. What I would say is longer term, we now have a platform in the U.S. that we could look to do some smaller tuck-ins. We could look to acquire more brands in the U.S. I would not expect that in the short term, though, I think we -- this is a transformational acquisition for us. This has a lot of upside, has a lot of -- it really allows us to accelerate our growth as a company.

And we want to stay laser-focused on ensuring the integration goes right, ensuring we take advantage of the revenue opportunities and the cost synergies in front of us. And when we feel we have a good handle on that and we have it sorted out, we could be in a position to possibly look at some further acquisitions to tuck in. So it's a bit of a short-term long-term answer, but that's how we're thinking about it.

[Ty Collin, analyst]

Okay. Great. That's great color. And then following up maybe on an earlier question about the trade down or potential trade down, I appreciate your commentary that you're not really seeing any trade down into private label or discount brands, but are you seeing any shift or starting to see any shift in channel mix at all, maybe customers moving from drug into dollar store, for example? If you are seeing that or if you expect to see that, does that have any sort of material margin impact to take note of?

[Michael Pilato, executive]

I mean we haven't seen anything specific or material from a channel shift perspective. And from a margin perspective, we're pretty margin neutral across channels. So it doesn't impact us too much from a channel to channel perspective. I mean, I would say though, if you listen to and you follow some of the retailers out there, they are talking about some shifting going on to more discount channels or drug channels, various channels that you're seeing overall consumer sentiment in and out of. We're not seeing anything material from a shift perspective, though we're quite pleased with where everything is going, and our margins, as you see, continue to be strong.

[Operator]

[Operator Instructions] Moving on to Derek Lessard of TD Securities.

[Derek Lessard, analyst]

Congrats on a good quarter. Just a couple -- or maybe just one for me, everything else has been answered. Maybe just going back to the domestic business and the strong margin performance there, just wondering if you can maybe add some more color more on the branded side? And more specifically, what's the favorable mix that you're talking about?

[Christopher Snowden, executive]

So from a branded segment perspective, we've talked about 120 basis point increase driven by mix, and that's category mix. So mix of higher-margin categories, efficient trade investment, which is more volume driven by promotional activity as well as the efficiency from a production volume perspective in our tablet facility.

[Operator]

Moving on to Peter Sklar of BMO Capital Markets.

[Peter Sklar, analyst]

Mike, when you bring innovation from Jamieson to -- like, to youtheory, what's the regulatory process to get the product approved? And how long does it take?

[Michael Pilato, executive]

Yes. Thanks, Peter, and that's here from you. We talked about this on some calls before. It's a little bit of a complicated world out there when it comes to regulatory. Most countries, including Canada, is what's considered a premarket registered country. So you have to register the product and get a license from the government before you can sell it. The United States is not that way. The United States is a self-regulated market where you can launch product at any time, and it is on you to make sure that you are compliant with the FDA regulations.

So there is really no barrier to entry for us in terms of innovation from a regulatory perspective to enter into the United States. It is more just about planogram timing, timing around retailer calls, timing around getting on the shelf. So we're ready to go. We've already started talking about some products. I mean, I personally have already been to a meeting in the United States where we talked about a possible innovation. So speed from regulatory is not an issue in the United States, and it's one of the beautiful things about doing business in the United States. You can move fast, and you can grab on to a consumer base with speed. So that's where that market stands there.

[Peter Sklar, analyst]

Okay. And then Chris, can you just -- can we just go through a couple of these adjustments in EBITDA? So there's international market expansion, CAD 3.5 million. What does that represent?

[Christopher Snowden, executive]

Yes, those are acquisition-related costs.

[Peter Sklar, analyst]

So are those costs related to, like to acquiring youtheory? Or...

[Christopher Snowden, executive]

Direct costs of the acquisition. So due diligence, legal fees.

[Peter Sklar, analyst]

Okay. And then what about the other charge there? There's one for CAD 1.4 million business integration cost?

[Christopher Snowden, executive]

Yes. And that relates to our IT system improvement costs. That's the big difference we talked before about capitalizing something you own versus you're configuring where it's hosted third party. If it's hosted by a third party, that's a P&L charge today. So those aren't obviously specific to revenue and income earned in the quarter, and those will be added back as we go through those projects.

[Peter Sklar, analyst]

And so the idea is to make your numbers comparable because before they were capitalized?

[Christopher Snowden, executive]

No, it's to make the number specific to operating earnings from a margin perspective in terms of what the business earned in the period, excluding costs that didn't go towards that earning potential.

[Peter Sklar, analyst]

You lost me there, but like it's a charge, you're paying for it. So I don't follow.

[Michael Pilato, executive]

So Peter, so we're -- it's a system implementation that we've talked about in the past. These are the implementation costs. In a non-hosted environment you would capitalize those costs. These are the setup implementation costs to get the system up and running that because we've gone with a hosted system, they have to be charged on the P&L, and we add them back. They're onetime costs from implementation, not the ongoing hosting costs or cost of the software, it's the implementation of the system.

[Peter Sklar, analyst]

Okay. Got it.

[Michael Pilato, executive]

Does that make sense for you? Is that clear?

[Peter Sklar, analyst]

Yes, it does. What you're saying, it's a onetime cost.

[Michael Pilato, executive]

So onetime implementation costs that then goes away, the ongoing cost of the system never get added back.

[Peter Sklar, analyst]

Okay. Got it. And then final...

[Christopher Snowden, executive]

So just to be clear, we've guided that this is something that's going to continue for the next few quarters as we round out our supply chain software as well as our ERP from a broader business perspective, and they are included in the guidance from an outlook perspective.

[Peter Sklar, analyst]

Okay. And then finally, in the 6.5% revenue growth in the Jamieson brand, how much price would be in that?

[Michael Pilato, executive]

There would be very little price in that in the second quarter, Peter. If you go back to our conversations over the last few quarters, we priced the domestic business kind of middle of Q1 towards the end of Q1 in 2021, and we priced the domestic business again in the third quarter of 2022. There's a little bit of pricing embedded in there for international pricing, but majority of that growth would not be pricing in Q2.

[Operator]

And next, we'll hear from Julian Hung of Stifel GMP.

[Julian Hung, analyst]

I'm just speaking on behalf of Justin today. My first question is just to understand customer behavior a bit better. When you're increasing prices, have you seen customers switching package sizes, so maybe going from bigger packs to smaller packs or the other way around?

[Michael Pilato, executive]

Julian, thanks for the question. We -- again, we haven't seen -- usually, when you see packaging changes, you would say that's a type of trade down or channel shift. We've not seen anything material in that space in terms of shifting. Now what I would say, and I just alluded to it on Peter's question, is our pricing in the domestic market took place in Q3. So we'll continue to monitor and see if we see any of that in the future based on our new price points. But to date, and then the last price increase, we haven't seen anything material in a shift like that.

[Julian Hung, analyst]

Okay. And just a follow-up on that. Have you seen your -- monitored your competitors to see if they've also been increasing prices? And if so, how much relative to what you've been doing?

[Michael Pilato, executive]

Yes. I mean I don't want to comment too much detail about competitors. What I would say is we monitor that daily. We are pleased with where our price gaps are today versus where they were pre-pandemic and through the pandemic. We continue to monitor and make sure that we maintain the gaps that we think are competitive set us apart and ensure that we recover cost to ensure our margins on what is a premium product. So I would say we're comfortable and happy with where those gaps are today.

[Operator]

And there appears to be no further questions at this time. We'll turn the conference back over to Mr. Pilato for any additional or closing remarks.

[Michael Pilato, executive]

Perfect. Thanks, Melinda, and thank you to everyone for attending the call today. We are extremely proud of these results. We continue to be laser-focused on delivering our commitments, focusing on our clear strategic priorities and improving the world's health and wellness. We are on track to our long-term growth aspirations, and we really look forward to speaking to you all again soon. We wish you all a great evening, and thanks again for joining. We really appreciate it. Have a great night.

[Operator]

And that does conclude today's conference. We thank you for your participation. You may now disconnect.