Jamieson Wellness Inc

TSX:JWEL

Earnings Call Transcript 2017-Q4

[Operator]

Good day, ladies and gentlemen. Welcome to the Jamieson Wellness conference call to discuss financial results for the fourth quarter of 2017. [Operator Instructions] Please be advised that 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 Mark Hornick, President and Chief Executive Officer; and Chris Snowden, Chief Financial Officer and Corporate Secretary. Before I turn the call over to Mark Hornick, please note that a press release covering the company's fourth quarter 2017 financial results was issued this afternoon, and a copy of that press release can be found in the Investor Relations section on the company's website. Please note that the prepared remarks, which will follow, contains 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 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 law. 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 with the company's press release issued earlier today. Also, please note that unless otherwise stated, all figures discussed today are in Canadian dollars and are occasionally rounded to the nearest million. I would now like to turn the call over to Mark Hornick to get started. Please go ahead, sir.

[Mark Hornick, President, CEO & Director]

All right. Thanks, Teri. Good afternoon, everybody. It's my pleasure to speak with you today. We are proud of our performance during 2017, finishing the year with another strong quarter and achieving the target that we established before our IPO. We're particularly pleased with this performance given that all of the incremental demands of becoming a public company were significant. And despite that, our results are very strong, and I appreciated the focus and efforts of the entire Jamieson team in achieving this. Let me run through a few of the highlights before we turn it over to Chris to get into the details. So fourth quarter revenue increased 28%. That includes 11% organic growth, excluding acquisition, and a very strong performance with our branded business within Jamieson Canada, with 55% growth in our legacy Strategic Partners business on top of that. And of course, obviously, we had contribution from the Body Plus and Sonoma acquisitions that we completed early in the 2017. We delivered our innovation plans, including the launch of Cold Fighter, and we remain very excited about the launch of our TRU-ID certification product. The past year was very busy for us and a significant year in the company's long history. We began with the integration of our acquisitions of the Body Plus and Sonoma, which added to our portfolio, diversifying our channel and category exposure and expanding our manufacturing capabilities. Both Body Plus and Sonoma are on track with expectations, and we continue to see opportunities generate across channel and operating synergies from the combination of those 2 companies. We will leverage our strength in protein and sports nutrition now with the launch of Jamieson Essentials plus Protein. You will recall that this product is a one-stop-shop to get all 4 of the Jamieson Essentials, which are multivitamin, probiotic, vitamin D and omega, plus 20 grams of protein, all in one breakfast shake, which is truly going to be a remarkable innovation in the marketplace. And we're excited to begin shipping that in the first quarter. During 2017, we also completed our IPO and the subsequent secondary offering and established a very talented and experienced Board of Directors. We also formed an impressive Scientific Advisory Board and continue to strengthen our brands along the way. As we enter 2018, I'm confident with our strategic positioning and our opportunities for growth across all the channels of our business. In particular, we see strong opportunities internationally and we'll be working incrementally to invest, to cultivate the upside potential from our growing international exposure. So right now, I'm going to turn the call over to Chris to discuss fourth quarter financial results in greater detail. Chris, over to you.

[Christopher Snowden, CFO & Corporate Secretary]

Thank you very much, Mark, and good afternoon, everyone. Our fourth quarter results were in line with our expectations. And as Mark indicated, we are pleased with the underlying trends in our business and our outlook for 2018. Let me touch on some financial highlights for the fourth quarter. Revenue increased 28.3% to $84.3 million, driven by both higher revenues in our brand segment and growth in our Strategic Partners segment, plus contributions from Body Plus and Sonoma, which we acquired in January 2017. By segment, Jamieson Brands revenue increased 18.8% to $65.5 million. As Mark mentioned, we had a strong quarter in Jamieson Canada and our international business declined slightly by $0.5 million on a constant currency basis and -- due to the timing of shipments to our agent. Innovation delivered $2.2 million of growth, consistent with the prior year, where we launched value size of our popular letter of vitamin products. Net revenue in our Strategic Partners segment increased 78.7% to $18.8 million, while the acquisition of Sonoma contributed to the growth. The primary driver was increased activity within our legacy Strategic Partner customers. Total gross profit increased 30.3% to $30.9 million, and gross margin increased by 50 basis points to 36.6%. The increase in gross margin was primarily driven by the impact of higher volumes, sales mix and improved manufacturing efficiencies, plus the impact of higher-margin Body Plus and Sonoma volumes. Selling, general and administrative expenses increased 29.5% to $14.3 million. As a percentage of sales, SG&A increased slightly by 10 basis point to 16.9%. The increase in SG&A as a percentage of sales was as a result of higher public company cost of approximately $500,000, the impact of higher variable compensation in the quarter and higher SG&A as a percentage of sales associated with the acquired business. Operating income increased 30.3% and operating margin increased slightly to 17.7%. Operating margin for the Jamieson Brands business decreased to 19.4% due to higher variable contribution and accelerated share-based compensation, while operating margin for the Strategic Partners business increased to 11.7%. Adjusted EBITDA increased 28% to $18.8 million, while adjusted EBITDA margin was consistent with prior year as a result of higher fixed cost that offset gross margin and the higher mix of Strategic Partner revenue. Normalizing the impact for variable compensation in the prior year and public company cost in the current year, adjusted EBITDA margins would have increased by 190 basis points.Interest expense and financing costs were $2.1 million compared to $5.7 million in the prior quarter. The difference is primarily due to our notes payable to Jamieson Finco, which was discharged to the company's pre-IPO reorganization and lower interest rates associated with our new credit facility established in January 2017. Our reported net income was $3.7 million in the fourth quarter compared to a net loss of $18.7 million in the prior year. However, on an adjusted basis, net income increased 91.1% to over -- year-over-year to $9.7 million. The adjustment to net income in the quarter include $2.1 million of public offering cost as we closed the secondary offering, $2.5 million of share purchase -- sorry, purchase consideration related to the Body Plus acquisition and other expenses of 1.1 -- sorry, and other expenses, $1 million of accelerated vesting of options and share-based compensation, $1.6 million of termination benefit and $0.1 million foreign currency loss and $500,000 of other nonrecurring costs. Most notably, the fourth quarter included -- fourth quarter in 2016 included $24.1 million of preferred share accretion costs, which were not in the current quarter. Turning to the balance sheet and cash flow. We generated $17.6 million of cash operation during the fourth quarter compared to $12.6 million in the prior year quarter. Capital expenditures in the fourth quarter were $2.1 million and were $4.7 million for the full year. We ended the quarter with $4.8 million in cash and equivalent, and total debt of $163.2 million. We had almost $45 million in cash available to our revolving operating line. Now let me turn to guidance. We're establishing our 2018 outlook and anticipate the following: net revenue in the range of $325 million to $335 million, adjusted EBITDA in the range of $67 million to $69 million and adjusted earnings for fully diluted share in the range of $0.83 to $0.87 for fiscal 2018. This compares to adjusted earnings per share of $0.70 in fiscal 2017. This is based on adjusted 2017 net earnings divided by the post-IPO fully diluted share count of 39.6 million shares. Additionally, I would like to note some additional assumptions to assist you. First of all, the revenue is based on foreign exchange rate of CAD 1.25 per U.S. dollar. [indiscernible] we are estimating fully diluted share count of approximately 39.8 million shares. We're also anticipating interest expense in the range of $9 million to $9.5 million, which reflects the expectation for a higher LIBOR rate in fiscal 2018. Finally, we are assuming an income tax rate of approximately 28%. With that, I'd like to call the -- turn the call back to the operator for questions.

[Operator]

[Operator Instructions] Our first question comes from Sabahat Khan of RBC Capital Markets.

[Sabahat Khan, Analyst]

Just on the new product that you mentioned earlier, the new protein product. Can you maybe talk about the traction that you're seeing? What channels or types of retailers that the product is initially being offered in?

[Mark Hornick, President, CEO & Director]

Yes. So just let -- Saba, let me just kind of recap to give everybody context in case they haven't heard about this in the meeting before. So the genesis for this came from a very fast-growing protein category, which started in the sports nutrition world, but is now becoming quite mainstream. So about 30% of Canadians right now taking, at some point in time, a protein supplement. So what we wanted to do was to increase the penetration, but also make that unique to Jamieson, to take Jamieson's core competency, which is vitamins, and combine vitamins plus protein into one product to create an incremental innovation. So that's where Jamieson Essentials, which is our 4 essential vitamins plus protein comes from. So that was one of the reasons why we purchased the Body Plus company to begin with, to allow us to extend the brand into these logical adjacent categories. So we've developed the product, 3 different flavors. We have vanilla, strawberry and chocolate. It will be initially merchandised, primarily, in the vitamin section, where you have about 75% of the population actively shopping. And what -- we presented this product to our retail partners in the last half of 2017. We have virtually 100% listings confirmed. So we got great retailer reception to the initiative, and we will begin shipping that product in Q1 -- towards the end of Q1 and mostly in March. So, so far, so good, and then our marketing for the product will begin with television advertising starting in May. And that will begin our entry into an adjacent category of protein with the Jamieson Brands, so we're pretty excited by that.

[Sabahat Khan, Analyst]

Thanks. And just on the -- just the broader outlook for new products. So how many are you looking to introduce? I know you mentioned a number at IPO. Can you maybe recap what you're looking to introduce for the next year and what we should expect to be the cadence of new products or new innovations over the course of 2018?

[Mark Hornick, President, CEO & Director]

So broadly speaking, it'll pretty much be in line with what we actually ended up introducing into the market in 2017, so around 80 products. About 30 on the Jamieson branded side and about 50 across the rest of the portfolio. So it's a pretty robust innovation agenda. Very well thought out. We're pretty proud of what we got coming. And you should see an output of innovation that's very consistent with the great effort that we did in our opinion last year.

[Operator]

Our next question comes from Peter Sklar of BMO Capital Markets.

[Peter Sklar, Analyst]

If you look at your growth, I think you talked about 11% organic growth. Like can you talk about -- like what is the vintage of innovation that is driving that growth? Like I assume it's not the 80 products you introduced in 2017 because they're just getting ramped up. So where is kind of the sweet spot for the organic growth that you're getting?

[Mark Hornick, President, CEO & Director]

Well, you get a mixture, Peter. So you get the -- because we're measuring this in shipment, so you get the pipeline effect of things like Cold Fighter, where we get all new distribution in the last quarter of the year, which was very positive. But then you get, of course, all the sell-out from things launched in the past 12 months that are now hitting their stride based on the consumer marketing associated with them. So there's a mixture, but most of the growth would have been from products that have been launched within the past 12 to 18 months.

[Christopher Snowden, CFO & Corporate Secretary]

Just to be clear, Peter, that's across branded and Strategic Partner on an organic basis, not just branded.

[Peter Sklar, Analyst]

Okay. And like with this quarter end, did it have an unusually high pipeline effect or is this a normal fourth quarter?

[Mark Hornick, President, CEO & Director]

There was some timing within the Strategic Partner business that was -- that we would not expect that would be consistent going forward. And if I was to estimate that, it will be about $3 million to $4 million in terms of unusual timing of Strategic Partner revenues in the corner. With respect to organic growth within the branded and other areas, we're confident with that being a good baseline to move forward with.

[Peter Sklar, Analyst]

Okay. The other thing I wanted to ask you about is -- like I keep seeing on TV advertising your -- you're really promoting the Jamieson Essentials. And Mark, like what is the marketing strategy behind that? Like are you really trying to get consumers to buy all 4 products?

[Mark Hornick, President, CEO & Director]

Yes. So what it is, is to make the story simple for consumers who don't understand what to take. So when they look at the shelf and they see a 1,000 different vitamin SKUs, they want to know what should I really take? And so the simplest way to answer that for us is there are 4 vitamins that every single Canadian person could benefit from taking. And that's the multivitamin, an omega, vitamin D and a probiotic. And that's why we call them the Jamieson Essentials. And so both from a retailer perspective as well as from a consumer perspective, we're getting a lot of very positive feedback into how we are making the story simple so that consumers can get started. Because there's a big underlying current for people who want to improve their health and wellness, but a lot of them just aren't sure how to get started. And so that's what we're advocating. We don't get everybody, of course, buying all 4 at once, that will take time. But we have seen definitely an uptick in the multiple purchases of vitamins per store visit. And our base business on our Jamieson Brands has never been stronger than it is now, so we have a very solid evidence to say that, that approach is really working well. And that's why you still see it now. If you're watching the Olympics, you still see those ads. And our momentum on our branded business so far, January to February, is very encouraging.

[Peter Sklar, Analyst]

Okay. And then just lastly, I just wanted to ask about in terms of your M&A strategy. As I recall, I detected a shift in your thinking on M&A last quarter versus your thinking that you communicated during the IPO process, and that you seemed prepared to buy -- to potentially buy brands in developed countries. And then, with the synergies, perhaps, being by -- integrating their manufacturing into your facilities in winter. Is that true? And can you provide us with an update on your thinking?

[Christopher Snowden, CFO & Corporate Secretary]

Yes. That's certainly one of the possibilities, Peter. We're also -- and that would help us, certainly, accelerate the leverage perspective. Again, when you look at our available set of opportunities, right now, the -- when we're looking deeper into the opportunity set, our multiples are very high and that branded opportunity seems to be priced higher than what we're really interested in paying. So that type of acquisition might take longer now than we hoped earlier on.

[Peter Sklar, Analyst]

Okay. And then -- sorry, lastly, Mark. Just in terms of the -- your brand activity of your brand online, the Jamieson Brands online or anything noteworthy happening, any change in consumer behavior or anything with your online efforts?

[Mark Hornick, President, CEO & Director]

We are seeing a continued uptick in interest in the vitamin category online. It's definitely not at all close to what it is south of the border, but it's definitely encouraging. And from our side, the Jamieson Brand, in particular, seems to be of incremental interest to consumers, which makes sense, too, given all the broad scale advertising that we're doing behind the brand. So we are internally looking at ways to take advantage of the online opportunity and get ahead of that. And as those materialize, we will keep you informed. But there is a robust opportunity that we see -- as we've talked to you guys about before in terms of getting ahead of that and diversifying our channel mix and it looks very positive.

[Operator]

Our next question comes from Lennox Gibbs of TD Securities.

[Lennox Gibbs, Research Analyst]

Can you be more specific regarding who you see as the target audience for the new multivitamin, protein combination product?

[Mark Hornick, President, CEO & Director]

So Lennox, this is a consumer who believes in the concept of improving their health. They know that protein is good for them and they're willing to try something new and invest in it. They're highly convenience-driven, so they don't have a lot of time. So this kind of concept where you get everything in one shot is very appealing. So this is your kind a very, very busy, highly driven sort of 30- to 50-year-old parent, urban, higher educated, who is not necessarily a dedicated protein user, but is aware of protein. May have tried a product like Vega before and didn't like the taste of it, for example. And then we'd see this as a way to get them everything that they were looking for from a very well-known and trusted brand with a taste profile that quite mainstream and appealing.

[Lennox Gibbs, Research Analyst]

Okay. Got it. And then switching to Cold Fighter. On the third quarter call, you discussed maximizing the distribution for the product by early December. The first question is, whether or not you achieved that objective? And then secondly, if you can help us understand what maximize means relative to the 10,000-odd out retail stores that carry your broader line of product?

[Mark Hornick, President, CEO & Director]

So to keep it, I guess, in the realm of allowable disclosure. So our Cold Fighter objectives, we exceeded in the third -- or in the fourth quarter what we were trying to achieve. That said -- and you guys can see this for yourself. When you go and you look for in the stores, a lot of -- in a lot of cases, because we launched this in the fourth quarter and most of the shelf reset take place in the spring, retailers believed in the concept so they merchandised it. But we didn't always get it where it would be optimal, so a lot -- in lot of cases it's in the vitamin section. So we're going to be looking to drive some upside to the Cold Fighter initiative by getting our distribution into the cough and cold section in all retailers in the second and -- or sorry, in the first and second quarter this year as they change their merchandising. So despite the fact that we didn't get it exactly where we wanted everywhere, we still over delivered our objectives. So that's very positive. And then you'll see incremental advertising then coming in in Q3 and Q4 this year behind an even stronger distribution set that we already have now.

[Operator]

Our next question comes from Endri Leno of National Bank.

[Endri Leno, Associate]

I just have a quick question actually on Cold Fighter. I mean, you said it exceeded your expectations in Q4. I just want to know how would you characterize Q1 performing up-to-date based on your expectations or versus Q4? And would you expect any change in seasonality due to the Cold Fighter? I mean, it's been -- the flu season has been pretty strong, actually, in January. So would that play -- or would that have any impact?

[Mark Hornick, President, CEO & Director]

So yes, when you're looking at the passive sales, our Cold Fighter initial quantity -- when you buy Cold Fighter, there's 30 doses in the bottle. That's typically enough to carry someone through an entire cough and cold season. So as the sales of Cold Fighter continue to accelerate, we won't really know until Q3 and Q4 2018 how that comparing because we -- as we continue to sell each new user into a unit of Cold Fighter, that is probably going to carry them through the cough and cold season because it's not something that you need to use every day. So our sales are increasing. We're very pleased with the results. But it's not something that we can definitively answer as we're building new users and new trial and awareness until we have some time under our belt to see what the repeat rate of the product is going to be. And that won't be until Q3, Q4 in '18.

[Endri Leno, Associate]

Great. And the second question I had is regarding the acquisition activity that has been going on or some that has been talked, hasn't been executed yet. Do you expect any increases in competition or any sort of price concerns as some of these -- as they change hand?

[Christopher Snowden, CFO & Corporate Secretary]

So you mean -- are you thinking multiples are going up?

[Endri Leno, Associate]

No. But I mean -- so Nestle buying Atrium, for example, I mean, would you expect any sort of more aggressive pricing on their part to try to get more market share at all?

[Mark Hornick, President, CEO & Director]

It's really hard to speculate on, and the Nestle acquisition kind of goes beyond our direct competitive set. So it's not something -- and obviously, we don't know the inside stories to what their acquisition strategy was. All we can say is that when you look at the underlying growth in the vitamin, mineral and supplement segment, and you see now large players coming in that are very attracted to our world, that's a great indicator of the fundamental strength of VMS and where -- why it's a great place to be competing in. Because a lot of the companies are seeing the long-term benefits of our world and they're prepared to invest in it. And in the case of Nestle, quite significantly. So for us, it's going to mean more investment, more innovation, driving more users, more consumers. So all in all, in a macro way, we see this as very positive and we'll have to see how it plays out from a specific standpoint. But we don't see anything -- that is going to be anything but positive for our business coming out of it so far.

[Operator]

[Operator Instructions] Our next question comes from Prakash Gowd, a private investor (sic) [ CIBC Capital Markets ]

[Prakash Gowd]

This is Prakash of CIBC. A few questions for me. The -- I wonder if you could talk a little bit about the raw material supply and pricing in the industry. Are you currently -- or do you anticipate any supply issues with specific ingredients?

[Mark Hornick, President, CEO & Director]

From a supply side, we're good. I think there's been -- there were some questions that some people had around a fire that BASF had in California that limited some of their production. That hasn't had any impact on us overall. That said in the areas of letter vitamins, particularly C and B, there's been a large increase in demand and some constraints in supply associated with the production of those raw materials, which have been driving up raw material costs. I think we gave some pretty transparent visibility to the -- in our last quarterly call. That required us to implement across-the-board price increase in order to make sure that we were shielded from that impact, which we have now implemented as of the 5th of February across the industry.

[Prakash Gowd]

Sorry, just to confirm then. Did you say you have implemented price increases as of February 5?

[Mark Hornick, President, CEO & Director]

We have.

[Prakash Gowd]

Okay. That's fine. And then so just to -- just to close the loop on that discussion. Did you say that the -- you've seen significant price increases on C and B specifically, or are there other ones as well?

[Mark Hornick, President, CEO & Director]

C and B specifically were the biggest. There are some other ones, but of the most note was on Cs and Bs.

[Prakash Gowd]

Okay. And then on your policy for price increases, what is the -- are you -- is it something you're doing on an annual basis or on an as-needed basis?

[Mark Hornick, President, CEO & Director]

So we -- mostly on an as-needed basis. We look at ourselves making sure that we can supply vitamins to the consumer at prices that will continue to allow us to grow penetration and repeat and broaden the usage of vitamin. So we take price increases very seriously. And we, typically, in the past we've executed -- we, usually, every 2 to 3 years as needed when the aggregate cost increase reaches a point where it merits across-the-board price increase. Just for perspective, at Jamieson, we have one list price for all of our items across Canada. So we have a very high degree of transparency in terms of our pricing. And when we do it, we implement it across-the-board, which is a fairly large undertaking. And so we only do that on a cadence that is practical and easy for us -- for both us and our retailers to understand and then implement in a way that has a minimal chance of impact in the consumption for consumers. So far, our track record of that has been pretty good.

[Prakash Gowd]

Okay. And then just one last question on the Jamieson Essentials and protein combination product. How are you going to price it relative to some of the more higher-end products from Body Plus and also trying to make sure that it doesn't cannibalize any of that business?

[Mark Hornick, President, CEO & Director]

So it is priced in line with what we would -- what our strategy would be to encourage the mass market at large to have access to the product. So the sizing is smaller than what you would see for a consumer who is already invested in the category in buying it on a regular basis where they would, typically, buy a 2 to 5 pound tub. So this product is smaller. And it's at a price point around the $20 mark as opposed to a $40 to $60 price point to allow a consumer to try the product with relatively lower risk. We also have a trial size that we've implemented, which comes with a Jamieson branded shaker cup and has 2 or 3 different samples of the product on a one-use basis, included inside for around $5, in order to gain trial. You could find those on freestanding displays when you're in the store.

[Operator]

If there are no further questions, I'd like to turn the call the back to Mark Hornick for closing comments.

[Mark Hornick, President, CEO & Director]

Right. So thank you very much, everybody. We're very proud of the results that we were able to achieve in 2017. We participate in a fundamentally exciting market that has underlying growth driven by consumer trends that are consistent worldwide and we are very proud to be a market leader in that -- in our category. We look forward to generating strong results for our shareholders in 2018. And thank you very much for your participation on the call.

[Operator]

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.