Jamieson Wellness Inc

TSX:JWEL

Earnings Call Transcript 2019-Q4

[Operator]

Good afternoon, everyone. Welcome to the Jamieson Wellness conference call to discuss financial results for the fourth quarter and full year 2019. [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 Mr. Hornick, please note that a press release covering the company's fourth quarter and full year 2019 financial results was issued this afternoon, and a copy of that press release can be found in the Investor Relations section on the company's website. Please note that the prepared remarks, which will follow, contain forward-looking statements, and management may make additional forward-looking statements in response to your questions. These statements do not guarantee future performance and therefore, 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 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 the applicable securities laws. Finally, we would like to remind listeners that the company may refer to certain non-IFRS financial measures during this teleconference. A reconciliation of these non-IFRS financial measures was included with the company's press release issued earlier today. Also, please note that unless otherwise stated, all figures discussed today are in Canadian dollars and are occasionally rounded to the nearest million. I will now turn the call over to Mr. Hornick to get started. Please go ahead, sir.

[Mark Hornick, President, CEO & Director]

Well, thank you, Christy, and good afternoon, everyone. We're very pleased to report a strong finish to 2019, delivering healthy revenue growth, margin expansion and performing at the high end of our 2019 revenue, adjusted EBITDA and adjusted earnings per share guidance. Fiscal 2019 was a very successful year for Jamieson Wellness. We maintained robust sales momentum with the Jamieson Brands, both here in Canada and internationally. We returned our Specialty Brands to growth. We've successfully executed our domestic China strategy, broadening our product portfolio and entering the domestic retail and e-commerce channels there. We delivered solid adjusted earnings growth, while investing in new markets and new channels, further strengthening our long-term growth opportunities. We once again increased our quarterly dividend and entered into an amended and restated credit agreement with existing and new lenders, and that's going to improve our borrowing rate, increase our available capacity for future strategic growth opportunities and also eliminated our quarterly debt payment. I'm very proud of the efforts of our global team and believe that we're well positioned for success in 2020 and beyond. Let me begin with an overview of our fourth quarter and the business highlights. During the fourth quarter, we generated 4% revenue growth, 12% growth in adjusted EBITDA and 17% adjusted net income growth. Now firstly, our Jamieson Brands segment grew 13% in the quarter, led by a 10% increase in domestic Jamieson Brand sales. That was driven by a very successful media campaign leading to increased consumer demand and more shelf space with a key customer. Our international sales increased 38% this quarter, led by strong growth in China as we continue to broaden our portfolio of products there and build distribution in both the domestic retail and the domestic e-commerce channel. We now have 21 products for sale in the domestic market, which we believe is more than any other international competitive brand, and we continue to see very positive response to the Jamieson brand in terms of sales. We also saw favorable shipments across other key regions, including Europe, the Middle East and the rest of Asia. Specialty Brands revenue increased 5% during the fourth quarter as we continue to focus on innovation as well as e-commerce, grocery, drug and channel expansion, combined with very much improved promotional activity through collaboration with our key customers. We remain very pleased with the turnaround this year and are confident with the continued momentum in Specialty Brands. In our Strategic Partners segment, business continues to perform in line with our expectations. The volumes were heavily weighted to the first half of 2019 given the timing of new programs with those partners. As such, during the fourth quarter, we saw planned 17% year-on-year decline, but ended the year in totality with 4% growth versus 2018. In summary, we're very pleased with a strong finish to the year. We delivered results at the high end of expectations with sales growth and margin expansion, while implementing several key initiatives to set the stage for long-term growth. The strength of our Jamieson Brands sales in our domestic market, despite our leading market share and 100-year history in supporting consumers, is a testament to the power of the Jamieson brand and the consumer trust that we've garnered. As we look to 2020, we're really excited about the opportunities that lie ahead for us. Jamieson probiotics are now available to U.S. customers on amazon.com and our plans to advance our e-commerce efforts there are now in full swing. We continue to make products available for the domestic retail market in China and look forward to continued growth there. In 2019, we saw a significant benefit in leveraging consumer insights in our marketing efforts to grow incremental brands -- to grow -- to drive incremental branded growth here in Canada, especially on the Jamieson Brands, and we believe that there's further upside over time in harnessing our wider brand portfolio and developing programs to introduce our very large Jamieson consumer base to the benefits of all of our brands as consumers move through the different stages of their health and wellness journey. To help facilitate this, we are bringing our significant marketing resources together and forming a holistic Canadian commercial organization under the leadership of Mike Pilato. Mike is -- will now lead the entire Canadian Jamieson and Specialty Brands business as President, Jamieson Canada. In his new role, Mike's mandate will be to drive incremental growth through the holistic marketing of our brand, while leveraging the important customer relationships that we have by channel to make those brands come to life for the shopper. Over 2020, Mike and his team will develop incremental plans to make this vision come to life in order to drive incremental growth for years to come. Finally, as announced in our media release today, we again increased our dividend, reflecting the interest savings realized from our amended and restated credit agreement. We're committed to continuing to grow our dividend every year in line with our annual earnings growth. Now with that, I'm going to turn the call over to Chris to talk about our first -- fourth quarter financial results and our initial 2020 guidance. Chris?

[Christopher Snowden, CFO & Corporate Secretary]

Thank you very much, Mark, and good afternoon, everyone. As Mark mentioned, we are pleased with the solid finish to 2019. In the fourth quarter, revenue increased 4.1% to $103.3 million, driven by growth in our branded channels, partially offset by the anticipated decline in our Strategic Partners segment, given the timing of shipments throughout fiscal 2019. By segment, the Jamieson Brands revenue increased 13% to $78.8 million, consisting of 10.3% growth in domestic Jamieson revenue, 37.7% growth internationally, led by growth in China as the company continues to ramp our domestic distribution opportunities as well as 4.8% increase in Specialty Brands. Revenue in our Strategic Partners segment decreased to 16.9% as anticipated due to the timing of new programs that occurred earlier in the year, and the final quarter transition away from a strategic partner who brought manufacturing volumes in-house. As previously announced in the third quarter, in exchange for a multi-year contract extension, we transitioned 1 partner program from a tolling to a turnkey relationship, whereby the cost of customer supply of raw material and the cost of tolling services were combined to determine invoice pricing, whereas under the tolling program, we only charge for the product and cost and raw materials that are passed through as we do not take ownership. The financial impact of this change will result in higher recorded program revenues, consistent gross profit dollars, resulting in lower gross margins and operating margins. Adjusting for this change, revenue decreased 21.6% in the fourth quarter for our strategic partners. Total gross profit increased 12.2% to $39.5 million, and gross margin increased 280 basis points to 38.3%. The increase in gross margin percentage was due to favorable margin mix with higher branded sales volume and margin improvements in both segments. In the Jamieson Brands segment, we generated 100 basis points of margin improvement, driven by higher volumes, increasing facility utilization and higher volumes -- and higher facility utilization and production efficiencies gained from the addition of production and packaging capacity. In the Strategic Partners segment, gross margins grew 50 basis points year-over-year, primarily due to favorable customer mix, which offset the impact of our invoicing change in the quarter. Selling, general and administrative expenses increased by $0.6 million to $17.6 million. The increase included lower business integration, international expansion, termination and other nonrecurring costs of $1.3 million compared to the prior year. Excluding these costs, normalized SG&A increased $1.8 million in the quarter due to the timing of marketing programs, investment in resources for e-commerce and our international growth priorities. Operating income increased 17.6% (sic) [ 19.8% ] to $20.3 million, and operating margin increased by 130 (sic) [ 260 ] basis points to 19.7%. Adjusted EBITDA increased 11.8% to $25.6 million, and adjusted EBITDA margin increased to 170 basis points to 24.8%. The growth in adjusted EBITDA margin was driven by our gross margin improvements in both segments. In the fourth quarter, interest expense and financing costs were $2 million compared to $2.4 million in the prior year. The primary difference was due to lower interest rates as a result of our amended and restated credit agreement, which was partially offset by the adoption of IFRS 16 on January 1, 2019. Our reported net income was $13.3 million in the fourth quarter compared to $10 million in the prior year. On an adjusted basis, net income increased 16.9% (sic) [ 16.7% ] year-over-year to $14.3 million or $0.36 of diluted EPS. All of the adjustments to net income are described in today's press release and are included in the adjusted net income reconciliation table at the end of the release. Turning to the balance sheet and cash flow. We generated $13 million of cash from operations during the fourth quarter compared to $22 million in the prior year. Cash from operating activities before working capital consideration of $18.2 million was $3.9 million higher, primarily due to increases in earnings in the current quarter. Offsetting this increase was investments in working capital of $13.1 million due to lower trade payables due to the timing of production and inventory build leading up to the fourth quarter and an acceleration of trade deductions initiated by our domestic retail partners. Higher inventories due to an over depreciation -- depletion in 2018, combined with an increase in safety stock, including unique SKUs for international customers, primarily China, to improve our customer fill rates and higher accounts receivable due to the timing of collections plus the significant growth in timing of our international revenues, which carry longer trade terms. Capital expenditures during the fourth quarter were $3.4 million, and we paid $3.9 million in dividends. We ended the quarter with over $100 million in cash and available operating lines and $164.8 million of total debt. Now let me turn to guidance. We are consolidating the commercial organization for Specialty Brands in Jamieson. This will allow Jamieson Specialty Brands' commercial organization to benefit from the best practices in place within the larger Jamieson organization. Beginning in Q1, we will present a consolidated domestic branded result and no longer break out individual revenues for Jamieson and the Specialty Brands. We are now initiating our 2020 guidance and anticipate the following. Net revenue in the range of $364 million to $376 million, representing top line growth of 5.5% to 9%. This compares to $345 million in revenue for 2019. Adjusted EBITDA in the range of 84 -- sorry, $80 million to $84 million or 5.4% to 10.7% growth over fiscal 2019, and adjusted earnings per fully diluted share of $1.02 to $1.10. Additionally, I would like to note some assumptions to assist you in your modeling. We anticipate Jamieson Brands segment growth of 6% to 9% in fiscal 2020, including the following: 3% to 5% growth in our domestic brands in Canada, reflecting the impact of new Jamieson media launch in fall 2019; our 2020 innovation plans; the strength of the current cold and flu season; and strong growth within our Specialty Brands business. This includes our expectation for planned lower inventory levels in our retail and distributor partners. Approximately 25% to 35% growth in our international business, driven by growth in China as well as expansion into new territories and expanded offerings in existing geographies. This estimate for international growth excludes the impact of revenue from our recent launch of Jamieson on amazon.com in the United States, where we expect to provide guidance upon initial results in Q2 2020. We expect Strategic Partner revenue growth of approximately 5% to 10%, with the change from tolling to turnkey agreement with a customer accounting for approximately 50% of this growth. We continue to expect normalized SG&A increases of 6% to 9% in support of our marketing to accelerate our growth in international markets, and additional resources to support our continued expansion in e-commerce initiatives. We assume interest expense of approximately $7 million to $7.5 million and additionally, our guidance reflects the assumption of CAD 1.32 to U.S. exchange rate and an effective tax rate of approximately 28%. Our estimate of fully diluted shares is between 40 million and 40.5 million. Please note that during the first quarter, we expect stronger domestic branded revenue growth of between 5% and 10% as a result of customer demand from increased promotional activity in response to our new television and digital media efforts as well as a strong cold and flu season thus far. We anticipate 15% to 30% international growth as we anticipate a short-term delay in the launch of our products in China due to the extended Chinese New Year and limited -- and limitation on transportation resulting from the coronavirus outbreak. While our guidance for Q1 and fiscal 2020 includes all of the known impacts of the coronavirus, this is an evolving situation which creates a potential risk to delay our planned expansion in China, and could potentially impact the availability of specific ingredients only available in our Chinese market. Now we have taken steps to ensure that our current demand is supported by available supply as we have proactively secured incremental inventory or alternative supply for these products. We will continue to monitor the situation and reflect any changes in the environment in our future guidance. Strategic Partner revenue is expected to decline 10% to 20% during the fourth quarter as we compare it to a pipeline fill in the first quarter of 2019. Additionally, our marketing and trade spend will be more heavily weighted in the first quarter, and we expect this to increase by approximately $1 million in addition to our guided SG&A grew -- growth year-over-year. A complete discussion of the outlook and factors impacting our expected performance in 2020 is included in the outlook section of the MD&A that will be filed today. In closing, we continue to make investments in key growth opportunities included our continued expansion in Canada, e-commerce -- in China, our e-commerce efforts and our initial entry into the United States this year, all of that driving long-term growth of 6% to 10% in EBITDA. With that, I'd like to turn the call back to the operator for Q&A.

[Operator]

[Operator Instructions] First, we'll go to Sabahat Khan from RBC Capital Markets.

[Sabahat Khan, Analyst]

Just a quick follow-up on the commentary around China. I guess based on your current outlook, have you built in any impact beyond Q1 for any further impact? Or is it largely kind of you shored up some supplies, and you see some impact in the near term, and then we'll play it by ear from there on?

[Mark Hornick, President, CEO & Director]

So Sabahat, let me give you our whole perspective on this. So first and foremost, this is a global pandemic, so our main concern, first and foremost is our employees in China as well as our partners. We've been fortunate, and we're grateful that at this time, no one in the Jamieson organization or our partners in China have been affected by coronavirus. So we're grateful for that. From a business perspective, the situation has evolved very quickly, and there are still some uncertainty around things. But Jamieson and our partner in China have been very proactive in helping to ensure to the best of our ability that were able to meet both the changes in demand caused by the situation as well as mitigate potential supply risk. We have seen the impact of pandemics twice so far in recent history: one was the SARS outbreak and the other was H1N1. And in both cases, you have factors driving changes in demand and changes in supply. And so from a demand perspective, what we've seen is consumers, particularly in China, but also in other countries as well, looking to do their best in terms of making sure they protect their health. So increasing things like the frequency of hand washing, purchasing disinfectants and also, there is a tendency towards taking more vitamins, particularly vitamins that affect immune health. And so we've seen shifts in demand related to that, which we've been able to continue to supply, which has some impact of offsetting bricks-and-mortar rollout in China, which we anticipate will probably be delayed into late Q2 or Q3, and that's kind of the working assumption that we're going on there. As far as supply, we acted in January to ensure that we could proactively increase stock on all the key raw materials that had any potential to be impacted by coronavirus and its fallout. And we're currently in a position that we believe that we're fully able to meet all of our Q '20 sales and profitability objectives as well as any potentially shifts in consumer demand as well. So despite the obviously significant concern that we have as an organization, we were able to proactively put in place several measures, I think, to secure our business position and our ability to serve our consumers. And all of that is now taken into account in our guidance. And to just repeat kind of more pointedly to your question, we are anticipating that in our modeling, that we'd be able to continue our bricks-and-mortar rollout earliest kind of late Q2, sometime in Q3.

[Sabahat Khan, Analyst]

Okay. And then just on the kind of secondary impact of people taking up more vitamins. Have you seen that? Or is there -- does that kind of follow-on maybe later on? Have you seen any of the pickup in demand in Canada, for example?

[Mark Hornick, President, CEO & Director]

We do see shifts in consumption, but it's very much connected to only the immune-type vitamins. It's not vitamin in general. So we do see some pickup in vitamin C consumption, for example. Products that we have like Cold Fighter, et cetera, they tend to be fairly successful at this time of the year anyway, because we're in cough and cold season, but we do see some pickup in that. But it's not in the broader stroke given how diverse our vitamin portfolio is, it wouldn't be something that would cause a material difference in the flow of our business.

[Sabahat Khan, Analyst]

Okay. And then just one on your branded business in Canada, with the growth that you're pointing to, the growth that you've had over the last few years, where do you still see opportunity for growth in the Canadian market? Like where is it coming from? And second part is, can you update us on what market share you ended up with as of the end of last year?

[Mark Hornick, President, CEO & Director]

So we're in a position where our market share has continued to grow, which is an exciting position to be in. We're not -- because it comes from a proprietary store, so we're not going to disclose our market share, but I can tell you that it's continued to grow since the IPO on a fairly consistent basis. And we're in a situation now where we are probably at the highest market share that we've seen as a company, which is exciting. The fundamentals that drive our business are all still in place. So you have aging population, rising disposable income, focus on prevention, and consumers really getting more information, particularly from digital media, to understand the category better. But for example, the traffic to our website in 2019 is up 72% versus 2018. The majority of those consumers turning to Jamieson to find out information on how they can do more for their health. And so that provides an undercurrent of growth. From our perspective, we continue to drive growth through innovation. But now excitingly, with the new structure that we're putting in place, we're going to get much more proactive in sharing the consumer insights that we have on the Jamieson brand with vitamins and consumers in general, to promote our Specialty Brand. So when you think about the Jamieson brand, we have so many consumers taking Jamieson. We have almost 40% household penetration. If you equalize that across the population, you have like 18 million Jamieson consumers, very few of whom really know a lot about Lorna Vanderhaeghe or Precision, Progressive or even Iron Vegan. And so now we are in a position where we can take our growth to the next level by getting consumers to include these other brands that we have into their vitamin regimen in order to improve their whole performance around their own individual health and wellness journey. And that's a really exciting mix. Definitely believe that once those plans are in place, we're going to be able to catalyze then another step change in our growth trajectory. So we're really excited about the future with regards to that.

[Sabahat Khan, Analyst]

And then just one last one. Are you able to update us on what proportion; of your sales are online? Whether that's through your own website or through your partners' retail websites? Just trying to understand where you're at and how that might have changed over the last few years with the digital push.

[Mark Hornick, President, CEO & Director]

It's increasing exponentially, I would say, is the best way to describe it. So we don't have -- we're not going to get channel-specific with regards to our revenue just based on our policy. But digital commerce is producing triple-digit growth versus previous year in terms of our sales, and that's right across the board, whether that's Specialty Brands or Jamieson itself.

[Operator]

And next, we'll take from Endri Leno from National Bank.

[Endri Leno, Associate]

Just a few for me. First, I just wanted to start on the Jamieson Brands, the increase in quarter. You also mentioned you had some higher shelf space at a key customer. I was wondering if you can talk a little bit about that. If you can share the customer? What caused shelf space? Was it new product? Or just simply taking market share?

[Mark Hornick, President, CEO & Director]

Well, we're not -- we don't like to talk about customers specifically on our calls, with small marketing. We don't want to speak for them. But what we would say, Endri, is that based on the success that we've had, particularly over the past 2 years on the Jamieson brand, the combination of innovation success as well as just the increased penetration of the brand and sales of the brand is driving retailers to look at how they can most efficiently deploy the shelf space that they have. And we've been quite successful in working with our retail partners to expand the offering that those retailers have for Jamieson, and in the quarter, we had particular success with one key important customer. And interestingly, it's also driving a broader distribution base. So as shoppers are looking to alternative channels to shop vitamins that, probably in the past, may not have been as well-known for vitamin shopping as they are now, particularly things like gas and convenience and dollar stores. Consumers want to be able to do their shopping where they go to the store, and so what we're finding is those retailers are increasingly interested in having a vitamin offering, and we've been quite successful in working with them to make sure that they're offering the market leader. And so all of that combined is helping us grow the baseline of consumption for the brand, as you can see in Q4 with a 10% year-over-year increase in Jamieson. It's quite something.

[Endri Leno, Associate]

Great. That's fantastic. And just a couple of questions actually on China. I just want to get like just a little bit specific, because some other companies have mentioned issues to packaging in China. I mean first, I was wondering if you do get your packaging in China. And then, I mean, I know all vitamin C that is produced there, are there any other product that are produced there? And since it has been a bit of a tight supply, have you seen any increase in raw material costs?

[Mark Hornick, President, CEO & Director]

So we -- from an overall perspective, we don’t disclose the origin of our supply of raw materials or packaging for competitive reasons. So a lot of what we do is proprietary to Jamieson, and so we don't want to get into segmenting our particular ingredients and their origins and disclosing that from a competitive standpoint, because we don't think that really would -- really be a -- would serve the brand very well. That said, as the issue is around the world, what we did in early January once it became clear that coronavirus is on the rise, is we leveraged our -- their past experience that we've had with SARS and with H1N1. We did a complete scan of all of our raw and packaging materials and where they come from globally, and we put ourselves in the position early that we would be able to meet both shift in consumer demand as well as potential supply interruption should that occur. And so all of that work has already been done, and we're confident based on that, that we are in good shape to be able to deliver all of our objectives for 2020.

[Christopher Snowden, CFO & Corporate Secretary]

The only thing I'd add to that, Mark, is that all of our raw material pricing for our major ingredients are under contract. So there's been no price fluctuation in those procurement -- in our planned procurement costs thus far.

[Mark Hornick, President, CEO & Director]

Perfect. Thanks for that, Chris.

[Endri Leno, Associate]

Great. And one last one for me, just a little bit in terms of the working capital. You mentioned the longer trade terms in international versus domestic. I was wondering if you can elaborate a little bit, how much is the difference between the 2? How do you see it evolving? And on the inventory, I mean, is it a bit of a higher level in Q1? Do we see it drawing down in Q2 a little bit on [ exit ]. If you can elaborate on those 2 points, and that's it for me.

[Christopher Snowden, CFO & Corporate Secretary]

Yes. So where domestic trade terms are normally around 30 days, international trade terms are anywhere between 90 to 120. And that reflects the fact that in those cases, we're using sea freight to ship product to our distributor partners, and that reflects just the time to get into the market. And helping our partners manage through that working capital on their side as well. From an inventory perspective, you had, I think, what would be called a one-time increase in 2019. That really puts ourselves in a better position to fulfill our customer demands and make sure that our customer fill rates are best-in-class. So that increase, I think, has been paid for now, and then you'll see now the seasonal flow, a new normalized seasonal flow of building as we head into Q3 and then drawing down between Q3 and the end of the year. In most cases, the year-end will be our lowest inventory point.

[Operator]

And next, we'll go to George Doumet from Scotiabank.

[George Doumet, Analyst]

Congrats on a solid year. I just wanted to look a little bit deeper onto a 3% to 5% Jamie domestic kind of 2020 and longer-term guidance. It seems like we've been running at a higher cadence lately. So just wondering is that some conservatism? Or maybe can you call out some factors that are maybe potentially driving this for cadence?

[Mark Hornick, President, CEO & Director]

Yes. We see good uptake from a customer POS perspective, certainly in line or ahead of our expectation. It's really in response to what we're healing -- hearing from retailers and distributors in the market to reduce their inventory positions. So from that perspective, we just don't want anybody to be surprised by the fact. I'm sure if people are covering retail on the other side of the street, they're hearing those initiatives from those public companies as well. So we just don't want to have any surprises work through the year, if that comes to fruition.

[George Doumet, Analyst]

Okay. Maybe just kind of switching gears to China. You guys are running around 21 products there. Just wondering if you were to look out 2 to 3 years and -- to meet your kind of international goal of growing by 25%. What do you foresee the number of products out there? And maybe, what categories are you kind of -- subcategories, if you will, you guys really focusing on there?

[Mark Hornick, President, CEO & Director]

We're following the availability of licenses that are published by the China FDA. So for a bricks-and-mortar retail, 3 to 4 years from now, you would probably see from us somewhere, I would say, around 40 to 50 solid products. We may find that some licenses that we have in the long-term don't provide -- they're regulatory approved, but they don't provide the sales base that we're looking for, and some will provide more. So we'll probably end up with a domestic set somewhere in that 40 to 50 product range 3 years out. What's important to know, though, is from a cross-border e-commerce perspective, we have well over 100 products available for sale in China right now, and that continues to increase as we take the innovation that we generate here in Canada and then make that available in China. And all of those products are ready for sale, Canadian products, that are made available as foreign brands to the Chinese consumer through cross-border e-commerce. We have 2 different channels you got to think about when you look at the business holistically.

[George Doumet, Analyst]

That's helpful. And just one last one, if I may. Looking at the balance sheet, we're well below or at least it looks like you're running well below our comfort zone kind of exiting this year. You guys alluded in the past that acquisition multiples aren't cheap, and the larger kind of midsized ones tends to come and go on a pretty lumpy basis. So just wondering from a return to capital standpoint, would you guys look to do something a little bit more aggressive like SIB or NCIB if we don't see any acquisitions over the next 12 months?

[Mark Hornick, President, CEO & Director]

I think we'll manage at the current kind of cadence around dividend increases. Our float isn't the largest float on the street. So we would be very cautious if we ever went down the road of a share -- potential share buyback. That, I think we're just going to be very responsible around capital allocation, continue to invest in the business, and then when the right opportunity comes, we'll have the balance sheet and the strength to be able to act.

[Operator]

[Operator Instructions] Next, we'll go to Matt Bank from CIBC.

[Matt Bank, Associate]

Okay. I wanted to ask, you mentioned media campaign a few times in your prepared remarks. Can you just elaborate on your plans in terms of media initiatives for 2020? You mentioned TV, but anything sort of more broadly, the way you're thinking about it?

[Mark Hornick, President, CEO & Director]

So TV remains a core baseline for consumer communication here in Canada to provide reach to the broader community and audience. And we supplement that with a combination of digital marketing direct-to-consumer. We do a significant amount of PR around themed events or around -- like for example, we have quite a bit of product placement in PR events right now around immune health, for example, because it's cough and cold season. Around our new innovation, we do digital media around that as well. And in-store, of course, we spend significant resources with our retail partners to promote our new innovation, and again, to promote different themes. So for example, February is healthy heart month, so you will see a significant amount of in-store communication around products, like our Omega, for example. All of that kind of comes together in our marketing plans and has the power to increase consumer consumption. Interestingly enough, Matt, I don't know if we talked to you about this, but we have a proprietary model here that we developed with an outside party that allows us to segment and measure the individual sales uplift of all of the different aspects of our marketing campaign in order for us to get the right marketing mix to be able to drive the highest revenue at the most efficient cost. And so we've honed that over the past 5 years, and as a result, we think we have a little bit of a competitive advantage in understanding how to take a given budget for marketing and get the most out of it. And if you look at the sales performance of the brand and the pending market share growth that we've pooled over the past 3 years, it looks like that's really helping us to deliver on that.

[Matt Bank, Associate]

And then I wanted to also ask, it came up on the last conference call, one of your large customers is going from third-party to in-house distribution. That could impact Q4 and Q1. How did that end up playing out?

[Christopher Snowden, CFO & Corporate Secretary]

Matt, in spite of our trepidation, that actually worked through on a fairly orderly basis. So there was no significant impact to Q4, and so far, Q1 is on track. So that impact has been taken into consideration as we put out guidance for Q1 around our domestic growth in the quarter.

[Matt Bank, Associate]

Okay. And just last quick one for me. Do you have a target for debt pay down in 2020?

[Christopher Snowden, CFO & Corporate Secretary]

I don't think that -- yes, I think when we look at kind of our cash flow from an operating perspective before working capital, we would expect single digit investment in working capital for 2020. We'd expect about $10 million in capital expansion as well again in 2020. Beyond that, from a dividend perspective, I think you can calculate where that current run rate is, and then the difference between those 3 numbers would be our debt pay down. And I would guess that would be anywhere between $10 million and $20 million.

[Operator]

[Operator Instructions] Next, we'll go to Ammar Shah from Eight Capital.

[Ammar Shah, Research Analyst]

I guess first from me, I'm just wondering, I know you guys have consolidated the Specialty Brands into Jamieson branded. But just curious if you could give some color on where that might grow for 2020. And then just kind of how you think about that internationally? Do you plan to roll that out at some point in the near future?

[Mark Hornick, President, CEO & Director]

So we're expecting some solid growth across all of our brands in Canada in 2020. We've got very strong innovation across the board on every single brand, with great promotional plans as well, and we have a very solid consumer base to drop front end and also to grow. Our strategy internationally is really to focus on the Jamieson brand. But we do have the ability to use our Specialty Brands as sub brands of Jamieson when we introduce them into a new market. So for example, if we launch Iron Vegan in the U.S. that would be Iron Vegan by Jamieson. So the Jamieson mother brand will connect all of the brands, so that we have one international mother brand going forward, but then we'll be able to use the individual brand personas of our sub-brands to differentiate them within the portfolio. But on an -- from an international perspective, the view is to come to the market with one solid, well-known 100 years of history in quality Canadian Jamieson brand.

[Ammar Shah, Research Analyst]

Okay. Great. And just touching on the U.S. I know you said in the prepared remarks that you'd start with probiotics, but I don't know if you're willing to give color. But just looking further out, are you able to talk at all about how many products we might be able to see or different types of products by the end of the year, or something like that?

[Mark Hornick, President, CEO & Director]

Well, Ammar, the -- our venture into the U.S. definitely has a learning and a test component to it. Where we're starting off as a fairly -- a very strong foot with a very unique selling proposition with a TRU-ID tested globally, we believe, globally superior probiotics formula that consumers can't readily find with competition, as their first interaction with the Jamieson brand. As we gain knowledge and experience around the success of that, we will bring the products that we feel best suits competitive advantage opportunities in the U.S., and bring them as quickly as that makes sense. From a disclosure standpoint, though, because it's a competitive market in -- as our competitors in the U.S. well know now that we're entering the U.S. market, we probably won't be able to be as open as you would probably like on exactly what we're doing for the reason that it wouldn't really serve us very well because as we release that to you, our competitors now know what our plans are. So we'll have to ask you for a bit of patience with regards to making sure that we give you a balance of information that allows you to overall see the progress and the potential, without putting ourselves in a disadvantaged position from a competitive standpoint.

[Ammar Shah, Research Analyst]

No, for sure, that makes sense. And then just one final one for me. Obviously, it's nice to see gross margin expansion in the quarter and I guess, years past. Just curious, do you see further upside in that metric, perhaps closer to that 40% mark? Or are current levels more better for run rate purposes?

[Christopher Snowden, CFO & Corporate Secretary]

So if you dig into our guidance for 2018, what you'll find is adjusted EBITDA guidance that's pretty well in line with our adjusted EBITDA rate in 2019. And what that reflects is, it reflects an increased investment in marketing and promotion that's going to help drive growth of the brand, particularly in the U.S. and in China. So we're taking some of that margin growth, reinvesting it into the brand to drive faster growth and presumably higher sales.

[Mark Hornick, President, CEO & Director]

What you see from our P&L over time is that our -- the biggest driver of margin expansion overall is volume and branded volume, more specifically. So as our mix becomes more and more favorable towards branded volume and as the overall volume of the company increases, our goal is that is a hand-in-hand improvement in gross margin as well. So that's our goal. So we're not putting a cap on anything.

[Operator]

And at this time, I'd like to turn the call back to Mark Hornick for closing remarks.

[Mark Hornick, President, CEO & Director]

Well, thank you very much for joining us to discuss our fourth quarter and our full year 2019 results. We're very pleased with the results that we have in 2019, and we're extremely eager to embark on 2020 as we see really great opportunities to expand our brand, expand our consumer base and expand our footprint, allowing us to improve the world's health and wellness. Thanks very much, and we'll speak to you on the next earnings call.

[Operator]

And that does conclude our call for today. Thank you for your participation. You may now disconnect.