Jamieson Wellness Inc

TSX:JWEL

Earnings Call Transcript 2020-Q4

[Operator]

Good afternoon, everyone. Welcome to the Jamieson Wellness conference call to discuss financial results for the fourth quarter and full year 2020. [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; Mike Pilato, President of Jamieson Canada; 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 2020 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 the filings with the Canadian securities administrators for more detailed discussions of the factors that could cause actual results to differ materially from those projections and any forward-looking statements. The company undertakes no obligation to publicly correct or update the forward-looking statements made during the presentation to reflect future events or circumstances, except as may be required under applicable 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'll now turn the call over to Mr. Hornick to get started. Please go ahead, sir.

[Mark Hornick, President, CEO & Director]

Well, thanks, James, and good afternoon, everyone. Thank you for taking the time to join us for our Q4 and full year 2020 financial results call. Before we begin, as you might expect, I'd like to take the time to address our leadership transition, which we announced concurrently with earnings this afternoon. I'm very pleased to announce that on June 1, Mike Pilato will become President and CEO of Jamieson Wellness upon my retirement from the company. Early retirement has always been a personal goal. And with the planning that the Board, myself and Mike have been able to do together, the timing is now right on all fronts. Over the past 2.5 years, we worked with Mike to prepare him in a way that not only will result in a seamless transition, but a significant upside for our business in the future. And I know most of you have already had the chance to interact with Mike. But I met Mike in 2017. And from our first meeting, it's very clear to me that he'd be a perfect fit for our company. He joined us the following year, and since then he's shown phenomenal performance and capabilities in progressive leadership roles, ultimately leading the strategy and operations as the President of Jamieson Canada. He came with an extremely strong background, including being the President of Clorox Canada for 4 years prior to coming to Jamieson. His increasing responsibilities here over the past 3 years have prepared him to be uniquely positioned to balance the continued execution of our winning strategy, which he has developed, and also being able to adopt the future changes in our environment. The fundamentals of Jamieson Wellness have never been stronger, and Mike has the respect and support of our entire team, which ensures that we are well positioned to build on our progress to date and then take Jamieson for the next level. Mike and I are going to finish our transition over the next 3 months. I've thoroughly enjoyed my 7 years here at Jamieson, and I am thrilled with the continued momentum we are sure to see.Now let's go on to Q4 results. As you might expect, I am very proud to record such a strong finish to a challenging year for everyone. The COVID-19 pandemic made health and wellness a top priority for consumers in 2020, and Jamieson Wellness was there to support them. Our existing consumers increased their daily compliance and added more vitamins and supplements to their routines. We also engaged many new consumers as shoppers looked for quality brands they could trust during an uncertain time. The COVID-19 pandemics has also tested our Jamieson team's ability to navigate unprecedented challenges in a constantly changing environment. I'm incredibly proud of how our team pulled together to ensure uninterrupted supply of products when our consumers needed them most, while doing everything possible to maintain a healthy and safe working environment for our people.Now let me walk through some financial highlights in the first quarter. During the quarter, we saw a continuation of the strong trends we experienced earlier in the new reporting revenue of $120 million, representing growth of nearly 17% from the fourth quarter of 2019. Adjusted EBITDA increased almost 15% to $29 million and adjusted EPS was $0.42, which is an increase of 17% versus the year earlier period. The Jamieson Brands segment revenue increased nearly 14%. We benefited from the underlying strength in the overall VMS market, the power of our brand, supported by our winning marketing and innovation strategy and solid execution. This has led to another consecutive quarter of increased market share, of which I'm very proud. Similarly, the breadth of our business continues to impress as we experienced solid performance across all of our major categories and all of our channels.We have a new expanded consumer base coming out of 2020 globally that we look forward to growing from in 2021. In the fourth quarter, our international revenue increased nearly 15%. And when combined with the timing of shipments in previous quarters, resultant full year international revenue growth was 50%. Consumer demand remains strong and -- in its broad-based category across different geographies, including China, Eastern Europe and the Middle East. In the fourth quarter, the pace of growth on a year-on-year basis normalized compared to the third quarter, which benefited from earlier shipments of cough and cold products in anticipation, of course, of accelerated demand. Our Strategic Partners segment had another strong quarter with revenue increasing 25%, consistent with the rate of growth we experienced in the third quarter. Of course, timing again is a factor as order fulfillment was more back-end weighted in 2020. In summary, we have solid momentum in all of our business and remain well positioned to continue driving strong growth in 2021. Before I turn the call over to Chris and then Mike, to discuss our financials and guidance, I want to stress that the health and wellness and safety of our employees, customers and communities remains our top priority at Jamieson. In addition, we continue to accelerate our investment plans in our manufacturing facilities to increase production capacity to ensure that we have the ability to meet increasing consumer demand for our products that our consumers trust and rely on.And with that, let me turn the call over to Chris to discuss the fourth quarter's financial results.

[Christopher Snowden, CFO & Corporate Secretary]

Thank you, Mark, and good afternoon, everyone. As Mark discussed, our business continued to perform very well and grow steadily, reflecting elevated demand stemming from our customers' ongoing focus on their health and wellness.In the fourth quarter, revenue increased 16.6% to $120.4 million, driven by strong growth in both reported segments. In Jamieson Brands, revenue increased 13.9% to $89.7 million, consisting of 13.7% growth domestically and 14.8% growth internationally. We've gained share domestically as point-of-sale growth consistently demonstrated expanded consumption and the development of a broader consumer base.International growth reflected timing of shipments to China realized in the preceding quarter. We continue to experience strong demand in each of our primary international markets resulting in fourth quarter shipment growth in Eastern Europe and the Middle East.Revenue in our Strategic Partners segment increased 25.3% and reflecting timing factors as well as higher soft-gel volumes, offsetting lower powder volumes in the quarter. Gross profit margin decreased 300 basis points to 35.3%, including 130 basis points primarily from the impact of transition costs associated with our move to a third-party logistics provider. Normalizing for this impact, gross profit margin declined by 170 basis points, including 110 basis points from the impact of higher costs to maximize output and ensure supply continuity, and 60 basis points due to segment mix attributable to higher strategic partner volumes as a percentage of our overall revenues. In the Jamieson Brands segment, gross margin decreased by 260 basis points to 43%, including 180 basis point impact from the transition and start-up costs as we adopt a new third-party logistics model to make room for capacity expansion projects in our Rhodes and Scarborough facility. On a normalized basis, gross margin in the Jamieson Brands segment decreased 80 basis points, reflecting higher supply continuity costs, including our COVID-19 health and safety measures, partially offset by gains from promotional efficiency and increased volume.Strategic Partners segment gross margin declined by 170 basis points to 12.9% as efficiency from higher soft-gel and tablet volumes were offset by increased supply chain costs and a reduction in volume and efficiency at our powder processing facility. Selling, general and administrative expenses increased by $1 million from a year earlier to $18.6 million. Excluding the impact of specific costs related to COVID-19 and business integration, normalized SG&A expenses increased by $1.4 million to $18.1 million. The majority of this increase was attributable to the Jamieson Brands segment, with increased headcount to support worldwide and e-commerce expansion, higher variable compensation and increased marketing investments. Operating income increased $2.4 million to $22.7 million, and operating margin decreased 80 basis points to 28 -- sorry, to 18.9%. On a normalized basis, operating income increased $3.7 million to 29-- $24.9 million, and adjusted operating margin increased 10 basis points to 20.7%. Adjusted EBITDA increased 14.6% to $29.4 million, and adjusted EBITDA margin was 24.4% versus 24.8% in the year earlier period. The modest decline in adjusted EBITDA margin reflects segment mix and incremental cost to maximize output, secure supply and the costs associated with COVID in our operating facilities. This was offset by a reduction of selling and general and administrative expenses as a percentage of revenues.Interest and financing costs were $1.4 million compared to $2 million, reflecting reduced borrowings and lower interest rates compared to the year earlier. Our effective tax rate in the fourth quarter was 25.5% compared to 27.6% in the fourth quarter of 2019. This is due to the impact of nondeductible share-based expenses relative to higher earnings. Our reported net income was $15.4 million in the fourth quarter compared to $13.2 million in the prior year, an increase of 17%. On an adjusted income basis, net income increased 23.6% to $17.6 million and adjusted diluted EPS increased by 16.7% to $0.42. All of the adjustments to net income are described in today's press release and included in the net -- adjusted net income reconciliation table at the end of the release. Turning now to the balance sheet and cash flow. We generated cash from operating activities before working capital considerations of $22.2 million, a $4 million increase from the prior year, primarily due to higher earnings in the quarter. Cash invested in working capital decreased by $1.7 million due to the timing of payments and significant shipments in the quarter. Capital expenditures during the fourth quarter were $4.2 million, and we paid approximately $5 million in dividends. We ended the quarter with over $127 million in cash and available operating lines.Additionally, the Board of Directors of the company have declared a cash dividend in the fourth quarter of 2020 of $0.125 per common share or approximately $5 million in aggregate. The dividend will be paid on March 15, 2021, to all common shareholders of record at the close of business on March 5, 2021. Now with that, let me turn the call over to Mike to discuss our guidance.

[Michael Pilato, President of Jamieson Canada]

Perfect. Thank you, Chris. Good afternoon, everyone, and thank you, Mark, for your comments at the top of the call. They are very, very much appreciated. It's been a great, great privilege to work alongside you for the past few years, and it's something that I will take some lessons with me from you for the rest of my life. So thank you for that.Before we discuss 2021 guidance, I just want to say I am honored to have been chosen to lead this incredible company and this passionate-driven team. I'm grateful to Mark and the Board of Directors for their support and confidence, and I'm looking forward to continuing this great story and this great track record of success here at Jamieson. I'm fully committed to continuing to execute on our proven growth strategy and committed to staying ahead of consumer trends around the world to continue driving strong growth and market leadership.2020, as you just heard, was an incredible year for Jamieson, building on what was already multiple years of branded business growth driven by our world-class marketing and innovation initiatives. We are driving accelerated brand growth pre-COVID, and we believe the strength of 2020 has bolstered our 2021 growth prospects and the future of this company. We continue to see points of consumer data and business results that indicate we are now operating off a new elevated base of consumers and a step change for our category and for our brands from which we will continue to grow.Health and wellness in vitamins, minerals and supplements, we're seeing sustained growth as the global megatrend pre-COVID. It has accelerated during COVID and we are confident, and we'll continue to see sustained growth post-COVID as consumers continue to drive towards healthier lifestyles, preventative health care solutions and self-care. Based on this, we are initiating our 2021 guidance and anticipate the following. Net revenue in the range of $421 million to $438 million, representing top line growth in the range of 4.3% to 8.6%. The this compares to $404 million in revenue for 2020, reflecting consumer concern for their health and wellness driving demand for our branded products, both domestically and international. We expect adjusted EBITDA in the range of $95 million to $100 million or 8% to 13.6% growth over fiscal 2020 adjusted EBITDA of $88 million and adjusted diluted earnings per share of between $1.24 and $1.32.Revenue in the Jamieson Brands segment is expected to increase between 4% and 8% compared to fiscal 2020, driven by growth in the following categories. Domestic branded revenues are expected to grow between 2% and 5%, including the impact of both pricing and volume expectations while lapping surge COVID-19 demand realized early on in the pandemic. We plan to expand our market position by continuing to focus on innovation and consumer education, while increasing investments in digital commerce. We expect our international growth to continue to be strong at 20% to 30%, excluding a 5% headwind resulting from strengthening Canadian dollar. Our guidance reflects strong growth in China, while sustaining a higher baseline demand in our remaining international markets. We will increase our marketing investment in China to build brand equity and accelerate our long-term growth in the region. Revenue in the Strategic Partners segment is expected to increase between 5% and 10%, reflecting the higher demand of our customers branded products. The foregoing financial outlook is based on the following assumptions for fiscal 2021. Normalized SG&A expenses will increase by approximately 9% to 13% as we continue to expand in our e-commerce capability, and we grow marketing investments, including approximately $3 million to $4 million investment in marketing, primarily to support our long-term international growth opportunities. Depreciation will be approximately $10.5 million, reflecting the acceleration of capital additions and our third-party logistics platform. Interest expense of approximately $5.5 million to $6 million based on our estimated borrowing and prevailing rates. Income tax rate of approximately 27% and a fully diluted share count of between 41.5 million and 42 million shares. A complete discussion of our outlook and factors impacting our expected performance in 2021 is included in the Outlook section of our MD&A that will be filed today. With that, now let me turn the call back to James for Q&A.

[Operator]

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

[Sabahat Khan, Analyst]

Just on your 2021 guidance for revenue, can you maybe shed some color on what you're seeing by channel heading into 2020 -- going through 2021 across food, drug and mass and is there any channel that stands out to the upside or to the softness?

[Michael Pilato, President of Jamieson Canada]

Yes, thanks. It's Mike, thanks for the question. We have seen strong growth across all the channels we play through 2020. And we are not presently seeing any slowdown in -- as we flip into the new year. So we talked about this in the last few calls. The growth has been led by e-comm. It definitely was the strongest growing channel. But we've seen growth across every channel in Canada: food, drug, mass, we've seen club, we've seen dollar, we've seen it across the board and the elevated levels of demand we're seeing from the consumer we expect to continue.

[Sabahat Khan, Analyst]

Okay. And then, I guess, just on that theme, one of the topics that we've discussed a lot this year is the new consumers that have entered the category, the existing ones that are using the product more. I guess, where do you stand on that as in 2020? How are the trends at the end of the year versus perhaps during summertime during peak pandemic? And what's your expectation for consumers to continue to stay with the category through this year?

[Michael Pilato, President of Jamieson Canada]

Yes. So we've seen sustained elevated levels of demand through the entire year. After we got through that initial COVID panic buying period, we saw elevated levels of demand remain consistent through the year. And it was really led by the trends we've talked about: new entrants into the category, increased compliance across pre-COVID consumers, continued growth across all of the categories or most of the categories I should say, not just limited to immune-boosting products, and this continued shift to quality where consumers are looking for brands that they know and they trust. We're extremely confident based on a couple of data points and some research that we have out in the marketplace that tells us consumers are going to stay with the category long term. We know from the past that the longer consumers build vitamins, minerals and supplements into their daily habits and routine, the higher likelihood it is to stay in the category. We know this from our past success. We know this from all of our research over the years. When we talk about that, typically, we talk about the consumer staying in the category 3 to 4 months. And then there is a high likelihood they stay in the category. We're going on a year now, and we're seeing some trends continue to strengthen. We've seen new consumers enter in the early days of the pandemic. We've seen them repeat purchase and we're seeing new consumers enter the category since. On the increased compliance side, our research shows us that more and more consumers are increasing their usage of vitamins, minerals and supplements and actually crossing over to more categories. And we've seen that number of crossover increase in every wave of research that we've done. And it's been quite encouraging to see for us. So we're very confident that they will stay with us.The other piece I would talk about this while we have everyone here is this increased research that we're seeing in the press and we're seeing around the world on vitamin D. There's upwards of 65 studies going on, on vitamin D around the world. And the studies are looking at the impact of what vitamin D has in terms of fighting off or lessening the impact of COVID. And the scientific data that's going to come out of that research is going to be quite incredible, we believe, and it will halo out to over more than just COVID, it will halo to general virus and strong immune system boosting overall. We're very confident that, that's going to help drive this category for the long-term and that section of the category for the long-term as well. We recently fielded some research in market in Canada, and what came back is that 50% of consumers are aware of the vitamin D research going on around the world, are following it and are looking to increase their vitamin D usage through this. So lots of science point us in the direction we've been talking about for the last 3 quarters.

[Sabahat Khan, Analyst]

Okay. And then just one on China. With, I guess, the COVID trending up, I think we've seen uptick in demand, even abroad. But can you maybe update us on your legacy strategy there? Some of the licensing process that you are part of and some of the retailers that you're trying to get shelf space with. Maybe an update on how that strategy is expected to payout over the course of 2021 as we move beyond the impact of the pandemic?

[Michael Pilato, President of Jamieson Canada]

Yes. We have had tremendous increase in business in China over 2020, and it has followed our strategy but shifted a little bit due to the pandemic, and we've talked about it before. So we -- the e-comm side of that business has continued to accelerate at very high demand levels, and we continue to grow there. Mainly due to the fact that early on in the pandemic when China was pretty much shut down, consumers shifted more to e-comm than what we originally expected. And that was great, and we picked up a lot of growth there and we continued to invest in those capabilities and in the marketing that we used in that channel. We did see an initial slowdown early in the year in terms of our distribution of brick-and-mortar stores in Mainland China. But once that country started reopening and the stores started reopening, we got right back to plan in terms of number of stores that we're in, the distribution that we expected for the year and, frankly, the number of registrations that would allow us to build a shelf set of scale of which we can now grow off of. So we have scale in our shelf set, the numbers of registrations we have, and we have some scale building in the numbers of stores we're in. So our strategy is moving forward. You heard we've invested marketing in international led by China in 2021, and we expect to continue to accelerate that growth.

[Operator]

Next we'll hear from Peter Sklar with BMO Capital Markets.

[Peter Sklar, Analyst]

First of all, a couple of things impacting your margin I don't quite understand. I think you said that transition to a new logistics framework was a drag of 130 basis points. So could you explain what that means?

[Christopher Snowden, CFO & Corporate Secretary]

Yes. So this is us essentially moving our distribution centers out of our Twin Oaks drive facility in Windsor and our Scarborough facility to a third-party logistics provider. So it is really just transition costs of setting up and moving that inventory to make space for additional capacity, generating projects in our existing facilities.

[Peter Sklar, Analyst]

So Chris, that -- then that won't be repeatable, that's kind of a onetime item?

[Christopher Snowden, CFO & Corporate Secretary]

Yes. So we talked about this in our guidance at the end of the third quarter that, that project is ongoing between Q3 -- it started in Q4 and will be completed in Q1. So the costs to move and establish that distribution framework will be in those 2 quarters. But ongoing, they will not affect our margins.

[Peter Sklar, Analyst]

Okay. And then the other item was something called supply continuity costs. Could you explain what you mean by that expression?

[Christopher Snowden, CFO & Corporate Secretary]

Yes. So those are all the costs related for us to ensure that we maximized our throughput. It's the use of third-party manufacturing and packaging to increase throughput. It's the COVID costs in our manufacturing facilities with shift gaps, physical distancing and PPE. It's also the cost of accelerated freight and taking on additional inventory to ensure that we have the supplies of any at-risk critical ingredients.

[Peter Sklar, Analyst]

Okay. And so those costs will still be in even in 2021, won't they?

[Christopher Snowden, CFO & Corporate Secretary]

Yes. So we expect -- those costs have impacted really Q2 to Q4 in 2020. Q1, you'll see another similar 100 basis point impact with those costs. But then as you get into Q2, you're lapping a similar operating structure year-on-year. So we don't think that, that will affect our margins as significantly by the end of the year.

[Peter Sklar, Analyst]

Okay. Then Mike, you talked about that all your domestic channels are strong, but I didn't hear you call out specialty. I was just wondering if specialty was weaker because it's largely a bricks-and-mortar basis with relatively small store footprint. And so -- and plus there were lockdowns that would have affected those stores.

[Michael Pilato, President of Jamieson Canada]

Yes. So what was interesting, Peter, was in wave 1 of lockdowns, we definitely saw an impact that we've mentioned in the last few calls on our specialty brands business with some of those stores either close or went to curbside pickup or were forced to an e-comm platform that a lot of them didn't have. You would be surprised though how strong the e-comm platform is in a lot of specialty channel stores. So we did feel that in Q2 -- late Q1, early Q2 in the initial shutdowns and the initial lockdowns. And we talk about as those stores starting to be open, those businesses really will be bouncing back to what we expected them in the back half of the year. We didn't see that same slowdown in the second set of lockdowns. What we saw was the accounts in [indiscernible] over to curbside pickup. A lot of them went online or started to...[Technical Difficulty]

[Peter Sklar, Analyst]

Sorry, Mike, I've lost you. I'm not so sure if it's you or me.

[Christopher Snowden, CFO & Corporate Secretary]

It sounds like that might be Mike, Peter. So essentially, those customers found ways to access consumers through those -- through alternate channels, whether it's curbside pickup or through e-commerce in Q3 and Q4. So our growth exiting the year in those quarters or in those channels were -- met our expectations. So we look forward to continued growth in those channels going forward.

[Peter Sklar, Analyst]

Right. Okay. And then just one last question. I'm not too sure who wants to field this one. I think in your guidance, you're saying your SG&A line is going to grow 9% to 13%, which is a big growth rate. I think you're attributing it to investment in e-commerce. Can you just add a little more flavor there exactly what investments are you making on the SG&A line?

[Christopher Snowden, CFO & Corporate Secretary]

So it's really that big nut that we called out, $3 million to $4 million in incremental marketing, and that's really about brand building in China and making sure that we maximize the opportunity there.

[Peter Sklar, Analyst]

Okay. And how do you market...

[Christopher Snowden, CFO & Corporate Secretary]

As well as -- yes? Sorry, so it's all about brand building, brand awareness. It's through KOLs. It's through promotional activities. It's through expanding our website and working with our partners there to expand awareness of the Jamieson brand, and continue to message around our Canadian heritage, our quality, our 100 years of experience in Canada and the benefits of our brands to the Chinese consumer.

[Peter Sklar, Analyst]

Okay. And Chris, I'm trying to think like can you segment out your international sales, like what they amount to now?

[Christopher Snowden, CFO & Corporate Secretary]

They're in the MDA -- or they're in the -- I think they're in our revenue note in our financial statements. So I think you can see what the number is there. Let me see if I can pull that for you, Peter.

[Michael Pilato, President of Jamieson Canada]

Chris, I'm back. Sorry, the phone dropped.

[Christopher Snowden, CFO & Corporate Secretary]

It's all good.

[Peter Sklar, Analyst]

And then at the same time, like can you give us some guidance as to what proportion of your international sales in 2020 are now composed of China sales?

[Christopher Snowden, CFO & Corporate Secretary]

As normal, Peter, unfortunately, we're not disclosing what specific component of our international sales are from China. But I can give you the international numbers. Just give me a second.

[Peter Sklar, Analyst]

Okay.

[Christopher Snowden, CFO & Corporate Secretary]

Sorry, Mike, I did answer the rest of your question. I don't know if there's anything else you wanted to say around that -- the specialty brand.

[Michael Pilato, President of Jamieson Canada]

No, I'm sure you handled it perfectly. So thanks, Chris.

[Peter Sklar, Analyst]

I can look that up, Chris, myself. I don't need to hold you up.

[Christopher Snowden, CFO & Corporate Secretary]

Just a second. All right. Let's take that off-line, Peter, I'll give it to you shortly.

[Operator]

George Doumet with Scotiabank has our next question.

[George Doumet, Analyst]

Yes. Congrats, Mike, on the premium happier time with Mark. Looking into your 2021 revenue guide, 2% to 5% growth for domestic. Does that assume negative volumes offset by pricing? And if so, can you maybe talk a little bit about what the pricing looks like?

[Michael Pilato, President of Jamieson Canada]

Yes. Yes, we -- yes, for sure. We are not expecting negative volumes. There's going to be some lumpy quarters in here. So Q1 ended extremely strong last year, and Q2 started off very strong. So we do expect to see some level of growth down the year in our domestic business. So there definitely is some volume growth in there. We also have done what we need to do to protect our margins. So we have seen some increased costs and some cost pressures on our business. And as we've done in the past and as we've committed through the years, we will do everything in our power to protect our margins. So we have done -- we have taken actions that we needed to take. We have worked with all of our retailers to ensure that everything that we need from a margin perspective has happened and has been recovered. And we're going to move forward through the year driving both volume growth and some growth off of necessary pricing actions.

[George Doumet, Analyst]

Okay. Maybe on [indiscernible] comment you alluded to earlier. I think you guys guided for 90 basis points of margin expansion at the midpoint of the guide for 2021. Can you talk a little bit about how much of the headwind you're seeing in terms of higher input costs embedded in that guide against that margin expansion?

[Michael Pilato, President of Jamieson Canada]

Chris, do you want to talk to that?

[Christopher Snowden, CFO & Corporate Secretary]

Well, I guess, the critical point is, yes, with the higher demand levels within our process from a supply chain perspective, we have some input costs. We're going to pass those costs along in the ordinary course of business. But the key drivers of our margin expansion is really about efficiency in the year and bringing some of that volume that was manufactured externally into our manufacturing facilities as well as growing volume organically on those -- within our operations and continuing to lever. So we're not really pricing for margin. We're pricing to cover elevated cost inputs coming into our system.

[George Doumet, Analyst]

Okay. And maybe one last one for Chris as well. On -- for the year, can you maybe give us a sense a little bit about what you're thinking in terms of CapEx and what you're thinking in terms of working capital? Just trying to get a sense of, I guess, free cash flow conversion in '21 versus '20.

[Christopher Snowden, CFO & Corporate Secretary]

Yes. So we're going to -- we're -- when you look at our cash from operations before working capital, we ended 2020 at about $60 million. We invested about $20 million in working capital. Next year, I would expect to earn -- if you go to the midpoint, about $10 million in more free cash from operations before working capital. I would expect to invest a little bit less in working capital in 2021 as we take a higher level of raw materials entering 2020 and replace that with a higher level of finished goods to bring back our stock of cycle stock. And then when you look at capital expansion, we're moving a whole bunch of internal distribution out to the third parties, and that's making room for us to expand our operations, both at Rhodes Drive and at Scarborough. We're bringing tablet manufacturing and packaging to our Scarborough facility, and including some rollover in capital projects from 2020 that did not get completed. We could spend up to $25 million in total capital and intangibles as we look to also upgrade some of our IT systems at the same time.

[Operator]

Our next question will come from Mr. Endri Leno with National Bank.

[Endri Leno, Associate]

Congrats, Mark, on the retirement, and Mike on your new position. My question actually, I just wanted to ask a little bit about China. I was wondering if you can talk on the progress in selling the physical store. Do you think -- are you in a good spot right now? Or do you see it expanding further? And I guess further to that question on new product approvals, have you had any new ones? And are you still targeting that [indiscernible] by year-end if my notes are correct?

[Michael Pilato, President of Jamieson Canada]

Yes. Thanks, Endri, for the congratulations. You want to go, Chris?

[Christopher Snowden, CFO & Corporate Secretary]

By all means, go ahead dude. No, no, go ahead.

[Michael Pilato, President of Jamieson Canada]

All right. Perfect. Thanks, Endri, for the question. Thanks for the congratulations. So from a China perspective, we are -- as we talked about a little earlier, we had a little bit of a slowdown early in the pandemic as China slowed down in terms of our physical store distribution. So by the end of the year, we have caught right back up to our expectations, and we are now in the number of doors that we expected to be, and we expect to continue growing that through 2021. And we're very happy with that and very happy to be doing that. From a registration perspective, we stopped reporting actual numbers only because it was giving some competitors -- some competitive information that is not available to them unless we say it, and we cannot really understand what they're doing. What we know is that we are the clear market leader in the numbers of registrations. We have -- we are on target for what we were hoping to have in terms of registrations at this point in time and we will continue to apply for new registrations as new ingredients become available to be registered for and to apply for Orange Hat and Blue Hat registrations.

[Endri Leno, Associate]

Great. And I mean, looking at 2021 in China -- you have more growth in e-comm there in 2020. Do you expect a similar kind of growth profile looking further? Or do you expect a bit more shift towards physical stores?

[Michael Pilato, President of Jamieson Canada]

Well, I think we expect to see some more shift in physical stores just because that's a new part of our strategy. However, we expect e-comm and especially cross-border e-comm to drive substantial growth in China. It is a rapidly growing channel there. It is seeing great growth across the category, and we will drive a lot of our investment and our time to build in that category. It's estimated by the end of 2021 that in China, it will be the first time that sales to consumers across the board will be over 50% in the e-comm channel for the first time, it will be larger than bricks-and-mortar. So the growth on bricks-and-mortar will be there because we haven't been there, but we are going to continue to really accelerate and really grow on the e-comm channel as well because it is hot, it is growing and it is where the consumer is moving to, for sure.

[Endri Leno, Associate]

Great. A couple more questions for me. Just on the Canadian business, you mentioned that you've gained market share over competition. Do you have any estimates where you are right now in terms of share?

[Michael Pilato, President of Jamieson Canada]

So we don't release share data, Endri. But what I can tell you is we grew over 3x more than our closest competitor in share in 2020. And what I can also tell you is we saw share growth across multiple categories. This was not just driven by [indiscernible]. We saw share growth across 10 of 12 categories that we track. They were all growing substantially, and we managed to grow share in all of them. So we're really quite proud of it. We're really quite pleased with it, and we were the clear share gainer in the market in Canada in 2020, for sure.

[Endri Leno, Associate]

Great. And last one for me. There were some reports that there were inventory depletion at some retailers during 2020 for vitamins -- for VMS because there's lots of demand. Do you factor, in your guidance, any replenishment of those inventories? Or is that purely -- the guidance a continuation of the consumption patterns that we saw this year in the system?

[Michael Pilato, President of Jamieson Canada]

Yes. So yes, you're right. I mean, some stores across multiple categories, not just vitamins, minerals and supplements had some stock issues in stores with the pandemic seeded up and all throughout the pandemic. And if you go to stores, yes, we did have a few of those issues. We are manufacturing more products than we ever manufactured, and we are selling it to the consumer. So -- or to the stores to meet the consumer needs. So we are meeting more the consumer's demand on shelf than what the [ eye ] would think when you see the shelf.Where we're short is some safety stock both in our warehouse and in the retailers' warehouses. And as we add all the capacity we've been talking about, and that Chris has referred to, we will be refilling the pipeline of inventory at the retailers, the safety stock there, the safety stock with us. And we do expect to shift some of that through the year. So really, when you look at the domestic business, we're really expecting kind of 3 things. We're expecting some consumption growth off of a really high base from last year. We're expecting to refill some of that safety stock at the accounts that meet some safety stock top-up. And we're expecting some of the pricing that we talked to earlier to roll through into our growth numbers.So all those 3 things combined are what's driving us to see growth in Canada year-over-year off of a record year. So we're quite pleased with that and feel that we can deliver on that.

[Operator]

[Operator Instructions] We'll hear from Graeme Kreindler with Eight Capital.

[Graeme Kreindler, Principal]

I wanted to follow up regarding the efforts made to free up capacity. And I appreciate the commentary on those costs being finished up by Q1. With respect to those increases in capacity, how far out does that take the company in terms of the growth trajectory of continuing to see elevated demand? Does that satiate demand for '21 and then might need further increases of capacity? How many years out exactly does that take you?

[Christopher Snowden, CFO & Corporate Secretary]

Yes. So thanks, Graeme. Our capacity plans right now are required because we continue to operate in a constrained manner with health and safety measures and physical distancing in our plants as well as shift gaps in our plants. So from that perspective, we need to add the capacity today to continue to meet the demand of our consumers.By the time we're finished 2021, we should have enough inherent capacity to be able to satisfy normal growth for the next 3 years. So we should have enough capacity taking us into 2025 before we need to continue to do a similar level of capital expansion. And at that point, we'll be really thinking about whether it's third party, whether it's an acquisition of a facility or just a greenfield or brownfield project that we take on ourselves to add capacity for the next 20 years of growth for Jamieson.

[Graeme Kreindler, Principal]

So just to clarify, Chris. So sort of exit 2021 and with that growth -- sorry, the capacity over the next 3 years that assumes that those shift-offs, those physical distancing that returns to a more normalized environment after this year?

[Christopher Snowden, CFO & Corporate Secretary]

That's correct.

[Graeme Kreindler, Principal]

Okay. And then just one other question on a different note. With respect to the U.S. market, I know that was -- that initiative was tempered down or put on hold at the start of the pandemic. Is Jamieson revisiting that at all or looking to ramp that back up at any point soon?

[Michael Pilato, President of Jamieson Canada]

Yes. Thanks, Graeme, for the question. So in regards to the U.S., we launched a test in the U.S. on a pay as you go variable model early in this year, in early Q1. It got slowed down due to COVID. I mean it just was not the time to be developing a new brand in a country where -- or in a situation where consumers are looking for brands that they know and they trust, and we pulled that back. In the very late periods of Q3 into Q4, we did reinitiate some of the variable spend on our test in the U.S. around our probiotic lineup on Jamieson and our Iron Vegan lineup in terms of plant-based crowded proteins.We continue to operate that in a test mode. We have seen some progress on a couple of SKUs. We've seen them move up the rankings on Amazon. And we're going to continue in a pay as you go variable model to see if we can start to build those up as we continue to be in test mode. We're also looking at some other platforms in the U.S. to possibly test some products out on to other e-com platforms. But I fully expect it to be in test mode through 2021. We don't expect anything material from it this year. But we do plan on spending some time this year really, really unlocking and thinking about what is our strategy to really grow at scale in the U.S. over the next few years. Our strategy, as we've been very clear multiple times, is to double this business over the next 5 to 7 years, and we've got 3 very distinct priorities. One is growing Canada at historical rates or more, which is a very material amount of growth to our business over the next 5 to 7 years. The second is our international expansion, led by China and really building a scale business globally, led by China. And number three is to find a way to build some level of sale in the U.S. So while we're testing, we will continue to look at different strategies to do that, and we'll continue to figure out how do we make that third priority come to life in future years to meet our goals.

[Operator]

Next question will come from Justin Keywood with Stifel GMP.

[Justin Keywood, Director of Equity Research]

Just for this year, are there any new key product launches or variations to highlight? And I'm also wondering if there were certain product categories that may come back as the restrictions ease. I'm thinking perhaps those sports nutrition products or have those categories relatively held up?

[Michael Pilato, President of Jamieson Canada]

Yes. So we have seen -- sports nutrition is an interesting one. We get bucket business sports nutrition quite often. But the truth of it is we don't have a lot of hard-core sports nutrition business. We have a little bit kind of immaterial in our portfolio. Most of our specialty brands are built more on foundational health and foundational active athleticism and things like that.We have seen them start to rebound, as I'm sure Chris talked about when I got cut off in the call. They did get off to a bit of a slow start in the original lockdown, but they did start to recover, and we are seeing some growth in some of those for sure. And we do expect them to recover globally. And we do have some innovations coming out in that space in the new year.So from an innovation perspective, I think that was the start of your question, we are on the full offense in terms of innovation. This is not a time for us to slow down in innovation. We have a robust innovation plan going into 2021 as we do in every year. It is the lifeblood of vitamins, minerals and supplements, and we plan on bringing a lot of exciting products to the market. We don't usually talk about what we're launching prior to doing it just for competitive reasons. But we continue to follow the consumer trends, see where they're shifting and we have products ready to go that meet those consumer needs, be it an increased demand in immunity. We're seeing a lot of growth in natural energy and sleep and stress relief, and we've got some products launched -- launching around that. We see growth around healthy aging, women's health and beauty and, of course, continued growth in herbals and super foods. And you will see different innovations from different brands around those buckets as we follow the trends and the ingredients.What we did launch in late Q4, which is an interesting one if you open the specialty brand sources, we did launch a line of progressive mushrooms -- mushroom products. And mushrooms are a hot ingredient right now. It's really hot when it comes to stress relief, when it comes to energy, when it comes to all these things that consumers are looking for today. So we did launch that lineup. We're excited about it, and we're hoping it brings us some growth in 2021 for sure.

[Justin Keywood, Director of Equity Research]

That's very helpful color. And then on the investment in e-commerce, and if I heard correctly, it was primarily related to the international markets. Is that for the U.S. and some of those promotion activities resuming? Or is it more broadly based?

[Michael Pilato, President of Jamieson Canada]

Are you talking for 2021?

[Justin Keywood, Director of Equity Research]

Correct.

[Michael Pilato, President of Jamieson Canada]

Yes. So no, it is -- that is not U.S. So U.S., as I've talked about a few minutes ago, it's very much in test mode. It's a very immaterial expectation. We have a very immaterial spend on a variable basis that we're looking to make as we just test various, I would say, marketing platforms and what do we want to say, who do we want to stay to, who are we targeting, and really try to unlock where we pick up a little bit of growth there as we look to our market for the future.The spend we talked about in terms of increasing marketing is mostly in international for 2021. It is a big chunk of it. It is -- a lot of it's focused on China and really continuing to build scale in that country, both in terms of working media from a digital perspective and also driving more insights. As we continue to build in China, we really want to unlock our understanding of the consumer like we have in Canada, really get to know them. And we're spending a little bit more money in terms of understanding that consumer so we can build for the future. But most of it's working media and the digital environment.

[Justin Keywood, Director of Equity Research]

Understood.

[Christopher Snowden, CFO & Corporate Secretary]

So just to add to that, Mike. Sorry, just to add to that, from an e-commerce perspective, it's really building out our core capabilities with our international distributors as well as our Canadian customers, making sure that they're bringing the best product offering in the best way possible to their customers from a consumer strategy perspective. We do a lot of work both from a direct-to-consumer perspective as well as helping our distributors and customers go to market from an e-commerce perspective.

[Michael Pilato, President of Jamieson Canada]

Thanks, Chris, you're right, domestic as well. That's correct.

[Operator]

Next, we'll hear from Tania Gonsalves with Canaccord Genuity.

[Tania Rae Gonsalves, Analyst of Healthcare]

Just a couple from me here. In terms of China, how do you see the -- your sales continue to grow there and you're penetration of that market continue to grow. Do you intend to acquire a distributor or manufacturing power in the country?

[Christopher Snowden, CFO & Corporate Secretary]

Can I take that one, Mike?

[Michael Pilato, President of Jamieson Canada]

Yes, go ahead. Go ahead, Chris.

[Christopher Snowden, CFO & Corporate Secretary]

So we entered our current agreement with our existing distributor in China at the end of 2017, and that's a 5-year agreement. That agreement comes to an end at the end of 2022. And at that point in time, we have an option to buy that distributor out at an existing price or we have the ability to find a new distributor or take that -- take those activities in-house and kind of go on our own from a China perspective. I think long term, for us to maximize the opportunity in China, we want to control our own destiny. So we'll look to transition over the next few years from a distributor model to a Jamieson-owned model over time.

[Tania Rae Gonsalves, Analyst of Healthcare]

And in terms of -- on the grounds manufacturing, are there any plans for that?

[Christopher Snowden, CFO & Corporate Secretary]

No, not in the near future. We prefer to make everything in facilities that we can control and our QA team can assess. So the reason why we are spending the amount of capital we are in Canada is to ensure that we maintain that high-quality position and have the capacity to grow both domestically and internationally, while maintaining those very high Canadian production standards.

[Tania Rae Gonsalves, Analyst of Healthcare]

Okay. Excellent. And then domestically, I guess, could you provide a little bit more color on what you're seeing in terms of the competitive landscape here? I'm hearing about new health enrollment VMS brands pop up every day. What kind of pressure are you seeing from those companies? Or is there the opportunity to acquire these targets?

[Michael Pilato, President of Jamieson Canada]

Yes. Thanks, Tania. So this industry, vitamins, minerals and supplements, is a -- still a very fragmented industry. There's a lot of players in it. And we see small players and challenger brands pop up all the time for years. It's nothing new that they would be popping up this year. They pop up all the time. And it is something that we have gotten through as a company by continuing to build our share, continuing to build around our brand that is trusted and have a high quality...[Technical Difficulty]a brand they know and that they trust and they look at or [indiscernible] and promote quality and trust, and that's the #1 thing consumers were looking for pre-pandemic and they're looking for now. And our share growth is growing because of that. And we continue to drive that and we'll continue to drive that.So these small players that we see poke their heads in and out, we've been dealing with them for years and they haven't slowed it down, and we don't expect them to slow it down anytime soon. So I think there was a second part to that question. What was the second part, Tania?

[Tania Rae Gonsalves, Analyst of Healthcare]

Yes, is there any opportunity to acquire some of these brands similar to what you did with specialty [indiscernible] years ago? Like mushrooms, for instance, instead of a just having novel SKU, is there an opportunity to buy like Four Sigmatic, for instance, that has a customer base already? .

[Michael Pilato, President of Jamieson Canada]

Well, so we actually think that we have the right brands in Canada, which we're building an innovation pipeline around and we continue to launch products. So there isn't really a category out there that we are interested in. We don't have a brand that has a right to play in it and a right to win in it, frankly, if we launch products in it. So mushrooms is a great example. Progressive lineup of products is known as an accessible professional level product in the Specialty Brands channel. We saw an opening of a trend moving towards mushroom-based products from a consumer perspective. Instead of going out and buying a company that would be quite small and operate in the mushroom side of business, we launched a lineup of mushroom products. And that's really how we look at this. We look at consumer trends, and then we say, okay, where is the consumer going? What trends do we want to follow or do we think are worth following? And then what brand makes the most sense to launch this in to make sure we target the consumer that's looking for it?So we don't see a big opportunity to start acquiring more small brands in Canada. Where we see an M&A opportunity for us longer term is more international or into the U.S., into some countries that have a lot of scale in the category but we don't yet have a strong presence, and that could really step change us in terms of building scale somewhere where we're not. So that's where we focus a lot of our M&A thinking and a lot of our time, not really in Canada. We feel we've got the right brand to build any portfolio that we want right now.

[Tania Rae Gonsalves, Analyst of Healthcare]

Okay. Perfect. And another question on the domestic market. I know e-commerce was a really strong segment in 2020. Apart from increased consumption, your e-commerce partners, did you sell -- did you start selling a wider assortment of SKUs to these partners? And were there any big name e-commerce websites that you are added to over the year that you think are not -- are low penetration today and you could see significant growth in?

[Michael Pilato, President of Jamieson Canada]

Yes. I mean there's really 3 pillars of digital commerce that we look at in Canada. One is the traditional e-comm channel that you would -- that we would deal with, like Amazon or Well.ca. And we continue to expand our assortment with them based on innovation and based on where the consumer trends are going, and we have quite a robust business in that channel of trade. We have our direct-to-consumer business as well, which has been growing steadily and had a very good year in 2020 as more and more consumers shifted online, and we have our full assortment of products there. We actually have all of our brands up online now on separate sites, and continuing to drive in consumers.Where we've seen the biggest assortment improvement over 2020 and we expect to see over the next few years is really the expansion of e-comm into our brick-and-mortar partners. So we have very strong relationships with the traditional retailers here in Canada. You've seen many of them launch new e-comm capabilities or platforms. We are working hand in hand with them as partners to help them really build out and drive their vitamin, minerals and supplement sections of those sites and of those platforms, and we are growing along with them. And we've seen them increase distribution of our products to their e-comm platforms and, of course, reaching more and more consumers as consumers shift online. So I think the partnership with the bricks-and-mortar retailers that are moving or shifting some business online, that's where the biggest growth has been, and we'll continue to grow along with that.

[Tania Rae Gonsalves, Analyst of Healthcare]

Got it. And now that a big portion of your sales is coming from online, is there any way to put a number on how much of that revenue is recurring, say, like through Amazon as customers sign up for like the recurring shipment of vitamin C every month or so. Is there any opportunity to increase recurring revenue by instituting this kind of optionality on your own website, for instance?

[Michael Pilato, President of Jamieson Canada]

Yes. I mean we do have some indication of it. We don't release those numbers. We will continue to grow and try to get people to repeat purchase through different levels of subscriptions or repeat purchases or subscribe and saves or whatever the different platforms call it. Our research would tell us that while that is something that some consumers are interested in the vitamins, minerals and supplement side of the business, it is not as, I would say, as in demand as you would think. So there are other businesses and brands and categories out there that are much more demand on a subscription-based business here in Canada. We see it as a longer-term opportunity. We continue to look for ways to grow that, but it isn't like a very top priority for us right now because we're just not seeing the consumer acceptance of it as you would think. And we went out and actually researched with the consumer. We actually fielded some research on this because we wanted to understand how big it is and how interested consumers are. And we've actually found them to be not as interested as we thought in this category. But we'll continue to monitor it. We'll continue to watch it. We have those capabilities. We offer it to consumers. And I think you'll see it grow organically over time.

[Operator]

And that will conclude today's question-and-answer session. I'll now turn the conference over to Mr. Hornick for any additional closing remarks.

[Mark Hornick, President, CEO & Director]

Well, thank you very much, everyone, for joining us. We remain very confident in our 2021 and beyond plans and look forward to speaking to you again on our next call.In the meantime, please stay healthy and safe. And have a good night. Thank you.

[Operator]

That will conclude today's conference. Thank you for your participation. You may now disconnect.