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Good day, ladies and gentlemen. Welcome to the Jamieson Wellness Conference Call to discuss financial results for the first quarter 2018. [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 first quarter 2018 financial results was issued this afternoon, and a copy of that press release can be found in the Investor Relations section of the company's website.Please note that the prepared remarks, which will follow, contain forward-looking statements and management may make additional forward-looking statements in response to your questions. These statements do not guarantee future performance, and therefore, undue reliance should not be placed upon them. We refer you to all risk factors contained in Jamieson's press release issued this afternoon and in filings with the Canadian securities administrators for a more detailed discussion of the factors that could cause actual results to differ materially from those projections and any forward-looking statements.The company undertakes no obligation to publicly correct or update the forward-looking statements made during the presentation to reflect future events or circumstances, except as may be required under applicable security law.Finally, we would like to remind listeners that the company may refer to certain non-IFRS financial measures during the teleconference. A reconciliation of these non-IFRS financial measures was included with the company's press release issued earlier today. Also please note that unless otherwise stated, all figures discussed today are in Canadian dollars and are occasionally rounded to the nearest million.I would turn the call over to Mr. Mark to get started. Please go ahead, sir.
Thank you, and good afternoon, everyone. It's my pleasure to speak with you today. We're proud to report another good quarter, including strong momentum for the Jamieson brand in Canada and are pleased to reiterate our 2018 outlook.Let me run you through a few of the highlights. First quarter revenue increased 8% and adjusted EBITDA grew by 11%. Our total branded revenue grew over 13%, supported by some very strong sales growth by the Canadian Jamieson brand as well as revenue from our Body Plus brand acquired in 2017. This 13% includes a very busy quarter for our Health Food brands, which was somewhat impacted by the effort required to integrate Body Plus and Lorna Vanderhaeghe Health Solutions into one entity. The physical integration is now complete and included the closure of 2 West Coast distribution facilities and the consolidation of supply chain activities. Importantly, this integration will now deliver efficiencies and improved geographical sales coverage, which will benefit the business going forward.Strategic Partner revenue was lower in Q1 by almost 15% year-over-year, primarily due to the timing as saw in your press release. We did expect most of this, given the differences in our Strategic Partners business plans for 2018. The one exception was the shift in sales related to a self-imposed delay in the supply of one of our Strategic Partners with raw materials, which they supplied themselves, which will then move their sales into the third and fourth quarters.Our strong branded growth also reflects the fact that we began to shift our key innovation for the year, Jamieson Essentials plus Protein. We've already begun our digital campaign, and we'll support the launch with TV, media and promotion starting in the next couple of weeks. In fact, in Ontario, I believe, our media starts next Tuesday. We have discussed -- as we have discussed, this is an innovative addition to the protein category. It's branded Jamieson, and it combines our essentials, which I think, as you know by now, are multivitamin, vitamin D, Omega 3 and probiotic with protein, leveraging the strengths of the Jamieson brand and the Body Plus R&D. On the international front, we continue to be encouraged by international growth opportunities for 2018, with the focus being Mexico, India and Southeast Asia as well, as you already know, we are also looking forward to our Orange Hat registration certification in China. This process is going well, and we're pleased to say that we expect the first Orange Hat certification for us potentially as early as the end of this quarter. That will allow us to begin the task of rebuilding our offline Chinese distribution, which is a very positive first step in our Chinese growth.I will now turn the call over to Chris to take you through the financials in more detail.
Thank you very much, Mark, and good afternoon, everyone. We remain pleased with the underlying trends in the business and remain confident with our outlook for 2018.Let me touch on some financial highlights. Revenue increased 8% to $70.1 million driven by growth in our Jamieson branded segment, partially offset by the timing-related decline in our Strategic Partners segment.By segment, Jamieson Brand's revenue increased 13.2% to $59.9 million. As Mark mentioned, we had another very strong quarter in Jamieson Canada driving 7.8% organic growth.Innovation contributed $1.7 million to sales, up from $600,000 a year ago, as we began shipping our Jamieson Essentials plus Protein during the quarter.Additionally, strong consumer demand and our recent price increase contributed to branded growth. Revenue in our Strategic Partners segment decreased 14.8% to $10.2 million, including $1.1 million in additional revenue from the Sonoma acquisition. The decrease in volume reflects the timing of orders, as Mark discussed. Our strategic Partner production and shipment cycle is dependent on our customer sales and marketing plans and their inventory management cycles. These sales can be very lumpy quarter-to-quarter.Total gross profit increased 14.2% to $25.4 million and gross margin increased 200 basis points to 36.2%. The increase in gross margin percentage was primarily driven by the segment mix and manufacturing efficiencies in the quarter.Selling, general and administrative expenses increased 10.2% to $14.8 million. As a percentage of SG&A -- as a percentage of sales, SG&A increased 40 basis points to 21.1%. The increase in SG&A as a percentage of sales includes $600,000 in additional public company costs and higher SG&A as a percentage of sales associated with the acquired Body Plus and Sonoma businesses.Operating income increased 26.2% and operating margin increased 200 basis points to 14.4%. Operating margin for Jamieson brands increased 280 basis points to 15.3% due to 150 basis point increase in segment gross margin and lower share-based compensation SG&A as a percentage of sales.Operating margin for the Strategic Partners business decreased 190 basis points to 9.7% as a result of higher SG&A, partially offset by increased gross margin as a result of manufacturing efficiencies and higher Sonoma margins.Adjusted EBITDA increased 11% to $12.7 million and adjusted EBITDA margin increased 50 basis points to 18.1%.Interest expense and financing costs in the quarter were $2.2 million compared to $8.3 million in the prior quarter. The difference was primarily due to our note payable to Jamieson Finco, which was discharged in the company's pre-IPO reorganization, lower interest rates from our new credit facility as of January 31, 2017 and a $3 million deferred financing fee write-off in the first quarter of 2017.Our reported net income was $4.6 million in the first quarter compared to a net loss of $21.7 million in the prior year. On an adjusted basis, net income increased 1.6x year-over-year to $5.8 million or 15% diluted EPS. The adjustments to net income in the current quarter include: $1.7 million of termination benefits and related costs associated with the integration of our Body Plus and Lorna Health Foods solutions operations and $1 million of business integration costs also associated with the Health Food integration and $1.1 million net gain for purchase consideration; $200,000 of foreign currency loss; and $100,000 of other expenses and the tax effect of each of these items.Turning to the balance sheet and cash flow. We used $5.2 million of cash from operations during the first quarter compared to generating $8.1 million in the prior year. The key driver was deferred compensation of $7 million associated with the acquisition of Body Plus and Sonoma paid in the quarter and investments in inventory related to the pending growth of our Strategic Partners segment. Capital expenditures during the first quarter were $3.1 million, including approximately $1 million in carryover capital from 2017 as well as the payment of our $3 million dividend in the quarter.We ended the quarter with $2.4 million in cash and equivalents and total debt of $171.8 million and had almost $35 million in cash available through our revolving operating lines.Now let me turn to guidance. We are reiterating our 2018 outlook and anticipate the following: Net revenue in the range of $325 million to $335 million; adjusted EBITDA in the range of $67 million to $69 million; and earnings per fully diluted share in the range of $0.83 to $0.87.Additionally, I would like to note some additional assumptions to assist our analysts. Please note that given the timing of our innovation this year, there will be approximately $1 million in incremental marketing costs during the second quarter. This year, we have timed our marketing and promotion plans to support the launch of our Jamieson Essentials plus Protein and the marketing investment will coincide with this product being broadly distributed in the market.Our revenue range is based on the original assumption of CAD 1.25 per U.S. dollar exchange rate, and we are estimating fully diluted share count of approximately 39.8 million shares.We anticipate 2018 interest expense in the range of $9 million to $9.5 million, which provides for room for potentially higher LIBOR rates as we exit 2018.Finally, we are assuming an income tax rate of approximately 28%.With that, I'd like to turn the call back to the operator for questions.
[Operator Instructions] Our first question is from Sabahat Khan with RBC Capital Markets.
Just on the Jamieson Essential Protein product that you're launching. Can you maybe give us some color into how much or how far along that is in its retail rollout, in terms of how many of your retailers have taken it on? And in terms of each of those retailers, are they testing it in a few doors and then will roll it out further? What's kind of the uptake initially versus the long-term opportunity?
So it's been pretty successfully received, Saba. So we will have what we would call national full distribution. We have distribution right now in virtually all banners at the head office level and now our field sales force is just implementing all distribution at each individual retail location. But this will be a fully distributed product. The only place you may not see it is in what we would call D stores or very small pharmacies or grocery, which don't physically have the shelf space to carry it. But this is a full-blown national launch. It will be very widely distributed. And distribution build is going quite well. That's why we've decided to start our television advertising on Tuesday.
And then, I guess, in terms of some of the opportunities you highlighted with your acquisition of Body Plus and the Lorna products, rolling those out into international markets, is that something you're already working on? Or is that something we should expect over the next couple of years? And if you guys are working on it, how far along is that?
The first opportunity is to take the combined sales resources between the former 2 companies that are now rolled into one and maximize the distribution of all brands in Canada. There are still some accounts in some regions that have distribution opportunities with both of those brands. So now with the bigger combined sales force, which will be selling all brands as well as, interesting enough, as well as the Jamieson brand itself into the Health Food channel, which we haven't really been very present in the past, but there is appetite now from customers to proceed in that direction. So our new Health Food sales force will handle all brands. As a result, so priority one is to maximize distribution in Canada; and then, priority number two is, as we build critical mass for countries which have the disposable income and the critical mass to be able to handle a high-end Health Food brand like Lorna Vanderhaeghe, for example, then we will subsequently looking at rolling that out. But you probably won't see that immediately. The first step is just to maximize the distribution synergies with the combined sales force here in Canada.
And then, one last one from me on China. So you have indicated that over the long run, you want to get about 50 products licensed in that market. And I think you have -- you mentioned that you have about 20 in the process now. I guess what's your thought process around getting from 20 to 50, would you get those 20, see how the market responds and then submit applications for the rest? How are you thinking about the next few years in terms of getting into that market?
So the 50 products kind of break into 2 groups. There's about 20 Orange Hat license products. Just is -- for people on the phone who may be not as familiar, so Orange Hat licenses are granted for simple, single letter vitamin and mineral products that are formulated to Chinese specifications. So to get an Orange Hat, you don't take it -- normally speaking, you don't take an existing product and get the license. It's a specifically formulated product to comply with those regulations. It typically has a lower potency than the products available here in Canada. So about 20 of the products are Orange Hat, and that 20 kind of encompasses the basic Chinese consumers need for vitamins and minerals. The other 30 are more complicated natural health products, like fish oil and joint care products, brain health products, lung health products, et cetera, that then fall under what's called the Blue Hat registration process, which is a much longer process, typically 3 to 5 years. And so we will do this in two ways, way one will be, get critical mass around the Orange Hat products and get those distributed then in the bricks-and-mortar and domestic online retail in China. During this time, concurrently we'll be working on Blue Hats, and as they are available, roll those out as well with the aim that between now and 2023, we would have the full suite of Jamieson products to meet Chinese consumers' needs. But as you can tell by the time line, it's a long-term focus. And it's going to be a while before we see dramatic results from that. But again, I think as we've said before, the upside of that is not built into the forecast that you all have for the next 5 years.
Our next question is from Peter Sklar with BMO Capital Markets.
If you look at the organic growth rate of the Jamieson brand, which was just under 8%, like is that a measure of consumer demand for the brands? Or would there have been some channel filling as you get ready for the -- as you're filling the channel for the new powders?
Peter, it's Chris. So approximately $1.6 million in that revenue growth in the quarter was innovations. So that component of the growth would be more on the fill side versus flow-through, and I think we've been pretty clear in terms of how that innovation would play out going forward. That pipeline would effectively be all the shipments. The good about the protein product is it's got a much shorter use cycle than average innovation. So we could certainly see reorder points much quicker on that than we do for other products. So we're pleased with the progress so far and more to come, I guess.
So like, it seems to me then that, that added about 2% to an 8% -- of an 8% organic growth rate. So you're still growing at 6%, if you take out the innovation. That's pretty strong. Where is it coming from?
I think the biggest thing, Peter, is the combination of the very positive underlying consumer trends that underpin our business. So we're getting probably towards the higher end of that 1% to 3% organic market growth that also includes some Jamieson base growth. And then, I got to tell you, our -- the consumer is really responding well to the entire marketing mix that we've been putting in place since the beginning of 2017. And without, I guess, going too far in terms of disclosure, our point of sale results for the Jamieson brand that we measure every week are not dissimilar to the 8%. So we are seeing some very positive brand momentum from consumer offtake at shelf and it's very encouraging. And you between the great results that we have with our retailer partnerships as well as the consumer response to all of the marketing efforts that we've put forward, the brand's in great shape.
Okay. Going to the SG&A, like if you look at it on an adjusted basis, like we calculated, it was up about 130 basis points on a margin basis. Now Chris, you talked about that Body Plus and Sonoma, like it sounds like they can have a higher SG&A margin structure. Is that what it's accounting for? Or is there growth in other SG&A besides the public company costs?
Yes. So there's a couple of different items going into SG&A. There's the underlying public company costs, which don't match prior year. There is inflation in salaries and wages and services. And then, there is the -- if you go back to the IPO deck, you can see the fact that the Body Plus and Sonoma businesses, as a rule, have a higher gross margin, but also a higher SG&A rate. And now that we've comped that on a year-on-year basis, that will normalize as we move forward from a quarter-on-quarter comparative perspective.
Okay. And then, just my last question. Going back to the Strategic Partners business, like how do you know that you're going to get those orders that were deferred? Is that just because these are more strategic-type relationships and you're talking to them all the time, and so you know what their production plans are?
Yes, what we -- so we've already shipped it. So it came in April instead of -- like this simple -- this is just simple commerce. So they supply the raw material that goes into the product that we make for them. They decided to delay it based on their inventory. Then they shipped it to us later than we expected, so we didn't make the product in the Q1 and then we made it in April and we already shipped it. So I guess, the -- stepping back, so we have a really good level of understanding in advance of what our Strategic Partners' annual plans are. And then, they give us line of sight based on the agreement that we have with them as far as manufacturing goes. But they do change their plans with the dynamics in their own individual markets. And as we said before, most of these strategic partners are not in Canada. So we don't -- whether it's in the U.S., Australia or Asia, we don't follow their market the way we do our own products, so we kind of go with their lead. And a lot of times, they change the flow of their product and that's kind of a little bit out of our control. And as long as they hit our requirements to manufacture the product efficiently, in terms of notice and lead time, we're okay with that. But what it does is it makes it very difficult to predict exactly their volume quarter-to-quarter. And then, when they want to change it, we don't prevent them from doing that because we want to be a good partner for them. And as long as they don't cause us any inefficiency, we're good with that. But it is also one of the reasons why we would be very hesitant to want to try to give quarterly guidance because it's just an element that is a little farther out of our control quarter-to-quarter. And it would make predicting the revenue by quarter very lumpy, as Chris has said before. So that's the practicality of it.
Our next question is from Derek Dley free Canaccord Genuity Limited.
Just on that Strategic Partner's business, the deferral here of some revenue in Q1 and presumably some volume out of your manufacturing plant, can you just quantify, does that -- how much did that impact the gross margins by? I mean, you had strong overall gross margin expansion, but just wondering what it could have been with a more normalized volume from the strategic partners?
Well, I think you can calculate that if you look at our guidance in terms of total growth from a Strategic Partner perspective at being 6% to 12% in the full year. Based on existing margins, you could see what that would mean. And when you look at the phasing to Mark's point, that's going to come back in Q3 and Q4. So we talk to these guys all the time. And when we look at -- and when we updated our forecast for the year, we're using latest information to go back and reiterate what our full year guidance is. So to the best of our ability, we still believe that, that 6% to 12% is the right number for 2018.
Okay -- no, that's very helpful. And I guess, just going back to your last quarterly call, you guys mentioned that there was some inflation in vitamin C and B and you did pass through price increases, which seemingly more than covered that, midway through the quarter. But did you see an impact -- like I would assume that there was a slight negative impact in the front half of the quarter before the price increase? Or how did that play out?
I think the delta between the fact that we had some inventory's old stock and took a month to pass the price increase through effectively put us in a neutral position for the total quarter overall. So it's going to be pretty representative from a margin perspective going forward, excluding the volume impact on a quarter-by-quarter basis.
Yes. Okay, got you. That's great. And have you seen any other inflationary pressures on any of your costs looking forward?
Not out of the norm. So some of the minor ingredients that we have, there's a little bit here or there, but nothing that we wouldn't normally see on an annual basis, which we then -- we then have other ones that are going down. So there is nothing in the mix that is as exceptional as what vitamin C and B12 were.
Our next question is from George Doumet with Deutsche Bank (sic) [ Scotiabank ].
I still have my followup to some of the questions asked earlier. But on the -- you had mentioned that on the strategic partnerships -- partner channel we lost some volume into the third and fourth quarter. Just wondering, is that a function of the higher input costs, like the inflationary forces in vitamin A and C? And on a similar, maybe, separate note, can you maybe give us a little bit of an outlook on to -- where you see those prices kind of flowing through for the rest of the year?
Okay. So on the flow-through part, the actual Strategic Partner movement from Q1 didn't have anything to do with those particular raw materials. It was strictly the strategic partners themselves moving the volume because of their internal needs. So it had nothing -- there was nothing to do with that particularly. I don't know Chris, do you want to talk about the raw materials?
Yes, like -- from a guidance perspective, all the inflation that we know about is already in our guidance. So there's really not much to say in addition to current prices other than, we still feel very comfortable about our margin profile and our ability to hit our margin expectations for the full year. Does that answer your question, George?
Yes. I think, there were some chatter about like capacity -- higher capacity coming on at the end of the year. I'm just wondering if that kind of -- if that...
Are you talking about in the production industry for those raw materials?
Yes, correct.
It looks like it's moving in that direction. But not -- we don't see anything dramatic right now in terms of prices going down. They're not going up anymore. But we haven't seen any return, like if you're thinking about the chance of, say, some sort of gain because we take a price increase and then prices come down on the raw material, we're not seeing that.
Okay, that's helpful. And just, maybe shifting gears to the branded segment, can you maybe give a sense of the international versus the domestic, how they compare in the quarter? And where is the international growth coming from?
So in spite of our best efforts, international in the quarter was fairly flat. I think it was up $100,000 or $200,000 from prior year. And that's just is a function of capacity and when we allocate [ line ] time to that business. So we are fully expecting incremental growth in that business to materialize throughout the year. And as we talked about our focus on new geographies in the year, we're really excited about the opportunities. So I think that's really all I can say right now.
Okay. Just one last one, if I may, on China. I think Mark, you mentioned in your remarks about expecting that Orange Hat certification this quarter. How do you see other kind of other certifications playing out throughout the year?
Like for -- in terms of China and Orange Hat?
Correct.
So it's hard to say because this is the very first time the Orange Hat has been implemented. And we will be likely -- I mean, there's a fingers crossed here, but so far we have all indications that we could be one of the very first Orange Hats granted. Once you get one done, then by logic and by discussion with China FDA, the other one should flow a lot quicker. But I say that with the hugest grain of salt having us 15 years experience in China, things can change, people can change. But it sounds silly, but there's a bit of a fingers crossed here going on with China FDA. What happens one day in China could change the next because it has before. But all indications for us, looking at this with an optimistic lens, would be that once we get our first one approved, we should then have a very much quicker approval period for the other 20 that we have in the pipeline.
[Operator Instructions] Our next question is from Lennox Gibbs with TV securities.
Still on Strategic Partners, what percentage of the Strategic Partners component of your overall guidance is covered by orders that are currently in hand?
I think from a lead-time perspective, it's typically between 3 and 6 months from a scheduling perspective. But our current reiteration of the forecast or of guidance, it takes into consideration our individual discussions with all of our strategic partners and their expectations of what they will need from us in fiscal 2018. So just to reiterate what I said before, the reiteration of guidance includes all of our potential known data points from our Strategic Partner customers at this point in time.
Okay, got it. And then, on the $1.6 million, I think it was, in channel fill. What's the underlying assumption there in terms of weeks of inventory? How does that translate to weeks of inventory?
It really depends on the -- how media impacts the consumer and how quickly they come back to the shelf. I mentioned before that the usage time, so our protein -- sorry, Jamieson Essentials plus Protein is about a 2-week use cycle, if you are using it every day, whereas the average bottle of vitamins is between a 30 and a 60 count, and on one use per day, that's 1 to 2 months rebuy cycle. So we're hopeful that with good media, good penetration and good consumer interest, we'll have much -- a much higher velocity of repeat orders than -- and a velocity of repeat orders than our average innovation cycle. That's still to be proven, but we're hopeful.
And just in the way that we constructed our business plan and the guidance that you have, we took a fairly conservative view of that just to make sure that our first foray into branded protein, we didn't overestimate. So if the product does, in fact, take off a lot faster than we thought, that would represent an upside.
Our next question is from Endri Leno with National Bank.
Just a couple from me. I mean, first, it was discussed on the last conference call that there is the potential for a shelf reset with the Cold Fighter to move it to the cough and cold section rather than vitamin section. So I'd like -- has that reset happened? I mean, was there any shift? And how was the Cold Fighter received? Or how did you do in the first quarter generally? I mean, did it meet or exceed your expectations?
Yes. So it's fully meeting our expectations. We do have quite a bit of movement right now in shelf space changes. If you guys go into a shop or a drug mart today, you'll notice in the vitamin aisle that there could be totes all over the place and young people retagging all the shelves. So their shelf set is going -- restage is going on right now. We haven't taken stock yet, Endri, of exactly kind of what the end result is. We'll probably have that done sort of by the beginning of June. But we did get quite a bit of movement around from a shelf perspective on Cold Fighter, and retailers' support of Cold Fighter is quite strong. Everyone is quite bullish about it. Everyone was quite pleased with how it performed in its initial launch. And we will have another full-on round of marketing support for Cold Fighter coming in the cough, cold season in the fall. And so we're looking forward to what, I guess you would call, onward and upward with Cold Fighter.
Okay, great. The other question I have, it's on the international. I mean, you mentioned Mexico, India and Southeast Asia. I was just wondering why did you choose this market specifically? What is the competition going in there? And like what kind of time frame do you have in mind in terms of stabilizing or reaching a good potential of sales there?
So in general, what we do is we do a scan of each country, and we look at a series of variables, and we put the business case to each one in terms of success criteria. So we look at the regulatory environment, we look at disposable income, we look at the competitive set that's already there, we look at retailer receptiveness, we look at the availability of a qualified distributor who can help kickstart the brand and actively sell and help us market the brand in the geography. And then, we make choices. But when we embark on something like Mexico, for example, we first negotiate with existing distributors, then we build the distribution over time. So it's not an en masse big launch that takes place in the country. It's more of a seeding strategy, where we build distribution, we use the pharmacist to educate the consumer and we build the volume over time. So you will not see any material sales impact from any of Southeast Asia, Mexico or Indian launches in 2018. You may get some news around that, so we'll keep you guys updated as we reach certain milestones, like signing a distribution agreement or shipping our products, we'll keep you apprised of that. But you're not going to see anything transformational. And what you are going to see is already built into the model that Chris made when we did the IPO.
Ladies and gentlemen, we have reached the end of the question-and-answer session. I'd like to turn the call back to Mark Hornick for closing remarks.
Well, all I can say is thank you very much for your support. We definitely are continued to be committed to our vision of improving the world's health and wellness and generating material value for our shareholders. And we hope that you see us doing that and look forward to continued discussion in the future. Thanks very much.
This concludes today's conference. Thank you for your participation. You may disconnect your lines at this time.