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Edited Transcript of JWEL.TO earnings conference call or presentation 5-Nov-20 10:00pm GMT

·43 min read

Q3 2020 Jamieson Wellness Inc Earnings Call Nov 7, 2020 (Thomson StreetEvents) -- Edited Transcript of Jamieson Wellness Inc earnings conference call or presentation Thursday, November 5, 2020 at 10:00:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Christopher Snowden Jamieson Wellness Inc. - CFO & Corporate Secretary * Mark Hornick Jamieson Wellness Inc. - President, CEO & Director * Michael Pilato Jamieson Wellness Inc. - President of Jamieson Canada ================================================================================ Conference Call Participants ================================================================================ * George Doumet Scotiabank Global Banking and Markets, Research Division - Analyst * Graeme Kreindler Eight Capital, Research Division - Principal * Matt Bank CIBC Capital Markets, Research Division - Associate * Peter Sklar BMO Capital Markets Equity Research - Analyst * Sabahat Khan RBC Capital Markets, Research Division - Analyst * Tania Rae Gonsalves Canaccord Genuity Corp., Research Division - Analyst of Healthcare ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Good afternoon, everyone, and welcome to the Jamieson Wellness conference call to discuss financial results for the third quarter 2020. (Operator Instructions) 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 Security. We also have Mike Pilato, President of Jamieson Canada. Before I turn the call over to Mr. Hornick, please note that a press release covering the company's third quarter 2020 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 will refer you to all risk factors contained in Jamieson's press release issued this afternoon and in filings with 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 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 the non-IFRS financial measures was included in the company's press release issued earlier today. Also, please note that unless otherwise stated, all figures discussed today are Canadian dollars and are occasionally rounded to the nearest million. I would now like to turn the call over to Mr. Hornick to get started. Please go ahead, sir. -------------------------------------------------------------------------------- Mark Hornick, Jamieson Wellness Inc. - President, CEO & Director [2] -------------------------------------------------------------------------------- Well, thanks a lot, Allie, and good afternoon, everyone. Thank you for taking the time to join us to discuss our Q3 2020 financial results. I'm pleased to report an all-time record-setting quarter for company revenue, with strong growth across all segments. Throughout Q3, we saw a continuation of the positive consumer trends that we spoke about last quarter. And a growing body of consistent data that shows globally, consumers are prioritizing their health and wellness during this time. All indications are that the new consumers that we saw enter the category at the beginning of the pandemic have stayed, and that the new consumers who are entering now are doing so in increasing numbers. Vitamin and supplement use is becoming part of their daily regime as they continue to add new products and take them daily. Consumers continue to prioritize their immune health, which is where about 50% of the overall category growth is coming from. We see significant growth across virtually all of our categories in which we offer products. We know consumers are also supporting their foundational health, as we see continued growth in categories like digestive health, sleep aids and energy-boosting products like vitamin B12, for example, as well as multivitamins. Consumers continue to shift to quality, to brands they know and trust. And this is a trend that you'll see across many categories, but it's particularly true in the vitamin category. With Jamieson holding by far the highest levels of consumer confidence for quality and brand trust, we're continuing to see a significant lift in market share and a significant lift above category in household penetration growth and a lift in dollars spent per household. As a result of all of this, coming off a very strong level of momentum exiting 2019 and continuing throughout the year, we saw in Q3, we generated 19% revenue growth, 18% growth in adjusted EBITDA and 25% adjusted diluted earnings per share growth. So to give you some highlights, our Jamieson Brands segment grew by 18%. And that was led by an 82% growth in international sales this quarter, which performed, of course, at the top end of our expectations. The new products are a very high percentage of our international portfolio and demand for them remained high across multiple geographies. And those main geographies including China, Eastern Europe and the Middle East. This growth is also attributable to an acceleration of fourth quarter cough and cold shipment. And that's a combination of our consumers and our partners requesting shipments that normally they know are needed for Q4 early to prepare for accelerated demand that they're seeing in their individual markets. International growth was led by China through increased cross-border e-commerce sales and shipments in the retail stores as we expand our domestic distribution network. Our domestic branded sales grew by 10%. So as a result of strong marketing support and the continued impact of the COVID-19 pandemic shifting health and wellness from a consumer trend to the #1 global consumer concern. This has translated to increased demand for immunity products and higher penetration across almost all vitamin and minerals supplement categories. Sports nutrition product sales are also returning to pre COVID-19 levels, as supplement-holding health food stores continued to reopen during the quarter. In our Strategic Partners segment, we reported 25% growth in sales, primarily driven to the timing of new programs in the first half of 2019. Said another way, we had a lower-than-normal Q3 volume in last year. So our growth looks larger than it would normally be. That said, we also have accelerated demand due to the effectiveness of our Strategic Partners marketing program, also driving part of our growth. Before I turn the call over to Chris to discuss our financials, I want to remind you that the health and wellness and safety of our employees, customers and communities remains our top priority at Jamieson. We continue to maintain and monitor execution of all safety measures in place in our facility during this challenging time. In addition, we continue to accelerate our investment plans in our manufacturing facility to increase production capacity and ensure we have the ability to meet the increasing 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 quarter 3 financial results and our prudent guidance for the rest of the year. -------------------------------------------------------------------------------- Christopher Snowden, Jamieson Wellness Inc. - CFO & Corporate Secretary [3] -------------------------------------------------------------------------------- Thank you very much, Mark, and good afternoon, everyone. As Mark discussed, consumers around the world remain focused on their health through this pandemic. As a result, we continue to see elevated demand for our products in the 45-plus countries and regions we serve. In the third quarter, revenue increased 19.2% to $105.6 million, driven by strong growth in our Jamieson Brands and Strategic Partners segments. By segment, Jamieson Brands revenue increased 17.7% to $82.6 million, consisting of 9.5% growth in domestic revenue and 82% growth internationally. Growth reflects sustained elevated demand for immunity and general health supplements and confidence in the Jamieson brand. Revenue in our Strategic Partners segment grew by 25% due to the timing of new programs in the prior year and higher turnkey revenues, partially offset by lower volumes to a Strategic Partner customer who filed for bankruptcy protection, disclosed in the second quarter. Total gross profit increased 13.9% to $38 million, and gross margin decreased 170 basis points to 36%. The decrease in gross margin percentage was primarily due to segment mix, higher costs to ensure continuity of supply, and continued physical distancing and safety measures established in our production facilities to protect our employees. In the Jamieson Brands segment, gross margin declined 80 basis points, driven by physical distancing initiatives, increased freight and third-party costs to maximize throughput, partially offset by operational efficiencies that commonly accompany higher volumes. Strategic Partners segment margin declined 340 basis points year-over-year, primarily reflecting customer mix, including the prior year transition from tolling to turnkey of one of our Strategic Partner customers and higher supply continuity costs required to maximize throughput, as well as COVID safety measures, as previously discussed. Selling, general and administrative expenses increased slightly to $19 million. Excluding the impact of specific costs related to COVID and business integration costs of $800,000, normalized SG&A expenses increased by $1.5 million in the quarter, higher due to variable compensation and the timing of marketing activity, which had been delayed to the second half as a result of COVID-19. Operational income increased $4.5 million to $17.8 million, and operating margin increased 190 basis points to 16.9%. On an adjusted basis, operating income increased 20.5% to $18.6 million in the third quarter of 2020. And adjusted operating margin was 17.6% compared to 17.4% in the prior period. Adjusted EBITDA increased 18.2% to $22.9 million, and adjusted EBITDA margin was 21.7% compared to 21.9% in the prior year. The modest decline in adjusted EBITDA margin reflects lower gross profit margins, offset by lower fixed costs as a percentage of revenue. In the third quarter, interest expense and financing costs were $1.3 million compared to $2.5 million in the prior year. This difference was primarily related to lower interest rates and lower, below-average borrowings. Our reported net income was $12 million in the third quarter compared to $4.9 million in the prior year. On an adjusted basis, net income increased 33% year-over-year to $12.7 million or 30% of diluted EPS. All of the adjustments to net income are described in today's press release and included in the adjusted net income reconciliation table at the end of the release. Turning to the balance sheet and cash flow. We generated $4.6 million of cash from operations during the quarter compared to $6.7 million in the prior year. Cash from operating opportunities before working capital considerations of $16.1 million was $4 million higher than prior year due to higher volumes in the quarter. Cash invested in working capital was mainly driven by an acceleration of purchases and payment for immunity and other raw materials in the first half of 2020 to ensure our continuity of supply. Capital expenditures during the third quarter were $1.8 million and we paid $5 million in dividends. We ended the quarter with over $118 million in available cash and operating lines. Now with that, let me turn to guidance. We are updating our 2020 outlook, and now anticipate the following: Net revenue in the range of $395 million to $400 million representing top line growth of 14.5% to 16%. This compares to $345 million in revenue -- sorry, for 2019, reflecting strong demand for our branded products, both domestically and internationally, while [maximing] our COVID-constrained capacity in the fourth quarter of 2020. Adjusted EBITDA in the range of $86 million to $88 million or 13% to 16% growth over fiscal 2019 adjusted EBITDA, reflecting higher volumes, offset by a continuation of a higher cost operating environment as a result of COVID-19, as we ensure the continuity of supply and maintain heightened safety measures throughout our operations and facilities. Adjusted earnings per fully diluted common share of $1.11 to $1.15, representing 15.6% to 19.8% growth over fiscal 2019. Additionally, I would like to note some assumptions to assist you in modeling. We anticipate Jamieson Brands segment growth of 19 -- sorry, of 17% to 19% in fiscal 2020, including 12% to 14% growth of our brands domestically, reflecting strong demand realized year-to-date, and fourth quarter domestic revenue of between 6% and 13% growth. Approximately 50% growth internationally, driven by strong demand for immunity products across our existing international markets, and fourth quarter international growth of approximately 10%, giving due to the timing of shipments favoring the third quarter and year-to-date. We expect Strategic Partner revenue growth of approximately 5% and fourth quarter Strategic Partner revenue growth of between 10% and 15%. Normalized SG&A increases of approximately 9%, reflecting our investment in international marketing and e-commerce as well as higher variable compensation. We are assuming interest expense of between $6 million and $6.5 million. And in the fourth quarter, we will begin to transition our East Coast distribution activities in Windsor and Scarborough to a third-party logistics provider. That is fundamental to maximize our available space and capacity for tablet manufacturing and packaging at both our Rhodes Drive and Scarborough facilities. We estimate costs of up to $3 million throughout this transition and will adjust for these costs in our reported results. Additionally, our guidance reflects an assumption of CAD 1.34 per U.S. dollar exchange rate and an effective tax rate of approximately 28%. Our estimate for fully diluted common shares is approximately 100 and -- sorry, approximately 41.5 million. Consumer response to COVID-19 has resulted in increased demand for both immunity and general health supplements throughout 2020. Higher demand is expected to continue for products in specific categories as consumers seek out health and wellness solutions, and we are taking steps to support increased demand. We remain focused on the safety and well-being of our employees while implementing necessary measures to ensure business continuity, increasing sanitation, maximizing physical distancing where possible, and establishing shift gaps to avoid congestion during changeovers. A complete discussion of our outlook and factors impacting our expected performance in 2020 is included in the outlook section of our MD&A, and that will be filed today. With that, now let me turn the call back to the operator for Q&A. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions) We'll take our first question from Peter Sklar from BMO Capital Markets. -------------------------------------------------------------------------------- Peter Sklar, BMO Capital Markets Equity Research - Analyst [2] -------------------------------------------------------------------------------- A few questions here. Just first, I just want to confirm, did you have any COVID issues that disrupted plants or distribution center operations or disrupted supply of any kind? -------------------------------------------------------------------------------- Christopher Snowden, Jamieson Wellness Inc. - CFO & Corporate Secretary [3] -------------------------------------------------------------------------------- Not particularly in the third quarter. We did have certain COVID costs that were added back, and they're identified both in the press release and in the MD&A. -------------------------------------------------------------------------------- Peter Sklar, BMO Capital Markets Equity Research - Analyst [4] -------------------------------------------------------------------------------- Right. Okay. But nothing that's interrupted operations? -------------------------------------------------------------------------------- Mark Hornick, Jamieson Wellness Inc. - President, CEO & Director [5] -------------------------------------------------------------------------------- No, we're really thrilled how well our employees are following our compliance and confidence program. We have over 1,000 employees in Jamieson, and thank goodness, we have had very minimal impact to ongoing operations from COVID other than the large safety measures that we put in place at the beginning of the pandemic. -------------------------------------------------------------------------------- Peter Sklar, BMO Capital Markets Equity Research - Analyst [6] -------------------------------------------------------------------------------- And you said that when you talked about your margins, you talked about third party, like third party costs. Are you -- what do you mean by third party costs? Are you referring to materials? Or is it other costs you were referring to? -------------------------------------------------------------------------------- Christopher Snowden, Jamieson Wellness Inc. - CFO & Corporate Secretary [7] -------------------------------------------------------------------------------- That's the use of third-party co-packagers to package product to help us maximize our throughput. -------------------------------------------------------------------------------- Peter Sklar, BMO Capital Markets Equity Research - Analyst [8] -------------------------------------------------------------------------------- Okay. And the new -- this new outsourcing of distribution, does that mean you will cease doing any self-distribution on your own, like completely? It's all outsourced? -------------------------------------------------------------------------------- Christopher Snowden, Jamieson Wellness Inc. - CFO & Corporate Secretary [9] -------------------------------------------------------------------------------- Yes. We've got a large DC in Windsor that would be transitioning to a third-party over the next 2 quarters as well as our specialty brands distribution currently located in our Scarborough facility. We're utilizing that room for either prep or inventory storage or for -- directly for manufacturing purposes. -------------------------------------------------------------------------------- Peter Sklar, BMO Capital Markets Equity Research - Analyst [10] -------------------------------------------------------------------------------- Right. Okay. And Mark, just a couple of questions for you. Like I remember when you did the IPO, you had done a couple of tuck-in acquisitions that ultimately worked out for you. I think probably the last one, I think, was Lorna Vanderhaeghe. But really, really nothing has happened on that front in terms of acquiring little brands and tucking them in. Can you just describe what's happened and why you've been quiet on that front over the last couple of years? -------------------------------------------------------------------------------- Mark Hornick, Jamieson Wellness Inc. - President, CEO & Director [11] -------------------------------------------------------------------------------- I think, Peter, we started to see at the beginning of 2017, and frankly, while we were integrating Body Plus, which is our last acquisition, we saw a real consumer response to the combination of marketing and innovation that we were putting into the market, which started to drive domestic growth quicker than expected, as well as we really then developed our thinking around how to approach the quite massive opportunity that we have in China. And we really started getting big traction on our international business. So as a result, from a focus standpoint, our organic growth opportunities became, more and more, the best forward-looking source of return that was visible to us. And if you recall at that time, in 2017, 2018 -- 2017, 2018, 2019, acquisition, a little different than now. We're quite expensive from a multiple standpoint. We were still integrating Body Plus and moving from a private equity model to public. So we had our plates full. Since then, now that we've seen just the sheer demand increases for Jamieson, not only domestically but abroad, again, organic growth is the single best source of return for us at the moment. Multiples for acquisitions are extremely high right now. But we are so pleased that, in our case, our organic growth opportunities have never been bigger. And so you can anticipate that over the next 12 to 24 months, we will be going very hard at a combination of responding to demand, building manufacturing capacity, as well as focusing on taking full advantage of the organic growth that we have in China as well as the rest of the world from an export standpoint, as well as doing things like maximizing our distribution in Canada. And you will see continued very positive business results coming from that. As we get those opportunities well executed, well managed and well implemented, we'll then start revisiting then the global role M&A would play. But in that time, unless something comes up too good to be true as an opportunity that fits our strategy like a glove, organic growth is where we're going to be focused. -------------------------------------------------------------------------------- Peter Sklar, BMO Capital Markets Equity Research - Analyst [12] -------------------------------------------------------------------------------- Okay. And then just lastly, I've noticed there's a lot of TV advertising for Jamieson Essentials. And can you talk a little bit about like why you're booking on that innovation in terms of your advertising focus? And just how has that innovation done, now that I think you've been at it for a couple of years now? -------------------------------------------------------------------------------- Mark Hornick, Jamieson Wellness Inc. - President, CEO & Director [13] -------------------------------------------------------------------------------- Yes. So the absolute level of advertising is fairly consistent with what we've done last year and the year before. We typically do have a lot of on-air advertising at this time of year with back-to-school as well as cough and cold season starting. So it's pretty normal to see what you might see as an elevated level of Jamieson marketing support. But that said, with all of the new consumers coming to the brand, and all consumers in Canada really looking to find brands that they can trust and put their faith in to help them during this period of focus on health and wellness, it makes a lot of sense to be first and foremost in consumers' minds. And so the investment that we're doing from that standpoint, we see as really helpful in terms of not only driving continued market share growth, but also bringing new users into the category. And the longer the new users stay and incorporate Jamieson into their routine, the longer and more permanent that step-change volume growth becomes. And so for us, it's really key to our strategy to take advertising and marketing programs that we already have a very strong track record of, of delivering results and integrating them then into our plan at a time when consumers are looking for solutions in health and wellness like never before. -------------------------------------------------------------------------------- Operator [14] -------------------------------------------------------------------------------- We'll take our next question from Sabahat Khan from RBC Capital Markets. -------------------------------------------------------------------------------- Sabahat Khan, RBC Capital Markets, Research Division - Analyst [15] -------------------------------------------------------------------------------- Just some commentary in the... -------------------------------------------------------------------------------- Mark Hornick, Jamieson Wellness Inc. - President, CEO & Director [16] -------------------------------------------------------------------------------- Sabahat, we're having a really hard time hearing you. Operator, turn the volume up. -------------------------------------------------------------------------------- Sabahat Khan, RBC Capital Markets, Research Division - Analyst [17] -------------------------------------------------------------------------------- Is it better now? -------------------------------------------------------------------------------- Mark Hornick, Jamieson Wellness Inc. - President, CEO & Director [18] -------------------------------------------------------------------------------- Yes, it's better now. -------------------------------------------------------------------------------- Christopher Snowden, Jamieson Wellness Inc. - CFO & Corporate Secretary [19] -------------------------------------------------------------------------------- Perfect. -------------------------------------------------------------------------------- Sabahat Khan, RBC Capital Markets, Research Division - Analyst [20] -------------------------------------------------------------------------------- Okay. Perfect. There was some commentary in the press release around some of the impacts that you're seeing on the gross margin line because of COVID. And I was just wondering, is it possible maybe given the elevated demand to maybe try to price some of this away? Or is this sort of the environment where you just don't want to pass on pricing given the nature of your category and the backdrop? -------------------------------------------------------------------------------- Christopher Snowden, Jamieson Wellness Inc. - CFO & Corporate Secretary [21] -------------------------------------------------------------------------------- Well, I guess the first question is what is the permanence of these COVID measures? So to the extent where we've got shift gaps and are using third-party partners to package product, all of those are temporary measures. And we certainly wouldn't price for temporary measures. To the extent there is an increase in the cost basis, I think we have a good track record of passing those along and maintaining our target margins. But while things are situational and temporary in nature, we typically don't pass those on to our consumers. -------------------------------------------------------------------------------- Sabahat Khan, RBC Capital Markets, Research Division - Analyst [22] -------------------------------------------------------------------------------- Okay. And then the commentary around the new warehouse, I guess, if I'm understanding it correctly, this is going to be extra storage or servicing capacity. I guess how should we think about that in terms of sort of the margins and costs as we head into next year? Is it, to some extent, offset by incremental sales or expected? Or how should we think about maybe the incremental SG&A associated with it? -------------------------------------------------------------------------------- Christopher Snowden, Jamieson Wellness Inc. - CFO & Corporate Secretary [23] -------------------------------------------------------------------------------- Not a lot of SG&A associated with it. Certainly, some costs in the cost of goods sales line. We're not, I think, in a position to start forecasting margin for 2021 at this point. But what it is doing, more importantly for the organization, is freeing up a lot of space. And what that will do in Windsor, in particular, is free up inventory space in the plant to essentially build more packaging lines and more tablet compression and blending to maximize the capacity at our Rhodes Drive facility, then moving that inventory over to what is the DC now as a -- really as a shuttle center to help maximize the throughput in that group of -- in that existing footprint. Similarly, at the Scarborough location, we manage our distribution out of that Scarborough location. We're going to repatriate that space to add packaging lines and tablet compression in Scarborough to essentially create that second plant and really have that -- an expanded capacity for our ability to meet consumer demand as we move forward through COVID and through other -- through the future. -------------------------------------------------------------------------------- Sabahat Khan, RBC Capital Markets, Research Division - Analyst [24] -------------------------------------------------------------------------------- Okay. I thought there might be some -- I thought I may have heard the third-party warehouse additions, so I may have misunderstood that. Okay. And then, I guess, maybe more on some of the top line trends that you saw. During the course of Q3, the things, I guess, in the backdrop got a little bit better with things opening up. And then there was the advent of what everybody is calling a second wave. Can you maybe talk about your customer demand or what you were hearing from them? Should we assume your demand directionally trended higher as the pandemic became more serious for a second time? -------------------------------------------------------------------------------- Mark Hornick, Jamieson Wellness Inc. - President, CEO & Director [25] -------------------------------------------------------------------------------- Yes. Maybe I'm going to call on Mike Pilato, who's our President of Canada. He's very close to that. And maybe, Mike, you could give some commentary on what you see happening from a top line perspective. -------------------------------------------------------------------------------- Michael Pilato, Jamieson Wellness Inc. - President of Jamieson Canada [26] -------------------------------------------------------------------------------- Yes. Perfect. Thank you, Mark. Thanks for the question, Saba. I mean first of all, from a consumer trend perspective, Saba, we're seeing a lot of the exact same trends that we talked about last quarter. And we're really seeing a growing evidence of data points that are showing consumers are prioritizing health and wellness during this time and for the long term. So continuing to see new consumers enter the category. Continuing to see elevated levels of compliance as consumers have increased their consumption of vitamins and mineral supplements. Continuing to see an expansion and growth across many of the sub categories that we sell in and not just the immunity-based products, but strong growth in things like sleep products and energy-boosting products and gut health. And then this continued shift to quality that we talked about last quarter, where consumers are really shifting to brands they know and trust. And Jamieson being the #1 brand equity-wise and quality and trust, we're continuing to see significant lift in share outpacing the market in terms of household penetration growth and also a lift in dollars per household. As we look across the different waves, from wave 1 to wave 2, which was in your question there, really we're seeing the demand levels holding consistent with what we saw in the periods right after the initial wave 1 panic period. So if you remember, we talked about a wave 1 panic period, and then that panic calmed, and we saw this continued elevated level of demand. It's been very consistent throughout every month from that point, week-to-week, month-to-month. And we are continuing to meet as much of that demand as we can in the marketplace. But wave 2 had just really held and consistent, just continued to spread out this elevated demand that is leading to the strong results that [product group] released today. That has some strong growth. -------------------------------------------------------------------------------- Sabahat Khan, RBC Capital Markets, Research Division - Analyst [27] -------------------------------------------------------------------------------- Okay. And then just last one from me. Can you maybe talk about -- you alluded to the kind of the no real impact from COVID, but I was just wondering if the supply of inputs out of China and kind of your other supplier sources, is that still holding in okay in there, so whether there's been any impact from the second wave? -------------------------------------------------------------------------------- Christopher Snowden, Jamieson Wellness Inc. - CFO & Corporate Secretary [28] -------------------------------------------------------------------------------- So from a supply chain perspective, there's a couple of factors. There's -- we see a significant lengthening in lead times. That's led us to take on a significantly higher level of raw material in input inventories. You see that existing in our market -- or in our balance sheet. But what we've done is we've done -- taken those inventories to ensure that we have this -- the appropriate supply of stocks to meet our consumer demand. So we feel very confident going forward based on our levels today and our current POs that are in place to supply Q4. Certainly, if the situation changes, COVID cases continue to rise, there are risks. But as far as where we are at today, everything looks good for Q4. -------------------------------------------------------------------------------- Operator [29] -------------------------------------------------------------------------------- We will now take our next question from George Doumet from Scotia Bank. -------------------------------------------------------------------------------- George Doumet, Scotiabank Global Banking and Markets, Research Division - Analyst [30] -------------------------------------------------------------------------------- Well done on the quarter. I had a question on -- Mark, on your prepared comments on the market share gains, that also seems to be kind of our modus operandi in the last few years. But maybe double-clicking on that. Just looking at Jamie domestic in terms of the immunology products. Can you talk about any market share gains there vis-à-vis our competitors? -------------------------------------------------------------------------------- Mark Hornick, Jamieson Wellness Inc. - President, CEO & Director [31] -------------------------------------------------------------------------------- So we have seen market share increases across virtually every category in which we operate. I think what you've seen is the consumer transition from shopping to buying. And so when consumers are in stores, they are looking for what they know is their highest quality product choice, and they're buying it. And so other -- I know other companies, other categories with strong established brands are seeing it. We are seeing it in an exaggerated way in Jamieson, just based on the heritage and the sheer level of trust that we have with consumers, which has been extremely gratifying. When you add on top of that, the breadth of subcategories in which we provide products as well as the very strong marketing programs that we have in place, we're seeing all of that transition into significant and consistent market share growth period by period. Incidentally, we've been growing market share very consistently since about 2017, and we are the market leader in Canada by a very large margin. And in -- at times when consumers are very concerned about product quality and want to make sure that they're finding a solution that works best, that plays very well to our brand. And so that acceleration in market share growth has picked up. -------------------------------------------------------------------------------- George Doumet, Scotiabank Global Banking and Markets, Research Division - Analyst [32] -------------------------------------------------------------------------------- Okay. That's helpful. Just following up on an earlier question. Can you maybe talk in terms of the potential -- for the potential for us to increase price? Maybe if you can give us a sense of quantification there to maybe account for the presumably higher inventory costs that we're building up here for next year. -------------------------------------------------------------------------------- Mark Hornick, Jamieson Wellness Inc. - President, CEO & Director [33] -------------------------------------------------------------------------------- You say about increasing price, George? Your voice is a little -- is a little bit soft on the phone. -------------------------------------------------------------------------------- George Doumet, Scotiabank Global Banking and Markets, Research Division - Analyst [34] -------------------------------------------------------------------------------- Yes, sorry about that. I was just wondering if you can maybe give us a sense of order of magnitude of price we're going to have to take next year to account for the higher inventory that we're building up -- higher priced inventory? -------------------------------------------------------------------------------- Mark Hornick, Jamieson Wellness Inc. - President, CEO & Director [35] -------------------------------------------------------------------------------- So I think the best way to think about this is our role and our track record is to continue to maintain margins despite changes in the circumstances of our business. And so from a modeling standpoint or from a future expectation standpoint, you can count on us to do that. The mechanics by which we approach price and deal with our retail partners, that we don't make public. That's between us, and they wouldn't want that either. So from our standpoint, I think the best way to think about this is that we are -- we run this business quite well, in our opinion. We have very forward-looking views on our cost structure. We take those into account, and we work within the market and with our retail partners to make sure that we fairly maintain our margins despite changes in input costs. -------------------------------------------------------------------------------- George Doumet, Scotiabank Global Banking and Markets, Research Division - Analyst [36] -------------------------------------------------------------------------------- Okay. Got a question for Chris. My last one. Can you talk a little bit about the free cash flow conversion profile. I think working capital has been kind of moving up here, and how should we think of CapEx, working capital for the rest of the year? And maybe directionally, how does conversion look like this -- next year maybe compared to this year? -------------------------------------------------------------------------------- Christopher Snowden, Jamieson Wellness Inc. - CFO & Corporate Secretary [37] -------------------------------------------------------------------------------- So I guess that's a good question. You saw in 2019, a significant rightsizing of our working capital, primarily related to an increase in our inventories. Now you've got another significant increase in demand, which requires us to hold more inventory. So when we talked originally about an expectation to spend in the high single-digit investment in working capital in 2020 as a target, you might be a little bit higher than that in terms of like the teens. But that would be, I think, the maximum we would end the year at from an investment in working capital perspective. So we're targeting around $40 million in operating cash flow, exiting 2020, for the fiscal year 2020. When you turn to '21, we would expect to probably have about the same level of working capital investment, just to be safe, as we really deal with the shock and maintain higher inventory levels, just more from a safety perspective to ensure we can meet consumer demand versus what we would otherwise expect to carry from a normal, orderly operation. -------------------------------------------------------------------------------- Operator [38] -------------------------------------------------------------------------------- We'll now take our next question from Matt Bank from CIBC. -------------------------------------------------------------------------------- Matt Bank, CIBC Capital Markets, Research Division - Associate [39] -------------------------------------------------------------------------------- Okay. I guess I have some questions on China. So this year, it seems like the key metrics we are following was how many licenses you're winning and then just rolling out. What are the key sort of goalposts to look for next year? -------------------------------------------------------------------------------- Mark Hornick, Jamieson Wellness Inc. - President, CEO & Director [40] -------------------------------------------------------------------------------- So one thing I want to preface this with, Matt, and not in any way to be evasive to your question, but we're one of the only companies that, well, first of all, we're one of the only public companies that we compete with in China, which is a very competitive market. And the other companies we compete with, our competitors are divisions of companies that don't report directly on China. So we for -- in order to protect the integrity of our marketing plans and to allow us to have the best chance of success, we have to be pretty lean with what we publicly publish in terms of what we're doing in China. Because I can guarantee you that as soon as this call is done, our competitors are going to want to look and see exactly what we said about China. So we are not going to be extremely forthcoming, I would say, on the execution of how we are doing what we're doing in China. I think the things that you need to think about from a Chinese strategy are that we approach it on a channel basis. So in cross-border e-commerce, which is where we are doing the bulk of our sales right now in China, we will continue to expand our product assortment. So these are the same products that you can buy right now in Canada with a sticker on the back with Mandarin language for safe use. We'll continue to expand that range, continue to increase marketing as we build the brand. We had an extremely successful year on cross-border e-commerce and which was, of course, assisted by the pandemic in that our business is very immune-focused in China. Jamieson, in some circles in China, is known as the vitamin C brand. And so we have seen a very large consumption increase because of that. The next channel is the domestic e-commerce and bricks-and-mortar channel where we are deploying our licensed products in order to gain distribution and then begin in marketing China formulated products for the Chinese consumer. There, our goal is to be the foreign brand that Chinese consumers recognize in the traditional channel. So that's where the licensed products come in. And our main goal there is building store distribution. So we have a very targeted plan with which stores in which cities we want to be, in what order. So there are several thousand retail outlets that are part of this plan. We are currently present in thousands of retail outlets in China, and we intend to grow that as well as growing our licensed product distribution at the same time. And so we are well on track for that. We did have -- experienced a bit of a delay when COVID hit and travel was limited within China. Our cross-border e-commerce business more than compensated for that in terms of sales. And now we are back on track and have made up all ground with regards to the pace of distribution build. And we'll continue to do that into 2021. I would not look at the absolute number of licenses as an indicator of anything specific, nor can you link it numerically to any model. Licensed products that are published by the Chinese FDA are done in the order that they feel comfortable with releasing product standards for. And they do not -- the order which does not relate at all to demand for the product, more around the science of the product. So once we have -- we are in a position where we are now where we have over 20 products in our license portfolio, we have a very solid critical mass to approach the bricks-and-mortar and domestic e-commerce distribution. And so from now on, the number of licenses is not a big determining factor in our success. We will continue to grow that. The main factor for us is that we have many more licenses, as far as we know, compared to any other international competitor. That's our competitive advantage. We'll continue to leverage that and get as many licenses as we can and get those products into the market. But based from now on, really, then we'll move into distribution build and then direct consumer marketing in China of the portfolio to continue to build awareness and trial of the brand. And so that's what you're going to see our main -- as our main focus. I can just tell you strategically what the direction is. I can tell you, it's going very well. You see it in our business results. But I would not be able to give you KPIs or benchmarks without giving our competitors too much information on what our execution is in China. So it's a long answer. I hope it wasn't too cryptic. That's kind of the best we can do at this moment. -------------------------------------------------------------------------------- Matt Bank, CIBC Capital Markets, Research Division - Associate [41] -------------------------------------------------------------------------------- That's helpful. And then I guess on international more broadly, can you just put a bit more context here on that 10% growth number, which is obviously slower than the really strong pace you've done year-to-date? And then do you see that reverting to back to a higher level in the following quarters? -------------------------------------------------------------------------------- Christopher Snowden, Jamieson Wellness Inc. - CFO & Corporate Secretary [42] -------------------------------------------------------------------------------- So it's really about it's really about ensuring that we get that product into the shelf as the cough and cold season hits most of those countries. So it is really about making sure that the supply hits the shelf more than choosing what quarter it landed in. So it's primarily timing. When you look at -- I think we've got about 70% year-to-date growth. When you add Q4 to that, that really ladders to that 50% year-to-date number. We would not expect to be -- we would not expect to have any more than one quarter at the 10% growth level, but we have not provided guidance for 2021, and we'll validate that, obviously, when we announce our official guidance with our fiscal year-end results in February. -------------------------------------------------------------------------------- Matt Bank, CIBC Capital Markets, Research Division - Associate [43] -------------------------------------------------------------------------------- And just a follow-up on 2021, and I hear you that you haven't released guidance in as early. So I guess I'm not sure how much you can say here, but high level, how do you think about lapping the very strong growth that you put out this year? -------------------------------------------------------------------------------- Mark Hornick, Jamieson Wellness Inc. - President, CEO & Director [44] -------------------------------------------------------------------------------- Well, when you look at the fundamentals that drove the growth, so number one, we came into 2020 with a very strong level of momentum coming off a record-setting 2019. So coming into 2021, that's going to continue. The consumer focus on health and wellness is also going to continue into 2021, given that it's going to take a long time before that environment changes. And the longer we stay in an environment like that, the more permanent routine changes become with consumers who are now changing your health and wellness routines and frankly, from what we understand, feeling a lot better for it. So you're going to see that changing. We are continuing. We will continue our very strong pipeline of innovation, geographic expansion as well as very strong marketing of our brand throughout all channels. We continue to build distribution, and we continue to build consumer awareness and trial, particularly in international markets. So the trajectory of business growth is very much on our side for 2021. The numerics of it quarter-by-quarter may be lumpy, as we saw panic buying in both at the end of Q1 and Q2. We'll address that when we go through our guidance for 2021. But broadly speaking, we are very optimistic about our business trajectory. Our brand has never been stronger, and our company and our people have never been better or more committed. And so I think you can still expect pretty great things from us for many years to come. -------------------------------------------------------------------------------- Operator [45] -------------------------------------------------------------------------------- (Operator Instructions) And we'll take our next question from Graeme Kreindler from Eight Capital. -------------------------------------------------------------------------------- Graeme Kreindler, Eight Capital, Research Division - Principal [46] -------------------------------------------------------------------------------- I just wanted to follow up on one item, and that was the discussion surrounding the acceleration in the fourth quarter cough and cold shipment. So I just -- I wanted to understand the dynamic there. Appreciating that the retail partners want to be prepared for the cold and flu season here, when we think about the demand for those products, are those accelerated shipments? Is there expected to be continued demand coming behind that during the fourth quarter? Or is this generally the elevated demand across the entire portfolio that will help to continue to propel that growth, that related to Q4 in particular? -------------------------------------------------------------------------------- Christopher Snowden, Jamieson Wellness Inc. - CFO & Corporate Secretary [47] -------------------------------------------------------------------------------- Yes. I think it's really just about timing, right? We see good demand all the way through the initial COVID, I guess, [pull], for lack of better words. So it's really a combination of us and our partners wanting to make sure, and we've got that inventory in place to maximize that velocity as the COVID situation continues to elevate in many of the markets that we participate. So it's really just about safety. There really wasn't anything else in terms of us wanting to get that out any quicker, just other than making sure that it was in -- on shelf for the consumer when the cough and cold season hit rather than late. As you also know, transportation lanes are in high demand because of the amount of e-commerce and activity. So those are harder to come by. So it was really just about insurance for us to make sure that those partners had the product in hand. -------------------------------------------------------------------------------- Operator [48] -------------------------------------------------------------------------------- We will now take our last question, from Tania Gonsalves from Canaccord Genuity. -------------------------------------------------------------------------------- Tania Rae Gonsalves, Canaccord Genuity Corp., Research Division - Analyst of Healthcare [49] -------------------------------------------------------------------------------- Just a couple from me here. I think the last quarter, you talked about some of your specialty sales had transitioned to e-commerce channels while the health and supplement stores were closed. Could you provide any color? Do you see sales fade within e-commerce? Or are you seeing transitions back to brick-and-mortar stores? -------------------------------------------------------------------------------- Mark Hornick, Jamieson Wellness Inc. - President, CEO & Director [50] -------------------------------------------------------------------------------- Mike, do you want to take that? -------------------------------------------------------------------------------- Michael Pilato, Jamieson Wellness Inc. - President of Jamieson Canada [51] -------------------------------------------------------------------------------- Yes. No, I got it. I got it. Yes. Tania, kind of a couple of things rolled in that question. One is specialty brands [been consecutively] strong. We can talk about both of them. We just talked about in Q2, a shift to some sales into e-comm into some of the other channels across specialty brands when we saw a temporary decline in sales at stores that were closed during the height of the pandemic, most notably mall locations. As those provinces reopened through -- or sorry, as those stores reopened in provinces across the country through Q2, we saw those brands really start to bounce back to original expectations, and that momentum continued into Q3. And we have absolutely no reason to believe that it won't continue into Q4. And that momentum really has carried across all the channels as consumers continue to focus on foundational health, of which our portfolio lines up. So we've been gaining distribution and seeing increased strength in all of the channels, from the health food and specialty channel to food and drug and the e-comm channel across multiple brands. From an e-comm specific perspective, we did see exceptional growth early on in the pandemic period. We continue to see exceptional growth in that channel across all of our brands and all of the digital platforms that we play in, be it our own e-commerce, third-party partners e-commerce. It continues to grow and continues to do quite well for us. We're going to continue to invest in all these platforms. We're going to grab these consumers short- and long-term and really, really continue to partner with all of the e-comm partners out there to make sure we're a leader here for the long term. So we've seen those brands come back everywhere and continue to build in the e-comm channel. -------------------------------------------------------------------------------- Tania Rae Gonsalves, Canaccord Genuity Corp., Research Division - Analyst of Healthcare [52] -------------------------------------------------------------------------------- Perfect. And then just one more here. Could you comment maybe on sales in the U.S.? I think earlier in the pandemic, they were a little bit lighter because you had limited brand awareness in that geography. But I think you were starting to turn the tests back on in terms of marketing and getting your brand known. What kind of traction did you build over Q3? -------------------------------------------------------------------------------- Michael Pilato, Jamieson Wellness Inc. - President of Jamieson Canada [53] -------------------------------------------------------------------------------- Yes. So our business in the U.S. continues to be very, very much in a test mode, as we talked about coming into this year. And you are correct, we talked about how when COVID hit in the front half of the year, right as we were launching, we paused the investment in that test. We did turn that back on very late in Q3. So that is back. We've invested back into that test. And now we're waiting through Q4 to see what those results are. So we don't have any immediate results. It's really new spending to build the brand. As for our original plan, we did launch Iron Vegan in the U.S. in very, very late in Q3. So you'll see that in the U.S.A., it's actually a co-branded approach. So in the U.S., it's launched as Iron Vegan by Jamieson because we want to expand our Jamieson portfolio, which we can grow the brand's presence and awareness. So we've added those to our lineups. We've invested back into the marketing. We're waiting to see some of the results and gather some of those learnings for the remainder of 2020. We do have more plans for 2021. We have a robust innovation pipeline that we're looking to distribute into our U.S. test model based on the learnings that we get through this quarter. So we feel good about it, but it's just a little too early to tell what kind of pickup we're seeing at this point. -------------------------------------------------------------------------------- Operator [54] -------------------------------------------------------------------------------- We have no further questions. That does conclude today's question-and-answer session. I would now like to hand the call back over to Mr. Hornick for any additional or closing remarks. -------------------------------------------------------------------------------- Mark Hornick, Jamieson Wellness Inc. - President, CEO & Director [55] -------------------------------------------------------------------------------- All right. Thanks, Allie. So thanks very much to everyone for joining us to discuss our third quarter 2020 results. On behalf of the entire management team at Jamieson Wellness, Chris and I would like to take a moment to extend our gratitude to our employees. -------------------------------------------------------------------------------- Christopher Snowden, Jamieson Wellness Inc. - CFO & Corporate Secretary [56] -------------------------------------------------------------------------------- This year has not been easy to say the least, but we are so very proud of how the team has come together to support our customers, consumers and each other. -------------------------------------------------------------------------------- Mark Hornick, Jamieson Wellness Inc. - President, CEO & Director [57] -------------------------------------------------------------------------------- We'll always be supported by such dedicated people who continue to focus on delivering health and wellness products to consumers around the world who rely on the Jamieson brand, now more than ever. So thanks to the entire team, and thanks to everyone on the call today for your support of Jamieson. Please stay healthy and fit. Thanks a lot. -------------------------------------------------------------------------------- Operator [58] -------------------------------------------------------------------------------- With all that, that does conclude today's call. Thank you for your participation. You may now disconnect.