Andrew Peller Limited (ADWA) Earnings Call Transcript & Summary

Good afternoon, everyone, and welcome to Andrew Peller's Annual General Meeting, calling the meeting to order. And although we're disappointed that we can't see and be with you in person. We want to thank you for joining us virtually. I am at Oakville, Ontario at our offices in the boardroom, with Steve Attridge and Jonathan, [ Bernard Kochi ] with Joe and Lisa, and we're thrilled to be with you. It's been a great summer for all of us, certainly lots of surprises and challenges. We've begun our harvest in both the Okanagan and the Niagara Peninsula now. You know we've had a challenging year with fires out in the Okanagan. And I'm delighted to say everybody is healthy and happy in the Okanagan. In fact, we'll have a normal crop. It's a little light in terms of its yield this year just because of the heat and dryness. But despite the challenges from the fires, we have not been compromised in any way by them this year. We're grateful for the incredible efforts of the -- all the firemen and social and health workers who have done an incredible job to service the people of the valley. And I grew up -- as you know, we've had a banner growing season. Life is coming back to normal. In wine country, there's a lot of energy and excitement. We had a Board meeting and dinner with -- in person with our Board of Directors and spouses and management team last night. It's the first time we've been together in person for over 2 years, and there was lots of hugging and some tiers and it really felt great to be with everybody. We are reminding people that tough times don't last but tough teams do. And it's been 2 years of incredible challenge for our company and all our employees and management, and they really demonstrated incredible resiliency, and we're all very, very proud and grateful. I'm happy to tell you that over 66% of our employees from Vancouver to Toronto, Scotia are shareholders through our company-assisted employee share purchase program. I've been a Director of the company since 1989, and I'll be standing for reelection as a director again this year. As I said, Steve is here and he'll be assisting you with the formal agenda. For the purposes of the meeting today, voting on all matters will be conducted by electronic ballot. To allow for sufficient time for voting, the polls are now open. I remind you that registered shareholders and duly appointed proxy holders who have properly logged in with their control number or user name will be able to vote. We remind you that if you are a registered shareholder and you've already voted by proxy, you do not need to vote again. If you have already -- during the online ballot, your online vote during the meeting will revoke your previously submitted proxy. If you've already voted by proxy, do not -- and do not wish to revoke your proxy, do not vote again during the online ballot. I hope that was clear for all of you. To vote, simply click on your choice for or withhold as applicable. A confirmation message will appear to show your vote has been received. To change your vote before the polls close, simply change your selection. The vote you have submitted on each polling item at the time the polls close will be recorded and tallied by the scrutineers. Final voting results will be published in due course. Questions in respect of a motion during the formal portion of the meeting can be submitted by any registered shareholder or duly appointed proxy holder with a valid log in using the instant messaging feature of the virtual interface. So you have a message icon at the top of your screen. If you have any questions just write out the questions using that icon, they'll come in to our team here in Oakville, and we'll address your questions at the end of our remarks. I would now like to introduce those who will be nominated for directors for our current year. First is Shauneen Bruder of Oakville, Ontario. Shauneen previously served as Executive Vice President, Operations at the Royal Bank of Canada and as President of the Canadian Chamber of Commerce. She's been a Director since 2018, and she will also serve as the Chair person of the Governance and HR Committee. Also up for nomination is Mark Cosens of Burlington, Ontario, he's the Managing Director of Kilbride Capital. He's been a Director since 2001, and he serves as the Chairman of our Pension Committee. Dr. Andrew Angus Peller of Toronto, Ontario. Gus is the senior Medical Consultant to RBC Insurance and has been a Director at Andrew Peller since 1991. Gus will also serve as Vice Chair of the Board of Directors. Perry Miele of Burlington, Ontario. Perry is Chairman and Partner of Beringer Capital. He became a Director in 2010, and he will be serving as our Independent Lead Chair. And finally, Francois Vimard of Mississauga, Ontario. Francois is a CPA who served Empire Limited in various capacities at Sobeys, including Interim President and Chief Executive Officer; as well as Chief Financial and Administrative Officer. Francois has been a Director since 2018, and he will also serve as our Audit, Finance and Risk Committee. I'm now happy to introduce you to our senior executive management team. In addition to myself and Steve, there is Patrick O'Brien, who is our Chief Commercial Officer; Jim Cole, who's our EVP Business to Consumer; Sean McLeod, who's our Executive Vice President of Marketing; Sara Presutto is our Executive Vice President of People Culture; Brendan Wall is our EVP, Operations; Greg Berti is our Vice President of Global Markets, Industry Relations and Business Development; Gavin Hawthorne is our Vice President for Global Vintners, our wine kit division; Craig McDonald is our Vice President of Winemaking; and Stefan Barker is our Vice President of Supply Chain. With those introductions, I'd now like to call this meeting to order and continue with our formal agenda. The first item is the appointment of secretary and scrutineers. I will serve as Chairman of the meeting, and Steve will serve as Secretary. With your approval, I appoint Computershare Investor Services as scrutineers. In terms of our notice of meeting, copies of the notice of this have been distributed to the shareholders in accordance with applicable laws and prescribed procedures. The Secretary has placed before the meeting copies of the notice of the meeting, management proxy circular and the form of proxy for this meeting, certifying that these documents were delivered to all shareholders. I received an interim report from the scrutineers. At this meeting, there are 21 shareholders present or represented by proxy. In total, there are 77% of outstanding Class B shares represented by proxy and in person today. I have been advised that there is a quorum present, and since the required notice of meeting has been given, I declare the meeting to be regularly called and properly constituted for the transaction of business. In view of the necessity of attending to various formal corporate matters at this meeting as set forth on our agenda, the Secretary has requested certain shareholders and proxy holders to propose and second various motions. While this procedure will assist and speed up the handling of the formal matters, it should not discourage anyone from speaking in reference to any resolution after it has been proposed and seconded. I will now ask for a motion regarding approval of the minutes of the last meeting.

Be it resolved that the minutes of the Annual Shareholders Meeting of September 8, 2020, be taken as read and confirmed.

Do I have a seconder?

I second the motion.

Thank you. The minutes of the last meeting have been approved. The next is the election of directors. In accordance with the company's articles, the number of directors to be elected at this meeting is fixed at 6 directors, and the following individuals have been nominated for election as directors to hold until the next Annual Meeting of Shareholders or until their successors are elected. I declare the meeting open to the nomination of directors.

Mr. Chairman, I nominate each of the following individuals as directors of the company, John E. Peller, Dr. A. Angus Peller, Shauneen Bruder, Mark W. Cosens, Perry J. Miele and Francois Vimard.

Since no further nominations were received by the company, I declare the nominations closed. Based on the preliminary results provided by the scrutineer, all nominees have received more votes for than withheld. As a result, I declare the individuals nominated to be duly elected directors of the company to hold office until the next annual election of directors or until their successors are duly elected or appointed. And now the appointment of auditors.

I move that PricewaterhouseCoopers LLP, chartered professional accountants, be appointed auditors of the corporation to hold office until the next annual meeting or until their successors are duly appointed and the Board of Directors be authorized to fix the remuneration of the auditors.

Do I have a seconder?

I second the motion.

Based on the preliminary results provided by the scrutineer, I declare that PricewaterhouseCoopers LLP are reappointed as auditors of the corporation until the next Annual Meeting of Shareholders or until a successor is appointed. Our last item of business is the presentation of the annual report, including the financial statements for the company and the auditor's report for the year ended March 31, 2021. The secretary has placed a copy of the annual report before the meeting, copies were made available to all shareholders. This concludes the formal portion of the agenda. I move that we now close the meeting. Do I have a seconder?

I second the motion.

I would now like to declare the formal part of our meeting closed. We would now like to kind of share with you an update of the past year's activity and provide you with an outlook on our future. As said in my introduction, it has been an incredible 2 years for our company. And both, my family, myself and all our shareholders can be incredibly proud of how well our company has performed. And we were able to actually increase our sales and earnings in a year where a great deal of our business was compromised and closed. There was an enormous amount of change in processes and product mix and trade channel flow and many, many challenges to our supply chain to react to all the changes in the business. But as I said, we're very, very proud of the performance that we've had both last year and still challenging us through the first quarter of this year. There have been and continue to be a lot of pressures on the value end of the market with products coming in at variable prices from import companies around the world who heavily subsidize the production and cost of their products as well as provide marketing subsidies to these products and not all our provincial liquor boards appropriately monitor this activity and respond to it in an equitable way. Having said that, we've performed very, very well, and we're still dealing with the challenges of interprovincial trade restrictions. We've had a change in the excise exemption that we used to get, but the federal government has stepped up and replaced that program with a new program that is no longer in violation of international trade law, but provides us the same level of support. I would say that I think one of the leftover impacts of COVID is going to be a reassessment by governments around the world that globalization was not achieving a great deal of their national ambitions and that they are going to take a much more careful look going forward that they support local manufacturing and local agricultural trade in a way that they haven't in the last 10 years. And I think that, that will be a very positive thing for our industry, not just the wine industry, but all agricultural industries and hopefully, all manufacturers as well. I mean our country has given up way too much manufacturing to foreign markets, and it's important that we repatriate a lot of that valuable economic activity back to Canada. There indeed were many changing consumer patterns brought about by COVID. The most notable was the increase in all value priced wine, but in particular wines that were made in the bag and box 3-liter and 4-liter format. They grew instead of their normal 3% a year. They were up almost 30% last year. And conversely, premium wines that had been on a significant growth streak softened through COVID. And there has been a decline in the sales of premium wines. A lot of that was a result of the closures of the state wineries, certainly, the closure of restaurants where premium wines have a much higher share. But as this year has progressed, consumers are returning to their normal consumer patterns. The value price wine segments are now starting to decline and return to previous levels. And the premium channels are starting to grow nicely again, although not at the same pace as there is a bit of a decline overall in the market in the first 4 months. We saw an enormous amount of reduction in international travel. Basically, global travel right now is less than 25% of its normal volume. It's expected to stay very low for the next 1 or 2 years and not return to full strength until 2024, 2025. We've also dealt with a lot of supply chain disruptions, which have put additional pressure on our operations, both increases in component and glass packaging costs. And certainly, our shipping costs as regulations have made it more challenging for shippers, but certainly, people are being opportunistic with their pricing as well. So our theme is kind of continuing managing back to normal. We know that the rest of this year will stay a little bumpy and challenged. Our primary focus was to ensure the health and safety of our employees, and I'm very, very proud of everybody in the company who has really stepped up their game to ensure that we provided health and safety environment for our people. We had over 80% of our 1,700 employees have been frontliners, and we have had no workplace transmissions of COVID-19. We've assisted over 1,040 employees with additional COVID pay. We isolated our operations facilities to protect our frontline operations teammates. We supported our employees to attend vaccination clinics. We did a lot of rapid antigen screening testing to ensure our premises stayed safe. We launched an APL mental health program, and we've provided increased health benefits to all our employees of $3,000 each to facilitate their focus on their physical and mental health. It was interesting in the hospitality industry, it's been a very turbulent time from being open and closed with regulations changing by the hour, by the minute. And we've had to redesign our hospitality experiences. We've curated a lot more prebooking and private tastings and that has proven very successful from both an experience and sales perspective. Our estate wineries are incredibly busy right now, and we're happy to have people back. We've increased pricing and sold a lot more tasting programs and sign more people up to wine clubs than we ever have. We have provided extra kind of domes and private tasting areas, and we facilitated a lot of conversion to patio, dining and tasting that has proven very successful. We, of course, lost all our special event and business hospitality business, but we more than accommodated for it on the tasting side. I can't tell you that what was the greatest achievement of our company as well. Enduring all the challenges of COVID, we have not taken our eye off everything we need to do to grow our business in the future. We completed the implementation of a new ERP system. We've talked about it before, at around $30 million. It's the largest CapEx in our company's history, and it's going to help us transform how we sell and serve customers in all our trade channels, including direct-to-consumer, it will help us improve all our business processes. We're redesigning and restructuring our supply chain and our product management processes. And while we were implementing this, we also entered new categories that we've talked to about in the past, RTDs and spirits. And we've launched more new product innovations than in any part of our company's history. So it's been a very, very busy time for us. Looking at our financial results, which you've all seen that ended March 31, 2021, despite all those challenges, we increased our total revenue by 3% and our EBITDA by 3% and our net earnings by 18.3%. And looking at the first quarter of this year, our revenue was down 6% in the first quarter, and our EBITDA is down 47%. Our net earnings are down 70%. Importantly, what's happened here is that the huge pantry load and growth that we got in last year's first quarter is now a level of volume that we'll no longer be able to hit. So we were expecting this volume decline. And our earnings are down because we now have a more normalized SG&A expense level. Last year, it was artificially low because we furloughed people, and we cut back all spending everywhere. As our business is now opening up and returning to normal, we're having to spend at our normal SG&A levels. So both the reduction in revenue and the increase in spending has naturally created a significant loss to last year's position. But as we look to the end of this fiscal year, we expect our revenue to be similar to last year's revenue, maybe a little up. We expect our EBIT down to -- our EBITDA rather, to be down in the 5% range. This is as a result of both revenue pressures and costs. We wanted to share our pride with you in the fact that over the last 20 years, our company's share and return performance has outperformed the TSX by 165%. And in the last 3 years, we've increased revenue and our earnings in every year and we've had 4 dividend increases over that 3-year period. Obviously, the -- in contrast to our performance, our stock price has kind of declined to kind of a very, very low level in our opinion. We've looked at our stock price over the last 30 years, and we are very aware that we have significant share price volatility from year-to-year. On average to TSX, we have 20% share price volatility, ours is more in the 28%. So we are much more volatile in price and in fact in the last 5 years, we've been evenly significantly more volatile. If we look through kind of regression analysis and try to correlate our share price to revenue and earnings, you would normally expect to see positive revenue and earnings correlated to a positive share price performance. And in fact, that has not happened with us. Thirdly, if you look at our discretionary stocks on the TSX, when we looked at all our peers in that group and we found that all the consumer index on the TSX is trading at share prices that are higher than their average 10-year multiples. And then of course, one of the only exceptions is that is our stock. We're not only not trading at our 19 PE average multiple, we're trading down at 12 or 13, much lower than that. So it's clear that our share performance is being driven by things that are kind of unrelated to performance. One of those things, I'm sure you're all aware is that we have -- we don't have a great deal of liquidity in our stock. And we've shared with you that in the past, large investment, mutual funds investors will not be purchasing our stock because we don't need their limited liquidity thresholds. And they know that when you go into shares that have limited liquidity, it's easy to have to move the price up or down to get in or out of these transactions. And in fact, we feel that, that has been impacting us in the last year. We know the large pension fund that has been unloading almost 2 million shares and that it is no doubt having pressure driving our share price down. Recognizing the kind of low price and what we think is incredible value in our share price, we have purchased 500,000 shares of our own stock back in the last 3 months at prices in and around 865 for 400,000 of those shares, and I think 935 for the other 100,000. I'd point out that in the last 30 years that I've been here, we've had -- we have been in this position, and we have purchased our stock back 3x under almost identical circumstances. In every one of those times, we have been rewarded with very, very high returns on those purchases because eventually, our stock price will reverse to its mean and reflect its revenue and earning performance and multiples that it deserves. Most importantly, we are incredibly excited about our future and we're very, very confident that we're going to be able to grow our revenue and our earnings as we go forward. We have 6 pillars of growth that you see in front of you without our principal focus is on continuing to strengthen our premium and ultra-premium wine portfolio. We have invested a lot of money in our estate wineries, in our hospitality facilities. We're making significant investments in Vineyards and Winery Capital. We're pursuing best-in-class practices in all aspects of premium wine marketing, and we're very excited about the future and the return to a post kind of COVID-normal business environment. Related to just our wine clubs, which are the backbone of those premium wine investments, we have invested in an e-commerce platform, as a result of our new cloud-based ERP system, and we've developed a very capable e-commerce technical platform in the last year in the last 9 months, and we've had a very, very successful year launching this e-commerce platform, which is known to consumers as the Wine Shop. We sell beer, spirits and wine premium value price point on this platform, and it has proven to be a great new business venture for us. As we've told you, we've invested in the last 3 years in the new ready-to-drink segment of the market. Our No Boats cider is one of the best brands in the segment. We've launched vodka, sodas and seltzers. As well, we launched sparkling RTDs under the XOXO and Peller Estates brands, and those brands continue to perform admirably as well our launch into spirits with Gretzky whiskey and our Cream Spirit products has been very, very successful right across the country. We definitely ensured that we've increased our focus on the sale of $115, which are principally bag-and-box wines and value import wines and best-selling value VQA wines at least in the eastern markets. We've launched new products into those segments as well. And our wine kits business, GDI has had a very, very strong year and is poised for growth and increase margins in the future. Looking at kind of what we call the mass retail, which is liquor boards and the grocery channels, you can see our entry-level VQA expansion with the 3-liter Gretzky product that we launched in the LCBO that's done exceptionally well. We're -- we've launched 2 new brands Good Natured and Honest Lot, at premium value prices, which are addressing the interest in low-sugar low-calorie wellness physician wines. We've also had the innovation in the new categories. And we're excited that restaurant business is starting to open up nicely. The restaurant on-premise business represents almost 20% of total wine consumption. Last year, it was -- it performed at 20% of its normal capacity. It's probably up to about 50% now, and we expect it to return to 100% in the following year. One of the strengths of our company is our Wine Shop retail system. We have over 102 licenses that are mostly co-located in a grocery stores, but we have many strong independent stores as well. We are refocusing our efforts around premium and VQA wines sold through these trade channels, we have a new loyalty program that we've launched with the Wine Shop, and we're continuing to launch a lot of innovative products in our Wine Shop system as well. We've talked to you significantly about our principal focus on the premium wine industry and our estate wineries. As I said, they are all very, very busy right now, and we are -- even though, we got off to a slow start because most of them were closed for the first 3 months. They are -- most of them you have to have reservations to get into. Now that's how popular it is for people to -- this is the wineries, which we kind of expected because people aren't traveling abroad much these days. So we're grateful for and taking advantage of the fact that they're anxious to come and visit us. Our Wine Clubs are doing record levels and our state hospitality is definitely enjoying a great deal of private seated tastings and dining. We've also spent a significant amount of capital this year and will next year on vineyard investments to support our growth in particularly premium red wines. And we're looking forward to the return of all the promotions and special events that we've done in years passed. I think you'll see us continue to invest in e-commerce. We are focused on our omnichannel experience so that no matter how a consumer enters our system whether it's through a store, whether it's through the club, through visiting in the state that we can give them a very seamless and best-in-class service and experience, where we know that in the future being capable with personalized digital marketing, which is using CRM and artificial intelligence to help understand how we can tailor not just wines, but also winery experiences for people will be an increasing focus for us. And we're really looking at redefining our value proposition in future marketing with e-commerce. We're 1 year into no doubt a 10, 20-year journey. It's been a thrilling ride so far, and we're looking forward to that as we go forward. Our wine kit industry -- our wine kit company has had a very, very strong year. Most notably, we've consolidated our West and Eastern facilities here at St. Catherines, and we've built a beautiful state-of-the-art facility, which is going to support margin improvement going forward. We've also had success entering both European and U.S. export markets, and we also have a great deal of product innovation to look forward to in our wine kit division. And finally, from a winemaking and operations, I wish Craig was here to -- he would speak for the next half hour on some of the great things they've achieved this year and challenges they had to overcome. We're definitely transforming our entire supply chain. We're driving greater efficiency. We're investing in our capital like we've never invested before, and we're supporting R&D and innovation as we go forward. So with that, that's the end of the presentation, and we're happy if anyone have any questions to address them now.

So we've got one question, and the question is, do you have an update on the Port Moody property of British Columbia?

Thanks for that question. We have filed a notice that we have 2 properties that were available for sale that were surplus due to our operating needs. One was a Port Coquitlam property that we just sold for $9 million, it closes next month. In the Port Moody property, which is the winery in Port Moody, that was the original home of our very first winery back in 1961. It is a vacant piece of property that we have rezoned for complex, residential and commercial development. It's fair to say that the COVID uncertainty shut down the development industry in B.C. for the last 1.5 years, people wanted to see how the economy would play out before they engaged in significant development projects. The development project that is part of -- that it is now part of our Port Moody property is a very significant large development, and we are in negotiations and discussing with lead developers in the market right now. Fortunately, the value of Vancouver real estate has gone up in the last 2 years, again, so that though we have not been able to proceed with the development of the property at the rate that we wanted to, we benefited from the fact that it's a very, very healthy market. There's very, very strong demand for all uses of product, and we know that our property will be developed in the next year or 2. And we're engaged with several people, and we'll keep you advised -- the proceeds of the sale project will be well in excess of $50 million, and we're working with a great team of people who are supporting us both an adviser who's a planner, developer and firm owner and Cushman & Wakefield as well. So we will hopefully see more -- have more news for you in the next year for that.

There are no more questions at this time.

Thank you, Jonathan. So lastly, I just want to thank all our employees and our management team for their dedication and hard work. I want to thank our Board of Directors who have been working and advising us closely throughout the year. They are an enormous support to me and my family and our management team. I've had a lot more opportunity to talk with shareholders throughout this year. They've been anxious to follow our story. They're all very, very happy with their investments and supportive of us as a company, and I'm grateful for their support. I encourage that anyone of you who has any questions, feel free to reach out to us at any time, and we're happy to speak with you. Bottom line is we're very confident about our future, about our ability to grow our revenue and earnings. We're very proud of all our products and the experiences and the quality that we're bringing to the Canadian and international market, and we're really excited for the future ahead. So thanks for joining us today. As I said, please don't hesitate to call if we can help in any way. Thanks very much.