Andrew Peller Limited (ADWA) Earnings Call Transcript & Summary

Good morning. My name is Michelle, and I will be your conference operator today. At this time, I would like to welcome everyone to the Andrew Peller Limited Fiscal 2021 Results Conference Call. [Operator Instructions] Thank you. I will now turn the call over to Mr. David Mills. Please go ahead, Mr. Mills.

Thank you, Michelle, and good morning, everyone. Before we begin, I remind you that during this conference call, we may make statements containing forward-looking information. This forward-looking information is based on a number of assumptions and is subject to a number of known and unknown risks and uncertainties that could cause actual results to differ materially from those disclosed or implied. We direct you to our earnings release, MD&A and other securities filings for additional information about these assumptions, risks and uncertainties. I'll now turn this over to Mr. John Peller, Chief Executive Officer.

Thank you, David, and good morning, everyone. It's definitely nice to be with you. And joining me today is our CFO, Steve Attridge. And just some summary comments before I turn it over to Steve. We finished our fiscal year-end March 31, 2022. And our results, we kept -- we've monitored this closely with you over the year. They've come in as we have forecasted, our revenue ended up being down around 4.9%, and our EBITDA dropped some 30% as a result of the challenges presented by COVID. All the revenue loss in that year, the down 5%, all the revenue loss was attributed to businesses that were shuttered and closed as a result of the pandemic. So there were -- obviously, the restaurant industry was closed significantly throughout the period as were our state wineries from time to time and the global travel business was reduced to about 10% of its normal flow. And other than that, we performed very well in all our other trade channels. And I'm very pleased with how the company has performed and the things that we're doing to ensure that we have a very, very bright future. COVID is now in its third year, if you will, with us. In the first year, unexpectedly, we had a bit of a revenue boost because of the strength of our sales through retail channels were greater and offset the declines in other trade channels. And in this last year, as things normalized, those retail levels came down and there was still some business closures as I've indicated. And now as we start the third year, our revenues are already starting to return to what I would call [indiscernible], and we expect to finish quarter 1, up around 4% in revenue, and we are on target to finish the year in and around plus 5%. I say that because we are presented with a lot of supply chain disruptions. So naturally, the theme of our business these days is the inflationary costs that have hit our supply chain. I would estimate the inflationary impact on our cost structure is at around 25% up, so that while the rest of the world inflation is tracking at 6%, 7%, we're in an area of supply chain logistics that are more severely impacted. We've had significant increases in our cost of goods related to transportation and shipping and fuel surcharges. Our glass costs have gone up significantly and packaging materials, and we are intensely focused on managing a very difficult circumstance. As much as anything in addition to the inflationary costs, we're having trouble getting stock in on time. And in this first quarter, even though we're up around 4%, we have significant out of stocks that we're trying to manage around, and our glass supply disruption has caused us a lot of challenges as well. So even though our results are positive, we would be doing better, and we expect to do better as these supply chain issues start to resolve themselves. This kind of tail of the COVID drag, and the inflationary pressures on our business, we were hoping that they would abate in this fiscal year, but in lieu of things geopolitically and particularly around energy, we anticipate and are preparing to deal with these inflationary pressures into the following year as well. And then hopefully, we will emerge to a post-COVID normal world, and we look forward to that. We're -- I've used the metaphor in our company that we are navigating our way through a storm. And appropriately, we are conserving our cash. We are intensely focused on at least 20 cost reduction projects that we're monitoring very, very closely, everything from consolidating warehouses and rationalizing our SKUs and looking for a way to reduce our cost of goods. We are intently focused on that. And we -- as I've told you in the past, we have implemented the new ERP system, and there are significant software programs. We're writing to manage the liquid system in our business to consolidate our production schedule so that it's more efficient to improve our warehouse and distribution. So we're really doing a lot of things to ensure that we manage cost effectively, but these things are really going to serve us well as we come out of COVID in the future. And there is no uncertainty in my view at all that I'm confident that as we come out of COVID, we will emerge a much stronger, more capable, and we're very excited about our future. So I'll let Steve make some comments first, and then I'll close after that. Over to you, Steve.

Thanks, John. Good morning, everyone. As John mentioned, our sales and operating results in fiscal '22 were impacted by a number of unusual factors related to the pandemic. When the pandemic was announced, consumers increased their purchases throughout fiscal '21, driven by uncertainty and concern about whether supply chains for beverage alcohol would remain open. These unusually high sales were not repeated in fiscal '22. And in fact, in Ontario, the LCBO was closed on Mondays through much of fiscal '21, driving consumers to our higher-margin retailer. And the LCBO stores resumed normal business hours through the majority of fiscal '22. We're also significantly affected by government-mandated closures of restaurants and our state winery and hospitality businesses in fiscal '22. And of course, international air travel restrictions continue to impact our revenue in the export channel. These factors combined resulted in a revenue decrease of 4.9% in fiscal '22 compared to the prior year. In the fourth quarter of fiscal '22, sales were consistent with prior year, which we believe is the beginning of an upward trend. Gross margin has been negatively impacted by higher material and labor costs such as import wine, glass and other packaging materials as well as minimum wage have all increased due to inflationary pressures. Gross margin has been compressed due to an increase in global supply chain costs, such as international freight and associated shipping charges, and particularly evident in the second half of fiscal '22 and in the fourth quarter, where gross margins were 29.2%. In the first quarter of fiscal '23, we've implemented price increases that are expected to partially offset inflation, and we continue to review opportunities for further increases throughout the year. Our ability to increase prices for certain products in certain markets is dependent on the actions of lower-priced importers as domestic producers can face a decrease in volumes when raising prices without the corresponding increase in port wine price. We've implemented cost saving initiatives to mitigate increasing costs and supply constraints through alternative sourcing arrangements for components and the negotiate -- sorry, negotiation of lower freight costs for sales and admin expenses increased in fiscal '22 as our staffing and marketing overheads returned to more normal levels. You remember that in fiscal '21, we laid off a significant part of our workforce to conserve cash as so many of the trade channels were closed. In addition, in fiscal '22, we incurred certain nonrecurring start-up costs related to the opening of the recently acquired Riverbend Inn. On September 28, 2021, we completed the sale of our Port Coquitlam property in British Columbia. The assets for total cash proceeds of approximately $8.8 million, net of transaction costs and the sale generated a realized gain of $7.5 million or $0.21 per Class A share. Including all of these factors, net earnings in fiscal '22 were $12.5 million or $0.29 per Class A share compared to 28 -- sorry, $27.8 million or $0.65 per Class A share in fiscal '21. Now turning to balance sheet. Our debt increased to $192 million as of March 31 due to reduced cash from operations and increase in investments in our [ products and ] operations. At the end, we had capacity -- at the end of the year, we had capacity on our revolving credit facility of approximately $158 million. As of March 7, 2022, our normal course issuer bid expired, and we had repurchased and canceled 598,600 Class A nonvoting shares under the normal course issuer bid at a weighted average price of $8.70 per share for total cash considerations of $5.2 million. And with that, I'll thank you for your time this morning and turn things back to John to wrap up.

Okay. Thanks, Steve. I'll just say in summary again, that over the last 5 years, we have invested significantly more than $100 million in our facilities and our people or our technology. We've built a much stronger business platform, and we're excited about our future. We're really performing well in all our product categories. Our value wines. We're strengthening our value wine portfolio with imports that are with brands that we own. And we have 3 of those brands in market now, an Australian product called Natural Selection, an Italian one called [indiscernible] and a Chilean product called Vivo, they're all in 4-liter boxes, which is where we have a strength in the market. We're offering great quality wines at great values, and it now supplements our positions with the Peller Family series and several other brands like Copper Moon. Our premium wines are doing very, very well. They're growing in volume and in share. There's been a lot of interest in, obviously, people vacationing more. Within the country, our state wineries are packed these days as they're hard to get into and they're performing at record levels. Our balance sheet is very, very strong. We've parked doing any M&A activity at this time just to ensure that we return the business to its good health coming out of COVID, but there will be lots of opportunities for us going forward. And those are all the reasons why we're feeling very, very confident and positive about our future. So with that, I'll turn it over to you, operator, to poll for questions.

[Operator Instructions] Your first question comes from [ Steven Tatesti ], [indiscernible] Asset Management.

Just a couple of questions. One is, can you get into a little more detail regarding those 20 cost initiatives that you're pursuing? And also second question is, in an economic slowdown, what has been your experience with the premium wines, do you expect the sales to soften in a recession here in Canada?

The details on our cost reduction programs, we -- very disciplined project management system, [ Steve ]. And so we are looking at ways to reduce the number of glass packages that we're using right now to get greater efficiency with our glass purchases and our packaging generally. We have a sourcing project. We buy a lot of wine around the world, and we are relocating some of our sourcing to markets like Australia, which have significant surpluses these days and our offering some very significant values for us. As I said, we have a very major program on warehouse consolidation. And we have many programs we're writing to help us manage inventory now that we have this ERP system that's more robust. We're putting in a new supply chain demand system that will help us manage our systems. And our biggest initiative was this LMS, we call liquid management system that's just gone live in the last month, and it's going through a hypercare phase right now. We will also do a broad cost savings review this year with an outside consulting firm. So we're not leaving any stone unturned, and it is a principal focus of our EMT. Your other question -- by the way, we've taken as much price in the market as we feel we can at this time. we've taken prices up across the board. We've done very well in all segments so far. And we might get our prices up by 5%, 6%, 7% for the year. The most difficult area is obviously the value price segments where while there is a lot of people taking prices up there are notably some countries out of Europe that are not reacting with their prices. These are a challenge for us, but we'll continue to monitor that carefully. What was your other question, [ Steve ]?

It was just on the premium wines. What's been the experience in the past during economic slowdowns, would you expect a softening if things get really slow here in Canada?

For sure, it will happen. In other words, all through COVID, there has been a measured shift from premium and super premium into value price points, and those volumes are holding. And if, in fact, the recession happens, and everyone expects that it will, there will be increased migration to value. It's happened that way 3 or 4 times in my life in the last 30 years. I mean, our company is designed purposefully so that we compete, as you know, in not just value price [indiscernible] but in wine as well. And we're very evenly distributed across the price segment all the way up to the highest luxury brands and pricing all the way down to the greatest value. And so we're built to manage successfully through these periods. And in fact, we tend to do better through them.

All right. Okay. Maybe one last question on new product initiatives. You've been looking at launching many new products over the last few years. How are they doing? And maybe some detail on some of the things you're working on now?

I think the major initiatives we launched into craft spirits with Gretzky whiskey. The sales of our spirits have doubled in the last few years. They are performing very, very well. And in addition to the whiskeys, we launched the cream liqueurs, the Gretzky cream liqueurs. We have now 4 or 5 different SKUs. They're performing exceptionally well, also at prices above Baileys. So the business has some more innovation coming in the next year, including a craft vodka and several new cream products. And premium whiskeys to support Red Cask, a double oak whiskey. We've got new package sizes in addition to the packages that are -- we've had 750, we've now earned additional package sizes because of the strength of the business. So we're feeling very, very positive about that. In the RTD refreshment category are No Boats On Sunday, a craft cider, has performed exceptionally well and continues to strengthen. We also have innovation coming in this year. We've built a great little business that -- while the cider category is soft these days, the premium segments are doing very, very well. So we feel we've got a very strong brand and a defensible niche. We've launched some seltzer products that didn't do all that well and our craft beer initiative with Gretzky, it appears we've entered the market a little late to try to establish any kind of a retail beachhead, if you will. So there's been lots of learning over the last 2 or 3 years. It's a very, very challenging category. And you have to be very smart about where you choose to participate and how you go about it. And we've had some experiences that are reminding that we had a higher level of package write-offs this year than we've ever had, and we're very mindful about managing our innovation going forward. But we're very pleased overall with our performance in RTD. The ultra-premium and premium VQA business, we've gained share and grown in the last 2 years. And as I said, our -- we've had a significant e-commerce initiative that's done well. There's been a lot of learning for us in that as well. We came out of the blocks early in COVID, and we were overwhelmed with e-commerce orders. But it's clear to us that the delivery costs are exceptionally high and that it's not a segment that you want to focus on selling value products with any kind of discount associated with them with the delivery charges, in other words, trying to be a broad retailer and beverage alcohol in e-commerce is not the strategy we will focus on going forward. We're much more focused on our Wine Clubs and the e-commerce related to the people who visit our state wineries, and we've increased that business significantly. It's profitable. And we've hired a lot of new people to strengthen our participation in there. And as I said, we're supplementing our value domestic blended wines with now some imported brands that we own. So we're feeling very positive about all segments and our participations in them. We're keeping a bit of powder dry for the next year just to make sure we manage through the supply chain issues. And but it's why we feel very confident about the future.

Any idea where you can get your margins back up to your gross margins this year? Or sort of what target you are aiming for?

Prior to COVID, our gross margin was 43.5%, and it looked like it was headed to 45%. It has fallen now down to 37%, 36%. That's the gross margin that we saw back in '08. That's the lowest our gross margins have ever been, and that's where they sit right now. But it's not possible or feasible to me that these things will not improve. In fact, transportation costs are already coming down as we speak. And it will take some time. As I said, I think where we were hoping it would last a year, we're now kind of looking at 1.5 years. And -- but there's no doubt in my mind that they'll improve. I think we're going to try to get up to the 38%, 39% level this year. And then I fully expect us to be back in the 43%, 45% range in the next 2, 3 years?

One final question, sorry about that. The elections in Ontario, Ford's back in. You're seeing or expecting any developments in your industry as a result of the election victory?

That's a very good question. And we are monitoring it very, very closely. It's easily 30%, 40% of my time. And I think it's fair to say when Premier Ford got elected, he came in with a lot of populist strategies that backfired severely in here. And that COVID has allowed him to move to the middle and he's enjoying his popularity helping Ontarios get through the challenges of their life. And I think that that's a change that's going to stay with him. In other words, I feared when he first got in, that it would be some impulsive populist move that might get pushed on us. And I don't have the same fear right now. And one of the things that we're really focused on is developing an economic growth strategy for our industry. I'm working with the tourism hospitality providers in the region, local business developers, all the growers and uniting our industry to make sure that the government knows that there's easily $10 billion to $20 billion worth of investment that can come into the Niagara region if they just provide us reasonable support. It doesn't have to be as strong a support as all the other people who come into our country get in their domestic markets. But if they just give us what we have in British Columbia, which is a decent margin support program that reflects, we should have direct delivery privileges in our own market. And I suspect that we can get a lot more support from the LCBO going forward as well. And I'm quite confident that once the economic benefit opportunities are more clear to them. I mean we've suffered because we've had to report mostly into the finance department, and in particular, the people that manage lotteries and casinos and cigarette taxes. That's not an appropriate place for the policy of a great agricultural industry to be reporting, and I'm addressing that now with the support of everybody in our industry. And I think that they're going to support us significantly in the future.

Your next question comes from Douglas Smith, investor.

I want to go back to your MD&A on Page 6. There you mentioned amendments to your credit agreement and your amendment to some financial covenants. Could you provide more color?

Happy to. We had an EBITDA covenant to our loan that was kind of 4% to 1-ish. And because our earnings have dropped down to $40 million and our total debt package was $190 million, we had to go to the bank and ask for a waiver from the covenant. The -- one of the things is that the bank holds a general security over all our assets. And I estimate fair market value of our company's assets in the $750 million range. And in fact, of the $190 million that we've purchased -- that we've borrowed, we've put $100 million into real estate in the last 2, 3 years alone, so that, that covenant didn't really reflect the strength of our balance sheet. And I've had those conversations with the bank, and they are in total agreement with us. So I think you probably know that we have a surplus piece of real estate in Vancouver that we've rezoned and that we are marketing. Its value is significantly in excess of $50 million. It's for sale so that our loan structure is in good shape and our balance sheet is in very strong shape. Does that help?

Yes. Thank you. That helps.

Your next question comes from Nick Corcoran, Acumen Capital.

A couple of questions from me. One of [ Steve's ] questions, you mentioned you had a higher level of package write-offs. Can you maybe quantify the impact on gross margin in the fourth quarter from that?

I think Steve is better to answer that than me.

Yes. Specifically, I guess, Nick, in the fourth quarter, it would be in the order of magnitude of kind of 3% of revenue.

And is that a onetime item? Or would you expect it to continue into the first quarter of this fiscal year?

No, it's a onetime item. I mean, any business is sort of subject to the cost of, obviously, packaging and inventory, this is specifically related to our refreshing beverage category. And that's something that we entered into a year or so ago. Certainly, the cadence of the category is different than bottled wine and even value and premium wine. And the category is very competitive. And so -- and the shelf life of the products are much shorter than that of the wine. So all of those factors, I would say, sort of came to bear on the value of our inventory. And so we need to make an adjustment for year-end.

Yes. And our annual or package write-offs, and obviously, write-offs used to be in kind of in the $1.5 million to $1 million range, I think. Did they go up as high as $5 million, Steve, for the year?

Yes.

Better on there. And most of it was canned RTD. And we've taken note and adjusted our business plans accordingly.

Yes. it's an ongoing process. It's a -- we review that every quarter and make adjustments as necessary. And it was perhaps more material in the fourth quarter just as we headed into the end of the year. But yes, John's numbers are directionally correct.

Great. That's great color. And I guess a related question is, what's the learnings you've gotten from that category? Are you going back to more of your historical kind of product mix with wine and then the extent you have with Gretzky into whiskeys? Or are you still looking to be competitive in the RTD market?

We had been looking to acquire in refreshment beverages last 5 years. Our appetite for that going forward has [indiscernible]. Having said that, it was important to ignore the fact that consumers are increasingly attracted to the convenience of cans in all segments, craft cocktails, craft beers, seltzers, ciders and wine and cans. So we didn't want to sit on our hands and watch the world go by. We got engaged. And by getting engaged, we've had some great learning. Some of it has been painful. And we knew it was a tough segment. It's tougher than we thought. And having said that, we love our craft cider brand [indiscernible]. And we have some niches in refreshed products that we'll pursue. I don't think we'll be as aggressive in craft beer space going forward, but -- and we will eventually [indiscernible] with some wine products. But we'll be very thoughtful and focused on where we go. For example, in Western Canada, the pricing of all the refreshment products is exceptionally low and the margins are negligible. So that we're doing well in the East in Ontario. We're doing very well in the Maritime provinces. We're being thoughtful and purposeful about where it is we choose to play and how we play. So we're -- not by any exiting, but we're not as aggressive as we were in the last 3 years going forward. And this will allow us and help us to focus back on some of our core segments as well. We do have plans to grow in spirits, [indiscernible]. Those are our principal focuses.

And then maybe switching gears. You mentioned Port Moody is being rezoned in your marketing [indiscernible]. Any indication what the timeline for sales of that property might be?

I'm given up trying to time forecast this thing, Nick. It's not that it's not getting a lot of attention, it's getting a lot of attention. We have the development permit application in, and we're speaking with a lot of people currently. It's a very, very big project. It has over $7 million, $8 million of costs associated with it. So this is not a project for run-of-mill developers. They have to be incredibly well financed, and there are not a lot of those people in Vancouver who do it. We're talking with several. I think the fear of interest rates in the short term will be a factor, but I'm confident. I went to an independent adviser on the whole thing just to have all of our activities assessed and reviewed. And he said to me, John, the first thing I can tell you is you have a very, very valuable piece of property there, congratulations. In other words, don't lose sight of that fact and play smart and confident, you'll get to where you need to go. So I don't want to create a time expectation. We are having lots of discussions with several groups, and it will take as long as they determine it's going to take.

And your goal with that property, is it to be [ right ] sale? Or do you like to maintain some sort of interest in it going forward?

I guess it could -- but truthfully, most of the proposals that have been put in front of us would just kind of being paid over 5 or 6 years, also that -- hopefully, we could get significant property and then help facilitate the purchasers of management of their cash flow [ to equity ]. It's highly likely that they prefer to have it paid over 5 or 6 years. And of course, the deal structures are complex, but I believe that is a much more likely scenario than a onetime payment.

And just the last question for me. I definitely understand you're going through a challenging period with the inflationary pressures and supply chain issues. What are your capital allocation priorities over the next 12 months?

We've significantly reduced our CapEx where we were normally spending at the $28 million, $30 million, we dropped it down to around $18 million for the year. It's slightly above our maintenance cap kind of level because we're still -- we have a significant vineyard planning program going on in the [indiscernible], I think there's $50 million going to [ red vinegar wines ] in the Southern Valley. But we've been very prudent in managing our cash flow to reduce it, focusing on reducing our inventories. We probably have $20 million or $30 million more inventory than we need right now, and it will take us more than a year to return it to its normal level, but we're focused on that as well. So there's lots of projects we'd like to invest in. We've -- we have a lot of projects that are designed and programmed and ready to go, but we thought it would be prudent to make sure that we comfortably exit COVID and return to a more normal environment before we make those investments.

And the related question, are there any plans to -- can you buying back stock?

No, for the same reason that cash management, we're not planning to do that in the short term.

And there are no further questions at this time. I will turn it back to Mr. John Peller. Please go ahead.

Okay. Thank you, everybody, for joining us, and don't hesitate to call me anytime if you have questions or Steve. We're grateful for all your support, and we're looking forward to a good year. Thanks, and we'll be in touch soon.

Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.