Andrew Peller Limited (ADWA) Earnings Call Transcript & Summary

Hello, and welcome to the Annual Meeting of Shareholders of Andrew Peller Limited. Please note that today's meeting is being recorded. If you participate in today's meeting and disclose personal information, you will be deemed to consent to the recording, transfer and use the same. [Operator Instructions] It is now my pleasure to turn today's meeting over to John Peller, Chairman of Andrew Peller Limited. Mr. Peller, the floor is yours.

Thank you very much, and good afternoon, everyone. I'd like to call this meeting to order and welcome you to the Annual Shareholders Meeting of Andrew Peller Limited. I want to thank you for joining us virtually. Approximately 64% of our employees from Vancouver to Truro, BC or from -- yes, from Vancouver, BC to Truro, Nova Scotia, our shareholders through our company-assisted employee share purchase program. I've been a director since 1989, and I'll be standing for reelection as a director. With me today is Paul Dubkowski, our Chief Financial Officer and EVP of Information Technology, who will be joining me and providing you a view of company's financial performance over the past fiscal year, and he'll be assisting with the formal agenda of our meeting as well. Paul joined APL on July 11 and brings 20 years of finance, accounting and IT experience, leading organizations in hospitality and retail. Most recently, he has spent the last 2 years as a Senior Vice President at Indigo. We're happy to have him as part of our executive management team. I'd like to take the opportunity to thank Steve Attridge for his leadership over the past 4 years. He was instrumental in leading our ERP implementation, and he'll continue to lead APL's systems and process transformation. 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 voting polls are now open. I remind you that only registered shareholders and duly appointed proxy holders who have properly logged in with their control number or username will be able to vote. And we remind you that if you are a registered shareholder and you've already voted by proxy, you do not need to vote again. To vote, simply click on your choice for, against or withhold, as applicable. A confirmation message will appear to show you your vote once it's been received and you can change your vote before the polls close, simply change your selection. The votes 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. Registered shareholders, duly appointed proxy holders and guests are also able to submit questions during the meeting. Please indicate your name and confirm if you are a registered shareholder or a duly appointed proxy holder when asking a question. Due to timing, if we're not able to answer your question during the meeting, a representative of the company will be happy to reach out to you following the meeting with a response. I would now like to introduce those who will be nominated for directors for this current year. First is Shauneen Bruder of Oakville, Ontario. Shauneen previously served as an 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 serve as the Chairperson of the Governance and HR Committee. Perry Miele of Burlington, Ontario. Perry is the Chairman and partner of Beringer Capital. He became a director in 2010, and he will be serving as our Independent Lead Chair. David Mongeau of Monte Carlo, Monaco. David is the Founder and Chair of the Avington Group and is standing for election to our Board of Directors for the first time. Dr. A. Angus Peller of Toronto, Ontario. Gus is a Senior Medical Consultant to RBC Insurance, and he's been a director at Andrew Peller since 1991. Mr. Peller will serve as Vice Chair of the Board of Directors. Francois Vimard of Mississauga, Ontario. Francois is a CPA who has served Empire Limited, known more to you by Sobeys in various capacities, including Interim President, Chief Executive Officer, as well as Chief Financial and Administrative Officer. Francois has been a director since 2018, and he will serve as the Chair of our Audit, Finance and Risk Committee. I would now like to introduce our senior executive management team. In addition to myself, as I mentioned, Steve Attridge will be the EVP of IT; Paul Dubkowski is CFO and Executive Vice President of Finance and Information Technology; Patrick O'Brien is the Chief Commercial Officer; Jim Cole is EVP, Business to Consumer, which is our winery retail system in the Estate Winery Group; Sara Presutto is an Executive Vice President of People & Culture; Brendan Wall remains Executive Vice President, Operations; Stefan Barker is our Vice President, Integrated Supply Chain; Greg Berti is our Vice President, Global Markets, Industry Relations and Business Development; Ramit Bordia, our Vice President, Integrated Customer Solutions; Gavin Hawthorne is our Vice President of Sales and Marketing at our Consumer Wine division, GVI; Craig McDonald is our Vice President of Winemaking; Mark Torrance is our VP of Estate Wine Group's operations; and Jose Salgado is our Vice President, VQA and Direct-to-Consumer division as well as our Legal Counsel. With that, I would now like to call this meeting to order and continue with the formal agenda. And the first item is the appointment of Secretary and scrutineers. I'll serve as Chairman of the meeting, and Paul Dubkowski will serve as Secretary. With your approval, I appoint Computershare Investor Services as scrutineers. Notice of the meeting, copies of this notice of this meeting have been distributed to shareholders in accordance with applicable law and prescribed procedures. The Secretary has placed before the meeting, copies of the notice of meeting, management proxy circular and the form of proxy for this meeting, certifying that these documents were delivered to the shareholders. I received an interim report from the scrutineers. At this meeting, there are 20 shareholders present or represented by proxy. In total, there are 65.2% of the outstanding Class B shares represented by proxy and in person. I've been advised that there is a quorum present, and since the required notice of the 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 the 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 08, 2021, be taken as read and confirmed.

Thank you. Paul, do I have a seconder?

I second the motion.

Thank you, Richard. The next item is the election of directors to the Board of Directors for the ensuing year. 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 now 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, Perry Miele, David Mongeau; and Francois Vimard.

And since there are 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 against. And 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. The next item of the business is the appointment of auditors for the ensuing year.

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, John.

Thank you, Richard. Based on the preliminary results provided by 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. Now turning to the financial statements and auditor's report. It's the last item of business. The Secretary has placed a copy of the annual report before the meeting. Copies were made available to all shareholders. So at this point, the polls are all closed. And we will now turn -- this concludes the formal portion of the agenda. And I move that we now close this meeting. Do I have a seconder?

I second the motion, John.

Thank you, Richard. I declare this formal part of our meeting closed. And we would now like to share an update on the past year's activities and provide an outlook for our future. And of course, the first slide you'll see is the legal disclaimer, reminding everyone that we make statements that contain forward-looking information, and we direct you to our securities filings for information about these assumptions, risks and uncertainties. So it's clear to all of us on a very positive note that although there are many external factors that are continuing to impact our industry, a light is emerging at the end of the tunnel. We have been dealing with a significant impact of an inflationary environment to stabilize global supply chain. However, I really believe that management has handled all of these channels very, very well. We've seen COVID as well changed consumers' purchasing habits. And while there are some significant changes that will remain the growth of e-commerce being one and a lot more at home entertaining and hospitality, restaurants are starting to return to their normal sales levels. On a very positive note, our estate wineries have been extremely busy over this last summer and exceeding previous record levels. And both [ foot ] traffic and [ reserve ] tastings and corporate and group hospitality is now doing very, very well. And we're seeing the return of international and domestic travel. Airports are slowly getting up to the 50%, 60% of capacity that they were pre-COVID. We are dealing with lots of disruptions and labor shortages. But on the whole, they're managing well, and as the slide suggests, there is a light at the end of the tunnel. Looking at the overall inflationary environment, you'll see that with the most recent acknowledgment of the CPI going up almost 8.1%, we haven't seen that rate of inflation since January of 1983. For our company, our cost inflation is, in fact, around 30%, and it's been largely driven by 3 buckets: transportation costs and fuel surcharges, significant increases in our packaging materials and wine costs and significant disruption of deliveries, leading to significant out of stocks and relative challenge to managing our supply chain. We expect these pressures to remain for the rest of this year and continue into next year. Already, we're seeing things beginning to moderate, but we don't have a crystal ball as to how this exactly will play out other than we're confident that we'll return at some point to a more normal cost environment. Looking at the impact of COVID on both our revenue and earnings, I've consistently used the analogy of the 3 periods of a hockey game. In the first period, we actually had a revenue boost despite the fact we had significant business closures. And in the first year of COVID, we posted record revenue and earnings. In the second year of COVID, while kind of consumer behaviors returned to more normal shopping patterns, we had significant extended closures of our estate wineries and restaurants. And it led to the -- about a 5% decline overall in our revenues and about a 25% to 30% reduction in our earnings as cost inflation had already started to creep into our supply chain. And now in this third and final period, we are seeing the recovery and return to normal levels of our revenue this year. And while the revenue is recovering, it's going to take a while before our costs and margins are restored to their normal level. But we have every confidence that we're going to see a return to pre-pandemic levels. As a result of the inflation and supply chain disruptions, we remain laser-focused on our cost containment, our pricing strategies and our cash flows. We've reduced our CapEx and cut back on some of our G&A, and we've launched several initiatives targeted at generating indirect savings. In addition to these short-term initiatives, we have significant long-term strategic projects that are focused on optimizing our packaging and glass consolidations. We're looking at a strategy to optimize our warehouse going forward in our outbound freight. We've implemented a significant new liquid management system to enable greater efficiency from a production standpoint and inventory management. And with that, I'm happy to turn it over to Paul to talk about the financial results.

Thanks, John, and good afternoon, everyone. I am happy to provide an update on results for full year fiscal '22 and Q1 fiscal year '23. With respect to fiscal '22, it was a challenging year with significant business and market obstacles. During the calendar months of April 2021 to March 2022, which represented the fiscal period, we were faced with headwinds with 2 overarching themes. The first of which was the ongoing evolution of COVID-19 and its impact on our top line business with closures, restrictions and changing consumer patterns. Secondly, as the fiscal year progressed, there was a ramp-up of inflationary pressures and supply chain challenges, which hindered margins and overall profitability. While the day-to-day impact of COVID has stabilized, inflation and supply chain pressures remain and required continued focus and management as we move forward. Moving to our key financial metrics. Net revenue finished the year at $373.9 million, a decline from the prior year of 4.9% or $19.1 million. Our top line was influenced significantly by the evolution of COVID, and the supply chain pressures. In particular, we experienced softer consumption year-over-year in some channels that benefited from consumer purchasing patterns at the onset of the pandemic in early fiscal year '21. In addition, early in the year, government restrictions and closures negatively impacted trade channels such as restaurants, hospitality and travel. As we transitioned into Q2 and beyond, government restrictions had begun to be lifted and that allowed us to realize partial recovery in channels such as [ the states ] on-premise and export as there was a pent-up demand for travel and gatherings at this point. As we progress to the end of the fiscal year, the business continued to recover as we finished Q4 with only a slight decline of 0.4% versus FY '21. Gross margins finished the year at 37.2%, down 260 basis points versus FY '21. The main drivers included a shift in sales mix between and within trade channels, which have different margin profiles. And in the second half of the fiscal period, margins were impacted by higher inbound and outbound freight costs and inflationary pressures across the supply chain, including import wine and other key components. While we have actively managed the impact and have seen the impact moderate, we are still facing these pressures today. With respect to EBITDA for the fiscal period, it landed at $39.2 million compared to $63.0 million in the prior year, driven by lower sales, higher cost of sales due to the aforementioned inflationary and supply chain pressures and higher selling and administration expenses as the business returned to normal operations. Net earnings for fiscal 2022 were $12.5 million compared to $27.8 million in the prior year, with this decrease being driven by lower EBITDA, partially offset by the $7.5 million gain on the sale of Port Coquitlam, BC property and related assets. Moving to the next slide and FY '23 Q1 results. We have seen a continued recovery of the business despite the ongoing challenges presented by the inflationary environment and supply chain pressures. Building off our fiscal 2022 Q4 sales momentum, our net revenues for the first 3 months of fiscal 2023 delivered $97.7 million, up 5.7% versus the prior year. Sales have increased in the majority of our well-established trade channels with solid growth generated in markets closed for part of the prior year's first quarter due to pandemic restrictions, and we were also able to implement price increases in all markets to partially offset inflationary pressures, which further supported our Q1 results. Gross margins for Q1 finished at 39%, down from 40.3% or down 130 basis points from the prior year. We are operating in a highly inflationary environment where raw materials such as imported wine, glass bottles and other packaging have increased substantially. International freight and fuel and shipping charges have moderated, but also remain high. In response to these margin pressures, we have taken price increases, as mentioned previously, while also executing production efficiency and cost saving programs, as John mentioned, to help manage the current cost environment. EBITDA of $12 million was delivered for the quarter compared to $11.9 million a year ago as our revenue recovered and was offset by higher costs in this environment. And lastly, net earnings landed at $2.9 million compared to $3.3 million in the prior year. The small decrease versus the prior year was mainly driven by higher interest expenses due to higher interest rates and debt levels. Thank you, and I'll now pass it back to John.

Thank you, Paul. And now we'll have a quick look at our 5-year strategic plans and why we think our future is indeed going to be very bright. We start with a perspective on some of the key enablers, the strengths that support our business model that will help us achieve our organizational goals, we'll look at our sales and marketing leadership and our diversified asset portfolio, our supply chain and enterprise technology capabilities and also note that we are doubling down on our commitment to environmental, social and governance initiatives to ensure we follow industry and global best practices. We spent a lot of time presenting and talking to shareholders about our sales and marketing leadership. We have an outstanding family of brands across multiple categories, and we are positioned to play and win in every space. And as you know, we have long held a great position in value and premium wine. We've invested heavily in ultra-premium and estate products. Our consumer made wine kit division continues to be an industry leader. And now we've added in addition to that, a growing spirits portfolio and various refreshment and cider products that are all doing very, very well. And with all these great brands, many of which we've nurtured over the last 25, 30 and 40 years, we have a trade and retail network that we service that's totally comprehensive, our own retail stores. We have a significantly growing e-commerce and Wine Club platform. We call on an expensive network of restaurants, and we have a major presence in provincial liquor stores and grocery stores as well. And we have a significant export and duty-free travel in the industry. On our balance sheet, we have very high value and productive assets. We have more than 1,100 acres of owned and leased property in Eastern, in the Niagara Peninsula and the Okanagan Valley. We have 4 estate wineries in Ontario, 5 estate wineries in British Columbia, and we've recently purchased the Riverbend Inn. And we have a very significant network of production assets in Kelowna, Grimsby and Truro, which we've invested somewhat close to $25 million a year over the last 5 years in our facilities and our equipment. Overall, it is a very formidable asset base, and it's a real strength of our company. We've highlighted many times that we're digitally transforming every aspect of our business and investing in our people so that our knowledge and capability will provide us advantages as we go forward. Most recently, we've updated and invested in a new Oracle ERP, our liquid management system. We have a demand supply operations, new system going in and we've invested heavily in sales force, marketing and service cloud. And certainly, we've focused on our commitment to ESG, environmental initiatives, social initiatives and our overall governance practices. All of our Ontario wineries are now sustainably Winemaking Ontario certified and all our wines from our '22 vintage will be certified as sustainably produced, and we're in the process of completing those same accreditations for the Okanagan wineries as well. Importantly, we have invested heavily in our communications with our employees and our team members and our approach to a flexible workplace that's meeting our individual employees' needs and the needs of their families. We've spent a lot of time focused on mental health and paramedical benefits throughout this last 2 years and our own employee assistance program. We have a new well-being day off for all employees that they can use however they see fit. And certainly, we are strong believers in being leaders in our communities. We invest in all the communities we work and live in across Canada in the arts, in health, charities. We were an official sponsor this year of the Canadian Paralympic team, and we give employees time off to support their efforts to get engaged in the communities in which they live. So you can see in our final slide, the factors that we believe will drive growth for us going forward, our fundamental investment in ultra-premium and estate brands, our growth in premium brands included. This is a new Italian product that we are now bottling here in Canada and selling in Western Canada just got launched. We'll continue to grow in new segments. You can see in the middle, we've just launched our Gretzky 99 Vodka. It's selling extremely well out of our estate so far. And the other products in the tetra pak is Weekender. It's an RTD and it's available on tetra pak and 4-liter boxes. It's off to a very, very good start. We're going to invest in our -- certainly our broadened retail network and estates, and we'll continue to evaluate mergers and acquisitions as we go forward. So at this moment, I'm just going to pause to see if there are any questions to be answered.

John and Paul, there are currently no questions on the line.

Thank you very much. So I'd like to thank all the employees and shareholders for their unwavering support over the last few years as we've dealt with the significant challenges that COVID has presented us. And I want to thank our management team for the great leadership they're providing our company. I want to thank you today, all of you for joining us. We have quarterly conference calls to stay in constant communication with everybody, and many shareholders take the opportunity to call us at any time they have a question. And both Paul and I are happy to speak with anybody any time they have a question. And with that, thanks again for attending, and I now declare this meeting is terminated.

That concludes the meeting. You may now disconnect.