Andrew Peller Ltd

TSX:ADW.A

Earnings Call Analysis

Earnings Call Transcript 2024-Q1

[Operator]

Good morning. My name is Eric, and I will be your conference operator today. At this time, I would like to welcome everyone to the Andrew Peller Limited First Quarter Fiscal 2024 Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] Thank you.

I would now like to turn the call over to David Mills. Please go ahead, Mr. Mills.

[David Mills, Investor Relations]

Thank you and good morning everyone. Before we begin, this is a reminder that during this conference call, management 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. Please refer to the company’s earnings release, MD&A and other securities filings for additional information about these assumptions, risks and uncertainties.

And I'll turn things over to John Peller, Chief Executive Officer.

[John Peller, Chief Executive Officer]

Thank you. Thank you, David. Good morning everyone. Paul and I are here at our boardroom in Oakville, and we're delighted to be with you. Obviously despite the kind of uncertainty that still hangs in the overall economy these days, our business continues to improve overall and strengthen on all levels. We are both very, very pleased with these developments, knowing that the tough times and the worst is behind us. And we're very confident about improving our results as we go forward and addressing the very bright future that the company has. Our focus has really been twofold. As we indicated at last time, we spoke with you.

First and foremost, we've been focused on returning our business to its normal profitability, and largely all our issues were supply chain focused. We've discovered – we've discussed with you at great length, the challenges we've had with freight surcharges to merge exorbitant increases in our glass and packaging costs so that our ambition was to improve our earnings by $20 million over the next two years.

And we're making great progress against these goals as costs are coming down to their normal levels now at different rates in different places. But overall, they're coming down very, very well and we're pleased with our progress. In addition to that, being our principle focus, we negotiated our bank agreement so that we get both more favorable lending terms and recognition for the value of the assets that we hold in our company. We're also reducing our CapEx to low levels to maintenance levels until we're sure that we're out of the storm, if you will.

We've reduced our SG&A savings significantly. We've restructured our headcount at all levels of the company significantly, so that you'll see a focus and a maintaining of lower costs. And then we're doing all of that while still painting strong market performance and revenue growth. And we're up 2.8% in this first quarter. We would've been up 4% over last year on an equivalent excise policy, but this year we're now paying excise tax so that we're recognizing a bit of reduction in that revenue.

But we're expecting to maintain a 2% to 3% revenue growth going forward. We anticipate our EBITDA growing around 15% this year. When we look at the market, the majority of our trade channels have performed very well, in particular provincial liquor boards and the restaurant hospitality businesses. Our export business is growing nicely. We're almost two-thirds back to where we were pre-COVID and we're actually doing better across the base business. We're just waiting for the benefit of Chinese travelers to return to the market. But we've done very well there.

We're also stabilized and showing small growth in our kit business, which is very positive. We're having some slow down in our Estate Winery business, which is interesting. We've had two significant previous years of growth and when Canadians were kind of restricted to the home base, we've had super accelerated growth in those trade channels.

Now that people are back traveling, that business has come off a little bit, but it's also still at levels significantly above pre-COVID levels so overall it's positive, but it's interesting, as I've talked, I don't know anybody in Canada who isn't visiting Italy or Greece this summer. And it's clear there was a pent up need for people to get out and travel.

So we've increased our prices around 5% this year to counteract the inflation. As I've said, we have significant cost savings programs and efficiencies that we're delivering on. Our gross margin has remained consistent with Q1 of fiscal 2023. I essentially took a lot of time last call to explain to you that the inventory that's on our books right now is at an all-time record high cost, and it will take several quarters for it to work its way through our supply chain.

Having said that, everything we're buying now is at significantly reduced levels. Freight is almost back to its normal level. We've got some glass savings coming in right away and significant savings coming next year so that we're comfortable with our targets. It's just a matter of how they time through our supply chain, and it's why we're very confident about getting everything back to normal within a year or two's time.

So I think I've mentioned additionally that we put out a press release on Port Moody. We achieved a fourth bylaw reading approval two weeks ago. This is a very positive development for Port Moody. It essentially crystallizes the density entitlements that we were awarded, which were considerable. And we've also got a development approvement – development permit approval for the first phase of that development, which is a 32-storey condo tower. There are offices, retail restaurants, a community art center and theater. There are 11 units in that first phase.

I would add that it's incredible that the Vancouver market for real estate is as strong as you could imagine. Naturally, developers out there have been concerned with high interest rates and the increase in building costs, but business is starting to turn very, very positive. Again, sales are happening. The market is active and the future for real estate development in the area is incredibly strong.

In some respects, while COVID was very, very difficult on our supply chain and business in the last 18 months, there’s been a silver lining in the delay in the Port Moody value. It’s in fact now higher because of the delay and the increase in demand for the products that are in our development plan.

So it points to the fact that we already have a very strong balance sheet and on top of having a strong one, it’s about to get a lot stronger. And that’s very positive for us. We plan to monetize our investment and we will use the proceeds to both pay down debt and invest in our growth initiatives, which we expect to be considerable as we exit this recessionary time.

So with that, I’ll turn things over to you, Paul.

[Paul Dubkowski, Chief Financial Officer]

Thanks, John. Turning to our results. Sales in the first quarter of fiscal 2023 increased $2.8 million, or 2.8% to $100.5 million from $97.7 million in the prior year. As in the fourth quarter of fiscal 2023, sales were reduced in the first quarter due to the repeal of the federal excise exemption. In Q1 fiscal 2024, the impact was $2.2 million. Excluding this impact, sales for the quarter would’ve been higher.

The increases in sales for the quarter were driven by growth across the majority of our trade channels, including provincial liquor boards, restaurant hospitality, and export. A number of positive factors supported this growth, including price increases implemented to help offset inflationary pressures, introduction of new domestic and international products to meet consumer demands, ongoing return of international travel driving increased export traffic, and the stabilization of our personal winemaking business.

Growth in our key trade channels was partially offset by lower sales at our estate wineries as traffic moderated slightly in comparison to the prior year, but sales and performance remains well above pre-pandemic levels. While sales growth in fiscal 2023 was impacted by supply chain issues related to the pandemic, these issues have now stabilized and are improving.

Moving to margins. Margin in the first quarter landed at $39.0 million, up $1.0 million or 2.5% to the prior year. Margin as a percentage of sales for the quarter was 38.8% consistent with the prior year of 39.0%. Margin in the quarter was supported by the company’s recognition and accounting of the Wine Sector support program benefit as described in the MD&A.

Margin in the first quarter continues to be affected by higher than normal cost of raw materials, particularly glass bottles and packaging, international freight, shipping charges and fuel surcharges. But as John mentioned, on a positive note, we are now seeing many of these costs stabilizing and improving, and we expect to realize the full benefit of these cost savings starting in late fiscal 2024, after we sell through inventory produced at higher costs.

In response to these margin pressures, the company has implemented price increases and continues to implement a number of cost savings initiatives aimed at enhancing operating margins, including evaluating alternative sourcing for imported wine and glass bottles, optimizing logistics and freight and rationalizing SKUs.

Looking ahead, we are confident these cost savings and production efficiency programs combined with further reductions in our cost inputs will drive enhanced margins in the quarters ahead. Sales and admin expenses landed at $26.3 million for the quarter up $0.2 million or 0.9% to the prior year. As a percentage of sales expenses were 26.2% for the quarter down from 26.7% in the prior year. Sales and admin expenses have increased to the prior year as the Ontario minimum wage increase took effect in the third quarter of fiscal 2023. This impact was largely offset by savings realized as a result of the company’s restructuring in the fourth quarter of fiscal 2023.

EBITDA landed at $12.7 million for the quarter compared to $12.0 million last year. Interest expense was higher for the [Audio Dip] higher interest rates compared to last year. As we discussed last quarter, we entered into a new asset-backed loan credit facility in June and believe this arrangement will reduce our interest costs compared to those incurred under our prior credit facility.

Additionally, on June 30, the company entered into an interest rate swap agreement on $65 million of its long-term debt. Until June 13, 2027, the interest rate on this portion of the facility is fixed at 4.46% plus applicable margin. This arrangement will also result in interest rate savings at current market rates.

In addition, the amendment to the company’s credit facility was determined to constitute an extinguishment of long-term debt. And as a result, the company recorded a loss on extinguishment of $1.0 million and financing fees of $1.2 million were expensed immediately. Both of these are one-time impacts related to the setup of the new facility.

With higher interest costs and one-time costs related to the new debt facility in the first quarter, we incurred a net loss of $0.9 million or $0.02 per Class A share for the quarter. This compares to earnings of $2.9 million or $0.07 per Class A share in fiscal 2023.

Turning to our balance sheet. Total debt was approximately $208 million consistent with the prior year end. At June 30, 2023, we had capacity on our credit facility of approximately $66.7 million with shareholders equity standing at $5.87 per Class A share.

Appreciate your time this morning. I’ll now pass it back to John.

[John Peller, Chief Executive Officer]

Thanks, Paul. So we are pleased with the strong quarter that we’ve enjoyed. We are still aware that we’re contending with economic headwinds, which are facing most companies. And at the same time we’re watching inflation decline and interest rates will at some point start to decrease. We’re going to be well positioned to capitalize on our strong portfolio and improve efficiency in our cost structures.

As I’ve mentioned in past calls, this will be my fourth recession that I’ve gone through over the last three years. And in each of those recessions, our company emerged stronger and more capable going forward. I’m 100% confident that will happen again this time where the efforts that we’re putting into streamlining and strengthening all our processes and capabilities are going to produce savings now and even more savings in the future.

So thank you for joining us. And operator, we’re happy to entertain questions if there are any.

[Operator]

Thank you. [Operator Instructions] Your first question comes from Nick Corcoran with Acumen Capital. Please go ahead.

[Nick Corcoran, Acumen Capital]

Good morning guys, and thanks for taking my questions.

[John Peller, Chief Executive Officer]

Good morning, Nick.

[Nick Corcoran, Acumen Capital]

Just a couple questions from me. Good sales growth in the quarter. Can you maybe give a little bit more color on how much is price versus volume?

[John Peller, Chief Executive Officer]

We’re in so many segments, Nick, to give it across the board. Probably I think it’s pretty unbalanced the same, wouldn’t it? We’ve taken about 3%, 4%, 5% increase in price and volumes in the wine category and the beer category and the spirit category as we’ve traditionally known it, the volumes are down right across the board. And the big reason is RTD is driving a lot of growth and in kind of encroaching on all categories.

So what you would see is RTDs have taken the most growth out of beer. So sometimes they record beer with flavored malt beverages in them, sometimes separate. And similarly with spirits, they’re showing growth in spirits, but in fact, all the growth in spirits is RTD spirit growth, like in other words, the RTD can products, the traditional packaging is down.

So wine is down a little, but we’ve picked it up in pricing. And I think in our case, Nick, we’ve had – we’ve picked up market share across the board as a company this year. We’ve done particularly well in kind of value, value Premium Wine segment pricing. On the premium side of our wine business, we’ve had short crops in BC and Niagara, so that we’ve given up some of our premium pricing there. But we’ve done well in spirits and we’ve done well with our cider and RTD products as well. So it’s a mixed picture. And if you need more information, Nick, I’d be happy to follow-up with you.

[Nick Corcoran, Acumen Capital]

That’s good color. And yes, the next question was on market share. Did you say that you picked up the most market share in value and value premium?

[John Peller, Chief Executive Officer]

That would be correct. Yes, there’s definitely been trading in the categories – all three categories, overall have traded down from premium to what I call value premium. And certainly that’s where we are equally strong as we are in the premium, super premium, ultra-premium categories. So it’s been good that we’ve had solid growth where there was solid growth and overall as a company we’ve improved market share.

[Nick Corcoran, Acumen Capital]

And in the past, you’ve commented on the impact that imports have had the competitive pressure. What are you seeing from imports currently?

[John Peller, Chief Executive Officer]

Well, the first thing I’d say, Nick, is I maintain a very close network with the CEOs of large companies in Europe, in the U.S. and right across Canada. And that every wine industry is going through the exact same stresses around the pressures that have been on their supply chains and challenges. So I think all regions have been under siege, if you will, dealing with their cost structures.

There’s an enormous amount of pressure for everybody could take prices up. And indeed, a lot of the import prices now are starting to come up in our market. It’s not always right across the board, but the trending is for them to catch up on some of their pricing and it’s enabled us to be able to come and at least take a 5%. So, I mean, where groceries been taking 15% price increases, we’ve been taking 5%, 6% price increases. And I think that the businesses are still overall healthy. The import markets are doing still reasonably well. But we’ve picked share up against them this year overall because of our strength in the value price segments.

[Nick Corcoran, Acumen Capital]

Good. And then in the past you’ve talked about kind of the timing that you expect to get back to historical margins with cost seem to ease a bit. Can you give an update on when you expect about kind of historical margins?

[John Peller, Chief Executive Officer]

Yes. I mean, I said at the outset, Nick, we need to pick up about $20 million in supply chain cost savings. We expect to get half of it this year and the next half in the year after that. So you’re looking at kind of 18 to 24 months at the latest. But we're tracking it very closely. And we're focused on the biggest areas first, but we have cost saving initiatives right across the company you've seen, we've kept our SG&A down, we're managing our labor costs as well. And so that my best guess is it's 18 months, we should see lower costs coming into our cost of goods sold in the latter part of the third quarter and definitely into the fourth quarter and then even more significantly into the next year.

[Nick Corcoran, Acumen Capital]

That's helpful. And then in Western Canada, there's been quite a few forest fires and active kind of fire season. What is the impact being on the wineries and how do you expect that to impact your harvest?

[John Peller, Chief Executive Officer]

We don't expect any impact from fires on our harvest. I mean, we have one fire that crept across the border into [indiscernible] and I don't believe it's a factor at all anymore. Most of the fires have not been in our region this year, touch wood. So we don't expect any impact assuming things stay fortunate in that regard.

[Nick Corcoran, Acumen Capital]

And is smoke taint a concern or do you – are you able to manage your own on that?

[John Peller, Chief Executive Officer]

We've had a lot of experience with smoke taint over the years. In fact, Californian's rough the visit us aggressively as they started to have their issues knowing that the Okanagan had had some major issues in the previous years. For there to be smoke taint, the fire has to be right up against the vineyard. In other words, it doesn't – it's not impacted from fires in other areas that drift through the region. And then when it does happen, there's certainly lots of ways we can process to minimize or eliminate some of the issues. But fair to say that we're very capable around it. But there are definitely none of those issues currently in our radar at this time.

[Nick Corcoran, Acumen Capital]

Good to hear. And then one last question from me. Obviously, the approval for Port Moody is positive. Can you maybe give some color on what your plan with that and whether you're looking for a complete sale or whether you'd consider getting a partner with that carries your interest?

[John Peller, Chief Executive Officer]

We're going through a very intense process right now, refining our sales marketing strategy. The lights have definitely gone from red to green and as I said, the activities picked up briskly. It's a very large project. There's 726,000 buildable square feet and there's considerable interest that's been expressed and we're working with the best people. Our goal is to monetize our investment. So, we're focused on it. We have a very large capable team that is responsible with me and a member of our board. It's a priority and we're very, very grateful for the circumstances that we're in.

[Nick Corcoran, Acumen Capital]

Great. That's all for me. Thanks for taking my questions.

[John Peller, Chief Executive Officer]

Thanks, Nick.

[Operator]

[Operator Instructions] At this time, there are no further questions. Please proceed with your closing remarks.

[John Peller, Chief Executive Officer]

Thank you, operator, and thanks everyone for joining us. We're pleased that in September, we're going to have an in-person AGM at the Trius Winery in Niagara on the lake. So we're hoping many of you will come and visit with us. And hope you enjoy the rest of your summer. Don't hesitate to call Paul or I, if you have any questions. We have lots of shareholders coming down for visits these days to tour visit and get a closer look at our business model and our activities, and we're delighted to accommodate those people. So if you're interested, give us a shout. And otherwise, we'll hopefully see you in September and talk to you shortly thereafter. All the best. Have a great summer.

[Operator]

This concludes your conference call for today. You may now disconnect your lines. Thank you.