Andrew Peller Ltd

TSX:ADW.A

Earnings Call Transcript 2022-Q2

[David George Mills]

Thank you, Pam, and good morning, everybody. Before we begin, let remind you that during this call, we may make certain statements containing forward-looking information. This forward-looking information is based on a number of assumptions that are subject to a number of known and unknown risks and uncertainties. It 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 I'll now turn things over to John Peller, Chief Executive Officer.

[John E. Peller, President, CEO & Director]

Thank you, David, and good morning, everyone. It's good to be with you. I'm here and joined with -- by our CFO, Steve Attridge, and reporting on the first half of our year's results, which we published last evening. You can see that our sales for the first 6 months have decreased by 5.5% when compared to the previous year. And having said that, we're very, very pleased with our performance. We think that we know that the company is performing very, very well. And having said that, it is most definitely a challenging and difficult time -- one second here. Okay. Sorry about that noise, but I got a window washer banging on my window outside here. The bottom line is that when you compare the first 6 months of sales to last year, we actually grew our business in the trade channels that were open and were doing well, but we have locked business in the trade channels that are still not open. You'll recall that last year, we had some pantry loading at the start of the year that kind of artificially inflated our sales early on. And we got, if you will, an updraft from the pandemic that we wouldn't have expected. And now the consumers are returning to more normal retail shopping patterns. And while they're doing that, the other channels that have been closed are kind of slower to return to their normal volumes because of closures and restrictions. So -- for example, the first -- in the first half of this year -- or the first quarter, we had many, many estate winery -- of our 9 estate wineries, they were closed or partially closed in the first quarter. And as you know, restaurants are just coming back online now. I would submit that compared to a normal year, restaurant sales across the province are still kind of half of their normal levels. And similarly, trade and travel restrictions have been -- are still in place and our export sales and duty-free sales have been likely affected. We've also had significant impact to our margins from supply chain disruptions. They're significant. Everything that you're reading in the news in terms of the bulk wine shipments we receive from around the world, our class in packaging is definitely being disrupted and creating some margin challenges, which we believe will impact us through this year, and to some degree next year as well. But they'll eventually abate, and we're returning to normal so that -- we feel very, very positive that the recovery is well underway. And hopefully, most of it should be back next year. We're not going to make too much of a prediction there just because it's hard for us to know exactly how fast everything will return to its normal state, but it's -- we should be mostly recovered next year, and we know travel will lag a bit into the '23, '24 fiscal years. But we expect it to fully recover as it always has in the past for these types of events. We did -- as you have no doubt noticed, we sold a piece of property in Port Coquitlam, which was our former wine [ kit ] operation in Port Coquitlam. We sold it for $9 million and realized a gain of $7.2 million. It's but 1 of the many properties that the company owns and [Technical Difficulty]

[Operator]

Pardon me, please stand by. Please go ahead, Mr. Peller.

[John E. Peller, President, CEO & Director]

Okay. I was just going to turn things over to Steve. Steve, if you're there, over to you.

[Steven J. Attridge, Executive VP of IT, CFO & Secretary]

Great. Thanks, John. As John mentioned, our sales and operating results through the first 6 months of fiscal '22 continued to be impacted by a number of unusual factors related to the pandemic. When the pandemic was announced in the fourth quarter of fiscal '20, consumers increased their purchases through the first 6 months of fiscal '21, driven by uncertainty and concern about whether supply chains for alcoholic beverages would remain open through the pandemic. As well, the LCBO in Ontario was closed on Mondays during the majority of fiscal '21, which helped to drive consumers to our retail outlets, increasing sales of products through our network of over 100 stores. We're also significantly affected by government-mandated closures of bars and restaurants, which included our estate winery businesses, and travel restrictions that significantly reduced our travel retail business. And while these channels are now slowly reopening, it will take some time for them to return to normal. As a result of these factors, sales decreased by 5.5% when compared to the first 6 months of fiscal '21. When comparing our sales so far this year with the 6 months that ended September 30, 2019, to the comparable quarter with no COVID-related restrictions, sales are -- have decreased 3.5%. However, if you adjust for the trade channels that remain impacted by the pandemic in fiscal '22, namely the restaurants, hospitality and travel, retail, our sales have increased by approximately 4.5% in the remaining open trade channels. Turning to margins. Our gross margin was again negatively impacted by purchasing patterns and [ other ] factors related to COVID. These include revenue declines in our high-margin trade channels and higher reported wine costs. In addition, we experienced costs related to the much publicized global supply chain issues due to the pandemic as well as increased co-packing costs in our new and growing refreshment brands. However, we are seeing margins gradually returned as the pandemic eases, rising to 42.7% in the second quarter of fiscal '22 from 40.3% in the first quarter and 35.5% and 37.4% in the fourth and third quarters of fiscal '21, respectively. It's higher costs are partially offset by a modest increase in higher-margin sales. Over the long term, our business returns to normal operations, we expect margins will continue to improve. Our sales and admin expenses increased compared to last year as we returned our staffing and marketing overheads to normal levels as these trade channels reopened. You remember that in the -- in last year's first half, we laid off a significant part of our workforce due to closed trade channels and to conserve cash. In addition, during the first 6 months of this year, we incurred certain nonrecurring start-up costs related to the opening of our recently acquired Riverbend Inn. As John mentioned, on September 28, we completed the sale of our Port Coquitlam, British Columbia, property and assets for total cash proceeds of approximately $8.8 million, net of transaction costs. The sale generated a realized gain of $7.5 million or $0.21 per Class A share. Including all of these factors, net earnings for the 6 months of fiscal '22 were $16.4 million or $0.39 per Class A share compared to $23.9 million or $0.56 per share last year. Turning to the balance sheet. Our debt increased to $170.4 million at December 30, due to debt repayments partially offset by our working capital requirements, share repurchases and increased investment in our properties and operations. At quarter end, we had increased capacity on our revolving -- on a credit facility of approximately $180 million. As of September 30, '21, we've repurchased and canceled 598,600 Class A [ non-voting ] shares under our normal course issuer bid at a weighted average price of $8.70 per share for a total cash consideration of $5.2 million. I'd like to thank you for your time this morning, and I'll turn things back over to John to wrap up.

[John E. Peller, President, CEO & Director]

Thank you, Steve. And as I said earlier, the company is performing well and we're very positive and confident about our prospects going forward. And truly many companies we have, we're very proud of the fact that our company has definitely focused on the health and well-being of our people. It's been a very difficult time for them as I'm sure it has been for you and your families and your companies. But a company is only as good as its people and its culture. And I'm incredibly humbled and proud of the fact that our company has done such a great job caring for each other, including that we're implementing a mandatory vaccination policy. We're anxious to get people back to work. We know people work better when they're together and while we'll have a -- we will have a hybrid work model going forward, we will encourage and ensure that people spend more time together as soon as possible. So we have a lot to get done and we want to benefit from the energy that we get from working with each other. For the last 5 years, we've invested more than $100 million in our facilities, in our people and our technologies. We put together a new ERP system, which we've told you about, which is the largest CapEx we've ever had as a company. We've invested in our [indiscernible], our capacity, our crush capabilities. We're making sizable investments in new plantings and new vineyards to grow. We've made a lot of investments in our estate wineries, which are all performing very, very well. We have a very unique business model, and it's -- we have an incredible network of diverse businesses that all are supported by and leveraged by a very significant asset supply chain capability. We're looking to grow not just in premium and ultra premium wine, but we'll grow our value vine business. We're going to grow our spirit business that we've entered in the last 2 or 3 years, and it's doing very well. We're going to grow in refreshment beverages as well. We know that as we come out of the pandemic, we're going to be a stronger, more capable company and we're very excited about our prospects for growth going forward. So with that, operator, I'm happy to turn things back to you for questions.

[Operator]

[Operator Instructions] Your first question comes from Nick Corcoran with Acumen.

[Nick Corcoran, Equity Research Analyst]

Congratulations on the star quarter. Are you seeing any increase in your input costs? And have you been able to take any price [indiscernible]?

[John E. Peller, President, CEO & Director]

Very popular question these days, Nick. I mean, a lot of the impact of the supply chain restrictions and challenges have yet to hit our sheet. And we're kind of doing a lot of reengineering of product mix and the like to offset it. A simple answer, though, we have not taken any major price initiatives at this point in time. We're watching it closely. And as an industry, our price increases and the lag other categories and other businesses just because of the impact of foreign trade into our markets and whether or not that they're going to take increases as well. We do know that the European wine industries are under even worse pressures than we are from a cost perspective, and that is incomprehensible to me that they will pay increases in prices, but we'll watch that and monitor it closely. Where we can sell our premium products, we will take some pricing up for sure. And on the value-end products, we're evaluating it and waiting to see how the market is going to react.

[Nick Corcoran, Equity Research Analyst]

Good color. And can you provide any update on the Port Moody [indiscernible]?

[John E. Peller, President, CEO & Director]

How did Vancouver place in the last month, and I think that the -- first and foremost, that the real estate market in Vancouver is very, very active and hot, if you will. I think hot is the only word you can use, it's a very strong, healthy and increasing market. So -- more importantly, the developed -- development industry that was kind of very on its hands and quiet through the COVID. And then with years, the last 1.5 years, they're now becoming much more active. We've had lots of discussions with people. We're very confident in our opportunity to realize value with our investment, and we're speaking to more than several groups. I'm sure you are aware that the property is 5 acres. The plan that's been approved is over 750,000 buildable square feet. So that it is a very, very complex and large mixed-use development. It has everything from residential housing and condominiums to a hotel and a lot of retail is -- a senior's home and a cancer clinic. It's an impressive development project, and it required the coordinated investment of many groups. And we're -- I'm confident that there's great discussions underway, in that things are moving now in the right direction at a much better pace.

[Nick Corcoran, Equity Research Analyst]

Is that something we could see transact in this fiscal year? Or would it potentially be the following year?

[John E. Peller, President, CEO & Director]

I'm not trying to be evasive in any way, but it's one or the other. I don't think it will go beyond that. But it's really about getting the right team. And there will be several players in terms of developers and financers. And I'd like to think it's going to be sooner. Although the irony about -- the delays that have happened up to this point over the last kind of even, call it, 2 years, have been disappointing. But at the same time, they've increased the value of our asset through the process. So every time this thing has been delayed, it's just increased the value of the asset. I do believe now there's clean runway ahead of us. And I think the 1- to 2-year time frame is the appropriate -- we're applying for the development permit right now as we speak. So it's not like things aren't happening. It's a very, very active trial. And I think more than anything that the focus is on getting the right team together and putting a great plan to realize value for us in the future.

[Nick Corcoran, Equity Research Analyst]

And you've applied for the development permit. How long do you expect until you get approval for that?

[John E. Peller, President, CEO & Director]

I think, if I'm not mistaken, it -- just because I'm trying to go -- I think the development permit seems in the next 4 months. The next 4 to 5 months. It's at a stage of transportation and engineering drawings across a wide list of preparations for a construction permit. So it's with architectural firms and consultants. I believe it's 5 months that it will be completed.

[Operator]

[Operator Instructions] There are no further questions at this time. Mr. Peller, please proceed.

[John E. Peller, President, CEO & Director]

Thanks, everybody. I definitely want to thank you for your support. I've had great conversations with many of you over the last month or 2. But we've -- We're planning to get out into the community in the next couple of months to meet with different shareholder groups and provide as much opportunity for you to ask questions and understand our business model and our aspirations for growth and development going forward, so that if you're interested in meeting with us and just connecting and receiving a short presentation on the company, please don't hesitate to give us a call. And on top of that, we'll follow-up with you in the normal course after our third quarter. So wishing you all good health and success in your own business, and we look forward to following up with you soon. Thank you.

[Operator]

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