Andrew Peller Ltd

TSX:ADW.A

Earnings Call Transcript 2023-Q3

[Operator]

Good morning, ladies and gentlemen. My name is Serge, and I will be your conference operator today. At this time, I would like to welcome everyone to the Andrew Peller Limited Third Quarter Fiscal 2023 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. Instructions will be given at that time.

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

[David Mills, Investor Relations]

Thank you, and good morning, everyone. Before we begin, let me 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. Please refer to our earnings release, MD&A and other securities filings for additional information about these assumptions, risks and uncertainties.

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

[John Peller, Chief Executive Officer]

Thanks, David. Good morning, everyone. Good to be with you following our Board Meeting yesterday, we published our results and we're pleased to be with you this morning.

As we highlighted, we were encouraged by our growth and improved profitability through the first nine months of our fiscal year. I've maintained a narrative around COVID being this three-year event in which year one, our revenue spiked up a bit as people did a significant amount of pantry loading. In the second year of COVID, our sales dropped 5%. And as a result of business closures, our estate wineries and stores were closed; restaurants were closed as well. And our EBITDA dropped as a result of those closures.

In the third -- this third year, the revenue is returning to its normal level, so we are managing the challenges of inflation and supply chain disruption. I can tell you now that we're very confident that the worst of the disruption is behind us. We've hit rock bottom in the last few months and already our gross margins are trending upward, and we expect to have a recovery of our EBITDA back to our normalized levels in the low 60s over the next two years just to maintain a high-level view of our category wine in both Canada and in North America, if you take the average of the three years, wine is growing at 1%.

Some of the volume has been down a little bit in some years, but the pricing has been up overall net revenue has trended up 1% over the three-year period. And I think it's an important comment, because we've always maintained our confidence in the strength of our category's resilience. I don't know of a more recession prove category than wine. If you look at what happened to most businesses through the last three years. Their revenues have been up and down significantly.

Similarly, not just hotels and airlines and restaurants, but retail segments as well. Our segment just motors through. This is consistent with what happened in 2008 in the financial recession and the tech bubble and 9/11 issue in the early part of the 2001. We've never gone through one of these events without our category staying strong and demonstrating its resilience.

So our sales were up year-to-date at 3.2%. Now that everything is fully open, we were the beneficiary of some price increases. Our sales would have been up 5%, if we had been able to fully meet the demand, but we had significant supply disruption particularly in our western courts in terms of receiving bulk wine in. And while we were able to expedite and offset some of that supply disruption, we did not -- we weren't able to manage all of it, and we have some significant out of stocks throughout the year, so that to the extent that we're up 3.2%, it did demonstrate both the strength of our brands and our sales capabilities through this disruptive period.

You know, supply chain issues have -- will continue. But clearly, the forecast has changed and things are looking more positive, and we'll talk more about that throughout the call. Our gross margins year-to-date are stable to last year, which underlines the fact that there was a lot going on there, we had significant increases in freight, container and shipping costs. We had significant increases in glass costs. We've been able to offset a great deal of that through price increases and other cost savings programs. So there's been an enormous amount of activity in place to offset some of these challenges.

You'll have seen that we received our agricultural Canada support program in the third quarter. This is the continuation of support that we have received for many, many years, at least 15, 20 years. We previously received the support in the form of an excise tax exemption. And this excise exemption was challenged by the Australians, which on its face was somewhat bazar, because they have and continue to maintain the exact same program in Australia that they felt ours was illegal, but our government decided rather than to fight with them legally. They would change our support into a trade legal program through agriculture. That is what the wine sector support program is a program that we always enjoyed and will continue to enjoy going forward. And I'm happy to talk about that if you need more details.

And then in any event, we are feeling that the worst is behind us. We're confident that we're going to continue to grow over the next few years. I think it's fair to say that the market is a little still soft. I mean people aren't traveling and spending at their highest levels, because there's still some concern with the recession as well.

But the commentary around the lowering of the inflation rate and the improvement in the economy seems to be accelerating and becoming increasingly positive, and that should provide us some nice tailwind as well. So generally, our brands and our trade channels are performing strong. Our balance sheet continues to be very strong, and we have a very confident view of our future.

I'll turn things over to Paul now and then provide a few closing words. Thanks, Paul.

[Paul Dubkowski, Chief Financial Officer]

Thanks, John. Good morning, everyone. Happy to be with you this morning.

Turning to our results. We continue to be encouraged by our sales growth so far this year. Sales in the third quarter of fiscal 2023 increased 1.4% to $104.9 million. And in the first nine months of fiscal 2023 increased 3.2% to $304.4 million.

The increases were driven by growth across the majority of our trade channels, including restaurant hospitality, retail, export and our estate wineries, A number of positive factors supported this growth, including price increases implemented at the start of fiscal 2023 to help offset the ongoing inflation and supply chain pressures, increased sales of our premium higher margin VQA products through our Ontario retail network at our estate wineries and to our direct-to-consumer wine clubs. Additionally, our personal line banking business continues to underperform the prior year when we experienced higher sales during the midst of the pandemic.

As John mentioned, sales growth was impacted by ongoing supply chain issues. We continue to closely manage the timely delivery of wines from international producers in the sourcing of glass bottles and other input components from our suppliers. To help us meet this demand, we have had to source liquid and other components from domestic and international suppliers at higher costs.

In terms of our margins, we were pleased to see margins continue to stabilize landing at $42.3 million, up $6 million or 16.5% to the prior year for the quarter and at $119.8 million up $3.9 million or 3.3% to the prior year for the nine months ended December 31.

Margin as a percentage of sales for the first nine months of fiscal 2023 increased to 39.4% compared to 39.3% in the prior year. Margin in the quarter and year-to-date was supported by the company's recognition of the wine sector support program benefit as described in our disclosures.

Consistent with the first-half of fiscal 2023 and the second-half of fiscal 2022, we continue to experience higher-than-normal costs of raw materials, particularly glass bottles and packaging and international freight shipping charges and fuel surcharges remained above historical levels. In response to these margin pressures, the company has implemented price increases throughout fiscal 2023 and is focusing on increasing sales of higher-margin BTA products.

In addition, the company is executing numerous production efficiency and cost-saving programs aimed at enhancing operating margins, including rationalizing stock keeping units, evaluating alternative sourcing for imported wine and glass bottles and optimizing our logistics and freight.

As John mentioned in his remarks, we are confident that our cost savings initiatives will drive further recovery of our margin in fiscal 2024 with full recovery back to normal levels within two years as it will take time for cost reductions to work their way through our system.

Sales and admin expenses landed at $26.7 million for the quarter, up $2.5 million or 10.1% to the prior year and at $80.6 million, up $4.4 million or 5.8% to the prior year for the nine months ended December 31.

Sales and admin expenses have increased this year as the Ontario minimum wage increase took effect and as we return to full operations at our states post pandemic. EBITDA ended at $15.6 million and $39.3 million for the three and nine months ended December 31, compared to $12.1 million and $39.8 million, respectively, last year.

For the third quarter of fiscal 2023, we had net earnings of $3.9 million or $0.09 per Class A share. For the nine months ended December 31, 2022, net earnings were $6.7 million or $0.16 per share. This compares to earnings of $3.1 million or $0.07 per Class A share in last year's third quarter and $19.5 million or $0.46 per share for the first nine months of fiscal 2022. In last year's second quarter, we recognized a gain of $7.5 million or $0.21 per share on the sale of our Port Coquitlam BC property and assets.

Turning to our balance sheet. Total debt increased to $194.9 million from $192.1 million at the end of fiscal 2022, and -- at quarter end, we had capacity on our revolving credit facility of approximately $138 million with shareholders' equity standing at $6.16 per Class A share.

Thank you for your time this morning, and John, I'll pass it back to you.

[John Peller, Chief Executive Officer]

Thanks, Paul. Just a couple of quick comments in terms of our sales and marketing efforts. We continue to participate in a broad spectrum of segments across a lot of trade channels, and our performance has been strong in all those areas, perhaps some softness in our [Indiscernible] business that we expect to bounce back this year. But our premium VQA products have had a very solid year. We've gained market share. We were boosted by the significant increase in traffic to our estate wineries and the growing clubs.

Our export portfolio, which is focused on our ice wine sales around the world has come back to almost 50%, 60% of what it was prior to the pandemic. It was up significantly this year. And we're pleased that, that travel is starting to open up everywhere. You can see the Chinese are planning there, return to normal levels of travel, and that will help us.

And our Spirit portfolio had a very, very strong year, as did our participation in the ready-to-drink RTD segment and our Noble cider brand also performed very, very well. So we feel confident about these efforts continuing to be successful in the short and medium term.

That being all said, we are laser-focused as an executive and management team on our cost efforts to restore our margins, including all the management of cash and CapEx and the costs associated with our capital. We have many projects active and on reducing glass, corrugate, transportation, freight, to [Indiscernible] and we will be, as a senior team all leaning into all these projects. We're confident in our ability to restore these margins, as Paul said, over the next two years.

I've always tried to reinforce that our company has a very strong balance sheet. We have built our balance sheet over two or three decades now. We're built for the long-term. We have a very, very strong portfolio of assets that reflect our increased investment in the premium wine category. We're up to like nine state wineries and 1,000 acres of property and our recent person purchase of the Riverbend den. These assets are going to generate great returns for our business going forward.

So with that, I'm happy to turn the things back to our moderator for your questions, if there are any.

[Operator]

Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] Your first question comes from Nick Corcoran from Acumen. Please go ahead.

[Nick Corcoran, Acumen Capital]

Good morning, guys. I have a few questions. The first is revenue was up 1.4% in the quarter. Can you give any indication of what you're seeing in terms of volume versus value?

[John Peller, Chief Executive Officer]

I think quickly on that, Nick, that if you take, kind of, average volume fluctuations across Canada and for that, matter, I can say pretty consistently in North America. The volumes are down, maybe 3%. And -- but that all net revenue on the volumes were up in previous year, which is why I kind of referenced, Nick the three-year outage of a 1% growth in the category. And it's considered a little soft right now, but it's strengthening. The markets are off to a good start this year. So that's the most clear indications of the strength of the market I can give you.

[Nick Corcoran, Acumen Capital]

That's fair. And then maybe just thinking about how consumers are being impacted by inflation. Are you seeing any trade down in your portfolio?

[John Peller, Chief Executive Officer]

There's definitely greater movement to value pricing as the concerns of clear consumers are reacting to higher interest rates and their concerns for a recessionary economy. There's definitely more interest in value these days. There's a little bit of softness in the kind of travel restaurant premium-priced area, but it looks transitory at our line clubs were very strong, and that's all, ultra-premium wine. So I would definitely say that there's a bit of an adjustment down to value pricing in the retail systems, but still strong indication that the premium segments are going to do well.

[Nick Corcoran, Acumen Capital]

Great. And then you mentioned that ice line is up, I think, 60% or is -- sorry, 50% to 60% of historical levels, what do you think the path is to get back to 100% at historical levels or grow above that?

[John Peller, Chief Executive Officer]

I think it's just a return to normal travel. I mean don't forget, it went from 100 to zero, so that it's land border opened up first. People started traveling again summer, but there's nowhere near normal travel levels right now. And I expect them to be significantly open by the end of this year, and I expect travel retail and export retail to grow in the following year towards its higher levels.

[Nick Corcoran, Acumen Capital]

That's helpful. And last question for me. What are your capital allocation priorities? -- over the next kind of 12 to 18 months?

[John Peller, Chief Executive Officer]

I think that our balance sheet is strong, and we have a lot of potential with capital. And that being said, our real focus is to see ourselves through the challenge of getting the supply chain back into its greatest position of strength and improving on our cash position. In other words, we didn't want to feel confident any statements last year, because we wanted to make sure that we have seen the bottom, if you will, of all of this, and we're confident that happens now and we're bouncing up, so that I think that we're looking to invest into our brands and our marketing going forward. But we're going to hold off on CapEx a little and ensure that we deliver on our short-term focus to prove margins before we get more aggressive with our investment.

[Nick Corcoran, Acumen Capital]

Thanks. I’ll pass the line.

[Operator]

Thank you. Your next question comes from John Sartz from Viking Capital. Please go ahead.

[John Sartz, Viking Capital]

Good morning. I'm wondering about the -- your interest expense. It's not quite as high as it was last quarter, but it's quite elevated. And I'm wondering to what extent is that due to rates? And what percentage is due to rate to interest rates? And what percentage is due just to a larger balance?

[John Peller, Chief Executive Officer]

Yes. Our loan balance has not increased over the year. It's all the increase in interest rates that have occurred throughout the year-end. We're confident that those rates will start to work their way back down, and we'll measure and focus on that carefully.

[John Sartz, Viking Capital]

Okay, thanks.

[Operator]

Thank you. [Operator Instructions] There are no further questions at this time. You may proceed.

[John Peller, Chief Executive Officer]

Thank you, everyone. We definitely are anxious to get out and meet with our investors. A lot of people have been calling us recently. We fully are putting all our plans in place to get out and be active in the community, communicating with not just our existing investors, but a lot of people, who are interested to get in front of us.

So please don't hesitate to reach out to either Paul or I to make sure that we connect with you as soon as we can, and we're looking forward to your feedback. And a successful year for the remainder of the year. Thanks for all your support and your attention today. Have a great day.

[Operator]

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