Andrew Peller Ltd

TSX:ADW.A

Earnings Call Transcript 2018-Q4

[Operator]

Good morning, ladies and gentlemen. Welcome to the Andrew Peller Limited Fourth Quarter and Year-end Fiscal 2018 Results Conference Call. I would now like to turn the meeting over to Mr. David Mills. Please go ahead, Mr. Mill.

[Unknown Executive]

Good morning, and thank you, everyone, for joining us this morning. 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. 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 things to over to Mr. John Peller, Chief Executive Officer.

[John E. Peller, Chairman & CEO]

Thank you, David, and good morning, everyone. It's great to be with you and follow-up with our results for our year ending March 31. And we've had a very positive and successful year overall as our company, and we're happy really with the way everything has evolved, and we're increasingly confident about our future.You all have seen our sales are up just over 6%, which partially is a result of some of our acquisitions. Pete will give you those numbers more specifically in just a few minutes. But we also had around 4% organic growth across the company, which is very strong and supports the strength of our brands at premium, value and in both craft spirit and craft refreshment categories that we've entered.I think significantly our gross margins are up from where they used to be at the 38% level now up into 41%, heading to 42%. And this is the result of a great deal of hard work around our supply chain. A lot of capital has been invested to upgrade line speeds and the efficiency of our cellars, the capability of our crush and inventory planning. So we take great pride and confidence in the efforts of our management team around improving our margins.And while we've improved them, we've seen a very strong performance in our premium wine VQA segments, both in the Okanagan and here in Niagara. You may recall that around 2013 and '14, we had some very challenging short crops with some cold weather here in Ontario. And now that, that is way behind us, we've actually got very balanced inventories, and we've had good-quality crops. Our vintage '15 and '16 here are now coming onto retail shelves. They're outstanding vintages so that not only our brand is doing well, but the great crop and qualities that support them are in great shape. So we think this augers very, very well for our future. And we'll continue to focus on this premium wine segment both from growth and margin perspective.We did perform well at value price points as well, and there is still strong support for -- by consumers for wine in the kind of $8 and $12. It's where 80% of the volume in the industry is done, although it represents probably half of the overall retail dollars. One of our highlights for the year was we had a full year of the opening of the Wayne Gretzky estate winery and distillery. It's been very, very positive. The results have exceeded what were our high expectations in terms of performance. And already to the start this year we're doing better than the numbers we did last year, and we remain very optimistic with both the wine and our craft spirit. We launched our craft whiskey into the Chicago and St. Louis markets this year. It's still very early, but our distribution is strong. We have a highly motivated distributor partner. And so far the sales have been very encouraging.And as I had mentioned earlier, from a craft refreshment standpoint, we launched our No Boats On Sunday premium craft cider. It trades at a much premium retail price to the regular category. It's been incredibly well received, and we're excited with its prospects going forward.So basically, all the strategies we've talked to everyone about at our shareholder meetings and in all our communications are on point. They're doing well. If anything, they are doing better than what we had hoped. And we're placed to continue to invest in our brands. And we have high expectations for growth and brand development in the next few years.And we'll eventually take some questions. But at this time, I'll turn it over to Pete who can take you through some of the details.

[Peter B. Patchet, Interim Chief Financial Officer]

Thanks, John. Fiscal 2018 was another record year for our company. Sales were up 6.2% to $364 million on strong organic growth, 3.7%, and the contribution from the 3 acquisitions that were completed in early October. Fourth quarter sales were up 10.4%, driven by 5.4% organic growth and our first full year's contribution from acquisitions.Organic growth, once again, came from our successful sales and marketing programs, the introduction of new products and product categories and just overall continued strength on the Canadian wine market. Gross margin strengthened again in fiscal 2018, rising to 41.3% of sales from 38.3% in the prior year. Fourth quarter margins improved to 41.1% from 39.2% in the final quarter of fiscal '17.As John mentioned, we continue to benefit from our focus on selling more higher-margin wines. We've had selected price increases that we implemented in the second quarter of last year. We have discontinued certain low-margin products, and we've had positive impact from cost control programs.On acquisition, we recorded a $10.4 million increase to inventory to represent the fair value of goods acquired as required under IFRS guidelines. This increase will be expensed over time as finished goods are sold, thus reducing our gross margin. During the fourth quarter and year ended March 31, 2018, we recorded a charge to earnings of $1.1 million and $3 million, respectively, to cost of goods sold because of this adjustment.In fiscal '18, selling and admin expenses increased to the acquisitions and the opening of the Wayne Gretzky estate winery and craft distillery in June 2017. Sales expenses were also higher to support many new product launches throughout the year and to the impact of the minimum wage increase in Ontario.Sales and marketing expenses in both fiscal 2018 and fiscal 2017 were impacted by certain onetime costs associated with the acquisitions. In fiscal 2018, we recorded onetime costs of approximately $1.1 million for professional and transition costs related to the acquisition and $3 million -- $0.3 million related to severance payments. Fiscal 2017 included a onetime charge of $1.1 million for costs related to an acquisition that was not completed and $1.3 million for post-retirement benefits for certain employees retired through the year.EBITDA was $52.9 million for fiscal 2018, up 14.6% from $45.1 million in the prior year. The increase was due to the growth in sales and improved gross margin, partially offset by the higher sales and admin costs and the reduction in margin for the 3 new wineries due to the inventory fair market value adjustment charged to cost of sales.We have also disclosed our adjusted EBITDA, which excludes the onetime acquisition charges for both years. Adjusted EBITDA rose 23.7% to $57.2 million in fiscal 2018 from $46.2 million in fiscal 2017. Adjusted EBITDA for the fourth quarter of fiscal 2018 was $5.7 million compared to $5.9 million in the prior year.Interest expense increased in fiscal 2008 (sic) [ 2018 ] due to the long-term debt incurred to complete the acquisitions in October. Interest expense in the fourth quarter was approximately $1 million over the prior year.Amortization expense was higher due to the addition of 3 recently acquired wineries and to the completion of the Wayne Gretzky Winery in 2017. Amortization expenses in the fourth quarter were $2 million over the previous year.The net unrealized noncash gains in both years continue to reflect the mark-to-market adjustments to our interest rate swaps and foreign exchange contracts. We believe these programs continue to mitigate the impact of potential future interest rate volatility and changes in foreign currency exchange rates.Fiscal 2018 also included a onetime gain of $4.2 million recorded in other income related to one of the October acquisitions. Net earnings for fiscal '18 was $3.1 million or $0.71 per Class A share, up from $26.4 million or $0.64 per share in fiscal 2017. The net loss in the fourth quarter of fiscal 2008 (sic) [ 2018 ] was primarily due to the charge to cost of sales sold for the inventory adjustment, the increase in sales and admin expenses, which included onetime costs related to the acquisitions, and the increase in interest and amortization charges.As we disclosed in our year-end press release, the acquisitions contributed $8.6 million in sales, $1.1 million in EBITDA and $400,000 or $0.01 per Class A share net earnings in fiscal 2008 (sic) [ 2018 ]. Excluding the acquisition-related fees and fair market value margin adjustments, our earnings per share in fiscal '18 were also impacted by the 1.6 million shares issued to acquire one of the wineries.Looking ahead, the remaining balance of $7.4 million of fair market value adjustment to inventory will be expensed as the wines are sold, thus reducing gross margin. We expect the majority of this adjustment will flow through earnings within the current fiscal year. You should also note that the onetime transaction -- transition and restructuring cost recorded in 2018 reduced earnings per share by approximately $0.10.Looking ahead, we are confident that the 3 acquisitions will make strong and growing contribution to the company's performance. Despite the dilutive impact in fiscal 2018 and 2019, the acquisitions will generate positive and accretive contributions over the longer term.Turning to our balance sheet. The changes at March 31, 2018, from the prior year-end were due primarily to the 3 acquisitions. Overall bank debt increased to $171.7 million due primarily to $79 million drawn on our credit facilities to complete the acquisitions.At the end of the year, we had $42.7 million in our operating facility and $94.7 million in our investment facility, providing sufficient liquidity to continue our growth and investment programs going forward.Cash flow from operating activities was $21.7 million in fiscal 2018. Investing activities included funding for the acquisitions and the completion of the Gretzky facility.In summary, fiscal 2018 was another very strong year for the company with solid increases in sales and improved gross margins. We look for these trends to continue going forward. With the growing contribution to our revenues from our recent acquisitions, combined with the cost and operating synergies we expect to generate in our Western Canadian operations, we believe our future is very bright.I thank you for your time and attention this morning. I'll turn things back to John for wrap-up.

[John E. Peller, Chairman & CEO]

Thanks, Pete. I inadvertently omitted to highlight the fact that our dividend has just have been increased 14%. I believe that's sixth or seventh year in a row that we've increased our dividend. We're proud of our dividend record, and it's a critical part of our return to shareholder value strategy.We've had -- we got good crops growing in both the Niagara and the Okanagan, and we're pleased with that this year. I did want to highlight, recently we won a very significant award with Decanter magazine out of the U.K. Those of you who follow the wine world know that Decanter is probably the leading authority on wine and wine quality globally. And I tell you this because I've always tried to punctuate my remarks whenever I get a chance to make them around the fact that our country makes wine as good as the very best around the world. And Decanter hands out an award for the best in global -- by variety for the best wines around the world. And this year, they probably get 3,000 to 4,000 entries per variety for these awards, where they will give as many as 200 to 300 gold medals. And beyond that, they'll honor 15-or-so of those wines with platinum awards. And then they choose amongst those platinum winners one wine which they declare to be the very best in the world. And this year, we were honored that they selected our Thirty Bench 2015 Cabernet Franc red as the best cabernet franc red varietal wine in the world. So I'm going to change my remarks in the future and not say that we rank among the best but, in fact, we are the very best.I attempted humor there, but it's an award that we're extremely proud of. And I think that winning these types of awards does a lot for everyone in our industry to believe and want to invest in our quality and to have the confidence to promote our brands, not just here in Ontario and in Canada but around the world.Just a couple of quick comments on the political landscape. I'm -- hopefully we'll address a few of the questions that we normally get. We've got a lot of activity happening on the global trade front with NAFTA becoming less and less certain as it goes forward. And trade issues between the EU and the U.S. and China and the U.S. There's not a lot of optimism in the business community that these issues are going to get resolved in the short term and that we're likely headed for some bumpy times in terms of increased application of duties and penalties.In addition, the U.S. has brought a WTO complaint against the B.C. liquor board over a policy involving the selling of wine in grocery. I was surprised that they did it. I think that if anything the liquor boards have gone out of their way to support the California wine industry in Canada, and I think this is a bit of a slap in their face, they've grown more than any other country in the world. Their sales have grown in Canada significantly, and they've been treated very, very well. And I think one of the themes that comes out of all of this is that all the countries that complain about trade policies have the most restrictive trade policies in their own country when it comes to wine so that I think the fact that there may be a trend towards reassessing the openness of the markets might in the end play into our favor.Similarly, you'll note we had a lot of discussion of the Comeau case at the Supreme Court of Canada. The result that came out of Comeau, you recall that the constitution said that all goods of manufacture and produce and agricultural shall trade free. The court felt that the free was equivocal and basically supported the provincial regulated trade systems, and it was a result that we were not expecting. And having said that, it at least allows us to understand what the trade environment is going to look like going forward. They've emboldened provincial regulators to be restrictive with their trade practices. And so long as we know that, we can adjust our strategies accordingly. We've always done well trading in all the markets. And more than anything, it's just trying to anticipate changes in rules and policy, and this helps clarify that for us and we'll respond accordingly.We have a big election in Ontario. And the usual comments have been made around beverage alcohol distribution. It's not clear to us what the policies will be of a new government. But I do know for sure that increasingly the Ontario, all political parties and the bureaucracy are becoming increasingly aware of the great potential in our industry to add employment and investment growth that's good for our region. And I think going forward, I'm optimistic that the policies that support our industry are going to improve.And then lastly, just a quick comment on cannabis. It is a once-in-a-lifetime kind of disruptive event, and it's going to have a significant presence. And at the same time, it's very difficult for us to know how things will unfold because of -- there'll be so much regulatory and political intervention as the system rolls out. And there is a lot to have observed in the U.S. markets that have legalized marijuana. They all did it a different way so that there really isn't a clear sense of what best practice will look like. All the provinces are taking a different approach.And they are very concerned about taxing cannabis too highly so that the black market doesn't go way. There is so much speculation in all of us. We are definitely talking with people in the industry to making sure that we're aware of how the industry is developing. And we'll be keenly focused on whether there are opportunities for us in the future. But at this point in time, we're happy to watch from the sidelines and monitor things as they develop.So I think as Pete mentioned in his comments and I tried to mention in the start of mine, Canadian wine industry continues to strengthen. And this is principally because consumers are increasingly supporting us. They're happy with our brands with the experiences in wine country, and particularly, millennials, younger consumers are supporting the Okanagan and Niagara wines entities with more and more enthusiasm, and that more than anything emboldens us and gives us confidence about our future. We have a great marketing and sales trade channel system. We can get our products to market in every available path.We'll continue to monitor acquisitions. There are lots of opportunities in the market these days, and we're focused on making sure any opportunity is the right one at the right place, which is kind of the challenge in all of this, but we expect to be active going forward in the acquisition market. And we're happy that our balance sheet gives us lots of strength to look at these opportunities.So with that, I'll turn the call back to the operator, and we can poll for questions.

[Operator]

[Operator Instructions] The first question is from Amr Ezzat with Echelon Partners.

[Amr Ezzat, Special Situations Analyst]

Your organic growth for the quarter is quite impressive. I know you don't usually quantify that. But can you maybe give us a sense of how volumes evolved on a year-on-year basis? I believe last quarter, the organic growth was mostly driven by price increases. Is it more of the same?

[John E. Peller, Chairman & CEO]

No. I think we were selective with price increases and took them up in a few areas. But I think the growth reflects increased volumes and some retail pricing. And we were -- we basically had strong consumer support right across the board, in liquor boards and in our retail stores through our export market and through our direct-to-consumer trade channels. So it really reflects a strong support for all our brands in all other segments. And definitely, we've increased our investment behind our brands this year. As our margins have improved, it enabled us to invest more money behind our brands. So I think, it's really the nirvana of all things working in the right direction, improved margins, increased investments and strong consumer support right across the board.

[Amr Ezzat, Special Situations Analyst]

That's great to hear. Then maybe on the price increases or the selective price increases, I think we've seen you do that for a couple of quarters now. I'm just wondering how much more do you believe or how much more price increases you believe you can do over the next couple of quarters. Or are you mostly done?

[John E. Peller, Chairman & CEO]

It's an important part of our strategy in terms of managing margin, but also the different competitive responses that come in different trade channels. And I think by and large that we still feel that there is a lot of upward potential for the premium category in particular. Some of the prices we took on premium wines, prices went up $1, $2 or $3, and there was absolutely no impact at the consumer level. The support was every bit as strong. So I think at the premium end, as it grows, we have a lot of latitude for growth and for margin strengthening. I think it's when you get down into the kind of $10 to $15 segment, which is the lower end of VQA that there's a lot more discounting and consumers are little more price sensitive. And then once you get down below that segment in the $8 to $12 range, price promotion and pricing are critical. So I think we're in a good spot at the value points, and I think there's lots of potential for us to grow our premium side, both in the Okanagan and in Niagara and in our export markets. So we're -- we think we're in a very good position there.

[Amr Ezzat, Special Situations Analyst]

Understood. Maybe a housekeeping. On the SG&A, it's a bit higher than the past few quarters. And I understand that some of that is recurring and that you added the 3 wineries. But you guys also mentioned it's linked to marketing and the launch of several new products during the quarter. So I'm just wondering, is that SG&A number a good run-rate to use going forward? Or there is some unusuals in the above and beyond the onetimers of the acquisitions?

[Peter B. Patchet, Interim Chief Financial Officer]

No. I think it's more an indication of increased investment in our brands that will be up and norm as opposed to a onetime of item. Again, it's very market select. We have learned some new products this year, and they tend to get more investment in the early phases, but we expect to strengthen our marketing investment behind our core brands going forward.

[Amr Ezzat, Special Situations Analyst]

Okay. Then maybe just one last one before I pass the line. To the extent that you can, can you comment on how the M&A landscape evolved since your acquisitions, both in terms of pricing and in terms of the pipeline of opportunities you are looking at?

[John E. Peller, Chairman & CEO]

That is a very good question. And I'll start by highlighting there are almost 500 wineries in the industry across Canada or maybe even more than that. So -- and the small wine business, in particular, is a very challenging financial environment. So there are always many, many wineries that are looking to divest, and it's never a question of trying to find wineries for sale. It's being strategic about finding a brand that you feel has great value and that fits an important piece of your portfolio. And especially on the premium side, ensuring that you have the capability to increase supply, to invest in the capital, because most of the wineries when they choose to sell, they kind of come to the end of their capital capability, if you will. They're needing to make big investments, not unlike all the 3 that we just purchased in the Okanagan. They were -- they had reached a point where it required a significant amount of investment to get to the next level. So we monitor it carefully. And the expectations for people's price are very difficult to manage. And having said that, we've got great relationships in the community. We've worked hard with most of these wineries our whole life. We have good relationships with owners. And we kind of wait until we get exactly what we want and where we need it. And then we are poised to make something happen. And I think similarly in craft refreshment, there's lots of opportunities out there, but you need to be very strategic in how you approach it. And we're doing the best we can to stay appraised of all the opportunities. And we'll continue to monitor very, very closely.

[Operator]

The next question is from Brian Pow with Acumen.

[Brian D. Pow, VP of Research & Equity Analyst]

I just wanted to follow on the conversation about your SG&A expenses. And if I look at, it's up sequentially about 12.5%, 27% year-over-year. Can you maybe just give us a little bit more insight in terms of sort of how much relates to the acquisitions? And then on the sales and marketing investment that you referred to, John, just how quick can you -- should we expect to see returns on those investments?

[John E. Peller, Chairman & CEO]

Well, truthfully, I don't think most of the sales and marketing investment was acquisition related. And we've launched some new products across Canada and into the U.S., and we've had fair amount of startup associated with those. And as well, we've looked at consolidating more marketing support behind our larger brands. And so that -- I don't think it's fair to expect them to go up 27%, but I think at the level of plus 10%, 12% is -- reflects what we think is an opportunity for us to provide more opportunity behind our big brands. And what was the second part of your question there, Brian?

[Brian D. Pow, VP of Research & Equity Analyst]

Well, I was really just trying to understand as you make these investments in your brands, really how soon should we anticipate to see that top line growth benefit from that?

[John E. Peller, Chairman & CEO]

Well, I mean, first of all, I think our top line growth is benefiting. That's why we're growing ahead of market right now. And we see an opportunity to continue investing. And a lot of the marketing investment is social media based now. And we have a huge direct-to-consumer and hospitality experiential side to our business that continues to grow and strengthen as well over and above just the absolute dollars in marketing investments, and the 2 work very well together. So I can't predict beyond our ambitions. We had a very solid Europe growth at the top line. I expect it to do a little bit better this year than last year. And then I expect us to continue to grow slightly ahead of market, I mean, in the 3% to 4% range of organic growth is a significant achievement in the competitive market in which we play.

[Brian D. Pow, VP of Research & Equity Analyst]

Okay. When we look at the sales and marketing investments you made in Q4, would they have benefited Q4? Like, is that really what's, again, helping you on the top line? Or is some of the investment we're seeing in Q4 relate to more to future periods?

[John E. Peller, Chairman & CEO]

I think both. I think we had some big promotions in the Q4, but a lot of them are focused for the next year as well. And the growth is so broad, it's not just one brand, the Peller brand is doing very, very well. Our large VQA brands, Trius, Red Rooster, they're all performing strongly. We're off to a good start with our acquisition brands. Our Black Cellar and XOXO brands received some support in promotion. So it's really very much across the board and across trade channels, which is a very positive thing for us.

[Brian D. Pow, VP of Research & Equity Analyst]

Okay, great. And then just turning to again Wayne Gretzky, you said this year continues to look better than last year. Can you just comment more specifically in sort of how the various SKUs are doing and maybe what's working for you there? And what else you'd like to see in that area?

[John E. Peller, Chairman & CEO]

Well, I will tell you that we're very pleased with the performance of the VQA wine brand in Niagara and in the Okanagan. It's done very, very well. And it's nice to see the quality continues to get recognized. It trades at premium prices, and the quality of the wine is outstanding. And the wine continues to grow. And naturally, the whiskey in an early year of launch and growth. It's been very, very well received. And it's doing well at retail. We took prices up significantly at the start of the year. And the brand continues to grow, notwithstanding the increases in the price. We went from $34.95 to almost $40 on the base price. And I can tell you that the reception of consumers down at the distillery and winery is enthusiastic. It's really been positive. And like I said, our initiatives in the export market are off to a very, very good start, but it's way too early to make any predictions.

[Brian D. Pow, VP of Research & Equity Analyst]

Okay. And in terms of the export market, again, you said Chicago and St. Louis is where you've launched. Where else should we expect to see launch in the next fiscal or this fiscal year?

[John E. Peller, Chairman & CEO]

Well, knowing that Wayne has a lot to say where we go, we're following its favorite hockey cities. And he played in St. Louis, and Janet was from there. And in Chicago, he had a very close relationship with the Wirtz family. And they are hockey cities, but they were great opportunities for us because of our partnership, and we're trying to make sure we do a great job launching the brand and get as much learning out of the gate as we can. We have gotten very good distribution. And so far we're doing well. And I'm not a 100% sure, but we'd likely go west with our next market launch, but we're waiting to see how we do here first.

[Operator]

The next question is from John Chu with Laurentian Bank Securities.

[John Chu, VP of Research & Diversified Agriculture Analyst]

So just on the G&A, I'm just going to push on that a little bit more maybe if you can just talk on the employee compensation and benefits expense line. Can you maybe break down to what extent would minimum wage driving that higher? Or was there year-end bonuses and other benefits that drove that higher? I'm just trying to understand a bit of a run rate for that line? And then as well as for the other external charges, not sure what's in there, what drove that higher?

[John E. Peller, Chairman & CEO]

Well, I think for sure on the minimum wage, we've been explicit there's $800,000 of increased wage expenses for the partial year. And on a full year basis, it will be about a $3 million charge to our system. And we've strengthened our human resource requirements in a couple of critical areas. And then we've also had the offsets of the acquisitions and some charges related to reorganizing around them. But as we've grown, we've brought some more resources in. And we're particularly on the marketing and supply chain front, where we are investing in our systems and bringing in new skills and capabilities to help us be more effective there. So I think, this was a significant year of growth in our HR kind of capability. But I expect it to kind of plateau going forward.

[John Chu, VP of Research & Diversified Agriculture Analyst]

Okay. And then on the BC winery sales, the 3 that you acquired, how's that tracking this quarter on a year-over-year basis? And really since you've acquired, are you seeing growth in the sales for those 3 acquisitions on a year-over-year basis?

[John E. Peller, Chairman & CEO]

I don't have that number on the tip of my tongue here, so that I can't really comment. But I think, in terms of total revenue, last year, it was only an $8 million contribution to the top line. So it's still very early. And we're assessing some opportunities to invest in the wineries and to add some programs, but they were doing, growing at market when we bought them, and I suspect that that's exactly what they are doing right now.

[John Chu, VP of Research & Diversified Agriculture Analyst]

Okay, great. And then lastly then, just on the global wine juice shortage, I think, we're at a 60-year low. So maybe let's talk about how that's impacting you sourcing some foreign grape juice. Are you seeing prices going up? And then secondly, are you seeing the prices of imported wine going up as a result of that? Is it this year that you're seeing it? Or is it kind of delayed for next year? Just curious on the impact.

[John E. Peller, Chairman & CEO]

Yes, that's a good question. And I think the first thing to acknowledge is there is a ginormous amount of global wine available in the bulk wine market. And there are -- every year we seem to notice weather patterns kind of hitting one area, and just because mother nature's a huge part of the industry, that's increasingly common to see one area suffer from either cold temperatures or storm activity, fires. But even when that happens, the total amount of available wine does not put us in anyway at risk. And we have a great deal of flexibility as to where we source from. We obviously like to source for certain areas where we get the highest quality at the best value. So sometimes there are some temporary blips. But as it currently stands, I don't really feel that there's any issue with shortages. I think when you see prices go up, it's always because some [indiscernible] in hot demand, like for example in the last few years when Pinot Grigio became so popular, it was harder to get it at the prices we want, but eventually the growing community catches up with that and a commodity type of pricing environment will take effect. So I don't think right now we have any concerns with it. And there is good supply available for us. We have a great network of partners around the world that we've worked with for 25 years. It's a very professional and technically data-driven supply chain environment right now. The quality is better than it's ever been. And the value is quite significant which is why our local markets in Niagara we focus on premium and super premium and ultra-premium segments, and not the value segments. So it is something we pay close attention to. And right now, in our view, the markets are very positive.

[John Chu, VP of Research & Diversified Agriculture Analyst]

But are you seeing the imported wine prices going up? So that means that it's probably better for you because consumers may now choose to buy your wine, the domestic wine, versus the now higher-priced wines from Italy and France? And were they were hard to set by the wine shortage?

[John E. Peller, Chairman & CEO]

I mean, I don't want to come across. It's totally cynical about this, but I am. No matter what happens in their markets with bad crops or whatever, their prices never change. And even when their foreign exchange moves 20% or 30%, their prices never change. And they are heavily subsidized. They all produce way more wine than they need. So their government is always looking to support moving surplus wine out of the market with some export marketing subsidy associated with it. And once they have market share, they don't ever want to give it up. And for some reason, we do not see responsive pricing to foreign exchange and/or changes in control. It supports what I've always said that these industries are incredibly valuable to their countries. They put an enormous amount of investment into them, and they are very dependent on their export sales. And they invest more in their businesses in our market then we get support from our government in our own. So this is an issue we're addressing with governments as we go forward and hope we'll get better policies going forward.

[Operator]

[Operator Instructions] The next question is a follow-up question from Amr Ezzat with Echelon Partners.

[Amr Ezzat, Special Situations Analyst]

Just a couple of follow-ups. On your craft whiskey products south of the border, I know it's early days, but can you speak to the margin profile there relative to the rest of the business?

[John E. Peller, Chairman & CEO]

The margins are exactly where we kind of want them to be. They are very positive. They are strong. It is -- and I think critical to that is it's a premium price product. We're not at the $28 level where the base value brands are. We have a -- we don't have the economy of scale that the large brands have. But we make up for it in premium pricing so the margins are strong.

[Amr Ezzat, Special Situations Analyst]

Then any updates on your Port Moody property that you can provide us with?

[John E. Peller, Chairman & CEO]

We're still very active on the file. And there are a lot of positive indications we will do well going forward. It's a hugely bureaucratic planning environment that we're kind of struggling with there. And having said that, I think the 5 issues or so we have left around sewer lines and top-of-line creek adjustments, and we're down with some very nitty-gritty issues there. But until the chicken gets across the road, we have to be careful about not trying to share people that certain things are going to happen the way we want. We're still confident, and we're working very hard on it. And we're optimistic it will be something of value for the company.

[Amr Ezzat, Special Situations Analyst]

Then I think in the past you spoke to it's probably worth anywhere between like $20 million and $30 million or a little higher. Is that number still good? Or do you care to comment on that or?

[John E. Peller, Chairman & CEO]

I mean, I suspect that, that could be the low end of the range. But having said that, it is only dependent upon a positive outcome on the zoning. So it's certainly a significant value, which is why we indicated that. The market in Western Canada and Vancouver, in particular, is a very strong market. It only continues to go up. And we have good support in the community for our proposal. And at the council level, at the mayoral level, it's just a matter of trying to work all the issues through. And as I said, we're working as hard on it as we can.

[Amr Ezzat, Special Situations Analyst]

Understood. Then how's the CFO search coming along? And just to be clear, I'm not suggesting that Pete's isn't doing a great job?

[John E. Peller, Chairman & CEO]

First of all, Pete is doing a great job. That is a certainty. But we're well into our search, and the pool of candidates is exceptionally strong. And we expect that we'll have some news in the short to medium term here.

[Operator]

The next question is a follow-up question from John Chu with Laurentian Bank Securities.

[John Chu, VP of Research & Diversified Agriculture Analyst]

Just 2 follow-up questions. First just on the -- before your discontinuing some of the underperforming brands, I'm just curious, where you are with that? Are you still discontinuing some more brands? And just the general outlook for that?

[John E. Peller, Chairman & CEO]

Yes, I mean, for sure there was a significant effort at the start of the year around that. I mean, we obviously have a protocol in our supply chain that constantly reviews our scan for slow-moving products. And I think in support of Brendan and Randy, they've put a great deal of discipline into that effort so that you're not always kind of waiting every 2 or 3 years to do a major cleanup. You're being progressive as you go. I'm extremely pleased with what they've done there. And there we have so many SKUs. I mean, we're probably up to 600, 700, 800 SKUs in total in the company so that in order to get the economies that we need to be price-competitive at value price points, we have to be progressive. And at the same time, the ultra-premium and premium categories are lots of small-moving volumes. So we've had to learn to suck and blow at the same time at this, and that's the real art and science behind it. And I really think that they've done an outstanding job.

[John Chu, VP of Research & Diversified Agriculture Analyst]

Okay, great. And then just secondly, just maybe an update on the grocery outlets for you and how that's coming along from the sales perspective?

[John E. Peller, Chairman & CEO]

Yes, I probably should have highlighted that earlier. The system is incredibly complex. I could dare try to explain to you all the changes that have been made. But the top line story is that of our 103 or 104 licenses, we agreed to move 30 retail stores that we have in grocery that were outside the grocery stores cash register system to inside the center of the store. And when they went inside the center of the store, they were co-located with beer. And the grocery store owns the beer part of the license, and we continue to own the wine part of the license. I think we're almost completed now, yes, where 28 of the 30 licenses are -- have been actuated. And the volumes as expected have gone up. And then as a result, so have the taxes. So you recall when we went into the center of the store, we had to give up 25% of our shelf space to other wines in the region and agreed to a higher tax formula. So that net-net, we're kind of coming out where we were prior to making the move at this point in time. And naturally, we're back with the government trying -- they've planned subsequent tax increases on us as well. They were prepared to wait and see how things went before they implemented them. So there is a dialogue around this. But like all things, there are pros and cons. Consumers like purchasing in the center of the store. They enjoy the opportunity to buy wine and beer together. And we've seen the volumes increase in the system, but the margin gain we would have hoped for has been offset by tax increase. So that's about the best summary I can give you.

[Operator]

There are no further questions registered at this time. I would like to turn the meeting back over to Mr. Peller.

[John E. Peller, Chairman & CEO]

Thank you so much. So our AGM -- what is our date for our AGM in September?

[Peter B. Patchet, Interim Chief Financial Officer]

September 12. September the 12 [indiscernible].

[John E. Peller, Chairman & CEO]

Wednesday in that week. Hopefully, we'll get to see all of you at our AGM. And on the 12th, we're having at Gretzky this year. And if you can't make it, don't hesitate to call us anytime with questions. Hope you enjoy your summer, and we look forward to speaking with you soon. Thanks very much.

[Operator]

Thank you. The conference has now ended. Please disconnect your lines at this time, and we thank you for your participation.