Andrew Peller Ltd

TSX:ADW.A

Earnings Call Transcript 2021-Q4

[Operator]

Good morning. My name is Colin, and I'll be your conference operator today. At this time, I'd like to welcome everyone to the Andrew Peller Limited Fourth Quarter and Year-end Fiscal 2021 Results Conference Call. [Operator Instructions] I'll now turn the call over to Mr. Steve Attridge, Chief Financial Officer. Please go ahead, Mr. Attridge.

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

Thanks, Colin. Good morning, everyone. Before we begin, we 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 over to John Peller, Chief Executive Officer.

[John E. Peller, Executive Chairman, President & CEO]

Thank you, Steve, and good morning, everyone. It's great to be with you. I'm sitting in my office in Burlington, and we have a beautiful summer day here. And we're definitely feeling great about returning back to a normal life as the COVID policies ease and we start to reengage with each other. I had the opportunity to get our executive management team together on Monday night this year down at The Riverbend Inn, which we just purchased. It's the first time as a team that we've been able to be together now in more than a year. And I can't tell you how gratifying that was.We've spent more time with each other than we've ever spent in our life. And having said that, doing it virtually, I'm sure you can all relate to the fact that it's nowhere near as enjoying the company of each other. We had a great night, and we celebrated what has been a very, very great year for our company. And obviously, the strangest year of business that we've ever experienced. Our results, in fact, were very positive for the year. We managed to increase our sales 3% for the year and increase our net earnings by 18%. And on the strength of that, we've increased a 10% dividend increase and a testament to the strong performance. It also reflects our confidence in our positive future and our commitment to enhance shareholder value as we go forward. I just want to make sure that you appreciate what a difficult year this has been for our company. And first and foremost, our focus was on the health and well-being of all our employees. A company of 1,600 employees and almost 80% of our employees work throughout the entire year, either in our facilities or in our retail stores. They definitely were our frontline heroes, and we invested heavily in everything we could do to ensure their health and safety. And I've never been more proud of our management and team for all they did, and we communicated carefully with everyone throughout the period.It was a very, very unusual year despite the fact that it looks like just another plus 3% in sales in another year, plus 18% in earnings. That in no way reflects the challenges that we faced. A great portion of our business trade channels were closed. We lost all our restaurant business. We had major closings at our 9 estate wineries. In our Hospitality division, all our export sales, our duty-free sales were reduced pretty well to nothing. And then there was a huge amount of demand that came through our retail channels and particularly in the early part of the pandemic, the LCBO was slow to open. They had difficulties with their union and had partial service in some stores. They actually closed stores. And if you recall, they actually closed their entire system on Mondays. So that we had a very, very significant demand in the March through May period, which is the one we are just finishing now.And naturally, we benefited from that. And in addition to the challenges of these trade channels that we're toggling open and close in various levels of degree, it impacted severely the product mix that we sold as well. All the channels that focused on premium and ultra-premium products were closed, and naturally, the channels that were more value-priced products actually overachieved. And a lot of those, and particularly the 4-liter bag-in-box, which as a segment was up over 30% over prior year, and it is the largest segment in the retail channel. It naturally has lower margins. And we were impacted by those trends as well as the opening and closing of the trade channels. So all in all, I think the other thing that's worth remarking is that while all this challenge was coming in, and we had to expedite product from all over the world, and we had a very, very disrupted supply chain system to manage while dealing with all of this change. We were still very focused on all the core strategies that we know will allow us to grow as we go forward. We invested more capital in this last 2, 3 years than we've ever invested before, not just in our ERP system, but in our operations, in our vineyards, in our state wine group so that while it was far from business is normal and while we still produced results that reflected increased revenue and earnings, we were busy investing in our future, and that's why our meeting on Monday night was a great way for us to acknowledge, be together and feel great about our future. So I'm going to turn things over to Steve right now, and then I'll have a couple of comments to make at the end. Thank you. Over to you, Steve.

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

Thanks, John. Sales were $393 million for the year ended March 31, 2021. That's up 2.8% from fiscal '20. Sales growth across provincial liquor stores and the strong contribution from the success of our recently launched e-commerce portal were partially offset by declines in revenues in our export, licensee and hospitality trade channels due to the COVID-19 pandemic.When the pandemic was announced in March of 2020, the company saw an increase in sales as a result of higher consumer purchases due to the uncertainty around trade channels for beverage alcohol staying open. Furthermore, given that pandemic was announced in March of 2020, it had minimal impact on the company sales channels during fiscal '20. As a result, sales in the fourth quarter of 2021 decreased 3.6% compared to Q4 of 2020. As we've communicated over the last year, our gross margin has been negatively impacted by purchasing patterns and other factors created by the COVID-19 pandemic. These include higher imported wine costs, an increase in consumption of lower margin products and an overall change in sales mix as export, licensee and hospitality channels were impacted due to COVID closures and travel restrictions. In addition, we experienced increased distribution costs related to the launch of our e-commerce platform and higher co-packing costs in our new and growing refreshment brands, including beer, cider and ready-to-drink products. We expect our margins will strengthen in post-COVID periods as markets return to more historic patterns. Our sales and admin expenses were lower in fiscal '21, as we made the deliberate effort to manage costs by temporarily reducing advertising and promotional spending and lower staff during the pandemic.In the fourth quarter of fiscal '21, we began to increase our staffing and marketing efforts in anticipation of more normal markets returning as the impact of COVID-19 eases. With the increase in sales and reduced selling and admin costs, our EBITDA increased to $63 million for the year ended March 31, up from $61.5 million last year. Net earnings for fiscal '21 were $27.8 million or $0.65 per Class A share, up from $23.5 million or $0.55 per share in fiscal '20. Now turning to balance sheet. You'll note that in December we restructured our debt facilities, increasing our borrowing limit to $350 million and combining our previous credit lines into 1 facility. Our bank indebtedness at the time when the transfer was made -- sorry, our bank indebtedness at the time was then transferred to a larger single facility. As the changes constituted a modification of our long-term debt, we recorded a gain of $2.3 million net of financing costs in the third quarter of fiscal '21. With this change, total debt was $174.5 million at March 31, '21, compared to $165.2 million at the prior year-end. The increase was largely due to the $10 million paid to acquire the assets and properties of The Riverbend Inn and Vineyard on February 26, 2021. At year-end, we had capacity on our revolving credit facility of approximately $175.5 million. We believe this strong liquidity position will provide the capital and flexibility to meet our growth objectives for the foreseeable future. As you may know, over the past year, we implemented a new and highly scalable enterprise resource planning solution, an initiative we are confident will greatly benefit our production, logistics and delivery systems going forward. This system successfully went live in early February, and we expect further investments in new systems will reduce going forward. In summary, as John mentioned, we're pleased with our results for fiscal '21. We remain confident in this track record of solid performance will continue. Thanks very much for your time this morning, and now I'll turn things back to John to wrap up.

[John E. Peller, Executive Chairman, President & CEO]

Thanks, Steve. Just a couple of quick comments. As we look towards the completion of this next year that we're in, it's important to note that this will be another COVID business-disrupted year. And in particular, we expect a soft first quarter. And the softness in this first quarter will reflect that the incredible pantry loading that we had in March, April and May of last year. On the revenue side, we'll fall below that. There's no way we can achieve the extraordinary numbers that we did in that first quarter last year. And secondly, even though we had strong revenue last year, we had a reduced SG&A, as we had significant layoffs and cost reductions that were imposed as a result of COVID. So this year, we'll have a full SG&A against a reduced expectation of revenue as a result of that load in. And additionally, we've had to endure some estate winery and restaurant estate closures as well that we didn't anticipate in these first 2 months. All that being said, we still plan to increase our revenue for the year. We expect growth in revenue, and we expect growth in our earnings. And as I said, we've been busy investing in revenue growth in our business. I mean I mentioned to you that we purchased The Riverbend. It opens actually tomorrow, and we hope you get a chance to come down and stay with us. When I was there on Monday night, I happened to overhear, we had 1,200 calls on Sunday for people who wanted to come and visit our wineries. So naturally, our winery experiences now all our hospitality programs. Tourism visitation are booked solid for the next 3 to 4 weeks, and there's no way we can meet the demand. And we'll be still operating under some restricted guidelines for at least the next month or so. But we're very, very confident that as this business returns, it will contribute to what I expect to be a very successful year for the company. We have also entered several new business categories. Our core wine category, both wine under 15 and our ultra-premium business, are both poised for growth as we go forward. And additionally, we've been investing in the ready-to-drink segment that is doing -- is very robust these days. We've had a very, very strong brand achievement with our No Boats, cider and seltzers, which are performing very, very well as we speak. And we have some more innovations. We have wine spritzers and cocktails that we'll be launching as well this year and in the next year. And we have definitely some nice growth coming in that category to complement our core categories. Additionally, our entry into spirits is now starting to perform very, very well, not just our Gretzky whiskey, which has earned several new package sizes or launches of our cream whiskeys, both in the Gretzky brand, but also our Panama Jack brand have performed very, very well and are growing at exceedingly the above the category growth rates. And as I have tried to emphasize as these -- as we return to a post-COVID new normal, our premium trade channels will be opening up. And we have a lot of exciting things happening in both at the estate level, in retail. With our wine clubs and our tour programs, we're going to do very, very well there. I also -- you've heard that we've had a very successful launch of an e-commerce platform, leveraging the strength of the new ERP system that we have put in over the last 2 years. It was the largest CapEx that our company has ever undertaken at around $30 million to put that ERP system in. And our e-commerce system has performed very well. It's obviously a new pioneering world. I'm sure you've all heard that e-commerce is one of the major growth engines in all consumer packaged goods right now. And we are investing heavily because we know that will be a critical trade channel for our future. And lastly, I'd point out that I think that the M&A field, mergers and acquisition will be quite active in the next few years. And larger companies continue to perform well. And we have a very strong balance sheet and availability to access capital. We are very diligent in terms of the opportunities that we look at. And we're excited that the prospects to strengthen our growth over and above the organic growth that we are going to make happen with some mergers and acquisitions opportunities as well.So with that, I'm happy to turn the -- open the floor for questions, if there are any.

[Operator]

[Operator Instructions] Your first question comes from Amr Ezzat from Echelon Partners.

[Amr Ezzat, Analyst]

Both of you sort of touched on it, but can we go back to the gross margins and the different drivers there? I'm assuming channel and product mix weren't very different over the past like quarter or 2. So I'm just like wondering what are the dynamics driving the decline this quarter relative to the last couple. I'm sure there's like fixed cost leverage in there, but can you speak to the other drivers as we look at fiscal 2022?

[John E. Peller, Executive Chairman, President & CEO]

Yes. I think quite simply the answer is that premium products in the channels that they were most dominant in were reduced significantly. And as I said, our estates are still not open as we speak. So that the channels that had higher gross margin products have been heavily negatively impacted by COVID and the channels where the margins are lower in retail have exceeded their normal revenue volumes. And those are value-priced lines and certainly 4-liter products. And additionally, the RTD has kind of lower gross margins as well. So that's really the long and the short of it. And I think there'll be a bit of a drag on this as we go through a return to normal over the next 9 months. And then I expect things to revert back to what we had seen previously as we exit and enter the post-COVID normal.

[Amr Ezzat, Analyst]

Great. That's good color. So -- okay -- so switching gears to SG&A. John, you mentioned, okay, obviously, you guys like spent your 10%, I think, lower year-on-year. And now I think you said in your prepared remarks back to normal spend, but there's also new moving parts with the addition of Riverbend Inn. So when we're thinking about SG&A in fiscal '22, would we go back to fiscal 2020 levels? Are you guys like anticipating to spend a little bit more?

[John E. Peller, Executive Chairman, President & CEO]

No, I think that we will still be a little bit below our -- as a percentage of sales, what we were in fiscal '20. And I know we'd creeped up over 27%. I think we're going to be more in the 25.5% level. And then -- and we're -- we've had a lot of reasons for the SG&A increase in that the easiest one was our ERP system. We had a lot of double hiring to cover people who were allocated to work on the project, and it was a significant administrative undertaking for us. And as well, we entered through trade channels, spirits, RTDs. We launched a new e-commerce system so that there were SG&A costs that were investments in entering these new businesses. Well, I think we've managed it well. We know that there's efficiencies and opportunities for us as we go forward. And in the end, it's all about balancing your ability to grow and managing your bottom line responsibly, but our business plans for the next 3 years are focused on our growth, and we're excited about those growth opportunities.

[Amr Ezzat, Analyst]

Great. On the CapEx, I guess, like with the ERP now live, should we expect the intensity of your CapEx to go down significantly year-on-year? Is that fair?

[John E. Peller, Executive Chairman, President & CEO]

I don't think that is fair. I think we still have an expectation that we'll be investing capital at current levels in the kind of mid-20 million range. We are investing significantly in some new vineyard development, which is very capital intensive. We're doing some improvements to some of the estate wineries, things that we have put off to allow us to focus on our ERP investments. We've got some catch-up to do in other places. Certainly, in our operations, we're having to add some capacity as well to accommodate our growth so that it's something we will manage responsibly. There is a lot of demand in our system to accommodate our growth expectations. And I'm happy to at least acknowledge that all the assets that we've purchased over the last 10, 20 years have increased significantly in value as well. It doesn't show on our balance sheet, but a lot of these assets that we have in our company have had a material increase in value.

[Amr Ezzat, Analyst]

Great. Maybe one last one. On the Riverbend Inn -- so is the long-term plan for you guys to run the hotel yourselves? Or can we see you guys like sell it and keep the 17 acres of vineyards? How do we sort of think about that? So then maybe you could give us an update on the M&A landscape. You spoke to investing more heavily in M&A over the next like 2, 3 years. Like what are -- how are things like coming out of the pandemic, I guess, with sellers and their expectations?

[John E. Peller, Executive Chairman, President & CEO]

Well, first on the Riverbend, we have been increasing our investments in hospitality over the years as part of our estate winery tourism business. We run 7 restaurants and tour programs now. We have corporate group hospitality sales teams. We run events that are everything from concerts to food festivals. And our capability in the hospitality sector of the ultra-premium wine business is considerable. So that in adding the Riverbend Inn, it really is an extension of hospitality and the services we're already supplying. So I think in the short term, we're going through an evaluative phase as to what our options are in terms of how we might invest more into The Riverbend Inn. And while we'll complete that review in the next few months and report back to you, but I see this as a potential area for growth for the business.On the M&A side, I think it's -- we're looking at the different segments and the opportunities that they provide. And we're still in a very, very strong position to make smart acquisitions on the wine side of our business, both in premium and value products. And you just have to be very disciplined around pricing when you make those acquisitions. I think in the RTD segment, in general, that is a very, very overheated segment right now. And small businesses are selling their businesses with revenue multiples, not earnings multiples. And so we'll be very thoughtful. I think, importantly, we didn't sit on our hands watching this darning work take place. We entered, and we've entered successfully. And we're demonstrating to ourselves that we can grow significantly organically. And at the same time, I expect that through all this incredible increase in marketing activity in the segment that there are going to be some people who will be looking to exit, and we'll definitely be evaluating opportunities there as well. So we expect to be very, very engaged in opportunities across the board.

[Operator]

Your next question comes from Nick Corcoran from Acumen Capital.

[Nick Corcoran, Equity Research Analyst]

The first question is just to do with gross margin. I think you called out that distribution costs through e-commerce and co-pack increased the gross margin. Can you give any indication what the dollar impact in the quarter was from those 2 things?

[John E. Peller, Executive Chairman, President & CEO]

Steve?

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

I really don't have that number, Nick, on my -- available to me right now. I mean we grew significantly in e-commerce. And yes, delivery costs are very, very significant. And I think we're in a phase now of refining our policies around how we provide service in a cost-effective way. And co-packing, the only thing I can say about co-packing is that there have been a significant increase in the amount of facilities that are now offering co-packing services so that there are more and more opportunities to lower costs in the co-packing space because of the increase in supply there. But unfortunately, I don't carry that dollar number in my head. But suffice it to say that it is a significant part of that business. We always have the opportunities to add those packaging facilities to our business at some point. It's certainly part of our thinking as we are going forward, and it will be an area where we invest a lot of time and attention evaluating what our best options are going forward.

[Nick Corcoran, Equity Research Analyst]

Good. That's helpful. And then maybe just turning to Q1, can you give any indication where you've seen kind of quarter-to-date in terms of revenue and how gross margin should track?

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

Yes. I think basically, our revenues look like they'll be a little soft to last year, and it's what we anticipated as well. Like last year, we had like increases of 30%, 40% type thing through the retail channels, and it was extraordinary growth. We had trouble finding product to -- in our supply chain system to meet the demand. So we're up against that. And naturally, the gross margins that we've had in the last 6 to 9 months, they're going to continue because we're operating under the same trade channel closures and so that the gross margins will likely follow that same pattern.Having said that, we're supposed to open up in the next week or 2. And we expect that we'll make up for some of that volume in the rest of the year. Whether we get all of it or not, it's not clear. It's not something we're at all concerned about. We're very much focused in the fact that we have great growth opportunity in all segments of our business right now. And we'll deal with COVID disruption for another year. We don't know how quick the travel industry will come back. It's still unclear how quickly restaurants will reopen and how many have been closed for good and whether the impact of people eating at home more will make them less inclined to go back to restaurants. And having said that, we just basically toggle 1 trade channel on and the other one off. If restaurant volumes go up, it's likely retail sales will start to go down a bit. So they're very difficult trends to kind of predict the timing of, and some of this will be some new learning as well in terms of what behaviors have changed more permanently. I mean, we're pleased that, as we told you earlier that, that the 4-liter bag-in-box has had a whole new cohort of consumers who are very, very pleased with the convenience and the quality of those products. And we're -- we expect to benefit from that going forward. And we're 100% confident that the premium wine industry will respond strongly. We don't know the timing, and we can't be sure about exactly how the trade channels return to their new normal. Sufficed to say we just know that they will, and we're investing to grow in all of them.

[Nick Corcoran, Equity Research Analyst]

Great. That's good color. And then maybe switching gears to RTD. How have you been or how do you feel about the performance of that category? And then relative to the broader category as well?

[John E. Peller, Executive Chairman, President & CEO]

I'm sorry, Nick, could you repeat that?

[Nick Corcoran, Equity Research Analyst]

Yes. What do you think the performance of RTD and then relative to the category as a whole?

[John E. Peller, Executive Chairman, President & CEO]

I think our performance has been very, very good. And I think, first of all, the RTD category is a very significant category. In North America, it will become the second largest beverage alcohol category at the end of this year. So there will be first beer, second RTD, third wine, fourth in spirits, and that's by volume. So it underscores that this is a very, very significant category. And even though it's already large, it's growing in the 30% to 40% range, which in a mature category is quite remarkable.I mean I think the first -- the other thing to notice is that, that people are entering this category instead of it being kind of the domain of 1 segment, all beer people are in it, all spirit people are in it, all the wine companies are in it. The cider companies are in it. So that this has become an incredibly intensive engagement of new products. Like I think there were something like 2,000 applications at the liquor board this year, and they took like 25 or 30 new products. I mean there's an intense level of competition, and I think you just got to be good with your brands and smart about what segments you play in. And it will be very interesting to see how this category evolves going forward. We have some great wine entries. Our cider and seltzers entry into No Boats is a fabulous brand. And we know brands like Gretzky can compete effectively in this segment as well. We like the fact that e-commerce, our e-commerce virtual channel allows us now to participate in this segment in ways that we couldn't before because we couldn't break through kind of distribution barriers either at the beer store or at the LCBO. So it's definitely an octagon in terms of the competition that's going on inside the category. It's not our core category, so we can participate intelligently and have it strengthen our core products as opposed to -- we're not betting the farm in RTD by any stretch. We're just playing smart and taking growth that we know is there with brands that we know that will stay strong. And it's really kind of a testament to our business model. We have great operations supply chain capability that allows us to participate in several categories. We have a national sales and marketing capability that allows us to market to every aspect of the retail and customer network. So we're just leveraging those strengths and trying to do it in an intelligent and sustainable way.

[Nick Corcoran, Equity Research Analyst]

Then just 1 last question for me has to do with the land you have in the lower mainland. It's -- I see it's still an asset held for sale. Can you give any update on the sale process for that?

[John E. Peller, Executive Chairman, President & CEO]

Yes. We have 2 pieces of property there, Nick. One is in Port Coquitlam. And it's for sale for, I believe, around $9 million or $10 million, and it's received quite a bit of attention. Won't be any issue about its disposal. The larger piece is the 5-acre piece in Port Moody that has been rezoned for comprehensive development. And I'm sure you're familiar with the guidance that we've given on that in the past.The development community for these types of projects was very, very quiet through the pandemic for obvious reasons. People wanted to see how financially these things would play out because the capital required to develop the Port Moody is in the several hundred million dollars. And we are engaged with a number of people right now. The -- both the commercial and residential values of real estate in Vancouver have increased significantly throughout this period. So we're feeling very, very positive about our ability to commercialize that investment in the next year or 2.

[Operator]

There are no further questions at this time. I'll turn it back to Mr. Peller for closing remarks.

[John E. Peller, Executive Chairman, President & CEO]

Okay, everybody, we wish you all a very pleasant summer with your families and friends, please take time to come and visit us in the Okanagan or in the Niagara Peninsula. And we look forward to engaging with you at our AGM in September. Have a great, healthy and safe summer. Thanks very much.

[Operator]

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