Earnings Transcript for ADWPF - Q4 Fiscal Year 2024

Operator: Good morning. My name is Joanna, and I will be your conference operator today. At this time, I would like to welcome everyone to the Andrew Peller Limited Q4 and Year-End 2024 Financial Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. I will now turn the call over to [Jennifer Smith], Investor Relations. Please go ahead.

Unidentified Company Representative: Thank you, and good morning. Before we begin, this is a reminder that during this conference call, management may make statements containing forward-looking information. This forward-looking information is based on a number of assumptions and is subject to a number of known and unknown risks and uncertainties that could cause actual results to differ materially from those disclosed or implied. Please refer to the Company's earnings release, MD&A, and other security filings for additional information about these assumptions, risks, and uncertainties. I'll now turn things over to John Peller, Chief Executive Officer.

John Peller: Thank you, Jennifer, and good morning, everyone. Great to be with you. I'm joined by our CFO, Paul Dubkowski. And we are happy to discuss the results of our fourth quarter and our year ending March 31. We've followed for the last two, three years, the journey that our company has made through the COVID pandemic and the inflationary supply chain disruption that followed it and taken many steps through that process to improve cost savings initiatives and are operating our business model, and it's really proud for me to acknowledge that our company has performed admirably, and we are now returning to historical levels of sales. We are actually hitting an all-time sales level at the close of business this year. We are back to improved margins and an improved EBITDA performance. So overall, we are pleased. And now having seen that the Bank of Canada has lowered the interest rate for the first time, I think it kind of signals the end of one era and the beginning of another. We reported a solid, solid fourth quarter to close out our year, and we delivered meaningful margin expansion as well as significant growth in our EBITDA. Our gross margin for the year was up 200 basis points to 39%, still below our target of 41%, 42%, which we expect to achieve over the next two years. We also delivered EBITDA of just over $50 million, which was up 32% or $12 million above the previous year. And I know Paul will have lots to say, to provide some more color on that. Importantly, I just want to acknowledge it took a great deal of work and effort from our team to navigate through this period, and I want to thank them for their commitment and execution. There is no doubt we are moving forward on a stronger platform and with a stronger company. From just the topline sales revenue, I said we've achieved a high watermark in revenue. Our sales revenue was slightly up just over between 1% to 2%. And this is definitely top-quartile performance in not just Canada, but in North America. I know in Canada, eight of the top 10 wine companies had sales declines. I index for people the reality that Canadian Tire sales just reported are down 10% for the year, and they are a very, very good proxy for how consumers are feeling and spending in our country. I noted as well recently that LVMH, which is the world's leading CPG firm. Their revenue is down 16% for the year, and obviously, they skew very heavily to the ultra premium discretionary segments. And while we serve that market as well, we are equally balanced with premium and value and economy products in our wine kits so that part of our resiliency is being able to meet consumers at all price levels and has been pressure on premium and ultra-premium price points we've actually picked up business and strengthened in the value/value premium. So our sales performance was really solid across all our segments and trade channels. We saw our global vendors, which is our consumer wine kits division have a great bounce back year in revenue. Our sales were strong at liquor stores and in the grocery stores out west. And here in Ontario, our restaurants and hospitality locations did well. And while there is some slowing down in global travel these days, our export channel had a very, very strong year, and we are very, very pleased with that. The real only softness we saw this year was kind of visitation to our state wineries and we just think that reflects consumers being a little more cost conscious with some of their discretionary spending. So all in all, it was a very successful fourth quarter and fiscal year. I did want to comment. People have asked about our crop this year in British Columbia. We have indicated to people that as a result of very, very cold temperatures in January, it went down to minus 34 for four days, which is the coldest temperatures they've recorded in British Columbia in 50 years that there was widespread bud damage, and we will be picking less than a 5% crop this year. As a result, we have been working hard with the British Columbia Ministry of Agriculture, Ministry of Finance and with the Premier, and we've put in policies that will allow us to bring in replacement products that will receive the same access to market and support that our locally grown products would have received so that effectively, we can get through the year with the same amount of wine we would normally have receiving the same privileges and without any financial disruption. We've experienced this twice before in our life in 2002 and 2006. We implemented the same government policies. They are temporary until the crops are returned to normal health. And we got through that process relatively unscathed, and we expect to do that again. Naturally, we are focused on some significant planting that will occur over the next two years in the Okanagan Valley. We received both insurance and government support to help us with the capital cost of that replant program. And like I said, I think we are going to manage through it very, very well. It's happened to us before. It will happen to us again, and it's a sign of the resiliency of our industry that we can manage these challenges without any financial hardship. As far as Port Moody goes, our real estate in Port Moody. We are actively engaged on this file, and I remain confident and optimistic that we are going to achieve a very positive result. We are in discussions with several groups right now. I think I mentioned to you that we are making some amendments to the approvals that we have, not to change anything around densification, but there was an office component in our development that we are going back to convert to housing rather, which is what, in fact, the city wants. So really everything that is happening on that file is positive. It remains a priority, and we are actively engaged in monetizing our position there. A lot of people have noticed in the news around Ontario retail modernization. It's a very active file that we have. We are very, very pleased that the government is committed to helping strengthen and grow the Ontario wine industry and investment in the Niagara region. We expect to receive support. We know that the addition of retail stores are an opportunity for us, but that also, we are pleased that there is a commitment to ensure that our retail licenses are an integral part of any retail modernization strategy. So we expect to grow our business significantly in the Ontario market over the next five to 10 years and not only in the grocery retail environment, but in the LCBO environment and through direct-to-consumer and e-commerce trade channels as well. So with that, I'm happy to turn things over to you, Paul.

Paul Dubkowski: Great. Thanks, John, and it is great to be here with everybody today. Turning to our results. Sales in the fourth quarter of fiscal 2024 increased $7.3 million or 9.4% to $85.0 million for the quarter. This increase was driven by ongoing strength in sales at provincial liquor boards, growth in our hospitality channels, including restaurants and ongoing growth in our export business. These results were further supported by a $5.8 million full-year benefit related to the revised Ontario VQA Support program. For the full-year of fiscal 2024, sales increased $3.7 million or 1% to $385.9 million. Similar to the fourth quarter, the increases in sales for the year were driven by growth across key channels, including provincial liquor boards, restaurants and hospitality and export partially offset by softness in our estate business due to fires in the West and some moderation in our direct-to-consumer channels due to economic pressure on consumers. Growth for the year was supported by the Ontario VQA Support program, as previously mentioned, and also impacted by the repeal of the excise exemption discussed in previous quarters. When adjusting for these items, sales would have still increased into the prior year. A number of other positive factors supported growth in the quarter and for the full-year, including growth in market share across our key national markets and price increases implemented throughout the fiscal period to help offset ongoing inflation and supply chain pressures. Moving to margins. Margins in the fourth quarter of fiscal 2024 ended at $35.6 million, up $13.5 million or 61.2% to the prior year. For the full-year, margin landed at $150.6 million, up $8.7 million or 6.1% to the prior year. Margin as a percentage of sales for the full-year, fiscal 2024 was 39.0% an increase over the prior year at 37.1%. Margin in the fourth quarter and the fiscal year benefited from targeted cost savings programs and from the inclusion of the Ontario VQA Support program, as described previously. We continue to be impacted by inflationary cost pressures in imported wine, glass bottles, packaging materials and international freight and shipping charges. In response to these margin pressures, the company has implemented price increases and is executing numerous production efficiency and cost savings programs aimed at enhancing operating margins such as renegotiating freight rates for raw materials and evaluating alternate sourcing of glass bottles and other components. During fiscal 2024, these programs resulted in $9.3 million in cost savings. These inflationary cost pressures we have faced over the last few years have now stabilized, and we continue to sell through inventory that was built up at higher cost levels. As we look ahead, we are confident these cost savings measures, and production efficiency programs combined with additional reductions in our cost inputs are sustainable elements that will positively impact our margins in the long-term. Sales and admin expenses landed at $35.8 million for the quarter, up $12.5 million or 53.6% to the prior year and at $109.8 million, up $5.9 million or 5.7% to the prior year for the 12 months ended March 31. As a percentage of sales, expenses were 28.4% in fiscal 2024, up from 27.2% in the prior year. Sales and admin expenses included a retiring allowance and consulting agreement as part of John's retirement and transition and legal and advisory fees incurred in connection with these agreements, as previously disclosed. When adjusting for these one-time non-operating expenses, sales in admin would be at $100.3 million, down $3.6 million or 3.5%, landing at 26.0% of sales compared to 27.2% in the prior year. This improvement in SG&A is due to labor productivity and savings initiatives implemented across the business. EBITDA landed at positive $9.3 million and $50.3 million for the three and 12 months ended March 31 compared to negative $1.2 million and positive $38.0 million, respectively, last year. We are confident that the cost savings and productivity and labor efficiency work we have undertaken will continue to deliver growth in bottom line results as we move forward. Interest expense was higher for the year due to increased debt levels and higher interest rates. We believe our new credit facility; interest rate swaps and future interest rate cuts will continue to reduce interest costs going forward. Turning to our balance sheet. Inventory for the year ended at $192.5 million, down $16.7 million from $209.2 million, representing an 8% decrease to the prior year. The decrease is due to the organization's focus on optimizing inventory and improving our working capital. Total debt remained consistent at $208.3 million compared to $208.1 million at the end of fiscal 2023. At March 31, 2024, there is capacity on our revolving credit facility of approximately $66.7 million with shareholders' equity standing at $5.56 per Class A share. Thank you for your time this morning, and I'm now going to pass back to John.

John Peller: Thank you, Paul. So in closing, it was a solid year for our company. And as we look ahead to fiscal 2025, we do so with a real sense of confidence and optimism. We're well aware that there are some challenges and softness in our short-term. So from a topline performance, we're relatively conservative on a kind of flat market for the remainder of the year. However, we still do expect to have above category revenue. As we've always been focused on improving our margins still, Paul referenced the 9.3% yet we achieved in cost savings this year, where every bit is ambitious in our plans to achieve cost savings this year and to improve our business model, our operating model, our supply chain and asset efficiency, it is the silver lining in difficult times that these challenges force you to get lean and mean. That's exactly what has happened to us. And we know as we emerge from this market to stronger markets in the future will not only be growing our revenues, we'll be growing them with better margins. So we're excited for the opportunities that lay ahead for us, as I said, specifically in the Niagara region where our industry plays as a catalyst for economic growth in not just agriculture and manufacturing, but in culture and tourism and that the government is increasingly aware and supportive that they don't see any greater economic opportunities for growth in Ontario than there are in our industry. We have an incredible leadership team. They've demonstrated their capability, hardworking efforts, and I'm very, very proud of everything that they have achieved. We expect in the short to medium-term that there will be lots of M&A opportunities for us to supplement our growth. I think I've mentioned many times in the past that we've done over 20 transactions to help us grow our business. Our topline growth of – that's averaged in and around 3% to 4%, has always been half organic and half through acquisition and we expect that to be the case going forward as well. So with that, thank you, operator, if there are any questions, we're happy to take them now.

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

Nick Corcoran: Good morning, guys.

John Peller: Good morning.

Nick Corcoran: Just a couple of questions for me. The first is with the Ontario government expanding distribution to grocery and convenience stores. I'm just wondering what the potential impact on the wine shops that you currently have will be and how the mechanics of those stores changing to licenses will be?

John Peller: Yes, the government has signed a deal with the brewer industry right now. They're in the details of doing a similar agreement with us. They're totally committed to supporting our licenses being part of the retail modernization. So we're very pleased with that. We expect to emerge stronger and more capable through this process. And we also believe that we're going to do a lot better in the LCBO going forward as well. So that's the general thrust and efforts. The retail system, Ontario Winery retail system sells more than 50% of the crop in Ontario. They realize its integral role and value to the industry and our future. So I'm confident that we're going to do well through this transition. And if anything, we're going to grow.

Nick Corcoran: Great. And then maybe switching gears to B.C. How much CapEx do you expect to spend to replant the vines? And is there any opportunity to plant varietals that may be better suited towards changing consumer preferences?

John Peller: The first thing I'd say is we're right in the midst Nick, of assessing the exact level of buying depth in each of the regions. But we're getting our head around it. I think that the total amount of capital that will be spent will be probably in the $20 million, $30 million range, of which we hope to get half to three quarters in terms of support. In fact, the government has already indicated that there's a $25 million program in place to support the replanting of grapes and other tender fruit in the region. So I think over three years, we'll probably be in and around the cost to our company over three years. We'll be in the $15 million, $14 million, $15 million range, but we will come back with way more detailed plans when they're available, they'll be well within our budgets. I think from a variety standpoint, I think there's a few varieties that we've really enjoyed giving us ultra-premium [reds] like Syrah that have fared very poorly in the last little while. And I think some growers will be reluctant to plant that. Maybe a little less Merlot, but I see ongoing commitment to [indiscernible] [Cabernet Franc], Pinot Noir. And there's a lot of research being done on the hardiness of varieties these days around the world. But I expect us to bounce back strong and healthy and that the region will fare very well.

Nick Corcoran: Good color. And then maybe – sorry, go ahead.

Paul Dubkowski: Sorry, Nick, I was just going to add on that. And those numbers, John, giving are correct. And some of that would have already been considered in our go-forward capital plan. So it wouldn't all be net new incremental dollars as we had a – obviously, we have a national replant strategy that is focused on premiumizing and growing margin, but also focused on planting those hardy varietals that can withstand some of the weather fluctuation. So it wouldn't all be net incremental capital, but we'll have some more visibility in the next month or two.

Nick Corcoran: That's helpful. And then staying in B.C., any indication of what the timing of the sale [indiscernible].

John Peller: I really can't comment on the timing other than to say it's a high priority. It's lots of work being done we feel very positive about the property increasingly becoming valuable, and the amendment will really be supportive as well, and we're talking to great groups. So I can't say more than that, Nick, unfortunately.

Nick Corcoran: Yes. That’s great. And then, John, maybe one last question for you. I know the leadership transition has been in the works for a while here. Where are we at in the process to find a new CEO?

John Peller: Again, it's a top priority for our Board, for me. We have lots of consultants and support. We're well through the process. We're really pleased with the work that we have done. And so I think everything is totally on plan. It's been work that we're all very proud of, and it's going to yield a great result, and you'll hear about it soon.

Nick Corcoran: Great. Thanks again for taking my questions and I'll pass the line.

John Peller: Thanks Nick.

Operator: Thank you. [Operator Instructions] We have no further questions. I will turn the call back over to John Peller.

John Peller: Okay. Thanks, everybody, for joining us. Don't hesitate if you have any questions or want to chat with Paul and I do give us a call. We have lots of shareholders and people who are analysts interested in the company coming in to visit us these days. If you give us a call, we're more than happy to accommodate your visit. So please give us a call. Otherwise, enjoy your summer, and we'll chat with you soon. Thank you.

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