Good morning. My name is Michelle, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Andrew Peller Limited Fiscal 2022 Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. If you'd like to ask a question during this time, simply press star, then the number one on your telephone keypad. If you would like to withdraw your question, please press star, then the number two. Thank you. I will now turn the call over to Mr. David Mills. Please go ahead, Mr. Mills.
Thank you, Michelle, and 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 Mr. John Peller, Chief Executive Officer.
Thank you, David, and good morning, everyone. It's definitely nice to be with you. Joining me today is our CFO, Steve Attridge. Just some summary comments before I turn it over to Steve. You know, we finished our fiscal year end March 31, 2022, and our results. We've monitored this closely with you over the year. They've come in as we have forecasted. Our revenue ended up being down around 4.9%, and our EBITDA dropped some 30% as a result of the challenges presented by COVID. You know, all the revenue lost in that year, the down 5%, all the revenue loss was attributed to businesses that were shuttered and closed as a result of the pandemic.
Obviously, the restaurant industry was closed significantly throughout the period, as were our estate wineries from time to time. You know, the global travel business was reduced to about 10% of its normal flow. Other than that, we performed very well in all our other trade channels. I'm very pleased with how the company has performed and the things that we're doing to ensure that we have a very bright future. You know, COVID is now in its third year, if you will, with us. In the first year, you know, unexpectedly, we had a bit of a revenue boost because of the strength of our sales through retail channels were greater and offset the declines in other trade channels.
In this last year, as things normalized, those retail levels came down, and there was still some business closures, as I've indicated. Now, as we start the third year, our revenues are already starting to return to what I would call almost. We expect to finish, you know, quarter one up around 4% in revenue, and we are on target to finish the year in and around +5%. I say that because we are presented with a lot of supply chain disruptions. Naturally, the theme of our business these days is the inflationary costs that have hit our supply chain.
I would estimate the inflationary impact on our cost structure is at around 25% up, so that while the rest of the world's inflation is tracking at 6%-7%, we're in an area of supply chain logistics that are more severely impacted. You know, we've had significant increases in our cost of goods related to transportation and shipping and fuel surcharges. Our glass costs have gone up significantly and packaging materials. We are intensely focused on managing a very difficult circumstance. You know, as much as anything, in addition to the inflationary costs, we're having trouble getting stock in on time. In this first quarter, even though we're up around 4%, we have significant out of stocks that we're trying to manage around.
Our glass supply disruption has caused us a lot of challenges as well. Even though our results are positive, we would be doing better and we expect to do better as these supply chain issues start to resolve themselves. You know, this kind of tale of the COVID dragon, you know, the inflationary pressures on our business, we were hoping that they would abate in this fiscal year. In lieu of things geopolitically and particularly around energy, you know, we anticipate and are preparing to deal with these inflationary pressures into the following year as well. Hopefully we will emerge to a post-COVID normal world, and we look forward to that. You know, we're
You know, I've used the metaphor in our company that we are navigating our way through a storm, and appropriately, you know, we are conserving our cash. We are intensely focused on at least 20 cost reduction projects that we're monitoring very, very closely. Everything from consolidating warehouses and rationalizing our SKUs and looking for a way to reduce our cost of goods. We are intently focused on that. As I've told you in the past, you know, we have implemented the new ERP system, and there are significant software programs we're writing to manage the liquid system in our business to consolidate our production schedule so that it's more efficient to improve our warehouse and distribution.
We're really doing a lot of things to ensure that we, you know, manage cost effectively, that these things are really going to serve us well as we come out of COVID in the future. There's no uncertainty in my view at all that I'm confident that as we come out of COVID, we will emerge a much stronger, more capable, and we're very excited about our future. I'll let Steve make some comments first, and then I'll close after that. Over to you, Steve.
Thanks, John. Good morning, everyone. As John mentioned, our sales and operating results in fiscal 2022 were impacted by a number of unusual factors related to the pandemic. When the pandemic was announced, consumers increased their purchases throughout fiscal 2021, driven by uncertainty and concern about whether supply chains for beverage alcohol would remain open. These unusually high sales were not repeated in fiscal 2022. In fact, in Ontario, the LCBO was closed on Mondays through much of fiscal 2021, driving consumers to our higher margin retail outlets, and the LCBO stores resumed normal business hours through the majority of fiscal 2022. We're also significantly affected by government-mandated closures of restaurants and our estate winery and hospitality businesses in fiscal 2022. Of course, international air travel restrictions continue to impact our revenue in the export channel.
These factors combined resulted in a revenue decrease of 4.9% in fiscal 2022 compared to the prior year. In the fourth quarter of fiscal 2022, sales were consistent with prior year, which we believe is the beginning of an upward trend. Gross margin has been negatively impacted by higher material and labor costs, such as import wine, glass, and other packaging materials, as well as minimum wage have all increased due to inflationary pressure. Gross margin has been compressed due to an increase in global supply chain costs, such as international freight and associated shipping charges. It's been particularly evident in the second half of fiscal 2022 and in the fourth quarter, where gross margins were 29.2%.
In the first quarter of fiscal 2023, we've implemented price increases that are expected to partially offset inflation, and we continue to review opportunities for further increases throughout the year. Our ability to increase prices for certain products in certain markets is dependent on the actions of lower-priced importers, as domestic producers can face decrease in volumes when raising prices without the corresponding increase in import wine price. We've implemented cost saving initiatives to mitigate increasing costs and supply constraints through alternative sourcing arrangements for components and the negotiation of lower freight costs. Our sales and admin expenses increased in fiscal 2022 as our staffing and marketing overheads returned to more normal levels. You'll remember that in fiscal 2021, we laid off a significant part of our workforce to conserve cash, as so many of the trade channels were closed.
In addition, in fiscal 2022, we incurred certain non-recurring startup costs related to the opening of the recently acquired Riverbend Inn. On September 28, 2021, we completed the sale of our Coquitlam property in British Columbia. The total cash proceeds of approximately CAD 8.8 million net of transaction costs. The sale generated a realized gain of CAD 7.5 million or CAD 0.21 per Class A share. Including all of these factors, net earnings in fiscal 2022 were CAD 12.5 million or CAD 0.29 per Class A share, compared to CAD 27.8 million or CAD 0.65 per Class A share in fiscal 2021. Turning to the balance sheet, our debt increased to CAD 192 million as of March 31 due to reduced cash from operations and increases in investments in our properties and operations.
At the end of the year, we had capacity on our revolving credit facility of approximately CAD 158 million. As of March 7, 2022, our normal course issuer bid expired, and we had repurchased and canceled 598,600 Class A non-voting shares under the normal course issuer bid at a weighted average price of CAD 8.70 per share for total cash considerations of CAD 5.2 million. With that, I'll thank you for your time this morning and turn things back to John to wrap up.
Okay. Thanks, Steve. I'll just say in summary again that, you know, over the last five years, we have invested significantly more than CAD 100 million in our facilities, in our people, our technology. We've built a much stronger business platform, and we're excited about our future. We're really performing well in all our product categories. Our value wines, you know, we're strengthening our value wine portfolio with imports that are with brands that we own. We have three of those brands in market now, an Australian product called Natural Selection, an Italian one called Ama Bène , and a Chilean product called Vivo. They're all in 4-liter boxes, which is where we have a strength in the market.
We're offering great quality wines at great values, and it now supplements our positions with the Peller Family series and several other brands like Copper Moon. Our premium wines are doing very, very well. They're growing in volume and in share. There's been a lot of interest in, obviously, people vacationing more within the country. Our estate wineries are packed these days. They're hard to get into. They're performing at record levels. You know, our balance sheet is very, very strong. We've paused doing any M&A activity at this time just to ensure that we return the business to its good health coming out of COVID, but there will be lots of opportunities for us going forward. Those are all the reasons why we're feeling very, very confident and positive about our future.
With that, I'll turn it over to you, operator, to call for questions.
Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. Should you have a question, please press the star followed by the one on your touch-tone phone. You will hear three-tone prompts acknowledging your request, and your questions will be pooled in the order they are received. Should you wish to decline from the polling process, please press the star followed by the number two. Ladies and gentlemen, as a reminder, should you have a question, please press the star followed by the one on your touchtone phone. One moment for your first question. Your first question comes from Stephen Takacsy, Lester Asset Management. Please go ahead.
Hi, guys. Just a couple of questions. One is, can you get into a little more detail regarding those 20 cost initiatives that you're pursuing? Second question is, you know, in an economic slowdown, what has been your experience with, you know, the premium wines? Do you expect the sales to soften in a recession here in Canada?
You know, the details on our cost reduction programs, you know, that we very disciplined project management system, Steve. We are looking at ways to, you know, reduce the number of glass packages that we're using right now to get greater efficiency with our glass purchases and our packaging generally. You know, we have a sourcing project. You know, we buy a lot of wine around the world, and we are relocating some of our sourcing to markets like Australia, which have significant surpluses these days and are offering some very significant values for us. As I said, we have a very major program on warehouse consolidation.
You know, we have many programs we're writing to help us manage inventory now that we have this ERP system that's more robust. We're putting in a new supply chain demand system that'll help us manage our systems. Our biggest initiative was this LMS, we call it, Liquid Management System, that's just gone live in the last month, and it's going through its hypercare phase right now. We will also do a broad cost savings review this year with an outside consulting firm. We're not leaving any stone unturned, and it is a principal focus of our EMT. Your other question, no, by the way, we've taken as much price in the market as we feel we can at this time.
You know, we've taken prices up across the board. We've done very well in all segments so far, and we might get our prices up 5%, 6%, 7% through the year. The most difficult area is obviously the value price segments, where while there is a lot of people taking prices up, there are notably some countries out of Europe that are not reacting with their prices. You know, these are a challenge for us, but we'll continue to monitor that carefully. What was your other question, Steve?
It was just on the premium wines. What's been the experience-
Right.
In the past during, you know, economic slowdowns? Would you expect a softening, you know, if things get really slow here in Canada?
You know, for sure it will happen. In other words, all throughout COVID, there has been a measured shift from premium and super premium into value price points, and those volumes are holding. If in fact, you know, the recession happens, and everyone expects that it will, you know, there will be increased, you know, migration to value. You know, it's happened that way three or four times in my life in the last 30 years. I mean, our company is designed purposefully so that we compete, as you know, in not just value-priced table wines, but in wine as well. We're very evenly distributed across the price segment all the way up to, you know, the highest luxury brands and pricing all the way down to the greatest value.
We're built to manage successfully through these periods, and in fact, we tend to do better through them.
Right. Okay. Maybe one last question on new product initiatives. You've been, you know, looking at launching many new products over the last few years. How are they doing? And maybe some detail on some of the things you're working on now.
I think the major is we launched into craft spirits with Gretzky Whisky. The sales of our spirits have doubled in the last few years. They are performing very well. In addition to the whiskeys, we launched the Cream Liqueurs, the Gretzky Cream Liqueurs. We have now four or five different SKUs. They're performing exceptionally well, also at prices above Baileys. The business has some more innovation coming in the next year, including a craft vodka and several new cream products and, you know, premium whiskeys to support Red Cask, a double malt whiskey. We've got new package sizes in addition to the packages that are. We've had 750, but we've now earned additional package sizes because of the strength of the business.
We're feeling very, very positive about that. You know, in the RTD refreshment category, our No Boats on Sunday craft cider has performed exceptionally well and continues to strengthen. We also have innovation coming in this year. You know, we've built a great little business that while the cider category is soft these days, the premium segments are doing very, very well. We feel we've got a very strong brand in a defensible niche. We've launched some seltzer products that didn't do all that well. You know, our craft beer initiative with Gretzky, you know, it appears we've entered the market a little late to try to establish any kind of a retail beachhead, if you will. There's been lots of learning over the last two or three years. It's a very, very challenging category.
You have to be very smart about where you choose to participate and how you go about it. We've had some experiences that are reminding that. You know, we had a higher level of package write-offs this year than we've ever had, and we're very mindful about managing our innovation going forward. We're very pleased overall with our performance in RTD. You know, the ultra premium and premium VQA business, we've gained share and grown in the last two years. As I said, you know, we've had a significant e-commerce initiative that's done well. There's been a lot of learning for us in that as well. You know, we came out of the blocks early in COVID, and we were overwhelmed with e-commerce orders.
It's clear to us, you know, that the delivery costs are exceptionally high and that it's not a segment that you wanna focus on selling value products with any kind of discount associated with them, you know, with the delivery charges. In other words, trying to be a broad retailer of beverage alcohol in e-commerce is not the strategy we will, you know, focus on going forward. We're much more focused on our wine clubs and the e-commerce related to the people who visit our estate wineries, and we've increased that business significantly. It's profitable, and we've hired a lot of new people to strengthen our participation in there. As I said, we're supplementing our value domestic blended wines with now some imported brands that we own.
We're feeling very positive about all segments and our participation in them. We're keeping a bit of powder dry for the next year just to make sure we manage through the supply chain issues and, but it's why we feel very, very confident about the future.
Any idea where you can get your margins back up to, your gross margins, this year? Is there sort of a target aiming for?
You know, prior to COVID, our gross margin was 43.5%, and it looked like it was headed to 45%. It has fallen now down to 37%-36%. That's the gross margin that we saw back in 2008. You know, that's the lowest our gross margin have ever been, and that's where they sit right now. It's not possible or feasible to me that these things will not improve. In fact, transportation costs are already coming down as we speak, and it will take some time. As I said, I think where we were hoping it would last a year, we're now kind of looking at a year and a half. There's no doubt in my mind that they'll improve.
I think we're gonna try to get up to the 38%-39% level this year, and then I fully expect us to be back in the 43%-45% range, you know, in the next two-three years.
One final question. Sorry about that. The elections in Ontario, Ford's back in. Are you seeing or expecting, you know, any developments in your industry as a result of the election victory?
That's a very good question. We are monitoring it very, very closely. It's easily 30, you know, 40% of my time. You know, I think it's fair to say, you know, when Premier Ford got elected, he came in with a lot of populist strategies that backfired severely in here, and that COVID has allowed him to move to the middle, and he's enjoying his popularity, you know, helping Ontarians get through the challenges of their life. I think that that's a change that's going to stay with him. In other words, I feared when he first got in that it would be some impulsive, you know, populist move that might get pushed on us and I don't have the same fear right now.
You know, one of the things that we're really focused on is developing an economic growth strategy for our industry. You know, I'm working with the tourism hospitality providers in the region, local business developers, all the growers and uniting our industry to make sure that the government knows that, you know, there's ease of investment that can come into the Niagara region if they just provide us reasonable support. It doesn't have to be as strong a support as all the other people who come into our country get in their domestic markets. If they just give us what we have in British Columbia, which is, you know, a decent margin support program that reflects we should have direct delivery privileges in our own market.
I suspect, you know, that we can get a lot more support from the LCBO going forward as well. I'm quite confident that once the economic benefit opportunities are more clear to them. I mean, we've suffered because we've had to report mostly into the finance department and in particular, you know, the people that manage lotteries and casinos and cigarette taxes. You know, that's not an appropriate place for the policy of a great agricultural industry to be reporting. I'm addressing that now with the support of everybody in our industry. I think that they're gonna support us significantly in the future.
Thank you very much, guys. Sorry to hog up the Q&A. Thanks.
Not at all. Good to hear from you. Hope to see you in the summer, Steve.
Okay. Yeah, will do.
Your next question comes from Douglas Smith, Investor. Please go ahead.
Yes. Good morning. I want to go back to your MD&A on page six. There you mentioned amendments to your credit agreement and your amendment to some financial covenants. Could you provide more color?
Happy to. You know, we had an EBITDA covenant to our loan, you know, that was kind of four-to-one-ish. Because our earnings have dropped down to CAD 40 million and our total debt package was CAD 190 million, we had to go to the bank and ask for a waiver from the covenant. You know, one of the things is that the bank holds a general security over all our assets, you know, and I estimate fair market value of our company's assets in the CAD 750 million range. In fact, of the CAD 190 million that we've borrowed, we've put CAD 100 million into real estate in the last two, three years alone.
That covenant didn't really reflect the strength of our balance sheet, and I've had those conversations with the bank, and they are in total agreement with us. You know, I think you probably know that we have a surplus piece of real estate in Vancouver that we've rezoned and that we are marketing. Its value is significantly in excess of CAD 50 million. It's for sale so that, you know, our loan structure is in good shape and our balance sheet in very strong shape. Does that help?
Yeah. Thank you. That helps.
Your next question comes from Nick Corcoran, Acumen Capital. Please go ahead.
Good morning. A couple questions from me. One of Steve's questions, you mentioned you have a higher level of package write-offs. Can you maybe quantify the impact on gross margin in the fourth quarter from that?
I think Steve's better to answer that than me. I think he can answer.
Yeah.
Yeah.
Yeah. You know, specifically I guess, Nick, in the fourth quarter, it'd be in the you know, order of magnitude kind of 3% of revenue.
Is that a one-time item, or would you expect it to continue into the first quarter of this fiscal year?
No, it's a one-time item. I mean, you know, any business is sort of subject to the cost of, you know, obsolete packaging and inventory. This is specifically related to our refreshing beverage category. You know, that's something that we entered into, you know, a year or so ago. Certainly the cadence of the category is different than, you know, bottled wine and even, you know.
Value and premium wine. You know, the category is very competitive. The shelf life of the products are, you know, much shorter than that of the wine. You know, all of those factors, I would say, sort of, you know, came to bear on the value of our inventory. We needed to make an adjustment for year-end.
Yeah.
And the-
Annually our package write-offs and obsolete write-offs used to be kind of in the CAD 1 million-CAD 1.5 million range. I think. Did they go up as high as CAD 5 million, Steve, for the year?
Yep. Yep.
Right around there. Most of it was canned RTD. We've taken note and adjusted our business plans accordingly.
Yep. Again, Nick, that's
That's good color.
Like, it's an ongoing process. You know, we review that every quarter and make adjustments as necessary. You know, it was perhaps more material in the fourth quarter just as we headed into the end of the year. Yeah, John's numbers are directionally correct.
Great. That's good color. I guess a related question is, with the learnings you've gotten from that category, are you going back to more your historical kind of product mix with wine and then the extension you have with Gretzky and the whiskeys, or are you still looking to be competitive in the RTD market?
You know, we had been looking to acquire in refreshment beverages for the last five years. You know, our appetite for that going forward. Having said that, it was impossible to ignore the fact that consumers are increasingly attracted to the convenience of cans in all segments. You know, craft cocktails, craft beers, seltzers, ciders, and wine in cans. We didn't want to sit on our hands and watch the world go by. We got engaged. By getting engaged, we've had some great learning. Some of it has been painful and we knew it was a tough segment. It's tougher than we thought. Having said that, we love our craft cider brand, and we have some niches in refreshment products that we'll pursue.
I don't think we'll be as aggressive in the craft beer space going forward. We will eventually with some wine products, but we'll be very thoughtful and focused on where we go. For example, you know, in Western Canada, the pricing of all the refreshment products are exceptionally low, and the margins are negligible. That we're doing well in the East, in Ontario. We're doing very well in the Maritime provinces. You know, we're being thoughtful and purposeful about where it is we choose to play and how we play. We're not by any means exiting. You know, we're not as aggressive as we were in the last three years going forward, and this will allow us and help us to focus back on some of our core segments as well.
We do have plans to grow in spirits, in wine and in core wine. Those are our principal focuses.
Maybe switching gears, you mentioned Port Moody is being rezoned in your MD&A. Any indication what the timeline for the sale of the property might be?
You know, I've given up trying to time forecast this thing, Nick. It's not that it's not getting a lot of attention. It's getting a lot of attention. You know, we have the development permit application in, and we're speaking with a lot of people currently. You know, it's a very big project. It has over CAD 78 million in construction costs associated with it. So this is not a project for mom-and-pop developers. They have to be, you know, incredibly well financed, and there are not a lot of those people in Vancouver who can do it. We're talking with several. I think the fear of interest rates in the short, you know, will be a factor.
You know, I am confident I went to an independent advisor on the whole thing just to have all of our activities assessed and reviewed. He said to me, John, the first thing I can tell you is you have a very, very valuable piece of property there. Congratulations. In other words, don't lose sight of that fact and play smart and you'll get to where you need to go. I don't wanna create a time expectation. We are having lots of discussions with several groups, and it'll take as long as they determine it's gonna take.
Your goal with that property, is it to be an outright sale, or would you like to maintain some sort of interest in it going forward?
I guess it could, but truthfully, you know, most of the proposals that have been put in front of us, you know, would discuss kind of being paid over five or six years. Also, that hopefully we could get some security on the property and then help facilitate a purchaser's manner of management of their cash flow ability. It's highly likely that they'd prefer to have it paid over five or six years. Of course, the deal structures are complex, but I believe that is a much more likely scenario than a one-time payment.
Just the last question for me. I definitely understand you're going through a challenging period with the inflationary pressures and supply chain issues. What are your capital allocation priorities over the next 12 months?
We've significantly reduced our CAPEX, you know, where we were normally spending at the CAD 28 million- CAD 30 million, dropped it down to around CAD 18 million for the year. It's slightly above our maintenance CapEx kind of level because we're still, we have a significant vineyard planning program going on in the South Okanagan Valley. I think there's CAD 50 million going to red vinifera vines in the South Okanagan Valley. You know, we've been very prudent in managing our cash flow to reduce it, focusing on reducing our inventories. We probably have CAD 20 million or CAD 30 million more inventory than we need right now, and it'll take us more than a year to return it to its normal level, but we're focused on that as well. You know, there's lots of projects we'd like to invest in.
We've we have a lot of projects that are designed and programmed and ready to go, but we thought it would be prudent to make sure that we comfortably exit COVID and return to a more normal environment before we make those investments.
The related question, can you buy back stock?
No. For the same reason, the cash management, we're not planning to do that in the short term.
Great. That's all for me. Thanks for taking my questions.
Thanks, Nick.
Those were the questions at this time. I will turn it back to Mr. John Peller. Please go ahead.
Okay. Thank you, everybody, for joining us. Don't hesitate to call me anytime if you have questions, or Steve. You know, we're grateful for all your support, and we're looking forward to a good year. Thanks, and we'll be in touch soon.
Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.