Good afternoon, ladies and gentlemen, and welcome to the Andrew Peller Limited Second Quarter Fiscal twenty eighteen Investor Conference Call. I would now like to turn the meeting over to Mr. Brian Abaid, Chief Financial Officer. Please go ahead, Mr. Abaid.
Good afternoon, everyone. Before we begin, let me remind you that during this conference call, we may make statements containing forward looking information. This forward looking information is based on a number of assumptions and is subject to a number of known and unknown risks and uncertainties that could cause actual results to differ materially from those disclosed or implied. We direct you to our earnings release, MD and A and other securities filings for additional information about these assumptions, risks and uncertainties. I'll now turn things over to Randy Powell, our President.
Thanks, Brian. Good afternoon, everyone, and thank you for joining us today. Following a record year in fiscal twenty seventeen, we're pleased to have generated another period of strong growth and solid operating performance through the first six months of fiscal twenty eighteen. Revenues continue to rise due to strong organic growth across the majority of our well established trade channels. With this revenue growth and our focus on operating efficiencies, gross margins also strengthened in the quarter and year to date periods.
Over the last twelve months, we've really been leveraging our heritage of quality by further investing in our proven sales and marketing programs with the goal of becoming the number one wine and crafts alcohol company in Canada. Our focus increasingly is on the consumer. And today, we feel we are closer to our end customer than ever before. We are achieving this through our vision of pouring extraordinary into everyday life. Let me highlight a few examples of our extraordinary performance of late.
The recent opening of the Wayne Gretzky Estate Winery and Craft Distillery has been a resounding success. We have tripled our visitor count in year one versus our expectations. We have overachieved our wine and whiskey volumes by more than double and we have also done so with our wine and whiskey club memberships. It's just been a phenomenal start to this legendary new establishment. In addition to significant success of our craft whiskey business, we are also seeing strong take up in entries in other new product categories, Specifically, our No Boats on Sunday Cider, which was launched last year with great success in Atlantic Canada, as well as mid season in our TWS stores, has had a terrific performance in this last year.
This year, we've seen more than doubling of our performance in these two key markets, which has encouraged us to launch next year into the LCBO as well as into Western Canada. We continue to be recognized for our leadership in quality wine with over 150 new awards, both national and international since June. Most recently, with a platinum for the best Canadian white wine at the twenty seventeen Decanter Awards for our twenty fourteen thirty Bench Riesling and a gold for our Red Rooster twenty sixteen Riesling at the recent InterVin Awards twenty seventeen Awards. Our three new acquisitions will provide a number of significant benefits for our shareholders as we go forward. The premium and ultra premium brands being produced by Greymunk, Tinhorn Creek and Black Hills complement and strengthen our VQA portfolio.
They also enhance our presence in the strong Western Canadian market as today, we are now the largest producer of VQA wines in British Columbia. With wine consumers becoming increasingly interested in the high value segment of the Canadian wine business, especially those wines coming from local producers, these new brands significantly increase our potential to capitalize on these trends. We believe our proven sales and marketing programs combined with our well established trade channel presence will contribute to the long term growth of our new brands. Finally, we also see opportunities where we can achieve cost and operating synergies to enhance profitability without in any way compromising our stellar reputation that these wineries have built over the many years. At this point, I will pass pass it back over to Brian Ethai for some financial details.
Thanks, Randy. For the six months ended September 3037, sales rose 2.4% to $180,500,000 from $176,300,000 the prior year.
For the second quarter, sales were
up a very strong 4% compared to last year. Once again, all of this growth was organic with solid performance across the majority of our domestic and export trade channels. The introduction of new wine brands and our entry into new wine related markets have also expanded our distribution channels and customer base. Furthermore, selective price increases introduced in the second quarter of fiscal twenty eighteen will continue to result in increased sales throughout the balance of this fiscal year. Our gross margins continued to strengthen in the second quarter and six months ended September 3037, the result of selected price increases, improved product mix and our successful cost control and production efficiency initiatives in such areas as distribution, operating expenses and packaging.
Selling and admin expenses have increased in fiscal twenty eighteen due primarily to an increase in our marketing programs and support for the launch of our new products and categories. The second quarter of fiscal twenty eighteen included approximately $600,000 in professional fees related to the three acquisitions completed last month, offset by a decrease in compensation expense of approximately $700,000 in the quarter, arising from our change from a cash based long term compensation plan to a share based plan, which vests over three years. As a result of our increase in sales and strengthened gross margins, EBITDA rose to $30,700,000 for the six months ended September 3037, up 12.3% from $27,400,000 in the first six months of twenty seventeen. Amortization expenses were largely in line with last year, while interest expense increased primarily due to a write off of approximately $400,000 in unamortized deferred financing fees related to our prior banking agreement that was amended late in September. As we have stated in the past, because of swings we experienced in non cash gains and losses of our financial derivative instruments and other income and expenses, we disclosed adjusted net earnings not including these items to provide a clearer picture of our performance.
For the three and six months ended September 3037, adjusted net earnings increased 12.5% to $17,300,000 from $15,400,000 last year. Net earnings for the first six months of fiscal twenty eighteen were $17,400,000 or $0.42 per Class A share, up from $16,200,000 or $0.39 per share in fiscal 'seventeen. During our balance sheet turning to our balance sheet, overall bank debt increased at September 3037 due primarily to $48,000,000 drawn on our restated credit facilities related to the three acquisitions, of which $46,600,000 was held in escrow at quarter end. An additional $31,000,000 was drawn on the credit facility subsequent to the quarter end to complete the three acquisitions. As I mentioned, we amended our debt facilities on September 29, increasing our borrowing limit to $310,000,000 separated into two facilities, dollars 90,000,000 to be used primarily for day to day operations and a second two twenty million dollars facility for capital spending, acquisitions and refinancing prior long term debt.
Full details of the amended facilities can be found in our MD and A. Cash flow from operating activities was $22,800,000 for the first six months of fiscal twenty eighteen, up from $20,300,000 last year. Included in the investment activities for the quarter end is the $46,600,000 in restricted cash related to the three acquisitions. As Randy mentioned, the three acquisitions recently completed bring a number of benefits to the company. For their most recently completed fiscal years, the three wineries generated a combined sales of approximately $24,500,000 and we believe we can grow this contribution to our consolidated revenues over the long term.
In addition, with the cost and operating synergies we expect to generate in our Western Canadian operations, we expect to see strong and growing contribution to our EBITDA in the coming years resulting from the new brands and bringing them into the Vanderkuller family. However, while the acquisitions are expected to be accretive within five years, we believe they will be dilutive to earnings per share in fiscal twenty eighteen and fiscal twenty nineteen due to a noncash cost of goods sold adjustment we will make in the first year of acquisition as well as the one time transaction costs related to these acquisitions. We will provide more details on these one time costs and the accounting implications in the coming quarters. Thank you for your time and attention this afternoon. I'll now turn things back to Randy to wrap up.
Great. Thanks, Brian. Well, thanks again, everyone, for joining us this afternoon. We'd now be happy to open up for any questions you may have.
Certainly. Thank you. So we will now take questions from telephone lines. Our first question is from Brian Powell from Acumen. Please go ahead.
Good afternoon and congratulations on a great quarter.
Thank you.
My first question just on the top line, these selective price increases you've noted, was that for the full quarter or can we expect to see some additional benefit in Q3?
That was for the quarter, but I mean, we will if you look at we haven't fully lapped it, so you will see additional benefit in the following quarter as well.
Okay, great. And then just turning to the gross margin, it was certainly better than we were looking for and just trying to understand maybe how far along you are in terms of some of the enhancements you're making on production, reducing costs, improved sales mix, that sort of thing?
Yes. So Brian, I mean, if you we've talked about this before. We're doing a number of things in our new strategy, which is driving a combination of pricing where we believe we deserve more pricing. Given the quality of our products and our innovation, we're driving more premium mix. And actually, that's probably the bigger driver of the gross margin.
That said, we have an ongoing cost savings program, which is driving a piece of it and we actually expect more of that in the coming quarters. So it's a big jump in gross margin. We do believe it's sustainable and we are looking forward to continuing driving it. But as we talked in the past, some of that gross margin, we are reinvesting back. We are doubling our consumer marketing spend in fiscal twenty eighteen versus what we have done before.
And we hope to double again next year as we try to really build our brand equities. And that's funded purely from higher pricing mix and cost savings. So at the same time, while we're investing in marketing, we expect to grow our EBITDA margin at the same time.
Okay, great. Appreciate it. And then maybe Randy, you could speak a little bit just to some of the sort of discussions around NAFTA and things like that. And in particular with BC sort of being pointed out, it's a little bit about sort of the I guess I'm going to say for lack of better protection that the BQA wines in BC and that are getting the grocery aisles versus some of the American wines in that. Can you just maybe speak to on a big picture sort of what you're seeing there or any concerns or anything like that?
Well, it's early to fully understand what the impact of NAFTA or these most recent discussions on NAFTA will deliver. So it would be we believe that the current structure in place today is fair and reasonable, particularly as it pertains to BC. We believe that there is a very significant opportunity has been proven out in the marketplace for import wines to come into that marketplace. So we believe the structure is correct today. It would be pure speculation at this point.
We've had no real indication as to which way those talks will go. But just to reiterate, we have seen a tremendous amount of inflow of import wines coming in from The United States in particular and done very well in that marketplace. So we'd be hard pressed to see how they're being discriminated against in any way. So Tom
And then maybe just stepping over to Ontario grocery, it's been another three months since that program sort of been running along. Maybe you could just speak to how you guys are seeing things there?
Sure. Yes, I'd love to. We're seeing the retailers are now the grocers are now really starting to get some traction in getting these co locate stores in place. I would comment that they are dedicating a significantly larger amount of space to and really getting behind their wine and beer programs. And I think that you'd have to speak to them about their specific numbers, but they look it looks to be good for the category and we're seeing increased performance certainly in the stores where we have had post checkout stores in the past.
So it looks positive to date and it continues to roll out. We have we're happy with our partnership, very happy with our partnership with the grocers and how they're treating
us. Okay. And then finally, could you maybe just speak to harvest, how things went both in the East and West and sort of how you anticipate the year to close on the harvest side?
Certainly, we're pretty much done in Western Canada. I'd say the industry is pretty much wrapped up in the West. It was another good year of very good quality product. As we look towards Ontario, we are still probably two weeks away from we can answer two weeks away from completing harvest in Ontario, but we're seeing a very large crop in Ontario and very good quality juice coming out of the field. So we were a little worried with a cooler and wet summer as we had commented on in the past, but the gods shone on us very nicely in the fall with that very warm and dry Indian summer that we had.
And we saw the quality of the juice improve dramatically and make up for the cool and more wet summer. So I think we're going to have a terrific year in both with a probably a record amount of juice coming off of the vineyards in Ontario.
All right. Great. That's great insight.
Thank you.
You.
There are no more questions registered at this time. I'd like to turn the meeting over to Mr. Powell.
Great. Well, thank you again for joining us today. And as always, if you have any further questions, please do not hesitate to call us at any time. Thank you again, and goodbye.
Thank you. The conference has now ended. Please disconnect your lines at this time and we thank you for your participation.