Good morning. My name is Jenny, and I will be your conference operator today. At this time, I would like to welcome everyone to the Andrew Peller Limited second quarter fiscal 2024 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 would like to ask a question during this time, simply press star then the number 1 on your telephone keypad. If you would like to withdraw your question, please press star two. Thank you. I will now turn the call over to David Mills. Please go ahead, Mr. Mills.
Thanks, Jenny, and good morning, everyone. 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 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 lovely to be with you. It's a gorgeous, sunny day here in the Niagara Peninsula, very reminiscent of the fall that we've enjoyed through September and October. We had a difficult August this year with kind of rain, and we didn't get as much sun as we wanted, but our crop was rescued by the beautiful fall that we've all enjoyed. And in fact, we're still out harvesting as we speak. We have a couple thousand tons to bring in in the next couple of days, and that will complete our harvest. But we're super pleased with both the harvest in Niagara and BC, although we're experiencing a bit of a shorter crop in BC because of the freeze we had last Christmas.
We did end up getting as good a crop as we could have hoped for, and things look better for next year. Obviously, we feel we've had a very good start to the year. Both the first and second quarter results are strong and are inspiring to us because we know we've got even better things to come. But before I talk about results, I'd like to make a few comments on the leadership transition plan that was part of our press release yesterday. We realized that it's some considerable changes, but we're really excited that the opportunity to add some new perspectives and experiences and skill sets to the company in a very thoughtfully planned and orderly transition that we've been focusing on for some time now.
While it's news to you, we've been working on our succession in the CEO role and in my role for the last year, and we're way down the track. Though I will retire within the year, I will still stay engaged on the board and continue to bring leadership to both the company, my family, and the industry because we've got lots of work to do, and I'm as excited as I've ever been at the prospects of our company and our industry. I think one of the most important points that I would stress is that within the last year and a half, we've completely strengthened our executive management team. Business is very much a human team sport, and you're only as good as the team around you.
And both with Paul Dubkowski, our CFO, joining us this year, and executive management leadership in sales and marketing with Patrick O'Brien and José Salgado, we've promoted Craig McDonald to the head of operations, and he's as capable of a winemaker, operator, and viticulturalist as there is in the world. And with Sara Pressuto helping us with our human resources, people, and culture, we have, in my opinion, the best executive management team we've ever had. And I think it shows in the way they're working and managing and supporting us through what has been a very, very, very difficult transition with COVID and the kind of so-called recessionary environment that we're in. So with that, I mean, I realize as well we are looking to refresh our board of directors as well.
We felt that it would be best if we were working through a CEO succession that it made sense to optimize the refreshment of the board throughout the transitionary process. Several of the directors had been long-serving, and the others were looking forward to transitioning in the near term in any event. So we just felt it would be good to complete the refreshment of the board and at the same time, we complete the succession process, and Gus and I will stay on the board and continue to provide that continuity there. And we're well into the recruitment of our new directors. In fact, it's relatively complete, so we'll be announcing the replacements of some very strong, diverse, capable candidates in the next few weeks.
But on the whole, we're excited with everything, and it's been well-planned, and it's transitionary so that we can help onboard people while we complete this process, and it'll work very well for us going forward. So commenting on just our results, as I said, the second quarter was a very strong quarter. I'd like to point out, as I'm sure some of you are aware, beverage alcohol in North America right now is soft across all categories. So whether it's spirits, I notice all the top 5 distilleries, spirits companies rather, the top global spirits companies have all experienced negative volumes and soft and negative revenues for the year. I think the beer's down the most in the 5%-7% volume range. I think 15 of the top 25 North American beer brands are experiencing moderate decline right now.
Similarly, in the wine category, volumes are down in the 3%-5% range across the board. And while people have been able to offset with some price increases, the performance of us at flat to slight growth is really in the top quartile of the performance of beverage alcohol companies, and we're very proud of that. And I think that this speaks to the strength of our brands and our sales and marketing capabilities. I'm sure the highlight of our performance is a 30% increase in our EBITDA for the second quarter. This is the result of all the efforts that we've been putting into what we told you was our four-point focused plan around margin enhancement, profitability, cash flow, and strengthening our balance sheet so that these savings have come back.
You'll recall on our last call, I highlighted that through a year and a half of 2022 and 2023, we lost almost CAD 42 million-CAD 43 million of margin as a result of the hyperinflation that was in the freight logistics and glass cost of goods area. We were able to offset CAD 20 million of that decline in the first years. This year, we're picking up another almost CAD 10 million of cost savings, and we have clear visibility on improving another CAD 10 million in next year's plan so that all our efforts and focuses around cost recovery, margin enhancement, profitability improvement are coming to bear. And they'll guarantee that we have a very positive year this year and then have an equally incremental increase in our earnings next year. There was some softness in terms of revenue, somewhat surprising to us at the estate winery level this year.
It looks like every Canadian that I know has taken a vacation in either Italy or Greece. But after two successive years of +25% revenue growth in our estate winery group, this year, we were experiencing about a 15% decline overall, which we've adjusted to. And we're still performing at levels above where we were pre-COVID. But I think that this area will bounce back in the next year. But our team has done a great job. We were also negatively impacted with the fires in the Okanagan in the month of August, but everything has recovered nicely there, and people are focused and looking forward to a good season next year. I mean, similarly, we've had a good pickup in our export business, which was decimated through the COVID period.
We've almost recovered 80% of our export sales, and that's without the benefit of having the return of Chinese travelers to Canada who were by far our largest consumers of Icewine. And we're confident that as these travelers are going to be allowed to return to Canada in the next year or two, that we'll end up significantly increasing our export presence. So I think next year is going to be another year of kind of transitionary recovery, and all plans are in place and focused to ensure that the momentum behind what we're doing will continue. But with that, I'll turn things over to Paul before some closing comments. All over to you.
Great. Thanks, John. It is great to be here with everybody today. Turning to our results, sales for the second quarter of fiscal 2024 decreased CAD 1.6 million or 1.6% to CAD 100.2 million compared with the prior year. This decrease was driven by a CAD 1.8 million revenue impact from the repeal of the federal excise duty exemption. Excluding this, sales for the quarter would have been up slightly over the prior year, as John mentioned. For the first six months of fiscal 2024, sales increased CAD 1.1 million or 0.6% to CAD 200.7 million. Sales were reduced by CAD 4 million due to the repeal of the excise exemption program, as mentioned. Sales in the quarter was driven by growth across the majority of our trade channels, including provincial liquor boards, restaurant and hospitality, and export.
A number of positive factors supported the quarterly performance, including price increases implemented to help offset ongoing inflationary pressures, the introduction of new domestic and international products to meet consumer demands, ongoing return of international travel driving increased export sales, and the stabilization of our personal winemaking business. Growth in our key trade channels was partially offset by lower sales at our estate wineries due to the Okanagan wildfires and as traffic moderated slightly in comparison to the prior year. Moving on to margins, gross margins in the second quarter landed at CAD 41.3 million, up CAD 1.8 million or 4.5% from the prior year. Gross margin as a percentage of sales for the quarter was 41.2%, an increase over the prior year at 38.8%. For the first half of the year, gross margin landed at CAD 80.3 million, up CAD 2.8 million or 3.5% to the prior year.
Gross margin as a percentage of sales for the first half of the year was 40%, an increase over the prior year of 38.9%. Margin in the quarter and year-to-date periods was supported by the company's recognition and accounting of the Wine Sector Support Program benefit as described in our financial statements and MD&A. Gross margins continue to be affected by higher-than-normal costs of raw materials, particularly glass bottles and packaging, international freight, shipping charges, and fuel surcharges. We are now seeing many of these cost issues stabilize and begin improving, and we expect to realize the full benefit of these cost savings starting in late fiscal 2024 after we sell through the balance of inventory produced at higher costs.
Our selling price increases are helping mitigate these cost issues, and we continue to implement cost reduction programs, including rationalizing our SKUs and looking at alternative lower-cost sourcing for our glass bottles and other packaging. Looking ahead, we are confident these cost savings 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. Moving into the second half of the year, we do anticipate the typical seasonality in our margins that we have historically experienced and see across the industry. Sales and admin expenses landed at CAD 26.2 million for the second quarter, down CAD 1.7 million or 6% compared with the prior year, and at CAD 52.5 million for the first half of the year. As a percentage of sales, expenses were 26.2% in the first half of the year compared to 27% last year.
In light of current market conditions, we have rationalized other costs, including reducing marketing spend and undertaking other productivity initiatives. We believe these actions and the impacts from our restructuring that we took in Q4 fiscal 2023 will drive further improvements going forward. EBITDA showed strong growth, increasing to CAD 15.1 million and CAD 27.8 million for the second quarter and first six months of the year compared to CAD 11.7 million and CAD 23.6 million, respectively, last year. Interest expense for the six months ended September 30th, 2023, decreased from the prior year due primarily to lower costs associated with the company's new debt facility. As we discussed last quarter, we believe our new credit facility and interest rate swap will reduce interest costs going forward. Turning to our balance sheet, total debt was approximately CAD 206 million, down slightly from the first quarter.
At September 30th, 2023, we had capacity on our new credit facility of approximately CAD 68.7 million, with shareholders' equity standing at CAD 5.88 per Class A share. Thank you for your time this morning, and I'll now pass it back to John to wrap up.
Thank you, Paul. I think, in summary, we're improved with our improved results. We know we're going to post a good number this year and beat it significantly next year by double-digit increases in our EBITDA as well. I think this has been a great period of our company being challenged and tested to its max. As I said, our very capable executive management team and our employees have responded incredibly well. In many ways, I believe that there is a significant silver lining that comes out of managing through difficult recessionary environments like we're in right now and that, in the end, we're going to emerge leaner, meaner, and stronger than we've ever been. We know we're going to be in a higher interest rate environment for some time, and it's why that we've kind of brought back some of our investments in categories like spirits.
We're continuing to invest, but our debt, we've trimmed our investment ambitions there, and we're way more focused on managing our core brands, which have provided exceptional performance this year, especially at the value and value premium end. The ultra premium end has certainly been impacted by people pulling back on their discretionary spending, but that won't last long, and we expect that to be the primary focus for our growth going forward as well. It's interesting that understanding our business is critical to having expectations around shareholder return. I've always been focused in terms of the number one thing that our company can do is to stay focused on long-term sustainable competitive advantage. The wine business is a long-tail capital investment cycle.
Yes, we have to have leading brands and exceptional operational capabilities, but we have a huge asset base both in agriculture and estate hospitality assets on top of our operational assets, which are considerable. I've told people every year, I repeat to them that you couldn't build our business today if you wanted to. We've only been able to become this strong because we've taken a 20-30-year investment focus and constantly improved our way all the way through the process. The fact that we've done it well augurs very well for our competitive sustainable advantage going forward. This will be the fifth recession that I've lived through in the last 50 years, starting in 1982 and then in 1991, in the beginning of 2001, and the global collapse in 2008.
And just in the same way with all of those recessions, we emerged a much stronger and more capable company, and that's going to happen for us again. I'm hoping that we'll stay focused not just in pushing our EBITDA into the 50s in the short term, in the medium term, rather, but that our goal is to get our debt down back to a 2:1 EBITDA ratio. We have a clear sight on making that happen. As you know, we've got approval for the development of our five-acre Port Moody site. We're in discussion with several developers in the immediate future. It's a difficult investment environment, as you might expect, with high interest rates and unusually high construction costs, confusing things.
At the same time, people need to appreciate that the construction budget for this project, five towers on our property, is in the CAD 800 million-CAD 900 million range so that these are very complex negotiations. The most positive thing is that our site is perceived to be one of the best sites in the GVA. There's a ginormous demand for housing, condos, and rental housing in the area. It's not a question of whether we monetize, and that is our goal, to monetize the asset. It's not a question of whether we will. It's just a question of timing and managing intelligently through all of these challenges. We're very focused on it, and it will yield a very positive result. We see an equal opportunity to significantly reduce our inventory cost levels.
The inventory that is currently on our balance sheet has about a 15%-20% additional cost value to it because of all the high costs that are still sitting in there now making their way out. So that we expect to be able to reduce that inventory value by CAD 10 million-CAD 20 million over the next 12 months-18 months. We have some other assets we can monetize that we'll be evaluating as well, several. And we're focused on that because we know getting our EBITDA to debt back to the 2:1 is exactly what we need. In any event, we're very excited about the future and confident about our growth and profitability going forward. So I'm happy to turn it back to you, operator.
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 a three-tone prompt acknowledging your request. Questions will be taken in the order received. Should you wish to cancel your request, please press the star followed by the two. If you're using a speakerphone, please flip to handset before pressing any keys. Your first question is from Nick Corcoran from Acumen Capital. Please ask your question.
Good morning. Thanks for taking my questions. Just the first question for me, the strong EBITDA performance in the quarter, are we seeing the bids return to historical levels of performance?
Just so I understand your question, Nick, are you saying that based on the strong performance we've had, do we see ourselves returning to historical EBITDA levels?
Yes, exactly.
Yeah, without a doubt. It will certainly take probably another full business cycle beyond this one, but we've got double-digit EBITDA growth, at least for the next year or two. I do think, by the way, that this kind of recessionary softness in terms of the market will bounce back to a growth market as this passes through. That's exactly what's happened in all of the last five times we've been through this. We expect to return to a growth. As you know, the most positive thing about our category is it's as recession-proof as any category there is. This is going to be a tough Christmas for a lot of retail discretionary products. They're already down significantly. On the contrary, we're sailing through with solid revenue and our EBITDA is coming back.
I have no doubt that we will return to those historical EBITDA levels.
That's helpful. Maybe you should think about the cost savings initiatives. How much progress have you made on those and what more should we expect?
Yeah. As I said, we picked up CAD 20 million in 2022. Our goal was to get another CAD 10 million this year, and we're really close to that mark. This is just cost of goods savings. We expect to pick up another CAD 10 million next year and additionally reduce the values of those inventory. We've generated a lot of SG&A savings to date. We've trimmed our staff significantly in the last year. There's no doubt some belt-tightening that needs to occur as we go forward because we're going to stay focused on that four-point plan of margin recovery, profitability, and cash management for the foreseeable future. Most of what we need to do for next year is almost done. In other words, these are longer-term glass contracts.
We're standing up projects on warehouse and logistics, and we have projects around vineyard profitability and improving a couple of the segments. Like our sphere, we have a profitability program there as well. So there's no stone unturned at this point. We believe most of those savings. We have a clear line of sight on delivering them next year as well as this year.
Great. And then maybe moving on to the leadership transition plan. I think you touched on this a bit in your prepared remarks, but maybe if you could give a little bit more color on what motivated the changes in both your role and the board now.
Well, I mean, I'm sure you're aware that kind of renewal of talent and capability at the senior level is the principal focus of every CEO and every board of directors. So it's not like we just decided to talk about it. We've been focused on it for a long, long time. I came back into this role in 2018, and I've probably stayed in the role a little longer than I've wanted to because we went through an inordinately difficult time. But we've always been focused on some recruitment and upgrading. In my role, I get to stay active when I leave. There's a lot of work that needs to be done in industry relations. Well, I never touched on government relations in my comments, but there are a lot of significant initiatives that we're working on.
The WSSP program was one of the biggest wins our industry ever received at the federal level. We have similar initiatives occurring in BC with the Ontario government and the Atlantic government because, hallelujah, governments are realizing that capital investment in their local markets is critical to their economic future. This is, in some ways, an anathema to what we've been fighting against in terms of globalization for the last 10 years or 15 years. I am significantly pleased with the fact that there is a resurgence at the provincial and federal level of supporting companies like ours and our capital investment potential in our country going forward. We produced a Deloitte study in Niagara that brought all the stakeholders together to build a compelling vision for economic development growth in the Niagara region. That's not just both agriculture, manufacturing, tourism, and hospitality.
With all the education and all the mayors of every city are involved with us, it's a real breath of fresh wind, and it's being received extremely well at the provincial level. So I think this was always it always has been a critical area to the foundation of our business model. Right now, it's trending in the right direction as well. So I think.
That's helpful.
Yeah. Yeah. I just think to your question, refreshing the CEO and knowing that we have a year lead time to do it and to bring in a new board of independents because we had planned to do it in any event. And rather than stagger it, we just felt it would be good to do it all at once. And we're pleased. Like I said, we have a new board that's ready to go, and it's a strong, capable board. And I think it'll work very, very well for us.
That's good color. Then maybe just on the board, what are you looking for in new board members?
I think it's diverse candidates who have certainly strong financial orientation. We have a very complex, asset-rich business model. So we need the right kind of audit oversight and banking and capital markets perspectives, people who've had operational capability, C-suite capability in related industries, hospitality. So there's a broad spectrum. We post up against a chart of competencies. And the more diverse and broad the experiences, the better. And this will be a very strong board as well.
That's helpful. And then maybe just on the CEO role, what are you looking for in terms of the new CEO? And is industry experience one of the things you're looking for this point in time?
Well, I mean, Connor McDavid. We want the role of the CEO is evolving. And I think that one of the most profound things that's happened to us is we put in a new ERP system company-wide during the high point of the COVID storm. But that, as you recall, was a very significant step of ours to ensure that we have a very high capability around digital management going forward. And it's paying significant dividends right now as we build efficiency with a much stronger understanding of our supply chain and financial record-keeping so that we make faster decisions real-time. That is to say that the cross-functionality of business is a very different environment today than it was even 10 years ago.
That I think there's a premium on senior leaders not only having diverse skills in sales, marketing, operations, and finance, but who are particularly capable of managing cross-functional teams. I know they said that 10 years ago, but it doesn't compare to how it works today. It's a very data-driven and complex process. I think that particularly in our case, we need an incredibly cross-functional, capable, digital, solid C-suite leader who can inspire not just the company, but an industry as well. There's lots of great people out there. We're looking at both internal and external candidates, and we're well down the road in this process.
That's great color. And then, Paul, maybe a couple of housekeeping items from me. AR stepped up in the quarter from about CAD 30 million in the first quarter to CAD 45 million in the second. What drove that increase? And should we expect this to be a source of cash in the coming quarters?
Yeah. Thanks, Nick. We did receive our WSSP payment. So that is sitting or sorry, we received notice of our WSSP payment. So it is sitting in AR, and we'll actually receive the cash in Q3. So that is why there's a bump in AR in the quarter.
Good. And then last question for me, just on the CapEx, it stepped up between the first six quarters. What drove the increase, and where should we expect CapEx to land for fiscal 2024?
Yeah. We still expect CapEx to be below CAD 20 million. Our run rate CapEx was sitting. We've been rationalizing it into the CAD 14 million or CAD 15 million dollar range, but we do have some additional expenses as we prepare Port Moody for sale. So we incurred a few of those in Q2, which would have caused a bit of a bump.
Great. That's all from me. Thanks for taking my questions.
You're welcome.
Thank you. Your next question is from Steve Corcoran from Echelon. Please ask your question.
Yes. Hi. Any progress that you can speak of with the government on extending their support program?
Can you repeat that, please?
Just the federal government program, whether it will be extended.
Yeah. I mean, there's 100% certainty that the program will be extended. It was always intended to be an extended program, but because they substantially changed the format of the program from excise tax exemption to a winery sector agricultural support program, they wanted to make sure in the first two years that the program had been set up. It's complicated with when vintages come in and how they manage the cash flow of people's inventories. And the program has run very, very well. And they wanted to make sure, in addition to its kind of administration and operational side of it, that there were no other legal trade challenges. There haven't been any. So that we'll extend the program. And we were up in Ottawa yesterday. We've met with all the senior ministries, and they understand how foundational this program is to our industry.
Don't forget, by the way, that unfortunately for us, our starting point was that we, as wine producers, were paying 5x, 6x, 7x the level of taxation that other wine-producing regions were around the world. So I spend a lot of my time explaining to people, "This WSSP is not a subsidy in any form. It's just them agreeing to take less tax from us than they're currently taking." And even with that program in place, we'll still pay 2x-3x the tax than other people pay around the world. But this reality is landing hard now at the federal and provincial levels that if they want the benefit of superclusters that wine industries generate, they have to have competitive tax regimes. And that's working in our favor right now.
We're not 100% certain of what the funding level is because when it was first introduced, there was a cider component that was in it, but that they left the excise tax on cider in Quebec. But the program is going to be funded fully for the wine industry going forward, and I can't see that changing in any way.
Okay. Second thing, you spoke of the possibility of other assets for sale. Are these material?
The assets that we have a lot of vineyard holdings that we don't have to hold necessarily. At the same time, most of our vineyards have been strategically invested in premium and ultra-premium red varieties so that they are a core part of our ultra-premium wine program. But there's significantly more than CAD 100 million in real estate there, but we rely on the supply. But there are pieces that we could let go and certain facilities we could rationalize so that there are definite opportunities, and we're looking at all of them because we want to be focused on trying to get down into that 2x-2.5x debt/EBITDA.
Okay. The one for Paul, on the interest cost this quarter, is this where it's going to stay at? It's a nice reduction.
Yeah. We expect it to be consistent with Q1 and Q2 of this year on a full-year basis comparatively. Just given the timing of when debt went up last year and the move of interest rates, we're not going to see a substantial drop year over year. But obviously, on an apples-to-apples basis, we're saving costs with the entry into our new debt facility and the swap we've entered into as well.
Okay. Thank you.
Thank you. Once again, please press 4 or 1 should you wish to ask a question. Your next question is from Peter Logar, sorry, he is a retail investor. Please go ahead.
Good morning. In light of your discussion of trying to reach the 2x-2.5x debt to EBITDA ratio, has there been any discussion of right-sizing the dividend in light of the recent share price to more quickly achieve that? And will the complete monetization of the Port Moody assets, what percentage of that do you anticipate going towards debt reduction?
Well, first, the Port Moody disposition will get us at least half of that, if not a little more. But I don't want to be overly specific around that. But we've had the property appraised at that level. And then there's an inventory level adjustment and other assets. So there's a clear line of sight to hit that target. And don't forget that we, as an industry, the wine industry has always had much higher levels of debt to EBITDA because of the fact that we're invested not just in manufacturing and expensive manufacturing assets, but huge investments in agriculture as well. And it was for that reason that we changed our banking facility to an asset-backed lending facility.
Because when I spoke with some of my colleagues in California, that's the only basis that banks in California lend to the industry is asset-backed because if they were doing it from debt to EBITDA multiples, they'd be up in the 7x, 8x, 9x, and 10x level. So even though we're at 4x-1x right now, we have a very strong balance sheet, and it's about to get a lot stronger. So I think this will serve us well going forward because there'll be lots of opportunities to acquire as we go forward, as we come out of the recession.
Thanks for the color on that. The approximate timeline to achieve that 2.5x approximately. I know you can't put a number on it, but if you proceed with the Port Moody and any additional asset sales, what's a ballpark timeline on reaching that 2.5x ?
I mean, I think the goal is to do it kind of in 6 months-12 months. Whether it takes a little longer or happens a little faster, it is a difficult economic environment with interest rates impacting this whole thing. It's definitely achievable. I think that's a fair timeframe to ballpark that at.
Okay. Thanks for the color on that and wishing you a happy retirement.
Thank you kindly.
Thank you. There are no further questions at this time. I will now hand a call back to Mr. Peller for the closing remarks.
Thanks, everybody. If you have any further questions or want to chat, Paul and I are always available. Otherwise, we'll look forward to connecting with you again in the early new year. Thanks for all your support, and we look forward to a successful close to the year. Thanks very much.
Thank you. Ladies and gentlemen, the conference has now ended. Thank you all for joining. You may all disconnect.