Andrew Peller Limited

Thank you Miranda. Good morning, everyone.

Before we begin, I 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 it's subject 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.

Good morning, everyone. Great to be with you.

I'm joined today by our CFO, Steve Attridge. And we had our Andrew Peller board meeting yesterday afternoon.

It's been a tough two years for everybody in the pandemic. And it's really positive to see that returning a corner and that the impact of the virus is definitely waning and although I think we're all bitten by our past prediction that things would improve quickly, it's clear now that things are improving significantly, and we're looking forward to returning to a more normal time.

Certainly, our business was totally impacted over the last two years by the pandemic, but we are very proud and pleased with how the company has performed through this period. I think I recall explaining the last time that in the first year of the pandemic we had a bit of an updraft from all the kind of panic pandemic buying that that occurred, particularly with value products and for leaders.

In the first part so that we got a bit of a lift from the first part of the pandemic and of course now in the tail end of the pandemic, the screen doors hitting us in the ass. Our revenue that we reported up to the nine-month period is down 6% over the previous year.

and we expect to finish down 5% towards the end of the year. And of course, we've had the government liquor stores and our TWS retail stores and grocery outlets have remained open throughout the period.

And although they've had various Monday closings and the like, as we've explained in the past, but in those trade channels that have stayed open we have performed very well, and in fact, we have sales better or 5% above where we were pre -pandemic. And we think that's very solid organic performance.

In -- Our sales have been negatively impacted by the restaurant industries, which normally provides up to 18% to 20% of the volume of our industry has been closed and compromised significantly sales in the restaurant area are probably just less than half of what they normally were pre -pandemic. We had Estate Winery hospitality closings and our export and international travel business has been significantly compromised.

But in spite of that, we've maintained a focus on a lot of product innovation and new products. We've had good performance in premium wines and in our spirits business, our RTD business and our [Indiscernible] brand continues to do very well.

Naturally, we've increased our focus on cost reduction. We're calling this last part of the pandemic and certainly into next year, the fifth wave, which -- where the first four waves were viral, the fifth wave is a -- an inflationary wave.

We're focused on managing our costs accordingly and managing price increases, and then focusing on those price increases and efficiencies where we can get them. And now that the revenue is expected to bounce back, we're looking forward to next year.

I'll turn things first over to Steve, and then have a few closing comments for you. Over to you, Steve.

Thanks, John. Good morning, everyone.

As John mentioned, our sales and operating results through fiscal '22 continue to be impacted by a number of unusual factors related to the pandemic. Year-to-date sales were down 6% when compared to the prior year due to temporary COVID related shifts and purchasing patterns over the last two years.

When the pandemic was announced in the fourth quarter of fiscal '20, purchases increased and continued through fiscal '21, driven by uncertainty and concern about whether supply chains for alcoholic beverages would remain open during the pandemic. The LCBO in Ontario closed on Mondays through much of fiscal '21, driving consumers to our higher-margin retail outlets, and increasing sales of our products through our chain of over a 100 retail stores.

We were also significantly affected by the cycle of government mandated closures of restaurants in Estate Winery, hospitality businesses, and most negligible sales in our export business due to restricted international travel. Additionally through much of the pandemic, sales volumes of our value priced wines increased significantly, and our higher margin premium and ultra premium brands decreased.

Largely a factor of the closing and restrictions on hospitality. Now we're seeing our value price volumes begin to return to the pre -pandemic levels, however, premium and ultra premium revenue is not rising enough to offset this decline due to the cycle of opening and closings, and restrictions in restaurants in our Estate Wineries, and international travel.

Looking ahead, the challenges presented by the pandemic on our near-term results, we expect will continue to affect our performance in the fourth quarter of fiscal '22 and into fiscal '23. However, given these challenges, we do believe that we've performed well throughout the pandemic, given the very difficult cycle of openings and closings that we've experienced.

Turning our margins, gross margin again, was negatively impacted by purchasing patterns and other factors related to the COVID-19 pandemic. These included higher imported wine and other raw material costs in addition, we're experiencing the same increased costs as others related to a much publicized global, supply chain issues due to the pandemic, as well as increased costs due to inflationary pressure.

We're implementing price increases in the fourth quarter of fiscal '22 that are expected partially offset the inflationary pressures -- pressure on margin. While we're also assessing fulsome cost saving initiatives to mitigate against increasing supply-chain costs.

Our sales and admin expenses increased compared to last year as we return our staffing and marketing overheads to more normal level. We'll remember that in last year's first half, we furloughed a significant part of our workforce due to close trade channels and to conserve cash.

In addition, this year, we encouraged certain non-recurring startup costs to let the opening of a recently acquired Riverbend Inn. September 28th, we completed the sale of our Port Coquitlam first Columbia property and assets for total cash proceeds of about $8.8 million, net of transaction costs still generated a realized $7.5 million and were 21 per Class a share, including all of these factors, net earnings for the first nine months of fiscal '22 were $19.5 million or $0.46 per Class a share, compared to $34.1million or $0.80 per Class a share.

Now looking at the balance sheet, total debt -- total debt increased marginally to $180.4 million at December 31 due to reduction in cash from operation and increased investment in the company's properties and operations. At quarter-end, we had capacity on our revolving credit facility of about $167 million.

As of December 31, we've repurchased and canceled 598,600 Class A non-voting shares under our normal course issuer bid at a weighted average price of $8.70 per share for total cash consideration of $5.2 million. Thanks very much for your time this morning, and with that, I'll turn things back to John.

Thanks, Steve. We're expecting to finish the year both down 5% in revenue and perhaps down 30% in our EBITA.

And as we plan for next year, we're really seeing things returning to what we think will be fairly close to post - COVID normal. Restaurants in restaurant revenue should get back into the 90% range.

There's, been at least of 5% to 8% closure in restaurants and there have been many significant changes. People ordering food to take home has become part of the restaurant normal now.

And then -- but that will be a significant change we were hoping our Estate Winery and business, which was performing extremely well last year or Estates did well even though they were closed for a quarter, we expect them to be open for a full-year. And really it should be just in the travel area where we expect at least another year of disruption because people will start traveling more, but it's not expected that things will return to post-COVID normal until about a year or two out.

So naturally we're taking price increases and we're expecting double-digit inflationary impact and we will certainly have a single-digit pricing increase impact. So it's certain that earnings and margins will be impacted for another year the so-called [Indiscernible] of COVID.

That being said, we have definitely kept our focus on the long-term and positive growth potential in our business. I've reflected many times in the last year that we've been -- over the last 40 years that I've been with the company, we've been through many inflationary and deflationary economic times and challenges, but our industry has always, and our company's always performed well both during those periods and subsequently, and I'm absolutely confident that that will be the case this time that we fully expect to leave the COVID pandemic a much stronger, more capable company.

Certainly our investments in the last few years, we've put in over a 100 million in to our facilities and our people, we've talked about our ERP system, which is fully implemented right now. It's been an incredible amount of work but sets us up to really digitize our business going forward and draw increased efficiencies and capabilities from the very complex supply chain that we manage.

All our entrants into new product categories are doing very well. We're particularly excited about the premiumization of our industry and the future that it has for our company.

So thanks for all your support. We definitely plan to get out and chat with everybody throughout the year.

I'm happy to take questions if any of the callers have any comments or questions they'd like to share with us. Over to you Operator.

Good morning. It's Michael Vaccarino here on behalf of Amr.

Just a couple of questions from me. In your prepared remarks, you spoke to higher input and supply chain costs that drove gross margins down.

So when do you foresee margins starting to rebound again?

It's a question that every company President and CFO is getting across the country right now, and obviously, none of us are crystal ball experts on this. Certainly it's -- transportation costs are the ones that are highlighted and are -- the winery purchase around the world is currently inflated as well, and so is all our packaging and pretty well most everything.

It's hard for us to predict that, I think that it's certain that it will be six months to a year is the timeframe that people talk most commonly about. It could drag into the following year bid as well, but it for certain will be for a year.

And then a lot depends on economic policies and political policies that we don't have a lot of insight to. All we know for sure is that they will definitely come and that they happened to us already, that we're doing everything we can to mitigate their impact.

And we also know that they'll eventually come back to normal. So hopefully in a year's time, but we'll have to wait and see.

Thank you. And then on capital allocation, you had previously repurchased some stock.

How do you think about capital allocation going forward? What do you think about M&A versus buybacks or other ways of allocating capital?

It's part of our everyday life and we still have very strong balance sheet and nothing feels better for management knowing that they have the opportunity to invest in growth as we go forward and that is our ambition to invest in growth and to -- we continue to monitor M&A very carefully. And on top of that, we bought shares back in this last year and I believe the year previously as well.

Our shares are trading at a very low value right now, and to the extent that it persist, it will still be part of our calculus to consider that opportunity. But we're also investing in Vineyard development as our premium and ultra premium business Estate Winery business grows, we're having to put a lot of money into the red premium varieties.

I think in the short-term we'll certainly be a little more cautious with our spending and our cash flow management while we get through this inflationary period, but I think we'll continue to allocate capital as we have in the past, including investments in our assets. We'll monitor the opportunity to purchase our shares back and we'll certainly be interested in any M&A opportunities that can help us grow strategically in spirits -- in premium wine and in the RTD business as well.

Great. Thank you so much.

I'll pass the line.

Good morning and thanks for taking my questions.

Good morning, Nick.

Just looking at the third quarter, were there any -- where you call one-time item, is there a temporary impacts of the quarter that might have impacted gross margin? And then should we expect a sequential improvement in margins in the fourth quarter?

I mean, Steve, do you want to take that? I don't recall any one time.

I think the only -- I will say the only thing that happened in the quarter that I would think about as unusual is we did have all of the major highways in British Columbia, [Indiscernible] for a considerable period of time. So that definitely added to some difficulty.

I think that we did a terrific job of getting products moved around, kind of a critical time before the holidays. But there would've been I would say a onetime impact.

Relatively small when you consider the amount of inflation that happened in the window. But I would say that would be the one thing that it's probably a bit of an anomaly, Nick.

Then moving onto the price increases that you talked about implementing in the fourth-quarter, when do you expect those to take hold?

We put those rates increased in already and atleast started to, and we can at a very broad range of trade channels, in some areas it's easy to put the price increase back them the hold. In some of the broader retail areas, it can be a little more challenging, but suffice it to say, we've seen all our competitors respond as well, which is unusual.

And we've tended to have led that activity in the past and now we're seeing others that we would not normally see, including Europeans who are starting to take price increases. So we've started our pricing policy increases for the year.

We're well into where we think we need to be and we will update you in our next quarterly call.

Good. And then I noticed in your disclosure that you amended the credit agreement prior to quarter end and then again in February, can you give any color on what the amendments were and what might be in the reason the behind that?

You want to take that, Steve?

Yeah, sure. So we amended both [Indiscernible] our agreement is subject to two covenants, so funded debt and interest coverage.

We amended both of them just as we look into the future and you can see a fair bit of inflation on the horizon. We amended the agreement to relax the covenants as we go through a bit of inflationary period just to make sure that we can continue to stay onside.

Wonders.

Good. And then the last question from me, do you have any updates on the Port Moody asset and what you're doing there, are there in terms of getting a development permit or potentially moving it towards sale.

Yeah. Nick, things, I think, are moving positively.

On the Port Moody side, we are expecting to have our development permit approved in the month of July. I think there is a provision for us to extend that a year if we needed to, but we're not anticipating needing an extension.

I think the -- it's fair to say that the BC development community has put COVID in its rearview mirror and there is considerable uptake in development interest and planning. We're certainly talking to lots of people and I'm feeling very positive and confident about the investments opportunity going forward.

And for sure in the next year, hopefully, or at the -- in the latest in the next -- in the second year.

Great, that's all for me. Thanks again.

Thanks to everybody for joining us, and as always, we invite you to call us at any time during the week if you have any questions or concerns. We're looking forward to finishing the year positively and we're excited about our future and hope to get out and speak with all of you throughout the next year.

Thanks very much, and we'll talk with you soon.