Andrew Peller Limited

Thank you, and good morning. Before we begin, this is a reminder that during the conference call, management may make statements containing forward-looking information.

This forward-looking information is based on a number of assumptions and is subject to a number of known and unknown risks and uncertainties that could cause actual results to differ materially from those disclosed or implied. Please refer to the company’s earnings release, MD&A and other security filings for additional information about these assumptions, risks and uncertainties.

With that, I’ll now turn things over to Paul Dubkowski, Chief Executive Officer of Andrew Peller Limited. Paul?

Thanks, Jen, and good morning to everybody on the call. It is really a pleasure to be joining you here today.

I'm pleased to be joined today by Renee Cauchi, Interim Chief Financial Officer and Patrick O’Brien, President and Chief Commercial Officer. In terms of an agenda for the call today, I will review operational highlights and provide an update on key business matters for the quarter, and Renee will review our financial highlights before we open up the call for any questions.

I'm pleased to share that our Q3 results showed strong year over year growth in revenue, margins and EBITDA as our team navigated significant changes to the retail distribution landscape in Ontario. The largest driver of change this quarter was retail modernization in Ontario, our largest market.

As of the October, eligible convenience, gas, grocery and big-box stores in Ontario are now able to sell beer, cider, wine and RTDs should they choose to do so. This change has expanded distribution points across the province by over 4,000 locations.

To address this changing landscape, we have made several changes internally to enhance our reach and sales capabilities within the convenience and gas channels. We partnered with a leading provider of outsourced sales and marketing solutions within that channel.

We have also optimized our commercial structure to ensure we are set up to meet the changing needs of our grocery and big-box customer partners as we move forward. Our sales growth in the quarter was led by our success in big-box retail.

Initial demand in big-box has exceeded expectations and we continue to evolve our product lineup based on consumer preferences and our supply chain. These gains were tempered by anticipated declines in the LCBO and our company owned retail stores.

We expect this to continue in our fourth quarter, traditionally our lowest volume quarter, as we will continue to evaluate the impact of this channel shift as retail modernization stabilizes in market in Ontario. We are pleased to highlight that during the third quarter, we continue to gain market share in total wine and VQA wine, while maintaining our position in blended wines.

Our portfolio highlights include our position as a strong number two share in the VQA category with our Gretzky brand holding the number one position in the category with Gray Monk, Peller and Trius continuing to show strength. In the blended wine category, we've seen strong growth in Copper Moon and Honest Lot, a zero-sugar offering across several varietals.

Honest Lot continues to be our fastest growing brand across the portfolio competing in the healthier for use segment. Within the overall wine category, the fastest growing brands are in the healthier-for-you segment and we are furthering our innovation in this area as we expect to see this momentum continue with changing consumer preferences.

By meeting consumer needs through innovative product offerings and enhanced distribution, we have continued to grow market share in fiscal 2025 across all major markets and are remained the fastest growing wine supplier in English Canada. Moving to the balance sheet, we are pleased to see continued working capital improvement as we right size our inventory levels post the supply chain disruption over the last few years.

These improvements along with increased profitability are driving improved free cash flow and ongoing debt reduction. Lastly, before passing it to Renee to review our financial results in more detail, I wanted to address the ongoing risk of a trade conflict between the U.S.

and Canadian governments, which was set to impose a 25% tariff on goods being imported into each country. While we are pleased to see that any tariffs are delayed thirty days, we have performed a preliminary assessment of the exposure and opportunities for our business.

Our initial analysis has indicated that with ongoing management and support the impact of tariffs on U.S. sourced bulk wine and components can be managed effectively, but we will continue to monitor the potential impact of further depreciation of the Canadian dollar against the U.S.

dollar. While these potential changes bring uncertainty, they also present an opportunity for our organization -- our organization, Canadian wine producers and for all Canadian made products.

We believe this is a time to support the incredible products that are made, manufactured and growing here in Canada with wine being one of them. Supporting domestic wine producers and grape growers will drive increased share for Canadian wines and has the potential to drive significant investment and economic impact across the entire value chain.

With that, I'll pass it over to Renee.

Thanks, Paul, and good morning, everyone. Sales in the third quarter increased $5.2 million or 5.2% year-over-year to $105.4 million.

This is primarily due to load in and sales to big-box stores, which began in Q3 as Paul outlined above. The sales growth was further supported by the revised Ontario BQA support program that was announced in December 2023 and further explained in our disclosure materials.

Offsetting these positive factors, we are continuing to see some softness in our personal wine making business as well as our owned retail stores as consumers adjust to the new distribution landscape across Ontario. Our margin in the third quarter of fiscal 2025 was $42.4 million up $7.6 million or 22% from $34.7 million in the prior year.

As a percentage of sales, margin was 40.2% compared to 34.7% in the prior year. Margins benefited from the inclusion of the Ontario BQA Support Program as well as lower costs for glass bottles and inbound freight due to the cost savings programs implemented by the company over the past two years.

Gross margin is also continuing to be impacted by channel mix and inflationary cost pressures in concentrates, packaging and other raw materials. In response to these pressures, we are continuing to execute cost savings programs and formulation changes relating to these inputs.

Selling and administration expenses landed at $23.8 million for the quarter, up $2.3 million or about 11% to the prior year. As a percentage of sales, expenses increased to 22.6% in the quarter compared to 21.5%.

This increase was due to higher compensation and higher selling costs as a result of our strong performance in Q3. EBITDA landed at $18.5 million in the quarter, up 40% from $13.2 million last year.

This increase was mostly driven by the net increase in sales in our B2B channel and favorable margin as a result of continued cost savings initiatives and the Ontario B2A support program. In taking a look at our year-to-date results, our revenue was $314.1 million up 4.4% from last year, and EBITDA was $49.4 million, up about 20% from last year.

The growth is due to the factors outlined above along with the performance in our owned retail stores during the LCBO strike in July. Now looking at our balance sheet, at the end of the quarter, inventory decreased to $167.9 million versus $192.5 million at the end of fiscal 2024 due to strong sales and cost savings initiatives.

Year-to-date, we have generated $59.6 million in cash from operations compared to $39.9 million last year largely due to these improvements in working capital due to the decrease in inventory. These working capital improvements have helped us reduce our net debt position from $208.5 million at the end of last fiscal year to $175.4 million at quarter end.

Our debt-to-equity ratio decreased to 0.74:1 compared to 0.86:1 at the end of last fiscal year, and there was capacity on our revolving credit facility of about $92.0 million. As we look forward to the end of the year, we do expect debt levels to increase slightly as the fourth quarter is generally our lowest volume quarter.

However, we remain focused on continuing to lower our debt to EBITDA ratio year over year. Thank you, and I'll now pass it back to Paul.

Thank you, Renee. As Renee highlighted, our results for the third quarter did show strong year-over-year growth in revenue, margins and EBITDA.

We are pleased to see these results as we adapt and continue to evaluate the significant changes in the Ontario retail environment. We are confident our operational scale, the strength of our team and the diversification of our portfolio will ensure we are set up for success as we move forward.

We are confident in our ability to outperform the category through consumer centric innovation and by winning in both core channels and impactful new ones. Stay tuned for more on innovation in the coming year.

In addition to the sales performance, as I mentioned before, we're encouraged by our improved cash generation and debt reduction, reflecting our efforts on working capital improvements, cost reductions and overall operating efficiency. Also with the recent news and uncertainty around trade relations, we believe this is a time to support the incredible products that are made, manufactured and grown here in Canada.

This is an opportunity to grow our domestic wine industry and the economic impact in the regions in which we operate. And lastly, to finish, I'd like to thank our teammates for their passion and commitment to our customers and our culture.

Our success is made possible by their dedication and efforts, which is especially impactful as we navigate a period of significant change. Thank you.

And I'll now turn it back to the operator for any questions.

Thanks, and good morning, everyone. I wanted to start with the big-box rollouts that you undertook during the quarter.

Maybe just want a little bit more information on you touched on in your prepared remarks, Paul, that you did optimize your commercial structure during the quarter to help better meet the needs of those retail customers, like a little bit more detail on what exactly that means. And then secondly, there is also mention of refining the assortments a little bit.

So I'd just be curious to know what were the initial learnings or what came out of the initial rollout and what evolution should we see from that as we go forward?

Yes, great. Thanks, Luke, and good morning.

I'm going to pass that to Patrick O’Brien, our President and Chief Commercial Officer.

Hey, good morning, Luke. Yes, so again, just to articulate just some more context around, I guess, retail modernization and our performance.

So I think it's fair to say that, again, retail modernization and the evolution of the retail landscape is certainly still in its infancy. We're really proud, I think, of our performance to date.

And again, as Paul alluded to, I think we're seeing really strong share and performance, particularly in the big-box and grocery channels. We do expect continued evolution of these trade channels as more kind of licensed locations come on stream.

And as Renee mentioned, as consumers ultimately adjust to a new distribution landscape in Ontario. But again, just to go a little bit deeper in terms of assortment, again, what we're seeing is there's different occasions, different needs from a C&G perspective versus big-box and grocery.

So again, I think we're in a very fortunate position in terms of our size and scale. And I think we have a deep portfolio with a rich history that again can meet the consumer where they're at.

So again, we're really leveraging I think that portfolio for different occasions and different channel leads and then we'll continue to evaluate that as we move forward.

Great. Thanks.

And then for my follow-up here and then I'll pass the line. The margin performance was particularly strong during the quarter and I know you guys have a lot of cost savings initiatives going on in the background.

Maybe if you can just shed some light over the course of, let's say, the next 6 months or 12 months. Do you expect those to increase in magnitude or scope?

Do you have any new initiatives planned? Or is this going to be more of a story about executing the existing initiatives that you have going on?

Again, I know that there's several different levers that you guys are pulling behind the scenes, but would love any incremental detail that you can share on that.

Yes. Good question.

We're certainly happy with the improvement we've seen in our margins over the, let's call it, the last ruling 12%. And I'll dig into that a little bit in a minute.

But in particular related to the third quarter, we're seeing the benefit of some specific cost savings initiatives and programs we put in place over the last twelve months. We did stand up and we've talked about this publicly a $20 million two-year savings program that we are delivering on.

We're nearing the end of that and kind of putting in place additional programs as we move forward. We have sold through a lot of that historical inventory built up at those higher levels of cost.

And so with those savings, we're starting to see that benefit. And that is seen in those Q3 margins that we presented with these results.

We do expect moving forward to see some margin growth. I will call out that there is seasonality in our business.

So Q4 is our lowest volume quarter, so naturally our margins do come down. In Q4 in most years, last year we had a onetime item in Q4 that impacted that.

But we will see that kind of natural flow of our margins with our seasonality in our quarters. Moving forward, we do expect that expansion.

There is still some staking inflation out there. Freight rates continue to go up and down on some of our internationally sourced items.

FX will have an impact on all Canadian companies, but we do expect some margin expansion next year as well.

That's great. Thank you very much.

Thanks, Luke.

Good morning and thanks for taking my questions.

Hi Nick.

Just the first question for me, strong it was a strong quarter for sales driven by big box. Any indication how much of that was loaded in the channel?

Yes, good question Nick. Yes, definitely a strong quarter overall.

Big-box was an important lever for us. I think as we look at the quarter with all of the change happening, we're super happy with the effort from our team, the ability to adapt and meet the needs.

Big-box was a big lever. There's definitely a little bit of load in there, but we've been through a couple of cycles now.

So some of that is balancing out. But I do think we'll see some further balancing in Q4, some modulation of that.

And as we roll out through the year and get through a few quarters, we'll see that stabilize over time. So again, a little bit of load in, but definitely a channel we put a focus on.

We believe we're winning in that channel and we'll continue to ensure we're meeting the needs of our customers.

That's helpful. And any indication how the margin in this channel compares to your legacy retail business or LCBO?

Yes, I can take that Nick. Good morning.

So I think from our perspective as retail modernization continues to take flight in market, we certainly expect to maintain strong margins overall as Paul alluded to. However, we do anticipate some increased costs as the market continues to evolve and we showcase our brands within a more fragmented marketplace.

Good. And then maybe just going back to last year, any indication how the harvest was and how that sets you up for this fiscal year?

Yes. We're real happy in Ontario.

It was a real good harvest this year, good quality, good yields. So I think it sets us up well from a supply standpoint as we look forward.

In the West, as everybody knows and it's been well publicized, there were two successive freeze events in the previous two years. So this year's harvest was minimal and there has been a great replacement program put in place in the West.

We do expect coming into this year to see a bit of a rebound with somewhere between a 30% and 50% harvest in the West this upcoming year, but that will continue to be evaluated as we look at the buds and look at the growth in the spring. So we'll provide more information on that when we get there.

And I think you've talked in the past that there have been government support programs. Can you talk about those a little bit?

Yes. Definitely, government's been a great partner both in the East and the West on supporting the domestic industry.

I think with the recent tariff announcements that have come out that support local, support domestic has definitely taken on a new meaning and we're certainly leaning into it as a business and telling about the great quality of wines we have here and having Canadians buy these great Canadian wines. Our government partners have been great.

In the West in particular, we're continuing to work with them on getting the right support mechanisms in place for the entire industry to ensure that the industry recovers from the success of freezes in those two winters. We have seen a willingness to be at the table to work with us and ensure we not only get the right support from a vine replant program where there has been vine death, but also in terms of ensuring that we can get grapes and liquid where required to ensure we can keep BC manufactured wines on shelf as we work through the impact of those freezes.

Great. And then just one last question for me.

Any update on Port Moody?

Yes. I can give a quick update on that.

We're kind of continuing along the path where we were last update. We are actively engaged with the City of Port Moody.

We're actively engaged with developers in the region. I previously shared about 12-month to 18-month time line during the last call that we'd like to move towards getting something done.

We're still aiming for that. There obviously are a variety of factors impacting us, whether it's interest rates or construction costs or demand in the lower mainland.

I will say interest rates are moving more favorable. Construction costs are still a bit sticky kind of to be expected and demand in the lower mainland is kind of ebb and flowing just with some restrictions on foreign money coming into the market.

So, we're still optimistic. It's still a valuable piece of property to us, but I'll provide some more guidance on that when I have that clarity in terms of exact timing and value.

Thanks. That's all for me.

I'll pass the line.

Thanks, Nick.

Thank you. Again, I'd just like to thank everybody for joining us today.

Acknowledging it has definitely been a period of change in the industry and a period of uncertainty in trade relations in our country, but we are optimistic and motivated for our future and the future of the domestic wine industry in Canada. And again, thank you to all of our teammates across the country for your support.

We look forward to connecting again in June to discuss our year end results. Thank you.

Have a great day.