Andrew Peller Limited

All participants, your meeting is ready to begin. Good afternoon, ladies and gentlemen. Welcome to the year-end fiscal 2020 results conference call. I would now like to turn the meeting over to Mr. David Mills. Please go ahead.

Well, it's actually good morning, 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. 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. And I'll turn things over to Mr. John Peller, Chief Executive Officer. Thanks, David.

And good morning, everyone. Joining you from my home here in Burlington. And also on the call is Steve Attridge, our CFO in Burlington. Randy Powell, our president, and Steve's going to speak to some of our financial results, and Randy will outline some of our major business initiatives for the years. Let me start by saying that for our year ending March 31, our fiscal 2020 was another very positive year for our company. Our sales for the year were flat, but Our earnings were up very nicely as we continue to strengthen our product mix into areas where we're getting higher margins. And those increased earnings have allowed us to both improve our results, but also to allow us to invest more in new areas as we look to grow our product portfolio in cider and craft beer the whiskey and distilled spirits. So all in all, it's been a very, very busy year and we're pleased with all the work that we've got done. So our net earnings rose to 23 and a half million or 55 cents a share, up from $22 million in fiscal 2019. Obviously the last part of our fourth quarter and particularly the month of March, was impacted with the onset of COVID-19. You know, we were most fortunate that right out of the gate, you know, our beverage alcohol category was deemed essential by the federal government. And as a result, you know, the main liquor stores across the country were kept open. And we adjusted to ensure our production facilities remained open and as well as the retail stores that we have here in Ontario at our wine shop. And we had our estate winery stores open for curbside pickup, but from a tourism standpoint, you know, visitation and normal events and activities are were not open for that period. They've just opened out west now. As you may have heard, the western markets are opening restaurants and the estate wineries are just opening now under a very strict regimen and protocol. And in Ontario, as you're aware, both restaurants and our estate wineries can do curbside pickup, but they've yet to open them up more broadly to consumer traffic. I must tell you I'm incredibly proud of the work that our management team did. They met twice a day remotely and through the weekends for three or four weeks to ensure that we kept our employees safe and all our operations ran strong. Our demand was particularly strong in March, and particularly the four-litre products were in high, high demand. And our team did a great job. And as well, not surprisingly, our e-commerce direct-to-consumer business became very, very popular and a great deal of effort and went into ensuring that we met all the demand that came through that channel as well. You know, if there is a silver lining with COVID for us, One of the very positive things that I think is going to come out of this going forward is that governments, both provincially and federally, are going to realize that a lot of the globalization that they promoted wasn't necessarily in their long-term economic interest. And it was made clear to me through my discussions with provincial and federal governments you know, politicians that they were lamenting the fact that so much of our manufacturing has left the country and that our supply chains in food, in agriculture, obviously in PPE and health were badly compromised. And that, you know, a lot of the value that they expected by promoting globalization had not accrued to us nor protected us in ways that we should have been protected. These are things that I've been promoting for 20 years. but I have been beaten back by kind of liberal trade messages. And I think going forward, you know, for us even trying to get the interprovincial trade shipments approved, we haven't been able, simple policies that they could have done to help promote manufacturing and sustainable business models here in our country, they've not been supportive. And I really do believe that that will change positively for us going forward. The beverage alcohol industry remains strong. You've no doubt heard us say over the years that in the last 20 years, whether it was 9-11 or the financial collapse in 2008 and 2009 or past recessions, we tend to power right through them and perform well. And we expect to do the same this time around. And as I told you, the sales through our liquor board and grocery channels and our e-commerce were particularly strong in April and May. And they offset a lot of the business that we lost because restaurants are closed. Our own restaurants are not open. Our estate, winery, tourism, and special event businesses down are, you know, our sales to duty free are non-existent as the airport business has dried up. And while we've been able to offset some of that and most of that in the first two months, we don't expect to be able to offset that for the entire year. So that it's likely we'll have some revenue impairment in the 5% to 10% for the year. And having said that, we're really looking at investing in our business as if everything was full bore. And our eyes are definitely... on our future and we're going to continue to make the investments we know that are critical for the next five to 10 years. So we're pleased and happy with the investments that we're making and we're definitely excited with our prospects for our future. So at this point, I'll just turn it over to Steve and then to Randy and if there are questions at the end, we'll be happy to address them. Over to you, Steve. Thanks, John.

Good morning, everyone. So sales were $82.1 million and $382.3 million for the three months from the year ending March 31st, 2020. That's up from $79.8 million and $381.8 million in the prior year. So once again, we experienced solid sales growth through the majority of our well-established bottled wine trade channels. resulting from the introduction of new products and product categories through the year. We did see a softness in our personal winemaking market and in our export sales through the year, as a result, as well as increased competition from subsidized lower price imported wines in certain markets, particularly in Western Canada. As a result of our sales performance through fiscal 20, We believe our share of accessible markets remains stable, a reflection of our strong product portfolio, our reputation for delivering value, and the loyalty of our customer base. While our estate properties, export, and personal winemaking sales were affected by the pandemic, we are seeing an increase in sales through the provincial liquor store channels as well as our retail locations. We've also increased our emphasis on direct-to-consumer sales leveraging the strong brand recognition that our state wineries and we're seeing positive momentum in this channel. Our gross margin improved in fiscal 20 to 43.5% of sales, up from 41.6 last year. The margin for the fourth quarter also improved, rising from 43.3%, rising to 43.3% from 39.2 in the prior year. Our gross margin continues to benefit from our increased focus on higher margin products, and our programs over the last few years to enhance efficiency and reduce costs. As we discussed in the past, our acquisition of three wineries in October of 2017, we recorded an increase of $10.4 million in inventory to represent the fair value of the goods acquired. This increase is being expensed to earnings as these goods are sold, thus reducing our gross margins. Through fiscal 20, we reported a charge of 1.7 million to the cost of goods sold compared to 5.5 million in fiscal 19. Our sales and admin expenses were lower in fiscal 20 due primarily to a $3.2 million reduction from the change in accounting for lease obligations adopted in April of 2019. Partially offsetting this decrease were one-time costs for consulting and professional fees related to our implementation of a new enterprise resource planning system and an increase in the allowance for doubtful accounts due to a potential impact from the COVID-19 pandemic on certain customers. Selling and administrative expenses as a percent of revenue in fiscal 20 improved to 27.4% from 27.8% in the prior year. With increased sales and stronger margins, our EBITDA rose to 61.5 million for the year, up to 52.9 million in fiscal 19. Adjusted EBITDA, which includes the one-time acquisition related charges, also increased to $63.2 million in fiscal 20, up from $58.3 million in the prior year. Interest and amortization expenses increased in fiscal 20 due primarily to the recently adopted accounting treatment for lease obligations in accordance with IFRF 16. Other expenses in fiscal 20 include $1.7 million in restructuring costs. We posted a net unrealized non-cash loss in fiscal 20, the result of mark-to-market adjustments in our interest rate swaps and foreign exchange contracts, mainly due to declining interest rates. Net earnings for fiscal 20 were $23.5 million, or $0.55 per Class A share, up from $22 million, or $0.51 per Class A share in fiscal 19. Now turning to the balance sheet, overall debt increased to $165.2 million at March 31st from $154.8 at the end of the prior year. The increase is due to lower cash from operations and our regular debt repayments. Cash from operating activities in fiscal 20 was $31.5 million compared to $49 million in the prior year. Shareholders' equity rose to $5.63 per common share, up from $5.31 per common share at March 31, 2019. At year-end, we had capacity on our operating credit facility of approximately $24 million, with another $112 million on our investment facilities. We believe we have the management experience and the financial resources and flexibility to meet the liquidity needs presented by the pandemic. Having said that, we're carefully reviewing all capital allocations to ensure we remain financially stable and well capitalized going forward. In summary, as John mentioned, we're very pleased with our results in fiscal 20, and we remain confident that our track record of solid performance will continue over the long term. Thanks very much for your time and attention. And I'll now turn things over to Randy.

Super, thanks, Steve, and good morning, everyone. As we've discussed over the last number of years, our goal at Andrew Pelley Limited is to increase our shareholder value through a handful of key strategies. The first one, of course, is strengthening our product portfolio. John commented on it earlier. You know that we rationalized in the last few years, some underperforming brands, but then we brought in and added some powerful new brands like the three acquisitions of Black Hills, Pinhorn Creek and Grey Monk. So a wonderful trade that really increased the profitability of each and every one of our sales. Another key strategy is investing in our consumer brand building. Innovating at a much higher level than we had done in the past. and of course entering into other beverage alcohol segments other than wine. We have seen over the years that consumers are buying across these categories and we want to make sure that we participate in that. Of course we've modernized our systems and processes. The largest of note is the work that we've been doing in replacing our ERP system. At the same time that we've been driving these strategies, we've been very vigilant to make sure that we drive efficiencies throughout the organization and ensure that we capture sustainable cost reductions. We believe that that not only contributes to our success here in 2020, but really puts us on a strong platform as we face the COVID-19 pandemic. So I thought I'd take a moment and talk about some of the key drivers in 2020. to give you a sense of what drove some of the strong performance elements of our business. From a brand perspective, the relaunch of the Peller Family Vineyards brand has continued to be very well driven by new product optimization, the differentiating marketing programs, innovative packaging, strong in-store merchandising, and I think a really strong presence in the digital campaigns that we've put into markets. We've seen some strong growth there. Our partnership from day one continues to grow with Wayne Gretzky, and we've seen some real benefits associated with that of late. The sales of our brands and our spirits continue to grow. And then, of course, we're very proud of the introduction of Wayne Gretzky 99 Premium Lager last year. That was primarily focused in fiscal 2020 to Ontario, but we have two wonderful new products we'll be adding to that portfolio, 99 Session Ale and our 99 Pale Ale. We'll be building that national distribution of all three of those products across the country this fiscal year. It's a very exciting, another dimension to that strong Wayne Gretzky beverage alcohol brand. Our entry into the craft cider business has been fabulous with no boats on Sunday. Very, very strong and successful from the very beginning. Sales were up again significantly in 2020, and with a strong roster of new product innovation, we think it will grow at that same strong level, if not even stronger in fiscal 21. Dry rosé cider, cider in cans, and most recently, even under the no boats on Sunday, We've launched some ready-to-drink products or RTD seltzers, as we call them. Our own retail stores, the wine shop, continues to do very well across all formats, including the co-located stores, which are in grocery stores. They're doing particularly well these days. It's also always been but continues to prove out to be a great place to test a new product. So as we're getting more and more into innovation and driving new products out, What a gem to have the wine shop, or TWS, we call it internally, available to us to get live feedback from consumers on a very instantaneous basis. Importantly, in this COVID-19 environment, we're seeing growth, as I think both John and Steve had mentioned, in our direct-to-consumer business. Our wineries have always been a very important brand builder and source of profitable volume in this direct-to-consumer business. But obviously, in this environment, we're implementing a number of new programs that allow consumers to buy their favorite brands across our full product offering, wine, beer, spirits, cider, RTDs, online, delivered directly to your home. From a sales perspective, Patrick O'Brien, our EDP of sales, joined us in September. He has settled in beautifully, and we're seeing him work hand in hand with our marketing team and our major customers in driving execution of our programs into the marketplace and importantly, our innovation in store. We're also strengthening our customer solutions team and really leveraging that revenue management and category management effort with our customers. I can tell you that our trade customers are thrilled with the value that we not only bring with outstanding world-class product, but also with the insights that we can bring through customer solutions. So a real strength in there and a benefit to all. Finally, looking at our operations overall, we continue to drive cost savings, strong cost savings and operational improvements across that entire platform. Steven mentioned that our margins had gone up from 41.6 to 43.5 in 2020. Obviously, our ops team and the great work they're doing is one of the drivers behind that. I'd also like to just take a moment and note that we have actually consolidated our wine kit operation from Port Coquitlam. That has now been consolidated into one facility nationally, which is in St. Catharines, Ontario. That was completed the last day of the fiscal year, so much of the work has been done. but the benefit will actually start to be realized in fiscal 21 and we will see that business continue to strengthen its financial margins as a result of that. So clearly you can see 2020 was a busy year. We laid a lot of foundation that allowed us to get the strong results that we did in fiscal 2020 and certainly encouraged by the the strengthening even more so in Q4 of 2020. But we also believe that this foundation puts us in very good stead. I think John said it well. I think it puts us in very good stead as we look at the pandemic. And although, yes, we are doing all we can to ensure we face that pandemic, we are very, very excited within fiscal 21 and beyond. We have a number of new products. We typically would average a dozen or so new products that would be a fair amount to bringing the marketplace any one particular year this year we're seeing kind of a four-fold increase in that with all the new products that we're bringing to market part of that is the great innovation we're bringing to wine and part of that is the is the new participation in some of these other bad alcohol segments where we hadn't participated before, but we really believe we're bringing a powerful bundle of innovation forward to our trade customers. We have seen a significant surge in our online business, as my other two colleagues had mentioned. For those of you online, go check out the wineshops.com website. It's a fabulous website that allows you to buy any of our products across our portfolio. in the Toronto area, and this is meaningful. In the Toronto area, it's one day, same day or one day delivery. We've got two days elsewhere, and I will tell you that delivery is free, so take advantage of that. The One Club, our One Clubs continue to also do very well in our consumer direct-to-home business, so we're seeing those, which have always been strong, see further growth in this current environment. Lastly, our production facilities are performing at record levels of efficiency. We're very proud of the work that these people have, that our team has done, and we're confident they will continue to drive margin improvements as they have for the last number of years. So in closing, I just wanted to echo John's comments, which was to thank all of our people for their hard work and dedication and contribution during these really challenging times. You can see the power of our culture and our innovation and performance in times like this and very proud of the way that they've shown up every day and allowed us to perform at this high level. I do believe when this pandemic is all said and done, and it will be all said and done at some point, that we will emerge from this even stronger than we went in. We were pretty strong going in. With that, I'd like to thank all of you for joining us this morning, and maybe I'll hand it back over to the operator to answer any of the questions that you might have for John, Steve, or myself. Operator?

Thank you. We'll now take questions from the telephone lines. If you have a question and using a speakerphone, please shift your handset before making your selection. If you have a question, please press star 1 on your telephone keypad. If at any time you wish to cancel your question, please press the pound sign. Please press star 1 at this time if you have a question. There will be a brief pause for the participants to register. Thank you for your patience. And the first question is from Amr Ezzat from Echelon Partners. Please go ahead.

Thank you. Good morning. Congrats on a strong quarter, guys. Randy, I appreciate your comments and your prepared remarks on the trends that drove, I guess, sales for 2020. But if I'm thinking specifically at fiscal Q4, you've had a 3% jump year-on-year. After a few quarters of flattish year-on-year sales, And I know you guys commented the past few quarters you were sort of impacted with the low-priced imports that have been an issue. I'm just wondering what's changed for the March quarter to cause the healthy jump in sales? Is there anything specific there? Then if you could also comment on what's driving it in terms of volume, price increases, or product mix, that'd be helpful. Sure, I'd be happy to.

John commented, let's get the COVID part of it out of the upfront handle, but it's much more than that. As John commented, we saw some very healthy gains in parts of our business, the retail part of our business in particular, the last couple of weeks as it resulted to COVID. But of course, we saw some down elevators that were fairly significant as well. associated with our hospitality and our export business. So those two kind of, there was a fair bit of canceling out of each one of those. I would say that we have seen some strengthening in Western Canada in particular. We saw growth across the board. I want to be clear. I don't want to make it any one region. We saw growth across the board in the fourth quarter But I'd say that the way that we're approaching Western Canada and our partnerships there, as well as some of the new products that we have brought into the market, I think we're the two larger contributing factors to an increase in Q4. And I think really, I would say it slightly differently in that maybe a return to a growth rate that we're more used to.

Okay, that's fantastic. And so, so that's mostly volume, I guess, that drove that?

Yes. Okay.

Okay, so if I'm looking ahead to the current quarter, the June quarter, and I understand the situations like still fluids, depending on the geography of the channel that you guys like spoke to the retail channel, ecom liquor boards, being up meaningfully, Then obviously export business is soft. Hospitality is obviously soft as well. I know John mentioned 5% to 10% impact for the year. So is that relative to fiscal 20? And then are you guys assuming the bulk of that impact would be in the June quarter?

Yeah, I'll comment on the quarter and maybe let John comment, kind of back up some of the thoughts he would have behind the year comment. But, you know, it's always, you know, I'll tell you, April versus May versus June all look wildly different right now. I think that, you know, I think that the best, you know, kind of direction I can give you is that the up elevators continue to go up. Those are the ones that John had mentioned, which are Our retail, our own retail stores, those tend to be our online business, our wine clubs, those tend to continue to go up. The question for us, and really it makes it challenging, is trying to figure out how big the down elevators are and how long they'll stay down. Will hospitality, which is a big part of our business, How long will that be suppressed? We saw some regions open up in Ontario. I think they opened up this Friday. Tomorrow, they're allowed to open up because Niagara happens to not be one of them. However, we're seeing our Western, you know, in BC, we're seeing those open up. It isn't only them opening up, though. It's also, you know, consumers' interest and comfort in visiting them. So it is a bit of an unknown. What we do know is that where we're strong, we believe we'll remain strong. And not only because of the way that people, the channels that people are buying that alcohol through, but also the innovation that we bring to and strategies that we bring to the market. So we're quite confident there. What we don't know is how low will the down elevators, how low will they be and how long will they stay? So that's the challenging part. I can't give you any more direction We just had a board meeting yesterday. I couldn't give them any further direction when I was asked that question as to how I thought the first quarter would go. But the elements that John commented on are absolutely the right ones. It's just a matter of the quantity. So maybe I will bounce it over to John just if he had any further comments on here.

No, I think that's well said. We did better in the first two, three months than we expected, but those were low. contribution month from those other channels. And as we get into the, you know, summer fall months where the other country, those trade channels, like the States contribute significantly more and knowing that most of them won't be open and operating at full speed, it'll be hard for us. We'll make up some of it in other areas, but not all of it. So I think it's hell we're thrilled that we're as little affected by the pandemic as we are. And, and, and, and, you know, We're doing well. It doesn't change the way we're going to operate or invest, but it's hard for me to foresee. Even though we did better in the first quarter, it's hard for us to foresee that we'll escape the whole year without a small hit to our revenue as a result of those channels that are closed. But we'll update you in six months and tell you how in three months we'll be at our AGM and we'll keep an honest and open perspective on how we're doing. We just think it's better to be straightforward up front.

Fantastic, fantastic. Okay, so let's switch gears, I guess, to longer term and margins. Another fantastic performance there. When I'm thinking about your overall portfolio and look at it a few years ago, you were probably underdeveloped in premium and probably a bit overdeveloped in value there.

um can you give us a sense of where um the portfolio mix stands now um and what can we sort of expect in the next you know call three to five years right well i can tell you we are thrilled with our portfolio as it sits today um i think that this portfolio has been built over the last number of years 20 years uh where we can where we as you know we participate in the largest wine kit business on the planet. So we are the largest in the world and all the way through to kind of the premium, wonderful premium wines that we have in our portfolio. I think the way that John and the team has built it over the years really puts you in a good position because in good times, we have, as you know, we felt that we needed to premiumize uh and add to that part of the portfolio and did so very successfully with black hills and tin horn and gray monk so that really uh strengthened that part of the portfolio but we are very uh proud and excited to have the full range so when you get into in this case it's a pandemic that was that has led us into recession but our portfolio will stand up in a recession uh as we've seen in the past very, very well because of that. So today I would say we have the most balanced portfolio that we've had probably ever, only because of the way that we built the portfolio, but feel very confident that we have a full portfolio and we will fare well as a result of that as you look forward, not only through what could be a more challenging, what's being predicted to be a a challenging and deep recession. We've got a portfolio for that. And as we, on the other hand, we still have a wonderful premium offering for those who want it now indefinitely as we come out of that more challenging economic downturn.

Great. Then going forward, like maybe like three, five year perspective, would we see like a larger premium mix or are you guys like happy with that current balance

Yeah, I think we've got a strong premium portfolio today. I think that maybe I'll ask John to maybe comment because I just want to make sure that we're looking at our whole portfolio. We've got wine, but remember, we have other segments that we're participating in now. So maybe I'll just ask John if he'd like to make any comments on that.

I think you've covered it well, Randy. I mean, we're... The one reality of the beverage alcohol industry, you know, everyone used to stay in their lane and now everyone's trying to kick the crap out of everybody across the board so that, you know, the spirit companies and the beer companies are coming out with seltzers and ciders and, you know, spirit brands are into refreshment and, you know, and wine cocktails. So, you know, we thought it was critical that we develop brands that we're strong in all categories across the board. And we're in the early phases of doing that, but we're doing them with great brands that can command premium pricing and solid margins. I think our premium estate wine business and DQA premium business has a great future. It's taken us 30 years to get where we are, and we're very confident about the positions that we have. I think in the value wine business, you know, when I made my comments about, you know, the government's oversight of our industry, you know, it certainly doesn't help us these days that the LCBO was selling, uh, Spanish wine for under its cost. And when I've gone to the government and said, Hey guys, you know, give me a break here. Spain doesn't let anybody, anybody, not even France, Italy, anybody sell value wine into their country and you're letting them discount and subsidize the wine and the LCBO. And, and, you know, naturally the product did well. And, and, and similarly at West, the, the BC liquor board is now bringing in their own private labels and undercutting the market. And, and, you know, we're going to go to the government there and, and. You know, it will not be a pleasant conversation. It's completely ridiculous that a local monopoly undercuts the local industry. So I think that that's where some of the softness in our, you know, value products has come from. And I think the governments will smarten up. You know, those other countries don't allow that in their country for a valid purpose. They want that manufacturing and the contribution to their economy to stay with them. I don't know how well you follow the food industry, but there have been over 65 countries food companies in Ontario in the last six years closed their facilities and now only ship their products up from the US. That was a mistake for us to let that happen. The Americans would never let that happen. And I think this change in view and valuing what these companies contribute to our economy requires some policy support. in the same way they're being supported in other countries. We've been totally naive and taken advantage of. So I think that value business will strengthen going forward. And I don't think we either want to over rely on it or under invest in it. We need to have a balanced portfolio. And that's why we've spread out our product offerings. We offer products in wine at value. wine kit and premium and ultra premium. And now we're into the other categories as well. So I think balancing our portfolio the way we have will will hold us in good stead going forward.

Thanks, that's helpful. Maybe one last one for well for all of you guys. Can you perhaps give us an update, I guess on the M&A and the landscape how it's evolving in light of covid and what sort of opportunities you're seeing then then maybe as well an update on the discussions uh you've been having with your uh corporate bankers just wondering how accommodating your balance sheet is to execute on acquisitions if you're you're going to see a period of um even if it's temporary of lighter sales and earnings i i'm happy to to address that i mean i think first and foremost

you know, our balance sheet is in great shape. And, you know, our debt is up slightly this year, more because we've built some inventory more than anything to support our ERP transition and the closing of our kit business. But, you know, our debt at call it 100, it was 150 million, it's up to 165. It normalizes at 150 million. You know, that's kind of not even inventory value. And, and on top of that, you know, we're, we're holding properties for, uh, for sale to the market right now, two properties in Western Canada that are just surplus real estate, and they have considerable value so that unlike 2008, 2009, you know, where, where we had a fairly, uh, a much more significant, um, level of, of, of leverage, We've gone into this in very good shape, and we know we have credit available to us. I think from the opportunity side, I've explained in the past that the beverage alcohol segment has been on an incredible run for the last 10 years. There was a considerable amount of M&A activity, and especially from larger players, large brewers, large distilleries, and you know, constellation on the U S and, and they set precedents for unbelievable EBITDA multiples. And, and it's why for the last, you know, four or five years, it's been very difficult to buy at reasonable values. So I think to a large extent, from my perspective, the, the, you know, the crack brewery boom, the roses off the bloom of it. And, and, and, You know, I'm sure you've heard the story that the craft brewery that Constellation bought, Ballast Point, they paid a billion dollars for. The company had 80 million in revenue and 20 million in earnings. They paid a billion for it five, six years ago. They sold it three months ago for 32 million. And yet I'm sure every craft brewer thinks they're worth what Ballast Point was paid. And it's not dissimilar with a lot of the small wineries. There are lots of small wineries for sale. And we're very picky about brand quality and how their wineries fit within our portfolio. And with the overall competitiveness of not just the wine space, but the spirit business, it's imperative that if you do buy, you buy at good pricing. You can pay fair prices, which you know, are still healthy multiples, but the expectations people had were unreal. And I suspect they'll moderate going forward and we'll see how it goes. If we feel we're in a good position and that there are good opportunities for us there, we're prepared to invest. And it's always been part of our strategy and it will be part of our strategy going forward. So we'll see how people fare through the next year. And I'm sure there'll be opportunities and if they're at decent values, we'll be interested.

Great. Thank you. Thank you. I'll pass the line.

Thank you. Next question is from Nick Corcoran from Acumen Capital. Please go ahead.

Good morning and congrats on a strong quarter. Just a couple questions for me. The first is in your press release, you indicated that alcohol consumption has been relatively stable and just wondering if that's in terms of dollars or volume.

Yeah. I don't mind just giving my perspective is, you know, the news channels, you know, kind of exaggerated the sale of beverage alcohol because they were just quoting that, you know, grocery was up 20, 30%. So naturally when all the restaurant channels were closed, you'd expect that volume to migrate to those other trade channels. And I think having read many sources, not just in Canada, but in the US, the general feeling is that overall beverage alcohol trends are up slightly and consistent with their past trend, and maybe a little bit more. In other words, there is a sense that in-home consumption, you know, people are Entertaining their families and themselves more at home, you know. That they they think it may have been a small pickup, but. I think if you're referring to the fact that they were reporting these huge increases in alcohol consumption, that's not true. They're they're at least equal to what they were, maybe up slightly from the previous year.

And that sounds like is in terms of volume in terms of dollar amount, have you seen a indication of whether it's being flat or slightly up?

No, that's a fair question because I think that's driven by volume. If anything, pricing is, you know, consumers are migrating to more value pricing. And I think that's just a reaction to recession. And, you know, so that total dollars, now that you mentioned it, are likely to be closer to flat. But I haven't seen anything reliable, Randy. I don't know if you've seen anything more current.

Now, what we see right now is exactly what John's saying. I'd say the dollars are up slightly, volume is up more. So you're leaning a bit more towards the value proposition. Total dollars are up, but just slightly, whereas volume is up at a more regular run rate.

Okay, that's great. And then maybe just shifting to your portfolio, what have you seen early on in the crisis compared to... maybe going through q1 in terms of consumer preference like it sounds like early on in the crisis they have migrated towards more value-based have they moved back towards more premium or is it being fairly constant no i think that what you'll see in the portfolio we'll see across everyone's portfolio and john had mentioned it earlier is uh you know there's

There's COVID, but let's remember that it's also leading us, that we're now into a recession. So I think we're seeing a consistently from when it started a more of a leaning towards the value part of the portfolio. I don't want to in any way say that premium is empty, but you're definitely seeing it on the value part of the portfolio. And I don't think this is a secret that that you're seeing it definitely in the, say, the bag and box side of the portfolio. So you're seeing some really strong, that's great value line in bag and box. We've always been very proud of the quality that we put out there. And so you're seeing across all bag and box a significant lift in volume in particular. That one has taken, that one takes the lead. But I would say that that's been true from the beginning. uh, with, uh, that, that jump with, uh, both COVID going into the recession. I suspect that you will, I know that you will see that, uh, as we, as we work our way through the recession.

And then how should we think about that in terms of the impact it could have on overall margins going forward?

You know, the wonderful thing about our portfolio is, as we said earlier, is it's a balanced portfolio. So, uh, you know, you will, uh, We have worked hard. The efficiency that we've driven through operations will allow us to have a strong performance on margin. Without misleading you, though, we all know that the premium associated with the smaller volume but higher premium, the margins are higher. However, from a dollar perspective, Bagging Box has got a much stronger dollar ring.

Okay, great. And then I'm just wondering what conversation you maybe had with the provincial government. I know they've been talking about opening up access to alcohol across the province. Do you think online could potentially fill the gap that they've been trying to get from increased access points through convenience stores?

I mean, that is a $64 question still. And You know, I'm trying to figure a way to answer it honestly. I don't really think the government understands the complexity and the challenge of making significant changes to their current beverage alcohol system. I mean, the whole thing started with this notion of a bucket beer and somehow migrated to, you know, Carolyn Mulroney met with Korean convenience store owners and made this commitment. And then on top of that, there's the reality of a beer agreement that the liberal government made with the large brewers that the government struggles with. But I think the best thing that's happened is Rod Phillips coming into the you know, Ministry of Finance role. He's very thoughtful and all of a sudden they're listening and they're realizing that they have quite a few interests to balance. The most important one being their own revenue base. Because one of the greatest ironies in all of this is this originally started eight years ago with their efforts to privatize the LCBO. Now they've decided they're not going to do that and they're going to make big changes everywhere else. So I think the priority of this has fallen considerably. I don't think there's any agreement inside the government on what the best way for them to go forward. And I think that they have way bigger fish to fry right now, and their policies are naturally focused on the pandemic and the economic fallout from it. So I think temporarily it's been pushed aside. It will come back. and we're there working as hard as we can on this file, and I expect our position in the process to improve going forward. So it's not clear to me at what point they're going to want to start making changes, but I think to the extent that they do make changes going forward, they'll be far more sensitive to the impact on local industry than they were going to be a year or two ago.

great and maybe i'll just a different way um are there any regulations that might be uh impacting the growth of your online business right now or do you think that the uh the government policies in place are uh allow for growth of that business i i think they're okay with that you know um you know there aren't a lot of restrictions there are interprovincial trade restrictions now that are completely absurd

But I think fair to say that most people in the industry don't even pay attention. They ship anyway. So that even though there's a lot of banter about them opening up the markets, I think most people are just getting on with business as they should. They should be able to sell their products freely in their own country. And I think anybody who steps in front of that will get shamed. know so i i think the biggest interesting one is that you know the government has allowed restaurants now to sell beverage alcohol with their takeout orders to help them and i i think restaurants are going to want to maintain that type of a privilege you know they in u.s markets there are some jurisdictions that support that and uh i'm sure there'll be a push around that but um I think it'll have to get dealt with in the context of all the other changes, you know, in terms of where they're headed. And I think that's going to take a lot more time and thoughtful effort on government so that they're careful about what they do. And, you know, I was terrified a year or two ago because they were talking about making decisions where they didn't even, they weren't even mildly informed. Now they're quite a bit more informed and I think they'll be able, more thoughtful going forward.

That's all from me. Thanks a lot. Thank you.

Thank you. Once again, please press star 1 on your telephone keypad if you have a question. Next question is from shareholder Barry Roderick. Please go ahead.

Good morning, Jan. Good morning, Barry. I've watched with interest the developments that have gone on in the last two or three months. I think wine tourism, which sort of spells out one of our interests, we'd like to go to Niagara-on-the-Lake. Do you see the wine tourism getting back in the near future?

You know, I know that it seems logical that if people can't leave the country that they're going to want to support local efforts more. And so I think that'll be, you know, a positive factor for us. And, you know, having said that, the protocols they're putting in place for the next six months about, you know, when people come on the property, how many people can be together in the same room and how we manage all that. I mean, it You know, we're not going to have any of the large events like we've had in the past years, which, you know, were significant impacts on our business. So, you know, I do believe, you know, I'm a big believer in the value of that business for the long term, full stop. And that, you know, I believe that millennials and younger consumers appreciate, you know, the value proposition of spending a great day and weekend down in the Niagara region more than ever and in the Okanagan. And I think we'll get some pickup from people's interest in the short term, but it'll be offset by those restrictions. I mean, until we get a vaccine, those businesses won't, you know, like sporting events and theaters and the like, they'll be open, but there'll be some restrictions on, you know, that'll hold them back a bit.

Well, the fallback position for me or for across the country and maybe an opportunistic for you would be that Canadians as a whole could be members of your wine club.

Well, in fact, that's happening. So, you know, where we feel very encouraged with the support that we've had in our e-commerce and wine club business, Barry, it's been very positive.

Well, thank you, and I continue to be a... You have a wonderful story from the time of your, I guess, your grandfather coming over, and I think that you're a great example for what can happen in Canada.

Thanks so much. Thanks so much for that. We've got two next-generation family members in the business, my son, Jordy, and my brother, Gus's son, Joey. And I definitely tell our people, we got where we are because we plan for next generation and we're making investments to strengthen our business going forward for the next generation. And hopefully we'll have the same good fortune. Thanks for your comments.

Thank you. Next question is from Amr Azad from HLM Partners. Please go ahead.

Yeah, guys, just a quick follow-up. John, you mentioned a couple of properties for sale out west. Do you have another property outside of Port Moody you guys are selling? Is it Port Coquitlam or is it something else?

Yeah, that's the location of where our wine kit facility was. So it's actually very close to our Port Moody facility. And it's a... I think it's a couple acres in an industrial park. It's very attractive property. And, you know, there's a strong market for industrial property in the GVA, the Greater Vancouver area. And, you know, it's definitely surplus property that will sell in due course. Great.

Thank you.

Thank you. Once again, please press star one on your telephone keypad if you have a question. There are no further questions at this time. I would like to turn the meeting back to Mr. Powell.

Yep. Okay. All right. Thank you again, everybody, for joining us this morning. Always great to be able to talk to you about the business, what we've done and where we're going. If you have any further questions, as always, please don't hesitate to call us at any time. Thanks again and have a wonderful day. Goodbye.

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