Andrew Peller Limited

Good morning, ladies and gentlemen, and welcome to the Andrew Peller Limited Q4 2025 Financial Results Conference Call. At this time, all lines are in a listen-only mode. Following the presentation, we will conduct a question and answer session. If at any time during this call you need assistance, please press star zero for the operator. This call is being recorded on Thursday, June 12, 2025. I would now like to turn the conference over to Jen Smith, Investor Relations. Please go ahead.

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 securities filings for additional information about these assumptions, risks, and uncertainties. With that, I'll turn things over to Paul Pipkowski, Chief Executive Officer of Andrew Peller Limited. Paul?

Thanks, Jen, and good morning, everyone. And I'd like to thank everybody for joining us today. I'm pleased to be joined by Rene Kauke, our Chief Financial Officer, and Patrick O'Brien, our President and Chief Commercial Officer. As usual, I'll begin with a review of our operational and strategic highlights from the fourth quarter and fiscal year, and then Rene will walk us through the financial results. As we kick off today, and I know we're all happy, it's the official start to summer is fast approaching here as we move through June. And I know everyone in the East has been long awaiting some warmer weather. There is a real energy across our company and the industry as we're seeing more guests visiting our beautiful estates in Ontario and BC. Patios are getting busier across the country. There's growth in life in our vineyards and preparations are well underway for the upcoming harvest. And while it's early in the growing season, early indications are that there will be a very good harvest in Ontario and a strong start to the recovery in the Okanagan after the challenging winter events from two winters ago. We will provide a further harvest update during our Q1 conference call. Focusing on our results, it was a strong fiscal 2025 for Andrew Peller. We continued to outperform the category and expanded important new channels and growth categories with revenue ending the year at an all-time high outside of the first year of COVID, which we all know was an anomaly. At the same time, we delivered meaningful improvement in gross margin, EBITDA, and free cash flow, while continuing to reduce debt levels and create capacity for future growth. This performance reflects the great work of the team as we drove growth and improved both operational and financial metrics across the core business. Looking more closely at our performance, I'm pleased to report that we grew share in fiscal 2025 across all major markets and continue to be one of the fastest growing domestic wine suppliers. While overall wine consumption was down modestly across the industry, we are outperforming the category by meeting consumer needs through both popular and innovative product offerings and by adapting quickly to the changing distribution landscape in Ontario. While it's early days, we also saw an overall pickup on domestic wine volume late in the year as consumers turned to made-in-Canada offering. Given our national presence and product breadth across approximately 50 brands, from value-priced to premium BQA, we are well-positioned to benefit from any sustained change in consumer behavior and ongoing growth in domestic consumption. And we are not being a passive beneficiary of these changes. you will see us investing in promoting the great wines in great wine regions Canada has to offer. We truly believe there is incredible opportunity in front of us as an industry to drive sustained growth share for domestic wines, which will have a significant economic impact across the regions, provinces, and all of Canada. We at Andrew Peller will take a leadership role in driving this. Looking at our portfolio more specifically, Recent highlights include strong demand for our Trias portfolio, continued momentum of the Peller Family Vineyards brand, ongoing growth in our better-for-you offerings with On A Slot, and strong performance in new formats like our 200 ml recyclable plastic bottle, which is an on-the-go, easy-to-transport offering. During the past year, I'm proud of how quickly we adapted to capitalize on the huge change in Ontario's distribution landscape, which saw 4,000 new distribution points come online across the province. We evolved our commercial structure to ensure we are set up to meet the changing needs of grocery, big box, and our gas convenience partners, as we expect to see ongoing channel shift, share shift, as consumers adjust their buying patterns. You see the early returns of our success in how we quickly and smartly adapted to the changing landscape in our fiscal 2025 results. Our sales growth was led by our success in big box retail. Initial demand in the channel has exceeded our expectations, and we continue to evolve our product lineup based on consumer preferences and our supply chain. Consumers have responded well to our offerings in big box led by our Gretzky, Trius, and PJ's portfolios. Several of the company's other well-established trade channels also perform well during the year, particularly sales to third-party restaurants and hospitality locations. We did see some softness in estate sales due to tightening consumer economic conditions, and as expected, a moderate decrease in the company's retail start network after the new expanded distribution came into effect in Ontario. In addition to our revenue growth, we were able to deliver meaningful improvement in gross margin during the quarter and the year. Margins for the year rose above 40%, which is a meaningful achievement in light of the inflationary environment that existed over the last several years. The margin improvement was supported by execution on our $20 million cost savings program, which we completed in fiscal 2025, with a focus on reducing costs and driving efficiencies in bulk wine, concentrates, packaging, and other raw materials. In addition to the improved performance and growth in our base margins year over year, which is a testament to the health of our core business, As you will see in our disclosures, our margins and profitability for fiscal 2025 also reflect the initial benefit of the Ontario government's recently announced Ontario Grape Support Program. This program is intended to increase the amount of Ontario grapes in every bottle of locally produced blended wine. It shows the Ontario government's leadership and continued support of our industry by promoting strong competitive policies that are aligned with global best practices and by focusing on local grape growers and wine producers, the government is reinforcing the vital role our sector plays as a key driver of economic growth in the province. We believe these programs will drive investment, increase domestic grape demand, and help grow the economic impact of the domestic wine industry. Our team is currently making investments in line with the program's intention with millions of dollars in investments planned over the coming years including adding a million liters of storage this year at our facility in grimsby to handle the increased domestic content we are planning for as i mentioned in my opening we are incredibly proud of the strong performance of our business in fiscal 2025 we delivered revenue growth margin expansion improved profitability and increased free cash flow In addition to this core year-over-year business improvement, the recent announcement of the Ontario Grape Support Program positions us for further investment and growth moving forward. Looking ahead, we remain focused on continuing to innovate, build industry-leading brands, strengthening our partnerships across all key trade channels, and investing in the capabilities that will support sustainable, profitable growth. We're proud of the progress we've made and we're energized for the opportunities ahead. With that, I'll pass it over to Renee to take you through the financial results in more detail.

Great, thanks, Paul, and good morning, everyone. Sales in the fourth quarter decreased $9.5 million, or 11.2% year-over-year, to $75.5 million. This is primarily due to the $5.8 million recognized as revenue at the end of fiscal 2024 relating to the revised Ontario VQA support program. In fiscal 2025, this program was recognized throughout the year as sales were made. Excluding the change in timing of this program, revenue was down about 4.5%, which is largely driven by the timing of the Easter holiday, continual adjustment of channel and shipment timing in the new Ontario retail market, and some softness in our personal winemaking business. For the full year, revenue increased $3.8 million, or 1% year over year, to $389.6 million. While there has been softness in some channels, we've seen growth in others. We saw a net increase in the expanded distribution in the Ontario retail market, with increased sales coming from the big box and grocery sales channels, partially offset by an expected decrease in our own retail store distributions, as Paul mentioned. We also saw an increase in sales in our retail stores during the LCBO strike in July. Offsetting this positive performance, as Paul mentioned, we continue to see some softness in sales from the estate wineries and wine clubs due to lower guest traffic and reduced consumer discretionary spending. We typically see a pickup in estate traffic over the summer months, and as we look ahead to the summer of 2025, we anticipate an increase in Canadian visitors to our wineries as more Canadians choose to stay closer to home and explore domestic travel options. Our gross margin in the fourth quarter was $39.7 million or 52.6%, up from $35.6 million or 41.8% in the prior year. This increase is primarily driven by the inclusion of $9.8 million from the Ontario Grape Support Program, as well as cost savings programs implemented over the past two years. The gross margin in Q4 of fiscal 24 benefited from the inclusion of 5.8 million related to the Ontario VQA support program. Gross margins for the year before the inclusion of the Ontario Grape Support Program landed at 40.3%, which is a meaningful increase over prior year. With the inclusion of this program, gross margins came in at $166.6 million, or 42.8% compared with at 39.0% in fiscal 24. The increase in gross margin over the prior year was driven by the previously mentioned government support programs, volume growth from Ontario retail modernization and the LCBO strike, as well as pricing optimization, operational efficiencies, and cost savings initiatives. Gross margins do continue to be somewhat impacted by channel mix and inflationary cost pressures, And in response to these pressures, we are continuing to execute cost savings program and formulation changes to keep our costs down. Selling and administration expenses were $26.2 million for the quarter, down $9.6 million from prior year. The expenses in last year's Q4 included non-recurring expenses relating to John Teller's retirement and transition. As a percentage of sales, expenses decreased to 34.7% in the quarter compared to 42.1% last year. Selling and admin expenses for the year were $103.7 million or 26.6% of sales, compared with $109.8 million or 28.4% in fiscal 24. EBITDA increased to $13.5 million in the quarter, up 46% from $9.6 million last year, and EBITDA for the year came in at $62.9 million, up 25% from $50.3 million in the prior year. This increase was driven by the net increase in sales in our B2B channel and favorable margin as a result of continued cost savings and the Ontario Government Support Program. Excluding the impact of the Ontario Grape Support Program, base business improved significantly in the year with growth in revenue and margin in the year and higher growth in EBITDA. Now looking at our balance sheet, at the end of the year, inventory decreased to $170 million versus $192 million at the end of fiscal 24, as we have had increased sales and reduced costs due to our cost savings initiative. We have also been actively managing our on-hand inventory through improved planning processes while optimizing our on-hand inventory levels for future performance. We're encouraged by our improved cash generation and debt reduction, reflecting our efforts on working capital improvements, cost reductions, and overall operating efficiencies. In fiscal 25, we generated $60.2 million in cash from operations compared to $38.1 million in prior year, and we also reduced our net debt position from $208.5 million at the end of last fiscal year to $182.4 million at the end of this year. Our debt to EBITDA ratio decreased to just under 3 to 1 compared to just over 4 to 1 at the end of last fiscal. And we had remaining capacity on our revolving credit facility of about $68 million. Thank you. And I'll now pass it back to Paul for closing remarks.

Thank you, Renee. You know, it really has been an incredible year. And as we've highlighted, fiscal 2025 was a year of significant progress for the company. We grew revenue and market share. We improved profitability. We generated increased free cash flow, lowered our debt level, and positioned the company for future growth and long-term success. As we look forward into fiscal 2026, we are focused on continued top-line performance and profitability expansion. Our confidence is grounded in the strength of our brands, our distribution, our people, and our financial position. And these fundamentals are now further supported by strong best-in-class policies that recognize the role of our sector as a key driver of economic growth. We believe the domestic wine industry is positioned for growth, and we will play a leadership role in supporting this. To our customers, partners, and shareholders, thank you for your continued support. And to our employees across the country, a huge thank you. None of our success is possible without you. I'm proud of what we've accomplished together this year. And I'm truly confident in our path forward together. With that, I'll now turn it back to the operator to open the line for any questions.

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 touchtone phone. You will hear a prompt that your hand has been raised. If you are using a speakerphone, please lift the handset before pressing any keys. The first question comes from Luke Hannon at Canada Court Genuity. Please go ahead.

Thanks. Good morning, everyone. I wanted to ask a little bit more about the OGSP. Maybe it's a two-part question. First, can you confirm the $9.8 million that you got during the quarter? That's sort of like a catch-up amount that you would have gotten for essentially the entire year. And then secondly, what should we be thinking about to put into our models for the year ahead? Thanks.

Yeah, thanks, Luke. Great question. Yeah, the $9.8 million that was booked in the fourth quarter reflects a full year allocation under the program. So we pick up this in Q4 because it related to the April 1, 2024 period to the March 31, 2025 period. uh and so that does relate to our it lines up with our fiscal so it related fully to our fiscal 2025 year um moving forward and we can't confirm this 100 on the call um we are working towards being able to record it quarterly moving forward with the expectation that we will receive the cash initially in q2 of our fiscal year um so we expect to receive Our allocation under that plan in Q2 of this year, what we recorded at the end of fiscal 2025, will start likely recording the program on a quarterly basis moving forward with the cash coming in after the fact. You know, it's difficult to give an exact number. The program is meaningful. It really is about putting more domestic grapes in every bottle of blended wine. And it really shows a belief in our domestic industry overall. We expect to be able to grow our allocation under the program. You know, all industry partners out there want to put more domestic grapes in every bottle. They're reformulating and making sure that, you know, we're achieving the desired intention of the program. So I can't give an exact number. It's early days, but we would expect to be able to grow that number going forward. And our hope is to be able to record it quarterly. But the $9.8 million is a full year allocation.

Got it. Appreciate that. Thanks. And then maybe as a follow-up to that, I know in the past you've mentioned that longer-term gross margin should probably be in and around maybe 42% to 43%. And I realize there's a number of headwinds out there and forefront among them is this consumer spending malaise that we've seen recently. But You know, in practice, and I mean, the details of this program are such that it seems like it's going to be in place now for five years. Is it fair to say then that that long-term margin target is perhaps not 42% to 43%, but maybe a little bit closer to the mid-40s at that point?

Yeah, I mean, good question. So I think there's a couple of things leading to this is our base business really performed well during the year. You know, we had revenue growth, we had margin growth, we had EBITDA growth, we generated more cash. So even before looking at the introduction of this new program, which is a long-term program, initially signed for five years, we believe it's going to be even longer just given the economic impact of the industry. Base business performed exceptionally well. And specifically related to margins, we actually saw margins land on an adjusted basis over 40% in the year so far. Even removing that $9.8 million, our F25 margins were north of 40%, even exceeding our initial expectations based on all the hard work that has gone in to getting mix right, to getting costs right, to delivering on our $20 million savings program. So you are correct. Our expectation would be stabilized that we're able to land run rate margins at over 42.5% in the future. Obviously, there's still some headwinds out there in the short term, but as we look out beyond the next couple of years, that would be our expectation, given the inclusion of this new program.

Appreciate that. Thanks. And then the last one, but before I pass the line, you touched on potentially seeing more Canadian visitors to your states just because of this bi-Canadian theme that seems to be taking shape. across, frankly, the rest of our coverage universe as well as with you guys as well. I mean, what can you share on what you've seen thus far to date? I know you mentioned the official start of summer is still about a week and a bit ahead of us, but, I mean, is there anything that you can share on estate visits perhaps thus far into the fiscal year?

Yeah, of course. No, that's a great question. Obviously, the national pride in the country is an all-time high, and we're definitely leaning into that as an organization. As I said in my opening, Patrick O'Brien, our president, is here, and I'm going to pass it over to him. Hey, good morning, everyone.

So, again, I'm just going to add a little bit more colour on that question around our estates. So, again, as we've touched on in the past, we're really proud of the properties that we've assembled here across Canada. Again, our team continues to perform, I think, amazingly well. When we think about our estates and ultimately our direct-to-consumer and wine clubs, we're very focused on delivering best-in-class winery experiences that celebrate Canadian wine and hospitality. When we think about the summer season ahead that Paul alluded to earlier, we're extremely excited about the summer season. We're certainly well-positioned to welcome even more Canadian visitors this year, as we believe staycations will continue to grow in popularity. Just to add a little bit more colour, we have really beefed up you know, the programming that we offer and the experiences that we also offer all of our guests for the coming season. So, you know, some really good examples would be, you know, in Western Canada, you know, one of our coveted estates, Tin Horn Creek, you know, we brought back our concert series, which again is a really, really popular and significant investment on our side. In, you know, Eastern Ontario, as Paul alluded to, our Trius brand is performing extremely well, and we're bringing back a couple of events this year, and I think the biggest event will be in August with our Tree of Sparkling event. So just to name a few, I think really, really strong programming and activations. We're very optimistic around staycations and that being a big opportunity for us, and we're certainly seeing some positive momentum as we've kind of turned a corner at the F26.

That's great. Thank you very much. Thank you, ladies.

As a reminder, if you have any questions, please press star one. The next question comes from Nick Corcoran at Acumen Capital. Please go ahead.

Good morning, and thanks for taking my questions.

This might be here for me. You mentioned your prepared remarks, good momentum in your brands, including Trius and Gretzky. Can you maybe key in on how Gretzky specifically has performed in the last few months and any trends you've seen?

Yeah, that's a good question. I mean, we have seen candidly great momentum across all of our brands. That was there before you know, kind of the more national by local movement. But certainly that movement has put some energy behind all Canadian brands and our brands are no exception. So lots of great momentum. You know, Trias is performing very well. As you said, it's very current in terms of the sparkling category and sparkling, you know, lean of that brand. So we're excited about that. But our Gretzky brand is one of the leading BQA brands nationally. You know, we acknowledge there was a few negative news cycles out there, but it quickly dissipated. And to be honest, the Gretzky brand is all about Canadiana. It really stands on its Canadian values. Essentially, all of our products are sold in Canada, poised Canadians. We have our great estate down in Niagara, and we spend a significant amount of money, tens and tens of millions of dollars in the local economy in Niagara. So definitely investing in all of our brands and and all of them are strong and delivering for us.

That's good, Keller. And maybe moving on to investments you're making in the business, what would you expect for CapEx in fiscal 26?

Yeah, we're going to be in and around our normal run rate. This year we had an investment, we had a little extra capital go into Port Moody to prepare the property for eventual sale, but I would expect us to be in that kind of $15 to $17 million range. which is generally our normal run rate, we can manage within that. And any costs around any replanting we're doing, any improvements at our facilities can be captured within that total.

Good. And then one last question, any update on Port Moody?

Yeah, we're still active on it. I mean, I fully acknowledge the real estate market is bumpy out there. I'd be remiss not to recognize what's happening, certainly in the Toronto area, and in and around Vancouver. We have partners out there that are helping advise us. We're actively engaged with the development community. We will sell that property. It still has significant value to us. It's a bit of a timing consideration on when we get the right price and it's the right time to sell it. So I'll provide an update on our Q1 call as well, but still working through the process.

Thanks. I'll pass along. Thanks, Nick.

Thank you. We have no further questions. I will turn the call back over to Paul Dabkowski.

Great. Thank you. So in closing, again, just thank you to our customers, our partners, and our shareholders. And I really mean it. A huge thank you to all of our teammates. It has been an incredible year of change, and we really do appreciate everything they've done to deliver the really strong results you know we reported on uh we are excited for the year ahead and uh we do look forward to connecting again in august when we release our q1 results thank you and have a great day everyone ladies and gentlemen this concludes your conference call for today we thank you for participating and we ask that you please disconnect your lines