Andrew Peller Limited

Good morning, ladies and gentlemen, and welcome to the Andrew Peller LTD Q1, 2026 Financial Results Conference Call. At this time, all lines are in listen-only mode. Following the presentation, we will conduct a question and answer session. If at any time during this call you require immediate assistance, please press star zero for the operator. This call is being recorded on Thursday, August 7, 2025. I would now like to turn the conference call over

to Craig. Please continue your conference.

Thank you, and good morning, everyone. I appreciate your joining us. Before we begin, this is a reminder that during the 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 that differ materially from those disclosed or implied. I'd encourage you to 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 turn things over to Paul Dupkowski, Chief Executive Officer of Andrew Peller. Paul?

Thank you, Craig, and good morning, everyone. I'm pleased to be joined today 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 first quarter, and then Rene will walk us through the financial results. As we join you today from our offices in Ontario, we're in the midst of our summer season across Canada. This is an exciting time of the year here at Andrew Peller, as preparations are in full swing for our upcoming harvest season, and our states are at peak traffic, with Canadians enjoying the great weather in both the Niagara and Okanagan regions. In addition, there is a growing awareness and affinity for Canadian-produced wines, and there's continued sense of national pride given the ongoing challenges with Canada and U.S. relations. We have seen the momentum coming out of fiscal 2025 continue through Q1 and into Q2, while Q1 top-line results remain steady year over year, and I will get into the puts and takes behind that. We delivered strong margins, profitability, and free cash flow, highlighted by a 25% year over year increase in EBITDA. At the same time, we significantly reduced debt, further strengthening our balance sheet. This performance reflects the great work and actions of the team, specifically evolving to a changing market landscape, delivering on cost savings programs, and driving operational efficiencies. We've seen a lift in domestic wine volume as consumers turn to Made in Canada offerings. However, the overall category is downmodestly year over year as consumer preferences evolve. Given our presence across Canada, strong brands, and depth of portfolio, we are well positioned to benefit from a sustained change in consumer behavior and ongoing growth in domestic consumption. We believe there is an incredible opportunity in front of us as an industry to drive sustained growth for domestic wines, which will have a significant economic impact across the regions, provinces, and all of Canada. And recent policy changes are a clear signal of the government's commitment to a strong, competitive wine industry and its broader economic impact. Looking more closely at our revenue drivers this quarter, we continue to outperform the by winning in important new distribution channels and in growth categories as we navigate a dynamic retail environment. The expansion of retail distribution in Ontario over the past year has meaningfully changed how and where consumers discover and purchase wine. We've responded by evolving our commercial structure, aligning our team more closely with the needs of grocery, big box, and gas and convenience, and sharpening our execution in each of these channels. Those adjustments are showing up in our results, as grocery big box retail was an important growth driver again in Q1. Our brand assortment offers a strong combination of quality, innovation, familiarity, and approachability, making us well positioned to win as consumers shop in these expanded retail settings. Our estates also performed well during the quarter, with positive traffic trends as the season ramped up. We're seeing more Canadians choosing to stay closer to home and explore local destinations, a trend that continues to benefit our leading estate properties in Ontario and British Columbia. Our team remains focused on delivering exceptional experiences, helping visitors discover the quality and character of great Canadian wine and wine regions, while deepening their connection to our brands. In addition to winning in the right channels, we're highly focused on innovation and growth categories, and we're seeing encouraging results from this work. Our Better For You offerings, led by Honest Lot, continue to be among our fastest growing skews. Sparkling wines continue to gain in popularity as well, supported by a preference for a fruitier, fresher taste, lighter profiles, and lower alcohol. At the same time, alternative packaging formats, like our 200ml recyclable plastic bottle, which is an -the-go, -to-transfer offering, resonate with consumers who value convenience. We have some exciting new launches in the works, and I look forward to sharing more with you later in fiscal 2026. Our strong performance across our core business was offset by lower agency business sales, with U.S. wine off shelves in the majority of provinces, a moderate decline in our personal wine-making business, and some expected softness in our standalone retail locations due to the evolving Ontario market. We continue to manage our retail footprint strategically as we adapt to the new Ontario landscape. Net-net, domestic sales were strong in the quarter, as we saw growth across the core business offset by some declines in other channels. In addition to domestic growth and resilient sales in our first quarter results, we are pleased to see meaningful growth in our margins and profitability, which Renee will walk through in more detail. Collectively, we have delivered a strong quarter for the company, highlighted by the improved profitability, free cash flow, and lower debt levels. Our balance sheet remains strong, and we are optimistic about the remainder of the year. Lastly, on past earning calls, we've talked about our intent to monetize non-core assets over time, principally real estate assets. During the quarter, we initiated the sale of a small, approximately 7-acre parcel of land in Collegium, British Columbia. This sale was completed in mid-July for proceeds of $1.3 million. While modest in size, this is an important step in the execution of our strategy to focus on our resources on the highest return areas of our business. With that, I'll pass it over to Renee to take you through the financial results in more detail.

Thanks, Paul. Good morning, everyone. Sales in the first quarter were largely consistent with the prior year at $99.2 million. As Paul highlighted, we saw growth from the expanded distribution in Ontario retail market, with increased sales coming from grocery and big box retail channels. This growth was partially offset by an expected decrease in our standalone retail stores. We also saw strong performance in Western Canada and at our state wineries, which has offset some softness from our agency and personal winemaking businesses. Our gross margin in the first quarter was $42 million, or 42.4%, up from .4% in the same period last year. This improvement is driven by the ongoing efforts of our team to deliver on our $20 million cost savings program that we implemented over the last two years. Additionally, Q1 results included $2.1 million from the Ontario grape support program, which was not in effect during the first quarter of last year. Excluding the impact of this program, gross margin expanded to 40.2%, representing strong growth year over year. Selling and admin expenses were $25.9 million for the quarter, up slightly from the prior year. The increase is primarily related to the timing of professional services and add-in promo expenditures relating to our new launches coming later in fiscal 26. These increases were partially offset by a reduction in compensation expense as a result of prior restructuring efforts. EBITDA increased by .4% to $16.1 million in the quarter from $12.9 million in the prior year, which is due to margin favorability as a result of continued cost savings and the Ontario grape support program. Interest expense also decreased by almost 15% compared to prior year due to lower average debt levels and lower interest rates. Looking at our balance sheet, at the end of the quarter, inventory had decreased to $153 million versus $170 million at the end of fiscal 25 due to lower cost inputs and our disciplined approach to managing our on-hand inventory. As we move into harvest, we will see these inventory levels increase accordingly, consistent with historical patterns. We're encouraged by our improved cash generation and debt reduction, which reflects our efforts on working capital improvements, cost reductions, and overall operating efficiencies. In the first quarter, we generated $19.2 million in cash from operations compared to $15.3 million in prior year, and as a result, we also reduced our net debt position from $182.4 million to $169 million at the end of this quarter. We have about $65 million of capacity on our revolving credit facility, and our debt ratio is about 2.6 times EBITDA on a rolling 12-month basis. Overall, we delivered a strong quarter with gains in margin, EBITDA as has flow, and we reduced debt materially, all while continuing to invest in the areas that will drive future growth. Thanks, everyone. I'll now pass it back to Paul for his closing remarks.

Thank you, Renee. It was definitely a strong start to fiscal 2026, and we built on the momentum we had last year. We are really pleased with our team's ability to win in an evolving market landscape. We've generated strong top-line results in profitability growth, while generating increased cash and lowering our debt balance, which further strengthens our balance sheet to support the business as we move forward. Our business is built on a strong foundation as we look to generate sustained long-term value through above-category sales performance, EBITDA growth, and leveraging our asset base. These fundamentals are being further supported by the federal and provincial governments' belief in the economic potential for our sector by ensuring Canada has -in-class policy in line with the leading wine regions of the world. This will play an instrumental role in the long-term growth across the industry. We remain confident in the future of Canada's domestic wine industry and are proud to take a leadership role in its continued evolution. As I wrap up, as always, I want to thank our Andrew Peller teammates for their passion and commitment to our company and to the domestic industry in Canada. Our success is made possible by our collective efforts. Thank you. With that, I'll now turn it back to the operator and open the line for any questions.

Thank you. Ladies and gentlemen, we'll now begin the question and answer session. Should you have a question, please press the star followed by the one on your touch tone phone. You will hear a prompt that your hand has been raised. Should you wish to decline for the polling process, please press the star followed by the two. And if you are using a speakerphone, please lift the handset before pressing any keys. One moment, please, for your first question.

And your first question comes from Nick from Acumen Capital. Please go ahead.

Good morning, guys, and thanks

for taking my questions.

Hey,

Nick.

Just my first question on the non-core assets you sold in BC. Any indication what the rationale was for disposing of these assets and what other assets you might have for sale?

Yeah, I appreciate it, Nick. So we've talked, you know, we've built a pretty substantial real estate portfolio in our business over time, over the history of the company. And, you know, not all of these assets are strategic to the core operation of the business. And, you know, we think it's prudent to unlock that value strategically over time to create, you know, to further improve the balance sheet and create capacity for the company and to help drive future growth. The Collidian site in particular, as I said, it's a relatively small site, about seven acres in size. It wasn't a core strategic vineyard for us, and it represented an opportunity to unlock some of that value and focus our capital and our efforts on the areas that drive growth for our business. In terms of other opportunities, we've been pretty clear. We're looking at our portfolio and looking at where we can unlock further value. You know, we're going to be smart in doing that. And so it's hard to give exact timing on that, but it's something we're focused on as a management team. And, you know, obviously we'll update as we have more information and move forward.

That's helpful. And maybe looking at the estates, how is traffic trended through July and into August?

Yeah, I'll pass that over to Patrick.

Hey, good morning, Nick. Yeah, so from an estate perspective, you know, as we've outlined previously, we certainly view this channel as a vital brand building platform for Andrew Peller. And we've increased investment in consumer experiences at our estate wineries across the country this year. More specifically in terms of Q1, you know, Q1 brought strong traffic and revenue growth across our estates in the East and the West. And that was really supported by a rise in tourism and a really strong affinity for our brands.

Great. And maybe one last question for me. How is the harvest looking this year?

Yeah, no, it's looking good. I mean, Ontario's had a quite warm summer, but we're expecting a strong harvest here in Ontario. And I think we're really pleased with what we've seen in the West. I mean, the West had two pretty hard winters the last couple of years. And certainly there was little to no crop last year, but we are seeing good growth in the vineyards. It's going to take a couple of years to get back to where we were, but certainly a little bit better for the 2025 harvest than we expected in the West. So optimistic about the future. But overall, well positioned, you know, with the, you know, the East and certainly in the West, with the actions that have been taken around supporting the industry and protecting domestic wines, there's definitely enough supply out there and we're well positioned.

Great. Thank you.

And your next question comes from Luke Hannon from

Canocor Junuity. Please go ahead.

Thanks. Good morning, everyone. I wanted to go back to that non-core asset disposition. It wasn't, I mean, it was included and held for sale as at the end of the quarter, but then it was sold in mid-July. I'm trying to get a rough sense of, I mean, how long was the sale process for this? It sounds like it was initiated during the quarter and it sounds like it was a relatively quick turnaround, but if you could confirm that, that would be great. And then secondly related to that, how long was this vineyard held within your portfolio as well?

Yeah, that's fair, Nick. I'll have, or sorry, Luke, I'll have to confirm exactly how long it was in the portfolio. Maybe Renee can check that. In terms of the process, it was a fairly quick turnaround. Conversation started in the quarter, essentially, and it closed subsequent to the quarter. Again, it was a non-strategic asset to us as a business. We would consider it excess and it represented a good opportunity to unlock that value and an appropriate market valuation.

Okay, thanks. And that one point. Sorry,

Luke, just to confirm on the timing, we have fired this winery when we bought the Greymonk company back in kind of 2018, 2019. Got it.

Perfect. Thanks. And then just to follow up on that as well, the 1.3 million of proceeds, that's net of taxes as well?

No, that is not net of taxes.

But since the land was acquired so recently, our tax liability will not be overly material.

Thanks. And then going back to the estate traffic, I know that you've talked, Paul, in the past about that being a good acquisition channel to add more folks to your wine club distribution or the wine clubs in general. I mean, have you seen that relationship take shape here as well? Have you been able to convert some of your estate guests into wine club members,

too? Yeah, and I'll pass it to Patrick in a second. Our estates are really the front end of our most premium brands. And they're more than just a hospitality to location. They're a marketing and an advertising channel and a sales channel for us. And so when we perform well at the estates, it's a nice halo on our brands. And this fiscal, last fiscal and this fiscal, we've been very focused on building our loyalty program, building our club. And we've put in place several actions that help drive that and the increased traffic in addition to those processes and those actions we put in place, in addition to the great work of the teammates that support that, has driven growth in our club business and put that halo on our brands. Patrick, I'm not sure if anything else to add to that.

No, I think that's great, Paul. The only thing I would maybe double click on is, as I touched on, it's a really critical brand building platform for us, our estates. More specifically in terms of wine clubs, it is a very important strategic growth pillar for us. Where we've been very successful and we are growing at double digits in terms of recruitment into our wine clubs this year is we are investing in experiences that we believe will drive higher recruitment and higher retention. For example, we've got an event this weekend at Trius. It's going to be upwards to 1,000 people where we're going to showcase one of our new innovations that we're launching to market. And events like that and investments like that are really helping us to recruit, I think, very strong numbers in terms of wine club members. And then our retention numbers as well are very strong versus last year. So yeah, definitely an important strategic pillar for us and something we're very focused on. Got it.

Appreciate it. Thank you very much. Thanks, Luke.

Thank you. As a reminder, if you wish to ask a question, please press star 1. If there are no further questions at this time, I will now turn the conference call back

over to Craig. You may proceed.

I think it was coming to me, but thank you. So again, thank you again to everybody for joining us today. We look forward to connecting again later this year when we release our two results. We hope everybody enjoys the rest of the summer and hopefully enjoys a glass of one of the great wines from across Canada.

Thank you. Have a great day.

Ladies and gentlemen, this concludes your conference call for today. We thank you very much for your participation. You may now disconnect. Have a great day.

Thanks, everyone.