Mr. Paul Dubkowski reports

ANDREW PELLER LIMITED REPORTS SOLID PERFORMANCE IN THIRD QUARTER OF FISCAL 2024

Andrew Peller Ltd. has released its results for the three and nine months ended Dec. 31, 2023. All amounts are expressed in Canadian dollars unless otherwise stated.

Third quarter 2024 highlights:

• Sales were $100.2-million, down 4.5 per cent compared with $104.9-million in Q3 2023;
• Gross margin was $34.7-million or 34.7 per cent, compared with $42.3-million and 40.3 per cent in Q3 2023;
• EBITA (defined as earnings before interest, amortization, loss on debt extinguishment and financing fees, net unrealized gains and losses on derivative financial instruments, other (income) expenses, and income taxes) decreased 15.2 per cent to $13.2-million, from $15.6-million in Q3 2023;
• Net loss of $400,000 (one cent per Class A share), compared with $3.9-million (nine cents per Class A share) in Q3 2023.

Fiscal 2024 YTD (year-to-date) highlights:

• Sales year to date decreased 1.2 per cent to $300.8-million, compared with $304.4-million in the prior year;
• Gross margin was 38.2 per cent, compared with 39.4 per cent in the prior year;
• EBITA of $41.1-million, up from $39.3-million in the prior year;
• Net income of $4.1-million (10 cents per Class A share), down from $6.7-million (16 cents per Class A share) last year;
• Dividend of 24.6 cents per Class A share and 21.4 cents per Class B share.

"The third quarter represents another quarter of solid performance in the face of continued macroeconomic headwinds across our sector, which speaks to the breadth of our portfolio and distribution channels," commented John Peller, president and chief executive officer. "Our brands have maintained their sales performance across the majority of our channels, often outperforming the industry. We are encouraged by our year to date results and anticipate further profitability improvements based on our initiatives to reduce costs and enhance operational efficiency.

"Looking ahead, we have strategically positioned ourselves for sustained EBITA growth by capitalizing on opportunities in the importation of bulk wines, optimizing our freight and logistics costs, rationalizing and finding cost-effective supply channels, and continuing our proven efforts to enhance operational efficiency. From a sales and market share perspective, we are focused on continuing to outperform the industry over the long term due to the strong positioning of key brands, increasing sales of our higher-margin premium products, the continued launch of new and innovative products, potential strategic acquisitions, as well as overall growth in the Canadian beverage alcohol market.

"It is also important to note the significance of the government of Ontario's alcohol modernization announcement on Dec. 14, 2023, which included a comprehensive set of policies designed to support and grow the Ontario wine industry. The suite of measures introduced will support investment in Ontario's wineries and allow Ontario to achieve its potential as one of the world's great wine and tourism regions."

Financial review

Sales for the third quarter of fiscal 2024 were $100.2-million, a decrease of 4.5 per cent compared with the prior-year third quarter, due to timing of shipments, reduced consumer discretionary spending due to tightening economic conditions and continued traffic softness at the estates, particularly in British Columbia after the wildfires in September, 2023. Sales for the quarter were further reduced by $1.8-million from the repeal of the federal excise duty exemption as previously disclosed.

For the nine months ended Dec. 31, 2023, sales were $300.8-million, down 1.2 per cent from the prior year. The majority of the company's well-established trade channels have performed well on a year-to-date basis, particularly provincial liquor stores, restaurants and hospitality locations, as well as sales in the export channel due to the improvement in international travel. This solid performance is offset by softness in sales from the estate wineries. In the first nine months of fiscal 2024, there was a $5.8-million reduction in sales resulting from the repeal of the federal excise duty. The company has implemented price increases to partially offset the excise exemption repeal.

Gross margin as a percentage of sales decreased to 34.7 per cent in the third quarter of fiscal 2024, down from 40.3 per cent in the prior year. The company's cost of goods sold in the third quarter of fiscal 2024 included a reduction of $3.5-million related to WSSP grants provided by Agriculture Canada, compared with $7.2-million in the same period of fiscal 2023, when the company recorded the reduction in cost of goods sold related to historical inventory sold in the nine months ended Dec. 31, 2022. Gross margin in the third quarter of fiscal 2024 has also been impacted by product mix, as consumers trade down to value-priced options, and inflationary cost pressures in imported wine, glass bottles, packaging materials, and international freight and shipping charges. Management believes these inflationary cost pressures are now stabilizing and should improve going forward. In response to these margin pressures, the company has implemented price increases and is executing numerous production efficiency and cost savings programs aimed at enhancing operating margins, such as renegotiating freight rates for raw materials and evaluating alternative sourcing for glass bottles and other components.

Gross margin as a percentage of sales was 38.2 per cent for the nine months ended Dec. 31, 2023, down from 39.4 per cent. The company's cost of goods sold in the first nine months of fiscal 2024 included a reduction of $12.2-million related to WSSP grants provided by Agriculture Canada, compared with $7.6-million in the same period of fiscal 2024. Cost of goods sold has been further impacted by the reasons outlined above.

As a percentage of sales, selling and administrative expenses improved to 21.5 per cent and 24.6 per cent for the three and nine months ended Dec. 31, 2023, respectively, compared with 25.4 per cent and 26.5 per cent in the prior year. The decrease in selling and administrative expenses is due to restructuring initiatives implemented in the fourth quarter of fiscal 2023, compensation optimization at the company's retail stores and estate wineries, and rationalization of marketing spend in line with current market conditions.

EBITA was $13.2-million in the third quarter of fiscal 2024, down from $15.6-million in the same prior-year period. EBITA increased to $41.1-million for the nine months ended Dec. 31, 2023, from $39.3-million in the prior year.

Interest expense for the three and nine months ended Dec. 31, 2023, decreased from the prior year due primarily to lower costs associated with the company's new debt facility. Management believes the new credit facility entered on June 13, 2023, and corresponding interest rate swap will continue to contribute to reductions in the cost of borrowing going forward.

On June 13, 2023, the company amended and restated its credit facility. These amendments were determined to constitute an extinguishment of long-term debt, which resulted in the derecognition of the carrying amount of the original credit facility and the recognition of the restated facility and fair market value. As a result, the company recorded a loss on extinguishment of $1.0-million and financing fees of $1.2-million were expensed in the first quarter of fiscal 2024. The company's new asset-backed lending facility is an interest-only facility with principal repayment due upon maturity and is to be used to finance day-to-day operations, distributions, capital expenditures and acquisitions. In connection with the closing June 13, 2023, the company also entered into an interest rate swap agreement on $65-million. From June 30, 2023, to June 13, 2027, the interest rate on this portion of the facility is fixed at 4.46 per cent, plus the applicable margin, which at Dec. 31, 2023, was 2.50 per cent. The interest rate on the balance of the facility has a variable interest rate of CDOR (Canadian-dollar offered rate), plus the applicable margin.

The company generated a net loss of $400,000 (loss of one cent per Class A share) for the third quarter of fiscal 2024, compared with a net income of $3.9-million (earnings of nine cents per Class A share) in the prior year and a net income of $4.1-million (10 cents per Class A share) for the nine months ended Dec. 31, 2023, compared with a net income of $6.7-million (16 cents per Class A share) in the prior year.

Long-term debt was $201.3-million at Dec. 31, 2023, compared with $208.1-million at March 31, 2023. For the nine months ended Dec. 31, 2023, the company generated cash from operating activities, after changes in non-cash working capital items, of $39.9-million, compared with $5.5-million in the prior year. As at Dec. 31, 2023, the company had unutilized debt capacity in the amount of $73.7-million on its credit facility.

Investor conference call

The company will hold a conference call to discuss the results on Tuesday, Feb. 13, 2024, at 10 a.m. ET. Mr. Peller and Paul Dubkowski, chief financial officer, will host the call, with a question-and-answer period following management's presentation.

Conference call dial-in details

Local/international dial-in:  1-416-764-8659

North American toll-free dial-in:  1-888-664-6392

Confirmation No.:  03918890

If connecting with an operator, the company advises calling 10 to 15 minutes prior to the start time. The live webcast and recording of the call will be archived on the company's website.

About Andrew Peller Ltd.

Andrew Peller is one of Canada's leading producers and marketers of quality wines and craft beverage alcohol products. The company's award-winning premium and ultrapremium Vintners' Quality Alliance brands include Peller Estates, Trius, Thirty Bench, Wayne Gretzky, Sandhill, Red Rooster, Black Hills Estate Winery, Tinhorn Creek Vineyards, Gray Monk Estate Winery, Raven Conspiracy and Conviction. Complementing these premium brands are a number of popularly priced varietal offerings, wine-based liqueurs, craft ciders and craft spirits. The company owns and operates 101 well-positioned independent retail locations in Ontario under The Wine Shop, Wine Country Vintners and Wine Country Merchants store names. The company also operates Andrew Peller Import Agency and The Small Winemaker's Collection Inc., importers and marketing agents of premium wines from around the world. With a focus on serving the needs of all wine consumers, the company produces and markets premium personal winemaking products through its wholly owned subsidiary, Global Vintners Inc., the recognized leader in personal winemaking products.

The company utilizes EBITA to measure its financial performance. EBITA is not a recognized measure under IFRS (international financial reporting standards). Management believes that EBITA is a useful supplemental measure to net earnings, as it provides readers with an indication of earnings available for investment prior to debt service, capital expenditures and income taxes, as well as provides an indication of recurring earnings compared to prior periods. Readers are cautioned that EBITA should not be construed as an alternative to net earnings determined in accordance with IFRS as indicators of the company's performance or to cash flows from operating, investing and financing activities as a measure of liquidity and cash flows. The company also utilizes gross margin (defined as sales less cost of goods sold, excluding amortization). The company's method of calculating EBITA and gross margin may differ from the methods used by other companies and, accordingly, may not be comparable with measures used by other companies.

Andrew Peller's common shares trade on the Toronto Stock Exchange (symbols ADW.A and ADW.B).

We seek Safe Harbor.