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Andrew Peller Limited — Interim / Quarterly Report 2022
Nov 11, 2021
42887_rns_2021-11-10_696db3aa-4aaa-4194-be0d-3e0b07c33325.pdf
Interim / Quarterly Report
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MANAGEMENT’S DISCUSSION & ANALYSIS For the three and six months ended September 30, 2021
The following management’s discussion and analysis (“MD&A”) provides a review of corporate developments, results of operations, and financial position for the three and six months ended September 30, 2021 in comparison with those for the three and six months ended September 30, 2020 for Andrew Peller Limited (the “Company” or “APL”). This discussion is prepared as of November 10, 2021 and should be read in conjunction with the unaudited condensed interim consolidated financial statements and accompanying notes contained therein for the period ended September 30, 2021 and 2020. Additional information relating to the Company, including the audited annual consolidated financial statements and Annual Information Form for the years ended March 31, 2021 and March 31, 2020, is available on www.sedar.com. The financial years ending March 31, 2022 and March 31, 2021 are referred to as “fiscal 2022” and “fiscal 2021” respectively. All dollar amounts are expressed in Canadian dollars unless otherwise indicated.
FORWARD-LOOKING INFORMATION
Certain statements in this MD&A may contain “forward-looking statements” within the meaning of applicable securities laws including the “safe harbour provisions” of the Securities Act (Ontario) with respect to APL and its subsidiaries. Such statements include, but are not limited to, statements about the growth of the business; its launch of new premium wines and craft beverage alcohol products; sales trends in foreign markets; its supply of domestically grown grapes; and current economic conditions. These statements are subject to certain risks, assumptions, and uncertainties that could cause actual results to differ materially from those included in the forward-looking statements. The words “believe”, “plan”, “intend”, “estimate”, “expect”, or “anticipate”, and similar expressions, as well as future or conditional verbs such as “will”, “should”, “would”, “could”, and similar verbs often identify forward-looking statements. We have based these forward-looking statements on our current views with respect to future events and financial performance. With respect to forward-looking statements contained in this MD&A, the Company has made assumptions and applied certain factors regarding, among other things: future grape, glass bottle, and wine and spirit prices; its ability to obtain grapes, imported wine, glass, and other raw materials; fluctuations in foreign currency exchange rates; its ability to market products successfully to its anticipated customers; the trade balance within the domestic Canadian and international wine markets; market trends; reliance on key personnel; protection of its intellectual property rights; the economic environment; the regulatory requirements regarding producing, marketing, advertising, and labelling of its products; the regulation of liquor distribution and retailing in Ontario; the application of federal and provincial environmental laws; and the impact of increasing competition.
These forward-looking statements are also subject to the risks and uncertainties discussed in the “Risks and Uncertainties” section and elsewhere in this MD&A and other risks detailed from time to time in the publicly filed disclosure documents of the Company which are available at www.sedar.com. Forward-looking statements are not guarantees of future performance and involve risks, uncertainties, and assumptions which could cause actual results to differ materially from the conclusions, forecasts, or projections anticipated in these forward-looking statements. Because of these risks, uncertainties, and assumptions, you should not place undue reliance on these forward-looking statements. The Company’s forward-looking statements are made only as of the date of this MD&A, and except as required by applicable law, Andrew Peller Limited undertakes no obligation to update or revise these forward-looking statements to reflect new information, future events, or circumstances.
Overview
The Company is a leading producer and marketer of quality wines and craft beverage alcohol products in Canada. With wineries in British Columbia, Ontario, and Nova Scotia, the Company markets wines produced from grapes grown in Ontario’s Niagara Peninsula, British Columbia’s Okanagan and Similkameen Valleys, and from vineyards around the world. The Company’s award-winning premium and ultra-premium Vintners’ Quality Alliance (“VQA”) 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 brands including Peller Family Vineyards , Copper Moon, Black Cellar and XOXO. Hochtaler, Domaine D’Or , Schloss Laderheim, Royal, and Sommet are the Company’s key value priced brands. The
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Company imports wines from major wine regions around the world to blend with domestic wine to craft these quality and value priced brands. The Company also produces craft beverage alcohol products, including No Boats on Sunday ciders and seltzers , and various beer, spirits and cream whisky products under the Wayne Gretzky No. 99 brand. 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. (“GVI”), the recognized leader in personal winemaking products. GVI distributes products through over 200 authorized retailers and more than 400 independent retailers across Canada, with additional distributors in the United States, the United Kingdom, New Zealand, Australia, and China. GVI’s award-winning premium and ultra-premium winemaking brands include Winexpert, Vine Co., Apres, LE, Passport Series, On the House, Wild Grapes, DIY My Wine Co., Island Mist and Niagara Mist . 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 for premium wines from around the world.
The Company’s vision is to Pour Extraordinary into Everyday Life . The Company believes it achieves this objective by delivering to its customers and consumers the highest quality branded wines, spirits, refreshments, beer and experiences at the best possible value. To meet this goal, the Company invests in improvements in the quality of grapes, wines, and other raw materials, its winemaking and distillation capabilities, sales and marketing initiatives, tourism and hospitality experiences, and its quality management programs.
The Company is focused on initiatives to reduce costs and enhance its production efficiencies through a continual review of its operations and cost structure with a view to enhancing profitability. The Company continues to expand and strengthen its distribution through provincial liquor boards, Ontario independent retail locations, grocery outlets and e-commerce platform under The Wine Shop, Wine Country Vintners, and Wine Country Merchants store names, estate wineries, restaurants, and other licensed establishments. This distribution network is supported by enhanced sales, marketing, and promotional programs. From time to time the Company also evaluates the potential for acquisitions and partnerships, both in Canada and internationally, to further complement its product portfolio and market presence.
Recent Events
On September 28, 2021, the Company completed the sale of its Port Coquitlam, British Columbia property and related assets for total proceeds of approximately $8.8 million, net of transaction costs, and generated a realized gain on sale of $7.5 million or $0.21 per Class A share.
On June 16, 2021, the Company’s Board of Directors approved a 10% increase in common share dividends. The annual dividend on Class A Shares was increased to $0.246 per share and the dividend on Class B Shares was increased to $0.214. The Company has consistently paid common share dividends since 1979. APL currently designates all dividends paid as “eligible dividends” for purposes of the Income Tax Act (Canada) unless indicated otherwise.
On March 4, 2021, the Company announced its notice of intention to make a normal course issuer bid had been approved by the Toronto Stock Exchange. Under the issuer bid the Company can purchase for cancellation up to 1,773,896 of its outstanding Class A non-voting shares, representing 5% of the Class A shares outstanding at the time, over the ensuing twelve months. As of November 10, 2021, the Company purchased 598,600 Class A non-voting common shares, at a weighted average price of $8.70 per Class A non-voting common share, for a total cash consideration of $5.2 million.
On February 26, 2021, the Company announced it had acquired The Riverbend Inn and Vineyard in Niagara-on-theLake, Ontario. This historic and well-located property, containing 17 acres of prime vineyards and a 21-room hotel and restaurant, is situated directly adjacent to the Company’s Peller Estates Winery. The Company paid $10.0 million for 100% ownership of the assets and the property. Due to the COVID-19 pandemic, the Inn was closed during fiscal 2021, and re-opened in September 2021 when the government-mandated lockdown in Ontario was lifted.
On July 27, 2020, it was announced that the Government of Canada has agreed to repeal the federal excise duty exemption of 100% Canadian wine by September 30, 2022 due to a World Trade Organization challenge put forward by Australia against Canadian wine measures. In its 2021 budget, the federal government announced an enhancement program for Canadian wine growers that is intended to mitigate the impact of the loss of the federal excise duty exemption. The enhancement program is effective July 1, 2022. The Company will continue to work with the federal
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government to review the terms of the enhancement program to determine the impact on the Company’s financial condition and results of operations.
The COVID-19 pandemic has continued to impact the financial results of the Company as government-mandated closures of restaurants and hospitality businesses and restricted international travel remained in place for part of the sixmonth period ended September 30, 2021. The pandemic has also continued to impact consumer purchasing patterns resulting in fluctuations in the Company’s quarterly results. Uncertainty resulting from the ongoing pandemic will continue to depend on future developments, including the duration of the pandemic and its impact on the overall economy and related advisories and restrictions.
Results of Operations
| esults of Operations | ||
|---|---|---|
| For the six months ended September 30, | 2021 | 2020 |
| (in $000, except per share amounts) | ||
| Sales | $ 191,621 | $ 202,850 |
| Gross margin | 79,669 | 86,892 |
| Gross margin (% of sales) | 41.6% | 42.8% |
| Selling and administrative expenses | 51,935 | 41,884 |
| EBITA | 27,734 | 45,008 |
| Interest | 4,751 | 3,852 |
| Net unrealized (gain) loss on derivative financial instruments | (1,425) | 191 |
| Gain on sale of land and property | (7,518) | - |
| Other expenses | 367 | 881 |
| Adjusted earnings | 9,056 | 24,971 |
| Net earnings | 16,380 | 23,876 |
| Earnings per share – Class A basic | $0.39 | $0.56 |
| Earnings per share – Class B basic | $0.34 | $0.49 |
| Dividend per share – Class A (annual) | $0.246 | $0.215 |
| Dividend per share – Class B (annual) | $0.214 | $0.187 |
Sales for the six months ended September 30, 2021 were $191.6 million, down 5.5% from the prior year. When the pandemic was announced, the Company saw an increase in sales through the first six months of fiscal 2021 as a result of changes in consumer purchasing patterns and uncertainty around trade channels for alcoholic beverages remaining open. Additionally, provincial liquor stores in Ontario were closed on Mondays for the majority of fiscal 2021, resulting in an increase in sales at our retail locations. As the pandemic eases, sales in these channels have normalized when compared to prior year. Government-mandated closures of restaurants and hospitality businesses were lifted in June 2021 with restrictions on capacity remaining in place throughout the six month period ended September 30, 2021. As a result, the recovery in the restaurant and hospitality industries has lagged when compared to the retail industry. The Company expect sales in these previously closed channels to gradually increase in the quarters ahead as consumers return to pre-pandemic activities.
The Company defines gross margin as gross profit excluding amortization. Gross margin as a percentage of sales was 41.6% for the six months ended September 30, 2021 compared to 42.8% in the prior year. Gross margin has declined in fiscal 2022 due to higher imported wine costs, increased global supply chain costs due to the COVID-19 pandemic, and increased co-packing costs related to the Company’s new and growing refreshment beverage categories. Gross margin, however, has improved sequentially on a quarterly basis to 42.7% in the second quarter of fiscal 2022, up from 40.3% in the first quarter of fiscal 2022, and 35.5% and 37.4% in the fourth and third quarters of fiscal 2021, respectively, due to increasing sales of higher margin products in the current quarter as pandemic restrictions ease.
Selling and administrative expenses increased for the first six months of fiscal 2022 as the Company increased staffing and marketing expenses in preparation for more normal markets returning as the impact of the COVID-19 pandemic
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eases. During the first six months of fiscal 2021, the Company laid off a significant part of its workforce due to government-mandated closures and reduced advertising and promotional spending to conserve cash in response to the pandemic. In addition, certain start-up costs have been incurred in fiscal 2022 related to the acquisition of the Riverbend Inn and Vineyard, which opened on June 19, 2021. As a percentage of sales, selling and administrative expenses were 27.1% through the first six months of fiscal 2022 compared to 20.6% in the prior year. As the pandemic eases and activity in the hospitality, licensee and export channels increases, the Company expects selling and administrative expenses will trend to pre-pandemic levels as a percentage of sales.
Earnings before interest, amortization, gain on sale of land and property, net unrealized gains and losses on derivative financial instruments and deferred financing fees, other (income) expenses, and income taxes (“EBITA”) were $27.7 million for the six months ended September 30, 2021 compared to $45.0 million in the prior year. The decline in EBITA in fiscal 2022 is due primarily to the lower sales, reduced gross margin and higher administrative and selling expenses compared to the prior year.
Interest expense in fiscal 2022 increased compared to the prior year due higher debt levels resulting primarily from capital investments in the Company’s operations and properties as well as a decrease in cash from operations.
The Company recorded a net unrealized non-cash gain in the first six months of fiscal 2022 of $1.4 million related to mark-to-market adjustments on interest rate swaps and foreign exchange contracts compared to an unrealized net loss of $0.2 million in the prior year. The change is primarily due to gains on interest rate swaps, partially offset by losses on foreign exchange contracts. The Company has elected not to apply hedge accounting and accordingly the change in fair value of these financial instruments is reflected in the Company’s consolidated statement of earnings each reporting period. These instruments are considered to be effective economic hedges and are expected to mitigate the short-term volatility of changing foreign exchange and interest rates.
On September 28, 2021 the Company recorded a realized gain of $7.5 million on the sale of its Port Coquitlam, British Columbia property and related assets.
Net earnings for the six months ended September 30, 2021 were $16.4 million or $0.39 per Class A Share compared to $23.9 million or $0.56 per Class A Share in the prior year. Adjusted earnings, defined as net earnings not including the gain on sale of land and property, net unrealized gains and losses on derivative financial instruments, other (income) expenses, and the related income tax effect were $9.1 million for the six months ended September 30, 2021 compared to $25.0 million in the prior year.
Quarterly Performance
The following table outlines key quarterly highlights.
| uarterly Performance he following table outlines key quarterly highlights. |
||
|---|---|---|
| (in $000, except per share amounts) Q2 22 Q1 22 |
Q4 21 Q3 21 Q2 21 Q1 21 |
Q4 20 Q3 20 |
| Sales 99,224 92,397 Gross margin 42,408 37,261 Gross margin (% of sales) 42.7% 40.3% EBITA 15,821 11,913 Interest 2,478 2,273 Gain on debt modification and financing fees - - Net unrealized (gain) loss on financial instruments (1,037) (388) Gain on sale of land and property (7,518) - Other expenses (income) 26 341 Adjusted earnings (loss) 5,801 3,255 Net earnings(loss) 13,090 3,290 |
79,126 111,060 104,410 98,440 28,089 41,537 44,165 42,727 35.5% 37.4% 42.3% 43.4% 1,815 16,223 22,438 22,570 2,619 1,637 1,813 2,039 - (2,312) - - (495) 170 (540) 730 - - - - 742 148 195 685 (6,145) 8,159 12,419 12,553 (6,328) 10,236 12,674 11,204 |
82,118 101,597 35,550 41,968 43.3% 41.3% 9,668 16,148 1,839 1,818 - - 1,984 (646) - - 634 (57) 1,196 7,815 (996) 8,056 |
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| (in $000, except per share amounts) Q2 22 Q1 22 |
Q4 21 Q3 21 Q2 21 Q1 21 |
Q4 20 Q3 20 |
|---|---|---|
| E.P.S. – Class A basic $0.31 $0.08 E.P.S. – Class B basic $0.27 $0.07 |
$(0.15) $0.24 $0.30 $0.26 $(0.13) $0.21 $0.26 $0.23 |
$(0.02) $0.19 $(0.02) $0.16 |
The second and third quarters of the Company’s fiscal year are historically the largest due to increased activity at the Company's estate properties and increased consumer purchasing of the Company’s products during the holiday season. However, the COVID-19 pandemic has, and may continue to cause fluctuations in the Company’s results and consequently, quarterly results may not follow historical trends.
Sales for the three months ended September 30, 2021 were 5.0% lower than the prior year’s second quarter as retail sales have normalized when compared to prior year as the pandemic eases and consumer purchasing patterns change. Government-mandated closures of restaurants and hospitality businesses were lifted in June 2021 with restrictions on capacity remaining in place throughout the six month period ended September 30, 2021, and as a result, sales in these channels have increased in the second quarter of fiscal 2022 when compared with the second quarter of fiscal 2021. Gross margin was 42.7% in the second quarter of fiscal 2022, which is consistent with prior year. Selling and administrative expenses increased for the three months ended September 30, 2021 compared to the prior year’s second quarter as the Company had temporarily reduced staffing levels and advertising and promotional spending in fiscal 2021 due to the COVID-19 pandemic. In the second quarter of fiscal 2022, the Company recorded a realized gain of $7.5 million on the sale of its Port Coquitlam, British Columbia property and related assets. Net earnings for the three months ended September 30, 2021 were $13.1 million or $0.31 per Class A Share compared to $12.7 million or $0.30 per Class A Share in the second quarter of fiscal 2021. Adjusted earnings, defined as net earnings not including the realized gain on the property sale, net unrealized gains and losses on derivative financial instruments, other (income) expenses, and the related income tax effect were $5.8 million for the three months ended September 30, 2021 compared to $12.4 million in the prior year.
Liquidity and Capital Resources
| Liquidity and Capital Resources | ||
|---|---|---|
| As at | September 30, 2021 | March 31, 2021 |
| (in $000) | ||
| Current assets | $ 240,130 | $ 225,302 |
| Property, plant, and equipment | 224,761 | 223,931 |
| Intangible assets | 41,162 | 39,650 |
| Goodwill | 53,638 | 53,638 |
| Total assets | $ 559,691 | $ 542,521 |
| Current liabilities | $ 69,958 | $ 54,618 |
| Long-term debt | 170,369 | 174,544 |
| Long-term derivative financial instruments | - | 717 |
| Lease obligations | 13,071 | 13,987 |
| Post-employment benefit obligations | 3,015 | 3,316 |
| Deferred income taxes | 30,507 | 29,765 |
| Shareholders’ equity | 272,771 | 265,574 |
| Total liabilities and shareholders’ equity | $ 559,691 | $ 542,521 |
The change in current assets as at September 30, 2021 compared to March 31, 2021 reflects an increase in cash on hand due to the net proceeds from the sale of the Port Coquitlam property, an increase in accounts receivable due to the timing of sales, and higher levels of inventory due to the timing of bulk wine and grape receipts. Inventory is dependent on domestically grown grapes that are used in the sale of premium and ultra-premium wines that are held for a longer period than imported wine. These wines are typically aged for one to three years before they are sold. The cost of producing wine from domestically grown grapes is also significantly higher than wine purchased on international markets.
Accounts receivable are predominantly with provincial liquor boards and, to a lesser extent, licensed establishments and independent retailers of personal winemaking products. The Company had $19.1 million of accounts receivable with provincial liquor boards at September 30, 2021, all of which is expected to be collectible. The balance represents amounts due from licensees, export customers, and independent retailers of personal winemaking products. The amount of accounts receivable that was 30 days past due was $0.9 million at September 30, 2021. Against these amounts an
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expected credit loss of $0.3 million has been provided which the Company has determined based on a reasonable estimate of lifetime expected credit losses for trade receivable.
Property, plant and equipment and intangible assets increased at September 30, 2021 compared to the prior year-end due to investments in the Company’s properties and operations, partially offset by amortization.
The change in current liabilities as at September 30, 2021 compared to March 31, 2021 is due primarily to an increase in accounts payable due to the timing of invoices and payments.
Overall bank debt decreased to $170.4 million at September 30, 2021 from $174.5 million at March 31, 2021, due primarily to the repayment of debt partially offset by working capital needs and increased investment in the Company’s properties and operations. The Company’s debt to equity ratio improved to 0.62:1 at September 30, 2021 compared to 0.66:1 at March 31, 2021. At September 30, 2021, the Company had unutilized debt capacity in the amount of $179.6 million on its operating facility. On November 10, 2021, the Company amended and restated its credit agreement with its lenders to amend its interest charge coverage ratio financial covenant for the three-month period ending December 31, 2021.
Management expects to generate sufficient cash flow from operations to meet its debt servicing and working capital requirements over both the short and long-term through continued profitability and strong management of working capital and prioritization of capital expenditures. The Company regularly reviews all of its assets to ensure appropriate returns on investment are being achieved and that they fit with the Company’s long-term strategic objectives.
For the six months ended September 30, 2021, the Company generated cash from operating activities, after changes in non-cash working capital items, of $30.3 million compared to $41.2 million in the prior year. Investing activities include $8.8 million in net proceeds from the sale of the Port Coquitlam property.
Financing activities for the six months ended September 30, 2021 include the payment of dividends, principal repayment of lease obligations and the purchase of Class A shares under the Company’s approved issuer bid.
Working capital at September 30, 2021 was $170.2 million compared to $170.7 million at March 31, 2021. Shareholders’ equity at September 30, 2021 was $272.8 million or $6.33 per common share compared to $265.6 million or $6.08 per common share at March 31, 2021.
Common Shares Outstanding
The Company is authorized to issue an unlimited number of Class A and Class B Shares. Class A Shares are non-voting and are entitled to a dividend in an amount equal to 115% of any dividend paid or declared on Class B Shares. Class B Shares are voting and convertible into Class A Shares on a one-for-one basis.
| Shares outstanding | September 30, 2021 | March 31, 2021 |
|---|---|---|
| Class A Shares | 34,978,011 | 35,525,639 |
| Class B Shares | 8,144,183 | 8,144,183 |
| Total | 43,122,194 | 43,669,822 |
On March 4, 2021 the Company announced its notice of intention to make a normal course issuer bid had been approved by the Toronto Stock Exchange. Under the bid the Company can purchase for cancellation up to 1,773,896 of its outstanding Class A non-voting shares, representing 5% of the Class A shares outstanding, over the ensuing twelve months. As of November 10, 2021, the Company has purchased 598,600 Class A shares to date in fiscal 2022 at a weighted average price of $8.70 per share for a total of $5.2 million.
Strategic Outlook and Direction
Andrew Peller Limited is committed to a strategy of growth that focuses on the expansion of its core business as a producer and marketer of quality wines and wine related products through concentrating on and developing leading brands that meet the needs of consumers and customers. Over the long term the Company believes higher-priced premium wine and spirits sales will continue to grow in Canada, generating higher margins and increased profitability
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compared to its lower-priced products. The Company has also entered the spirits and craft beer categories, through its strategic alliance with Wayne Gretzky, and has introduced ciders and seltzers through its own brand labels.
The Company has focused its product development and sales and marketing initiatives by capitalizing on alcohol consumption trends and expects to see continued sales growth. The Company will continue to closely monitor its costs and will react quickly to changes to risks and opportunities in the marketplace.
The Company will continue to expand product offerings outside the traditional table wine segment into other alcoholic beverages where it is able to leverage its detailed knowledge of growth opportunities in the Canadian market. The Company will also make packaging design changes that are more appealing to its target markets and are consistent with its initiative to be more environmentally friendly. Increased focus will be made on coordination between the Company’s business-to-consumer trade channels to provide customers with a more intimate awareness of its broad product portfolio. New product launches and key brands through all of the Company’s distribution channels will continue to receive increased marketing and sales support.
From time to time the Company evaluates investment opportunities, including acquisitions, which support its strategic direction.
The Company believes that sales will grow over the long term due to strong positioning of key brands, the continued launch of new and innovative products in both its core wine business and in new product categories, as well as overall growth in the Canadian beverage alcohol market. The Company expects to continue to invest in capital expenditures to improve efficiencies, increase capacity, support its ongoing commitment to producing the highest-quality wines and spirits, and improve productivity.
Risks and Uncertainties
The Company’s sales of wine and craft beverage alcohol products are affected by general economic conditions and social trends such as changes in discretionary consumer spending and consumer confidence, future economic conditions, changes to inter-provincial trade laws, tax laws, the prices of its products and health trends. During the six months ended September 30, 2021, the COVID-19 pandemic has continued to impact consumer purchasing patterns resulting in fluctuations in the Company’s results, however, the Company continues to generate operating cash flows to meet short-term working capital needs. The impact of the outbreak on the financial results of the Company will continue to depend on future developments, including the duration and spread of the outbreak and its impact on the overall economy and related advisories and restrictions. It is not possible to reliably estimate the length and severity of these developments and conclusively quantify the impact on the financial results and condition of the Company in future periods. In response to COVID-19, the Company has implemented working practices to address potential impacts to its operations, employees and customers and will take further measures in the future, if required. At present, the Company has not identified any material continuity risks specifically associated with COVID-19.
The Government of Ontario has announced its intention to modernize the rules for selling beverage alcohol in Ontario by expanding retail distribution in the province. This could represent a significant change to the retail landscape in Ontario with the goal of providing more convenience and choice to consumers. While there has not been a proposal by the Government of Ontario regarding implementation, the Company is working closely with its industry partners to mitigate the risks that this transition may have on its financial results.
The Canadian wine market continues to be the target of low-priced imported wines from regions and countries that subsidize wine production and grape growing as well as providing sizeable export incentives on subsidies. Many of these countries and regions prohibit or restrict the sale of imported wine in their own domestic markets. The Company, along with other members of the Canadian wine industry, are working with the Canadian government to improve support for the domestic industry.
The Company operates in a highly competitive industry and the dollar amount and unit volume of sales could be negatively impacted by its inability to maintain or increase prices, changes in geographic or product mix, a general decline in beverage alcohol consumption, or the decision of retailers or consumers to purchase competitive products instead of the Company’s products. Retailer and consumer purchasing decisions are influenced by, among other things, the perceived absolute or relative overall value of the Company’s products including their quality or pricing compared
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to competitive products. Unit volume and dollar sales could also be affected by purchasing, financing, operational, advertising, or promotional decisions made by provincial agencies and retailers which could affect supply of or consumer demand for the Company’s products. APL could also experience higher than expected selling and administrative expenses if it finds it necessary to increase the number of its personnel, advertising, or promotional expenditures to maintain its competitive position.
APL expects to increase sales in Canada principally through the sale of VQA wines, and as a result, is dependent on the quality and supply of domestically grown premium quality grapes. If any of the Company’s vineyards or the vineyards of our grape suppliers experience certain weather variations, natural disasters, pestilence, other severe environmental problems, or other occurrences, APL may not be able to secure a sufficient supply of grapes, a situation which could result in a decrease in production of certain products from those regions and/or result in an increase in costs. The inability to secure premium quality grapes could impair the ability of the Company to supply certain wines to its customers. When environmental risks such as wildfires, occur, the Company’s viticultural teams have internal processes to ensure Company’s vineyards are protected. This may include the use of technology and fire suppression activities. The Company’s winemaking teams are also able to monitor the quality of the grapes and use enhanced processing technology to minimize the risk of smoke taint. APL has also developed programs to ensure it has access to a consistent supply of premium quality grapes and wine. The price of grapes is determined through negotiations with the Ontario Grape Growers Marketing Board in Ontario and with independent growers in British Columbia.
Foreign exchange risk exists on the purchases of bulk wine and concentrate that are primarily made in United States dollars, Euros, and Australian dollars. Fluctuating foreign currencies may have a positive or negative impact on gross margins, however, the Company believes the impact on gross margin will be largely offset by its continued ability to leverage scale and successful cost control initiatives to reduce other cost of goods sold. The Company’s strategy is to hedge approximately 50% - 80% of its foreign exchange requirements throughout the fiscal year and to regularly review its on-going requirements. The Company does not enter into foreign exchange contracts for trading or speculative purposes and contracts are reviewed periodically. As at September 30, 2021, the Company has forward foreign currency contracts to buy $14.0 million US at rates ranging between $1.23 and $1.26 and $2.3 million AUD at rates ranging between $0.92 and $1.00. These contracts mature at various dates to February 2022. Based on the Company’s forecasts for foreign currency purchases and the amount of foreign exchange forward contracts outstanding at September 30, 2021, each one percent change in the respective foreign currency exchange rates would not result in a material impact on the Company’s net earnings.
The Company purchases glass, bag in box, tetra paks, and other components used for bottling and packaging. The largest component of packaging is glass, of which there are few domestic or international suppliers. There is currently only one commercial supplier of glass in Canada that is able to supply glass to APL’s specifications. Any interruption in supply could have an adverse impact on the Company’s ability to supply its markets. APL has taken steps to reduce its dependence on domestic suppliers through the development of relationships with several international producers of glass and through carrying increased inventory of selected bottles.
The Company operates in a highly regulated industry with requirements regarding the production, distribution, marketing, advertising, and labelling of wine and spirits. These regulatory requirements may inhibit or restrict the Company’s ability to maintain or increase strong consumer support for and recognition of its brands and may adversely affect APL’s business strategies and results of operations. Privatization of liquor distribution and retailing has been implemented in varying degrees across the country. The recent regulatory changes relating to privatization in Ontario and sales through grocery outlets remains a risk to the Company through its impact on the Company’s retail operations.
The wine industry and the domestic and international markets in which the Company operates are consolidating. This has resulted in fewer, but larger, competitors who have increased their resources and scale. The increased competition from these larger market participants may affect the Company’s pricing strategies and create margin pressures resulting in potentially lower revenues. Competition also exerts pressure on existing customer relationships which may affect APL’s ability to retain existing customers and increase the number of new customers. The Company has worked to improve production efficiencies, selectively increase pricing to increase gross margin, and implement a higher level of promotion and advertising activity to remain competitive. APL and other wine industry participants also generally compete with other alcoholic beverages for consumer acceptance, loyalty, and shelf space. No assurance can be given that consumer demand for wine and premium wine products will continue at current levels in the future.
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Federal and provincial governments impose excise, other taxes, and mark-ups on beverage alcohol products which have been subject to change. Significant increases in excise and other taxes on beverage alcohol products could materially and adversely affect the Company’s financial condition or results of operations. Federal and provincial governmental agencies extensively regulate the beverage alcohol products industry concerning such matters as licensing, trade practices, permitted and required labelling, advertising, and relations with consumers and retailers. Certain federal and provincial regulations also require warning labels and signage. New or revised regulations, increased licensing fees, requirements, taxes, or mark-ups could also have a material adverse effect on the Company’s financial condition or results of operations.
The Company’s future operating results also depend on the ability of its officers and other key employees to continue to implement and improve its operating and financial systems and manage the Company’s significant relationships with its suppliers and customers. The Company is also dependent upon the performance of its key senior management personnel. The Company’s success is linked to its ability to identify, hire, train, motivate, promote, and retain highly qualified management. Competition for such employees is intense and there can be no assurances that the Company will be able to retain current key employees or attract new key employees.
The Company has certain defined benefit pension plans. The expense and cash contributions related to these plans depend on the discount rate used to measure the liability to pay future benefits and the market performance of the plan assets set aside to pay these benefits. The Company’s Pension Committee reviews the performance of plan assets on a regular basis and has a policy to hold diversified investments. Nevertheless, a decline in long-term interest rates or in asset values could increase the Company’s costs related to funding the deficit in these plans.
The competitive nature of the wine industry internationally has resulted in the discounting of retail prices of wine in key markets such as the United States and the United Kingdom. Although significant price discounting may occur in Canada beyond current levels, the Company believes that its product quality, advertising, and promotional support along with its competitive pricing strategies will effectively mitigate the impact of this to the Company.
The Company considers its trademarks, particularly certain brand names and product packaging, advertising and promotion design, and artwork to be of significant importance to its business and ascribes a significant value to these intangible assets. APL relies on trademark laws and other arrangements to protect its proprietary rights. There can be no assurance that the steps taken by APL to protect its intellectual property rights will preclude competitors from developing confusingly similar brand names or promotional materials. The Company believes that its proprietary rights do not infringe upon the proprietary rights of fourth parties, but there can be no assurance in this regard.
As an owner and lessee of property the Company is subject to various federal and provincial laws relating to environmental matters. Such laws provide that the Company could be held liable for the cost of removal and remediation of hazardous substances on its properties. The failure to remedy any situation that might arise could lead to claims against the Company. A perceived failure to maintain high ethical, social, and environmental standards could have an adverse effect on the Company’s reputation.
The success of the Company’s brands depends upon the positive image that consumers have of those brands. Contamination of APL’s products, whether arising accidentally or through deliberate fourth-party action, or other events that harm the integrity or consumer support for those brands could adversely affect their sales. Contaminants in raw materials purchased from fourth parties and used in the production of the Company’s products or defects in the fermentation process could lead to low product quality as well as illness among, or injury to, consumers of the products and may result in reduced sales of the affected brand or all of the Company’s brands.
Non-IFRS Measures
The Company utilizes EBITA (defined as earnings before interest, amortization, gain on sale of land and property, net unrealized gains and losses on derivative financial instruments, other (income) expenses, and income taxes) to measure its financial performance. EBITA is not recognized measures under IFRS; however, 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 providing an indication of recurring earnings compared to prior periods.
9
The Company calculates EBITA as follows.
| e Company calculates EBITA as follows. | ||||
|---|---|---|---|---|
| For the three and six months ended September 30, | Three | Months | Six | Months |
| (in $000) | 2021 | 2020 | 2021 | 2020 |
| Net earnings | $ 13,090 | $ 12,674 | $ 16,380 | $ 23,876 |
| Add: Interest | 2,478 | 1,813 | 4,751 | 3,852 |
| Provision for income taxes | 3,509 | 3,836 | 4,792 | 7,494 |
| Amortization of plant and equipment used in production | 2,411 | 2,616 | 4,516 | 5,217 |
| Amortization of equipment and intangibles used in selling and administration | 2,862 | 1,844 | 5,871 | 3,497 |
| Net unrealized (gains) losses on derivative financial instruments | (1,037) | (540) | (1,425) | 191 |
| Gain on sale of land and property | (7,518) | - | (7,518) | - |
| Other expenses | 26 | 195 | 367 | 881 |
| EBITA | $15,821 | $22,438 | $ 27,734 | $45,008 |
Readers are cautioned that EBITA should not be construed as an alternative to net earnings determined in accordance with IFRS as an indicator 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 utilizes gross margin (defined as sales less cost of goods sold, excluding amortization) as calculated below.
low. |
||||
|---|---|---|---|---|
| For the three and six months ended September 30, | Three | Months | Six | Months |
| (in $000) | 2021 | 2020 | 2021 | 2020 |
| Sales | $ 99,224 | $ 104,410 | $ 191,621 | $ 202,850 |
| Less: Cost ofgoods sold,excludingamortization | 56,816 | 60,245 | 111,952 | 115,958 |
| Gross margin | $ 42,408 | $44,165 | $ 79,669 | $86,892 |
| Gross margin(% of sales) | 42.7% | 42.3% | 41.6% | 42.8% |
The Company calculates adjusted earnings as follows:
| e Company calculates adjusted earnings as follows: | |||||
|---|---|---|---|---|---|
| For the three and six months ended September 30, | Three | Months | Six | Months | |
| (in $000) | 2021 | 2020 | 2021 | 2020 |
|
| Net earnings | $ 13,090 | $ 12,674 | $ | 16,380 | $ 23,876 |
| Net unrealized (gains) losses on derivative financial instruments | (1,037) | (540) | (1,425) | 191 | |
| Other expenses | 26 | 195 | 367 | 881 | |
| Gain on sale of land and property | (7,518) | - | (7,518) | - |
|
| Fair value adjustment for acquired inventory sold during the period | - | - | - | 302 |
|
| Income tax effect of the above | 1,240 | 90 | 1,252 | (279) | |
| Adjusted earnings | $ 5,801 | $ 12,419 | $ 9,056 | $ 24,971 |
The Company’s method of calculating EBITA, gross margin, and Adjusted earnings may differ from the methods used by other companies and accordingly, may not be comparable to the corresponding measures used by other companies.
Financial Statements and Accounting Policies
The Company’s condensed interim consolidated financial statements have been prepared in accordance with IFRS, as issued by the International Accounting Standards Board (“IASB”) applicable to the preparation of interim financial statements, including International Accounting Standard (“IAS”) 34 – Interim Financial Reporting.
10
Critical Accounting Estimates
During the year, management is required to make estimates and assumptions that are inherently uncertain. These estimates can vary with respect to the level of judgment involved and ultimately the impact that these estimates may have on the Company’s financial statements. Estimates are deemed to be critical when a different estimate could reasonably be used or where changes are reasonably likely to occur which could materially affect the Company’s financial position or financial performance. The Company’s critical accounting estimates remain unchanged from those disclosed in the notes to the audited consolidated financial statements for the years ended March 31, 2021 and 2020.
Recently adopted accounting pronouncements
IFRS 16, Leases
This standard has been amended to provide lessees with an optional exemption from assessing whether a rent concession related to COVID-19 is a lease modification. This amendment is effective for annual periods beginning on or after June 1, 2020. At this time, the Company has not received rent concessions related to COVID-19 and therefore, this amendment has not had an impact on the consolidated financial statements.
London Inter-bank Offered Rate (LIBOR) reform with amendments to IFRS 9, IFRS 7, Financial Instruments: Disclosures and IFRS 16.
In August 2020, the IASB issued Interest Rate Benchmark Reform Phase 2 (the Reform Phase 2), which complemented the Reform Phase 1 and amended various standards requiring interest rates or interest rate calculations. The Reform Phase 2 provides guidance on the impacts on the financial statements after the LIBOR reform and its replacement with alternative benchmark rates. The amendments are effective for annual periods beginning on or after January 1, 2021. The adoption of these amendments did not have a significant impact on the consolidated financial statements.
Recently issued accounting pronouncements
IAS 16, Property, Plant and Equipment
This standard has been amended to prohibit an entity from deducting from the cost of an item of property, plant and equipment any proceeds received from selling items produced while the entity is preparing the asset for its intended use, clarify that an entity is “testing whether the asset is functioning properly” when it assesses the technical and physical performance of the asset and require certain related disclosures. The amendments are effective for annual periods beginning on or after January 1, 2022. The Company has not yet assessed the impact of the amendments on the consolidated financial statements.
IAS 37, Provisions
This standard has been amended to clarify that, before a separate provision for an onerous contract is established, an entity recognizes an impairment loss that has occurred on assets used in fulfilling the contract, rather than on assets dedicated to that contract and to clarify the meaning of costs to fulfil a contract. The amendments are effective for annual periods beginning on or after January 1, 2022. The Company has not yet assessed the impact of the amendments on the consolidated financial statements.
IFRS 9, Financial Instruments
This standard has been amended to address which fees should be included in the 10% test for derecognition of financial liabilities. This amendment is effective for annual periods beginning on or after January 1, 2022. The Company has not yet assessed the impact of the amendment on the consolidated financial statements.
IAS 1, Presentation of Financial Statements, and IAS 8, Accounting Policies, Changes in Accounting Estimates and Errors
This standard has been amended to clarify the classification of liabilities as current or non-current depending on the rights that exist at the end of the reporting period. Classification is unaffected by the expectations of the entity or events after the reporting date. The amendment also clarifies the meaning of settlement of a liability. This amendment is effective for annual periods beginning on or after January 1, 2023. The Company has not yet assessed the impact of the amendment on the consolidated financial statements.
11
IAS 12, Income Taxes
This standard has been amended to require companies to recognize deferred tax on transactions that, on initial recognition, give rise to equal amounts of taxable and deductible temporary differences. The amendments are effective for annual reporting periods beginning on or after January 1, 2023. The Company has not yet assessed the impact of the amendment on the consolidated financial statements.
Evaluation of Disclosure Controls and Procedures and Internal Control over Financial Reporting
To comply with National Instrument 52-109, the Company’s management, under the supervision of, and with participation of the CEO and CFO, have designed and maintained the Company’s disclosure controls and procedures as required in Canada by National Instrument 52-109 – Certification of Disclosure in Issuers’ Annual and Interim Filings.
For the six months ended September 30, 2021, there have been no material changes in the Company’s internal controls over financial reporting or changes to disclosure controls and procedures that materially affect or were likely to affect, the Company’s internal control systems.
12
Andrew Peller Limited
Condensed Interim Consolidated Financial Statements
September 30, 2021
ANDREW PELLER LIMITED
Condensed Consolidated Balance Sheets
Unaudited
These financial statements have not been reviewed by our auditors
==> picture [504 x 562] intentionally omitted <==
----- Start of picture text -----
September 30 March 31
2021 2021
(in thousands of Canadian dollars) $ $
Assets
Current Assets
Cash 12,613 2,737
Accounts receivable 30,829 28,896
Inventory 180,113 178,727
Biological assets 4,406 2,815
Prepaid expenses and other assets 6,511 4,879
Income taxes receivable 5,436 5,973
Current portion of derivative financial instruments (note 7) 222 -
Assets held for sale (note 9) - 1,275
240,130 225,302
Property, plant, and equipment 224,761 223,931
Intangible assets 41,162 39,650
Goodwill 53,638 53,638
559,691 542,521
Liabilities
Current Liabilities
Accounts payable and accrued liabilities 62,079 46,487
Dividends payable 2,587 2,404
Current portion of lease obligations 3,877 3,826
Current portion of derivative financial instruments (note 7) 1,415 1,901
69,958 54,618
Long-term debt 170,369 174,544
Long-term derivative financial instruments (note 7) - 717
Lease obligations 13,071 13,987
Post-employment benefit obligations 3,015 3,316
Deferred income taxes 30,507 29,765
286,920 276,947
Shareholders' Equity
Capital stock (note 8) 27,290 27,020
Contributed surplus 5,166 4,950
Retained earnings 243,183 236,773
Accumulated other comprehensive loss (2,868) (3,169)
272,771 265,574
559,691 542,521
----- End of picture text -----
Events after the reporting period (note 11)
The accompanying notes are an integral part of these condensed interim consolidated financial statements.
ANDREW PELLER LIMITED
Condensed Consolidated Statements of Earnings
Unaudited
==> picture [504 x 295] intentionally omitted <==
----- Start of picture text -----
For the three For the three For the six For the six
These financial statements have not been reviewed by our auditors months ended months ended months ended months ended
September 30, 2021 September 30, 2020 September 30, 2021 September 30, 2020
(in thousands of Canadian dollars, except per share amounts) $ $ $ $
Sales 99,224 104,410 191,621 202,850
Cost of goods sold (note 4) 56,816 60,245 111,952 115,958
Amortization of plant and equipment used in production 2,411 2,616 4,516 5,217
Gross profit 39,997 41,549 75,153 81,675
Selling and administration (note 4) 26,587 21,727 51,935 41,884
Amortization of plant, equipment, and intangibles used in selling and
administration 2,862 1,844 5,871 3,497
Interest 2,478 1,813 4,751 3,852
Net unrealized (gain) loss on derivative financial instruments (note 7) (1,037) (540) (1,425) 191
Gain on sale of land and property (note 9) (7,518) - (7,518) -
Other expense 26 195 367 881
Earnings before income taxes 16,599 16,510 21,172 31,370
Income taxes
Current 3,059 4,804 4,155 8,943
Deferred 450 (968) 637 (1,449)
3,509 3,836 4,792 7,494
Net earnings for the period 13,090 12,674 16,380 23,876
Net earnings per share
Basic
Class A shares 0.31 0.30 0.39 0.56
Class B shares 0.27 0.26 0.34 0.49
Diluted
Class A shares 0.31 0.30 0.38 0.56
Class B shares 0.27 0.26 0.33 0.49
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The accompanying notes are an integral part of these condensed interim consolidated financial statements.
ANDREW PELLER LIMITED
| Condensed Consolidated Statements of Comprehensive Income Unaudited These financial statements have not been reviewed by our auditors September 30, 2021 (in thousands of Canadian dollars) $ Net earnings for the period 13,090 Items that are never reclassified to net earnings Net actuarial gains (losses) on post-employment benefit plans (37) Deferred income taxes 10 Other comprehensive income (loss) for the year (27) Net comprehensive income for the period 13,063 For the three months ended |
September 30, 2020 $ 12,674 3 (1) 2 12,676 For the three months ended |
September 30, 2021 $ 16,380 406 (105) 301 16,681 For the six months ended |
September 30, 2020 $ 23,876 (1,424) 370 (1,054) 22,822 For the six months ended |
|---|---|---|---|
The accompanying notes are an integral part of these condensed interim consolidated financial statements.
ANDREW PELLER LIMITED
Condensed Consolidated Statements of Changes in Equity For the six months ended September 30, 2021 and 2020
Unaudited
These financial statements have not been reviewed by our auditors
(in thousands of Canadian dollars, except per share amounts)
| Balance at April 1, 2020 Net earnings for the period Net actuarial losses (net of deferred tax recovery) Net comprehensive income for the period Share-based compensation (note 10) Dividends (Class A $0.1076 per share, Class B $0.0936 per share) Balance at September 30, 2020 Balance at April 1, 2021 Net earnings for the period Net actuarial gains (net of deferred tax provision) Net comprehensive income for the period Repurchase and cancellation of class A non-voting shares (note 8) Exercise of share options and issuance of Class A non-voting shares (note 10) Share-based compensation (note 10) Dividends (Class A $0.123 per share, Class B $0.107 per share) Balance at September 30, 2021 |
Capital stock Contributed surplus Retained earnings Accumulated other comprehensive loss Total shareholders' equity $ $ $ $ $ 26,014 4,834 218,265 (3,588) 245,525 - - - 23,876 - 23,876 - - - (1,054) (1,054) - - 23,876 (1,054) 22,822 - 567 - - 567 - - (4,580) - (4,580) 26,014 5,401 237,561 (4,642) 264,334 27,020 4,950 236,773 (3,169) 265,574 - - 16,380 - 16,380 - - - 301 301 - - 16,380 301 16,681 (449) - (4,761) - (5,210) 719 (719) - - - - 935 - - 935 - - (5,209) - (5,209) 27,290 5,166 243,183 (2,868) 272,771 |
|---|---|
The accompanying notes are an integral part of these condensed interim consolidated financial statements.
ANDREW PELLER LIMITED Condensed Consolidated Statements of Cash Flows
Unaudited These financial statements have not been reviewed by our auditors
| (in thousands of Canadian dollars) Cash provided by (used in) Operating activities Net earnings for the period Adjustments for: Loss (gain) on disposal of PP&E and intangibles Amortization of plant, equipment, and intangible assets Amortization of deferred financing costs Interest expense Provision for income taxes Post-employment benefits Net unrealized loss (gain) on derivative financial instruments Share-based compensation Interest paid Income taxes paid Changes in non-cash working capital items related to operations (note 5) Investing activities Proceeds from disposal of property, plant and equipment Purchase of property, plant and equipment Purchase of intangibles Financing activities Decrease in bank indebtedness Principal payments on lease obligations Repayment of long-term debt Drawings on long-term debt Repurchase and cancellation of class A non-voting shares Dividends paid Increase in cash during the period Cash, beginning of period Cash, end of period |
September 30, 2021 $ 16,380 (7,518) 10,387 15 4,751 4,792 105 (1,425) 809 (3,665) (3,618) 21,013 9,243 30,256 8,793 (8,510) (3,442) (3,159) - (1,985) (17,000) 12,000 (5,210) (5,026) (17,221) 9,876 2,737 12,613 For the six months ended |
September 30, 2020 $ 23,876 616 8,714 - 3,852 7,494 (36) 191 381 (3,713) (5,651) 35,724 5,464 41,188 - (3,655) (9,701) (13,356) (16,632) (1,700) (4,924) - - (4,576) (27,832) - - - For the six months ended |
|---|---|---|
The accompanying notes are an integral part of these condensed interim consolidated financial statements.
Andrew Peller Limited Notes to the Condensed Interim Consolidated Financial Statements Unaudited September 30, 2021 and September 30, 2020 (in thousands of Canadian dollars, except per share amounts)
1 Nature of operations
Andrew Peller Limited (the “Company”) produces and markets wine, spirits, craft beer and wine related products. The Company’s products are produced and sold predominantly in Canada. The Company is incorporated under the Canada Business Corporations Act and is domiciled in Canada. The address of its head office is 697 South Service Road, Grimsby, Ontario, L3M 4E8.
The COVID-19 pandemic has continued to impact the financial results of the Company as government-mandated closures of restaurants and hospitality businesses and restricted international travel remained in place for part of the six-month period ended September 30, 2021. Uncertainty resulting from the ongoing pandemic will continue to depend on future developments, including the duration of the pandemic and its impact on the overall economy and related advisories and restrictions.
2 Significant accounting policies
(A) Basis of presentation
These condensed interim consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”) applicable to the preparation of condensed interim financial statements, including International Accounting Standard (“IAS”) 34 – Interim Financial Reporting. The condensed interim consolidated financial statements should be read in conjunction with the annual consolidated financial statements for the years ended March 31, 2021 and 2020, which have been prepared in accordance with IFRS as issued by the IASB.
The note disclosures for these condensed interim consolidated financial statements only present material changes to the disclosure found in the Company’s audited consolidated financial statements for the years ended March 31, 2021 and 2020. Changes to the Company’s accounting policies from those disclosed in its consolidated financial statements for the years ended March 31, 2021 and 2020 are described in note 2 (B), recently adopted accounting pronouncements.
These condensed interim consolidated financial statements are presented in Canadian dollars, which is the Company’s functional currency and dollar amounts have been rounded to the nearest thousand, except per share amounts.
These condensed interim consolidated financial statements were approved by the Board of Directors on November 10, 2021.
(B) Recently adopted accounting pronouncements
IFRS 16, Leases
This standard has been amended to provide lessees with an optional exemption from assessing whether a rent concession related to COVID-19 is a lease modification. This amendment is effective for annual periods beginning on or after June 1, 2020. At this time, the Company has not received rent concessions related to COVID-19 and therefore, this amendment has not had an impact on the consolidated financial statements.
1
Andrew Peller Limited Notes to the Condensed Interim Consolidated Financial Statements Unaudited September 30, 2021 and September 30, 2020 (in thousands of Canadian dollars, except per share amounts)
London Inter-bank Offered Rate (LIBOR) reform with amendments to IFRS 9, IFRS 7, Financial Instruments: Disclosures and IFRS 16.
In August 2020, the IASB issued Interest Rate Benchmark Reform Phase 2 (the Reform Phase 2), which complemented the Reform Phase 1 and amended various standards requiring interest rates or interest rate calculations. The Reform Phase 2 provides guidance on the impacts on the financial statements after the LIBOR reform and its replacement with alternative benchmark rates. The amendments are effective for annual periods beginning on or after January 1, 2021. The adoption of these amendments did not have a significant impact on the consolidated financial statements.
(C) Recently issued accounting pronouncements
IAS 16, Property, Plant and Equipment
This standard has been amended to prohibit an entity from deducting from the cost of an item of property, plant and equipment any proceeds received from selling items produced while the entity is preparing the asset for its intended use, clarify that an entity is “testing whether the asset is functioning properly” when it assesses the technical and physical performance of the asset and require certain related disclosures. The amendments are effective for annual periods beginning on or after January 1, 2022. The Company has not yet assessed the impact of the amendments on the consolidated financial statements.
IAS 37, Provisions
This standard has been amended to clarify that, before a separate provision for an onerous contract is established, an entity recognizes an impairment loss that has occurred on assets used in fulfilling the contract, rather than on assets dedicated to that contract and to clarify the meaning of costs to fulfil a contract. The amendments are effective for annual periods beginning on or after January 1, 2022. The Company has not yet assessed the impact of the amendments on the consolidated financial statements.
IFRS 9, Financial Instruments
This standard has been amended to address which fees should be included in the 10% test for derecognition of financial liabilities. This amendment is effective for annual periods beginning on or after January 1, 2022. The Company has not yet assessed the impact of the amendment on the consolidated financial statements.
IAS 1, Presentation of Financial Statements, and IAS 8, Accounting Policies, Changes in Accounting Estimates and Errors
This standard has been amended to clarify the classification of liabilities as current or non-current depending on the rights that exist at the end of the reporting period. Classification is unaffected by the expectations of the entity or events after the reporting date. The amendment also clarifies the meaning of settlement of a liability. This amendment is effective for annual periods beginning on or after January 1, 2023. The Company has not yet assessed the impact of the amendment on the consolidated financial statements.
IAS 12, Income Taxes
This standard has been amended to require companies to recognize deferred tax on transactions that, on initial recognition, give rise to equal amounts of taxable and deductible temporary differences. The amendments are effective for annual reporting periods beginning on or after January 1, 2023. The Company has not yet assessed the impact of the amendment on the consolidated financial statements.
2
Andrew Peller Limited Notes to the Condensed Interim Consolidated Financial Statements Unaudited September 30, 2021 and September 30, 2020 (in thousands of Canadian dollars, except per share amounts)
3 Seasonality
The second and third quarters of the Company’s fiscal year are historically the largest due to increased activity at the Company's estate properties and increased consumer purchasing of the Company’s products during the holiday season. However, the COVID-19 pandemic may cause unusual fluctuations in the Company’s results and consequently, quarterly results for fiscal 2022 may not follow historical trends.
4 Expenses
The nature of the expenses included in selling and administration and cost of goods sold are as follows:
| Raw materials and consumables Employee compensation and benefits Advertising, promotion and distribution Occupancy Repairs and maintenance Other external charges |
For the three months ended September 30, 2021 For the three months ended September 30, 2020 For the six months ended September 30, 2021 For the six months ended September 30, 2020 $ 42,933 $ 46,334 $ 84,702 $ 89,745 21,639 19,103 41,968 38,100 8,449 5,488 16,363 10,301 2,161 3,036 4,065 5,377 2,091 1,921 4,035 2,793 6,130 6,090 12,754 11,526 |
|---|---|
| $83,403 $81,972 $163,887 $157,842 |
5 Non-cash working capital items
The change in non-cash working capital items related to operations is comprised of the change in the following items:
| Accounts receivable Inventory Biological assets Prepaid expenses and other assets Accounts payable and accrued liabilities |
For the six months ended September 30, 2021 For the six months ended September 30, 2020 $ (1,933) $ 4,177 (1,386) 4,180 (1,591) (3,150) (1,632) (1,425) 15,785 1,682 |
|---|---|
| $9,243$5,464 |
3
Andrew Peller Limited Notes to the Condensed Interim Consolidated Financial Statements Unaudited September 30, 2021 and September 30, 2020 (in thousands of Canadian dollars, except per share amounts)
6 Related parties and management compensation
The compensation expense recorded for directors and members of the Executive Management Team of the Company was $1,733 (2020 - $1,754) for the three months ended September 30, 2021 and $3,367 (2020 - $3,068) for the six months ended September 30, 2021. The compensation expense consists of amounts that will primarily be settled within twelve months of being earned.
7 Financial instruments
Fair value
The fair value of accounts receivable, accounts payable and accrued liabilities and dividends payable approximates their carrying values because of the short-term maturity of these instruments.
The fair value of bank indebtedness and long-term debt is equivalent to the carrying value because the variable interest rate is comparable to market rates. The fair value of the interest rate swaps used to fix the interest rate on long-term debt is included in the current and long-term derivative financial instruments in the condensed consolidated balance sheets.
The fair value of foreign exchange forward contracts is determined based on the difference between the contract rate and the forward rate at the date of valuation and is included in the current portion of derivative financial instruments in the condensed consolidated balance sheets.
The fair value of interest rate swaps is determined based on the difference between the fixed interest rate in the contract that will be paid by the Company and the forward curve of the floating interest rates that are expected to be paid by the counterparty. The fair values of foreign exchange forward contracts and the interest rate swaps are adjusted to reflect any changes in the Company’s or the counterparty’s credit risk.
Fair value estimates are made at a specific point in time, using available information about the instrument. These estimates are subjective in nature and often cannot be determined with precision.
The net unrealized (gain) loss on derivative financial instruments is comprised of:
| Unrealized gains on interest rate swaps Unrealized (gains) losses on foreign exchange forward contracts |
For the three months ended September 30, 2021 For the three months ended September 30, 2020 For the six months ended September 30, 2021 For the six months ended September 30, 2020 $ (403) $ (370) $ (899) $ (382) (634) (170) (526) 573 |
|---|---|
| $ (1,037) $ (540) $ (1,425) $191 |
4
Andrew Peller Limited Notes to the Condensed Interim Consolidated Financial Statements Unaudited September 30, 2021 and September 30, 2020 (in thousands of Canadian dollars, except per share amounts)
The fair value measurements of the Company’s financial instruments are classified in the hierarchy below according to the significance of the inputs used in making the fair value measurements.
| Interest rate swap liability Foreign exchange forward contracts asset Interest rate swap liability Foreign exchange forward contracts liability |
September 30, 2021 |
|---|---|
| Quoted prices in active markets for identical assets (Level 1) Significant observable inputs other than quoted prices (Level 2) Significant unobservable inputs (Level 3) $ - $ 1,415 $ - - (222) - March 31, 2021 |
|
| Quoted prices in active markets for identical assets (Level 1) Significant observable inputs other than quoted prices (Level 2) Significant unobservable inputs (Level 3) $ - $ 2,314 $ - - 304 - |
There were no transfers of financial instruments between levels during the quarter.
8 Normal course issuer bid
On March 4, 2021, the Company announced its normal course issuer bid (the “NCIB”) to repurchase for cancellation up to 1,773,896 Class A non-voting common shares, representing 5% of Class A non-voting common shares issued and outstanding as at the close of markets on February 25, 2021, during the 12-month period from March 8, 2021 to March 7, 2022.
The total number of Class A non-voting common shares repurchased for cancellation under the NCIB during the six-month period ended September 30, 2021 amounted to 598,600 Class A non-voting common shares, at a weighted average price of $8.70 per Class A non-voting common share, for a total cash consideration of $5,210. For the six-month period ended September 30, 2021, the Company’s share capital was reduced by $449 and the remaining $4,761 was accounted for as a decrease to retained earnings.
9 Sale of land and property
During 2020, the Company listed for sale plant assets in Port Coquitlam, British Columbia, as a result of the consolidation of production assets. The assets listed for sale had a net book value of $1,275. On September 28, 2021, the Company completed the sale of the assets for total consideration, net of selling costs, of $8,793 resulting in a realized gain on sale of $7,518.
5
Andrew Peller Limited Notes to the Condensed Interim Consolidated Financial Statements Unaudited September 30, 2021 and September 30, 2020 (in thousands of Canadian dollars, except per share amounts)
10 Share based compensation
On September 13, 2017, the Company established a share based compensation plan comprised of stock options, performance share units (PSUs), restricted share units (RSUs) and deferred share units (DSUs). The impact of the share based compensation expense recorded for the six months ended September 30, 2021 and 2020 is summarized as follows:
| 1,316,499 stock options (March 31, 2021 – 1,041,800) (a) 292,731 performance share units (March 31, 2021 – 218,562) (b) 62,750 restricted share units (March 31, 2021 – nil) (c) 57,799 deferred share units (March 31, 2021 – 65,669) (d) |
For the six months ended September 30, 2021 For the six months ended September 30, 2020 $ 445 $ 286 343 95 21 - - - |
|---|---|
| $809 $381 |
The stock options, PSUs, RSUs, and DSUs are equity settled and as such, the expense associated with these instruments is recorded as share based compensation expense through the condensed consolidated statements of earnings with a corresponding entry made to contributed surplus on the condensed consolidated balance sheets.
The maximum number of shares that may be issued under all share based compensation arrangements implemented by the Company, including the stock option plan, the PSU plan, the RSU plan and the DSU plan, may not exceed 10% of the total number of Class A non-voting common shares issued and outstanding from time to time. As at September 30, 2021, the Company had 3,217,918 Class A non-voting common shares reserved for issuance under the share based compensation arrangements.
a) Stock options
The Company has a stock option plan under which options to purchase Class A non-voting common shares may be granted to officers and employees of the Company. Options granted under the plan have an exercise price of not less than the volume weighted average trading price of the Class A non-voting common shares where they are listed for the five trading days prior to the date of the grant. Options granted vest in tranches, equally over a three-year period on each anniversary of the grant date, commencing on the first anniversary of the grant date.
| Balance – Beginning of year Issued Forfeited Balance – End of year Exercisable |
September 30, 2021 Number of options Weighted average exercise price per share $ 1,041,800 11.89 290,700 8.75 (16,001) (11.12) |
September 30, 2020 Number of options Weighted average exercise price per share $ 765,200 14.19 494,900 9.29 (209,567) (14.08) 1,050,533 11.90 334,953 13.88 |
|---|---|---|
| Number of options 765,200 494,900 (209,567) |
||
| 1,316,499 11.20 |
1,050,533 | |
| 622,717 12.95 |
334,953 |
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Andrew Peller Limited Notes to the Condensed Interim Consolidated Financial Statements Unaudited September 30, 2021 and September 30, 2020 (in thousands of Canadian dollars, except per share amounts)
For options granted during the three and six months ended September 30, 2021, the fair value was estimated on the grant date using the Black-Scholes fair value option pricing model using the following weighted average assumptions:
| Weighted average fair value per share option | $1.89 |
|---|---|
| Expected volatility(1) | 24.68% |
| Dividend yield | 2.19% |
| Risk-free interest rate | 1.19% |
| Weighted average expected life in years | 10 |
(1) Expected volatility was determined using historical volatility
b) PSU plan
The Company has established a PSU plan for employees and officers of the Company. PSUs represent the right to receive Class A non-voting common shares settled by the issuance of treasury shares or shares purchased on the open market. PSUs vest in full at the end of the third fiscal year after the grant date. The number of units that will vest is determined based on the achievement of certain performance conditions (i.e. financial targets) established by the Board of Directors and are adjusted by a factor, which ranges from 0.5 to 2.0, depending on the achievement of the targets established. Therefore, the number of units that will vest and be exchanged for Class A non-voting common shares may be higher or lower than the number of units originally granted to a participant.
| Balance – Beginning of year Issued Exercised Forfeited Balance – End of year |
September 30, 2021 Number of options Weighted average exercise price per share $ 218,562 12.44 125,320 8.75 (28,416) (17.16) (22,735) (15.97) |
September 30, 2020 Number of options Weighted average exercise price per share $ 219,876 14.20 105,830 9.29 (44,419) (11.74) (60,405) (14.15) 220,882 12.46 |
|---|---|---|
| 292,731 10.13 |
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Andrew Peller Limited Notes to the Condensed Interim Consolidated Financial Statements Unaudited September 30, 2021 and September 30, 2020 (in thousands of Canadian dollars, except per share amounts)
c) RSU plan
The Company has established a RSU plan for employees and officers of the Company. RSUs represent the right to receive Class A non-voting common shares settled by the issuance of treasury shares or shares purchased on the open market. RSUs will vest ratably over the Restriction Period, as to one-third of the RSUs on each anniversary of the grant date, commencing on the first anniversary of the grant date.
| Balance – Beginning of year Issued Balance – End of year |
September 30, 2021 Number of options Weighted average exercise price per share $ - - 62,750 8.75 |
September 30, 2020 |
|---|---|---|
| Number of options Weighted average exercise price per share $ - - - - |
||
| 62,750 8.75 |
- - |
d) DSU plan
The Company has established a DSU plan for employees, officers and Directors of the Company. DSUs represent the right to receive Class A non-voting common shares settled by the issuance of treasury shares or shares purchased on the open market. DSUs vest immediately but are only exercisable when the participant’s employment with the Company ceases, or when the participant is no longer a Director of the Company.
Subsequent to year end, the Board of Directors were offered director fees in the form of DSUs which resulted in a reclassification from accounts payable to contributed surplus in the year.
| Balance – Beginning of year Issued Exercised Balance – End of year |
September 30, 2021 Number of options Weighted average exercise price per share $ 65,669 14.40 12,770 9.35 (20,640) (11.19) |
September 30, 2020 |
|---|---|---|
| Number of options Weighted average exercise price per share $ 72,459 17.19 19,840 9.48 (26,630) (18.22) |
||
| 57,799 14.43 |
65,669 14.40 |
11 Subsequent event
On November 10, 2021, the Company amended and restated its credit agreement with its lenders to amend its interest charge coverage ratio financial covenant for the three-month period ending December 31, 2021.
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