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Edited Transcript of CSW.A.TO earnings conference call or presentation 21-Aug-19 9:00pm GMT

Full Year 2019 Corby Spirit and Wine Ltd Earnings Call

Toronto Sep 9, 2019 (Thomson StreetEvents) -- Edited Transcript of Corby Spirit and Wine Ltd earnings conference call or presentation Wednesday, August 21, 2019 at 9:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Edward Mayle

Corby Spirit and Wine Limited - VP, CFO & Director

* R. Patrick O'Driscoll

Corby Spirit and Wine Limited - CEO, President & Director

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Conference Call Participants

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* Robert Gibson

PI Financial Corp., Research Division - Special Situations Analyst

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Presentation

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Operator [1]

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Good evening. Welcome to Corby Spirit and Wine's Fiscal Year-end 2019 Financial Results Conference Call for the period ended June 30, 2019. Joining me on the call this evening are Patrick O'Driscoll, President and Chief Executive Officer; and Edward Mayle, Vice President and Chief Financial Officer. Hopefully, everyone has had the opportunity to review the press release, which was issued earlier today. The press release containing the fiscal year-end financial statement and MD&A has been filed on to SEDAR.

Before we begin, I would like to inform listeners that information provided on today's call may contain forward-looking statements, which are subject to a number of risks and uncertainties that could cause actual results to differ materially from those anticipated. Risks and uncertainties about the company's business are more fully discussed in Corby's materials, including annual and interim MD&A filed with the securities regulatory authorities in Canada, as required. (Operator Instructions)

I would now like to turn the call over to your host, Mr. Robert O'Driscoll. Please go ahead, sir.

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R. Patrick O'Driscoll, Corby Spirit and Wine Limited - CEO, President & Director [2]

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Thank you. Good afternoon, ladies and gentlemen. Welcome to our discussion of Corby's fiscal year-end and fourth quarter earnings. I'd like to begin by providing highlights of fiscal 2019, followed by a review of Corby's brand performance in both the domestic and international markets and then subsequently provide some perspective for the new fiscal year.

So fiscal 2019 was a year of achievement culminating in strong top line growth, which enabled Corby to reinvest behind its core strategies and take advantage of fast-growing segments such as gin. Overall 2019 results showed an increase in revenue in 2018 of plus 3% to almost $150 million. Growth came from Corby domestic brands and commission income enabled us to fund strategic marketing investments and led to net earnings that is in line with the prior year.

Now the Canadian spirits market grew by 2.5% in value and just 0.9% in volume over the year, with growth led by the gin category, then followed by vodka and then tequila. The wine market was notably less buoyant with a volume decline of 2.5% and a value decline of 0.7%.

The Corby portfolio, including its represented brands, saw 3 of its brands in the top 10 value gainers in Canada, with Jameson Irish Whiskey leading market value growth and joined in the top 10 by J.P. Wiser's Canadian Whiskey and ABSOLUT vodka.

We are also very pleased with the strong performance of the Ungava Spirits brand, notably Ungava Gin and Cabot Trail Maple Cream Liqueur, both of which are delivering high growth in retail volume and value.

Ungava Gin is a highly differentiated super-premium gin in a category that was hot when we acquired it 3 years ago and, frankly, is even hotter now. Paint it yellow was the rallying cry for our Corby team as we set out to make Ungava Gin our newest power brand. This fiscal investment in Ungava Gin and other Ungava spirit brand is amplified, and that drove market-beating double-digit volume and value growth for these brands.

Corby's strengths lie in the passion of our people and our consumers and their passion for our brand. And J.P. Wiser's, our flagship brand, is a testament to that passion. The "Hold it High" marketing campaign gave Canadians a platform to show their appreciation for their friends by encouraging them to call out the qualities that make friendships unique. Over 1,000 messages were collected online, and of these, 165 heartfelt or tongue-in-cheek messages were selected for use in radio spots, custom billboards and transit shelters. The resulting improvement in consumer awareness is one of the reasons why J.P. Wiser's again outperformed the key Canadian whiskey category.

Our innovation is a key growth lever in our industry and for J.P. Wiser's. The introduction of J.P. Wiser's Old-Fashioned Whiskey Cocktail was a resounding success, outpacing year-1 projections and bringing new consumers into the Canadian whiskey category. In addition, the launch of the Alumni Whiskey Series enabled us to showcase our exceptional whiskey-making skills. In partnership with the NHL Alumni Association, we released 2 separate series of 3 super-premium limited-edition whiskey, each of which was uniquely crafted to match the playing style of the featured alumni. And a proportion of the proceeds of these are invested back into the retired player community, which is consistent with our corporate values.

Corby did, however, face ongoing challenges as some of our larger economy brands continued to be impacted by changing consumer preferences. Performance of dark and white rums, economy whiskey and mixable liqueurs were particularly affected.

Success in international markets is absolutely a goal of Corby strategy, and during the year, Corby continued its reorganization of its international route to market, which has caused some fluctuations in our shipment patterns. This reorganization is now complete, and it leaves us with a strong base to build on. And we look forward to working with our new partners to bring our vision to life.

Now turning to the outlook for fiscal 2020. Overall macroeconomic indicators for the Canadian economy paint a mixed picture. While employment rates are favorable, and consumer confidence levels remain strong, nonetheless, there are some worrying signs about the overall health of the global economy with some indicators striking the possible risk of recession. Outlook for the U.S. economy is moderate and supports our growth -- our export growth ambition.

Our business strategies focus on maximizing sustainable long-term value growth through enhanced margin quality and profit. Our focused-brand prioritization strategy aims to ensure that Corby delivers relevant consumer offerings. Consumer insights and data-driven assessments of our portfolio of owned and represented brands help us optimize value through innovation and through revenue management.

Corby is well positioned to exploit new routes to market and channels while creating opportunities to launch new innovation to drive value for shareholders.

Internationally, our goal is to leverage our Canadian whiskey expertise, focusing on super-premium craft brands as well as developing Ungava Gin in select markets in U.S. and in Europe.

At Corby, we believe there are a few things better than bringing people together and creating special moments. Steering passions for life through experiences from our brands is the common thread that runs through everything we do. While we bring that passion to drive our portfolio of brands forward, we also have to take into consideration the changing environments in which our beverage alcohol industry operates.

Now a major change in this past year was the legalization of cannabis. And although still early, to date, we have not seen any material impact on the beverage alcohol industry in Canada resulting from cannabis' legalization. Of course, we will monitor developments with interest, including the coming availability of cannabis edibles, including beverages, and will assess our actions, if any, are right to take for our business. Corby is a company that embraces challenging change, and we will continue to evolve with consumer trends and market opportunities.

Well, now I'd like to turn the call over to Ed who is going to review our year-end and fourth quarter financial results. Edward, over to you.

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Edward Mayle, Corby Spirit and Wine Limited - VP, CFO & Director [3]

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Thank you, Patrick, and good afternoon, everyone. In fiscal 2019, Corby focused efforts to drive value growth ahead of volume, enabling investment in our brands to position ourselves for long-term growth and success. I'll discuss first our full year results then turn to our fourth quarter.

Corby's revenues grew full year by 3%. And within this, our owned brand domestic performance saw volumes grow by 2% and revenues by 4%, with commission income growing by 4%.

Beginning with an overview of the domestic brand performance. Corby-owned brands performed well with the retail value of Corby's portfolio growing 2%, with a 1% volume growth.

In Corby, key Canadian whiskey battleground the last 2 years have seen a transformational journey for 162-year-old brand, J.P. Wiser's. With the newest evolution of our award-winning "Hold it High" campaign and the systematic packaging refresh, the brand family outperformed its category and continued to gain momentum. Retail value for the year increased 3%, while volume benched up slightly.

Value growth was amplified for a series of new innovations launched on fiscal 2019, which include the super-premium NHL Alumni Series whiskey, J.P. Wiser's Old-Fashioned Whiskey ready-to-serve cocktail and the new limited release of J.P. Wiser's 35-Year-Old. These initiatives contributed to a focus on value rather than volume and supported a full year growth in shipments value.

Ungava Gin continued to be the market value leader in the super-premium gin category and increased 19% in both retail volume and value for the year, benefiting from increased brand investment, including Ungava's consumer marketing campaign, while new retail price format has helped the brand gain shelf presence and recognition as it expands nationwide.

Polar Ice Vodka's performance recovered with the return to growth in fiscal '19 in both volume and value. Polar Ice Vodka is among the top-selling vodka brands in Canada. And last year, the brand outperformed the overall vodka category in Canada and grew 2% in retail volume and 3% in retail value.

Mixable liqueurs performance peaked in the category that is driven by innovation, traditional coffee and cream liqueurs. Retail volumes decreased 5%, while value for the year declined 3%. Corby continued to expand innovation and focus upon strong programming in the retail environment and launched like McGuinness Ruby Red Grapefruit, and an expanded 375-milliliter range of flavor offerings encouraged consumer trial.

Cabot Trail, Corby's maple-based liqueur, continued to perform well and compete in the dynamic cream and coffee segment of the liqueurs category, and the brand posted strong market-beating double-digit growth in both retail volume and value, surpassing category trends.

Lamb's Rum declined 4% in retail volume and echoed ongoing industry-wide changes in consumer appetite for standard or economy dark and white rum. Corby focused on defending its regional strongholds with targeted campaigns and focused on the most differentiated volumes as well as introducing innovative new variants such as Lamb's Sociable, a series of ready-to-drink rum premiums in a can.

Moving to our financial results. Corby posted top line performance as revenue increased $4.2 million or 3% year-on-year. Efforts to drive value ahead of volume growth is a feature of this result, with strategic price management and premiumization through innovations. Case Goods value grew 3% ahead of volume, and with stronger domestic shipments, the value grew 4%. Patrick mentioned the conclusion of the international route-to-market reorganization. And while this provides a base for future performance, the process calls some unfavorable variation in our shipment patterns. So last year, shipment value or gross revenue declined 3% and shipment volume decreased 13% prior -- compared to the prior year.

Commission income increased $1.1 million, an increase of 4% year-on-year and helped augment Case Goods revenue. The Pernod Ricard portfolio benefited from the strength of its premium international brands, along with Pernod Ricard investments to build passion brands in Canada.

Margin performance for the year was comparable to that of the prior year with a gross margin of 54%. Strategic revenue management helped to mitigate year-on-year cost increases of $2.1 million or 4%. Cost of sales, while unfavorably impacted by higher distribution costs to Western Canada, was relatively in line with Case Goods growth.

Corby is steadfast in its strategy to drive value growth and improve margin quality while exposing promotional programs to deliver maximum returns.

Marketing, sales and administration expenses landed at $58.8 million for the year, 4% up on the prior year. Incremental advertising and promotional investments were concentrated on driving equity building behind our premium brand, innovations in Canadian whiskey and Ungava Spirit brand. This increase in brand marketing investment is a key enabler for future brand success. Further, Corby invested in the development of new channels and to strengthen new routes to market.

Overhead expenses decreased for the year with ongoing efforts to tightly control these costs. Prior year one-off acquisition-related expenses were not repeated.

Other income and expenses include such items as realized foreign exchange and gains and losses in the sale of property and equipment. Other income and expenses were flat to the prior year as increased interest earned on deposits in cash management pools from improved market rates offset prior year gains from sale of property and equipment.

As a reminder, while Corby does not operate a hedging program, foreign currency mitigated through natural hedges with selling of whiskey and vodka in the U.S. and manufacturing and selling rum in the U.K.

Net earnings for the year were flat year-on-year. Strong top line Case Goods performance and higher commission allowed about the company to increase its marketing and investment in strategic brand equity, building activities necessary to drive long-term sustainable value growth.

Operating cash flow remained strong and increased $2.7 million to $34 million, and this was largely a result of fluctuations in working capital balances primarily related to timing of spend compared to the prior year.

Cash balances were partially impacted by the payments of the special dividend in H2, and the balance of $61.1 million in cash deposits as of June 30, 2019, maintained our investment flexibility.

Turning to the fourth quarter. Revenues decreased by 3%. Case Goods sales were influenced by the phasing of liquor board order patterns and adjustments made to routes to market in international market. This quarter saw domestic Case Goods orders return to a more normal profile, following last fiscal's shipment pattern distortion. The lower shipments in Q4 are, therefore, not a result of a deterioration in market performance where we saw Corby's domestic market performance grow 3% in retail value.

Commissions decreased $0.1 million, impacted particularly by softness in wine consumption that unfavorably impacted our wine performance. This softness has been evident in the market since last summer, although the impact of revenue was mitigated by price management and improved portfolio mix on the represented brands.

Gross margin performance for the quarter improved 1% to 57% when compared to the quarter last year, reflecting changes in product mix and cost savings from production synergies. Our international margin rate has improved through the simplification of our European route to market.

Fundamental to this quarter was the timing of marketing and sales investments behind domestic and international initiatives, which resulted in an overall increase of marketing sales and administration of $1.5 million. Consequently, net earnings for the fourth quarter was $7.8 million, a decrease of $1.5 million over the period last year.

In conclusion, the domestic performance of our brands and commission income and the conclusion of the international route-to-market changes had enable Corby to invest for long-term growth and provide a strong foundation for fiscal year '20.

And now I'd like to turn the call back to Patrick for his closing comments.

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R. Patrick O'Driscoll, Corby Spirit and Wine Limited - CEO, President & Director [4]

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Thank you very much, Edward, and thank you all for joining our call today. I'm pleased with the results that we've achieved while implementing key strategic initiatives for sustainable long-term growth. Our recent additions of the Ungava Spirit brand and Foreign Affair Winery plays nicely into our refocused product portfolio. Our key battlegrounds such as Canadian whiskey and gin remained strong, and outlook for international markets is favorable as we refocused resources on new routes to market.

Our brands are well positioned for the next fiscal, with our outstanding marketing and sales initiatives, and we look forward to capitalizing on the momentum that we've built in fiscal 2019. Our balance sheet remains healthy. And earlier today, our Board of Directors declared a dividend of $0.22 per share payable on September 27, 2019.

On an official note, I really can't say enough about our people and their ability to rise to challenges and improve their passion, creativity and proficiency in delivering our fiscal results. To capture market share and grow in this very, very competitive industry, we need our employees to be at the absolute top of their game. And without a doubt, they put their hearts and souls into helping us win in fiscal 2019. So to the Corby team, I raise a toast in line with our Wiser's campaign and also our "Hold it High".

So thank you, once again, for joining the call. I encourage that all of you on the line to include our wines and spirits products as you celebrate the people and passions in your lives. Cheers to you and yours. And we are going to open the lines to take your questions. And we'll answer them as best as we can, obviously, within the limitations of our ability to make forward-looking statements. So operator, if you'd like to open the lines up now, and thank you for joining us today.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question is from Bob Gibson from PI Financial.

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Robert Gibson, PI Financial Corp., Research Division - Special Situations Analyst [2]

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Can we start with marketing and promotion in Q4 and sort of how it compares to the previous 3 quarters and how are you thinking for next year?

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Edward Mayle, Corby Spirit and Wine Limited - VP, CFO & Director [3]

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Yes, the Q4 expenses were certainly higher than we've seen in the same quarter of the previous year. It was in line with our overall plan for the year to fund increased investments, primarily in support of 2 key initiatives, primarily for the Ungava and the rollout of Ungava from Quebec across the country and certainly in support of J.P. Wiser's and in support of that as our flagship brand.

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Robert Gibson, PI Financial Corp., Research Division - Special Situations Analyst [4]

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And can we expect that this higher level going forward? Or sort of a smoothing? Or how should we be thinking about the future?

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R. Patrick O'Driscoll, Corby Spirit and Wine Limited - CEO, President & Director [5]

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I think we can probably expect probably a bit more of a smoothing. Obviously, sometimes, there are particular development costs that land in 1 quarter rather than other. So we're investing in making sure that we have the right assets, for instance, for some of our new route to market and international market. So some of that fell development costs well into the fourth quarter this year. So yes, can't really say that exactly when these costs is going to be in the coming year, but the sort of overall level that we're investing at is probably not unusual to where we see things going.

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Edward Mayle, Corby Spirit and Wine Limited - VP, CFO & Director [6]

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Yes, I would add. It's on a full year basis rather than on a quarter-to-quarter for the overall investment level.

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Robert Gibson, PI Financial Corp., Research Division - Special Situations Analyst [7]

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Perfect. Looks like you've got 2 SKUs in your new Quebec wine operation. Can you give us some color on what you -- where you see that going? And sort of do you have enough capacity?

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R. Patrick O'Driscoll, Corby Spirit and Wine Limited - CEO, President & Director [8]

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Yes. I mean, I think on capacity, we're well served. Yes, we got a couple of new SKUs that are going to Quebec grocery. One's called Cordero. The other one's called Fleur de Lys. They're both red wines. Just going into -- these are slightly more premium SKUs than usual in that particular channel, so we're quite pleased to have secured those new listings.

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Robert Gibson, PI Financial Corp., Research Division - Special Situations Analyst [9]

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Great. If there is a Brexit, how will Lamb's in the U.K. be treated?

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R. Patrick O'Driscoll, Corby Spirit and Wine Limited - CEO, President & Director [10]

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Lamb's in the U.K. is slightly insulated from Brexit effect to the extent that it's produced and packaged in the U.K. through a partner that we have in the U.K. And the -- that limited exposure to importation from Europe for that.

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Robert Gibson, PI Financial Corp., Research Division - Special Situations Analyst [11]

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Okay. Great. And then lastly, next September, you're going to have to sign a new agreement with Pernod. Can we get sort of a time line on how that might play out?

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R. Patrick O'Driscoll, Corby Spirit and Wine Limited - CEO, President & Director [12]

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So the representation agreement, it's actually end 2 years away because it's the 2nd of September through 2021. So there's just over 2 years to go on the agreement. We are -- we're able to begin negotiations roughly about 2 years out. So we're obviously be trying to address that probably in the next 3 to 4 months. We'll start the process of discussing with them with Pernod Ricard, but that process will be very much led by the independent directors with Pernod Ricard.

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Operator [13]

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There are no further questions at this time. Please proceed, Mr. O'Driscoll.

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R. Patrick O'Driscoll, Corby Spirit and Wine Limited - CEO, President & Director [14]

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Okay. Well, since there are no other questions, I can just bid you a very good evening, and hope you enjoy the rest of your evening.

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Operator [15]

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Ladies and gentlemen, this concludes your conference call today. We thank you for participating, and ask that you please disconnect your lines.