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Corby Spirit and Wine Announces Quarterly Dividend and Reports Second Quarter Results

TORONTO, Feb. 7, 2018 /CNW/ - Corby Spirit and Wine Limited ("Corby" or the "Company") (TSX: CSW.A, CSW.B) today reported its financial results for the second quarter ended December 31, 2017. The Corby Board of Directors today also declared a dividend of $0.22 per share payable on March 9, 2018 on the Voting Class A Common Shares and Non-Voting Class B Common Shares of the Company to shareholders of record as at the close of business on February 23, 2018.

Revenue for the second quarter increased 1% while revenue for the six-month period ended December 31, 2017 increased 2% despite a lag in shipment performance in the Canadian market (primarily due to LCBO purchases in Q4 of the prior year in anticipation of a threatened but averted strike).

The addition of the premium Ungava Spirits' brands and Foreign Affair wines drove positive top line results in addition to an increase in commission income from Pernod Ricard brands. Significant advertising and promotional investments continued to support the sustained development of the newly acquired brands and behind our key strategic battlegrounds such as premium innovations in Canadian whisky and J.P. Wiser's, which continues to grow market share and outperform its category.

Net earnings of $5.8 million (or $0.20 per share) were reported for the three-month period ended December 31, 2017, reflecting a decrease of $1.4 million when compared to the same quarter last year. On a year to date basis, net earnings of $11.6 million reflect a decrease of $2 million for the six month period ended December 31, 2017, when compared to the same period last year.

"Our second quarter results demonstrate our commitment to invest behind our key brands and assets in order to build sustainable competetitive advantage  in the spirits and wine industry, both domestically and in key international markets.  We are pleased with the performance of our recent acquisitions, the Ungava Spirits' brands and the Foreign Affair wines, and how they complement the premium Corby portfolio. Recently released innovations such as the Northern Border Collection Rare Cask Series have performed exceedingly well at the 2018 Canadian Whisky Awards with J.P. Wiser's 35YO awarded Whisky of the Year.  It is through this kind of bold innovation, investment in brand equity buiding and collaboration with our Hiram Walker & Sons Limited production facility that we can establish a solid foundation for success," noted Patrick O'Driscoll, President and Chief Executive Officer of Corby.

For further details, please refer to Corby's management's discussion and analysis and interim condensed consolidated financial statements and accompanying notes for the three-and-six-months ended December 31, 2017, prepared in accordance with International Financial Reporting Standards.

About Corby
Corby Spirit and Wine Limited is a leading Canadian manufacturer, marketer and distributor of spirits and imported wines. Corby's portfolio of owned-brands includes some of the most renowned brands in Canada, including J.P. Wiser's®, Lot 40®, and Pike Creek® Canadian whiskies, Lamb's® rum, Polar Ice® vodka and McGuinness® liqueurs, as well as the recently acquired Ungava® Premium Canadian gin, Cabot Trail® maple-based liqueurs and Chic Choc® Spiced rum and Foreign Affair® wines. Through its affiliation with Pernod Ricard S.A., a global leader in the spirits and wine industry, Corby also represents leading international brands such as ABSOLUT® vodka, Chivas Regal®, The Glenlivet® and Ballantine's® Scotch whiskies, Jameson® Irish whiskey, Beefeater® gin, Malibu® rum, Kahlúa® liqueur, Mumm® champagne, and Jacob's Creek®, Wyndham Estate®, Stoneleigh®, Campo Viejo®, Graffigna® and Kenwood® wines. In 2017, Corby was named one of the 50 Best Workplaces in Canada by The Great Place to Work® Institute Canada for the sixth consecutive year, and was also listed among Greater Toronto's Top 100 Employers. Corby is a publicly traded company based in Toronto, Ontario, and listed on the Toronto Stock Exchange under the trading symbols CSW.A and CSW.B.  For further information, please visit our website or follow us on LinkedIn.

This press release contains forward-looking statements, including statements concerning possible or assumed future results of Corby's operations. Forward-looking statements typically are preceded by, followed by or include the words "believes", "expects", "anticipates", "estimates", "intends", "plans" or similar expressions. Forward-looking statements are not guarantees of future performance. They involve risks, uncertainties and assumptions and, as such, actual results or expectations could differ materially from those anticipated in these forward-looking statements. Accordingly, readers should not place undue reliance on forward-looking statements. All financial results are reported in Canadian dollars.

CORBY SPIRIT AND WINE LIMITED
Management's Discussion and Analysis
December 31, 2017

The following Management's Discussion and Analysis ("MD&A") dated February 7, 2018, should be read in conjunction with the unaudited interim condensed consolidated financial statements and accompanying notes as at and for the three and six-month period ended December 31, 2017, prepared in accordance with International Financial Reporting Standards ("IFRS"). These unaudited interim condensed financial statements do not contain all disclosures required by IFRS for annual financial statements and, accordingly, should also be read in conjunction with the most recently prepared annual consolidated financial statements for the year ended June 30, 2017.

This MD&A contains forward-looking statements, including statements concerning possible or assumed future results of operations of Corby Spirit and Wine Limited ("Corby" or the "Company"), including the statements made under the headings "Strategies and Outlook", "Liquidity and Capital Resources", "Recent Accounting Pronouncements" and "Risks and Risk Management." Forward-looking statements typically are preceded by, followed by or include the words "believes", "expects", "anticipates", "estimates", "intends", "plans" or similar expressions. Forward-looking statements are not guarantees of future performance. They involve risks and uncertainties, including, but not limited to: the impact of competition; the impact, and successful integration of, acquisitions; business interruption; trademark infringement; consumer confidence and spending preferences; regulatory changes; general economic conditions; and the Company's ability to attract and retain qualified employees. There can be no assurance that forward-looking statements will prove to be accurate, as actual results and future events could differ materially from those anticipated in such statements. Accordingly, readers should not place undue reliance on forward-looking statements. These factors are not intended to represent a complete list of the factors that could affect the Company and other factors could also affect Corby's results. For more information, please see the "Risk and Risk Management" section of this MD&A.

This document has been reviewed by the Audit Committee of Corby's Board of Directors and contains certain information that is current as of February 7, 2018. Events occurring after that date could render the information contained herein inaccurate or misleading in a material respect. Corby will provide updates to material forward-looking statements, including in subsequent news releases and its interim management's discussion and analyses filed with regulatory authorities as required under applicable law. Additional information regarding Corby, including the Company's Annual Information Form, is available on SEDAR at www.sedar.com.

Unless otherwise indicated, all comparisons of results for the second quarter of fiscal 2018 (three months ended December 31, 2017) are against results for the second quarter of fiscal 2017 (three months ended December 31, 2016). All dollar amounts are in Canadian dollars unless otherwise stated.

Business Overview

Corby is a leading Canadian marketer of spirits and importer of wines. Corby's national leadership is sustained by a diverse brand portfolio that allows the Company to drive profitable organic growth with strong, consistent cash flows. Corby is a publicly traded company, with its shares listed on the Toronto Stock Exchange under the symbols "CSW.A" (Voting Class A Common Shares) and "CSW.B" (Non-Voting Class B Common Shares). Corby's Voting Class A Common Shares are majority-owned by Hiram Walker & Sons Limited ("HWSL") (a private company) located in Windsor, Ontario. HWSL is a wholly-owned subsidiary of international spirits and wine company Pernod Ricard S.A. ("PR") (a French public limited company), which is headquartered in Paris, France. Therefore, throughout the remainder of this MD&A, Corby refers to HWSL as its parent, and to PR as its ultimate parent. Affiliated companies are those that are also subsidiaries of PR.

The Company derives its revenues from the sale of its owned-brands ("Case Goods"), as well as earning commission income from the representation of selected non-owned brands in Canada ("Commissions"). The Company also supplements these primary sources of revenue with other ancillary activities incidental to its core business, such as logistics fees and from time to time bulk whisky sales to rebalance its maturation inventories. Revenue from Corby's owned-brands predominantly consists of sales made to each of the provincial liquor boards ("LBs") in Canada, and also includes sales to international markets.

Corby's portfolio of owned-brands includes some of the most renowned brands in Canada, including J.P. Wiser's® Canadian whisky, Lamb's® rum, Polar Ice® vodka and McGuinness® liqueurs. Through its affiliation with PR, Corby also represents leading international brands such as ABSOLUT® vodka, Chivas Regal®, The Glenlivet® and Ballantine's® Scotch whiskies, Jameson® Irish whiskey, Beefeater® gin, Malibu® rum, Kahlúa® liqueur, Mumm® champagne, and Jacob's Creek®, Wyndham Estate®, Stoneleigh®, Campo Viejo®, Graffigna® and Kenwood® wines. In addition to representing PR's brands in Canada, Corby also provides representation for certain selected, unrelated third-party brands ("Agency brands") when they fit within the Company's strategic direction and, thus, complement Corby's existing brand portfolio. On September 30, 2016, Corby acquired certain brands, including Ungava® Premium Canadian gin, Chic Choc® Spiced rum, Cabot Trail® maple cream liqueur (Coureur des Bois®, in Quebec), and a range of maple-based products (collectively, the "Ungava Spirits Brands"). On October 2, 2017, Corby acquired the Foreign Affair® wine brands, including Temptress, Enchanted, Amarosé and The Conspiracy brands (collectively, the "Foreign Affair Brands").

PR produces the majority of Corby's owned-brands at HWSL's production facility in Windsor, Ontario. Under an administrative services agreement, Corby manages PR's business interests in Canada, including HWSL's production facility. On November 11, 2015, the parties entered into new agreements (a distillate supply agreement, a co-pack agreement and an administrative services agreement) each for a 10-year term commencing September 30, 2016, thus replacing the agreements that expired September 20, 2016 and extending these arrangements to September 30, 2026.

Corby sources more than 90% of its spirits production requirements from HWSL at its production facility in Windsor, Ontario. Ungava Spirits Co. Ltd. ("Ungava Spirits") produces the Ungava Spirits Brands and operates the Cowansville, Quebec production facility acquired on September 30, 2016. The Foreign Affair Winery Ltd., produces the Foreign Affair Brands and operates the winery and vineyard, based in Ontario's Niagara region, acquired on October 2, 2017. The Company's remaining production requirements have been outsourced to various third-party vendors including a third-party manufacturer in the United Kingdom ("UK"). The UK site blends and bottles Lamb's products destined for sale in countries located outside North America. 

In most provinces, Corby's route to market in Canada entails shipping its products to government-controlled LBs. The LBs then sell directly, or control the sale of, beverage alcohol products to end consumers. Exceptions to this model include Alberta, where the retail sector is privatized. In this province, Corby ships products to a bonded warehouse that is managed by a government-appointed service provider who is responsible for warehousing and distribution into the retail channel. Other provinces have aspects of both government-controlled and private retailing, including British Columbia, Saskatchewan and Quebec.

Corby's shipment patterns to the LBs will not always exactly match short-term consumer purchase patterns. However, given the importance of monitoring consumer consumption trends over the long term, the Company stays abreast of consumer purchase patterns in Canada through its member affiliation with the Association of Canadian Distillers ("ACD"), which tabulates and disseminates consumer purchase information it receives from the LBs to its industry members. Corby refers to this data throughout this MD&A as "retail sales", which are measured in volume (measured in nine-litre case equivalents). The Company reintroduced retail level analysis starting the last quarter of fiscal 2017 as the province of British Columbia cycled their move to wholesale pricing. Current retail value information as discussed in this MD&A is based on available pricing information as provided by the ACD and the LBs.

In addition to a focus on efforts to open new international markets, Corby's international business is concentrated in the United States ("US") and UK and the Company has a different route-to-market for each. For the US market, Corby manufactures the majority of its products in Canada and ships to its US distributor, Pernod Ricard USA, LLC ("PR USA"), an affiliated company. See the "Related Party Transactions" section of this MD&A for additional details. The market in the US operates a three-tier distribution system which often requires a much longer and larger inventory pipeline than in other markets, resulting in a disconnect between quarterly shipment performance, as reported in the financial statements, and the true underlying performance of the brands at retail level during the same quarter.

For the UK market, effective July 1, 2016, Corby entered into a distribution agreement with a related party for the distribution of Lamb's rum (more information is provided in the "Related Party Transactions" section of this MD&A) and, a new co-packing agreement for the production of the brand was entered into with Angus Dundee Distillers PLC, a third-party manufacturer.

Corby's operations are subject to seasonal fluctuations: sales are typically strong in the first and second quarters, while third-quarter sales usually decline after the end of the retail holiday season. Fourth-quarter sales typically increase again with the onset of warmer weather as consumers tend to increase their purchasing levels during the summer season.

Strategies and Outlook

Corby's business strategies are designed to maximize sustainable long-term value growth, and thus deliver solid profit while continuing to produce strong and consistent cash flows from operating activities. The Company's portfolio of owned and represented brands provides an excellent platform from which to achieve its current and long-term objectives.

Management believes that having a focused brand prioritization strategy will permit Corby to capture market share in the segments and markets that are expected to deliver the most growth in value over the long term. Therefore, the Company's strategy is to focus its investments on, and leverage the long-term growth potential of, its key brands. As a result, Corby will continue to invest behind those brands to promote its premium offerings where it makes the most sense and drives the most value for Corby shareholders.

Brand prioritization requires an evaluation of each brand's potential to deliver upon this strategy, and facilitates Corby's marketing and sales teams' focus and resource allocation. Over the long term, management believes that effective execution of this strategy will result in value creation for Corby shareholders.

Pursuing new growth opportunities outside of Canada is also a key strategic priority. Our primary goal is to leverage our Canadian whisky expertise and expand our business into markets where we believe there is growth potential in both volume and margin.

Of primary importance to the successful implementation of our brand strategies is an effective route-to-market strategy. Corby is committed to investing in its trade marketing expertise and ensuring that its commercial resources are specialized to meet the differing needs of its customers and the selling channels they inhabit. In all areas of the business, management believes setting clear strategies, optimizing organization structure and increasing efficiencies is key to Corby's overall success.

In addition, management is convinced that both innovation and acquisitions are essential to seizing new profit and growth opportunities. Successful innovation can be delivered through a structured and efficient process as well as consistent investment in consumer insight and research and development. Corby benefits from having access to leading-edge practices at PR's North American hub, which is located in Windsor, Ontario, where most of its products are manufactured. Corby assesses potential acquisition opportunities against specific criteria including its core competencies and strategic priorities.

Finally, the Company is a strong advocate of social responsibility, especially with respect to its sales and promotional activities. Corby will continue to promote the responsible consumption of its products in its activities. As an example, Corby has an agreement in place to continue its successful partnership with the Toronto Transit Commission to provide free transit on New Year's Eve until 2019.

Significant Event

Acquisition of the shares, winery and assets of the Foreign Affair Winery
On October 2, 2017 Corby acquired all of the shares of Vinnova Corporation and substantially all of the assets of the Crispino Estate Vineyard partnership, which together operated as the Foreign Affair Winery ("Foreign Affair"), a Niagara, Ontario-based wine producer for a purchase price of $6.2 million. The purchase price was funded from the Company's Deposits in Cash Management Pools. The transaction resulted in Corby's acquisition, through a wholly-owned subsidiary, of the Foreign Affair Brands (Foreign Affair's portfolio of premium award-wining Ontario red, white and rosé wines, including Temptress, Enchanted, Amarosé and The Conspiracy brands), as well as related production assets and inventory.   

Since the completion of the transaction on October 2, 2017, the acquired Foreign Affair Brands have contributed $0.4 million to revenues and $0.1 million to net earnings. More information regarding the transaction has been provided in Note 5 of the interim condensed consolidated financial statements for the three and six-month periods ended December 31, 2017.

Brand Performance Review
Corby's portfolio of owned brands accounts for approximately 80% of the Company's total annual revenue. Included in this portfolio are its key brands: J.P. Wiser's Canadian whisky, Lamb's rum, Polar Ice vodka, Corby's mixable liqueur brands and the Ungava Spirits Brands. The sales performance of these key brands significantly impacts Corby's net earnings. Therefore, understanding each key brand is essential to understanding the Company's overall performance.

Shipment Volume and Shipment Value Performance
The following table summarizes the performance of Corby's owned-brands (i.e., Case Goods) in terms of both shipment volume (as measured by shipments to customers in equivalent nine-litre cases) and shipment value (as measured by the change in net sales revenue). The table includes results for sales in both Canada and international markets. Specifically, the J.P. Wiser's, Lamb's and Polar Ice brands and the Ungava Spirits Brands are also sold to international markets, particularly in the US and UK.

       
 
       
   

Three Months Ended

Six Months Ended

       

Shipment Change

   

Shipment Change

   

Dec. 31,

Dec. 31,

Volume

Value

Dec. 31,

Dec. 31,

Volume

Value

(Volumes in 000's of 9L cases)

 

2017

2016

%

%

2017

2016

%

%

                   

Brand

                 

J.P. Wiser's Canadian whisky

 

218

233

(6%)

(6%)

409

434

(6%)

(6%)

Lamb's rum

 

127

130

(2%)

1%

232

255

(9%)

(7%)

Polar Ice vodka

 

94

98

(4%)

(10%)

186

193

(4%)

(4%)

Mixable liqueurs

 

50

52

(4%)

(3%)

92

95

(3%)

(2%)

Ungava Spirits Brands 1

 

32

24

30%

26%

59

24

140%

132%

Foreign Affair Brands2

 

1

-

N/A

 N/A 

1

-

 N/A 

 N/A 

Other Corby-owned brands

 

57

58

(1%)

(4%)

108

109

(0%)

3%

                   

Total Corby brands

 

580

595

(3%)

(1%)

1,087

1,110

(2%)

1%

                   

(1) Comparative information for Ungava Spirits Brands includes three months of activity, as these brands were not owned by

Corby prior to September 30, 2016. 

(2) Comparative information has not been provided for Foreign Affair Brands, as these brands were not owned by Corby prior

to October 2, 2017. 

 

For the three months ended December 31, 2017, shipment volume was 3% lower while value edged down 1% compared to the same period last year, due largely to LB order patterns impacting J.P. Wiser's in the domestic market, partially offset by positive export sales. For the six months ended December 31, 2017, Corby's owned-brands drove a 1% increase in shipment value despite a volume decline of 2% when compared to the same period last year. Revenue increase was driven primarily by the positive performance of the Ungava Spirits Brands, strategic and tactical price adjustments, as well as gains in international markets. 

It is not unusual for first and second quarter shipments to be impacted by timing of promotional activity and customers' inventory management leading into the busy holiday season. However, this year, results have been additionally impacted by lower ordering patterns as The Liquor Control Board of Ontario ("LCBO") moved to normalize inventory levels built in the previous fiscal year in anticipation of threatened strike action.

Trends in Canada differ significantly from international markets as highlighted in the following table:

 
 
       
   

Three Months Ended

Six Months Ended

       

Shipment Change

   

Shipment Change

   

Dec. 31,

Dec. 31,

Volume

Value

Dec. 31,

Dec. 31,

Volume

Value

(Volumes in 000's of 9L cases)

 

2017

2016

%

%

2017

2016

%

%

                   

Domestic

 

517

539

(4%)

(4%)

974

1,004

(3%)

(1%)

International

 

63

56

13%

29%

113

107

6%

26%

                   

Total Corby brands

 

580

595

(3%)

(1%)

1,087

1,110

(2%)

1%

 

 

 

Second quarter domestic shipment volumes and value declined 4% on a year over year comparative basis resulting in fiscal year to date volume and value decrease of 3% and 1%, respectively.  As in the first quarter, domestic shipments were highly impacted by customer inventory management activities following the late fiscal 2017 LCBO purchases in anticipation of a threatened strike. Domestic shipment volumes of J.P. Wiser's Deluxe continued to be primarily impacted. In addition, while economy variants remain challenged in regional strongholds by unfavourable economic conditions and aggressive competitor activity. These factors were partially mitigated by the solid performance of our more premium offerings; including Ungava Spirits Brands, the more premium variants of the J.P. Wiser's family and Pike Creek®, Lot No. 40® and Gooderham & Worts® (the "Northern Border Collection"). Corby's domestic shipment value benefited from favourable mix effects of the premium Ungava Spirits Brands and launch of higher marque innovations, as well as strategic and tactical price positioning in key regions.

In international markets, shipment volumes for the three and six months ended December 31, 2017 were higher on a year over year comparative basis mostly due to the positive contribution of the Ungava Spirits Brands' export business as well as entry into new international markets. Value grew significantly over volume for the three-month and six-month periods ended December 31, 2017 due to the addition of the more premium Ungava Spirits Brands to the portfolio and the launch of higher marque variants. Growth in the US market also contributed favourably with the reprioritized focus on a smaller number of markets and on the more premium and differentiated craft range (Lot No. 40 and Pike Creek).

Retail Sales Volume Performance
It is of critical importance to understand the performance of Corby's brands at the retail level in Canada. Analysis of performance at the retail level provides insight with regards to consumers' current purchase patterns and trends. Retail sales volume and value data, as provided by the ACD, is set out in the following table and is discussed throughout this MD&A. Given the importance of monitoring consumer consumption trends over the long term, we have included additional disclosure summarizing retail sales volume and value data for the twelve-month period ended December 31, 2017.

It should be noted that the retail information presented does not include international retail sales of Corby-owned brands.

 

           

RETAIL SALES FOR THE CANADIAN MARKET ONLY (AS PROVIDED BY THE ACD1)

           
           
 

Three Months Ended

 

Six Months Ended

 

Twelve Months Ended

     

% Retail

% Retail

     

% Retail

% Retail

     

% Retail

% Retail

 

Dec. 31

Dec. 31

Volume

Value

 

Dec. 31

Dec. 31

Volume

Value

 

Dec. 31

Dec. 31

Volume

Value

(Volumes in 000's of 9L cases)

2017

2016

Growth

Growth

 

2017

2016

Growth

Growth

 

2017

2016

Growth

Growth

                             

Brand

                           

J.P. Wiser's Canadian whisky

237

238

(0%)

1%

 

414

412

0%

2%

 

736

725

1%

3%

Lamb's rum

99

106

(6%)

(5%)

 

183

196

(7%)

(5%)

 

336

354

(5%)

(3%)

Polar Ice vodka

98

99

(1%)

0%

 

188

189

(1%)

0%

 

348

349

(0%)

1%

Mixable liqueurs

55

56

(2%)

(1%)

 

95

98

(2%)

(1%)

 

159

163

(2%)

(1%)

Ungava Spirits Brands

33

26

26%

26%

 

51

38

35%

34%

 

80

58

40%

38%

Foreign Affair Brands

1

1

3%

0%

 

2

1

22%

20%

 

3

2

21%

23%

Other Corby-owned brands 

55

56

(3%)

(0%)

 

99

103

(4%)

(1%)

 

187

192

(3%)

(1%)

                             

Total

578

582

(1%)

1%

 

1,032

1,037

(1%)

1%

 

1,849

1,843

0%

2%

                             

(1) Refers to sales at the retail store level in Canada, as provided by the Association of Canadian Distillers.

 

 

The Canadian spirits industry posted flat retail sales volume results for the three months ended December 31, 2017 and a modest 1% growth for the six months ended December 31, 2017, when compared to the same period last year. Industry trends are led by strong retail sales volume growth in the Irish whiskey and tequila categories as well as growth in the cognac, bourbon and single malt Scotch categories, which are categories in which Corby does not have owned-brands.

Corby's portfolio is heavily weighted in the Canadian whisky, rum and vodka categories; together they make up almost 87% of the Company's total retail volumes. The vodka category led retail volumes, increasing 1% in the three and six months ended December 31, 2017. The Canadian whisky category, however, declined 3% and 2%, respectively, in the three-month and six-month periods ended December 31, 2017, while the rum category continued its decline, dropping 3% when compared to the same periods last year. Gin, Corby's newest participating category, increased 8% for the three and six months ended December 31, 2017.

Despite the industry performance of the categories in which the Company is most heavily weighted, Corby's brand portfolio remained stable with retail value growing 1% for the three- and six-month periods. J.P. Wiser's remained relatively flat, outperforming the industry in the key Canadian whisky category while the Ungava Spirits Brands experienced outstanding retail sales growth. The following brand discussion provides a more detailed analysis of the performance of each of Corby's key brands relative to its respective industry category.

Summary of Corby's Key Brands

J.P. Wiser's Canadian Whisky
J.P. Wiser's Canadian whisky, one of the top-selling whisky families in Canada, is Corby's flagship brand. The brand's retail volumes for the three months ended December 31, 2017 remained flat with retail value growing 1% when compared to the same quarter last year. Retail sales volumes for the Canadian whisky category declined 3% while retail value dropped 1% when compared to the same quarter last year.

The brand's retail volumes for the six months ended December 31, 2017 were flat with retail value growing 2% when compared to the same period last year. The Canadian whisky category is showing signs of softness as it decreased 2% in retail volumes. Retail value for the category remained flat for the same comparative period as it lapped prior year innovation at premium price points. 

During fiscal 2017, Corby launched several innovative variants of the J.P. Wiser's family: J.P. Wiser's Apple, J.P. Wiser's Union 52 and J.P. Wiser's Dissertation, super-premium limited editions, and J.P. Wiser's One Fifty, in honour of Canada's 150th birthday. In fiscal 2018, Corby began shipping J.P. Wiser's 15-Year-Old and a limited release of J.P. Wiser's 35-Year-Old. These super-premium offerings continue to communicate to our consumers J.P. Wiser's unique heritage and quality credentials. This message is reinforced with a new high-profile television campaign using the "Hold it High" commercial, which features Corby and HWSL employees and proudly celebrates the care and pride of work our people have in creating our whisky.

Within the range, positive growth was posted by J.P. Wiser's Apple and Wiser's Special Blend.  J.P. Wiser's Deluxe, flat to the prior year, is experiencing industry-wide softness in Western Canada. New packaging on J. P Wiser's Deluxe launched in the previous quarter has been favourably received, particularly in Ontario, supported in part with a month-long LCBO Domination activation.

J.P. Wiser's 35-Year-Old was recently awarded the Whisky of the Year at the 2018 Canadian Whisky Awards. J.P. Wiser's variants continue to receive prestigious accolades including J.P. Wiser's Triple Barrel Rye and J.P. Wiser's Dissertation, which were awarded Best Canadian Whisky and Best Blended Limited Release, respectively, at the World Whiskies Awards for 2017.

Lamb's Rum
Lamb's rum, one of the top-selling rum families in Canada, was significantly impacted by unfavourable consumer trends and declining economic conditions in regional strongholds. Retail volumes for the overall rum category declined 3% for the three and six months ended December 31, 2017 while retail values declined 2% and 1% respectively when compared to the same three and six-month periods last year. The economy rum category declined 6% in retail volumes and 4% in retail value on a comparable six-month period.

For the three-month and six-month periods ended December 31, 2017, Lamb's experienced a 6% and 7% decline respectively in retail volumes and a 5% decline in retail value when compared to the same periods last year. The Lamb's rum product line is heavily weighted in the dark and white segments and has faced difficult economic conditions and increased competitor pressure in its key markets. Our strategy remains to defend its regional strongholds with targeted campaigns (including the "Hometown Heroes" campaign), to focus on the most differentiated variants and to launch new flavour variants such as Lamb's Spiced Cherry rum and Lamb's Pineapple rum (launched in the previous quarter).

Polar Ice Vodka
Polar Ice vodka is among the top-selling vodka brands in Canada. Retail volume decreased 1% for both the three-month and six-month periods ended December 31, 2017 while retail value remained flat compared to the same periods last year. This was primarily driven by increased competitor promotional activity and LB category management in Quebec. Alberta performance has shown signs of stabilization despite slow recovery of the overall spirits industry following economic challenges in the province and continued aggressive competitive retail activity.

The overall vodka category in Canada grew 1% in retail volume and 1% in retail value when compared to the same three-month period last year and 1% in retail volume and 2% in retail value when compared to the same six-month period last year. The premium vodka segment continues to drive the vodka category's positive performance. The standard vodka category was essentially flat on both retail volumes and retail values for the rolling 6-month period ending December 31, 2017.

The focus of advertising and promotion investment continues to be on driving overall brand awareness and trial especially behind the more premium Polar Ice 90 North. In the last fiscal year, we launched a successful social cause campaign, including a limited edition "Bearless" bottle, to support the work done by Polar Bears International. Polar Ice recently won Gold at the 2017 Global Vodka Masters Competition and Polar Ice 90 North won Double Gold at the 2017 San Francisco World Spirits Competition.

Mixable Liqueurs
Corby's portfolio of mixable liqueur brands consists of McGuinness liqueurs (which is Canada's largest mixable liqueur brand family) and Meaghers liqueurs. Retail volume for Corby's mixable liqueurs portfolio lagged category trends with retail volume declining 2% for the three- and six-month periods ended December 31, 2017 when compared to the same periods last year. Retail value declined 1% for the same comparable periods.

The liqueurs category grew 2% in retail volume and 1% in retail value for the three-month comparable period and 3% and 1% respectively for the six-month comparable period ended December 31, 2017. Category growth was led by new innovations, particularly in cream-based offerings with which McGuinness does not compete directly.

Our current strategy is to expand innovation and focus on strong programming in the retail environment, ensuring that our flavour offering is aligned to consumer trends. Recent innovation includes McGuinness Butterscotch as well as the launch of an expanded range of flavour offerings in a convenient 375mL format to encourage consumer trial.

Ungava Spirits Brands
Retail volume and value for the Ungava Spirits Brands (which Corby acquired on September 30, 2016) increased 26% for the three months ended December 31, 2017, when compared to the same period last year.  Retail volume increased 35% while retail value increased 34% for the six months ended December 31, 2017. The flagship brand, Ungava gin, grew 22% and 31% respectively in the three and six-month periods ended December 31, 2017 outperforming the Canadian gin category, which grew 8% in retail volume in both the three month and six-month comparable periods. Retail value grew 12% and 11% in the same periods. Ungava gin is the number one Super Premium gin in Canada. 

Cabot Trail maple-based liqueurs (in Quebec, Coureur des Bois) continued to perform strongly benefiting from increased distribution and successful recruitment from retail tastings. Retail volumes increased 35% and 47% on the three and six months ended December 31, 2017 while retail values grew 37% and 48% respectively.

Foreign Affair Brands
The Foreign Affair Brands (which Corby acquired on October 2, 2017) represent Corby's first foray into the Canadian wine category. Sales are conducted through many channels including LB, direct delivery (on-premise and wine club) and at the winery visitor center.

The largest percentage of sales are conducted at the winery. Retail volume through the liquor stores, as reported by the ACD, for the Foreign Affair Brands increased 3% and 22% respectively for the three and six months ended December 31, 2017 when compared to the same periods last year while retail value remained flat on a three-month comparable basis and increased 20% on a six-month comparable basis. The Canadian table wine category retail volumes decreased 3% and 1% for the three and six-month periods ended December 31, 2017 while retail value decreased 1% for the three-month comparable period and increased 1% on the six-month comparable period.

Other Corby-Owned Brands
Innovation remains an important pillar for delivering new profit and growth opportunities to the Corby domestic business. Relatively new premium offerings in Canadian whisky such as Pike Creek, Lot No. 40 and Gooderham & Worts (collectively known as the Northern Border Collection) grew retail volume 48% for the three-month period and 55% for the six-month periods ended December 31, 2017, outperforming the Canadian whisky category in Canada, which declined 2% for the same comparable periods. The Rare Range innovation series (featuring Pike Creek 21-Year-Old, Lot No. 40 12-Year-Old Cask Strength and Gooderham & Worts Little Trinity 17-Year-Old) launched this fiscal has received wide acclaim, winning various medals at the Canadian Whisky Awards 2018.

In addition, Lot No. 40 and Gooderham & Worts were both awarded Canadian Connoisseur Whisky of the Year at the seventh annual Canadian Whisky Awards for 2017. Lot No.40 has consistently won top awards in the most prestigious Canadian and International competitions. Gooderham & Worts was also awarded World's Best Canadian Blended at the World Whiskies Awards for 2017.

Royal Reserve® retail volume declined 5% and 6% for the three and six-month periods ended December 31, 2017 when compared to the same periods last year due to slow recovery of spirits consumption in Alberta and a significant increase in competitive retail activity in the economy segment of Canadian whisky.

Financial and Operating Results

The following table presents a summary of certain selected consolidated financial information of the Company for the three and six-month periods ended December 31, 2017 and 2016.

       
 

Three Months Ended

 

Six Months Ended

(in millions of Canadian dollars,

Dec. 31,

Dec. 31,

     

Dec. 31,

Dec. 31,

   

except per share amounts)

2017

2016

$ Change

 % Change 

 

2017

2016

$ Change

 % Change 

                   

Revenue

$

40.7

$

40.3

$

0.5

1%

 

$

76.7

$

74.9

$

1.8

2%

                   

Cost of sales

(15.5)

(15.1)

(0.4)

3%

 

(28.8)

(26.8)

(1.9)

7%

Marketing, sales and administration

(17.4)

(15.3)

(2.2)

14%

 

(32.3)

(29.3)

(3.0)

10%

Other income (expense)

0.1

(0.0)

0.2

0%

 

0.2

(0.0)

0.2

0%

                   

Earnings from operations

7.9

9.8

(2.0)

(20%)

 

15.8

18.7

(2.9)

(15%)

                   

Financial income

0.3

0.2

0.1

26%

 

0.6

0.5

0.1

13%

Financial expenses

(0.2)

(0.3)

0.1

(27%)

 

(0.4)

(0.5)

0.1

0%

Net financial income

0.1

(0.0)

(0.1)

313%

 

0.2

(0.0)

0.2

(773%)

                   

Earnings before income taxes

8.0

9.8

(1.8)

(19%)

 

16.0

18.7

(2.7)

(14%)

Income taxes

(2.2)

(2.6)

0.4

(17%)

 

(4.4)

(5.1)

0.7

(14%)

                   

Net earnings

$

5.8

$

7.2

$

(1.4)

(19%)

 

$

11.6

$

13.6

$

(2.0)

(14%)

                   

Per common share

                 
 

- Basic net earnings

$

0.20

$

0.25

$

(0.05)

(20%)

 

$

0.41

$

0.48

$

(0.07)

(15%)

 

- Diluted net earnings               

$

0.20

$

0.25

$

(0.05)

(20%)

 

$

0.41

$

0.48

$

(0.07)

(15%)

                                 

 

 

Overall Financial Results
Net earnings decreased $1.4 million, or 19%, and by $2.0 million, or 14%, respectively, for the three and six months ended December 31, 2017, when compared to the same periods last year. Results were impacted by lower LB ordering patterns following the LCBO contingency inventory build in the comparable fiscal period, pre-emptive of threatened strike action, as well as phasing of domestic advertising and promotional investment behind our key strategic brand J.P. Wiser's and the Northern Border Collection.

Revenue
The following highlights the key components of the Company's revenue streams:

       
 

Three Months Ended

 

Six Months Ended

 

Dec. 31,

Dec. 31,

     

Dec. 31,

Dec. 31,

   

(in millions of Canadian dollars)

2017

2016

$ Change

 % Change 

 

2017

2016

$ Change

 % Change 

                   

Revenue streams:

                 
 

Case goods

$

32.5

$

32.8

$

(0.4)

(1%)

 

$

61.0

$

60.1

$

0.9

2%

 

Commissions

7.2

6.6

0.6

9%

 

13.8

13.2

0.6

5%

 

Other services                 

1.1

0.9

0.2

27%

 

1.9

1.6

0.3

22%

                   

Revenue

$

40.7

$

40.3

$

0.5

1%

 

$

76.7

$

74.9

$

1.8

2%

                               

 

 

Case Goods revenue decreased by $0.4 million, or 1% and increased $0.9 million, or 2%, respectively, for the three and six-month period ended December 31, 2017, when compared to the same periods last year. Growth during the six-month period is attributable to the performance of the Ungava Spirits Brands (which were acquired on September 30, 2016), the addition of the Foreign Affair Brands (which were acquired on October 2, 2017), strategic and tactical price initiatives and favourable market mix which have helped offset domestic case good performance.

Commissions increased $0.6 million, or 9%, and $0.6 million, or 5%, respectively, for the three and six-month periods ended December 31, 2017 when compared to the same periods last year. Strong PR wines portfolio performance helped to offset the effects of fiscal 2017 LCBO strike contingency spirits inventory build. The PR brand portfolio continues to benefit from its positioning within the premium categories along with PR's investment to build these brands in Canada.

Other services represent ancillary revenue incidental to Corby's core business activities, such as logistical fees and from time to time bulk whisky sales. Revenue from other services grew slightly in both the three and six-month periods ended December 31, 2017 attributable to bulk whisky sales.

Cost of sales
Cost of sales increased by $0.4 million, or 3%, for the three-month period ended December 31, 2017 when compared to the same period last year. Overall gross margin on case goods was 52%, compared to 54% in the same period last year and was impacted by the higher standard costs of the premium Ungava Spirits Brands where the full benefits of the expected synergies have not yet fully materialized.

Cost of sales increased by $1.9 million, or 7%, for the six-month period ended December 31, 2017 when compared to the same period last year. Overall gross margin on case goods was 53%, compared to 55% in the same period last year and was also impacted by costs associated with the J.P. Wiser's packaging redesign and increased input costs. In addition, last year's comparative numbers benefitted from a one-off accrual reversal.

Marketing, sales and administration
Marketing, sales and administration expenses increased by $2.2 million, or 14% for the three-month period ended December 31, 2017 when compared to the same period last year. For the six-month period ended December 31, 2017, marketing, sales and administration expenses increased $3 million, or 10% year over year. This was driven by phasing of domestic advertising and promotional investment behind J.P. Wiser's Canadian whisky, the Northern Border Collection and promotional efforts related to the Ungava Spirits Brands and the Foreign Affair Brands. Overheads also increased year over year as we integrated the structures that support Ungava Spirits Brands and Foreign Affair Brands, as well as certain one-off items related to employee costs and professional fees associated with the acquisition of the Foreign Affair Brands.

Net financial income
Net financial income is comprised of interest earned on deposits in cash management pools, offset by interest costs associated with the Company's pension and post-retirement benefit plans. A slight increase for both the three and six-month period ended December 31, 2017 is due to lower pension related interest charges.

Income taxes
A reconciliation of the effective tax rate to the statutory rates for each period is presented below.

         
   

Three Months Ended

 

Six Months Ended

   

Dec. 31

Dec. 31

 

Dec. 31

Dec. 31

   

2017

2016

 

2017

2016

             

Combined basic Federal and Provincial tax rates

 

27%

27%

 

27%

27%

Other

 

1%

0%

 

0%

0%

             

Effective tax rate

 

28%

27%

 

27%

27%

             

 

 

Liquidity and Capital Resources

Corby's sources of liquidity are its deposits in cash management pools of $78.2 million as at December 31, 2017, and its cash generated from operating activities. Corby's total contractual maturities are represented by its accounts payable and accrued liabilities, which totalled $39.8 million as at December 31, 2017, and are all due to be paid within one year. The Company does not have any liabilities under short- or long-term debt facilities.

The Company believes that its deposits in cash management pools, combined with its historically strong operational cash flows, provide for sufficient liquidity to fund its operations, investing activities and commitments for the foreseeable future. The Company's cash flows from operations are subject to fluctuation due to commodity, foreign exchange and interest rate risks. Please refer to the "Risks and Risk Management" section of this MD&A for further information.

Cash Flows

       
 

Three Months Ended

 

Six Months Ended

 

Dec. 31,

Dec. 31,

   

Dec. 31,

Dec. 31,

 

(in millions of Canadian dollars)

2017

2016

$ Change

 

2017

2016

$ Change

               

Operating activities

             
 

Net earnings, adjusted for non-cash items

$

8.8

$

11.8

$

(3.0)

 

$

18.5

$

22.5

$

(4.0)

 

Net change in non-cash working capital

10.6

2.3

8.3

 

9.5

(2.9)

12.4

 

Net payments for interest and income taxes

(2.0)

(1.3)

(0.7)

 

(4.3)

(4.7)

0.4

 

17.4

12.8

4.6

 

23.7

14.9

8.8

               

Investing activities

             
 

Additions to property and equipment

(1.1)

(0.7)

(0.4)

 

(1.4)

(1.3)

(0.1)

 

Proceeds from disposition of property and equipment

0.2

-

0.2

 

0.3

-

0.3

 

Business acquisition

(0.4)

-

(0.4)

 

(6.4)

(12.0)

5.9

 

Deposits in cash management pools

(9.8)

(6.1)

(3.7)

 

(3.9)

9.8

(13.7)

 

(11.1)

(6.8)

(4.3)

 

(11.5)

(3.5)

(7.6)

               

Financing activities

             
 

Dividends paid

(6.3)

(6.0)

(0.3)

 

(12.2)

(11.4)

(0.8)

               

Net change in cash

$

-

$

-

$

-

 

$

-

$

-

$

-

 

 

Operating activities
Net cash from operating activities was $17.4 million during the quarter ended December 31, 2017, compared to $12.8 million last year, representing an increase of $4.6 million. Cash flows from operating activities are heavily impacted by the timing of collections from customers and payments to vendors. The holiday season favourably impacted cash flows at December 2017 by advancing the collections from customers into December, whereas a significant number of vendor payments fell into January.

For the six-month period ended December 31, 2017, net cash from operating activities was $23.7 million reflecting an increase of $8.8 million compared to the same six-month period last year, and the impact of the holiday season on cash flows as previously mentioned.

Investing activities
Net cash used in investing activities was $11.1 million for the three-month period ended December 31, 2017 and $11.5 million for the six-month period ending December 31, 2017, compared to $6.8 million and $3.5 million, respectively, for the same three and six-month periods last year.

The Company's completion of the acquisition of the Foreign Affair Brands and additions to capital assets were funded by withdrawals from cash management pools. In the prior year, the Company completed the acquisition of Ungava Spirits Brands.  Investing activities also include additions to capital assets in both current and prior year periods.

Cash management pools represent cash on deposit with Citibank NA via Corby's Mirror Netting Service Agreement with PR. Corby has daily access to these funds and earns a market rate of interest from PR on its deposits. Changes in cash management pools reflect amounts either deposited in or withdrawn from these bank accounts and are simply a function of Corby's cash requirements during the period. For more information related to these deposits please refer to the "Related Party Transactions" section of this MD&A.

Financing activities
Cash used for financing activities was $6.3 million for the three-month period ended December 31, 2017 and $12.2 million for the six-month period ended December 31, 2017 and represents payment of the Company's regular dividend to shareholders. In the three-month period ending December 31, 2017, regular quarterly dividends increased to $0.22 per share, compared to $0.21 per share during the same quarter last year. 

The following table summarizes dividends paid and payable by the Company over the last two fiscal years:

for

 

Declaration date

 

Record Date

 

Payment date

 

$ / Share

2018 - Q2

 

February 7, 2018

 

February 23, 2018

 

March 9, 2018

 

$  0.22

2018 - Q1

 

November 8, 2017

 

November 24, 2017

 

December 8, 2017

 

0.22

2017 - Q4

 

August 23. 2017

 

September 15, 2017

 

September 29, 2017

 

0.21

2017 - Q3

 

May 10, 2017

 

May 26, 2017

 

June 14, 2017

 

0.21

2017 - Q2

 

February 8, 2017

 

February 24, 2017

 

March 10, 2017

 

0.21

2017 - Q1

 

November 9, 2016

 

November 25, 2016

 

December 9, 2017

 

0.21

2016 - Q4

 

August 24, 2016

 

September 15, 2016

 

September 30, 2016

 

0.19

2016 - Q3

 

May 4, 2016

 

May 27, 2016

 

June 15, 2016

 

0.19

2016 - Q2

 

February 3, 2016

 

February 26, 2016

 

March 11, 2016

 

0.19

2016 - special

 

November 11, 2015 (special dividend)

 

December 11, 2015

 

January 8, 2016

 

0.62

2016 - Q1

 

November 11, 2015

 

November 27, 2015

 

December 11, 2015

 

0.19

 

 

Outstanding Share Data

As at February 7, 2018, Corby had 24,274,320 Voting Class A Common Shares and 4,194,536 Non-Voting Class B Common Shares outstanding. The Company does not have a stock option plan, and therefore, there are no options outstanding.

Related Party Transactions

Transactions with parent, ultimate parent, and affiliates
Corby engages in a significant number of transactions with its parent company, its ultimate parent and various affiliates. Specifically, Corby renders services to its parent company, its ultimate parent, and affiliates for the marketing and sale of beverage alcohol products in Canada. Furthermore, Corby outsources the large majority of its distilling, maturing, storing, blending, bottling and related production activities to its parent company. A significant portion of Corby's bookkeeping, recordkeeping services, data processing and other administrative services are also outsourced to its parent company. Transactions with the parent company, ultimate parent and affiliates are subject to Corby's related party transaction policy, which requires such transactions to undergo an extensive review and require approval from an Independent Committee of the Board of Directors.

The companies operate under the terms of agreements that became effective on September 29, 2006 (the "2006 Agreements"). These agreements provide the Company with the exclusive right to represent PR's brands in the Canadian market for fifteen years, as well as providing for the continuing production of certain Corby brands by PR at its production facility in Windsor, Ontario, for ten years. Corby also manages PR's business interests in Canada, including the Windsor production facility. Certain officers of Corby have been appointed as directors and officers of PR's North American entities, as approved by Corby's Board of Directors. On August 26, 2015, Corby entered into an agreement with PR and certain affiliates amending the September 29, 2006 Canadian representation agreements, pursuant to which Corby agreed to provide more specialized marketing, advertising and promotion services for the PR and affiliate brands under the applicable representation agreements in consideration of an increase to the rate of commission payable to Corby by such entities. On November 11, 2015, Corby and PR entered into agreements for the continued production and bottling of Corby`s owned-brands by Pernod Ricard at the HWSL production facility in Windsor, Ontario, for a 10-year term commencing September 30, 2016.  On the same date, Corby and PR also entered into an administrative services agreement, under which Corby agreed to continue to manage PR's business interests in Canada, including the HWSL production facility, with a similar term and commencement date.

In addition to the 2006 Agreements, Corby signed an agreement on September 26, 2008, with its ultimate parent to be the exclusive Canadian representative for the ABSOLUT vodka and Plymouth gin brands, for a five-year term, which expired October 1, 2013 and was extended as noted below. These brands were acquired by PR subsequent to the original representation rights agreement dated September 29, 2006. Corby also agreed to continue with the mirror netting arrangement with PR and its affiliates, under which Corby's excess cash will continue to be deposited to cash management pools. The mirror netting arrangement with PR and its affiliates is further described below. On November 9, 2011, Corby entered into an agreement with a PR affiliate for a new term for Corby's exclusive right to represent ABSOLUT vodka in Canada from September 30, 2013 to September 29, 2021, which is consistent with the term of Corby's Canadian representation of the other PR brands in Corby's portfolio (the "2011 Agreement"). On September 30, 2013, Corby paid the present value of $10 million, or $10.3 million, for the additional eight years of the new term pursuant to an agreement entered into between Corby and The Absolut Company Aktiebolag, an affiliate of PR and owner of the Absolut brand, to satisfy the parties' obligations under the 2011 Agreement. Since the 2011 Agreement is a related party transaction, the agreement was approved by the Independent Committee of the Corby Board of Directors, in accordance with Corby's related party transaction policy, following an extensive review and with external financial and legal advice.

On July 1, 2012, the Company entered into a five-year agreement with PR USA, an affiliated company, which provides PR USA the exclusive right to represent J.P. Wiser's Canadian whisky and Polar Ice vodka in the US (the "US Representation Agreement"). The US Representation Agreement provides these key brands with access to PR USA's extensive national distribution network throughout the US and complements PR USA's premium brand portfolio. The term of this agreement ended June 30, 2017 and on March 29, 2017, the Company entered into an amending agreement with PR USA to extend the term of the US Representation Agreement to June 30, 2018.

On March 21, 2016, the Company entered into an agreement with Pernod Ricard UK Ltd. ("PRUK"), an affiliated company, which provides PRUK the exclusive right to represent Lamb's rum in Great Britain effective July 1, 2016. Previously, Lamb's rum was represented by an unrelated third party in this market. The agreement provides Lamb's with access to PRUK's extensive national distribution network throughout Great Britain. The agreement is effective for a five-year period ending June 30, 2021.

Deposits in cash management pools
Corby participates in a cash pooling arrangement under a Mirror Netting Service Agreement, together with PR's other Canadian affiliates, the terms of which are administered by Citibank N.A. effective July 17, 2014. The Mirror Netting Service Agreement acts to aggregate each participant's net cash balance for purposes of having a centralized cash management function for all of PR's Canadian affiliates, including Corby. As a result of Corby's participation in this agreement, Corby's credit risk associated with its deposits in cash management pools is contingent upon PR's credit rating. PR's credit rating as at February 7, 2018, as published by Standard & Poor's and Moody's, was BBB and Baa2, respectively. PR compensates Corby for the benefit it receives from having the Company participate in the Mirror Netting Service Agreement by paying interest to Corby based upon the 30-day Canadian Dealer Offered Rate ("CDOR") plus 0.40%. Corby accesses these funds on a daily basis and has the contractual right to withdraw these funds or terminate these cash management arrangements upon providing five days' written notice.

Selected Quarterly Information

Summary of Quarterly Financial Results

                 

(in millions of Canadian dollars,

Q2

Q1

Q4

Q3

Q2

Q1

Q4

Q3

except per share amounts)

2018

2018

2017

2017

2017

2017

2016

2016

                 

Revenue

$

40.7

$

36.0

$

40.2

$

28.0

$

40.3

$

34.6

$

37.2

$

28.0

Earnings from operations

7.9

7.9

11.7

5.0

9.8

8.8

12.8

5.0

Net earnings

5.8

5.8

8.7

3.7

7.2

6.4

9.3

3.7

Basic EPS

0.20

0.21

0.30

0.13

0.25

0.23

0.33

0.13

Diluted EPS

0.20

0.21

0.30

0.13

0.25

0.23

0.33

0.13

 

 

The above table demonstrates the seasonality of Corby's business, as sales are typically strong in the first and second quarters, while third-quarter sales (January, February and March) usually decline after the end of the retail holiday season. Fourth-quarter sales typically increase again with the onset of warmer weather, as consumers tend to increase their purchasing levels during the summer season.

Revenues for the second, third and fourth quarters of 2017 and the first and second quarters of 2018 include Case Good sales for the Ungava Spirits Brands. The Ungava Spirits Brands were acquired on September 30, 2016 and since, the completion of the acquisition, the acquired Ungava Spirits Brands have contributed $11.4 million to revenues and are net earnings favourable.

Revenues for the second quarter of 2018 include Case Good sales for the Foreign Affair Brands. The Foreign Affair Brands were acquired on October 2, 2017 and since the completion of the acquisition have contributed $0.4 million to revenues and are net earnings accretive.

Recent Accounting Pronouncements
Recent accounting pronouncements

A number of new standards, amendments to standards and interpretations have been issued but are not yet effective for the financial year ended June 30, 2018 and, accordingly, have not been applied in preparing Corby's consolidated financial statements:

(i)     Revenue

In May 2014, the International Accounting Standards Board ("IASB") released IFRS 15, "Revenue from contracts with customers" ("IFRS 15"), which supersedes IAS 11, "Construction Contracts", IAS 18, "Revenues", IFRIC 13, "Customer Loyalty Programmes", IFRIC 15, "Agreement for the Construction of Real Estate", IFRIC 18, "Transfers of Assets from Customers" and SIC-31, "Revenue – Barter Transactions Involving Advertising Services". The core principle of IFRS 15 is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. IFRS 15 will also result in enhanced disclosures about revenue, provide guidance for transactions that were not previously addressed comprehensively (for example, service revenue and contract modifications) and improve guidance for multiple-element arrangements. IFRS 15 will be effective for Corby's fiscal year beginning on July 1, 2018, with earlier application permitted. The Company continues to assess the impact of the adoption of this standard on its financial statements and disclosures.

(ii)    Financial Instruments

The IASB has issued a new standard, IFRS 9, "Financial Instruments" ("IFRS 9"), which will ultimately replace IAS 39, "Financial Instruments: Recognition and Measurement" ("IAS 39"). The replacement of IAS 39 is a multi-phase project with the objective of improving and simplifying the reporting for financial instruments and the issuance of IFRS 9 is part of the first phase of this project. IFRS 9 uses a single approach to determine whether a financial asset or liability is measured at amortized cost or fair value, replacing the multiple rules in IAS 39. For financial assets, the approach in IFRS 9 is based on how an entity manages its financial instruments in the context of its business model and the contractual cash flow characteristics of the financial assets. IFRS 9 requires a single impairment method to be used, replacing multiple impairment methods in IAS 39. For financial liabilities measured at fair value, fair value changes due to changes in an entity's credit risk are presented in other comprehensive income.

This standard is effective for annual periods beginning on or after January 1, 2018 and must be applied retrospectively. For Corby, this standard will become effective July 1, 2018. The Company is currently assessing the impact of the new standard on its financial statements and disclosures.

(iii)   Leases

In January 2016, the IASB issued a new standard IFRS 16, "Leases" ("IFRS 16"), which will ultimately replace IAS 17, "Leases" ("IAS 17"). IFRS 16 specifies how an entity will recognize, measure, present and disclose leases. The standard provides a single lessee accounting model, requiring lessees to recognize assets and liability for all leases unless the lease term is 12 months or less or the underlying asset has a low value. The standard is effective for annual periods beginning on or after January 1, 2019 and must be applied retrospectively. For Corby, this standard will become effective July 1, 2019. The Company is currently assessing the impact of the new standard on its financial statements and disclosures.

Internal Controls Over Financial Reporting

The Company maintains a system of disclosure controls and procedures to provide reasonable assurance that all material information relating to the Company is gathered and reported to senior management on a timely basis so that appropriate decisions can be made regarding public disclosure.

In addition, the CEO and CFO have designed, or caused to be designed under their supervision, internal controls over financial reporting to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with IFRS. Internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be designed effectively can provide only reasonable assurance with respect to financial reporting and financial statement preparation.

Acquisition of Foreign Affair Brands
In accordance with the provisions of National Instrument 52-109 – Certification of disclosure in Issuers' Annual and Interim Filings, the Company has limited the design of its disclosure controls and procedures and internal control over financial reporting to exclude controls, policies and procedures of Foreign Affair Winery Limited ("Foreign Affair Winery"). Corby acquired the Foreign Affair Brands on October 2, 2017, and the brand portfolio and other assets acquired are currently operated by Corby's wholly-owned subsidiary, Foreign Affair Winery.

Further details related to the acquisition of the Foreign Affair Brands is disclosed under "Significant Event – Acquisition of the shares, winery and assets of the Foreign Affair Winery" in this MD&A and in Note 5 in the Notes to the Company's interim condensed consolidated financial statements for the three- and six-month periods ended December 31, 2017.

Since the completion of the acquisition of Foreign Affair Brands on October 2, 2017, the acquired brands and assets have contributed $0.4 million to revenues and $0.1 million to net earnings. The purchase price has been preliminarily allocated as described in Note 5 to the interim condensed consolidated financial statements for the three- and six-months ended December 31, 2017.

The scope limitation discussed under this section is primarily based on the time required to assess Foreign Affair Winery's disclosure controls and procedures and internal controls over financial reporting in a manner that is consistent with the Company's other operations.

Acquisition of Ungava Spirits Brands
In accordance with the provisions of National Instrument 52-109 – Certification of disclosure in Issuers' Annual and Interim Filings, Ungava Spirits was excluded from the Company's conclusions over disclosure controls and procedures and internal controls over financial reporting for the 365 day allowable period subsequent to the acquisition to allow for the assessment of the design effectiveness of Ungava Spirits disclosure controls and procedures and internal controls over financial reporting. The Company has completed its assessment of Ungava Spirits control environment and incorporated it in the Company's assessment of the design effectiveness of disclosure controls and procedures and internal controls over financial reporting.

Except for the preceding changes, there were no changes in internal control over financial reporting during the Company's most recent interim period that have materially affected, or are reasonably likely to materially affect, the Company's internal controls over financial reporting. 

Risks & Risk Management

The Company is exposed to a number of risks in the normal course of its business that have the potential to affect its operating and financial performance.

Industry and Regulatory
The beverage alcohol industry in Canada is subject to government policy, extensive regulatory requirements and significant rates of taxation at both the federal and provincial levels. As a result, changes in the government policy, regulatory and/or taxation environments within the beverage alcohol industry may affect Corby's business operations, causing changes in market dynamics or changes in consumer consumption patterns. In addition, the Company's provincial LB customers have the ability to mandate changes that can lead to increased costs, as well as other factors that may impact financial results.

Additionally, as the Company becomes more reliant on international product sales in the US, UK and other countries, exposure to changes in the laws and regulations (including on matters such as regulatory requirements, import duties and taxation) in those countries could also adversely affect the operations, financial performance or reputation of the Company.

The Company continuously monitors the potential risk associated with any proposed changes to its government policy, regulatory and taxation environments and, as an industry leader, actively participates in trade association discussions relating to new developments.

Consumer Consumption Patterns
Beverage alcohol companies are susceptible to risks relating to changes in consumer consumption patterns. Consumer consumption patterns are affected by many external influences, not the least of which is economic outlook and overall consumer confidence in the stability of the economy as a whole. Additionally, the proposed legalization of recreational cannabis in Canada could have the potential to impact consumer consumption patterns with respect to beverage alcohol products. Corby offers a diverse portfolio of products across all major spirits categories and at various price points.  Corby continues to identify and offer new innovations in order to address consumer desires.

Distribution/Supply Chain Interruption
The Company is susceptible to risks relating to distributor and supply chain interruptions. Distribution in Canada is largely accomplished through the government-owned provincial LBs and, therefore, an interruption (e.g., a labour strike) for any length of time may have a significant impact on the Company's ability to sell its products in a particular province and/or market. International sales are subject to the variations in distribution systems within each country where the products are sold.   

Supply chain interruptions, including a manufacturing or inventory disruption, could impact product quality and availability. The Company adheres to a comprehensive suite of quality programmes and proactively manages production and supply chains to mitigate any potential risk to consumer safety or Corby's reputation and profitability.

Inherent to producing maturing products, there is a potential for shortages or surpluses in future years if demand and supply are materially different from long-term forecasts. Additionally, the loss through contamination, fire or other natural disaster of the stock of maturing products may result in significant reduction in supply and, as a result, Corby may not be able to meet customer demands. The Company monitors category trends and regularly reviews maturing inventory levels.

Environmental Compliance
Environmental liabilities may potentially arise when companies are in the business of manufacturing products and, thus, required to handle potentially hazardous materials. As Corby largely outsources its production, including all of its storage and handling of maturing alcohol, the risk of environmental liabilities is considered minimal. Corby currently has no significant recorded or unrecorded environmental liabilities.

Industry Consolidation
In recent years, the global beverage alcohol industry has continued to experience consolidation. Industry consolidation can have varying degrees of impact and, in some cases, may even create exceptional opportunities. Either way, management believes that the Company is well positioned to deal with this or other changes to the competitive landscape in Canada and other markets in which it carries on business.

Corby's ability to properly complete acquisitions and subsequently integrate them may affect its results
Corby monitors growth opportunities that may present themselves to Corby, including by way of acquisitions. While we believe that an acquisition may create
the opportunity to realize certain benefits, achieving these benefits will depend in part on successfully consolidating functions and integrating operations, procedures and personnel in an efficient manner, as well as our ability to realize any anticipated growth opportunities or costs savings from combining the target's assets and operations with our existing brands and operations. Integration efforts following any acquisition may require the dedication of substantial management effort, time and resources, which may divert management's focus and resources from other strategic opportunities and from operational matters during this process. In addition, Corby may be required to assume greater-than-expected liabilities due to liabilities that are undisclosed at the time of completion of an acquisition. A failure to realize, in whole or in part, the anticipated benefits of an acquisition may have a negative impact on the results or financial position of Corby.

Competition
The Canadian and international beverage alcohol industry is extremely competitive. Competitors may take actions to establish and sustain a competitive advantage through advertising and promotion and pricing strategies in an effort to maintain market share, which may negatively affect our sales, revenues and profitability. Corby constantly monitors the market and adjusts its own advertising, promotion and pricing strategies as appropriate.

Competitors may also affect Corby's ability to attract and retain high-quality employees. The Company's long heritage attests to Corby's strong foundation and successful execution of its strategies. Its role as a leading Canadian beverage alcohol company helps facilitate recruitment efforts.

Credit Risk
Credit risk arises from deposits in cash management pools held with PR via Corby's participation in the Mirror Netting Service Agreement (as previously described in the "Related Party Transactions" section of this MD&A), as well as credit exposure to customers, including outstanding accounts receivable. The maximum exposure to credit risk is equal to the carrying value of the Company's financial assets. The objective of managing counter-party credit risk is to prevent losses in financial assets. The Company assesses the credit quality of its counter-parties, taking into account their financial position, past experience and other factors. As the large majority of Corby's accounts receivable balances are collectible from government-controlled LBs, management believes the Company's credit risk relating to accounts receivable is at an acceptably low level.

Exposure to Interest Rate Fluctuations
The Company does not have any short- or long-term debt facilities. Interest rate risk exists, as Corby earns market rates of interest on its deposits in cash management pools. An active risk management programme does not exist, as management believes that changes in interest rates would not have a material impact on Corby's financial position over the long term.

Exposure to Commodity Price Fluctuations
Commodity risk exists, as the manufacture of Corby's products requires the procurement of several known commodities, such as grains, sugar and natural gas. The Company strives to partially mitigate this risk through the use of longer-term procurement contracts where possible. In addition, subject to competitive conditions, the Company may pass on commodity price changes to consumers through pricing over the long term.

Foreign Currency Exchange Risk
The Company has exposure to foreign currency risk, as it conducts business in multiple foreign currencies; however, its exposure is primarily limited to the US dollar ("USD") and UK pound sterling ("GBP"). Corby does not utilize derivative instruments to manage this risk. Subject to competitive conditions, changes in foreign currency rates may be passed on to consumers through pricing over the long term.

USD Exposure
The Company's demand for USD has traditionally outpaced its supply, due to USD sourcing of production inputs and Advertising & Promotion expenses exceeding that of the Company's USD sales. Therefore, decreases in the value of the Canadian dollar ("CAD") relative to the USD will have an unfavourable impact on the Company's earnings.

GBP Exposure
The Company's exposure to fluctuations in the value of the GBP relative to the CAD was reduced as both sales and cost of production are denominated in GBP. While Corby's exposure has been minimized, increases in the value of the CAD relative to the GBP will have an unfavourable impact on the Company's earnings.

Third-Party Service Providers
HWSL, which Corby manages on behalf of PR, provides more than 90% of the Company's production requirements, among other services including administration and information technology. However, the Company is reliant upon certain third-party service providers in respect of certain of its operations. It is possible that negative events affecting these third-party service providers could, in turn, negatively impact the Company. While the Company has no direct control over how such third parties are managed, it has entered into contractual arrangements to formalize these relationships. In order to minimize operating risks, the Company actively monitors and manages its relationships with its third-party service providers.

Brand Reputation and Trademark Protection
The Company promotes nationally branded, non-proprietary products as well as proprietary products. Damage to the reputation of any of these brands, or to the reputation of any supplier or manufacturer of these brands, could negatively impact consumer opinion of the Company or the related products, which could have an adverse impact on the financial performance of the Company. The Company strives to mitigate such risks by selecting only those products from suppliers that strategically complement Corby's existing brand portfolio and by actively monitoring brand advertising and promotion activities.

Additionally, although the Company registers trademarks, as applicable, it cannot be certain that trademark registrations will be issued with respect to all of the Company's applications. Also while Corby constantly watches for and responds to competitive threats, as necessary, the Company cannot predict challenges to, or prevent a competitor from challenging, the validity of any existing or future trademark issued or licensed to Corby.

Information Technology and Cyber Security
The Company uses technology supplied by third parties, both related and non-related, to support operations and invests in information technology to improve route to market, reporting, analysis, and marketing initiatives.  Issues with availability, reliability and security of systems and technology could adversely impact the Company's ability to compete resulting in corruption or loss of data, regulatory-related issues, litigation or brand reputation damage.  With the fast-paced changing nature of the technology environment including digital marketing, the Company works with these third parties to maintain policies, processes and procedures to help secure and protect these information systems as well as consumer, corporate and employee data. 

Valuation of Goodwill and Intangible Assets
Goodwill and intangible assets account for a significant amount of the Company's total assets. Goodwill and intangible assets are subject to impairment tests that involve the determination of fair value. Inherent in such fair value determinations are certain judgments and estimates including, but not limited to, projected future sales, earnings and capital investment, discount rates, and terminal growth rates. These judgments and estimates may change in the future due to uncertain competitive market and general economic conditions, or as the Company makes changes in its business strategies. Given the current state of the economy, certain of the aforementioned factors affecting the determination of fair value may be impacted and, as a result, the Company's financial results may be adversely affected.

The following table summarizes Corby's goodwill and intangible assets and details the amounts associated with each brand (or basket of brands) and market as at December 31, 2017:

         
       

Carrying Values as at December 31, 2017

             

Associated Brand

 

Associated Market

 

Goodwill

Intangibles

Total

             

Various PR brands

 

Canada

 

$

-

$

21.7

$

21.7

Lamb's rum

 

United Kingdom(1)

 

1.4

11.8

13.2

Ungava brands (2)

 

Canada

 

5.1

3.2

8.3

Foreign Affair Winery brands

 

Canada

 

3.6

-

3.6

Other domestic brands

 

Canada 

 

1.9

-

1.9

             
       

$

12.0

$

36.7

$

48.7

                   

(1) The international business for Lamb's rum is primarily focused in the UK, however, the trademarks and licences

purchased relate to all international markets outside of Canada, as Corby previously owned the Canadian rights.

(2) The Ungava brands include trademarks related to Ungava Premium Canadian Gin, Chic Choc Spiced Rum and

Cabot Trail maple-based liqueurs. 

 

 

Therefore, economic factors (such as consumer consumption patterns) specific to these brands and markets are primary drivers of the risk associated with their respective goodwill and intangible assets valuations.

Employee Future Benefits
The Company has certain obligations under its registered and non-registered defined benefit pension plans and other post-retirement benefit plan. There is no assurance that the Company's benefit plans will be able to earn the assumed rate of return. New regulations and market-driven changes may result in changes in the discount rates and other variables, which would result in the Company being required to make contributions in the future that differ significantly from estimates. An extended period of depressed capital markets and low interest rates could require the Company to make contributions to these plans in excess of those currently contemplated, which, in turn, could have an adverse impact on the financial performance of the Company. Somewhat mitigating the impact of a potential market decline is the fact that the Company monitors its pension plan assets closely and follows strict guidelines to ensure that pension fund investment portfolios are diversified in-line with industry best practices. For further details, related to Corby's defined benefit pension plans, please refer to Note 16 of the consolidated financial statements for the year ended June 30, 2017.

CORBY SPIRIT AND WINE LIMITED

INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE  AND SIX MONTHS ENDED DECEMBER 31, 2017 AND 2016

CORBY SPIRIT AND WINE LIMITED

INTERIM CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(in thousands of Canadian dollars)

           
     

Dec. 31

Dec. 31

Jun. 30

   

Notes

2017

2016

2017

           

ASSETS

         

Deposits in cash management pools

   

$

78,163

$

75,218

$

74,253

Accounts receivable

 

6

31,793

33,526

34,828

Inventories

 

7

58,635

55,499

55,359

Prepaid expenses

   

649

552

527

           

Total current assets

   

169,240

164,795

164,967

Deferred income taxes

   

-

1,843

-

Property, plant and equipment

   

16,373

13,779

14,777

Goodwill

 

8

11,991

11,142

8,403

Intangible assets

   

36,733

39,456

39,675

           

Total assets

   

$

234,337

$

231,015

$

227,822

           
           

LIABILITIES

         

Accounts payable and accrued liabilities

 

9

$

39,817

$

31,128

$

31,317

Income and other taxes payable

   

192

2,059

912

Total current liabilities

   

40,009

33,187

32,229

Provision for employee benefits

   

16,766

24,436

18,249

Deferred income taxes

   

450

-

66

           

Total liabilities

   

57,225

57,623

50,544

           

Shareholders' equity

         

Share capital

   

14,304

14,304

14,304

Accumulated other comprehensive loss

   

(5,582)

(9,832)

(6,017)

Retained earnings

   

168,390

168,920

168,991

           

Total shareholders' equity

   

177,112

173,392

177,278

           

Total liabilities and shareholders' equity

   

$

234,337

$

231,015

$

227,822

 

 

The accompanying notes are an integral part of these interim condensed consolidated financial statements.

 

 

CORBY SPIRIT AND WINE LIMITED

INTERIM CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS

(Unaudited)

(in thousands of Canadian dollars, except per share amounts)

             
     

For the Three Months Ended

For the Six Months Ended

             
     

Dec. 31

Dec. 31

Dec. 31

Dec. 31

   

Notes

2017

2016

2017

2016

             

Revenue

 

10

$

40,748

$

40,266

$

76,718

$

74,898

             

Cost of sales

   

(15,547)

(15,112)

(28,752)

(26,836)

Marketing, sales and administration

   

(17,447)

(15,284)

(32,307)

(29,344)

Other income (expense)

 

11

138

(22)

173

(27)

             

Earnings from operations

   

7,892

9,848

15,832

18,691

             

Financial income

 

12

285

227

556

493

Financial expense

 

12

(190)

(259)

(381)

(519)

     

95

(32)

175

(26)

             

Earnings before income taxes

   

7,987

9,816

16,007

18,665

             

Current income taxes

   

(2,159)

(2,547)

(4,142)

(4,946)

Deferred income taxes

   

(37)

(98)

(224)

(112)

Income taxes

   

(2,196)

(2,645)

(4,366)

(5,058)

             

Net earnings

   

$

5,791

$

7,171

$

11,641

$

13,607

             

Basic earnings per share

   

$

0.20

$

0.25

$

0.41

$

0.48

Diluted earnings per share

   

$

0.20

$

0.25

$

0.41

$

0.48

             

Weighted average common shares outstanding

       
 

Basic

   

28,468,856

28,468,856

28,468,856

28,468,856

 

Diluted                                      

   

28,468,856

28,468,856

28,468,856

28,468,856

 

 

The accompanying notes are an integral part of these interim condensed consolidated financial statements.

 

 

CORBY SPIRIT AND WINE LIMITED

INTERIM CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

         

(in thousands of Canadian dollars)

         
           
   

For the Three Months Ended

For the Six Months Ended

           
   

Dec. 31

Dec. 31

Dec. 31

Dec. 31

   

2017

2016

2017

2016

           

Net earnings

 

$

5,791

$

7,171

$

11,641

$

13,607

           

Other Comprehensive Income:

         
           

Amounts that will not be subsequently reclassified to earnings:

       
 

Net actuarial losses

 

297

265

594

530

 

Income taxes                                                  

 

(79)

(71)

(159)

(142)

   

218

194

435

388

           

Total comprehensive income

 

$

6,009

$

7,365

$

12,076

$

13,995

 

 

INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN

SHAREHOLDERS' EQUITY

(unaudited)

(in thousands of Canadian dollars)

             
     

Share Capital

Accumulated
Other
Comprehensive
Loss

Retained
Earnings

Total

             

Balance as at June 30, 2017

   

$

14,304

$

(6,017)

$

168,991

$

177,278

Total comprehensive income

   

-

435

11,641

12,076

Dividends

   

-

-

(12,242)

(12,242)

             

Balance as at December 31, 2017

   

$

14,304

$

(5,582)

$

168,390

$

177,112

             
             

Balance as at June 30, 2016

   

$

14,304

$

(10,220)

$

166,701

$

170,785

Total comprehensive income

   

-

388

13,607

13,995

Dividends

   

-

-

(11,388)

(11,388)

             

Balance as at December 31, 2016

   

$

14,304

$

(9,832)

$

168,920

$

173,392

 

The accompanying notes are an integral part of these interim condensed consolidated financial statements.

 

 

 

CORBY SPIRIT AND WINE LIMITED

INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW

(Unaudited)

(in thousands of Canadian dollars)

       
   

For the Three Months Ended

For the Six Months Ended

           
   

Dec. 31

Dec. 31

Dec. 31

Dec. 31

 

Notes

2017

2016

2017

2016

           

Operating activities

         

Net earnings

 

$

5,791

$

7,171

$

11,641

$

13,607

Adjustments for:

         

Amortization and depreciation

13

2,015

2,027

4,024

3,964

Net financial income

12

(95)

32

(175)

26

Gain on disposal of property and equipment

 

(98)

-

(100)

-

Income tax expense

 

2,196

2,645

4,366

5,058

Provision for employee benefits

 

(1,049)

(96)

(1,270)

(193)

   

8,760

11,779

18,486

22,462

Net change in non-cash working capital balances

14

10,601

2,328

9,539

(2,857)

Interest received

 

287

232

558

496

Income taxes paid

 

(2,292)

(1,557)

(4,862)

(5,246)

           

Net cash from operating activities

 

17,356

12,782

23,721

14,855

           

Investing activities

         

Additions to property and equipment

 

(1,085)

(681)

(1,432)

(1,280)

Proceeds from disposition of property and equipment

 

243

-

260

-

Business acquisition

 

(440)

-

(6,397)

(12,000)

Deposits in cash management pools

 

(9,810)

(6,122)

(3,910)

9,813

           

Net cash from investing activities

 

(11,092)

(6,803)

(11,479)

(3,467)

           

Financing activity

         

Dividends paid 

 

(6,264)

(5,979)

(12,242)

(11,388)

           

Net cash used in financing activity

 

(6,264)

(5,979)

(12,242)

(11,388)

           

Net increase in cash

 

-

-

-

-

Cash, beginning of year

 

-

-

-

-

           

Cash, end of year

 

$

-

$

-

$

-

$

-

 

 

The accompanying notes are an integral part of these interim condensed consolidated financial statements.

 

 

CORBY SPIRIT AND WINE LIMITED
NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(in thousands of Canadian dollars, except per share amounts)

1.  GENERAL INFORMATION                                 

Corby Spirit and Wine Limited ("Corby" or the "Company") is a leading Canadian marketer of spirits and importer of wines. The Company derives its revenues from the sale of its owned-brands in Canada and other international markets, as well as earning commissions from the representation of selected non-owned brands in the Canadian marketplace. Revenues predominantly consist of sales made to each of the provincial liquor boards in Canada. The Company also supplements these primary sources of revenue with other ancillary activities incidental to its core business, such as logistics fees.

Corby is controlled by Hiram Walker & Sons Limited ("HWSL"), which is a wholly-owned subsidiary of Pernod Ricard, S.A. ("PR"), a French public limited company that controls 51.6% of the outstanding Voting Class A Common Shares of Corby as at December 31, 2017.

Corby is a public company incorporated and domiciled in Canada, whose shares are traded on the Toronto Stock Exchange. The Company's registered address is 225 King Street West, Suite 1100, Toronto, ON M5V 3M2. 

2. BASIS OF PREPARATION

Statement of compliance
These interim condensed consolidated financial statements have been prepared in accordance with International Accounting Standard 34, "Interim Financial Reporting" ("IAS 34"), as issued by the International Accounting Standards Board ("IASB"). These interim condensed consolidated financial statements follow the same accounting policies as the most recent annual consolidated financial statements, except for changes in accounting policies and methods described in Note 3 to these interim condensed consolidated financial statements. These interim condensed consolidated financial statements should be read in conjunction with the Company's 2017 annual financial statements.

These interim condensed consolidated financial statements were approved by the Company's Board of Directors on February 7, 2018.

Functional and presentation currency
The Company's interim condensed consolidated financial statements are presented in Canadian dollars, which is the Company's functional and presentation currency.

Foreign currency translation
Transactions denominated in foreign currencies are translated into the functional currency using the exchange rate applying at the transaction date. Non-monetary assets and liabilities denominated in foreign currencies are recognized at the historical exchange rate applicable at the transaction date. Monetary assets and liabilities denominated in foreign currencies are translated at the exchange rate applying at the balance sheet date.  Foreign currency differences related to operating activities are recognized in earnings from operations for the period; foreign currency differences related to financing activities are recognized within net financial income.

Basis of Measurement
These interim condensed consolidated financial statements are prepared in accordance with the historical cost model, except for certain categories of assets and liabilities, which are measured in accordance with other methods provided for by IFRS as explained in the accounting policies as described in the most recent annual consolidated financial statements, except for policies and methods described in Note 3 to these interim condensed consolidated financial statements. Historical cost is generally based on the fair value of the consideration given in exchange for assets.

Use of Estimates and Judgements
The preparation of these interim condensed consolidated financial statements in conformity with IFRS requires management to make certain judgements, estimates and assumptions that affect the application of accounting policies, the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the interim condensed consolidated financial statements, and the reported amounts of revenues and expenses during the reporting period. These estimates are made on the assumption the Company will continue as a going concern and are based on information available at the time of preparation. Estimates may be revised where the circumstance on which they were based change or where new information becomes available. Future outcomes can differ from these estimates.

Judgment is commonly used in determining whether a balance or transaction should be recognized in the interim condensed consolidated financial statements and estimates and assumptions are more commonly used in determining the measurement of recognized transactions and balances. However, judgment and estimates are often interrelated.

Estimates and associated assumptions are based on historical experience and other factors that are considered to be relevant. Estimates are made on the assumption the Company will continue as a going concern and are based on information available at the time of preparation. Estimates may be revised where the circumstance on which they were based change or where new information becomes available. Future outcomes can differ from these estimates.

Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in which the estimates are revised and in any future periods affected.

Management's most critical estimates in determining the value of assets and liabilities and the most critical judgements in applying accounting policies that have a significant risk of causing material adjustments to the carrying amounts of assets and liabilities within the next year have been described in Note 2 of the Company's most recent annual consolidated financial statements. The following discussion is an additional application of critical estimates and assumptions.

(i)     Fair value of grapes at point of harvest

Where possible, the fair value of grapes at the point of harvest is determined by reference to local market prices for grapes of a similar quality and varietal. For grapes for which local market prices are not readily available, the average price of similar grapes is used.

Seasonality
The interim condensed consolidated financial statements should not be taken as indicative of the performance to be expected for the full fiscal year due to the seasonal nature of the spirits business. Corby's operations are typically subject to seasonal fluctuations in that the retail holiday season generally results in an increase in consumer purchases over the course of October, November and December. Further, the summer months traditionally result in higher consumer purchases of spirits as compared to the winter and spring months. As a result, the Company's first and second quarter of each fiscal year tend to reflect the impact of seasonal fluctuations in that more shipments are typically made during those quarters.

3. SIGNIFICANT ACCOUNTING POLICIES

In addition to the accounting policies described in the most recent annual consolidated financial statements, the following policies have been applied to these interim condensed consolidated financial statements.

Inventories
Grapes produced from vineyards controlled by the Company that are part of inventory are measured at their fair value less costs to sell at the point of harvest.

Inventory of wine that is produced by the Company is valued at the lower of cost and net realizable value, with cost being determined on an average cost basis.

Inventory of bulk wine and grapes is included in work-in-progress inventory in Note 7.

Recent accounting pronouncements
A number of new standards, amendments to standards and interpretations have been issued but are not yet effective for the financial year ending June 30, 2018, and accordingly, have not been applied in preparing these interim condensed consolidated financial statements:

(i)     Revenue

In May 2014, the IASB released IFRS 15, "Revenue from contracts with customers" ("IFRS 15"), which supersedes IAS 11, "Construction Contracts", IAS 18, "Revenues", IFRIC 13, "Customer Loyalty Programmes", IFRIC 15, "Agreement for the Construction of Real Estate", IFRIC 18, "Transfers of Assets from Customers" and SIC-31, "Revenue – Barter Transactions Involving Advertising Services". The core principle of IFRS 15 is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. IFRS 15 will also result in enhanced disclosures about revenue, provide guidance for transactions that were not previously addressed comprehensively (for example, service revenue and contract modifications) and improve guidance for multiple-element arrangements. IFRS 15 will be effective for Corby's fiscal year beginning on July 1, 2018, with earlier application permitted. The Company continues to assess the impact of the adoption of this new standard on its financial statements and disclosures.

(ii)    Financial Instruments

The IASB has issued a new standard, IFRS 9, "Financial Instruments" ("IFRS 9"), which will ultimately replace IAS 39, "Financial Instruments: Recognition and Measurement" ("IAS 39"). The replacement of IAS 39 is a multi-phase project with the objective of improving and simplifying the reporting for financial instruments and the issuance of IFRS 9 is part of the first phase of this project. IFRS 9 uses a single approach to determine whether a financial asset or liability is measured at amortized cost or fair value, replacing the multiple rules in IAS 39. For financial assets, the approach in IFRS 9 is based on how an entity manages its financial instruments in the context of its business model and the contractual cash flow characteristics of the financial assets. It also amends the impairment model by introducing a new 'expected credit loss' model for calculating impairment. The standard introduces additional changes relating to financial liabilities. For financial liabilities measured at fair value, fair value changes due to changes in an entity's credit risk are presented in other comprehensive income.

This standard is effective for annual periods beginning on or after January 1, 2018 and must be applied retrospectively. For Corby, this standard will become effective July 1, 2018. The Company is currently assessing the impact of the new standard on its financial statements and disclosures.

(iii)   Leases

In January 2016, the IASB issued a new standard IFRS 16, "Leases" ("IFRS 16"), which will ultimately replace IAS 17, "Leases" ("IAS 17"). IFRS 16 specifies how an entity will recognize, measure, present and disclose leases. The standard provides a single lessees accounting model, requiring lessees to recognize assets and liability for all leases unless the lease term is 12 months or less or the underlying asset has a low value. The standard is effective for annual periods beginning on or after January 1, 2019 and must be applied retrospectively. For Corby, this standard will become effective July 1, 2019. The Company is currently assessing the impact of the new standard on its financial statements and disclosures.

4.  FAIR VALUE

The Company uses a fair value hierarchy in order to classify the fair value measurements and disclosures related to the Company's financial assets and financial liabilities. The fair value hierarchy has the following levels:

  • Level 1 – Quoted market prices in active markets for identical assets or liabilities;
  • Level 2 – Inputs other than quoted market prices included in Level 1 that are observable for the asset or liability, either directly (as prices) or indirectly (derived from prices); and
  • Level 3 – Unobservable inputs such as inputs for the asset or liability that are not based on observable market data.

 

The level in the fair value hierarchy within which the fair value measurement is categorized in its entirety is determined on the basis of the lowest level input that is significant to the fair value measurement in its entirety.

The Company has no financial instruments carried at fair value on its balance sheet. For financial assets and liabilities that are valued at other than fair value on its balance sheets (i.e., deposits in cash management pools, deposit on business acquisition, accounts receivable, accounts payable and accrued liabilities), fair value approximates their carrying value at each balance sheet date due to their short-term maturities. Fair value is determined using Level 2 inputs.

5.  BUSINESS ACQUISITION

On October 2, 2017 the Company acquired the all the shares of Vinnova Corporation and substantially all of the assets of the Crispino Estate Vineyard partnership, which together operate as the Foreign Affair Winery, a Niagara, Ontario-based wine producer for a purchase price of $6,397. The transaction, through a wholly-owned subsidiary, includes Foreign Affair's portfolio of wines as well as related production assets and inventory. The acquisition was accounted for using the acquisition method.

Acquisition costs of $446 arose as a result of the transaction. These costs have been recognized as part of marketing, sales and administration expenses in the interim condensed consolidated statement of earnings. The purchase price was funded from the Company's Deposits in cash management pools. Since the transaction date, the acquired brands and assets have contributed $402 to revenues and $65 to net earnings. The proforma results, which would represent the results for the acquired brands and assets had the purchase transaction occurred at the beginning of the fiscal year, have not been presented as they are not materially different from the actuals presented. Revenues are included in case goods sales in Note 10.

The fair values of the identifiable net assets acquired and the total consideration as at October 2, 2017 have been determined provisionally and are subject to adjustment. Provisional amounts for intangible assets have not been separately identified, valued or recognized as part of the purchase price allocation, and are pending completion of a comprehensive valuation. As a result, goodwill, which is the excess of the purchase price over the fair value of the net identifiable assets acquired, will be adjusted retrospectively to the acquisition date in future reporting periods.

Details of the fair value of identifiable assets and liablities acquired, purchase consideration and goodwill are as follows:

Purchase consideration transferred:

         

$

6,397

               
               

Identifiable net assets acquired:

           
 

Trade receivables

         

210

 

Inventory

         

1,400

 

Prepaid expenses

         

62

 

Property, plant and equipment

         

1,405

 

Trade payables

         

(268)

             

$

2,809

               

Excess initially allocated to goodwill

         

$

3,588

 

 

6.  ACCOUNTS RECEIVABLE

           

Dec. 31

Dec. 31

Jun. 30

           

2017

2016

2017

                 

Trade receivables

         

$

18,328

$

21,759

$

17,056

Due from related parties

         

11,768

9,959

15,619

Other

         

1,697

1,808

2,153

                 
           

$

31,793

$

33,526

$

34,828

 

 

7.  INVENTORIES

                 
           

Dec. 31

Dec. 31

Jun. 30

           

2017

2016

2017

                 

Raw materials

         

$

3,899

$

2,833

$

3,137

Work-in-progress

         

44,314

44,129

44,487

Finished goods

         

10,422

8,537

7,735

                 
           

$

58,635

$

55,499

$

55,359

 

 

The cost of inventory recognized as an expense and included in cost of goods sold during the three and six months ended December 31, 2017 were $13,738 and $25,459 (2016 – $13,112 and $23,418). During the three and six month periods ended December 31, 2017 and 2016 there were no significant write-downs of inventory as a result of net realizable value being lower than cost. No inventory write-downs recognized in previous years were reversed. Inventory write-downs are included in cost of goods sold.

8.  GOODWILL

   

Dec. 31

Dec. 31

Jun. 30

   

2017

2016

2017

         

Goodwill, beginning of period

 

$

8,403

$

3,278

$

3,278

Impact of acquisitions during the period (Note 5)

 

3,588

7,864

5,125

         

Goodwill, end of period

 

$

11,991

$

11,142

$

8,403

 

 

There have been no impairment losses recognized with respect to goodwill during the period (2017 - $nil).

9.  ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

       

Dec. 31

Dec. 31

Jun. 30

       

2017

2016

2017

             

Trade payables and accruals

     

$

28,318

$

19,364

$

22,937

Due from related parties

     

9,832

10,531

6,747

Other

     

1,667

1,233

1,633

             
       

$

39,817

$

31,128

$

31,317

 

 

10.  REVENUE

The Company's revenue consists of the following streams:

   

  Three months ended

  Six months ended

   

Dec. 31

Dec. 31

Dec. 31

Dec. 31

   

2017

2016

2017

2016

           

Case goods sales

 

$

32,452

$

32,815

$

60,978

$

60,061

Commissions (net of amortization of representation rights)

 

7,158

6,554

13,791

13,187

Other services

 

1,138

897

1,949

1,650

           
   

$

40,748

$

40,266

$

76,718

$

74,898

 

 

Commissions for the three and six month periods are shown net of amortization of long-term representation rights and non-refundable upfront fees of $1,471 and $2,941 (2016 - $1,471 and $2,941). Other services include revenues incidental to the manufacture of case goods, such as logistics fees and miscellaneous bulk spirit sales.

11.  OTHER INCOME (EXPENSE)

The Company's other income (expense) consist of the following amounts:

   

  Three months ended

  Six months ended

   

Dec. 31

Dec. 31

Dec. 31

Dec. 31

   

2017

2016

2017

2016

           

Foreign exchange gain (loss)

 

$

40

$

(22)

$

73

$

(27)

Gain on disposal of property and equipment

 

98

-

100

-

           
   

$

138

$

(22)

$

173

$

(27)

 

 

12. NET FINANCIAL INCOME AND EXPENSE

The Company's financial income (expense) consists of the following amounts:

       

  Three months ended

  Six months ended

       

Dec. 31

Dec. 31

Dec. 31

Dec. 31

       

2017

2016

2017

2016

               

Interest income

     

$

285

$

227

$

556

$

493

Net financial impact of pensions

     

(190)

(259)

(381)

(519)

               
       

$

95

$

(32)

$

175

$

(26)

 

 

13.  EXPENSES BY NATURE

Earnings from operations include depreciation and amortization, as well as personnel expenses, as follows:

     

  Three months ended

  Six months ended

     

Dec. 31

Dec. 31

Dec. 31

Dec. 31

     

2017

2016

2017

2016

             

Depreciation of property and equipment

   

$

544

$

556

$

1,083

$

1,023

Amortization of intangible assets

   

1,471

1,471

2,941

2,941

Salary and payroll costs

   

6,968

6,129

13,115

12,066

Expenses related to pensions and benefits

   

354

375

710

749

             
     

$

9,337

$

8,531

$

17,849

$

16,779

 

 

14. NET CHANGE IN NON-CASH WORKING CAPITAL BALANCES

   

  Three months ended

  Six months ended

   

Dec. 31

Dec. 31

Dec. 31

Dec. 31

   

2017

2016

2017

2016

           

Accounts receivable

 

$

(255)

$

(4,732)

$

3,244

$

(2,364)

Inventories

 

497

1,998

(1,877)

(179)

Prepaid expenses

 

259

(166)

(60)

(76)

Accounts payable and accrued liabilities

 

10,100

5,228

8,232

(238)

           
   

$

10,601

$

2,328

$

9,539

$

(2,857)

 

 

15. DIVIDENDS

On February 7, 2018 subsequent to the quarter ended December 31, 2017, the Board of Directors declared its regular quarterly dividend of $0.22 per common share, to be paid on March 9, 2018, to shareholders of record as at the close of business on February 23, 2018. This dividend is in accordance with the Company's dividend policy.

16. RELATED PARTY TRANSACTIONS

Transactions with parent, ultimate parent, and affiliates
The majority of Corby's issued and outstanding voting Class A shares are owned by HWSL. HWSL is a wholly-owned subsidiary of PR. Therefore, HWSL is Corby's parent and PR is Corby's ultimate parent. Affiliated companies are subsidiaries, which are controlled by Corby's parent and/or ultimate parent.

Corby engages in a significant number of transactions with its parent company, its ultimate parent and various affiliates. Specifically, Corby renders services to its parent company, its ultimate parent, and affiliates for the marketing and sale of beverage alcohol products in Canada. Furthermore, Corby outsources the large majority of its distilling, maturing, storing, blending, bottling and related production activities to its parent company. A significant portion of Corby's bookkeeping, recordkeeping services, data processing and other administrative services are also outsourced to its parent company. Transactions with the parent company, ultimate parent and affiliates are subject to Corby's related party transaction policy, which requires such transactions to undergo an extensive review and receive approval from an Independent Committee of the Board of Directors.

The companies operate under the terms of agreements that became effective on September 29, 2006. These agreements provide the Company with the exclusive right to represent PR's brands in the Canadian market for 15 years, as well as providing for the continuing production of certain Corby brands by PR at its production facility in Windsor, Ontario, for 10 years. Corby also manages PR's business interests in Canada, including the Windsor production facility. Certain officers of Corby have been appointed as directors and officers of PR's North American entities, as approved by Corby's Board of Directors. In 2015, the production and administrative agreements were each renewed for a further ten year term, commencing October 2016.

In addition to the aforementioned agreements, Corby signed an agreement on September 26, 2008, with its ultimate parent to be the exclusive Canadian representative for the ABSOLUT vodka and Plymouth gin brands, for a five-year term, which expired October 1, 2013 and was extended as noted below. These brands were acquired by PR subsequent to the original representation rights agreement dated September 29, 2006.

On November 9, 2011, Corby entered into an agreement with a PR affiliate for a new term for Corby's exclusive right to represent ABSOLUT vodka in Canada from September 30, 2013 to September 29, 2021, which is consistent with the term of Corby's Canadian representation of the other PR brands in Corby's portfolio. On September 30, 2013, Corby paid the present value of $10 million, or $10.3 million, for the additional eight years of the new term pursuant to an agreement entered into between Corby and The Absolut Company Aktiebolag, an affiliate of PR and owner of the Absolut brand, to satisfy the parties' obligations under the 2011 agreement.

On July 1, 2012, the Company entered into a five-year agreement with PR USA, an affiliated company, which provides PR USA the exclusive right to represent J.P. Wiser's Canadian whisky and Polar Ice vodka in the US (the "US Representation Agreement"). The US Representation Agreement provides these key brands with access to PR USA's extensive national distribution network throughout the US and complements PR USA's premium brand portfolio. This agreement ended June 30, 2017. On March 29, 2017, the Company entered into an amending agreement with PR USA to extend the term of the US Representation Agreement to June 30, 2018 (the "Amending Agreement").

On March 21, 2016, the Company entered into an agreement with Pernod Ricard UK Ltd. ("PRUK"), an affiliated company, which provides PRUK the exclusive rights to represent Lamb's rum in Great Britain effective July 1, 2016. Previously, Lamb's rum was represented by an unrelated third party in this market. The agreement is effective for a five-year period ending June 30, 2021.

Transactions between Corby and its parent, ultimate parent and affiliates during the period are as follows:

   

  Three months ended

  Six months ended

   

Dec. 31

Dec. 31

Dec. 31

Dec. 31

   

2017

2016

2017

2016

           

Sales to related parties

         

Commissions - parent, ultimate parent and affiliated companies

 

$

8,126

$

7,562

$

15,728

$

15,195

Products for resale at an export level - affiliated companies

 

2,508

1,737

4,265

3,417

           
   

$

10,634

$

9,299

$

19,993

$

18,612

           

Cost of goods sold, purchased from related parties

         

Distilling, blending, and production services - parent 

 

$

5,737

$

5,048

$

11,891

$

11,016

           

Administrative services purchased from related parties

         

Marketing, selling and administration services - parent 

 

$

671

$

658

$

1,129

$

1,295

Marketing, selling and administration services - affiliate

 

277

313

468

599

           
   

$

948

$

971

$

1,597

$

1,894

 

 

Balances outstanding with related parties are due within 60 days, are to be settled in cash and are unsecured.

During the three and six month periods ended December 31, 2017, Corby sold casks to its parent company for net proceeds of $243 and $260 (2016 - $nil). 

Deposits in cash management pools
Corby participates in a cash pooling arrangement under the Mirror Netting Service Agreement together with PR's other Canadian affiliates, the terms of which are administered by Citibank N.A.. The Mirror Netting Services Agreement acts to aggregate each participant's net cash balance for the purposes of having a centralized cash management function for all of PR's Canadian affiliates, including Corby.

As a result of Corby's participation in this agreement, Corby's credit risk associated with its deposits in cash management pools is contingent upon PR's credit rating. PR's credit rating as at February 7, 2018, as published by Standard & Poor's and Moody's, was BBB and Baa2, respectively. PR compensates Corby for the benefit it receives from having the Company participate in the Mirror Netting Services Agreement by paying interest to Corby based upon the 30-day CDOR rate plus 0.40%. During the three and six months ended December 31, 2017, Corby earned interest income of $305 and $586 from PR (2016 – $237 and $507). Corby has the right to terminate its participation in the Mirror Netting Services Agreement at any time, subject to five days' written notice.

17. SEGMENT INFORMATION

Corby has two reportable segments: Case Goods and Commissions. Corby's Case Goods segment derives its revenue from the production and distribution of its owned beverage alcohol brands. Corby's portfolio of owned-brands includes some of the most renowned and respected brands in Canada, such as J. P. Wiser's Canadian whisky, Lamb's rum, Polar Ice vodka, and McGuinness liqueurs.

Corby's Commissions segment earns commission income from the representation of non-owned beverage alcohol brands in Canada. Corby represents leading international brands such as ABSOLUT vodka, Chivas Regal, The Glenlivet and Ballantine's scotches, Jameson Irish whiskey, Beefeater gin, Malibu rum, Kahlúa liqueur, Mumm champagne, and Jacob's Creek and Wyndham Estate wines.

The Commissions segment's financial results are fully reported as "Commissions" in Note 10 of the interim condensed consolidated financial statements. Therefore, a table detailing operational results by segment has not been provided as no additional meaningful information would result.

 

SOURCE Corby Spirit and Wine Limited