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

TORONTO, Aug. 22, 2018 /CNW/ - Corby Spirit and Wine Limited ("Corby" or the "Company") (TSX: CSW.A) (TSX: CSW.B) today reported its financial results for the fourth quarter ended June 30, 2018. The Corby Board of Directors today also declared a dividend of $0.22 per share payable on September 28, 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 September 12, 2018.

Revenue grew 2% for the year ended June 30, 2018, despite an earlier lag in Canadian shipment performance as the LCBO normalized preemptive strike related inventory built up in Q4 of the previous fiscal. On a quarterly basis, revenue increased 1% compared to the same time last year.

Revenue was enhanced by the addition of the premium Ungava Spirits brands and Foreign Affair wines, export business growth and robust commission income from Pernod Ricard brands. Partially offsetting revenue, advertising and promotional investments continued to support growth of the newly acquired brands, new channel development, and the Company's key strategic battlegrounds, such as premium innovations in Canadian whisky, including J.P. Wiser's.

Net earnings of $25.7 million (or $0.90 per share) were reported for the year ended June 30, 2018, in line with that of the previous year. Net earnings of $9.3 million (or $0.33 per share) were reported for the three-month period ended June 30, 2018, reflecting an increase of $0.6 million, or 7%, when compared to the same quarter last year. 

"Our strategic acquisitions of Ungava Spirits Co. and Foreign Affair winery are performing well and have delivered strong top-line results. This has allowed us to compete in faster growing segments with more premium offerings and has opened new routes to market, such as the Quebec grocery wine channel where we are delighted to have launched two new brands in recent months. Our efforts in international markets are delivering strong results as we share the love of our homegrown Canadian brands with global spirits aficionados. I am pleased to raise a glass to our fiscal results and "Hold it High" in true J.P. Wiser's spirit," 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 consolidated financial statements and accompanying notes for the three-months and year ended June 30, 2018, 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® 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 2018, Corby was named one of the 50 Best Workplaces in Canada by The Great Place to Work® Institute Canada for the seventh 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
June 30, 2018

The following Management's Discussion and Analysis ("MD&A") dated August 22, 2018 should be read in conjunction with the audited consolidated financial statements and accompanying notes as at and for the year ended June 30, 2018, prepared in accordance with International Financial Reporting Standards ("IFRS"). While the annual financial statements were audited, information for the three months ended June 30, 2018 and 2017 were not audited or reviewed by the Company's external auditors in accordance with standards established by the Canadian Institute of Chartered Accountants for a review of unaudited financial statements by an entity's auditor.

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 August 22, 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 fourth quarter of fiscal 2018 (three months ended June 30, 2018) are against results for the fourth quarter of fiscal 2017 (three months ended June 30, 2017). All dollar amounts are in Canadian dollars unless otherwise stated.

Business Overview

Corby is a leading Canadian manufacturer, marketer and importer of spirits and 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® 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. Corby's wholly-owned subsidiary, 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). 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 agreement that appointed PRUSA expired June 30, 2018 and Corby has since signed agreements with new third-party distribution companies (see the "Significant Events" 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, 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, each of which is effective as of July 1, 2016.

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. In addition, retail sales comparisons can be affected by timing of key holidays and LB reporting calendars.

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 Events

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 $6.4 million. The purchase price was funded from the Company's Deposits in Cash Management Pools. The transaction resulted in Corby's ownership, 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 $1.0 million to revenues and are net earnings accretive. More information regarding the transaction has been provided in Note 6 of the consolidated financial statements for the year- ended June 30, 2018.

New US Distribution Agreements
Corby entered into an agreement providing 375 Park Avenue Spirits (a dba of Luctor International, LLC ("375 Park Avenue Spirits")) the exclusive right to represent J.P. Wiser's Canadian whisky and Lamb's rum in the USA effective as of July 1, 2018 for a five-year period to June 30, 2023, subject to extension as provided for under the agreement. 

In addition, Corby entered into an agreement providing Hotaling & Co. ("Hotaling") the exclusive right to represent Corby's Northern Border Collection of Canadian whiskies (the "Northern Border Collection"), consisting of Lot No. 40®, Pike Creek®, and Gooderham & Worts®, and Ungava gin in the US effective as of July 1, 2018 for a five-year period to June 30, 2023. 

Finally, effective July 1, 2018, Polar Ice vodka will be imported under an agreement with MHW, Ltd. ("MHW"). This agreement is for a term of one year, subject to extension as provided for under the agreement. 

Three-Year Review of Selected Financial Information

The following table provides a summary of certain selected consolidated financial information for the Company. This information has been prepared in accordance with IFRS.

       
       

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

2018

2017

2016

       

Revenue

$

146.6

$

143.9

$

140.0

       

Earnings from operations

34.9

35.0

34.6

 

- Earnings from operations per common share

1.23

1.23

1.22

       

Net earnings

25.7

25.6

25.4

 

- Basic earnings per share

0.90

0.90

0.89

 

- Diluted earnings per share                                             

0.90

0.90

0.89

       

Total assets

230.0

227.8

228.5

Total liabilities

45.3

50.5

57.7

       

Regular dividends paid per share

0.87

0.82

0.76

Special dividends paid per share

-

-

0.62

 

In 2018, revenue increased $2.7 million over 2017, while net earnings remained consistent with the prior year. This year-over-year improvement in revenues was the result of the newly acquired Foreign Affair Winery, an additional quarter of results from the Ungava Spirits Brands and export markets performance. Since the completion of the transaction on October 2, 2017, Foreign Affair has contributed $1.0 million to revenues. 

The Company sold bulk whisky in 2018, as it has in previous years, although the 2018 bulk sales were lower. (The Company sells bulk whisky when needed to rebalance its maturation inventories and to align them with long-term strategies and forecasts. This is a normal practice throughout the industry.) The growth in revenues did not fully translate into net earnings as we invested behind our recently acquired brands and incurred one-off acquisition costs.

Net assets (i.e., total assets less total liabilities) were impacted by pension liabilities and deferred tax liabilities, with the decrease in pension liabilities primarily the result of net actuarial gains on pension plan assets.

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, Polar Ice, Lot No. 40, Pike Creek, and the Ungava Spirits Brands are also sold to international markets, particularly in the US and UK.

 

BRAND PERFORMANCE CHART - INCLUDES BOTH CANADIAN AND INTERNATIONAL SHIPMENTS

                   
 

Three Months Ended

 

Year Ended

 

Shipment Change

 

Shipment Change

 

Jun. 30,

Jun. 30,

Volume

Value

 

Jun. 30,

Jun. 30,

Volume

Value

(Volumes in 000's of 9L cases)

2018

2017

%

%

 

2018

2017

%

%

                   

Brand

                 

J.P. Wiser's Canadian whisky

219

222

(1%)

1%

 

801

815

(2%)

(1%)

Lamb's rum

107

109

(2%)

(2%)

 

419

447

(6%)

(5%)

Polar Ice vodka

98

98

0%

(3%)

 

365

372

(2%)

(4%)

Mixable liqueurs

42

42

0%

1%

 

161

164

(2%)

0%

Ungava Spirits Brands 1

31

20

50%

18%

 

106

67

58%

43%

Foreign Affair Brands2

2

-

N/A

 N/A 

 

5

-

 N/A 

 N/A 

Other Corby-owned brands

55

53

3%

5%

 

211

209

1%

5%

                   

Total Corby brands

554

544

2%

2%

 

2,068

2,074

0%

2%

 

(1) Comparative information for Ungava Spirits Brands includes nine 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. 

 

 

Corby's owned-brands experienced strong fourth quarter shipments, largely due to the performance of Ungava Spirits Brands, and export sales. Shipment volumes for the year were negatively impacted by The Liquor Control Board of Ontario ("LCBO") inventory normalization. On a year-over year comparison basis, shipment volumes were relatively flat, while shipment value increased 2%. Revenue increase was driven primarily by the positive contribution of the Ungava Spirits Brands, as well as gains in international markets. 

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

         
   

Three Months Ended

 

Year Ended

       

Shipment Change

     

Shipment Change

   

Jun. 30,

Jun. 30,

Volume

Value

 

Jun. 30,

Jun. 30,

Volume

Value

(Volumes in 000's of 9L cases)

 

2018

2017

%

%

 

2018

2017

%

%

                     

Domestic

 

496

494

0%

0%

 

1,849

1,877

(1%)

0%

International

 

58

51

14%

64%

 

219

197

11%

36%

                   

Total Corby brands

 

554

544

2%

2%

 

2,068

2,074

0%

2%

 

Fourth quarter domestic shipment volumes and value are flat compared to the same time last year, while on a year-to-date basis, value remained even when compared to the same period last year (despite a 1% decrease in shipment volumes). Results for the current fiscal year have been impacted as the LCBO normalized higher inventory levels built in the previous fiscal year in anticipation of threatened strike action. Domestic shipment volumes of J.P. Wiser's Deluxe were primarily impacted. In addition, economy variants remain challenged in regional strongholds by changing consumer trends and declining economic conditions. These factors were partially mitigated by the solid performance of our more premium offerings; including Ungava Spirits Brands, other variants of the J.P. Wiser's family and 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 increases in key regions.

In international markets, shipment volumes year over year were higher on a comparative basis due to organic growth in the US, and entry into new international markets. Value grew significantly over volume 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 is a result of 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.

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

 

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

 
   

Three Months Ended

 

Year Ended

       

% Retail

% Retail

     

% Retail

% Retail

   

Jun 30

Jun 30

Volume

Value

 

Jun 30

Jun 30

Volume

Value

(Volumes in 000's of 9L cases)

 

2018

2017

Growth

Growth

 

2018

2017

Growth

Growth

                     

Brand

                   

J.P. Wiser's Canadian whisky

 

168

164

2%

4%

 

745

734

1%

3%

Lamb's rum

 

76

81

(7%)

(6%)

 

327

350

(6%)

(5%)

Polar Ice vodka

 

84

83

2%

0%

 

348

350

(0%)

1%

Mixable liqueurs

 

36

34

5%

6%

 

162

161

0%

2%

Ungava Spirits Brands

 

20

15

40%

31%

 

91

67

35%

32%

Foreign Affair Brands

 

1

1

(22%)

-25%

 

3

3

1%

(2%)

Other Corby-owned brands 

 

45

44

3%

3%

 

187

191

(2%)

0%

                     

Total

 

430

422

2%

3%

 

1,863

1,856

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 retail sales volume growth of 4% for the quarter ended June 30, 2018 and a 2% growth for the full year ended June 30, 2018. Industry trends are led by strong retail sales volume growth in the Irish whiskey, cognac, tequila, bourbon and single malt Scotch categories, in which Corby does not have owned-brands. Trends for the quarter were heavily impacted by LB reporting periods and the timing of the Easter holiday which fell in Q4 last year.

Corby's portfolio is heavily weighted in the Canadian whisky, rum and vodka categories; together they make up over 87% of the Company's total retail volumes. On an annual basis, the vodka category grew volume by 3%, while the gin category volume increased by 10%. Volume for the Canadian whisky category, however, was essentially flat in the same year-over-year comparable period, while the rum category declined 1%.

Despite the industry performance of the categories in which the Company is most heavily weighted, Corby's brand portfolio remained stable for the year with retail value growing 2%, ahead of retail volume, which was essentially flat. J.P. Wiser's retail volume increased 1%, outperforming the industry in the key Canadian whisky category. The Ungava Spirits Brands experienced outstanding retail sales volume growth of 35%, fueled by organic growth and entry into the Quebec grocery wine channel.

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 Canada's best-selling Canadian whiskies, is Corby's flagship brand. The brand's retail volumes for the year-over-year comparative period grew 1% with retail value growing 3%. The Canadian whisky category continues to be soft as volumes remain flat and retail value for the category grew a modest 1% in the comparative period. 

In fiscal 2018, Corby introduced a number of J.P. Wiser's innovations, including J.P. Wiser's Seasoned Oak, J.P. Wiser's Canada 2018, J.P. Wiser's 15-Year-Old and a limited release of J.P. Wiser's 35-Year-Old. These super-premium offerings, along with innovations launched in fiscal 2017, communicate to our consumers J.P. Wiser's unique heritage and superior quality credentials. Through the "Hold it High" communication platform, we celebrate the care and pride of work our people have in creating our whisky and we proudly share our story in the newly opened J.P. Wiser's Brand Experience Centre (located in Windsor, Ontario).

Within the range, organic growth was posted by Wiser's Special Blend, J.P. Wiser's Apple Whisky and J.P. Wiser's Triple Barrel Rye. 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 first quarter communicates better quality credentials and improved on-shelf stand-out. The new bolder, premium packaging has since been applied across the range.

J.P. Wiser's variants continue to receive prestigious accolades. 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 Dissertation was awarded Best Canadian Blended Whisky, J.P. Wiser's Toffee Whisky was awarded Best Canadian Flavoured Whisky at the World Whiskies Awards for 2018 and J.P. Wiser's 18-Year-Old and J.P. Wiser's Triple Barrel Rye won Gold and Silver respectively at the 2018 San Francisco World Spirits Competition.

Lamb's Rum
Lamb's rum, one of the top-selling rum families in Canada, has been impacted considerably by ongoing changes in consumer trends for standard rum, as well as difficult economic conditions in regional strongholds. Retail volumes for the overall rum category declined 1% for the year while retail values remained flat when compared to the same period last year. The economy rum category declined 3% in retail volumes and 2% in retail value on a year-over-year comparable basis.

Lamb's experienced a 6% decline in retail volumes and a 5% decline in retail value when compared to the same period last year. The Lamb's rum product line is heavily weighted in the dark and white segments, categories which have faced evolving consumer preferences in recent years, as well as increased competitor pressure in 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.

In the fourth quarter, Lamb's Sociable Pineapple and Soda, a new ready to drink rum cooler in a can, was launched in Newfoundland. Also, in Newfoundland, we celebrated local stories by running a highly successful Local Hero Competition that invited people to nominate and vote for individuals who had given back to their communities.

Polar Ice Vodka
Polar Ice vodka is among the top-selling vodka brands in Canada. Retail volume remained relatively flat for the year ended June 30, 2018. Increased competitor pricing pressure and promotional activity, as well as LB category management in Quebec continue to impact the standard vodka category. Alberta performance has reversed in recent months, showing growth despite a slow recovery of the overall spirits industry following economic challenges in the province.

The overall vodka category in Canada grew 3% in retail volume and value on a year-over-year comparable basis. The premium vodka segment continues to drive the vodka category's positive performance. The standard vodka category grew 2% in both retail volumes and retail values for the year ended June 30, 2018.

The focus of advertising and promotion investment continues to be on driving overall brand awareness and consumer trial especially behind the more premium Polar Ice 90 North, renamed Polar Ice Arctic Extreme, as well as limited-edition flavours, such as Polar Ice Peach (made from fresh Ontario peaches) which recently launched in Ontario.

Polar Ice won Gold at the 2017 Global Vodka Masters Competition and Polar Ice Arctic Extreme won Double Gold at the 2018 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 remaining flat for the year ended June 30, 2018, while retail value grew 2% for the same comparable period.

The liqueurs category grew 3% in retail volume and 5% in retail value for the year ended June 30, 2018. 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 and McGuinness Ruby Red Grapefruit as well as the launch of an expanded range of flavour offerings in a convenient 375mL format to encourage consumer trial. McGuinness also benefited from co-branded programs activated in retail and on-premise and through social media.

Ungava Spirits Brands
Retail volume and value for the Ungava Spirits Brands increased 35% and 32%, respectively, for the year ended June 30, 2018. The flagship brand, Ungava gin, grew 32% and 31% respectively in the year over year comparable period, outperforming the Canadian gin category, which grew 10% in retail volume while retail value grew 14%. Ungava gin continues to be the market leader in the Super Premium gin category while continuing to expand its global footprint. 

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 39% in the year ended June 30, 2018 while retail values grew 41%.

In the fourth quarter, Divine Sunshine, a contemporary rose blend made with California grapes, and Coureurs des Vignes, a premium French wine brand, both new-to-world wine innovations, were launched in the Quebec grocery channel. Distribution in this channel is restricted to wines bottled in Quebec which Corby is now able to access by utilizing the acquired Cowansville production facility.

Foreign Affair Brands
The Foreign Affair Brands (which Corby acquired on October 2, 2017) represent Corby's first foray into the VQA Canadian wine category. In addition to the LB, Foreign Affair Brands are available through several channels including direct delivery (on-premise and wine club) and the on-site winery visitor centre, where the majority of sales are conducted.

Only retail sales conducted through the LB, are reported by the ACD, which increased 1% for the year ended June 30, 2018 when compared to the same period last year while retail value decreased 2%. The Canadian table wine category retail volumes remained flat for the year ended June 30, 2018 while retail value increased 3%.

Other Corby-Owned Brands
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 37% for the year ended June 30, 2018, outperforming the Canadian whisky category in Canada, which was flat in the year-over-year comparable period. Innovation remains an important pillar for delivering new profit and growth opportunities to the Corby domestic business. The Rare Range 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 including Silver at the 2018 San Francisco World Spirits Competition. Gooderham & Worts was also awarded World's Best Canadian Blended at the World Whiskies Awards for 2017. Gooderham & Worts Little Trinity (17-Year-Old) was awarded Best Canadian Blended Limited Release at the World Whiskies Award for 2018.

Royal Reserve® retail volume declined 3% for the year ended June 30, 2018 when compared to the same periods last year due to slow recovery of spirits consumption in Alberta, a significant increase in competitive retail activity in the economy segment of Canadian whisky and industry-wide softness in the Canadian whisky category.

Financial and Operating Results

The following table presents a summary of certain selected consolidated financial information of the Company for the three months and year ended June 30, 2018 and 2017.

         

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

2018

2017

 $ Change 

 % Change 

         

Revenue

$

146.6

$

143.9

$

2.7

2%

         

Cost of sales

(54.9)

(51.9)

(3.0)

6%

Marketing, sales and administration

(57.5)

(57.0)

(0.5)

1%

Other income 

0.7

-

0.7

(91%)

         

Earnings from operations

34.9

35.0

(0.1)

0%

         

Financial income

1.1

0.9

0.2

17%

Financial expenses

(0.7)

(1.0)

0.3

-33%

 

0.4

(0.1)

0.5

(492%)

         

Earnings before income taxes

35.3

34.9

0.4

1%

Income taxes

(9.6)

(9.3)

(0.3)

3%

         

Net earnings

$

25.7

$

25.6

$

0.1

0%

         

Per common share

       
 

- Basic net earnings                                                      

$

0.90

$

0.90

$

-

0%

 

- Diluted net earnings

$

0.90

$

0.90

$

-

0%

 

Overall Financial Results
Net earnings remained relatively stable when compared to the same period last year. Results were driven by robust export market performance, increased commissions from PR brands, and sales of decommissioned barrels, offset by investment behind recently acquired brands, and one-off acquisition costs related to Foreign Affair. Domestic case goods performance was largely impacted by LCBO ordering patterns in advance of threatened strike action in the previous fiscal year.

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

         

(in millions of Canadian dollars)

2018

2017

$ Change

 % Change 

         

Revenue streams:

       

 Case goods 

$

116.8

$

114.8

$

2.0

2%

 Commissions

25.7

24.9

0.8

3%

 Other services

4.1

4.2

(0.1)

(2%)

         

Revenue

$

146.6

$

143.9

$

2.7

2%

 

Case Goods revenue increased $2.0 million, or 2%, for the year ended June 30, 2018, when compared to the same period last year. Growth is attributable to the performance of the Ungava Spirits Brands, the addition of the Foreign Affair Brands (which were acquired on October 2, 2017), strategic and tactical price initiatives and favourable international market mix which have helped offset domestic case good performance.

Commissions increased $0.8 million, or 3%, attributable to strong PR wines portfolio performance which helped to offset the effects of the 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 declined slightly, attributable to lower bulk whisky sales as the Company continued to rebalance its maturation inventory.

Cost of sales
Cost of sales was $54.9 million, an increase of $3 million, or 6%, for the year ended June 30, 2018 when compared to the same period last year. Overall gross margin on case goods was 55%, compared to 56% in the same period last year and was impacted by costs associated with the J.P. Wiser's packaging redesign, increased input costs of the premium Ungava Spirits Brands and tactical price adjustments in regional strongholds. In addition, last year's comparative numbers benefitted from a one-off accrual reversal.

Marketing, sales and administration
Marketing, sales and administration expenses increased $0.5 million, or 1% when compared to last year. This was driven by promotional investment behind the Northern Border Collection and promotional efforts related to the Ungava Spirits Brands and the Foreign Affair Brands, and entry into the Quebec grocery wine channel. Overheads also increased year over year as we integrated the structures that support Ungava Spirits Brands and Foreign Affair Brands, and incurred one-time 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 in interest income for the year ended June 30, 2018 is due to increases in the Canadian Dealer Offered Rate ("CDOR") throughout the fiscal year.

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

         
     

2018

2017

         

Combined basic Federal and Provincial tax rates

   

26.8%

26.8%

Other

   

0.6%

(0.1)%

         

Effective tax rate

   

27.4%

26.7%

 

Liquidity and Capital Resources

Corby's sources of liquidity are its deposits in cash management pools of $70 million as at June 30, 2018, and its cash generated from operating activities. Corby's total contractual maturities are represented by its accounts payable and accrued liabilities, which totalled $31.2 million as at June 30, 2018 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

       

(in millions of Canadian dollars)

2018

2017

$ Change

       

Operating activities

     
 

Net earnings, adjusted for non-cash items

$

40.9

$

41.4

$

(0.5)

 

Net change in non-cash working capital

(1.8)

(4.1)

2.3

 

Net payments for interest and income taxes

(7.8)

(9.5)

1.7

 

31.3

27.8

3.5

       

Investing activities

     
 

Additions to capital assets

(4.9)

(3.5)

(1.4)

 

Proceeds from disposition of capital assets

0.5

0.1

0.4

 

Business Acquisition

(6.4)

(11.9)

5.5

 

Deposits in cash management pools

4.3

10.8

(6.5)

 

(6.5)

(4.5)

(2.0)

       

Financing activity

     
 

Dividends paid

(24.8)

(23.3)

(1.5)

 

(24.8)

(23.3)

(1.5)

       

Net change in cash

$

-

$

-

$

-

 

Operating activities
Net cash from operating activities was $31.3 million during the year ended June 30, 2018, compared to $27.8 million last year, representing an increase of $3.5 million. Cash flows from operating activities were impacted by the timing of collections from customers and payments to vendors, as well as a decrease in income taxes paid compared to the prior year.

Investing activities
Net cash used in investing activities was $6.5 million for the year ended June 30, 2018, compared to $4.5 million in the prior 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 the 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 $24.8 million for the year ended June 30, 2018, compared to $23.3 million last year, and represents payment of the Company's regular dividend to shareholders. Regular quarterly dividends increased to $0.22 per share in the current fiscal, compared to $0.21 per share 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 - Q4

 

August 22, 2018

 

September 12, 2018

 

September 28, 2018

 

$  0.22

2018 - Q3

 

May 9, 2018

 

May 25, 2018

 

June 13, 2018

 

0.22

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

 

Outstanding Share Data

As at August 22, 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.

Contractual Obligations

The following table presents a summary of the maturity periods of the Company's contractual obligations as at June 30, 2018:

             
 

Payments

Payments

Payments

Payments

Obligations

 
 

During

due in 2020

due in 2022

due after

with no fixed

 
 

2019

and 2021

and 2023

2023

maturity

Total

             

Operating lease obligations

$

1.5

$

2.5

$

1.7

$

1.5

$

-

$

7.2

Employee future benefits

-

-

-

-

10.0

10.0

             
 

$

1.5

$

2.5

$

1.7

$

1.5

$

10.0

$

17.2

 

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 provided 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 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, which expired. New distribution agreements with third party distributors 375 Park Avenue Spirits, Hotaling and MHW were entered into effective July 1, 2018 (as discussed under the "Significant Events" section of this MD&A).

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 August 22, 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.

Results of Operations – Fourth Quarter of Fiscal 2018

The following table presents a summary of certain selected consolidated financial information for the Company for the three-month periods ended June 30, 2018 and 2017:

       
 

Three Months Ended

   
 

June 30,

June 30,

   

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

2018

2017

 $ Change 

 % Change 

         

Revenue

$

40.4

$

40.2

$

0.2

1%

         

Cost of sales

(14.6)

(13.8)

(0.8)

6%

Marketing, sales and administration

(13.5)

(14.6)

1.1

(8%)

Other income (expense)

0.3

-

0.3

-

         

Earnings from operations

12.6

11.8

0.8

7%

         

Financial income

0.3

0.2

0.1

50%

Financial expenses

(0.1)

(0.3)

0.2

(67%)

 

0.2

(0.1)

0.3

(300%)

         

Earnings before income taxes

12.8

11.7

1.1

9%

Income taxes

(3.5)

(3.0)

(0.5)

17%

         

Net earnings

$

9.3

$

8.7

$

0.6

7%

         

Per common share

       
 

- Basic net earnings

$

0.33

$

0.30

$

0.03

10%

 

- Diluted net earnings                               

$

0.33

$

0.30

$

0.03

10%

 

Revenue
The following table highlights the various components of the Company's revenue streams for the quarter:

       
 

Three Months Ended

   
 

June 30,

June 30,

   

(in millions of Canadian dollars)

2018

2017

$ Change

 % Change

         

Revenue streams:

       
 

Case goods                          

$

32.1

$

31.7

$

0.4

1%

 

Commissions

6.8

6.6

0.2

3%

 

Other services

1.5

2.0

(0.5)

(24%)

         

Revenue

$

40.4

$

40.2

$

0.2

1%

 

Total revenue increased 1% on a quarter-over-quarter comparison basis, or $0.2 million despite lapping prior year LCBO purchases in anticipation of a threatened strike. Case Goods revenue benefited from improved pricing, portfolio mix and robust performance in export markets. Commissions, compared to the same period last year, were up $0.2 million due to increased volumes and general price increases from represented brands.

Other services represent ancillary revenue incidental to Corby's core business activities, such as logistical fees and from time to time bulk whisky sales. The reduced revenue for the quarter was mostly attributable to the modification to the logistical activities Corby performs and decreased bulk whisky sales, as the Company continued to rebalance its maturation inventories.

Cost of Sales
Cost of goods sold was $14.6 million, representing a $0.8 million, or 6%, increase this period when compared with the same three-month period last year. Gross margin was 56% for the current year quarter compared to 59% the same quarter last year impacted by changes in product mix as impacted by prior year's LCBO contingency inventory build, tactical price adjustments in regional strongholds, and higher input costs of the Ungava Brands.

Marketing, sales and administration
Marketing, sales and administration expenses decreased $1.1 million, or 8%, over the same quarter last year. This decrease was driven by current year phasing of domestic and international advertising and promotional activities. In addition, the same quarter last year included incremental domestic advertising and promotional investment behind J.P. Wiser's Canadian whisky in support of a packaging upgrade and new advertising creative development. 

Net earnings and earnings per share
Net earnings for the fourth quarter were $9.3 million, or $0.33 per share, which is an increase of $0.6 million over the same quarter last year. As previously discussed, this increase was delivered through stronger Case Goods performance and higher commissions from PR brands, helped by phasing of promotional investments.

Selected Quarterly Information

Summary of Quarterly Financial Results

                 

(in millions of Canadian dollars,

Q4

Q3

Q2

Q1

Q4

Q3

Q2

Q1

except per share amounts)

2018

2018

2018

2018

2017

2017

2017

2017

                 

Revenue

$

40.4

$

29.5

$

40.7

$

36.0

$

40.2

$

28.8

$

40.3

$

34.6

Earnings from operations

12.6

6.5

7.9

7.9

11.7

4.6

9.8

8.8

Net earnings

9.3

4.8

5.8

5.8

8.7

3.3

7.2

6.4

Basic EPS

0.33

0.17

0.20

0.21

0.30

0.12

0.25

0.23

Diluted EPS

0.33

0.17

0.20

0.21

0.30

0.12

0.25

0.23

 

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.

The Ungava Spirits Brands were acquired on September 30, 2016 and are reflected in results beginning with the second quarter of 2017. In fiscal 2018 the Ungava Spirits Brands have contributed $8.9 million to revenues.

Revenues for the second, third and fourth quarters of 2018 include Case Good sales for the Foreign Affair Brands, which were acquired on October 2, 2017 and since the completion of the acquisition have contributed $1.0 million to revenues and is net earnings accretive.

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.

The Company will adopt IFRS 15 for the fiscal period beginning July 1, 2018 and expects to do so on a modified retrospective basis without the restatement of prior period results. IFRS 15 is not expected to materially impact the timing or the amounts recognized within the Company's consolidated operating results due to the nature of the contracts it has in place. The Company continues to assess the disclosure requirements of IFRS 15 on its consolidated financial statements.

(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.

Disclosure Controls and Procedures

The Company maintains a system of disclosure controls and procedures that has been designed to provide reasonable assurance that information required to be disclosed by the Company in its public filings is recorded, processed, summarized and reported within required time periods and includes controls and procedures designed to ensure that all relevant information is accumulated and communicated to senior management, including the Company's Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO"), to allow timely decisions regarding required disclosure.

Management, with the participation of the CEO and CFO, has evaluated the effectiveness of the Company's disclosure controls and procedures (as defined in National Instrument 52-109) as at June 30, 2018, and has concluded that such disclosure controls and procedures are effective based upon such evaluation.

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 6 in the Notes to the Company's audited consolidated financial statements for the year ended June 30, 2018.

Since the completion of the acquisition of Foreign Affair Brands on October 2, 2017, the acquired brands and assets have contributed $1.0 million to revenues and is net earnings accretive. The purchase price has been allocated as described in Note 6 to the audited consolidated financial statements for the year ended June 30, 2018.

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. Subsequent to the acquisition on October 2, 2017, the Company began and is now well underway on the integration of Foreign Affair Winey into our systems and control structures. The assessment on the design effectiveness of disclosure controls and procedures and internal controls over financial reporting is on track for completion by the first quarter of 2019 and the assessment of operating effectiveness thereafter.

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, or a change in business model 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 (including the recent acquisitions of the Ungava Spirits Brands and Foreign Affair winery) 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 June 30, 2018:

         
       

Carrying Values as at June 30, 2018

             

Associated Brand

 

Associated Market

 

Goodwill

Intangibles

Total

             

Various PR brands

 

Canada

 

$

-

$

18.8

$

18.8

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

 

0.4

2.5

2.9

Other domestic brands

 

Canada 

 

1.9

-

1.9

             
       

$

8.8

$

36.3

$

45.1

             

(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 10 of the audited consolidated financial statements for the year ended June 30, 2018.

CORBY SPIRIT AND WINE LIMITED

CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS AND YEARS ENDED JUNE 30, 2018 AND 2017

CORBY SPIRIT AND WINE LIMITED

     

CONSOLIDATED BALANCE SHEETS

     
       

as at June 30, 2018 and 2017

     

(in thousands of Canadian dollars)

     
       
   

June 30,

June 30

 

Notes

2018

2017

       

ASSETS

     

Deposits in cash management pools

 

$

69,955

$

74,253

Accounts receivable

8

33,469

34,828

Inventories

9

59,789

55,359

Prepaid expenses

 

593

527

       

Total current assets

 

163,806

164,967

Other assets

10

1,830

-

Property, plant and equipment

11

19,331

14,777

Goodwill

12

8,757

8,403

Intangible assets

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