Corby Spirit and Wine Ltd

TSX:CSW.A

Earnings Call Analysis

Earnings Call Transcript 2023-Q4

[Operator]

Good afternoon. Welcome to Corby Spirit and Wine Fiscal Year-End 2023 Financial Results Conference Call for the period ended June 30, 2023. Joining me on the call this afternoon are Nicolas Krantz, President and Chief Executive Officer; and Juan Alonso, Vice President and Chief Financial Officer. Hopefully, everyone has had the opportunity to review the press release, which was issued on August 23rd. The press release, the fiscal year-end financial statements and MD&A have been filed on to SEDAR.

Before we begin, I would like to inform listeners that information provided on today's call may contain forward-looking statements which are subject to a number of risks and uncertainties that could cause actual results to differ materially from those anticipated.

Risks and uncertainties about the company's business are more fully discussed in Corby's materials, including annual and interim MD&A filed with the securities regulatory authorities in Canada as required. At this time, all participants are in a listen-only mode. Following senior management' commentary we will conduct a question-and-answer session. Instructions will be provided at the time for you to queue up for questions. [Operator Instructions]

Now I would like to turn the call over to Mr. Krantz. Thank you. Please go ahead.

[Nicolas Krantz, President and Chief Executive Officer]

Yes. Good afternoon, everyone, and thank you for joining us for the Corby's call discussing the fiscal year 2023. So on today's call, I will provide a high-level overview of the year; and Juan Alonso, our Corby's CFO will review the financial and we will then wrap up before opening for any Q&A.

Okay. Very good. The slides are working. Sorry for this technical glitch. So if you want to qualify the year, I would say that FY'23 marks a very good year for total spirit portfolio, which overperformed the market in value in a very competitive and volatile environment leading to market share gain for most of our key brands and I would be very proud to name J.P. Wiser's and Polar Ice Vodka, Mixable liqueurs, but we also have a fantastic result on Jameson, The Glenlivet and our tequila brand, ALTOS. So overall, I'm very pleased to report that Corby delivered a robust revenue growth of plus 2% versus the year before, supported by strong underlying demand and the price increase across the portfolio and dynamic export sales driven by premiumization in the US and some opportunities in new markets.

However, in FY'23, like in other industries, the year has been affected by unprecedented rising input costs in the global inflationary environment. And we expect this high inflation on the raw materials to continue in FY'24. And we will, therefore, continue to play a price leadership role in many categories to seek and protect the margin. This year, we also continue to invest in our people to drive engagement and performance, while implementing what we call a fit-for-purpose organization designed to deliver efficiencies and enhance execution excellence.

We also successfully continue on our digital transformation journey. It's really about enhancing our marketing effectiveness but also what we call our revenue growth management capabilities and our sales force effectiveness, working at outlet level. Lastly, let me remind, of course, the audience that we have shared earlier this year the great news regarding the acquisition of the Ace Beverage Group on July 4th. We are thrilled to partner with the team to become -- with an ambition to become the leading RTD player in Canada. And as we believe, of course, that the combined strength of our companies and capabilities will deliver great opportunities.

And you know the flagship brands really Corby Spirit, which is the number one RTD brand in Ontario [indiscernible]. Now let me give you some color regarding what has been the spirits market. So I'm going to push to the next slide, it is coming on screen. Here we go. So in FY'23, the spirits market grew by plus 2.6% in value with the on-premise channel continue to steadily recover well sharing sign, of course, of normalization following the pandemic. And spirits growth has been mainly driven by pricing and the premiumization of the mix as the market volumes are declining overall by 0.9% as you can see.

In terms of category, it's clearly the premium category, which are leading the growth, Tequila, Bourbon, Irish Whiskey remain the fastest-growing spirits category in FY'23, driving, therefore, a strong growth of the overall category, while the wine decline across most key countries of origin.

And in that context, I'm pleased to see that Corby delivered a solid market performance across many of our key brands with an overall growth in the spirits category of 2.9% and growing our RTD portfolio by 51% in value, therefore, outperforming the market and validating our pricing strategy, portfolio prioritization and really the excellence in execution from all our teams. So very pleased with that.

Lastly, worth to mention that we had a very successful innovation launches during the year, launching many new products. And we can already say that 1/3 of our growth now is coming from innovation. We have launched into the market, J.P. Wiser's 10-year-old, Polar Ice Berry blizzard and also some ready to serve in many brands. So innovation remains a key driver of the growth for spirits and RTD category.

Now let me hand over to Juan to present briefly our key financials for the FY'23.

[Juan Alonso, Vice President and Chief Financial Officer]

Good afternoon, everyone. Before we talk about our financial performance, I must introduce our adjusted earnings definition, which are non-GAAP financial measures to better understanding our underlying core business performance. Whenever mentioned, adjusted figures exclude the transaction costs related to the acquisition of ACE Beverage Group, costs and termination fees related to distributor transitions and restructuring provisions and a noncash impairment charge related to the Foreign Affair Winery in FY '22.

So that being said, in FY '23, Corby delivered a robust growth in revenue. Our adjusted net earnings reflected our tight resource management focus on key strategic brands and priorities, offset by unprecedented rising input costs in the global inflationary environment. So starting with our volumes. Our shipment volumes decreased by 1% to 2.1 million cases with a slight decline of minus 1% of Corby-owned domestic brands and minus 5% on international sales due to supply chain constraints on dry and wet goods used in the production of Lamb's rum in the UK market as well as overall logistic disruptions.

Despite the volume decline, our revenue growth was robust at plus 2%, mainly driven by broad-based price increases and promotion optimization initiatives across the portfolio. I'm going to provide more details on this topic in the call. Cost of sales increase was unprecedented at plus 9% due to global inflationary pressure on cost of raw materials and finished goods. And as a result, our adjusted net earnings is likely decreased by 1% for the full fiscal year 2023, while our reported net earnings declined minus 6% in FY'23.

Operating cash flows declined $10.1 million to $35.4 million this year, primarily reflecting lower reported net earnings, as I mentioned before, and also increased the use of cash to support our working capital requirements with the strategic increased investment in maturing stocks and finished good levels compared to prior years. While delivering these results, Corby maintained a general dividend policy normalizing to FY pre-pandemic levels. Yesterday, the Board authorized the final quarter dividend payment of $0.21 per share, enabling a dividend yield of circa 6% in FY'23.

Now moving to give more details about our revenue growth. Our revenue growth was plus 2% to $163 million, supported by the following drivers. First one, robust domestic sales goods revenue up 3% to $118.2 million, with strong underlying demand and price increases across all portfolios. Also, we had strong export sales, plus 9% to $14.7 million, driven by pricing initiatives premiumization in the U.S. market and also opportunities in new markets. Commission income for represented and agency brands increased by 1% to $26.9 million, driven by positive momentum on spirits, enhanced by price increase across the entire represented portfolio, offset by softer trends online and supply chain disruptions. And revenue from other business activities decreased by 34% to $3.2 million, lapping bulk whisky sale last year.

Now I would like to give some highlights from our brands. So full year sales of Corby's owned brands benefited from broad-based price increases, as I said before, while volumes were impacted by consumer trends and the timing of liqueur board orders and inventory management. Value growth was driven by our flagship J.P. Wiser's that grew plus 6% through pricing, premiumization and innovation launch with J.P. Wiser 10 years old. And also Polar Ice Vodka increased plus 11% with successful innovation launches and the strong performance in the on-premise channel. Both brands beat their respective categories.

Mixable liqueur strongly increased plus 13% in revenue, cycling production challenges last year, while Ungava Spirits brands increased their revenue by 2% fueled by Cabot Trail, Maple Whiskey performance. Even though it was impacted by strong competition within the Canadian drink category and lapping a high comparison basis for Cabot Trial Maple Cream Liqueur. Lamb's rum was affected by consumer trends in domestic market and production constraints in the UK market.

Lastly, our commission income was up plus 1%, notably led by strong momentum of the Glenlivet, Chivas, ALTOS and our RTD portfolio, offset by lower demand on Jacob's Creek in the context of strong price competition. Now if we move to the next slide, to give -- to explain our P&L results. We enjoyed a robust revenue growth of 2%, and our cost of sales increased plus 9%, as I explained before. Marketing, sales and administrative expenses increased plus 2% in FY'23 versus last year, reflecting very tight resource management, focus on key strategic brands and priorities.

Our financial result was driven by an increase of our interest income by $1.6 million led by increased interest rates. As a result, our adjusted net earnings declined minus 1% to $25.3 million, and our reported net earnings per share declined by minus 6% when considering the transaction costs related to the acquisition of Ace, plus costs and termination fees related to distributor transitions and restructuring provisions.

From a cash flow perspective, if we move now to our cash flow. Our cash flow from operating activities declined by $10.1 million to $35.4 million this year primarily reflecting lower reported net earnings as explained before, and increase of use of cash to support our working capital requirements. And that was partially offset by increased interest income and lower tax payments compared to the prior year. Working capital balances were largely impacted by increased investment in maturing stocks and increased the finished good levels compared to prior years.

Now moving to cash flow used in investing activities. Investment on property, plant and equipment declined $0.8 million versus FY'22, and also versus FY '22, invest in activities when we look FY '22 included Corby's payment of $54.5 million for the upfront fee on the representation right agreement with Pernod Ricard in September 2021.

When it comes to cash flow used in financing activity in the current year, proceeds of $98 million were received from our financing arrangement with Pernod Ricard in advance of our acquisition of Ace Beverage Group. This 10-year term loan provided Corby with the funding to complete the acquisition on July 4, 2023.

Financing activities in 2023 also reflects payments on lease arrangements and regular quarterly dividends of $25.1 million. In the prior year, financing activity included lease payments and cash dividends of $26.5 million. And now to finalize on the cash flow, while last year, we withdrew $42 million from the cash management pool with Pernod Ricard, in FY'23, we increased our deposits in the cash management pool by $102.5 million to the proceeds of $98 million.

Now I return to Nicolas for closing remarks.

[Nicolas Krantz, President and Chief Executive Officer]

Thank you very much, Juan. Thank you very much for this quick overview. So let's wrap up before taking a few questions in RME. In a nutshell, I believe that Corby continued to have solid financials. But I think this year, we were particularly proud to have strong commercial performance by really having some market share gains on most of our key brands despite the very competitive and volatile environment.

I believe our brands continue to resonate very strongly with consumers. And also over the last couple of years, we have really made strong inroads in building a solid foundation for the future through investments in our brands, our people and of course, capabilities.

So to conclude, of course, we have mentioned the acquisition of the Ace Beverage Group, as a unique opportunity to enhance our growth profile, and I'm very excited, of course, to open this new chapter. But I will also say by showing the slide at moment on the screen, by really sharing with you that we really have one of the most, if not the most diverse portfolio of the industry with very strong brands across all spirits category of wine in our RTD.

I mean by that, all spirits category, but also all price points. We will also benefit in the coming year with a new spirit brand from the Pernod Ricard portfolio joining, of course, our portfolio here in Canada. And all that is going to be designed to unlock the growth, as we mentioned last time.

So that's it for us now. Let's open the Q&A. Are there any questions regarding the results or business for sure? Thank you very much.

[Operator]

Thank you. Ladies and gentlemen, we will now begin the question-and-answer session [Operator Instructions]

[Nicolas Krantz, President and Chief Executive Officer]

Okay. It looks at this point there is maybe no further question.

[Operator]

There are no questions over the phone. Yes, I do apologize. There are no questions over the phone. I would now like to hand the call over back to Mr. Krantz for closing comments.

[Nicolas Krantz, President and Chief Executive Officer]

Okay. Well, thank you very much for giving us the opportunity to give a bit of color on the results. As you know, we are, of course, reachable any time for any investors who wanted to have a one-to-one discussions and we will be back for Q1 results and the AGM in November. I wish you a very good evening, and thank you very much.

[Operator]

Thank you. Ladies and gentlemen that does conclude our conference for today. Thank you all for participating. You may all disconnect.