Ace Beverage Group Inc. (CSWA) Earnings Call Transcript & Summary

Good morning, and welcome to Corby Spirit and Wine's Investor Call. Joining me on the call this morning 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 yesterday. The press release has been filed on SEDAR. Before we begin, I would like to inform listeners that information provided on today's call may contain forward-looking statements, which are subject to a number of risks and uncertainties that could cause actual results to differ materially from those anticipated. Risks and uncertainties about the company's business are more fully discussed in Corby's materials, including annual and interim MD&A filed with the securities regulatory authorities in Canada as required. [Operator Instructions] Now I would like to turn the call over to Mr. Krantz. Please go ahead, sir.

Thank you very much, and good morning, everyone. Delighted to be here with you, of course, this morning, as we announced yesterday evening, an important piece of news for Corby. So today, we would like to share with our CFO, Juan Alonso, a bit more color on the acquisition of Ace Beverage Group. First, of course, but it's been done by the moderator. As usual, I will refer here to the disclaimer and the forward-looking statements. So I move that along. And this being said, let's basically move to the transaction highlights. So as announced yesterday, we have reached an agreement to acquire 90% of Ace Beverage Group for CAD 148.5 million. Corby has a pass to acquire the remaining 10% through 2 call options in 2025 and 2028. You could ask me straight away why 90%? Well, because both Corby and the founders of Ace Beverage Group shared the same vision and ambition for the company into the future. The founders and the management team are key people ready to deliver this ambition. And we see it important and fair for them to keep in a way as Killing the game going forward. We will cover through the presentation, all the key points of the transaction. So I propose to start presenting straightaway to you, Ace, and why it is a key strategic move for Corby. So with route dating back to 2013, Ace Beverage Group has achieved consistent high double-digit growth to become a Canadian RTD leader, reaching 2 million cases sold for retail value of approximately $120 million and generating nearly $60 million of revenue. Its flagship brands, Cottage Springs, is a leading ready-to-drink brand in Ontario with a strong positioning in key category segments and with best sellers that include Cottage Springs, Vodka Soda, Vodka Water and Tequila Soda. The company also boost a rich and diversified portfolio of other innovative brands such as Ace Hill, Cabana Coast and Liberty Village. And overall, [indiscernible] 28 listings in LCBO, which is remarkable, and make them the #1 RTD player in the LCBO and Cottage Springs is actually the fastest-growing brand in Canada. If we look a bit more, therefore, the overall portfolio, as we mentioned, the flagship brand is Cottage Springs. It represents nearly 80% of the portfolio revenue with a dynamic innovation pipeline. Ace Hill is also a strong brand in the better-for-you segment. And overall, we are experimenting successfully in all subsegments of the RTD category. So focusing a little bit on the transaction rationale and benefit. While we see this transaction as being strategic, of course, and providing strong benefit to Corby. First, it provides a clear expansion into the sizable and fast-growing and highly attractive RTD category. RTDs have clearly outperformed other categories in the beverage alcohol market and continue to exhibit a fast run rate for the future. It adds industry-leading brands to Corby's dynamic portfolio brand with, in particular, as we mentioned, Cottage Springs, being the #1 RTD brands in the LCBO. Third, with this acquisition, we are combining 2 companies with proven track records of building brands, successful product development, innovation capabilities and ability to launch new on-trend product for consumer. It's really the combination of these 2 platforms that are going to create value. The transaction will, of course, transform Corby's financial profile with a pro forma operating revenue increasing by circa 35% and will, therefore, very much enhance our growth profile in the future. The transaction is expected to be highly accretive with a positive earnings per share accretion expected as soon as year 1. And it will add an asset-light low CapEx business to Corby enabling Corby to maintain strong margin, low leverage and return capital to shareholders. That in a nutshell how do we see the key benefit of the transaction. Now let me put a bit of context and take a few minutes to share some key information about the RTD category and the market. It's a key point. As I mentioned already, RTD is now in Canada, a large and rapidly growing segment of the alcoholic beverage market. I will mention here 2 figures. It's a $2.4 billion retail value, growing double digit consistently and therefore, expected to double by 2027. So of course, a very attractive category in the landscape of the alcohol beverage industry. And it has clearly outperformed, as I mentioned, all the other categories over the last 5 years. Now in the RTD category, their flagship brand, Cottage Springs, consistently outperformed the key competitors and is now in Ontario, the #1 brand with a market share of 12% with the LCBO. Ace has, in fact, become the largest independent player in Canada and has significant runway. As you can see, the RTD category is still under-indexed in Ontario compared to all the other provinces in Canada. So there is, of course, a runway in Ontario, but of course, for the rest of Canada since Ace is not well established yet outside of Ontario. Now what's the main lever for growth? Well, the name of the game here is innovation. And this is where Ace is excelling. Their key competitive advantage is indeed their capacity to innovate with impact. They have developed proprietary in-house processes and capabilities, covering market and consumer insight, packaging and liquid development, and they have a dedicated team to drive results and accountability and they have continued [indiscernible] ideation generation but with a rigorous process to optimize product-market fit. Corby, on the other hand, of course, with our spirits in also RTD portfolio are also very much relying on successful innovation to fuel growth and to give you an idea, about 25% of our top line growth comes from innovation as well. So we have an amazing opportunity here to leverage our combined innovation credentials to create and launch on-trend new products and brand expansion that resonate with our consumers. Now the cherry on the cake, both Ace and Corby have been awarded in the recent years, Elsie Awards from the LCBO as a recognition of our execution excellence and partnership. So I have mentioned already our runway for growth. And this slide here is probably quite important to illustrate the strength of this new partnership. Our strategic objective is indeed to leverage our combined strength to continue the acceleration in Ontario for the whole RTD portfolio, which means the Ace portfolio but also the Corby portfolio, while applying the Ace playbook for RTD outside of Ontario to scale up the business. And as you can see, we have more than half of the market to conquer. And Corby's strong presence outside of Ontario will enable to open doors and leverage our very strong partnership with Liquor Board. So from here, there is only 1 clear ambition from here is to become the #1 RTD player in Canada with our combined portfolio. Now I will turn to Juan, so we can share a bit more with you the impact of the acquisition on Corby.

Good morning, everyone. So you can see that as a result of this acquisition, Corby will significantly increase its participation into the fastest-growing category in the market that is estimated to grow double digit in the next 3 years. So this will provide a fantastic strategic diversification of our revenue base while enhancing our growth profile with RTD representing 1/4 of our pro forma revenues. Next, you can see that the impact on our portfolio is fantastic. It is transforming Corby to become a key player as a multi-alcoholic beverage company in Canada. The addition of Ace brands creates the most diversified and comprehensive portfolio covering all categories, all consumer occasions and all price points to lead in Canada. Following this transaction, Corby will maintain a disciplined capital allocation strategy. First, we expect to continue to provide solid return to our shareholders through quarterly dividend payouts. Second, with low capital intensity, we will continue to focus on growth initiatives like innovations, marketing, R&D, product launches. Also, we are going to be leveraging our balance sheet with a low leverage ratio post closing compared to industry peers. Our net debt-to-EBITDA ratio expected to be 1.8x at closing. Finally, we will continue to have an active portfolio management and look at all relevant opportunities to create value for our shareholders. So let me finish by sharing a few additional important information we have not yet mentioned. We will fund the transaction using available cash and $120 million in arm-lengths financing at market rates from Corby's majority shareholder Pernod Ricard. There is no dilution to existing shareholders, and we do not foresee any need to issue equity. The transaction is expected to close in the first quarter of Corby's fiscal year 2024 and is subject to usual normal closing conditions, regulatory approvals and third-party consents. Ace business will operate as a subsidiary of Corby with members of existing executive team at Ace remaining in charge of the day-to-day management of the company. Two of the founders will be leading the company supported by a very talented and committed management team covering sales, marketing and operations. Now I hand over to Nicolas.

Thank you, Juan. And really now just to wrap up, I would like to share with you 2 very simple slides. This one simply to reaffirm that we are extremely excited to partner with Ace and become one of the leading RTD players in Canada as we believe the combined strength of our companies and people will unlock new opportunities. Really, the Ace team has built an inspiring business, I have to say, through a culture of execution excellence, consumer centricity and passionate people, it is really a winning and high-performing team, and we are very much looking forward to welcoming them to Corby. And I'm excited about the benefit of this acquisition we create for our consumers, our customers and, of course, our shareholders. The second and the last one is just to, again, to show you visually that Corby has now an amazing portfolio with so many iconic domestic and global brands in all the important categories in the market covering all consumer occasions at all price points. I would like to mention as well that as a result of recent acquisitions from the group Pernod Ricard, we are also going to represent [ and actually scale ] new brands from the next quarter, brands like [indiscernible] Wine, [indiscernible] Premium Tequila, Skrewball Peanut Butter Whiskey or Jefferson's Bourbon. All these brands are all amazing. They are premium brands, super premium brands and we expect significant growth in the Canadian market. So they will also contribute to refresh what I would call our portfolio priorities and strategy. Out of our historical Canadian portfolio, I'm pleased to say that all the great work done by the Corby team on our 2 largest brands, J.P. Wiser's and Polar Ice Vodka, in terms of communication platform, innovation and packaging is paying off as both brands are showing solid value growth and taking market share. So with our refreshed portfolio and the acquisition of Ace, Corby is poised for solid and sustainable growth as we will transition into a new financial year and open a new chapter for Corby. Thank you very much for your attention and giving us the opportunity to share with you some information on this important strategic transaction for Corby, and we will take some questions. We have a half close at 9:30. And if there are more questions, we will, of course, do that. You can redirect your questions on the investors platform of the Corby website, and we will answer all the questions. Thank you very much.

[Operator Instructions] And at this time, Mr. Krantz, it appears we have no questions registered. Please proceed with your closing remarks.

Okay. Listen, thank you very much for your attention. As I said, no doubt that we will continue to reach dialogue with our investment base in the coming days and coming weeks. So our intention was just to share with you straightaway more color on the transaction. But as I said, we will continue the dialogue through our various platforms. Thank you very much, and I wish you a great day.

Thank you, sir. Ladies and gentlemen, this does, indeed, conclude your conference call for today. Once again, thank you for attending. And at this time, we do ask that you please disconnect your lines.