Corby Spirit and Wine Limited (CSWA) Earnings Call Transcript & Summary

Good afternoon, and welcome to Corby Spirit and Wine's Fiscal Year-end 2021 Financial Results Conference Call for the period ended June 30, 2021. Joining me on the call this afternoon are Nicolas Krantz, President and Chief Executive Officer; and Edward Mayle, Vice President and Chief Financial Officer. Hopefully, everyone has had the opportunity to review the press release, which was issued earlier today. The press release, the fiscal year-end financial statements and MD&A have 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 and that could cause actuals 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 MDA -- 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.

Thank you very much, and good afternoon, everyone, and thank you for joining us today so we can present the full year result of Corby for FY '21. First, I would like to start, I would say, by recognizing the recent changes that we've made at the Board of Corby, the Board of Directors. Of course, we thank Bob Llewellyn and Paul Holub for their service to the company; but very much as well, of course, welcome Helga Reidel and Lani Montoya, who are joining the Board and bringing great experience and energy and I am thrilled that we're able to bring better balance to award in terms of diversity. I think it's an important direction for us. I'm pleased as well that we are reinstating this annual results call. I know that last year was a bit of a transition year. I believe there are good complements to the enhanced investor outreach that we have conducted during the year. Maybe some of you have had the opportunity to attend some of our nondeal virtual roadshow that we are doing on a regular basis. They give us an opportunity to more than anything introduce for Corby rather than talk about necessarily the performance of the result, but very much so to try to reach a broad base of investors and shareholders and introduce Corby. So I think it's a good complement. Okay. So on to this call, I will provide a high-level overview of the year. And of course, Edward Mayle, our CFO, will present the key financials and the results of this year, and we'll wrap up quickly to open, of course, the Q&A to give you the opportunity to ask a few questions. So if I have to, of course, characterize the FY '21, not a surprise to anyone. It's been very much dominated by unprecedented volatility caused by the pandemic. That is true for every company, every sector. But I mean, it's a year where we've seen the closure of the on-premise channel, of course, and some consumer penny by, as you know, last year, continued with a series of lockdown, sometimes different by province, but still very much the same of the year. And then in the second phase of the year, we've seen some vaccine rollout. And more recently, and we are very pleased at the beginning of some reopening in particular of the on-premise in some key markets. So volatility has been important. Probably FY '22 will be also marked by some volatility or some recycling of the effect of this year. A little word as well on global supply chain, which was also concern for us during the year. It hasn't impacted that much FY '21, but it's still a pressure point overall globally, and that's something we are very, I would say, not concerned that we are managing very closely to make sure we can ensure strong business continuity to our business. Of course, as I said during the year, the impact on the pandemic has particularly impacted the hospitality sector. So we spend a fair amount of time to support our key partners throughout the crisis. And we are really delighted to see some doors reopening and welcoming some consumer again. It's an important part of the business. It's an important part of how we connect with our consumers. I want to call out as well our employees because they've been also very much impacted with new demand in terms of way of working, remote working and also quite agility throughout the year. I have to say I've been very much impressed to see how we manage the year with a lot of energy and resilience throughout the year. So I want to be a bit close to them because I think it's been a very big part of our success this year, in a year, which was really like no other for that matter. I take the opportunity as well to remind all of us that the year was also characterized at the beginning of the year by the confirmation and the renewal of the relationship with Pernod Ricard as we have renewed the representation agreement for the Pernod Ricard brand. It was an important milestone for us, of course, that's starting effective July 1. And that's going, of course, to secure an important commission income revenue stream over the next, I mean, years. And that's important in terms of the relationship now that the acquisition with Pernod Ricard is, of course, very important to Corby. And I will just -- as a matter of introduction, I want also to call out, of course, the strong financial performance. Ed will give you much more detail on that. But in that extraordinary circumstances, we managed to deliver a very solid revenue growth of around 4% and a net earning double digit at plus 15%, which I think is, of course, an excellent result. The result of Ed will go through that, but also a cautious cost management. And this allow us, of course, to maintain our dividend payment to shareholders, aligned with our generous policy of 90% of prior year earnings. And I think it's important in that please we are able to consider all these features. So I'm going to cover some key themes around our key strategic stake, and Ed will go on the financials. But maybe before I do so, let me give you some color on what has been the market context. I think it's important for you to visualize a little bit what was the context in which we operated. While the spirit market overall grew by 3.8% in volume during this fiscal year. So that's to July -- to June '21, with, and I think you know that, exceptional strong first quarter. That was really a key feature. And of course, conversely, at the end of the year, we were recycling the very strong prior year last quarter, which was strong. So as you can see in the chart here, quite a different phasing between the beginning of the year and the latter part of the year. Also, and you won't be surprised, very contrasted, I would say, trend between the on-premise, which I was surprised collapsed completely at the beginning of the pandemic and start to rebound a little bit in Q4. So overall, minus 53% for the channel, which was, of course, a significant impact, but the channel represents about 10% of the market. And the opposite way the retail or the off-premise channel has been extremely dynamic with double-digit growth, I mean, 14 -- nearly 15% in the first 2 quarters, which was, of course, unprecedented as well in this market. And the Q4 was a decline, which is a result of the recycle of the high comparison basis last year, but also the fact, of course, that the on-premise started to reopen strongly. So occasion started to shift a bit from at-home occasion to bars. Quick one on the wine market, which is not mentioned here. It was a little bit softer than the spirit market, but there were some good growth in the first 2 quarters but some decline in the second half. So overall, the market is relatively flat for the year, but with a good mix, and we will see a result that as far as our country origin, we managed to have some strong results for our brand. So effectively in terms of our portfolio, you know that Corby has a very broad portfolio made of iconic Canadian brands and also international brands through the presentation of the Pernod Ricard portfolio. That's really given us the opportunity to play in different categories. We know that some categories have seen a lot of success this year through the increased at-home occasion. I can call out, for example, the leakers, which were very strong this year. So that's why our brand like Cabot Trail, but also the Canadian whiskey with the cocktail innovation that we've launched were very successful. And that's something that Ed is going to give us a bit more detail. But overall, we had contrasted or mixed results across the portfolio, but we did manage to really gain share on some key brands and against key competitors and really that gives me confidence for the future. So if we go down a bit more, the various things I wanted to share with you today and really as a key response to this year to the pandemic. We have very much focused the organization on our key business priorities. And when I say that the first point has been really to pretty much connect our consumer to our brand. I mean this is what we have to do, generally speaking, but in the context of evolving pattern trend, we'll be spending a lot of time to put our organization in the consumer-centric mode. So the first thing we did is very much continue to focus on building the brand equity of our brand. And that's something we've been doing very much through a strong communication platform. We have evolved our organization as well to reflect lesser category or lesser brand focus on which one is occasion-focused, and that's something I've been talking a lot about. I believe consumers don't go for a particular type of spirits, but they go for an occasion. When you consume a cocktail, you can go with different type of spirits. The prestige occasion as well is very versatile. And around the mill, that goes from the gin to wine and that's something that we have seen. We are communicating more and more with our consumers through this occasion lens. And I think this pandemic and the lockdown has been, if anything, the confirmation that our consumers behave like that. In that context, innovation has remained a very important part of our focus. I mean it's not new. We know that innovation is a big part, a big growth driver of the spirit and wine category across the board. So as always, we are building a dynamic pipeline of what we call purposeful innovation, I call that purposeful because it's not about just bringing a new product for the sake of it. It's about bringing the product that answer the needs of consumers. So we really anchor that with a strong consumer insight and also with a strong collaboration with our customers, the liquor board. You know that we have a long lead time to bring a product to shelf. So it's a collaboration which is well developed and well thought through. And this year, and you have on the slide, some visuals of key brands and product that we have basically put to market, quite a dynamic pipeline. And that's something that we've been able to do. We've increased as a result of what I call our share of innovation. Corby doesn't have its fair share of innovation yet. So there is room here for growth. And this is what we've been focusing on. And in particular, towards the end of the fiscal year '21, so the Q4, we've been launching a lot of new products, new packaging, and that's something that is going to, of course, support the beginning of the fiscal year '22. So we have a lot of innovation which are nice to see. I want to call out as well, of course, the accolade and awards or the pricing in the various trade shows are important. For example, with Lot 40 Dark Oak, this year, we won the World's Best Rye in the world. So of course, as a Canadian space company, we are very proud. But in that space as well, coming with new products in the market sometimes, of course, we start by some provinces. We've launched, for example, Ginger and Ungava Gin in Quebec and then we will roll out in other provinces. But the topic of innovation has been a key topic for us, and we remain in the future a clear growth driver for the organization. If I move on to the other area, which is our commercial execution, that's, of course, absolutely key. Corby has it all, what we call route-to-market, own commercial and sales force throughout the country. It is very much our brand and our people in the field, and they've been in the field indeed all year, of course, with sanitary restrictions. But overall, they really maintain a very strong relationship with our customers throughout the country. And we're very much focused on what we call delivering excellence of -- in the retail, what we call the last 3 fleet, which is very much making it happen in the store, and that's important. Of course, on-premise which were mostly closed during the year, what we've done, we stayed close to our key partner, the on-premise, in particular, the national chain. We've taken the opportunity as well to prepare ourselves for the strong rebound this year. As an example, I will mention that we've been using machine learning, which is really like AI to really segment the outlets and how we want to target basically the outlet with our portfolio. So I will say a few words on that because -- this is also something that we want to apply to our business. And of course, on the on-premise, we managed to leverage in that channel, the pickup and delivering or at-home delivery of the cocktail kit or the drinks. That has been the feature of the pandemic. Post pandemic most of the provinces have made that, in fact, a permanent feature. So that's something as well, which is important, and we are delighted to see our on-premise reopening. Last point I want to mention, which is a key element for Corby, and I would like to believe that we have a little bit of a competitive edge here. It's our obsession on delivering value ahead of volume. So the company has been working over the last few years in putting in place and embedding it throughout the organization, what we call a trade promotion optimization tool to really optimize the retail investment and the promotion. And I would say that this year, it has paid off quite nicely when we look at our results. And it's -- at the end of the day, it's a tool, but it's also a mindset. And today, our organization is very committed and dedicated into this value gain instead of the volume, and that's something that is going to continue in the future. And we have more program in the future to even enhance the way we work in terms of our value management. That's what we call usually a revenue growth management or value management. So not new, but I would like to believe that in this market, we are developing a competitive edge to play on price, to play on mix, also to play on the promotional optimization. And finally, I would say, of course, we've tried to take opportunity to leverage new channel on to market opportunities. So you won't be surprised to hear me to talk about online sales. We know that Canada, it's a bit of the beginning. It's a small footprint for now in Canada, but everywhere, those online sales have been booming. You really have 2 sub channels. You can have the direct-to-consumer through the wineries or the distilleries has been doing that with very successful sales throughout the year from our winery and our distillery in Windsor but also through likable. I mean 70% of the online sales are coming from the LCBO and the SAQ. And today, it's very clear that this is a big part of the strategy. So we want to play. We want to lead in that space. We believe we have the credibility. No one is really having, I would say, a large share. So it's still basically a building channel and we want to be a partner of choice in the future. So we have created a new team who's going to be fully focused on this channel and accelerate our share in that space, which I'm sure will be a key feature of the industry going forward in Canada. A quick word on the export, and you'll see that in our results with Ed, the export has been very buoyant for us this year, a very exciting result. If I mentioned the U.K. first, very briefly, where Lamb's Rum is a big brand in the U.K., while we've been very much able to revamp rationally the brand in the U.K. through the spice from, which has really taken off quite strongly, on #3 position in the retail market in the U.K., new packaging as well. So again, we've been enjoying a very strong result, which is great to see given the work that was put behind the brand for the purpose. And of course, since we have missed that before, the U.S. is a key priority for us. It's -- the Canadian whiskey is the #1 in imported whiskey category in the U.S. J.P. Wiser's has a very small footprint. So for us, it's all about growth. It's all about taking opportunity. We have accelerated growth and our distribution in the key states introducing new packaging and the ready-to-pour cocktail, of [indiscernible] and activated media. We do that in key cities. So we don't have a SME or blanket national approach. We really want to do that as a solid build city by city, and we have a double-digit growth this year in the export market, which is very pleasing to see. Now, of course, this -- I've mentioned that as well in some of the road show. We also have what I call a business transformation agenda. So in parade of running the business, we spent some time to really continue this transformation. It's about the digital transformation. So leveraging digital technology to be better in the way we capture our data, we exploit our data. We also -- we are more efficient and effective in our decision-making. I mentioned the e-commerce and the digital and marketing transformation will remain a key feature of Corby strategy in the next few years. Now a quick word, and I can't close our focus of the year without talking about it. All businesses today must recognize their obligation to behave in a sustainably and responsible way. I think the affiliation with Pernod Ricard gives us a lot of muscles in that space. And we have a very -- commitment to -- with some ambitious objective that we want basically to achieve. So again, we've been making a lot of progress covering a lot of initiatives in some programs, integrating, of course, alcohol issues but also water recarbon management, packaging and waste reduction or biodiversity to name a few. For example, this year, for the first time, we have eliminated all single-use plastic from all our promotional materials. And that's what -- I think it's very important. They are small steps, but this is the type of thing that is making a difference. And also in our distillery with the affiliation of Pernod Ricard, there has been a lot of effort to reduce carbon emission. Now, that's, of course, just to finish, all these achievements, which I'm quite proud of, have been delivered by people. I think this year has been an amazing year in terms of people management. Probably a tipping year, tipping point in terms of how the way we have dialogue with our teams, they have shown increasingly resilience, but also we had a tough moment, and I think every organization went through that through the COVID. And I think we've been having a very humane conversation through the organization. And that has probably give us a sort of maturity. We have also, I think, made a lot of progress in terms of our diverse and inclusion commitment. It is something which is important for us. We want our company to reflect our consumers. We want to have a workplace, which is inclusive, and that's something which we take very seriously, not just in Corby, but I believe in all of the group Pernod Ricard. And it's something which will be also important in terms of employee engagement. So I hope this has given you a good flavor of the year, busy year, an exciting year, but a year where we have, I think, delivered strong results, but also done a lot to prepare for the future. And I think that's what is important. Not only we've been riding the storm, but we've been also preparing for the year FY '20. So I will let hand over to Edward Mayle to present to you our key financial results, and I would like to pass on. Thank you very much.

Thank you, Nicolas. Good afternoon. So Corby's full year 2021 delivered solid growth in revenue and strong net earnings and is well positioned for the future. Shipment volumes grew 1% to 2.2 million cases with a decline of 2% on Corby-owned domestic brands and a growth of 35% on export sales volume. Our top line growth of plus 4% was driven by growth across all revenue streams. Domestic case goods grew 1%; gross domestic commission income, plus 7% before amortization; exports, plus 31%; and other services, plus 43%. Improved product and market mix complements revenue growth management and promotions optimization initiatives and together with ongoing cost optimization efforts have driven an improved gross margin, plus 85 basis points to 53%. Cash generated from operating activities has decreased by $8.6 million to $40.9 million as the favorable growth in adjusted net earnings was offset by working capital effects largely caused by changing flows arising from COVID-driven phasing on sales and expenses. Earnings per share delivered plus 15% growth as marketing sales and administration expenses reported a slight decrease of 1% primarily a result of COVID-impacted reduction in business travel. And Corby has maintained its generous dividend policy with dividends declared at 90% of prior year earnings. Earlier to date, the Board authorized the final quarter dividend payment of $0.21 per share, an increase of 5% on the same quarter last year. COVID pandemic provided exceptional disruption to the market. The travel retail and hospitality sectors remained heavily restricted for most of the year with the on-premise market reduced by 53%. The off-premise was the prime commercial focus for the year. Corby-owned brands face domestic Canada over-the-counter sales volume decline of 3% and 1% in value, reflecting challenges from prolonged on-premise closures impacting particularly polarized vodka and Lamb's and offset by growth in J.P. Wiser's, mixable liqueurs and Ungava Spirits brands and strong growth in export markets. Total revenue growth of plus 4% to $159.8 million. Domestic Case Goods revenue increased 1% to $112.2 million as a domestic portfolio faced mixed results. Corby's flagship brand, J.P. Wiser's, Canadian whiskey enjoyed category beating results breaking the milestone of 0.5 million cases and delivering value growth significantly ahead of volume. Mixable liqueurs and Cabot Trail Cream liqueur also enjoyed robust growth capitalizing on pandemic-driven trends for home cocktail making. However, Polar Ice Vodka and Ungava Gin were both impacted by the on-premise closures and by fierce competition in off-premise. Gross commission income for represented and the agency brands increased by 7% and to $53.6 million, while commissions net of amortization of Pernod Ricard representation rights increased by 3% to $28.4 million. The residual amortization from the historical representation agreement was accelerated ahead of the new agreement, which began on first of July 2021. Amortization increased by 26% to $7.2 million. Export revenue on Case Goods grew by 31% to $13 million, thanks to the strong performance of Lamb's Spiced in the U.K. and J.P. Wiser's in the U.S. Now some brand highlights. Corby's flagship, J.P. Wiser's, grew 4% in shipment volume and 7% in value, outperforming the Canadian whiskey category. Ungava Spirits brands grew 6% volume, 7% value. Cabot Trail Cream liqueur enjoyed particularly strong performance, thanks to those changing consumer trends during COVID and a vibrant new packaging considerably improving on shelf standout, while Ungava Gin also supports fresh new packaging. Mixable liqueurs grew 6% in volume and 8% in value as more consumers experimented with home cocktail making. Lamb's Rum grew 8% in volume and 14% in value, enjoying very strong performance in the U.K. Polar Ice Vodka declined 5% volume and 4% value, impacted by the closure of the on-premise. Marketing sales and administration expenses declined 1% to $56.4 million. Marketing expenses accelerated in Q4 as the country emerged from lockdown, providing strong consumer media engagement for the summer. Overhead expenses were particularly low due to the pandemic-driven restrictions on business travel, and this leads to the overall decline in expenses. Financial income is reduced as a result of the interest rate reductions, leading to earnings before income taxes up 14% at $41.5 million. And finally, income taxes increased by 12%. As a result of product and marketing mix, trade spend optimization and cost optimization, gross margin on Case Goods improved to 53%. The decline in marketing sales and administration costs converted the solid revenue growth of 4% to strong net earnings growth of 15%, delivering $30.6 million. Cash from operating activities increased by $8.6 million to $40.9 million. Net earnings adjusted for noncash items grew $6.6 million to $52.9 million. Working capital deteriorated by $8.3 million. In Q4 fiscal '20 working capital benefited from unusual sales phasing due to the COVID-19 pantry loading, which accelerated sales earlier in the year, enabling them to convert to cash before the year-end. Investing activities were maintained in line with prior year and represented in large part, cost purchases for new fill whiskey. Investments were also made for capacity expansion at the Ungava facility and for IT investments. $94.4 million were retained as deposits in cash pools versus $81.2 million last year. So that wraps up the overview of our financials and back to Nicolas for closing remarks.

Thank you very much, Ed. And I think Ed gave you a good view of our financials. So to wrap up, I believe that Corby delivered a strong financial performance in these extraordinary circumstances during the fiscal year '21. Corby has shown, I believe, resilience throughout the pandemic, and we often talk about resilience before, but I think this year has been really a testimony of, I think, the resilient industry and company. We have a way of working, and we have inspired continue to choose from our portfolio of brands. We're very much focused on winning share in key categories and building strong relationships with our partners throughout the -- I mean, throughout the year also across all the channels, and this has enabled us to deliver excellent earnings growth. And also, I'd like to continue to say that while keeping our people safe. That has been obsession during the year. In the sales force in the field, our colleagues working in the bottom lines. But throughout the year, we really kept that top of mind. And in the meantime, as I alluded to, we continue to portion some efficiency and effectiveness in the way we are managing our business. I talked about the dual transformation, the optimization of our trade investment and marketing investments, which were the key feature in the future. So I think in a nutshell, before opening the Q&A., I think, we have strong financials. Our robust business model has proven once more that it was very, very robust. And we have, this year, despite all the challenges of the year, a lot of engaged teams and people demonstrating remarkable commitment and resilience throughout the year. And these for me are forming very strong foundations as we are going into FY '22. So thank you very much. And now let's open the Q&A. If there are any questions for Ed and myself, we'll be pleased to take some.

[Operator Instructions]