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

Good afternoon. Welcome to the Corby Spirit and Wine's Fiscal Year-End 2022 Financial Results Conference Call for the period ended June 30, 2022. 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, you have had the opportunity to review the press release, which was issued earlier today. Before we begin, I would like to inform listeners that information provided on today's call may contain forward-looking statements, which can be subject to 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, interim MD&A filed with the securities regulatory authorities in Canada as required. [Operator Instructions] Now I'd like to turn the call over to Mr. Krantz.

Thank you very much, and good afternoon, everyone. Thank you for joining us today. So today, we'll provide -- we want to take the opportunity to provide a high-level overview of the year. And along with Juan Alonso, Corby's CFO, we will describe a little bit more in detail our financials. But I think very importantly, we want to give you the time for the Q&A. So we'll move at good pace and give you the opportunity to ask question at the end. So if we start a bit with a quick overview and some highlights of different topic we wanted to brought to your attention. So first, starting a little bit on the market side. We are very pleased to say that this financial year, we've been able to witness a strong recovery of what we call the on-premise channel after, of course, the restriction last year during the pandemic. That was the key feature for us and the growth of the market, as we will see a bit later, has been very much driven by this on-premise channel, which we benefited from. In that context and based on the positive consumer trend and demand, we've been able to brought back our advertising and promotional investment to levels which are very close to the pre-pandemic level. And I think it was important for us to be able to fuel, I would say, the momentum behind our strategic brands. As you know, our goal is to gain share on our key strategic brands in this market, and we're doing that with our purposeful investment but also to invest behind our organization with a view to sustain future growth. So whether it's on -- working on the new communication platform, advertising, new packaging for the brand, we are also investing behind what we have called several times, our digital transformation and our marketing transformation has been an important feature of the year. The other element, which I would like to remind, because it was the beginning, of course, of the new contract in terms of representation agreements with the Pernod Ricard brands, which were effective on July 1, 2021. So I think we have commented that many times in the past, but just to confirm the fact that this, of course, can affect this year. And this agreement runs through the end of September 2026. Of course, securing important commission income revenue stream, and this is a big part of our revenue streams this year and going forward. The other element, which I think is important to highlight, and that's not going to surprise anyone, the FY '22 fiscal year has been, like in many of the industry, impacted by quite challenging global supply chain volatility. We know that across many industry but also for us, as you know, we are importing product and even in North America. So this has -- we've seen some volatility throughout the year and that has impacted somewhat our volume performance. We expect, of course, this volatility to continue in the coming months. We know that, that this is not the end of the supply chain crisis. And we know as well that the high inflation, in particular, on raw material, but also on [ dry good ] will be also an element that we're going to have to monitor quite carefully and will be part of the landscape. Another topic which is important to understand as we are reading our financial results is that we have introduced some adjusted revenue and earnings definition, which are non-GAAP financial measures. One of it was, I think, introduced 9 months ago already, which is basically in relation to the amortization -- increase of amortization charges from the representation agreements. So there is an increased fee of $3.2 million. So that has been, of course, restated from the adjusted metrics to give a better idea of the like-for-like performance. And the other element of the noncash accounting impact or element that we've put in the result this year is an impairment charge of the Foreign Affair Winery trademark for $2 million, which is an accounting treatment we've decided to do. The Foreign Affair Winery brand is a very small part of the Corby business. It's approximately 1% of our reported revenue. And we remain, of course, committed to the Winery, but we decided to refocus the Winery more on the, I would say, a premium brand quality, the DTC, the wine boutique and the [ member ] and, given the circumstances in terms of supply chain and cost, to probably slow down the scale of commission we had. So again, not a material element, but we wanted also to give visibility on our financials for the topic. So all that being said, in the context that we just described and despite the challenges that we all know, we are pleased to report that after quite an exceptional year last year, if you remember when we reported very strong results, Corby has been able to deliver some resilient performance and adjusted revenue growth of plus 2% versus the year before. As I mentioned, this gave us the confidence to bring back our advertising and promotional investment to the pre-pandemic level. And because we are bringing us, I would say, investment in our [ cost ], this has resulted into some net earnings declining versus the year before. But if we are looking at, I would say, the earnings pre-pandemic, we are showing a consistent growth versus the pre-pandemic level of plus 3% on the CAGR level for the last 3 years, which is an important measure. It's a constant growth of our results. And of course, in that context, we are maintaining our dividend paid to shareholders in line with our generous policy of 90% of prior earnings that has been mentioned in the press release. So before Juan goes in more detail into the financials, I just wanted to give you a quick overview of the market landscape. It's important to understand what has been this channel dynamics and volatility. So first, the spirit market in Canada grew by 1.5% in volume during the fiscal year with, of course, some different quarterly phasing, with growth peaks observed in Q2 and Q4, and of course, very much driven by the shifting channel dynamics after the lockdown in Canada. So you can see that, in fact, the on-premise very much is driving a very strong growth whilst the retail and e-comm is showing a slight decline in volume. In fact, in value, it is flat. And last year, we were reflecting a very strong retail off-trade performance. So we can say that on the one hand, on-premise has recovered fully and the retail is maintaining the very good performance that we had experienced the year before. So that's the landscape, relatively positive landscape. Without too much into detail, we can say that the market continues to be characterized by a pocket of growth, which are driven by innovation. I think it's a very, very important element. And also by the fact that overall, we see value ahead of volume, which is a feature of positive pricing and the premiumization of the mix because on the value, the market is growing by 5%, so that's also an element which is quite positive for the sector. The wine market, which is not necessarily mentioned here, has been a bit softer than the spirits market, with a decline in volume compared to the year before and probably a bit more impacted by the supply chain compared to the spirit category with a lot of imported wine coming to the domestic market. So that's the overall landscape for the market. I will now let hand over to Juan to present a bit more detail the financial results that we posted today. Juan, over to you.

Hello, everyone. It's a big pleasure to be talking to you today to present fiscal year '22 results. Repeating a bit of what Nicolas just said, Corby delivered in fiscal year '22, a very resilient growth in adjusted revenue while our adjusted net earnings have been impacted by the marketing, sales and administrative expenses returning to the pre-pandemic level. And this is very important for us to boost really the momentum on our strategic brands and invest in our organization to sustain future growth. So when we look first to our shipment's performance, we see that our shipment volume decreased by 1% to 2.1 million 9-liter cases, with a declining basically on 1% on Corby-owned domestic brands but a growth of 2% on export sales in the middle of some precedent supply chain volatility that we had this year. On -- our adjusted revenue growth was resilient at plus 2%. So you can see a very important conversion from volume to value. So despite volume declining minus 1%, adjusted revenue grew by 2%. And this is mainly driven by our core business activities, and it's offset by a noncore business activity that we had last year, 22%, the declining on the sales of bulk of aged whiskey that we had last year. The other thing to highlight here is that, as Nicolas said in the beginning of his presentation, we had -- this is the first year with the new representation rights agreement. So there is an increase in the amortization of 44%, and this resulted that our reported revenue remained flat versus last year. So adjusted revenue from this amortization is growing 2%. When we consider the increase in the amortization, our reported revenue is flat versus last year. As I said before, we are pleased to say that our marketing, sales and administration expenses are increasing 8% and cycling a low cost base during the pandemic last year and returning to fiscal year '19 pre-pandemic levels. So this is important for us to really boost our strategic brands. But as a result of that, our adjusted net earnings during this fiscal year decreased by 8%. But it's showing a very solid growth versus fiscal year '19 pre-pandemic level. So when we compare to fiscal year '19 before the pandemic, we are growing an average of 3% every year in net earnings. When we consider so the increase of the amortization as well the impairment that Nicolas mentioned before, our reported net earnings declined 24% in fiscal year '22. As for cash flow, you see an increase by $4.7 million. So really driven by favorable working capital changes. And as Nicolas said, Corby has maintained the general dividend policy with dividends declared at 90% of prior year earnings. So earlier today, the Board authorized the final quarter dividend payment of $0.24 per share. That is an increase of 14% on the same quarter last year, okay? Just for information, this gives a yield of approximately 5%. So moving to the next slide, we are going to see a little bit of our revenue evolution during this year. So total adjusted revenue growth of 2%, as I said before. So we are getting to $169.8 million, while reported revenue remained flat at $159.4 million. So how we explain this 2% of revenue growth? Domestic Case Goods are increasing by 2%. So basically, what is more remarkable here is to talk about our Corby flagship brand, J.P. Wiser’s, that is increasing even more than the category. We have also Cabot Trail enjoying a very robust growth, really capitalizing on the pandemic trends for home cocktail making. And also Polar Ice, it's another brand that is enjoying an important growth with the recovery on the on-premise as well all the investments that we are doing behind the brand. So from Pernod Ricard side, we see that we are growing our commission for represented and agent's brands by 4%. And this is coming from -- mainly from price optimization and also we are selling more premium Pernod Ricard spirits in Canada. And when it comes to export, we are increasing 3% export, thanks to a solid performance of Lamb's in the U.K. and also J.P. Wiser's launch in the U.S. And the negative effect that you see in this slide is basically the reduction of the sales of bulk. That was an exceptional sale that we had in Q4 of last year, and we have this negative impact of $1.3 million. Now when we look at our performance by brand. So our Corby flagship brand is growing 2%, J.P. Wiser's, in value, while volume is flat. So we see here our conversion from volume to value really increasing price behind the brand, and we are outperforming the Canadian whiskey category. The group of all Ungava Spirits brands are growing 15% in volume and 14% in value. So Cabot Trail Cream Liqueur continued to enjoy a very strong performance, really fostered by new RTD innovations introduced to the Quebec market under our Ungava Gin as well. And our Chic Choc rum brands is also growing. Mixable liqueurs declined 1% in volume and remained -- stay mainly flat in value. And it was impacted really by lack of raw material and some supply constraints, okay? Lamb's Rum, we see here 2 performance, knowing total value is declining 3%. So we have a decline in our domestic market, but we have a growth in our export market, as I said before. Polar Ice grew 3% in value, so ahead of volume. So volume is declining 1%, but value is 3%, which is very remarkable as well. And as I said before, this brand is really boosted by the recovery in the on-premise and also due to some promotions optimization that we have done behind the brand. And as I said before, gross commission income on Pernod Ricard brands grew 4% before amortization and this is really led by the strong momentum behind the Jameson and The Glenlivet. Those are the main 2 performers. So now looking at the P&L that we just published to summarize now our results in a nutshell. We enjoy a very resilient adjusted revenue growth of 2%. So as I said, by a robust performance on our core business activities. Also, I need to say pricing strategy and premiumization of our portfolio generated this important revenue growth. Our marketing, sales and administration expenses increased by 8%. So really cycling this low base during pandemic. And when we look at our financial results, basically, we have some lower interest income this year that is offset by reduced pension costs. And our income taxes decreased by 14%. As a result, our adjusted net earnings declined 8% to $33.1 million, and our reported net earnings per share declined by 24% when we consider the noncash elements, like the increase in the amortization of the representation agreements versus last year and the impairment charge of the Foreign Affair. So this is minus 24%, but when we remove those effects, it's minus 8%. And if you remember, we're in line with what we reported as well in Q3 year-to-date results, that was around minus 7%. From a cash flow perspective, cash from operating activities significantly grew by $4.7 million to $45.5 million this year. So we generated, operationally speaking, $45.5 million. And on a full year basis, working capital balance were favorable driven by the timing of our group's payables and also the phasing of the promotional spend. So we increased our NP more close -- our investments more close to the end of the fiscal year. So this had a favorable impact in our cash flow. When you look at the investment activities, that was obviously impacted by the $54.5 million payment that we did in September of this fiscal year to renew the representation rights with Pernod Ricard, okay? And lastly, our financial activity, that is the last line that you see, reflects our dividends paid to shareholders in line with our general policy of distributing 90% of prior year earnings, okay? So now I'm going to hand back to Nicolas to do the wrap-up and the conclusion.

Thank you very much, Juan, for this summary. So to wrap up, the way we see our result is really important to understand that the top line at the end of the day remains very robust. And we've decided to continue to invest behind our brands. I also want to remind that the low base cost of last year is explaining, I would say, the phasing of the cost. But I think it's an important feature that Juan has well explained. So overall, we delivered some consistent growth over the last years despite the challenging economic environment and the supply chain constraint. And I think this topic of resilience and consistency is very important for us at Corby. We've been able to evolve, of course, a way of working, working with our customers. But what is also very important for us is we continue to connect with our consumers, with our brand. And I think that was, of course, the strategy that we want to pursue. So overall, we continue to win market share in our key categories. This is very important. We continue to be strong partners with all the liquor boards across Canada. I think this year, I would like to call out a great tribute to the team where Corby has been nominated Supplier of the Year by the LCBO, for example. And in parallel of that, we are continuing our digital transformation, which is well on track and is very much designed to build the competitive advantage in the midterm. As I mentioned many times in the past, we are enjoying in this market and at Corby a very rich data. And now we are at the edge to really make sure that we can use those data with insight and turn them into action and impactful activities for the future. So overall, we are continuing to build strong foundation for the future to develop a sharper portfolio strategy, a more data-driven organization. And of course, we do that with an engaged team who are passionate to collaborate and perform in this marketplace. So that's it. I think we wanted to give some space now in time for the Q&A, and to make sure we can address any questions you may have following our full year fiscal year results. Thank you very much.

[Operator Instructions] At this time, there are no phone questions. [Operator Instructions] I'll turn the conference back over to you.

Okay. Well, listen, thank you very much for your time. The whole purpose was to give you the color regarding the results. So thank you very much for your attention. And of course, we'll be going back around the shareholders' meeting, which will happen in November. Thank you very much.

Thank you. And that does conclude today's conference. We do thank you for your participation. Have an excellent day.