Corby Spirit and Wine Limited (OTCPK:CBYDF) Q4 2022 Earnings Conference Call August 24, 2022 5:00 PM ET
Company Participants
Nicolas Krantz – President and CEO
Juan Alonso – VP and CFO
Conference Call Participants
Operator
Good afternoon. Welcome to Corby Spirit and Wine Fiscal Year End 2022 Financial Results Conference Call for the period ended June 30th, 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 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 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 management’s commentary, we will conduct a Q&A session. Instructions will be provided at that time for you to queue up for questions. [Operator Instructions]
Now, I’d like to turn the call over to Mr. Krantz.
Nicolas Krantz
Thank you very much and good afternoon everyone and 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 bit more in detail our financials. But I think very importantly, want to give time for the Q&A, so we’ll move at good pace and give you the opportunity to ask a question at the end.
So, if we start a bit with a quick overview and some highlights of different topics, 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, there was a key feature for us. And the growth of the market, as we’ll see a bit later has been very much driven by these on-premise channels, which we’ve benefited from.
In that context and based on the positive consumer trend and demand, we’ve been able to put brought back our advertising and promotional investment to level which are very close to the clip on the next level and I think it was important for us to be able to fuel we see the momentum behind our strategic brands. As you know our goal is to again share on our key strategy brands in this market and we’re doing that with purpose reinvestment, but also to invest the 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’re 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 agreement with the Pernod Ricard brands, which were effective in July 1st, 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 it could be an important commission income in this 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 2022 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 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 the on [indiscernible] will be also an element that we’re going to have to monitor quite carefully and it will be part of the landscape.
Another topic, which is important to understand as we are reviewing our financial result is that we have introduced some adjusted revenue and earnings definition, which are non-GAAP financial measures. One of it was, I think, introduced nine months ago already, which is basically in relation to the amortization — increase of amortization charges from the representation agreements. So, there is an increase fee of $3.2 million. So that has been, of course, restated from the adjusted matrix to give a better idea of the like-for-like performance.
And the other element, the non-cash continue to impact or element that we’ve put in the reserve this here 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 Wine brand is a very small part of recovery business, it’s approximately 1% of all reported revenue. And we remain of course, committed to the winery, but we’ve decided to refocus the winery more on the — we’d say premium more 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 permission we had. So, again, not to materially irrelevant, but we want you also to give [indiscernible] on the financial for the topic.
So, that being said, in the context, which are described and despite the challenges that we all know, we are pleased to be brought at after quite an exceptional year last year, if you remember, when we put in very strong results, Corby have been able to deliver that some regions performance and adjusted revenue grows plus 2% as to the year before.
As I mentioned, this gave us the confidence to bring back advertising and publisher investment to the people [indiscernible]. And because we are bringing us, I would say, investment and cost, this has resulted into some net earnings declining as per the year before. But if we are looking at, I would say, the earnings pre-pandemic, we are showing the processing growth versus the pre-pandemic level of plus 3% on the CAGR level for the last three years, which is an important measure, it’s a constant cause of our results.
And of course, in that context, we are mentioning 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 into more detail into the financial, 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 spirits 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 the dynamics after the lockdown in Canada. So, you can see that in fact, the on-premise very much is riding events from growth, whilst the retailer e-commerce is showing a slight decline in volume, in fact, in value, which is flat, and last year, we were reflecting a very strong retailer performance.
So, we can say that on the one hand on-premise has recovered fully and the retailer is maintaining very good performance that we had experience the year before. So, that’s the landscape — well, actually positive landscape. Without too much into detail, we can say that the market continued to be characterized by 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 preimmunization of the mix because on the value, the market is going 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 the decline in volume compared to the year before and probably bit more impacted by the supply chain compared to the spirit category with a lot of important 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.
Juan Alonso
Hello everyone. It’s a big pleasure to be talking to you today to present fiscal year 2022 results. Repeating a bit of what Nicolas just said, Corby be delivered in fiscal year 2022, 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 shipments performance, we see that shipment volume decreased by 1% to 2.1 million 9-liter cases, with declining basically on 1% on Corby own domestic brands, but a growth of 2% on export sales in the middle of from present supply chain volatility that we have with 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 decline in minus 1%, adjusted revenue grow by 2%, and it is mainly driven by our core business activities. And is offset by a non-core business activity that we had last year, 22% declining on the sales of book 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 have this is the first year with the new representation rights agreement. So, there is an increase in the amortization of 44% and these results that that’s our reported revenue remain flat versus last year. So, adjusted revenue from this amortization is growing 2%. When we consider the increase in 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 2019 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 2019 pre-pandemic level. So, when we compare to fiscal year 2019, 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 as the impairment that Nicolas mentioned before, our reported net earnings declined 24% in fiscal year 2022. As for cash flow, you’ll 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 payments of $0.24 per share, that is an increase of 14% on the same quarter last year, okay. Just for information, this gives an 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 up 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 view 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 pandemic aside, we see that we are growing our commission for represented and agents brands by 4% and this is coming from mainly from price optimization and also we are selling more premium [indiscernible] spirits in Canada. And when it comes to export, we are increasing 3% exports, thanks to our solid performance of lands in the U.K., and also J.P. Wiser’s launch in the U.S.
And the negative effects that you see in the 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 a negative impact of $1.3 million.
Now, when we look our performance by brand, so our Corby flagship brand is running 2% J.P. Wiser’s in volume, volumes 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 experienced brands around 15% environment and 14% in value. So, Cabot Trail, our cream liqueur, continue to enjoy a very strong performance really fostered by new RTD innovations introduced to the Quebec markets under our Ungava gin as well, and our Chic Choc rum brands is also growing.
Mixable liqueurs declined 1% in volume and remained — mainly flat in value. And it was impacted really by lack of raw material and some supply constraints. Lamb’s rum we see here two performance, normally total value is declined 3%. So, we have a decline in our domestic markets. But we have a growth in our export market as I said before.
All our rates grew 3% in value. So, ahead of volume — so volume is declining 1%, but value 3%, this is very remarkable as well. And as I said before, this brand is really boosted by the recovery in the own pre-mix and also due to some promotions optimization that we’ve done behind the brand.
And as I said before gross commission income on canonical brands grew 4% Before amortization, and this is really led by the strong momentum behind the Jensen and Glenlivet those are the main two performance.
So now, looking at the P&L that we just published, to summarize know our results in a nutshell. We enjoy a very resilient adjusted revenue growth of 2%. Now, so as I said, by robust performance on our core business activities, also I need to say as pricing strategy and premiumization of our portfolio generated these important revenue growth, our marketing, sales, and administration expenses increased by 8%. So, really cycling this low base during the pandemic.
And when we look at our financial results, basically, we have some lower interest income this year, there is offset by reduced pension costs, and our income taxes decreased by 14%. As a result, our adjusted net earnings decline and 8% to $33.1 million and our reported net earnings per share declined by 24% when we consider the non-cash elements like the increase in the amortization of the representation agreement versus last year, and the impairment charge of deferring effect. So, this is the minus 24%, but when we remove those effects, it’s minus 8%.
And if you remember very in line with what we reported as well in Q3 year-to-date results, that was around minus 7%. From 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, we’re favorable, driven by the timing of our group payables and also the phasing of the promotional expense. So, we increased our NP more close — our investments more close to the to the end of the fiscal year. So, this has a favorable impact in our cash flow.
When you look at investment activities, that was obviously impacted by the $54.5 million payments that we did in September of this fiscal year, to renew the representation rights with Pernod Ricard.
And lastly, our financial activity, that is the last line that you see reflected 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 conclude.
Nicolas Krantz
Thank you very much Juan for this summary. So, to wrap-up, the way we see our result is — it’s really important to understand that the topline at the end of the day remains very robust. And we’ve decided to continue to invest behind the brands, I also want to remind that the low base cost of last year is explaining I would say, the phasing of a cost. But I think it’s an important that Juan as well explained.
So, overall, we delivered some custom growth over the last years, despite the challenging economic environment and 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 as we continue to connect with the consumers with our brand. And I think that was the — 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, we already covered across Canada, I think this year, we’d like to call out a great tribute to the team where Corby has been nominated Supplier of the Year with LCBO, for example.
And in parallel of that, we are continuing on digital transformation, which is well on track and is very much designed to build a competitive advantage to meet them. As I mentioned many times in the past, we are enjoying in this market and at Corby a very rich data and now we have the edge to really make sure that we can use that data with insight and turn them into action and impactful activities for the future.
So, overall, we are continuing to build strong foundations 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 leave some space and time for the Q&A and to make sure we can address any question you may have following our full year — fiscal year results. Thank you very much. Let’s start Q&A.
Question-and-Answer Session
Operator
At this time, there are no phone questions. I’ll turn the conference back over to you.
Nicolas Krantz
Okay. Thank you very much for your time. The whole purpose was to give you a color regarding the result. So, thank you very much for your attention. And of course, we’ll be going back around the shareholder’s meeting which will happen in November. Thank you very much.
Operator
Thank you. And that does conclude today’s conference. We do thank you for your participation. Have an excellent day.
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