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Corby Spirit and Wine Announces Quarterly Dividend and Reports Fourth Quarter and Year-Ended 2016 Results

TORONTO, Aug. 24, 2016 /CNW/ - Corby Spirit and Wine Limited ("Corby" or the "Company") (TSX: CSW.A, CSW.B) today reported its financial results for the fourth quarter ended June 30, 2016. The Corby Board of Directors today also declared a dividend of $0.19 per share payable on September 30, 2016 on the Voting Class A Common Shares and Non-Voting Class B Common Shares of the Company to shareholders of record as at the close of business on September 15, 2016.

Net earnings of $9.3 million (or $0.33 per share) were reported for the three month period ended June 30, 2016, representing an improvement of $2.0 million or 27% when compared with the same quarter last year. On a full year basis, Net earnings of $25.4 million (or $0.89 per share) represents an increase of $5.0 million or 25% when compared with last year.

Corby's strong quarterly and yearly earnings performance was largely the result of a negotiated increase in commission rates on Pernod Ricard brands, following the amendment of the September 29, 2006 Canadian representation agreements. The commission rate change was supplemented by strong shipments for the Pernod Ricard brand portfolio, which is weighted in the higher growth spirit and wine categories. While overall shipments of Corby-owned brands were lower year over year, the earnings impact was more than offset by decreased advertising and promotional investment in the US market as a result of a more focused strategy.

"I am pleased with Corby's strong fourth quarter and full year earnings results which highlighted the importance of the Pernod Ricard portfolio while we revitalize and reposition our portfolio of owned brands towards more fertile growth segments. In particular it was pleasing to see the continued growth and acclaim around our premium craft Canadian whisky range both in Canada and international markets", noted Patrick O'Driscoll, President and Chief Executive Officer of Corby.

For further details, please refer to Corby's management's discussion and analysis and consolidated financial statements and accompanying notes for the three-months and year ended June 30, 2016, prepared in accordance with International Financial Reporting Standards.

About Corby
Corby Spirit and Wine Limited is a leading Canadian marketer and distributor of spirits and imported wines. Corby's portfolio of owned-brands includes some of the most renowned brands in Canada, including J.P. Wiser's®, Lot 40®, and Pike Creek® Canadian whiskies as well as Lamb's® rum, Polar Ice® vodka and McGuinness® liqueurs. Through its affiliation with Pernod Ricard S.A., a global leader in the spirits and wine industry, Corby also represents leading international brands such as ABSOLUT® vodka, Chivas Regal®, The Glenlivet® and Ballantine's® Scotch whiskies, Jameson® Irish whiskey, Beefeater® gin, Malibu® rum, Kahlúa® liqueur, Mumm® champagne, and Jacob's Creek®, Wyndham Estate®, Stoneleigh®, Campo Viejo®, Graffigna® and Kenwood® wines. In 2016, Corby was named one of the 50 Best Workplaces in Canada by The Great Place to Work® Institute Canada for the fifth consecutive year, and was also listed among Greater Toronto's Top 100 Employers. Corby is a publicly traded company based in Toronto, Ontario, and listed on the Toronto Stock Exchange under the trading symbols CSW.A and CSW.B. For further information, please visit our website or follow us on LinkedIn.

This press release contains forward-looking statements, including statements concerning possible or assumed future results of Corby's operations. Forward-looking statements typically are preceded by, followed by or include the words "believes", "expects", "anticipates", "estimates", "intends", "plans" or similar expressions. Forward-looking statements are not guarantees of future performance. They involve risks, uncertainties and assumptions and, as such, actual results or expectations could differ materially from those anticipated in these forward-looking statements. Accordingly, readers should not place undue reliance on forward-looking statements. All financial results are reported in Canadian dollars.

CORBY SPIRIT AND WINE LIMITED
Management's Discussion and Analysis
June 30, 2016

The following Management's Discussion and Analysis ("MD&A") dated August 24, 2016, should be read in conjunction with the audited consolidated financial statements and accompanying notes as at and for the year ended June 30, 2016, prepared in accordance with International Financial Reporting Standards ("IFRS").

This MD&A contains forward-loking statements, including statements concerning possible or assumed future results of operations of Corby Spirit and Wine Limited ("Corby" or the "Company"), including the statements made under the headings "Strategies and Outlook", "Liquidity and Capital Resources", "Recent Accounting Pronouncements" and "Risks and Risk Management." Forward-looking statements typically are preceded by, followed by or include the words "believes", "expects", "anticipates", "estimates", "intends", "plans" or similar expressions. Forward-looking statements are not guarantees of future performance. They involve risks and uncertainties, including, but not limited to: the impact of competition; business interruption; trademark infringement; consumer confidence and spending preferences; regulatory changes; general economic conditions; and the Company's ability to attract and retain qualified employees. There can be no assurance that forward-looking statements will prove to be accurate, as actual results and future events could differ materially from those anticipated in such statements. Accordingly, readers should not place undue reliance on forward-looking statements. These factors are not intended to represent a complete list of the factors that could affect the Company and other factors could also affect Corby's results. For more information, please see the "Risk and Risk Management" section of this MD&A.

This document has been reviewed by the Audit Committee of Corby's Board of Directors and contains certain information that is current as of August 24, 2016. Events occurring after that date could render the information contained herein inaccurate or misleading in a material respect. Corby will provide updates to material forward-looking statements, including in subsequent news releases and its interim management's discussion and analyses filed with regulatory authorities as required under applicable law. Additional information regarding Corby, including the Company's Annual Information Form, is available on SEDAR at www.sedar.com.

Unless otherwise indicated, all comparisons of results for the fourth quarter of fiscal 2016 (three months ended June 30, 2016) are against results for the fourth quarter of fiscal 2015 (three months ended June 30, 2015). All dollar amounts are in Canadian dollars unless otherwise stated.

Business Overview

Corby is a leading Canadian marketer of spirits and importer of wines. Corby's national leadership is sustained by a diverse brand portfolio that allows the Company to drive profitable organic growth with strong, consistent cash flows. Corby is a publicly traded company, with its shares listed on the Toronto Stock Exchange under the symbols "CSW.A" (Voting Class A Common Shares) and "CSW.B" (Non-Voting Class B Common Shares). Corby's Voting Class A Common Shares are majority-owned by Hiram Walker & Sons Limited ("HWSL") (a private company) located in Windsor, Ontario. HWSL is a wholly-owned subsidiary of international spirits and wine company Pernod Ricard S.A. ("PR") (a French public limited company), which is headquartered in Paris, France. Therefore, throughout the remainder of this MD&A, Corby refers to HWSL as its parent, and to PR as its ultimate parent. Affiliated companies are those that are also subsidiaries of PR.

The Company derives its revenues from the sale of its owned-brands ("Case Goods"), as well as earning commission income from the representation of selected non-owned brands in Canada ("Commissions"). The Company also supplements these primary sources of revenue with other ancillary activities incidental to its core business, such as logistics fees and from time to time bulk whisky sales to rebalance its maturation inventories. Revenue from Corby's owned-brands predominantly consists of sales made to each of the provincial liquor boards ("LBs") in Canada, and also includes sales to international markets.

Corby's portfolio of owned-brands includes some of the most renowned brands in Canada, including J.P. Wiser's® Canadian whisky, Lamb's® rum, Polar Ice® vodka and McGuinness® liqueurs. Through its affiliation with PR, Corby also represents leading international brands such as ABSOLUT® vodka, Chivas Regal®, The Glenlivet® and Ballantine's® Scotch whiskies, Jameson® Irish whiskey, Beefeater® gin, Malibu® rum, Kahlúa® liqueur, Mumm® champagne, and Jacob's Creek®, Wyndham Estate®, Stoneleigh®, Campo Viejo®, Graffigna® and Kenwood® wines. In addition to representing PR's brands in Canada, Corby also provides representation for certain selected, unrelated third-party brands ("Agency brands") when they fit within the Company's strategic direction and, thus, complement Corby's existing brand portfolio.

PR produces Corby's owned-brands at HWSL's production facility in Windsor, Ontario. Under an administrative services agreement, Corby manages PR's business interests in Canada, including HWSL's production facility. The agreements reflecting these arrangements were scheduled to expire September 29, 2016. On November 11, 2015, the parties entered into new agreements (a distillate supply agreement, a co-pack agreement and an administrative services agreement) each for a ten year term commencing September 30, 2016, thus extending these arrangements to September 30, 2026.

Corby sources more than 90% of its spirits production requirements from HWSL at its production facility in Windsor, Ontario. The Company's remaining production requirements have been outsourced to various third party vendors including a third-party manufacturer in the United Kingdom ("UK"). The UK site blends and bottles Lamb's rum products destined for sale in countries located outside the Americas. 

In most provinces, Corby's route to market in Canada entails shipping its products to government-controlled LBs. The LBs then sell directly, or control the sale of, beverage alcohol products to end consumers. The exception to this model is Alberta, where the retail sector is privatized. In this province, Corby ships products to a bonded warehouse that is managed by a government-appointed service provider who is responsible for warehousing and distribution into the retail channel.

Corby's shipment patterns to the LBs will not always exactly match short-term consumer purchase patterns. However, given the importance of monitoring consumer consumption trends over the long term, the Company stays abreast of consumer purchase patterns in Canada through its member affiliation with the Association of Canadian Distillers ("ACD"), which tabulates and disseminates consumer purchase information it receives from the LBs to its industry members. Corby refers to this data throughout this MD&A as "retail sales", which are measured in volume (measured in nine-litre case equivalents). In the past, the Company was able to also provide retail value information (measured in Canadian dollars). However, retail value information has no longer been provided due to the province of British Columbia changing its value data from retail dollars to wholesale dollars. This change in methodology distorts comparability against prior periods and with other provincial LB customers. It is not known at this time when the Company will be able to re-introduce this retail value level of analysis.

Corby's international business is concentrated in the United States ("US") and UK and the Company has a different route to market for each. For the US market, Corby manufactures the majority of its products in Canada and ships to its US distributor, Pernod Ricard USA, LLC ("PR USA"), an affiliated company. See the "Related Party Transactions" section of this MD&A for additional details. The market in the US operates a three tier distribution system which often requires a much longer and larger inventory pipeline than in other markets, resulting in a disconnect between quarterly shipment performance, as reported in the financial statements, and the true underlying performance of the brands at retail level during the same quarter.

For the UK market in fiscal 2016, Corby utilized a third party contract bottler and distribution company for the production and distribution of Lamb's rum. These arrangements were terminated on June 30, 2016. Corby has signed an agreement with a new distributor and is finalizing an agreement with a new manufacturer. More information has been provided in the "Related Party Transactions" section of this MD&A. Distributors sell to various local wholesalers and retailers who in turn sell directly to the consumer.

Corby's operations are subject to seasonal fluctuations: sales are typically strong in the first and second quarters, while third-quarter sales usually decline after the end of the retail holiday season. Fourth-quarter sales typically increase again with the onset of warmer weather as consumers tend to increase their purchasing levels during the summer season.

Strategies and Outlook

Corby's business strategies are designed to maximize sustainable long-term value growth, and thus deliver solid profit while continuing to produce strong and consistent cash flows from operating activities. The Company's portfolio of owned and represented brands provides an excellent platform from which to achieve its current and long-term objectives.

Management believes that having a focused brand prioritization strategy will permit Corby to capture market share in the segments and markets that are expected to deliver the most growth in value over the long-term. Therefore, the Company's strategy is to focus its investments on, and leverage the long-term growth potential of, its key brands. As a result, Corby will continue to invest behind its brands to promote its premium offerings where it makes the most sense and drives the most value for shareholders.

Brand prioritization requires an evaluation of each brand's potential to deliver upon this strategy, and facilitates Corby's marketing and sales teams' focus and resource allocation. Over the long-term, management believes that effective execution of its strategy will result in value creation for shareholders. Past disposal transactions reflect this strategy by streamlining Corby's portfolio and eliminating brands with below average performance trends, thus focusing resources on key brands.

Pursuing new growth opportunities outside of Canada is also a key strategic priority. Our agreement with PR USA to represent certain of Corby's owned brands in the US supports our goal of expanding our Canadian whisky business into this market where we believe there is growth potential in both volume and margin.

Of primary importance to the successful implementation of our brand strategies is an effective route to market strategy. Corby is committed to investing in its trade marketing expertise and ensuring that its commercial resources are specialized to meet the differing needs of its customers and the selling channels they inhabit. In all areas of the business, management believes setting clear strategies, optimizing organization structure and increasing efficiencies is key to Corby's overall success.

In addition, management is convinced that innovation is essential to seizing new profit and growth opportunities. Successful innovation can be delivered through a structured and efficient process as well as consistent investment in consumer insight and research and development. Corby benefits from having access to leading-edge practices at PR's North American hub, which is located in Windsor, Ontario, where most of its products are manufactured.

Finally, the Company is a strong advocate of social responsibility, especially with respect to its sales and promotional activities. Corby will continue to promote the responsible consumption of its products in its activities. During the year, Corby continued a successful partnership with the Toronto Transit Commission to provide free transit on New Year's Eve for a three-year period which began in 2013 and was recently extended to 2019. The Company stresses its core values throughout its organization, including those of conviviality, straightforwardness, commitment, integrity and entrepreneurship.

Significant Events

Corby Increases Commission Rate under Pernod Ricard Canadian Representation Agreements
On September 29, 2006, Corby completed a transaction with PR which, amongst other things, provided the Company the exclusive right to represent PR's brands in the Canadian market for 15 years and added the Absolut vodka brand in 2008. Commission revenue earned from the representation of PR's brands in Canada is presented in the consolidated statement of earnings as part of "Revenue". On August 26, 2015, Corby entered into an agreement with PR and certain affiliates amending the September 29, 2006 Canadian representation agreements, to provide that Corby will provide more specialized marketing, advertising and promotion services for the brands of PR and its affiliates under the applicable existing agreements in consideration of an increase to the rate of commission payable by such entities.

Corby Extends Production and Administrative Services Agreements with Pernod Ricard
On November 11, 2015, Corby and PR entered into a distillate supply agreement and a co-pack agreement for the continued production and bottling of Corby's owned-brands by Pernod Ricard at the HWSL production facility in Windsor, Ontario, for a ten-year term commencing September 30, 2016.  On the same date, Corby and PR entered into an administrative services agreement, under which Corby will continue to manage PR's business interests in Canada, including the HWSL production facility, with a similar term and commencement date.

Corby Declares Special Dividend
On November 11, 2015, the Corby Board of Directors declared a special dividend of $0.62 per share payable on January 8, 2016 on the Voting Class A Common Shares and Non-Voting Class B Common Shares of Corby to shareholders of record as at the close of business on December 11, 2015. The special dividend payment resulted in a cash distribution of approximately $17.7 million to shareholders and was sourced from Corby's surplus cash position.

Three-Year Review of Selected Financial Information

The following table provides a summary of certain selected consolidated financial information for the Company. This information has been prepared in accordance with IFRS.

               

(in millions of Canadian dollars, except per share amounts)

   

2016

 

2015

 

2014(1)

               

Revenue

 

$

140.0

$

132.1

$

137.3

               

Earnings from operations

   

34.6

 

27.2

 

33.5

 

- Earnings from operations per common share

   

1.22

 

0.96

 

1.18

               

Net earnings

   

25.4

 

20.4

 

25.0

 

- Basic earnings per share

   

0.89

 

0.72

 

0.88

 

- Diluted earnings per share

   

0.89

 

0.72

 

0.88

               

Total assets

   

228.5

 

233.7

 

254.9

Total liabilities

   

57.7

 

45.6

 

45.8

               

Regular dividends paid per share

   

0.76

 

0.75

 

0.71

Special dividends paid per share

   

0.62

 

0.62

 

-

               

1In preparing its comparative information, the Company has adjusted amounts reported previously in the
consolidated balance sheet as a result of the retrospective application of the amendments to IAS 32,
Financial Instruments - Presentation.

 

As depicted in the above chart, revenue and net earnings dipped sharply in 2015, then recovered in 2016. The decrease noted in 2015 was largely attributable to the lapping of the J.P. Wiser's Canadian whisky launch in the US market (launched in 2014). As with any launch this size, the initial inventory pipeline buildup was significant. In addition, 2015 included substantial advertising and promotional investment to further support the brand in the US, thus adding more downward pressure on earnings that year.

Net earnings recovered in 2016, increasing $5.0 million from 2015. This year over year improvement was primarily the result of an increase in commissions, due to the negotiated commission rate increase on PR brands, following the amendment of the September 29, 2006 Canadian representation agreements with PR referred to under the "Significant Events" section of this MD&A. In addition, the Company sold bulk whisky as it rebalanced its maturation inventories, which is a normal industry practice as strategy is refined and future forecasts updated.

Net assets (i.e., total assets less total liabilities) had a decreasing trend since 2014. This is primarily the result of Corby returning value to shareholders via a special dividend in each of 2015 and 2016 with a dividend of $0.62 per share or $17.7 million being paid each year.

Brand Performance Review

Corby's portfolio of owned-brands accounts for approximately 80% of the Company's total annual revenue. Included in this portfolio are its key brands: J.P. Wiser's Canadian whisky, Lamb's rum, Polar Ice vodka and Corby's mixable liqueur brands. The sales performance of these key brands significantly impacts Corby's net earnings. Therefore, understanding each key brand is essential to understanding the Company's overall performance.

Shipment Volume and Shipment Value Performance
The following table summarizes the performance of Corby's owned-brands (i.e., Case Goods) in terms of both shipment volume (as measured by shipments to customers in equivalent nine-litre cases) and shipment value (as measured by the change in net sales revenue). The table includes results for sales in both Canada and international markets. Specifically, the J.P. Wiser's, Lamb's and Polar Ice brands are also sold to international markets, particularly in the US and UK.

 

BRAND PERFORMANCE CHART - INCLUDES BOTH CANADIAN AND INTERNATIONAL SHIPMENTS

       
   

Three Months Ended

Year Ended

       

Shipment Change

   

Shipment Change

   

June 30

June 30

Volume

Value

June 30

June 30

Volume

Value

(Volumes in 000's of 9L cases)

 

2016

2015

%

%

2016

2015

%

%

                   

Brand

                 

J.P. Wiser's Canadian whisky

 

207

194

7%

10%

810

806

0%

2%

Lamb's rum

 

94

109

(14%)

(13%)

450

503

(10%)

(9%)

Polar Ice vodka

 

101

97

5%

9%

375

383

(2%)

2%

Mixable liqueurs

 

42

42

(1%)

(5%)

167

174

(4%)

(5%)

                   

Total Key Brands

 

445

442

1%

3%

1,802

1,866

(3%)

(1%)

Other Corby-owned brands

 

54

48

11%

21%

216

216

0%

5%

                   

Total Corby brands

 

498

491

2%

5%

2,018

2,082

(3%)

(1%)

 

Corby's owned-brands had strong fourth quarter shipments on account of Corby's Canadian whisky portfolio (i.e., JP Wiser's and the craft range included in "other") and a positive contribution from Polar Ice vodka. The performance of these brands more than offset the continued weak trends seen with Lamb's rum. Year-to-date shipment volumes ended down versus last year, while shipment value held relatively even, once again mostly impacted by Lamb's rum and Corby's mixable liqueur brands.

Trends in Canada differ significantly from international markets as highlighted in the following table:

       
       
   

Three Months Ended

Year Ended

       

Shipment Change

   

Shipment Change

   

June 30

June 30

Volume

Value

June 30

June 30

Volume

Value

(Volumes in 000's of 9L cases)

 

2016

2015

%

%

2016

2015

%

%

                   
                   

Domestic

 

451

450

0%

4%

1,819

1,858

(2%)

0%

International

 

47

41

17%

22%

199

223

(11%)

(5%)

                   

Total Corby brands

 

498

491

2%

5%

2,018

2,082

(3%)

(1%)

 

In the domestic market, a strong fourth quarter value increase helped offset the difficult holiday period experienced in Q2, leaving Corby even on shipment value when compared to last year (albeit down 2% on shipment volume for the year). The challenges experienced in the holiday period were due to a significant increase of competitive retail activity in the economy segments of rum, vodka and Canadian whisky, which were only partially offset by newly introduced innovation, such as J.P. Wiser's Double Still Rye and Gooderham & Worts Canadian whiskies.

In international markets, lower shipment volumes year over year were largely attributable to Lamb's in the U.K. where shipment patterns were disrupted during the fourth quarter of 2016 by the announced transition to a new distributor as of July 1, 2016. In the US market, shipments were flat versus the prior year. Results from the launch two years ago of J.P. Wiser's Rye and Spiced Canadian whiskies have not been achieved.  The consumer demand that was expected did not materialize and these concepts have struggled against long established brands in an increasingly price competitive segment. Corby has therefore reprioritized its focus on a smaller number of markets in the US and on the more premium and differentiated craft range (Lot No. 40 and Pike Creek), both of which have achieved a small but growing base of business.

Retail Sales Volume Performance
It is of critical importance to understand the performance of Corby's brands at the retail level in Canada. Analysis of performance at the retail level provides insight with regards to consumers' current purchase patterns and trends. Retail sales volume data, as provided by the ACD, is set out in the following table and is discussed throughout this MD&A. Note that retail sales value information has not been provided as the province of British Columbia began to only provide wholesale pricing data starting in July 2015, thus significantly impacting any meaningful comparison against prior periods and with other LB customers. It is not known at this time when the Company will be able to re-introduce this retail value level of analysis.

It should be noted that the retail information presented does not include international retail sales of Corby-owned brands. While Corby's focus on the US business is increasing, retail data in the US is prepared using limited sampling techniques, which does not provide meaningful trend analysis on a brand that has not yet reached sufficient scale to make such disclosure meaningful. Corby will provide such data as and when it is considered to offer meaningful analysis of brand performance.

 

RETAIL SALES FOR THE CANADIAN MARKET ONLY1

                 
   

Three Months Ended

 

Year Ended

       

% Retail

     

% Retail

   

Jun 30

Jun 30

Volume

 

Jun 30

Jun 30

Volume

(Volumes in 000's of 9L cases)

 

2016

2015

Growth

 

2016

2015

Growth

                 

Brand

               

J.P. Wiser's Canadian whisky

 

160

159

1%

 

722

720

0%

Lamb's rum

 

82

83

(1%)

 

364

382

(5%)

Polar Ice vodka

 

82

80

3%

 

345

350

(1%)

Mixable liqueurs

 

35

37

(5%)

 

163

171

(5%)

                 

Total Key Brands

 

359

358

0%

 

1,594

1,623

(2%)

Other Corby-owned brands 

 

41

42

(1%)

 

181

184

(2%)

                 

Total

 

400

400

0%

 

1,775

1,807

(2%)

                 

(1)Refers to sales at the retail store level in Canada, as provided by the Association of Canadian Distillers.

 

The Canadian spirits industry's retail volume performance increased 1% for the quarter ended June 30, 2016 and 2% for the full year ended June 30, 2016, when compared with the same periods last year. The full year trend was supported by double digit retail sales volume growth in the Irish whiskey category and high single digit sales volume growth in single malt Scotch whisky, bourbon, tequila, and gin categories which are categories in which Corby does not have owned-brands.

As illustrated above, the performance of Corby's portfolio of owned brands trailed behind the spirits industry during the fourth quarter and on a full year comparison basis. The following brand discussion provides a more detailed analysis of the performance of each of Corby's key brands relative to its respective industry category.

Summary of Corby's Key Brands

J.P. Wiser's Canadian Whisky
J.P. Wiser's Canadian whisky, one of the top selling whisky families in Canada, is Corby's flagship brand. The brand's retail volumes for the fourth quarter were up 1%, while its full year performance was essentially flat when compared with last year.

Year over year, the Canadian whisky category grew 3% in retail volume, supported by successful innovation at premium price points and aggressive competitive retail activity in the economy segment.

Within the J.P. Wiser's range, positive growth posted by J.P. Wiser's Deluxe (retail volume grew 3% year over year) and the flavoured range was undercut by J.P. Wiser's Special Blend (retail volumes declined 3% compared to last year) which was impacted by a significant increase of competitive retail activity in the economy segment of Canadian whisky.

In July 2015, Corby began shipping two innovative new variants of the J.P. Wiser's family across Canada, J.P. Wiser's Hopped and J.P. Wiser's Double Still Rye. In June 2016, Corby also added J.P. Wiser's Last Barrels, a super-premium limited edition. During the first quarter of fiscal 2016, Corby launched new, premium point of sale material featuring quality cues and the "J.P. Wiser's, Tastes Like Whisky, Since 1857" campaign.  In April 2016, the campaign platform was brought to life with television advertising tied closely to sports broadcasts.

Lamb's Rum
Lamb's rum, one of the top-selling rum families in Canada, was significantly impacted by consumer trends, particularly in respect of the overall rum and white rum segments. Retail volumes for the overall rum category declined 1% for the quarter and were essentially flat for the year, when compared to the same periods last year. White rum retail volumes declined 2% and 3%, respectively, when compared to the same quarter and full year results last year.

Lamb's experienced a decline of 5% in retail volume on a full year over year comparison basis. The Lamb's rum product line is heavily weighted in the dark and white segments. It has experienced poor results in the key province of Ontario and faced difficult economic conditions in regional strongholds, and our strategy is to defend these regional strongholds and to aggressively promote the entire range. In addition, a package redesign has been implemented and began to appear at retail in March 2016.

Polar Ice Vodka
Polar Ice vodka is among the top selling vodka brands in Canada. Retail volume increased 3% for the three months ended June 30, 2016 when compared to the same three-month period last year. For the year ended June 30, 2016, retail volume declined 1% year over year due to increased competitive retail activity through the critical holiday period.

The overall vodka category in Canada grew retail volumes 2% when compared to both the three and twelve month periods last year with performance driven by the premium segment of the category.

The focus of advertising and promotion investment was on driving awareness and trial of Polar Ice 90 North via strong off-trade programming (tastings, value-add promotions and loyalty rewards programs).  As well, continued digital media to support the launch of Polar Ice 90 North, driving consumers to online (polarice.ca) and social media channels.

Mixable Liqueurs
Corby's portfolio of mixable liqueur brands consists of McGuinness liqueurs (which is Canada's largest mixable liqueur brand family) and Meaghers liqueurs. Retail volume for Corby's mixable liqueurs portfolio lagged category trends with retail volume declining 5% for both the quarter and year ended June 30, 2016, on a same period over period comparison basis. 

Over those same periods, the liqueurs category retail volume in Canada experienced a slight decline during the quarter when compared to the same quarter last year and grew 1% compared to the twelve months ended June 30, 2016. It is being driven by new innovations and cream based offerings with which McGuinness does not directly compete.

Our current strategy is to expand innovation and focus on strong programming in the retail environment, ensuring that our flavour offering is aligned to consumer trends. Two new flavours were launched during the fourth quarter 2016, McGuinness Simple Syrup and McGuinness Apple Whisky.

Other Corby-Owned Brands
Innovation remains an important pillar for delivering new profit and growth opportunities to the Corby domestic business. Recent premium offerings in Canadian whisky such as Pike Creek®, Lot No. 40® and Gooderham & Worts® collectively grew retail volume 143% and 103% for the respective fourth quarter and year ended June 30, 2016, outperforming the Canadian whisky category in Canada, which grew 1% and 3% respectively over the same periods.

Lot No. 40 was awarded Canadian Whisky of the Year at the sixth annual Canadian Whisky Awards, the second time it has received the honour in the last three years. Lot No. 40 was also named Best Canadian Rye Whisky at the 2016 San Francisco World Spirits Competition.

After disappointing holiday results for Royal Reserve®, retail volume rebounded somewhat to end the year at a 3% decline on a full year over year comparison basis. This result is in line with the year to date trend for the overall economy segment of Canadian whisky.

Financial and Operating Results

The following table presents a summary of certain selected consolidated financial information of the Company for the years ended June 30, 2016 and 2015.

                 
                 

(in millions of Canadian dollars, except
per share amounts)

   

2016

 

2015

$ Change

 % Change 

                 

Revenue

 

$

140.0

$

132.1

$

7.9

6%

                 

Cost of sales

   

(49.4)

 

(49.1)

 

(0.3)

1%

Marketing, sales and administration

   

(55.6)

 

(55.9)

 

0.3

(1%)

Other income 

   

(0.4)

 

0.1

 

(0.5)

(500%)

                 

Earnings from operations

   

34.6

 

27.2

 

7.4

27%

                 

Financial income

   

1.1

 

1.6

 

(0.5)

(31%)

Financial expenses

   

(1.0)

 

(1.1)

 

0.1

(9%)

     

0.1

 

0.5

 

(0.4)

(80%)

                 

Earnings before income taxes

   

34.7

 

27.7

 

7.0

25%

Income taxes

   

(9.3)

 

(7.3)

 

(2.0)

27%

                 

Net earnings

 

$

25.4

$

20.4

$

5.0

25%

                 

Per common share

               
 

- Basic net earnings

 

$

0.89

$

0.72

$

0.17

24%

 

- Diluted net earnings

 

$

0.89

$

0.72

$

0.17

24%

 

Overall Financial Results
Net earnings increased $5.0 million or 25% when compared with last year. The primary driver of growth was a negotiated increase in commission rate on PR brands, following the amendment of the September 29, 2006 Canadian representation agreements with PR referred to under the "Significant Events" section of this MD&A. The impact on net earnings of lower case good shipments is more than offset by lower advertising and promotional investment in the US market. In addition, net earnings also benefited from the sale of bulk whisky as the Company sought to rebalance its maturation inventories.

Revenue
The following highlights the key components of the Company's revenue streams:

                   
                   

(in millions of Canadian dollars)

     

2016

 

2015

$ Change

 % Change 

                   

Revenue streams:

                 
 

Case goods

   

$

111.1

$

111.8

$

(0.7)

(1%)

 

Commissions

     

23.0

 

16.4

 

6.6

40%

 

Other services

     

5.9

 

3.9

 

2.0

51%

                   

Revenue

     

140.0

 

132.1

 

7.9

6%

 

The decline in Case goods revenue reflected a difficult holiday period in both the Canadian and US markets. In Canada, in particular, a significant increase of competitive retail activity in the economy segments of rum and Canadian whisky was only partially offset by newly introduced innovation, such as J.P. Wiser's Double Still Rye and Gooderham & Worts Canadian whiskies.

The substantial increase in commissions was driven by the above aforementioned commission rate increase negotiated on PR brands supplemented by strong shipments for the brands in the PR portfolio, reflecting its position within the higher growth spirit and wine categories.

Other services represent ancillary revenue incidental to Corby's core business activities, such as logistical fees and from time to time bulk whisky sales. This year, the increase in the other services category was attributable to bulk whisky sales as the Company rebalanced its maturation inventories.

Cost of sales
Cost of sales was $49.4 million for the year ended June 30, 2016, an increase of $0.3 million when compared with last year, albeit on 3% lower shipment volumes. While overall gross margin on case goods remained a creditable 58% year on year, the results reflect an amount paid to a former third party distributor and bottler of Lamb's rum in the UK as part of the planned transition and termination which became effective July 1, 2016.

Marketing, sales and administration
Marketing, sales and administration expenses decreased $0.3 million or 1% when compared with last year. The change year over year is comprised of a significant decrease in marketing expenses, which was mostly offset by employee related costs and activities. In addition, the decreased marketing activity reflects lower investment in the US as Corby transitioned its strategy of concentrating investment on a smaller number of US markets.

Other income and expenses
Other income and expenses include such items as realized foreign exchange gains and losses, and gains on sale of property and equipment. The $0.5 million change year over year is primarily related to foreign currency fluctuations.

Net financial income
Net financial income is comprised of interest earned on deposits in cash management pools, offset by interest costs associated with the Company's pension and post-retirement benefit plans. The decrease is due to lower deposits in cash management pools and decreased market interest rates.

Income taxes
A reconciliation of the effective tax rate to the statutory rates for each period is presented below.

               
               
         

2016

 

2015

               

Combined basic Federal and Provincial tax rates

       

26.8%

 

26.6%

Other

       

0.0%

 

(0.1%)

               

Effective tax rate

       

26.8%

 

26.5%

 

Liquidity and Capital Resources

Corby's sources of liquidity are its deposits in cash management pools of $85.0 million as at June 30, 2016, and its cash generated from operating activities. Corby's total contractual maturities are represented by its accounts payable and accrued liabilities, which totalled $30.7 million as at June 30, 2016, and are all due to be paid within one year. The Company does not have any liabilities under short- or long-term debt facilities.

The Company believes that its deposits in cash management pools, combined with its historically strong operational cash flows, provide for sufficient liquidity to fund its operations, investing activities and commitments for the foreseeable future. The Company's cash flows from operations are subject to fluctuation due to commodity, foreign exchange and interest rate risks. Please refer to the "Risks and Risk Management" section of this MD&A for further information.

Cash Flows

                   
                   

(in millions of Canadian dollars)

       

2016

 

2015

$ Change

                   

Operating activities

                 
 

Net earnings, adjusted for non-cash items

     

$

41.2

$

33.7

$

7.5

 

Net change in non-cash working capital

       

(3.7)

 

(0.4)

 

(3.3)

 

Net payments for interest and income taxes

       

(4.2)

 

(6.2)

 

2.0

         

33.3

 

27.1

 

6.2

                   

Investing activities

                 
 

Additions to capital assets

       

(3.1)

 

(2.8)

 

(0.3)

 

Proceeds from disposition of capital assets

       

-

 

0.2

 

(0.2)

 

Deposits in cash management pools

       

9.1

 

13.9

 

(4.8)

         

6.0

 

11.3

 

(5.3)

                   

Financing activities

                 
 

Proceeds from note receivable

       

-

 

0.6

 

(0.6)

 

Dividends paid

       

(39.3)

 

(39.0)

 

(0.3)

         

(39.3)

 

(38.4)

 

(0.9)

                   

Net change in cash

     

$

-

$

-

$

-

 

Operating activities
Net cash from operating activities increased $6.2 million this year versus last. This is reflective of the increase in net earnings and lower tax payments being partially offset by an increase in inventory levels.

Investing activities
Net cash generated from investing activities was $6 million for the year ended June 30, 2016, representing a decrease of $5.3 million when compared to last year.

The Company's additions to capital assets were more than offset by its withdrawals from cash management pools. Cash management pools represent cash on deposit with Citibank NA via Corby's Mirror Netting Service Agreement with PR. Corby has daily access to these funds and earns a market rate of interest from PR on its deposits. Changes in cash management pools reflect amounts either deposited in or withdrawn from these bank accounts and are simply a function of Corby's cash requirements during the period of time being reported on. For more information related to these deposits, please refer to the "Related Party Transactions" section of this MD&A.

Financing activities
Cash used for financing activities this year was purely for paying dividends to shareholders. Dividends this year included a special dividend of $17.7 million, in addition to the regular dividends paid quarterly. The special dividend payment is consistent with the prior year. 

The following table summarizes dividends paid and payable by the Company over the last two fiscal years:

for

 

Declaration date

 

Record Date

 

Payment date

 

$ / Share

2016 - Q4

 

August 24, 2016

 

September 15, 2016

 

September 30, 2016

 

$  0.19

2016 - Q3

 

May 4, 2016

 

May 27, 2016

 

June 15, 2016

 

0.19

2016 - Q2

 

February 3, 2016

 

February 26, 2016

 

March 11, 2016

 

0.19

2016 - special

 

November 11, 2015 (special dividend)

 

December 11, 2015

 

January 8, 2015

 

0.62

2016 - Q1

 

November 11, 2015

 

November 27, 2015

 

December 11, 2015

 

0.19

2015 - Q4

 

August 26, 2015

 

September 16, 2015

 

September 30, 2015

 

0.19

2015 - Q3

 

May 6, 2015

 

May 29, 2015

 

June 12, 2015

 

0.19

2015 - Q2

 

February 4, 2015

 

February 27, 2015

 

March 13, 2015

 

0.19

2015 - special

 

November 05, 2014 (special dividend)

 

December 12, 2014

 

January 9, 2015

 

0.62

2015 - Q1

 

November 05, 2014

 

November 28, 2014

 

December 14, 2014

 

0.19

2014 - Q4

 

August 27, 2014

 

September 15, 2014

 

September 30, 2014

 

0.18

 

Outstanding Share Data

As at August 24, 2016, Corby had 24,274,320 Voting Class A Common Shares and 4,194,536 Non-Voting Class B Common Shares outstanding. The Company does not have a stock option plan, and therefore, there are no options outstanding.

Contractual Obligations

The following table presents a summary of the maturity periods of the Company's contractual obligations as at June 30, 2016:

                             
     

Payments

 

Payments

 

Payments

 

Payments

 

Obligations

     
     

During

 

due in 2018

 

due in 2020

 

due after

 

with no fixed

     
     

2017

 

and 2019

 

and 2021

 

2021

 

maturity

   

Total

                             

Operating lease obligations

 

$

1.6

$

2.3

$

1.4

$

2.8

$

-

$

 

8.1

Employee future benefits

   

-

 

-

 

-

 

-

 

24.6

   

24.6

                             
   

$

1.6

$

2.3

$

1.4

$

2.8

$

24.6

$

 

32.7

 

Related Party Transactions

Transactions with parent, ultimate parent, and affiliates
Corby engages in a significant number of transactions with its parent company, its ultimate parent and various affiliates. Specifically, Corby renders services to its parent company, its ultimate parent, and affiliates for the marketing and sale of beverage alcohol products in Canada. Furthermore, Corby outsources the large majority of its distilling, maturing, storing, blending, bottling and related production activities to its parent company. A significant portion of Corby's bookkeeping, recordkeeping services, data processing and other administrative services are also outsourced to its parent company. Transactions with the parent company, ultimate parent and affiliates are subject to Corby's related party transaction policy, which requires such transactions to undergo an extensive review and receive approval from an Independent Committee of the Board of Directors.

The companies operate under the terms of agreements that became effective on September 29, 2006 (the "2006 Agreements"). These agreements provide the Company with the exclusive right to represent PR's brands in the Canadian market for fifteen years, as well as providing for the continuing production of certain Corby brands by PR at its production facility in Windsor, Ontario, for ten years. Corby also manages PR's business interests in Canada, including the Windsor production facility. Certain officers of Corby have been appointed as directors and officers of PR's Canadian entities, as approved by Corby's Board of Directors. On August 26, 2015, Corby entered into an agreement with PR and certain affiliates amending the September 29, 2006 Canadian representation agreements, pursuant to which Corby will provide more specialized marketing, advertising and promotion services for the PR and affiliate brands under the applicable representation agreements in consideration of an increase to the rate of commission payable to Corby by such entities. On November 11, 2015, Corby and PR entered into agreements for the continued production and bottling of Corby's owned-brands by Pernod Ricard at the HWSL production facility in Windsor, Ontario, for a 10-year term commencing September 30, 2016.  On the same date, Corby and PR also entered into an administrative services agreement, under which Corby will continue to manage PR's business interests in Canada, including the HWSL production facility, with a similar term and commencement date.

In addition to the 2006 Agreements, Corby signed an agreement on September 26, 2008, with its ultimate parent to be the exclusive Canadian representative for the ABSOLUT vodka and Plymouth gin brands, for a five-year term which expired October 1, 2013 and was extended as noted below. These brands were acquired by PR subsequent to the original representation rights agreement dated September 29, 2006. Corby also agreed to continue with the mirror netting arrangement with PR and its affiliates, under which Corby's excess cash will continue to be deposited to cash management pools. The mirror netting arrangement with PR and its affiliates is further described below. On November 9, 2011, Corby entered into an agreement with a PR affiliate for a new term for Corby's exclusive right to represent ABSOLUT vodka in Canada from September 30, 2013 to September 29, 2021, which is consistent with the term of Corby's Canadian representation of the other PR brands in Corby's portfolio. On September 30, 2013, Corby paid the present value of $10 million, or $10.3 million, for the additional eight years of the new term pursuant to an agreement entered into between Corby and The Absolut Company Aktiebolag, an affiliate of PR and owner of the Absolut brand, to satisfy the parties' obligations under the 2011 agreement. Since the agreement is a related party transaction, the agreement was approved by the Independent Committee of the Corby Board of Directors, in accordance with Corby's related party transaction policy, following an extensive review and with external financial and legal advice.

On July 1, 2012, the Company entered into a five-year agreement with PR USA, an affiliated company, which provides PR USA the exclusive right to represent J.P. Wiser's Canadian whisky and Polar Ice vodka in the US. The agreement provides these key brands with access to PR USA's extensive national distribution network throughout the US and complements PR USA's premium brand portfolio. The agreement is effective for a five-year period ending June 30, 2017. The agreement with PR USA is a related party transaction between Corby and PR USA, as such; the agreement was approved by the Independent Committee of the Board of Directors of Corby following an extensive review, in accordance with Corby's related party transaction policy.

On March 21, 2016 the Company entered into an agreement with Pernod Ricard UK Ltd. ("PRUK"), an affiliated company, which provides PRUK the exclusive right to represent Lamb's rum in Great Britain effective July 1, 2016. Previously, Lamb's rum was represented by an unrelated third party in this market. The agreement provides Lamb's with access to PRUK's extensive national distribution network throughout Great Britain. The agreement is effective for a five-year period ending June 30, 2021. Since the agreement with PRUK is a related party transaction between Corby and PRUK, the agreement was approved by the Independent Committee of the Board of Directors of Corby following a thorough review, in accordance with Corby's related party transaction policy.

Deposits in cash management pools
Corby participates in a cash pooling arrangement under a Mirror Netting Service Agreement, together with PR's other Canadian affiliates, the terms of which are administered by Citibank N.A. effective July 17, 2014. The Mirror Netting Service Agreement acts to aggregate each participant's net cash balance for purposes of having a centralized cash management function for all of PR's Canadian affiliates, including Corby. As a result of Corby's participation in this agreement, Corby's credit risk associated with its deposits in cash management pools is contingent upon PR's credit rating. PR's credit rating as at August 24, 2016, as published by Standard & Poor's and Moody's, was BBB- and Baa2, respectively. PR compensates Corby for the benefit it receives from having the Company participate in the Mirror Netting Service Agreement by paying interest to Corby based upon the 30-day Canadian Dealer Offered Rate ("CDOR") plus 0.40%. Corby accesses these funds on a daily basis and has the contractual right to withdraw these funds or terminate these cash management arrangements upon providing five days' written notice.

Results of Operations – Fourth Quarter of Fiscal 2016

The following table presents a summary of certain selected consolidated financial information for the Company for the three-month periods ended June 30, 2016 and 2015:

                 
           
   

Three Months Ended

     

(in millions of Canadian dollars, except

   

June 30,

 

June 30,

     

per share amounts)

   

2016

 

2015

$ Change

 % Change 

                 

Revenue

 

$

37.2

$

32.5

$

4.7

15%

                 

Cost of sales

   

(12.3)

 

(11.7)

 

(0.6)

5%

Marketing, sales and administration

   

(12.0)

 

(11.0)

 

(1.0)

9%

Other income (expense)

   

(0.1)

 

0.0

 

(0.1)

(437%)

                 

Earnings from operations

   

12.8

 

9.8

 

3.0

31%

                 

Financial income

   

0.2

 

0.3

 

(0.1)

(20%)

Financial expenses

   

(0.2)

 

(0.3)

 

0.0

(10%)

     

0.0

 

0.0

 

(0.0)

(80%)

                 

Earnings before income taxes

   

12.8

 

9.8

 

3.0

31%

Income taxes

   

(3.5)

 

(2.5)

 

(1.0)

37%

                 

Net earnings

 

$

9.3

$

7.3

$

2.0

27%

                 

Per common share

               
 

- Basic net earnings

 

$

0.33

$

0.26

$

0.07

27%

 

- Diluted net earnings

 

$

0.33

$

0.26

 

0.07

27%

 

Revenue
The following table highlights the various components of the Company's revenue streams for the quarter:

                   
             
     

Three Months Ended

     
       

June 30,

 

June 30,

     

(in millions of Canadian dollars)

     

2016

 

2015

$ Change

 % Change 

                   

Revenue streams:

                 

 Case goods 

   

$

28.6

$

27.3

$

1.3

5%

 Commissions

     

5.9

 

4.3

 

1.6

38%

 Other services

     

2.7

 

0.9

 

1.8

196%

                   

Revenue

   

$

37.2

$

32.5

$

4.7

15%

 

Revenue increased $4.7 million this quarter when compared with the same quarter last year with all three revenue streams contributing to the strong performance. Case goods revenue increased $1.3 million quarter over quarter and was primarily the result of general price increases combined with modest volume increases in both Canada and international markets. Commissions increased primarily on account of the aforementioned commission rate increase on the PR brand portfolio which came into effect July 1, 2015. Other services reflect bulk whisky sales made to third party customers as the Company rebalanced its maturation inventories.

Cost of Sales
Cost of goods sold was $12.3 million, $0.6 million representing a 5% increase this period when compared with the same three-month period last year. Gross margin was 61% for the current year quarter compared to 59% the same quarter last year (note: commissions are not included in this calculation).

Marketing, sales and administration
Marketing, sales and administration expenses increased $1.0 million, or 9% over the same quarter last year. The increase is the combination of increased investment in brand marketing activities and higher employee related expenses and activities. More specifically, the Company launched its new J.P. Wiser's television campaign in Canada while reducing spend in the US market as we concentrate our investment in a smaller number of markets where the portfolio has performed well and the greatest opportunities exist.

Net earnings and earnings per share
Net earnings for the fourth quarter were $9.3 million, or $0.33 per share, which is an increase of $2.0 million over the same quarter last year. As discussed previously, higher commissions from PR brands, general price increases in Canada for case goods, and bulk whisky sales drove the improved performance.

Selected Quarterly Information

Summary of Quarterly Financial Results

                                 
                                 

(in millions of Canadian dollars,

 

Q4

 

Q3

 

Q2

 

Q1

 

Q4

 

Q3

 

Q2

 

Q1

except per share amounts)

 

2016

 

2016

 

2016

 

2016

 

2015

 

2015

 

2015

 

2015

                                 

Revenue

$

37.2

$

28.0

$

38.3

$

36.4

$

32.5

$

26.8

$

38.0

$

34.8

Earnings from operations

 

12.8

 

5.0

 

8.2

 

8.6

 

9.8

 

3.1

 

7.7

 

6.6

Net earnings

 

9.3

 

3.7

 

6.1

 

6.3

 

7.3

 

2.4

 

5.8

 

4.9

Basic EPS

 

0.33

 

0.13

 

0.22

 

0.22

 

0.26

 

0.08

 

0.20

 

0.17

Diluted EPS

 

0.33

 

0.13

 

0.22

 

0.22

 

0.26

 

0.08

 

0.20

 

0.17

 

The above table demonstrates the seasonality of Corby's business, as sales are typically strong in the first and second quarters, while third-quarter sales (January, February and March) usually decline after the end of the retail holiday season. Fourth quarter sales typically increase again with the onset of warmer weather, as consumers tend to increase their purchasing levels during the summer season.

In addition to the seasonality effect, net earnings has increased each quarter in 2016 versus the same quarter in 2015. This is primarily attributable to an increase in commissions, due to the negotiated commission rate increase on PR brands, following the amendment of the September 29, 2006 Canadian representation agreements with PR referred to under Significant Events.

Recent Accounting Pronouncements

Recent accounting pronouncements
A number of new standards, amendments to standards and interpretations have been issued but are not yet effective for the financial year ending June 30, 2016, and accordingly, have not been applied in preparing these consolidated financial statements:

(i)     Revenue

In May 2014, the International Accounting Standards Board ("IASB") released IFRS 15, "Revenue from contracts with customers" ("IFRS 15"), which supersedes IAS 11, "Construction Contracts", IAS 18, "Revenues", IFRIC 13, "Customer Loyalty Programmes", IFRIC 15, "Agreement for the Construction of Real Estate", IFRIC 18, "Transfers of Assets from Customers" and SIC-31, "Revenue – Barter Transactions Involving Advertising Services". The core principle of IFRS 15 is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. IFRS 15 will also result in enhanced disclosures about revenue, provide guidance for transactions that were not previously addressed comprehensively (for example, service revenue and contract modifications) and improve guidance for multiple-element arrangements. IFRS 15 will be effective for Corby's fiscal year beginning on July 1, 2018, with earlier application permitted. The Company is currently assessing the impact of the adoption of this standard on its financial statements and disclosures.

(ii)    Financial Instruments

The IASB has issued a new standard, IFRS 9, "Financial Instruments" ("IFRS 9"), which will ultimately replace IAS 39, "Financial Instruments: Recognition and Measurement" ("IAS 39"). The replacement of IAS 39 is a multi-phase project with the objective of improving and simplifying the reporting for financial instruments and the issuance of IFRS 9 is part of the first phase of this project. IFRS 9 uses a single approach to determine whether a financial asset or liability is measured at amortized cost or fair value, replacing the multiple rules in IAS 39. For financial assets, the approach in IFRS 9 is based on how an entity manages its financial instruments in the context of its business model and the contractual cash flow characteristics of the financial assets. IFRS 9 requires a single impairment method to be used, replacing multiple impairment methods in IAS 39. For financial liabilities measured at fair value, fair value changes due to changes in an entity's credit risk are presented in other comprehensive income. This standard is effective for annual periods beginning on or after January 1, 2018 and must be applied retrospectively. For Corby, this standard will become effective July 1, 2018. The Company is currently assessing the impact of the new standard on its financial statements and disclosures.

(iii)   Disclosure initiative

In December 2014, the IASB issued Disclosure Initiative Amendments to IAS 1 as part of the IASB's Disclosure Initiative. These amendments encourage entities to apply professional judgement regarding disclosure and presentation in their financial statements. These amendments are effective for annual periods beginning on or after January 1, 2016. Earlier application is permitted. For Corby, these amendments will become effective July 1, 2016. The application of these amendments will not have a significant impact on the Company.

Disclosure Controls and Procedures

The Company maintains a system of disclosure controls and procedures that has been designed to provide reasonable assurance that information required to be disclosed by the Company in its public filings is recorded, processed, summarized and reported within required time periods and includes controls and procedures designed to ensure that all relevant information is accumulated and communicated to senior management, including the Company's Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO"), to allow timely decisions regarding required disclosure.

Management, with the participation of the CEO and CFO, has evaluated the effectiveness of the Company's disclosure controls and procedures (as defined in National Instrument 52-109) as at June 30, 2016, and has concluded that such disclosure controls and procedures are effective based upon such evaluation.

Internal Controls Over Financial Reporting

The Company maintains a system of disclosure controls and procedures to provide reasonable assurance that all material information relating to the Company is gathered and reported to senior management on a timely basis so that appropriate decisions can be made regarding public disclosure.

In addition, the CEO and CFO have designed, or caused to be designed under their supervision, internal controls over financial reporting to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with IFRS. Internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be designed effectively can provide only reasonable assurance with respect to financial reporting and financial statement preparation.

Management, with the participation of the CEO and CFO, has evaluated the effectiveness of the Company's internal controls over financial reporting as at June 30, 2016, and has concluded that internal control over financial reporting is designed and operating effectively to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with IFRS. Management's assessment was based on the framework established in Internal Control – Integrated Framework (2013), published by the Committee of Sponsoring Organizations of the Treadway Commission.

There were no changes in internal control over financial reporting during the Company's most recent interim period that have materially affected, or are reasonably likely to materially affect, the Company's internal controls over financial reporting. 

Risks & Risk Management

The Company is exposed to a number of risks in the normal course of its business that have the potential to affect its operating and financial performance.

Industry and Regulatory
The beverage alcohol industry in Canada is subject to government policy, extensive regulatory requirements and significant rates of taxation at both the federal and provincial levels. As a result, changes in the government policy, regulatory and/or taxation environments within the beverage alcohol industry may affect Corby's business operations, causing changes in market dynamics or changes in consumer consumption patterns. In addition, the Company's provincial LB customers have the ability to mandate changes that can lead to increased costs, as well as other factors that may impact financial results. As the Company becomes more reliant on international product sales in the US, UK and other countries-exposure to changes in the laws and regulations in those countries could also adversely affect the operations, financial performance or reputation of the Company.

The Company continuously monitors the potential risk associated with any proposed changes to its government policy, regulatory and taxation environments and, as an industry leader, actively participates in trade association discussions relating to new developments.

Consumer Consumption Patterns
Beverage alcohol companies are susceptible to risks relating to changes in consumer consumption patterns. Consumer consumption patterns are affected by many external influences, not the least of which is economic outlook and overall consumer confidence in the stability of the economy as a whole. Corby offers a diverse portfolio of products across all major spirits categories and at various price points.  Corby continues to identify and offer new innovations in order to address consumer desires.

Distribution/Supply Chain Interruption
The Company is susceptible to risks relating to distributor and supply chain interruptions. Distribution in Canada is largely accomplished through the government-owned provincial LBs and, therefore, an interruption (e.g., a labour strike) for any length of time may have a significant impact on the Company's ability to sell its products in a particular province and/or market. International sales are subject to the variations in distribution systems within each country where the products are sold.   

Supply chain interruptions, including a manufacturing or inventory disruption, could impact product quality and availability. The Company adheres to a comprehensive suite of quality programmes and proactively manages production and supply chains to mitigate any potential risk to consumer safety or Corby's reputation and profitability.

Inherent to producing mature products there is a potential for shortages or surpluses in future years if demand and supply are materially different from long-term forecasts.

Environmental Compliance
Environmental liabilities may potentially arise when companies are in the business of manufacturing products and, thus, required to handle potentially hazardous materials. As Corby outsources its production, including all of its storage and handling of maturing alcohol, the risk of environmental liabilities is considered minimal. Corby currently has no significant recorded or unrecorded environmental liabilities.

Industry Consolidation
In recent years, the global beverage alcohol industry has continued to experience consolidation. Industry consolidation can have varying degrees of impact and, in some cases, may even create exceptional opportunities. Either way, management believes that the Company is well positioned to deal with this or other changes to the competitive landscape in Canada and other markets in which it carries on business.

Competition
The Canadian and international beverage alcohol industry is extremely competitive. Competitors may take actions to establish and sustain a competitive advantage through advertising and promotion and pricing strategies in an effort to maintain market share. Corby constantly monitors the market and adjusts its own strategies as appropriate. Competitors may also affect Corby's ability to attract and retain high-quality employees. The Company's long heritage attests to Corby's strong foundation and successful execution of its strategies. Its role as a leading Canadian beverage alcohol company helps facilitate recruitment efforts.

Credit Risk
Credit risk arises from deposits in cash management pools held with PR via Corby's participation in the Mirror Netting Service Agreement (as previously described in the "Related Party Transactions" section of this MD&A), as well as credit exposure to customers, including outstanding accounts receivable. The maximum exposure to credit risk is equal to the carrying value of the Company's financial assets. The objective of managing counter-party credit risk is to prevent losses in financial assets. The Company assesses the credit quality of its counter-parties, taking into account their financial position, past experience and other factors. As the large majority of Corby's accounts receivable balances are collectable from government-controlled LBs, management believes the Company's credit risk relating to accounts receivable is at an acceptably low level.

Exposure to Interest Rate Fluctuations
The Company does not have any short- or long-term debt facilities. Interest rate risk exists, as Corby earns market rates of interest on its deposits in cash management pools. An active risk management programme does not exist, as management believes that changes in interest rates would not have a material impact on Corby's financial position over the long term.

Exposure to Commodity Price Fluctuations
Commodity risk exists, as the manufacture of Corby's products requires the procurement of several known commodities, such as grains, sugar and natural gas. The Company strives to partially mitigate this risk through the use of longer-term procurement contracts where possible. In addition, subject to competitive conditions, the Company may pass on commodity price changes to consumers through pricing over the long term.

Foreign Currency Exchange Risk
The Company has exposure to foreign currency risk, as it conducts business in multiple foreign currencies; however, its exposure is primarily limited to the US dollar ("USD") and UK pound sterling ("GBP"). Corby does not utilize derivative instruments to manage this risk. Subject to competitive conditions, changes in foreign currency rates may be passed on to consumers through pricing over the long term.

USD Exposure
The Company's demand for USD has traditionally outpaced its supply, due to USD sourcing of production inputs and Advertising & Promotion expenses exceeding that of the Company's USD sales. Therefore, decreases in the value of the Canadian dollar ("CAD") relative to the USD will have an unfavourable impact on the Company's earnings.

GBP Exposure
The Company's exposure to fluctuations in the value of the GBP relative to the CAD was reduced as both sales and cost of production are denominated in GBP. While Corby's exposure has been minimized, increases in the value of the CAD relative to the GBP will have an unfavourable impact on the Company's earnings.

Third-Party Service Providers
HWSL, which Corby manages on behalf of PR, provides more than 90% of the Company's production requirements, among other services including administration and information technology. However, the Company is reliant upon certain third-party service providers in respect of certain of its operations. It is possible that negative events affecting these third-party service providers could, in turn, negatively impact the Company. While the Company has no direct control over how such third parties are managed, it has entered into contractual arrangements to formalize these relationships. In order to minimize operating risks, the Company actively monitors and manages its relationships with its third-party service providers.

Brand Reputation and Trademark Protection
The Company promotes nationally branded, non-proprietary products as well as proprietary products. Damage to the reputation of any of these brands, or to the reputation of any supplier or manufacturer of these brands, could negatively impact consumer opinion of the Company or the related products, which could have an adverse impact on the financial performance of the Company. The Company strives to mitigate such risks by selecting only those products from suppliers that strategically complement Corby's existing brand portfolio and by actively monitoring brand advertising and promotion activities. The Company registers trademarks, as applicable, while constantly watching for and responding to competitive threats, as necessary.

Information Technology
The Company uses technology supplied by third parties, both related and non-related, to support operations and invests in information technology to improve route to market, reporting, analysis, and marketing initiatives.  Issues with availability, reliability and security of systems and technology could adversely impact the Company's ability to compete resulting in corruption or loss of data, regulatory related issues, litigation or brand reputation damage.  With the fast paced changing nature of the technology environment including digital marketing the Company works with our third parties to maintain policies, processes and procedures to help secure and protect these information systems as well as consumer, corporate and employee data. 

Valuation of Goodwill and Intangible Assets
Goodwill and intangible assets account for a significant amount of the Company's total assets. Goodwill and intangible assets are subject to impairment tests that involve the determination of fair value. Inherent in such fair value determinations are certain judgments and estimates including, but not limited to, projected future sales, earnings and capital investment; discount rates; and terminal growth rates. These judgments and estimates may change in the future due to uncertain competitive market and general economic conditions, or as the Company makes changes in its business strategies. Given the current state of the economy, certain of the aforementioned factors affecting the determination of fair value may be impacted and, as a result, the Company's financial results may be adversely affected.

The following table summarizes Corby's goodwill and intangible assets and details the amounts associated with each brand (or basket of brands) and market:

                     
       

Carrying Values as at June 30, 2016

Associated Brand

 

Associated Market

   

Goodwill

 

Intangibles

   

Total

                     

Various PR brands

 

Canada

 

$

-

$

30.6

$

 

30.6

Lamb's rum

 

United Kingdom(1)

   

1.4

 

11.8

   

13.2

Corby domestic brands

 

Canada 

   

1.9

 

-

   

1.9

                     
       

$

3.3

$

42.4

$

 

45.7

                     

(1)The international business for Lamb's rum is primarily focused in the UK, however, the trademarks and licences
purchased relate to all international markets outside of Canada, as Corby previously owned the Canadian rights.

 

Therefore, economic factors (such as consumer consumption patterns) specific to these brands and markets are primary drivers of the risk associated with their respective goodwill and intangible assets valuations.

Employee Future Benefits
The Company has certain obligations under its registered and non-registered defined benefit pension plans and other post-retirement benefit plan. There is no assurance that the Company's benefit plans will be able to earn the assumed rate of return. New regulations and market-driven changes may result in changes in the discount rates and other variables, which would result in the Company being required to make contributions in the future that differ significantly from estimates. An extended period of depressed capital markets and low interest rates could require the Company to make contributions to these plans in excess of those currently contemplated, which, in turn, could have an adverse impact on the financial performance of the Company. Somewhat mitigating the impact of a potential market decline is the fact that the Company monitors its pension plan assets closely and follows strict guidelines to ensure that pension fund investment portfolios are diversified in-line with industry best practices. For further details, related to Corby's defined benefit pension plans, please refer to Note 15 of the consolidated financial statements for the year ended June 30, 2016.

CORBY SPIRIT AND WINE LIMITED

                 

CONSOLIDATED BALANCE SHEETS

                 
                   

as at June 30, 2016 and 2015

                 

(in thousands of Canadian dollars)

                 
                   
             

June 30

 

June 30

       

Notes

   

2016

 

2015

                   

ASSETS

                 

Deposits in cash management pools

         

$

85,031

$

94,100

Accounts receivable

     

7

   

30,045

 

24,763

Income taxes recoverable

           

-

 

1,257

Inventories

     

8

   

54,173

 

50,858

Prepaid expenses

           

476

 

226

                   

Total current assets

           

169,725

 

171,204

Deferred income taxes

     

9

   

2,099

 

1,165

Property and equipment

     

10

   

11,003

 

9,784

Goodwill

     

11

   

3,278

 

3,278

Intangible assets

     

12

   

42,398

 

48,281

                   

Total assets

         

$

228,503

$

233,712

                   
                   

LIABILITIES

                 

Accounts payable and accrued liabilities

     

14

 

$

30,719

$

25,540

Income and other taxes payable

           

2,359

 

-

                   

Total current liabilities

           

33,078

 

25,540

Provision for employee benefits

     

15

   

24,640

 

20,048

Total liabilities

           

57,718

 

45,588

                   

Shareholders' equity

                 

Share capital

     

16

   

14,304

 

14,304

Accumulated other comprehensive loss

     

17

   

(10,220)

 

(6,733)

Retained earnings

           

166,701

 

180,553

                   

Total shareholders' equity

           

170,785

 

188,124

                   

Total liabilities and shareholders' equity

         

$

228,503

$

233,712

                   

The accompanying notes are an integral part of these consolidated financial statements.

 

CORBY SPIRIT AND WINE LIMITED

                     

CONSOLIDATED STATEMENTS OF EARNINGS

                     
                       
                       

(in thousands of Canadian dollars, except per share amounts)

                       
       

For the Three Months Ended

For the Year Ended

                       
         

June 30

 

June 30

 

June 30

 

June 30

   

Notes

   

2016

 

2015

 

2016

 

2015

                       

Revenue

 

18

 

$

37,202

$

32,473

$

140,002

$

132,066

                       

Cost of sales

       

(12,147)

 

(11,680)

 

(49,344)

 

(49,037)

Marketing, sales and administration

       

(12,107)

 

(11,006)

 

(55,635)

 

(55,865)

Other (expense) income

 

19

   

(185)

 

27

 

(400)

 

75

                       

Earnings from operations

       

12,7