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Corby Spirit and Wine Announces Quarterly Dividend and Reports Fourth Quarter Results

TORONTO, Aug. 23, 2017 /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, 2017. The Corby Board of Directors today also declared a dividend of $0.21 per share payable on September 29, 2017 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, 2017.

On a quarterly basis, revenue increased 8%, driven by a significant 9% improvement on shipment volumes largely attributable to Ungava Spirits' brands, J.P. Wiser's and Lamb's rum performance.  Domestic advertising and promotional investment supporting the newly acquired Ungava Spirits' brands (45% retail volume growth) and J.P. Wiser's development of a packaging upgrade and new marketing creative impacted the company's bottom-line earnings.

Revenue for the year increased 3% primarily due to the addition of Ungava Spirits' brands and increased commissions earned from the PR brand portfolio.  Partially offsetting revenue, increased promotional investment and overheads supporting Ungava Spirits' brands also include one-off items related to employee costs and professional fees associated with the acquisition.

Net earnings of $25.6 million (or $0.90 per share) were reported for the year ended June 30, 2017, reflecting an increase of $0.2 million, or 1%, when compared to the same period last year. Net earnings of $8.7 million (or $0.30 per share) were reported for the three-month period ended June 30, 2017, representing a decrease of $0.6 million or 7% when compared with the same quarter last year.

"I am pleased with Corby's overall performance for this fiscal year, particularly how quickly Ungava Spirits' brands were incorporated into the Corby family and their strong contribution to top-line growth.  With the successful integration of this new acquisition, I look forward to seeing the potential of these brands further develop in the new year.  It was satisfying to see J.P. Wiser's return to market share growth and delivering healthy increases in both volume and value.  The premium craft Canadian whiskies continue to win awards and recognition in Canadian and International markets. These results show the strength of our portfolio prioritization, our vision to improve the portfolio of owned brands and the success of investing behind a more premium range.," 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, 2017, prepared in accordance with International Financial Reporting Standards.

About Corby
Corby Spirit and Wine Limited is a leading Canadian manufacturer, 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, Lamb's® rum, Polar Ice® vodka and McGuinness® liqueurs, as well as the recently acquired Ungava® Premium Canadian gin, Cabot Trail® maple-based liqueurs and Chic Choc® Spiced rum. 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 2017, Corby was named one of the 50 Best Workplaces in Canada by The Great Place to Work® Institute Canada for the sixth 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, 2017

The following Management's Discussion and Analysis ("MD&A") dated August 23, 2017, should be read in conjunction with the audited consolidated financial statements and accompanying notes as at and for the year ended June 30, 2017, prepared in accordance with International Financial Reporting Standards ("IFRS"). Financial information for the three months ended June 30, 2017 and 2016 were not audited or reviewed by the Company's external auditors in accordance with standards established by the Canadian Institute of Chartered Accountants for a review of unaudited financial statements by an entity's auditor.

This MD&A contains forward-looking 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; the impact, and successful integration of, acquisitions; 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 23, 2017. 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 2017 (three months ended June 30, 2017) are against results for the fourth quarter of fiscal 2016 (three months ended June 30, 2016). 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. On September 30, 2016, Corby acquired certain brands, including Ungava® Premium Canadian gin, Chic Choc® Spiced rum, Cabot Trail maple cream liqueur (Coureur des Bois, in Quebec), and a range of maple-based products (collectively, the "Ungava Spirits Brands"). PR produces the majority of 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. Ungava Spirits Co. Ltd. produces the Ungava Spirits Brands and operates the Cowansville, Quebec production facility acquired on September 30, 2016. 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 products destined for sale in countries located outside North America. 

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. Exceptions to this model include 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. Other provinces have aspects of both government-control and private retailing, including British Columbia, Saskatchewan and Quebec.

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 also able to provide retail value information (measured in Canadian dollars). The Company has reintroduced retail level of analysis starting this quarter due to the province of British Columbia cycling their move to wholesale pricing. Current retail value information as discussed in this MD&A is based on available pricing information as provided by the ACD and the LBs.

In addition to a focus on efforts to open new international markets, 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 terminated on June 30, 2016. Effective July 1, 2016, Corby entered into a distribution agreement with a related party with respect to which more information is provided in the "Related Party Transactions" section of this MD&A; and, also effective as of July 1, 2016, a new co-packing agreement was entered into with Angus Dundee Distillers PLC, a third party manufacturer.

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 those brands to promote its premium offerings where it makes the most sense and drives the most value for Corby 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 this strategy will result in value creation for Corby shareholders.

Pursuing new growth opportunities outside of Canada is also a key strategic priority. Our primary goal is to leverage our Canadian whisky expertise and expand our business into markets 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. As an example, Corby has an agreement in place to continue its successful partnership with the Toronto Transit Commission to provide free transit on New Year's Eve until 2019.

Significant Event

Extension of US Distribution Agreement
On March 29, 2017, the Company entered into an amending agreement with Pernod Ricard USA, LLC ("PR USA"), an affiliated company, to extend the term of the existing distribution agreement between the parties to June 30, 2018. The amended agreement was effective as of July 1, 2017, continues PR USA's exclusive rights to represent certain of the Company's brands, including its J.P. Wiser's, Lot No. 40 and Pike Creek Canadian whiskies and Polar Ice vodka in the US. Since the agreement with PR USA is a related party transaction between Corby and PR USA, the agreement was approved by the Independent Committee of the Board of Directors of Corby following review, in accordance with Corby's related party transaction policy.

Acquisition of the spirits assets of Quebec-based Domaines Pinnacle Inc.
On September 30, 2016, Corby acquired the spirits assets of Domaines Pinnacle Inc. ("Domaines Pinnacle") for a purchase price of $12 million which was funded from the Company's Deposits in Cash Management Pools. The transaction included the Ungava Spirits Brands (Ungava® Premium Canadian gin, Chic Choc® Spiced rum and Cabot Trail® maple cream liqueur (Coureur des Bois®, in Quebec) (collectively, the "Ungava Spirits Brands"), as well as production assets and related inventory. The brand portfolio and other assets acquired are operated by Ungava Spirits Co. Ltd. ("Ungava Spirits"), a wholly-owned subsidiary of Corby based in Cowansville, Quebec.

Since the completion of the transaction on September 30, 2016, the Ungava Spirits Brands have contributed $6.2 million to revenues and -$0.1 million to net earnings. These results are impacted by seasonal fluctuations in sales and phasing of advertising and promotional efforts. More information regarding the transaction has been provided in Note 6 of the consolidated financial statements for the year ended June 30, 2017.

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)

2017

2016

2015

       

Revenue

$

143.9

$

140.0

$

132.1

       

Earnings from operations

35.0

34.6

27.2

 

- Earnings from operations per common share

1.23

1.22

0.96

       

Net earnings

25.6

25.4

20.4

 

- Basic earnings per share

0.90

0.89

0.72

 

- Diluted earnings per share

0.90

0.89

0.72

       

Total assets

227.8

228.5

233.7

Total liabilities

50.5

57.7

45.6

       

Regular dividends paid per share

0.84

0.76

0.75

Special dividends paid per share

-

0.62

0.62

 

As depicted in the above chart, revenue and net earnings rose sharply in 2016 (when compared to 2015) and again in 2017 with further improvement when compared to 2016. The 2016 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 "Related Party Transactions" section of this MD&A.

2017 revenue increased $3.9 million over 2016, while net earnings remained relatively stable. This year over year improvement in revenues was primarily the result of the newly acquired Ungava Spirits Brands.  Since the completion of the transaction on September 30, 2016, the Ungava Spirits Brands have contributed $6.2 million to revenues.  Conversely, international shipments resulting from our new strategy to focus on fewer US markets with a more premium portfolio showed a decrease compared to the prior year. In addition, the Company sold bulk whisky in 2017. The Company sells bulk whisky when needed to rebalance its maturation inventories and to align them with long-term strategies and forecasts. This is a normal industry practice and similar transactions also occurred in 2016, although the 2017 bulk sales were lower. The growth in revenues did not fully translate into net earnings as we invested behind our newly acquired brands and incurred one-off acquisition costs.

Net assets (i.e., total assets less total liabilities) increased in 2017 after a 3-year declining trend. The decrease was 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. A special dividend was not declared in 2017. 

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, Corby's mixable liqueur brands and the Ungava Spirits 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, Polar Ice and the Ungava Spirits 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 

 

Jun 30

Jun 30

Volume

Value

 

Jun 30

Jun 30

Volume

Value

(Volumes in 000's of 9L cases)

2017

2016

%

%

 

2017

2016

%

%

                   

Brand

                 

J.P. Wiser's Canadian whisky

222

207

7%

6%

 

815

810

1%

(1%)

Lamb's rum

109

94

16%

8%

 

447

450

(1%)

(7%)

Polar Ice vodka

98

101

(3%)

1%

 

372

375

(1%)

(1%)

Mixable liqueurs

42

42

(0%)

2%

 

164

167

(2%)

(3%)

Ungava Spirits Brands 1

20

-

N/A

 N/A 

 

67

-

 N/A 

 N/A 

Other Corby-owned brands

53

54

(1%)

(4%)

 

209

216

(3%)

(2%)

                   

Total Corby brands

544

498

9%

11%

 

2,074

2,018

3%

3%

                   

(1) Comparative information has not been provided for Ungava Spirits Brands, as these brands were not
owned by Corby prior to September 30, 2016.

 

Corby's owned brands experienced strong fourth quarter growth with a 9% increase in shipment volumes and an 11% increase in shipment value when compared to the same quarter last year. This increase was driven primarily by the performance of the newly acquired Ungava Spirits Brands, J.P. Wiser's Canadian whisky (Corby's flagship brand) and Lamb's rum.

On a year-over-year comparison basis, both shipment volumes and shipment value grew 3% mostly due to the performance of the Ungava Spirits Brands which helped to balance declines in Corby brands competing in economy segments Corby's brand portfolio continued to be significantly impacted by difficult economic conditions in Alberta.

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

       
 

Three Months Ended

 

Year Ended

     

Shipment Change

     

Shipment Change

 

Jun 30

Jun 30

Volume

Value

 

Jun 30

Jun 30

Volume

Value

(Volumes in 000's of 9L cases)

2017

2016

%

%

 

2017

2016

%

%

                   

Domestic

493

451

9%

12%

 

1,877

1,819

3%

5%

International

51

47

7%

(7%)

 

197

199

(1%)

(16%)

                   

Total Corby brands

544

498

9%

11%

 

2,074

2,018

3%

3%

                   

 

A strong fourth quarter in the domestic market, with both shipment volume and shipment value higher when compared to the same period last year, was mostly due to the contribution of J.P. Wiser's Deluxe, the Ungava Spirits Brands, and Lamb's rum. J.P. Wiser's Canadian whisky, Corby's flagship brand, led the shipment performance during the quarter due to the impact of LCBO purchases in anticipation of a threatened strike, which was averted end of June 2017.

For the year ended June 30, 2017, Corby's domestic shipment volume was 3% higher on a year-over-year comparative basis as the performance of Ungava Spirits Brands, J.P. Wiser's Deluxe and premium craft whiskies helped offset declines experienced by Lamb's rum, Royal Reserve and Wiser's Special Blend. Economy variants have been particularly impacted by challenging economic conditions and aggressive competitor activity in Alberta. Over the same period, Corby's domestic shipment value increased 5% due primarily to the favourable mix effect of the premium Ungava Spirits Brands which are higher priced than most of the other Corby-owned brands.

In international markets, higher shipment volumes in the quarter were largely attributable to a change in Lamb's shipment patterns as Corby transitioned to a new UK distributor early in fiscal 2017 as well as the impact of the new Ungava export business. These positive contributions were partially offset by decreased US shipments for J.P. Wiser's which also impacted overall value. Value trailed volume for both the three months and year ended June 30, 2017 as the Company's underlying pricing model with the new UK distributor has changed so that advertising and promotional spend is now included in the selling price. Value has also been impacted by a weakened UK pound sterling compared to the prior year.

For the year ended June 30, 2017, the decline in international shipments was largely attributable to a change in strategy for our Canadian whisky portfolio in the US. It was determined last fiscal year to change our US strategy as the expected consumer demand did not materialize and these products struggled against long-established brands in an increasingly price competitive segment. Corby addressed this by reprioritizing 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. As a result of this change, the Company is lapping volume activity on deprioritized variants in the comparative periods.

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 and value data, as provided by the ACD, is set out in the following table and is discussed throughout this MD&A.

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 ONLY (AS PROVIDED BY THE ACD1)

                   
 

Three Months Ended

 

Year Ended

     

% Retail

% Retail

     

% Retail

% Retail

 

Jun 30

Jun 30

Volume

Value

 

Jun 30

Jun 30

Volume

Value

(Volumes in 000's of 9L cases)

2017

2016

Growth

Growth

 

2017

2016

Growth

Growth

                   

Brand

                 

J.P. Wiser's Canadian whisky

164

161

2%

4%

 

734

726

1%

3%

Lamb's rum

81

85

(4%)

(2%)

 

350

374

(6%)

(4%)

Polar Ice vodka

83

83

(1%)

0%

 

350

351

(0%)

1%

Mixable liqueurs

34

35

(4%)

(2%)

 

161

165

(2%)

(1%)

Ungava Spirits brands

15

10

45%

42%

 

67

48

40%

39%

Other Corby-owned brands 

44

45

(3%)

(1%)

 

191

195

(2%)

%

                   

Total

421

419

0%

2%

 

1,853

1,859

(0%)

2%

                   

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

 

 

The Canadian spirits industry posted retail sales volume growth of 2% for the quarter ended June 30, 2017 and a modest 1% for the full year ended June 30, 2017. These trends were supported by double digit retail sales volume growth in the Irish whiskey and cognac categories and volume growth in tequila and bourbon categories which are categories in which Corby does not have owned-brands.

Corby's portfolio is heavily weighted in the Canadian whisky, rum and vodka categories; together they make up almost 88% of the Company's total retail volumes. The vodka category led retail volumes, increasing 1%, followed by the Canadian whisky category which was essentially flat, while the rum category continued its decline, dropping 1% this year versus last. Gin, Corby's newest participating category, increased 6% compared to 2016.

Despite the industry performance of the categories in which the Company is most heavily weighted, Corby's brand portfolio performed well with retail value growing 2%, ahead of retail volume which was essentially flat. J.P. Wiser's outperformed the industry in the key Canadian whisky category. The Ungava Spirits Brands experienced outstanding retail sales growth during the year. 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 increased 2% with retail value growing 4% when compared to the same quarter last year. Retail sales volumes for the Canadian whisky category grew 1% while retail value grew 3% when compared to the same quarter last year.

The brand's retail volumes for the year increased 1% with retail value up 3% ahead of the Canadian whisky category when compared to the same period last year. Aggressive competitive retail activity in the economy segment remains as competitors focus on maintaining share within a challenging economic environment.

Within the range, positive growth posted by J.P. Wiser's Deluxe and J.P. Wiser's Double Still Rye was dampened by J.P. Wiser's Special Blend which was impacted by an increase in competitive retail activity in the economy segments of Canadian whisky.

During fiscal 2017, Corby launched several innovative variants of the J.P. Wiser's family: J.P. Wiser's Apple, our newest flavour extension, J.P. Wiser's Union 52 and J.P. Wiser's Dissertation, super-premium limited editions and J.P. Wiser's One Fifty, in honour of Canada's 150th birthday. The J.P. Wiser's brand was supported by a high profile television campaign using the "J.P. Wiser's, Tastes Like Whisky, Since 1857" commercial that significantly focused on sports broadcasts.

J.P. Wiser's variants continue to receive accolades including J.P. Wiser's Double Still Rye and J.P. Wiser's Dissertation which were awarded Best Canadian Whisky and Best Blended Limited Release, respectively, at the World Whiskies Awards for 2017.

Lamb's Rum
Lamb's rum, one of the top-selling rum families in Canada, was significantly impacted by unfavourable consumer trends and declining economic conditions in regional strongholds. Retail volumes for the overall rum category declined 2% for the quarter and 1% for the year, while retail values remained flat for both the quarter and the year when compared to the same periods last year. The economy rum category declined 3% in retail volumes and 2% in retail value on a quarterly comparable period.

Lamb's experienced a 6% decline in retail volumes and 4% in retail value when compared to the same period last year. The Lamb's rum product line is heavily weighted in the dark and white segments and has faced difficult economic conditions and increased competitor pressure in its key markets. Our strategy remains to defend its regional strongholds with new targeted campaigns, to focus on the most differentiated variants and to launch new flavour variants such as Lamb's Spiced Cherry rum (launched in the third quarter of the fiscal year ended June 30, 2017.).

Polar Ice Vodka
Polar Ice vodka is among the top selling vodka brands in Canada. Retail volume remained relatively flat for both the quarter and the year ended June 30, 2017. This is primarily due to weak economic conditions and aggressive competitive retail activity in Alberta.

The overall vodka category in Canada grew 2% in both retail volumes and value when compared to the same three-month period last year and 1% in retail volume and 2% in retail value on a year-over-year comparable basis.  Positive performance was driven by the premium segment of the category. The standard vodka category declined 2% on a rolling twelve-month basis on retail volume and 1% on retail value.

The focus of advertising and promotion investment continues to be on driving overall brand awareness and trial especially behind the more premium Polar Ice 90 North. In a previous quarter, we launched a successful social cause campaign, including a limited edition "Bearless" bottle, to support the work done by Polar Bears International. Most recently, we launched a national "Not your Ordinary Caesar" campaign in partnership with French's.

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 4% and 2% for the quarter and year ended June 30, 2017 when compared to the same periods last year. Retail value declined 2% and 1% for the same comparable periods.

The liqueurs category grew 2% in retail volume and 3% in retail value for the three-month comparable period ended June 30, 2017 and was relatively flat at 1% volume growth and 2% value growth for the year. Category growth was led 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, McGuinness Simple Syrup and McGuinness Apple Whisky were launched in the fourth quarter of 2016, followed by McGuinness Butterscotch at the end of September and the launch of an expanded range of flavour offerings in a 375mL format to encourage consumer trial.

Ungava Spirits Brands
Retail volume for the Ungava Spirits Brands increased 45% and 40% respectively for the three months and year ended June 30, 2017, when compared to the same periods last year. Retail value increased 42% and 39% respectively for the same comparable periods. The flagship brand, Ungava Gin, grew 44% and 43% respectively for the three-month period and year ended June 30, 2017, outperforming the Canadian gin category which grew 6% in retail volume and 9% in retail value for the same periods. Retail value for Ungava Gin grew 41% and 42% respectively for the three-month and year-over-year comparable periods. Ungava Gin is now the number one Super Premium gin in Canada. 

Cabot Trail maple-based liqueurs (in Quebec, Coureur des Bois) has performed well since it's packaging upgrade. Retail volumes were 62% and 46% on the three months and year, respectively, while retail values were 63% and 47% respectively.

Other Corby-Owned Brands
Innovation remains an important pillar for delivering new profit and growth opportunities to the Corby domestic business. Relatively new premium offerings in Canadian whisky such as Pike Creek®, Lot No. 40® and Gooderham & Worts® collectively grew retail volume 15% and 44% for the respective three-month period and year ending June 30, 2017, outperforming the Canadian whisky category in Canada, which grew 1% for the three-month period year.

Lot No. 40 and Gooderham & Worts were both awarded Canadian Connoisseur Whisky of the Year at the seventh annual Canadian Whisky Awards for 2017. This is the third time Lot No. 40 has received a top honour in the last four years. Lot No. 40 was also named Best Canadian Rye Whisky at the 2016 San Francisco World Spirits Competition. Gooderham & Worts was also awarded World's Best Canadian Blended at the World Whiskies Awards for 2017.

Royal Reserve® retail volume declined 2% and 3% for the three-month period and year ended June 30, 2017, respectively, when compared to the same periods last year due to challenging economic conditions in Alberta and a significant increase in competitive retail activity in the 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 year ended June 30, 2017 and 2016. 

         

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

2017

2016

 $ Change 

 % Change 

         

Revenue

$

143.9

$

140.0

$

3.9

3%

         

Cost of sales

(51.9)

(49.4)

(2.5)

5%

Marketing, sales and administration

(57.0)

(55.6)

(1.4)

3%

Other income 

-

(0.4)

0.4

(91%)

         

Earnings from operations

35.0

34.6

0.4

1%

         

Financial income

0.9

1.1

(0.2)

(15%)

Financial expenses

(1.0)

(1.0)

(0.1)

8%

 

(0.1)

0.1

(0.2)

(172%)

         

Earnings before income taxes

34.9

34.7

0.2

1%

Income taxes

(9.3)

(9.3)

-

0%

         

Net earnings

$

25.6

$

25.4

$

0.2

1%

         

Per common share

       
 

- Basic net earnings                                                  

$

0.90

$

0.89

$

0.01

1%

 

- Diluted net earnings

$

0.90

$

0.89

$

0.01

1%

 

Overall Financial Results
Net earnings, largely driven by solid growth in commissions on PR Brands, increased $0.2 million or 1% when compared to last year. The improvement in net earnings was also impacted by the reduction in advertising and promotional investment in the US (related to the Company's change in strategy with respect to Canadian whisky in that market as previously mentioned in the "Brand Performance Review" section of this MD&A). This was offset by increased domestic advertising and promotional investment to defend market share in regional strongholds, lower bulk whisky sales in 2017 compared to 2016, and certain one-off administration expenses related to the acquisition of the Ungava Spirits Brands.

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

         

(in millions of Canadian dollars)

2017

2016

$ Change

 % Change 

         

Revenue streams:

       
 

Case goods

$

114.8

$

111.1

$

3.7

3%

 

Commissions

24.9

23.0

1.9

8%

 

Other services                    

4.2

5.9

(1.7)

(29%)

         

Revenue

143.9

140.0

3.9

3%

         

 

Case goods revenue increased by $3.7 million, or 3%, for the year ended June 30, 2017, when compared to the same period last year. The growth is primarily attributable to the performance of the Ungava Spirits Brands acquired on September 30, 2016, which have offset declines in US case good shipments. As previously discussed, changes to Corby's strategy in the US market have impacted case good sales during the current year.

Commissions increased by $1.9 million, or 8%, attributable to strong performance from the PR brand portfolio. The PR brand portfolio continues to benefit from its positioning within the premium spirit and wine categories along with PR's investment to build these brands in Canada.

Other services represent ancillary revenue incidental to Corby's core business activities, such as logistical fees and from time to time bulk whisky sales. The reduced revenue for the year was mostly attributable to an underlying modification to the logistical activities Corby performs. While these modifications impact revenue, net earnings remain virtually unchanged, as the Company no longer bears the economic risks associated with these activities.  As well, there was a decrease in bulk whisky sales as the Company continued to rebalance its maturation inventories.

Cost of sales
Cost of sales was $51.9 million for the year ended June 30, 2017, an increase of $2.5 million, or 5% when compared with last year. Overall gross margin on case goods was 56% this year, compared to 58% the same period last year impacted by changes to our distributor co-pack model in the UK (note: commissions are not included in the gross margin calculation).

Marketing, sales and administration
Marketing, sales and administration expenses increased by $1.4 million, or 3% when compared to last year.  The change year-over-year is due to an increase in domestic advertising and promotional investment behind J.P. Wiser's Canadian whisky, Polar Ice vodka, craft whiskies and, as of the acquisition date, promotional efforts and overheads related to the Ungava Spirits Brands, partially offset by the previously mentioned change in advertising and promotional strategy in the US. In addition, higher overheads included certain one-off items related to employee costs as well as professional fees associated with the acquisition of the Ungava Spirits Brands.

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. On an annual basis, net financial income is consistent on a comparative basis.

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

         
     

2017

2016

         

Combined basic Federal and Provincial tax rates

   

26.8%

26.8%

Other

   

(0.1)%

0.0%

         

Effective tax rate

   

26.7%

26.8%

         

 

Liquidity and Capital Resources

Corby's sources of liquidity are its deposits in cash management pools of $74.3 million as at June 30, 2017, and its cash generated from operating activities. Corby's total contractual maturities are represented by its accounts payable and accrued liabilities, which totalled $31.3 million as at June 30, 2017, 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)

2017

2016

$ Change

       

Operating activities

     
 

Net earnings, adjusted for non-cash items

$

41.4

$

41.2

$

0.2

 

Net change in non-cash working capital

(4.1)

(3.7)

(0.4)

 

Net payments for interest and income taxes

(9.5)

(4.2)

(5.3)

 

27.8

33.3

(5.5)

       

Investing activities

     
 

Additions to capital assets

(3.5)

(3.1)

(0.4)

 

Proceeds from disposition of capital assets

0.1

-

0.1

 

Business Acquisition

(11.9)

-

(11.9)

 

Deposits in cash management pools

10.8

9.1

1.7

 

(4.5)

6.0

(10.5)

       

Financing activity

     
 

Dividends paid

(23.3)

(39.3)

16.0

 

(23.3)

(39.3)

16.0

       

Net change in cash

$

-

$

-

$

-

             

 

Operating activities
Net cash from operating activities was $27.8 million during the year ended June 30, 2017, compared to $33.3 million last year, representing a decrease of $5.5 million. This decrease is largely a result of increased tax payments in the current year. Cash flows from operating activities for the year ended June 30, 2016 included a refund received upon filing of the 2015 taxation returns. As well, fiscal 2016 tax instalments, as prescribed by the Canadian tax authorities, were lower as they were based on 2015 taxable income. 

Investing activities
During the year ended June 30, 2017, $4.5 million was used in investing activities compared to $6.0 million generated from investing activities last year.

The Company's completion of the acquisition of the Ungava Spirits Brands and additions to capital assets were funded by withdrawals from cash management pools during the year ended June 30, 2017. 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 was $23.3 million for the year ended June 30, 2017, compared to $39.3 million last year and represents payment of the Company's regular dividend to shareholders. The comparative period included a special dividend of $17.7 million or $0.62 per common share.

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

2017 - Q4

 

August 23. 2017

 

September 15, 2017

 

September 29, 2017

 

$

0.21

2017 - Q3

 

May 10, 2017

 

May 26, 2017

 

June 14, 2017

 

0.21

2017 - Q2

 

February 8, 2017

 

February 24, 2017

 

March 10, 2017

 

0.21

2017 - Q1

 

November 9, 2016

 

November 25, 2016

 

December 9, 2017

 

0.21

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, 2016

 

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

 

Outstanding Share Data

As at August 23, 2017, 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, 2017:

             
 

Payments

Payments

Payments

Payments

Obligations

 
 

During

due in 2019

due in 2021

due after

with no fixed

 
 

2018

and 2020

and 2022

2022

maturity

Total

             

Operating lease obligations

$

1.6

$

2.6

$

1.6

$

2.2

$

-

$

8.0

Employee future benefits

-

-

-

-

18.3

18.3

             
 

$

1.6

$

2.6

$

1.6

$

2.2

$

18.3

$

26.3

                         

 

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 North American 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 agreed to 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 agreed to 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 (the "2011 Agreement"). 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 2011 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 "US Representation Agreement"). The US Representation 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. This agreement ended June 30, 2017. On March 29, 2017, the Company entered into an amending agreement with PR USA to extend the term of the US Representation Agreement to June 30, 2018 (the "Amending Agreement"). As the US Representation Agreement and the Amending Agreement with PR USA is a related party transaction between Corby and PR USA; as such, the agreements were approved by the Independent Committee of the Board of Directors of Corby following 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 23, 2017, 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 2017

The following table presents a summary of certain selected consolidated financial information for the Company for the three-month periods ended June 30, 2017 and 2016:

       
 

Three Months Ended

   
 

June 30,

June 30,

   

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

2017

2016

 $ Change 

 % Change 

         

Revenue

$

40.2

$

37.2

$

3.0

8%

         

Cost of sales

(13.8)

(12.1)

(1.7)

14%

Marketing, sales and administration

(14.6)

(12.1)

(2.5)

21%

Other income (expense)

(0.0)

(0.2)

0.2

(92%)

         

Earnings from operations

11.8

12.8

(1.0)

(8%)

         

Financial income

0.2

0.2

(0.0)

(12%)

Financial expenses

(0.3)

(0.2)

(0.0)

10%

 

(0.0)

0.0

(0.1)

(510%)

         

Earnings before income taxes

11.7

12.8

(1.1)

(8%)

Income taxes

(3.0)

(3.4)

0.4

(12%)

         

Net earnings

$

8.7

$

9.3

$

(0.6)

(7%)

         

Per common share

       
 

- Basic net earnings                                                    

$

0.30

$

0.33

$

(0.03)

(9%)

 

- Diluted net earnings

$

0.30

$

0.33

(0.03)

(9%)

 

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)

2017

2016

$ Change

 % Change 

         

Revenue streams:

       
 

Case goods

$

31.7

$

28.6

3.0

11%

 

Commissions

6.6

5.9

0.6

11%

 

Other services               

2.0

2.6

(0.7)

(25%)

         

Revenue

$

40.2

$

37.2

$

3.0

8%

               

Total revenue increased 8% on a quarter-over-quarter comparison basis, or $3.0 million. This was driven by Corby's Case Goods business (up $3.0 million) and a significant 9% improvement in shipment volumes which were largely attributable to the Ungava Spirits Brands and order timing in Ontario due to the impact of LCBO purchases in anticipation of a threatened strike. Case Goods revenue also benefitted from improved pricing and portfolio mix. Commissions compared to the same period last year were up $0.6 million due to increased volumes and general price increases from represented brands.  

Other services represent ancillary revenue incidental to Corby's core business activities, such as logistical fees and from time to time bulk whisky sales. The reduced revenue for the quarter was mostly attributable to the modification to the logistical activities Corby performs and decreased bulk whisky sales, as the Company continued to rebalance its maturation inventories.

Cost of Sales
Cost of goods sold was $13.8 million, representing a $1.7 million, or 14% increase this period when compared with the same three-month period last year. Gross margin was 59% for the current year quarter compared to 61% the same quarter last year impacted by changes to our distributor co-pack model in the UK (note: commissions are not included in the gross margin calculation).

Marketing, sales and administration
Marketing, sales and administration expenses increased $2.5 million, or 21% over the same quarter last year. The increase is the combination of increased domestic advertising and promotional investment behind J.P. Wiser's Canadian whisky in support of a packaging upgrade and new advertising creative development; Polar Ice vodka and Lamb's rum to maintain market share in regional strongholds; as well as promotional efforts and overheads related to the Ungava Spirits Brands. 

Increased advertising and promotional spend has been invested behind craft whiskies in international markets.

Net earnings and earnings per share
Net earnings for the fourth quarter were $8.7 million, or $0.30 per share, which is a decrease of $0.6 million over the same quarter last year. As discussed previously, increased promotional investment, administration costs related to the management of the Ungava Spirits Brands and decreased bulk sales offset strong Case Goods performance and higher commissions from PR brands.

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)

2017

2017

2017

2017

2016

2016

2016

2016

                 

Revenue

$

40.2

$

28.8

$

40.3

$

34.6

$

37.2

$

28.0

$

38.3

$

36.4

Earnings from operations

11.7

4.6

9.8

8.8

12.8

5.0

8.2

8.6

Net earnings

8.7

3.3

7.2

6.4

9.3

3.7

6.1

6.3

Basic EPS

0.30

0.12

0.25

0.23

0.33

0.13

0.22

0.22

Diluted EPS

0.30

0.12

0.25

0.23

0.33

0.13

0.22

0.22

                 

 

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.

Revenues for the second, third and forth quarters of 2017 include case good sales for the Ungava Spirit Brands. The Ungava Spirits Brand were acquired on September 30, 2016 and since the completion, the acquired Ungava Spirits Brands have contributed $6.2 million to revenues and -$0.1 million to net earnings.

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, 2017, 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 continues to assess 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)    Leases

In January 2016, the IASB issued a new standard IFRS 16, "Leases" ("IFRS 16"), which will ultimately replace IAS 17, "Leases" ("IAS 17"). IFRS 16 specifies how an entity will recognize, measure, present and disclose leases. The standard provides a single lessees accounting model, requiring lessees to recognize assets and liability for all leases unless the lease term is 12 months or less or the underlying asset has a low value. The standard is effective for annual periods beginning on or after January 1, 2019 and must be applied retrospectively. For Corby, this standard will become effective July 1, 2019. The Company is currently assessing the impact of the new standard on its financial statements and disclosures.

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, 2017, 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.

In accordance with the provisions of National Instrument 52-109 – Certification of disclosure in Issuers' Annual and Interim Filings, the Company has limited the design of its disclosure controls and procedures and internal control over financial reporting to exclude controls, policies and procedures of Ungava Spirits. Corby acquired the Ungava Spirits Brands on September 30, 2016, and the brand portfolio and other assets acquired are currently operated by Corby's wholly-owned subsidiary, Ungava Spirits.

Further details related to the acquisition of the Ungava Spirits Brands is disclosed under "Significant Event – Acquisition of the spirits assets of Quebec-based Domaines Pinnacle Inc." in this MD&A and in Note 6 in the Notes to the Company's consolidated financial statements for year ended June 30, 2017.

Since the completion of the Ungava Spirits Brands transaction on September 30, 2016, the acquired Ungava Spirits Brands have contributed $6.2 million to revenues and -$0.1 million to net earnings. These results are impacted by seasonal fluctuations in that the retail holiday season generally results in an increase in consumer purchases over the course of October, November and December. The purchase price has been allocated as described in Note 6 to the consolidated financial statements for the year ended June 30, 2017.

The scope limitation discussed under this section is primarily based on the time required to assess Ungava Spirits' disclosure controls and procedures and internal controls over financial reporting in a manner that is consistent with the Company's other operations. Subsequent to the acquisition on September 30, 2016, the Company began and is now well underway on the integration of Ungava Spirits into our systems and control structures. The assessment on the design effectiveness of DC&P and internal controls over financial reporting is on track for completion by the first quarter of 2018 and the assessment of operating effectiveness thereafter. 

Except for the preceding changes, there were no changes in internal control over financial reporting during the Company's most recent annual 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 alcoholic beverage 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.

Additionally, 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 (including on matters such as regulatory requirements, import duties and taxation) 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 maturing products there is a potential for shortages or surpluses in future years if demand and supply are materially different from long-term forecasts. Additionally, the loss through contamination, fire or other natural disaster of the stock of maturing products may result in significant reduction in supply and as a result, Corby may not be able to meet customer demands. The Company monitors category trends and regularly reviews maturing inventory levels.

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 largely 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.

Corby's ability to properly complete acquisitions and subsequently integrate them may affect its results
Corby monitors growth opportunities that may present themselves to Corby, including by way of acquisitions. While we believe that an acquisition may create the opportunity to realize certain benefits, achieving these benefits will depend in part on successfully consolidating functions and integrating operations, procedures and personnel in an efficient manner, as well as our ability to realize any anticipated growth opportunities or costs-savings from combining the target's assets and operations with our existing brands and operations. Integration efforts following any acquisition may require the dedication of substantial management effort, time and resources which may divert management's focus and resources from other strategic opportunities and from operational matters during this process. In addition, Corby may be required to assume greater than expected liabilities due to liabilities that are undisclosed at the time of completion of an acquisition. A failure to realize, in whole or in part, the anticipated benefits of an acquisition may have a negative impact on the results or financial position of Corby.

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, which may negatively affect our sales, revenues and profitability. Corby constantly monitors the market and adjusts its own advertising, promotion and pricing 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.

Additionally, although the Company registers trademarks, as applicable, it cannot be certain that trademark registrations will be issued with respect to all of the Company's applications. Also while Corby constantly watches for and responds to competitive threats, as necessary, the Company cannot predict challenges to, or prevent a competitor from challenging the validity of any existing or future trademark issued or licensed to Corby.

Information Technology and Cyber Security
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, 2017

             

Associated Brand

 

Associated Market

 

Goodwill

Intangibles

Total

             

Various PR brands

 

Canada

 

$

-

$

24.6

$

24.6

Lamb's rum

 

United Kingdom(1)

 

1.4

11.8

13.2

Ungava brands (2)

 

Canada

 

5.1

3.2

8.3

Other domestic brands

 

Canada 

 

1.9

-

1.9

             
       

$

8.4

$

39.6

$

48.0

             

(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.

(2)The Ungava brands include trademarks related to Ungava Premium Canadian Gin, Chic Choc Spiced Rum and Cabot Trail
maple-based liqueurs.