Corby Distilleries announces quarterly dividend and reports first quarter financial results
TORONTO, Nov. 6, 2013 /CNW/ - Corby Distilleries Limited ("Corby" or the "Company") (TSX: CDL.A) (TSX: CDL.B) today reported its financial results for the first quarter ended September 30, 2013. The Corby Board of Directors today also declared a dividend of $0.18 per share payable on December 13, 2013 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 November 29, 2013.
Net earnings for the quarter ended September 30, 2013 totaled $7.5 million (or $0.26 per share), representing an increase of $0.6 million when compared with the same quarter last year. The improved earnings performance this quarter was mostly driven by the launch of J.P. Wiser's Rye and J.P. Wiser's Spiced Canadian whiskies in the US market. The first quarter launch drove new shipments as the Company began to fill distribution channels. However, it should be noted that given the early stages of the launch, advertising and promotional investment has not yet ramped up to full levels. As such, the profitability experienced in the first quarter will not be maintained as it is imperative to invest heavily behind the brand to build success over the long-term. In addition to the launch, Corby's commissions business delivered a strong commercial performance and benefited from our new wine presence with several products added to our portfolio of agency brands.
Several factors partially offset these positive impacts, the most significant of which was a reduction in earnings from bulk whisky sales as the Company stopped selling bulk in September 2012. Other offsetting impacts include increased advertising and promotional investment behind Corby's owned-brands, reduced shipment volumes in the UK market due to production timing, and inflationary-type increases in other selling and administrative costs.
"I am pleased that the key strategic initiatives we built last year have clearly started to deliver - particularly our increased presence in wine and the launch of a new whisky portfolio in the US market," noted Patrick O'Driscoll, President and Chief Executive Officer of Corby.
The Company also announced that Corby shareholders approved a resolution to change the legal name of the company from Corby Distilleries Limited to Corby Spirit and Wine Limited. As part of the change, Corby will now trade as "CSW.A" and "CSW.B" on the Toronto Stock Exchange effective at the start of trading on Tuesday, November 12, 2013.
For further details, please refer to Corby's management's discussion and analysis and interim condensed consolidated financial statements and accompanying notes for the three-month period ended September 30, 2013, prepared in accordance with International Financial Reporting Standards.
About Corby
Corby Distilleries Limited is a leading Canadian marketer of spirits and imported wines. Corby's portfolio of owned-brands includes some of the most renowned brands in Canada, including Wiser's® Canadian whisky, Lamb's® rum, Polar Ice® vodka and McGuinness® liqueurs. Through its affiliation with Pernod Ricard S.A., 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® and Graffigna® wines.
The existing Voting Class A Common Shares and Non-voting Class B Common Shares of the Company are traded on the Toronto Stock Exchange under the symbols CDL.A and CDL.B, respectively.
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, the Company's results 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 DISTILLERIES LIMITED
Management's Discussion and Analysis
September 30, 2013
The following Management's Discussion and Analysis ("MD&A") dated November 6, 2013, should be read in conjunction with the unaudited interim condensed consolidated financial statements and accompanying notes as at and for the three month period ended September 30, 2013, prepared in accordance with International Financial Reporting Standards ("IFRS"). These unaudited interim condensed financial statements do not contain all disclosures required by IFRS for annual financial statements and, accordingly, should also be read in conjunction with the most recently prepared annual consolidated financial statements for the year ended June 30, 2013.
This MD&A contains forward-looking statements, including statements concerning possible or assumed future results of operations of Corby Distilleries Limited ("Corby" or the "Company"). 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, 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. Additional factors are noted elsewhere in 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 November 6, 2013. 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 first quarter of fiscal 2014 (three months ended September 30, 2013) are against results for the first quarter of fiscal 2013 (three months ended September 30, 2012). 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 "CDL.A" (Voting Class A Common Shares) and "CDL.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. 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 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® and Graffigna® 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.
The Company expanded its agency portfolio, particularly with regard to our strategic priority of wines, via a new agreement (which began April 2013) with The Wine Group LLC ("The Wine Group"), providing Corby with the exclusive rights to represent The Wine Group brands in Canada for the next five years (expiring May 2018). The agreement complements Corby's owned and represented brands and expands Corby offerings in the premium wine sector. Corby now represents all The Wine Group brands, including Cupcake Vineyards, Big House Wine Co., Concannon Vineyard, Grayfox Vineyards and Mogen David Wine Co.
Pursuant to a production agreement that expires in September 2016, PR produces Corby's owned-brands at HWSL's production facility in Windsor, Ontario. Under the production agreement, Corby manages PR's business interests in Canada, including HWSL's production facility, also until September 2016.
The Company sources more than 80% 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 the formerly owned bottling plant in Montreal, Quebec. The Company also utilizes a third-party manufacturer in the UK to produce its Lamb's rum 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. 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 both in volume (measured in nine-litre-case equivalents) and in retail value (measured in Canadian dollars).
Corby's international business is concentrated in the 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. For the UK market, Corby utilizes a third party contract bottler and distribution company for the production and distribution of Lamb's rum. 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 moving forward.
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 (i.e., the sale of the Seagram Coolers brand in March 2011, and the October 2011 sale of certain non-core brands and the subsidiary that owned the Montreal bottling facility) 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 United States is an important step towards expanding our Canadian whisky business into this market where we see 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 focused around the differing needs of its customers and the selling channels they inhabit. In all areas of the business, management believes setting clear strategies which optimize organization structure and increase 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 ("R&D"). As far as R&D is concerned, the Company benefits from access to leading-edge practices at PR's North American hub, which is located in Windsor, Ontario.
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. Most recently, Corby partnered with the Toronto Transit Commission to provide free transit on New Year's Eve for the next three years. The Company stresses its core values throughout its organization, including those of conviviality, straightforwardness, commitment, integrity and entrepreneurship.
Significant Events
Corby Launches J.P. Wiser's Rye and J.P. Wiser's Spiced Canadian Whisky in the US Market
In July 2012, the Company reached a new agreement with PR USA to represent Corby brands in the United States for a five year period, giving Corby access to one of the strongest spirits distribution networks in the US market.
Since signing the agreement a year ago, Corby and PR USA have been readying Corby's whisky portfolio for a national launch which began this quarter. Specifically, Corby has developed two new Wiser's brand extensions under the names J.P. Wiser's Rye and J.P. Wiser's Spiced Whisky. The launch is currently still in the initial phase, but already has had an impact on our first quarter financial results and will be discussed throughout this MD&A.
Corby Continues its Exclusive Canadian Representation of the Iconic ABSOLUT Vodka Brand
On September 30, 2013, Corby paid $10.3 million to continue its exclusive rights to represent the ABSOLUT vodka brand in Canada for an eight-year period ending September 29, 2021. The previous representation period expired September 29, 2013. The terms of this agreement are further described in the "Related Party Transactions" section of this MD&A. The transaction was accounted for as an increase in Intangible Assets and will be amortized, straight-line, over the eight-year term of the agreement. Amortization expense will be recorded net of commission revenues. The payment was funded from the Company's deposits in cash management pools.
Brand Performance Review
Corby's portfolio of owned-brands accounts for more than 80% of the Company's total annual revenue. Included in this portfolio are its key brands: 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 chart summarizes the performance of Corby's owned-brands 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 gross sales revenue). The chart includes results for sales in both Canada and international markets. Specifically, the 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 | ||||||
| % Shipment | % Shipment | |||||
| Sept. 30, | Sept. 30, | Volume | Value | |||
| (Volumes in 000's of 9L cases) | 2013 | 2012 | Growth | Growth | ||
| Brand | ||||||
| Wiser's Canadian whisky | 242 | 204 | 19% | 28% | ||
| Lamb's rum | 124 | 150 | (17%) | (15%) | ||
| Polar Ice vodka | 96 | 109 | (12%) | (12%) | ||
| Mixable liqueurs | 47 | 41 | 15% | 17% | ||
| Total Key Brands | 509 | 504 | 1% | 8% | ||
| Other Corby-owned brands | 57 | 58 | (2%) | 4% | ||
| Total Corby brands | 566 | 562 | 1% | 7% | ||
Overall, Corby brands experienced 1% growth in shipment volumes and 7% growth in shipment value when compared to the same three-month period last year. However, trends in the domestic and international markets were significantly different as highlighted in the following chart:
| Three Months Ended | ||||||
| % Shipment | % Shipment | |||||
| Sept. 30, | Sept. 30, | Volume | Value | |||
| (Volumes in 000's of 9L cases) | 2013 | 2012 | Growth | Growth | ||
| Domestic | 499 | 505 | (1%) | 1% | ||
| International | 67 | 57 | 18% | 104% | ||
| Total Corby brands | 566 | 562 | 1% | 7% | ||
Shipments to Canadian customers were relatively consistent quarter-over-quarter (volumes declined 1%, and shipment value improving by 1%) while shipments to international markets increased 18% accompanied by an exceptional increase in shipment value driven by premium pricing of J.P. Wiser's in the U.S. market along with the impact of changes to country mix between the US and the UK.
The growth internationally comes from Corby's launch this quarter of J.P. Wiser's Rye and J.P. Wiser's Spiced Canadian whisky in the US market. The launch is in its initial stages where distribution channels are being filled, thus volumes experienced this quarter may not be representative of future shipment patterns. The shipment growth in the US market was partially offset by a decline in Lamb's UK shipments due primarily to a shift in production timing at our third-party bottling facility.
From a branded perspective, the growth in Wiser's was offset by declines in Lamb's rum and Polar Ice vodka. The aforementioned launch of J.P. Wiser's in the US market was accompanied by a solid 4% increase in Canadian shipments as the Wiser's brand once again outpaced its category in Canada and continues to be supported by the highly successful Welcome to the Wiserhood and That's Spiced Up television and media campaigns.
Lamb's rum shipment volumes decreased mostly due to production timing at our third-party bottling facility in the UK market. Note that production timing impacts are not indicative of an underlying issue, rather simply impacts timing of shipments between financial reporting periods. In Canada, Lamb's rum shipments were down as we cycled against last year's re-launch of Lamb's Black Sheep, which is the brand family's spiced variant. While Lamb's Black Sheep continues its strong growth at the retail level (+8% in retail volume), Lamb's white is competing in a difficult white rum category with the market currently trending at -8% in retail volume. Polar Ice vodka's shipment volumes declined 12% compared to the same period last year as we cycled against heavy promotional programming in the first quarter of 2012. Finally, Corby's mixable liqueur brands benefited from the launch of new product offerings during the current quarter which were not available in the same quarter last year.
Retail Volume and Retail Value 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 data, as provided by the ACD, is set out in the following chart and is discussed throughout this MD&A. It should be noted that the retail sales information presented does not include international retail sales of Corby-owned brands:
| RETAIL SALES FOR THE CANADIAN MARKET ONLY1 | |||||||
| Three Months Ended | |||||||
| % Retail | % Retail | ||||||
| Sep. 30, | Sep. 30, | Volume | Value | ||||
| (Volumes in 000's of 9L cases) | 2013 | 2012 | Growth | Growth | |||
| Brand | |||||||
| Wiser's Canadian whisky | 173 | 172 | 0% | 2% | |||
| Lamb's rum | 104 | 108 | (4%) | (2%) | |||
| Polar Ice vodka | 90 | 103 | (12%) | (6%) | |||
| Mixable liqueurs | 42 | 43 | (1%) | 0% | |||
| Total Key Brands | 409 | 426 | (4%) | (1%) | |||
| Other Corby-owned brands | 53 | 52 | 1% | (3%) | |||
| Total | 462 | 478 | (3%) | (1%) | |||
| (1) Refers to sales at the retail store level in Canada, as provided by the Association of Canadian Distillers. | |||||||
The Canadian spirits industry as a whole saw retail sales volumes decline 1% this quarter when compared to the same three-month period last year, while industry retail sales value increased 1% over the same period. As noted above, Corby's brand portfolio experienced retail volume and value declines of 3% and 1%, respectively, primarily driven by Polar Ice vodka promotional phasing.
Corby's portfolio is heavily weighted in the Canadian whisky, white rum and vodka categories; as together they combined to make up over 80% of the Company's total retail volumes. During the quarter, all three categories showed declines in retail volume. Vodka and Canadian whisky were relatively flat for retail sales value. The white rum category continued to be negatively impacted by consumer trends favouring spiced rum and showed retail volume and value declines of 8% and 7%, respectively. Further discussion and analysis of each of Corby's key brands is noted below.
Summary of Corby's Key Brands
Wiser's Canadian Whisky
Corby's flagship brand, Wiser's Canadian whisky, continued to outperform the Canadian whisky category with steady retail volumes and +2% growth in retail value during the quarter when compared to the same three-month period last year, gaining market share. The Canadian whisky category declined 2% quarter-over-quarter in retail volume and remained flat for retail value. Corby continued its strong investment behind the brand, with a new version of its highly successful Welcome to the Wiserhood television commercial. In addition, Wiser's Spiced (launched last year in Canada) continued its outstanding growth (+15% in shipment volumes) in this new innovative spiced whisky category, supported by That's Spiced Up campaign.
Lamb's Rum
Lamb's rum, one of the top-selling rum families in Canada, experienced a 4% decline in retail volumes and a 2% decline in retail value when compared to the same quarter last year. The white rum segment, for which Lamb's rum is heavily weighted, is down -8% in retail volume and -7% in retail value on a quarter-over-quarter basis. Growth in the rum category has been entirely driven by spiced rum. Lamb's Black Sheep, Corby's spiced rum variant, continued to out-perform the overall rum category with retail volume and retail value growth of +8% and +11%, respectively, when compared to the same quarter last year.
Polar Ice Vodka
Polar Ice vodka is among the top three largest vodka brands in Canada. On a quarter-over-quarter basis, the brand's retail volumes and retail value fell -12% and -6%, respectively. However, the decline is the result of timing of promotional activity conducted during the first quarter last year. The vodka category reported an overall decline of 1% in retail volume and retail value remained flat during the period.
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. Quarter-over-quarter, retail volume and retail value for Corby's mixable liqueurs portfolio is slightly ahead of market trends (retail volume -1% and retail value was flat), as the category as a whole declined -2% for retail volume and remained flat for retail value. Corby continues to innovate in this category, most recently launching a new line of luxury chocolate liqueurs, Criollo® Chocolate Sea Salted Caramel and Criollo® Chocolate Raspberry Truffle.
Other Corby-Owned Brands
Other Corby-Owned brands as a group had 1% growth in retail volume and -3% decline in retail value when compared to the same three-month period last year. Royal Reserve, a Canadian whisky, is the most significant brand in this grouping. This brand's performance was behind the Canadian whisky category, with retail volumes at -4% and retail value at -3% on a quarter-over-quarter basis. Also included in this group are two new premium small-batch Canadian whisky innovations introduced earlier in this fiscal year, "Pike Creek" and "Lot 40", both of which have been well received by the whisky community. Lot 40 was named "Canadian Whisky of the Year" by Whisky Advocate magazine.
Financial and Operating Results
The following table presents a summary of certain selected consolidated financial information of the Company for the three month periods ended September 30, 2013 and 2012.
| Three Months Ended | |||||||||
| (in millions of Canadian dollars, | Sept. 30, | Sept. 30, | |||||||
| except per share amounts) | 2013 | 2012 (1) | $ Change | % Change | |||||
| Revenue | $ | 36.7 | $ | 35.9 | $ | 0.8 | 2% | ||
| Cost of sales | (12.8) | (14.0) | 1.2 | (9%) | |||||
| Marketing, sales and administration | (14.0) | (12.5) | (1.5) | 12% | |||||
| Other income (expense) | 0.0 | 0.1 | (0.1) | (73%) | |||||
| Earnings from operations | 9.9 | 9.5 | 0.4 | 5% | |||||
| Financial income | 0.5 | 0.5 | - | 2% | |||||
| Financial expenses | (0.3) | (0.3) | - | 7% | |||||
| Net financial income | 0.2 | 0.2 | 0.0 | 30% | |||||
| Earnings before income taxes | 10.1 | 9.7 | 0.4 | 4% | |||||
| Income taxes | (2.6) | (2.8) | 0.2 | (9%) | |||||
| Net earnings | $ | 7.5 | $ | 6.9 | $ | 0.6 | 9% | ||
| Per common share | |||||||||
| - Basic net earnings | $ | 0.26 | $ | 0.24 | $ | 0.02 | 9% | ||
| - Diluted net earnings | $ | 0.26 | $ | 0.24 | $ | 0.02 | 9% | ||
| 1 In preparing its comparative information, the Company has adjusted amounts reported previously in the condensed consolidated financial statements as a result of the retrospective application of the amendments to IAS 19, Employee Benefits. Refer to Note 3 for details regarding adjusted amounts. |
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Corby's first quarter results reflect a 9% increase in net earnings and earnings per share when compared to the same three-month period last year. This improvement was primarily driven by Corby's launch of "J.P. Wiser's Rye and J.P. Wiser's Spiced Canadian whisky in the US market. The first quarter launch drove new shipments as the Company began to fill distribution channels, contributing $1.1 million to net earnings in the first quarter. However, it should be noted that given the early stages of the launch, advertising and promotional investment has not yet ramped up to full levels. As such, the profitability experienced in the first quarter will not be maintained as it is imperative to invest heavily behind the brand to build success over the long-term.
Corby's commission business also contributed, providing an additional $0.5 million in earnings this quarter when compared to the same quarter last year. A strong commercial performance from the PR brand portfolio combined with commissions earned from the addition of new wine brands into Corby's agency portfolio.
Several factors partially offset these positive impacts, the most significant of which was a $0.5 million reduction in earnings from bulk whisky sales as the Company stopped selling bulk in September 2012. Other offsetting impacts include increased advertising and promotional investment behind Corby's owned-brands, reduced shipment volumes in the UK market due to production timing, and inflationary-type increases in other selling and administrative costs.
Revenue
The following highlights the key components of the Company's revenue streams:
| Three Months Ended | ||||||||
| Sept. 30, | Sept. 30, | |||||||
| (in millions of Canadian dollars) | 2013 | 2012 | $ Change | % Change | ||||
| Revenue streams: | ||||||||
| Case goods | $ | 30.5 | $ | 28.5 | $ | 2.0 | 7% | |
| Commissions | 5.0 | 4.3 | 0.7 | 17% | ||||
| Other services | 1.2 | 3.1 | (1.9) | (62%) | ||||
| Revenue | $ | 36.7 | $ | 35.9 | $ | 0.8 | 2% | |
Revenue increased 2% or $0.8 million, when compared to the same three-month period last year. This increase is driven by case good sales and commissions. Other services include bulk sales and logistical fees. As previously mentioned bulk whisky sales included in the three-month period ending September 30, 2012 did not recur in the current quarter.
As Corby's shipments in Canada declined 1%, the aforementioned launch in the US market was the primary contributor to the quarter-over-quarter increase in case goods revenue. These newly launched products, J.P. Wiser's Rye and J. P. Wiser's Spiced Whisky, demand premium prices and are responsible for the increase on both a value and volume basis. Offsetting the growth experienced in the US market is a decline in our UK business when compared to the same period last year. This decline is largely the result of production phasing.
Commission revenue increased $0.7 million or 17% on a quarter-over-quarter comparative basis. Commission revenues are generated through the representation of many international brands in Canada through Corby's affiliation with PR as well as a select number of unrelated third-party agency brands. The growth this quarter was due to both a strong commercial performance from the PR brand portfolio (shipment volumes were +3%), combined with new commissions earned from Corby's recently added agency partner, The Wine Group.
Cost of sales
Cost of sales was $12.8 million, representing a decrease of 9%, or $1.2 million when compared to the same quarter last year. The decrease in cost of sales is mostly the result of the Company's cessation of its bulk whisky business in September 2012. Corby stopped selling bulk once it fulfilled its contractual commitments to its former contract bottling customer.
Gross margin for the year was 59.6% versus 55.6% last year (note: commissions are not included in this calculation). The improved gross margin reflects the higher sales price of its new premium products launched into the US market this quarter. As well, another factor is that the comparative period included bulk whisky sales, which are typically lower margin than case goods.
Marketing, sales and administration
Marketing, sales and administration expenses were $14.0 million for the first quarter ended September 30, 2013, which is an increase of 12% or $1.5 million compared to the same quarter last year. The increase is primarily driven by having increased advertising and promotional investment behind the Company's owned-brands. There were relatively minor inflationary-type increases related to selling and administrative costs. The increased advertising and promotional investment was used to support activities in both Canada and the US market.
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 balances comprising this account were consistent quarter-over-quarter.
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. This balance is consistent quarter-over-quarter.
Income taxes
Income tax expense for the quarter was $2.6 million as compared to $2.8 million last year. The effective tax rate is impacted by permanent differences between financial income and income reported for taxation purposes as well as the impact of other adjustments that arise upon the completion of annual tax filings.
| Three Months Ended | ||||||
| Sept. 30, | Sept. 30, | |||||
| 2013 | 2012 | |||||
| Combined basic Federal and Provincial tax rates | 26.6% | 26.6% | ||||
| Other | (1.3%) | 2.0% | ||||
| Effective tax rate | 25.3% | 28.6% | ||||
Liquidity and Capital Resources
Corby's sources of liquidity are its deposits in cash management pools of $95.0 million as at September 30, 2013, and its cash generated from operating activities. Corby's total contractual maturities are represented by its accounts payable and accrued liabilities, which totalled $24.6 million as at September 30, 2013, 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
| Three Months Ended | ||||||||
| Sept. 30, | Sept. 30, | $ | ||||||
| (in millions of Canadian dollars) | 2013 | 2012 (1) | Change | |||||
| Operating activities | ||||||||
| Net earnings, adjusted for non-cash items | $ | 11.4 | $ | 10.9 | $ | 0.5 | ||
| Net change in non-cash working capital | (6.8) | 2.0 | (8.8) | |||||
| Net payments for interest and income taxes | (2.4) | (5.9) | 3.5 | |||||
| 2.2 | 7.0 | (4.8) | ||||||
| Investing activities | ||||||||
| Additions to property and equipment | (0.1) | - | (0.1) | |||||
| Additions to intangible assets | (10.3) | - | (10.3) | |||||
| Proceeds from disposition of property and equipment | - | 0.2 | (0.2) | |||||
| Withdrawals from (deposits in) cash management pools | 13.0 | (2.8) | 15.8 | |||||
| 2.6 | (2.6) | 5.2 | ||||||
| Financing activities | ||||||||
| Dividends paid | (4.8) | (4.3) | (0.5) | |||||
| Net change in cash | $ | - | $ | - | $ | - | ||
| 1 In preparing its comparative information, the Company has adjusted amounts reported previously in the condensed consolidated financial statements as a result of the retrospective application of the amendments to IAS 19, Employee Benefits. Refer to Note 3 for details regarding adjusted amounts. |
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Operating activities
Net cash from operating activities was $2.2 million compared to $7.0 million in the prior year, representing a decrease of $4.8 million. The quarter-over-quarter change is mostly attributable to the net change in non-cash working capital and was driven by an increase in accounts receivable and inventory balances. Prior year cash flows from operating activities were impacted by final tax payments related to the 2012 sale of the Montreal plant and non-core brands.
Investing activities
Cash management pools represent cash on deposit with The Bank of Nova Scotia 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.
On a comparison basis, cash flows from investing activities increased $5.2 million over the same quarter last year. The current quarter includes a payment of $10.3 million to PR for the exclusive right to represent the ABSOLUT vodka in Canada for an eight year term, as discussed in the "Related Party Transaction" section of this MD&A. The payment was funded through withdrawals from cash management pools.
Financing activities
Cash used for financing activities was $4.8 million this quarter, an increase of $0.5 million over the same quarter last year. The $4.8 million reflects regular quarterly dividends being paid to shareholders. The quarter-over-quarter increase is a result of higher dividends per share being paid this quarter when compared with the same quarter last 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 | |||||
| 2014 - Q1 | November 6, 2014 | November 29, 2013 | December 13, 2013 | $ | 0.18 | ||||
| 2013 - Q4 | August 28, 2013 | September 13, 2013 | September 30, 2013 | 0.17 | |||||
| 2013 - Q3 | May 9, 2013 | May 31, 2013 | June 14, 2013 | 0.17 | |||||
| 2013 - Q2 | February 6, 2013 | February 28, 2013 | March 15, 2013 | 0.17 | |||||
| 2013 - special | November 7, 2012 (special dividend) | December 14, 2012 | January 10, 2013 | 0.54 | |||||
| 2013 - Q1 | November 7, 2012 | November 30, 2012 | December 14, 2012 | 0.17 | |||||
| 2012 - Q4 | August 29, 2012 | September 15, 2012 | September 30, 2012 | 0.15 | |||||
| 2012 - Q3 | May 10, 2012 | May 31, 2012 | June 15, 2012 | 0.15 | |||||
| 2012 - Q2 | February 8, 2012 | February 29, 2012 | March 15, 2012 | 0.15 | |||||
Outstanding Share Data
As at November 6, 2013, 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.
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. 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.
In addition to the aforementioned 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 expiring October 1, 2013. These brands were acquired by PR subsequent to the original representation rights agreement dated September 29, 2006.
Further, 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, 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.
Pursuant to the November 9, 2011 agreement, 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 July 1, 2012, the Company entered into a five year agreement with Pernod Ricard USA, LLC ("PR USA"), an affiliated company, which provides PR USA the exclusive right to represent 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.
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 The Bank of Nova Scotia. 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 November 6, 2013, as published by Standard & Poor's and Moody's, was BBB- and Baa3, 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% (previous to June 2013, LIBOR plus 0.40% was used, as the Canadian LIBOR rate was discontinued). 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.
Selected Quarterly Information
Summary of Quarterly Financial Results
| (in millions of Canadian dollars, | Q1 | Q4 | Q3 | Q2 | Q1 | Q4 | Q3 | Q2 |
| except per share amounts) | 2014 | 2013 | 2013 | 2013 | 2013 | 2012 (1) | 2012 (1) | 2012 (1) |
| Revenue | $ 36.7 | $ 33.5 | $ 25.7 | $ 37.7 | $ 35.9 | $ 32.4 | $ 29.2 | $ 40.9 |
| Earnings from operations | 9.9 | 10.0 | 5.3 | 12.0 | 9.5 | 6.6 | 6.1 | 33.6 |
| Net earnings, excluding | ||||||||
| undernoted items (2) | 7.5 | 7.3 | 3.9 | 8.9 | 6.9 | 4.9 | 4.6 | 9.0 |
| Net earnings | 7.5 | 7.3 | 3.9 | 8.9 | 6.9 | 4.9 | 4.6 | 27.1 |
| Basic EPS | 0.26 | 0.26 | 0.14 | 0.31 | 0.24 | 0.17 | 0.16 | 0.95 |
| Diluted EPS | 0.26 | 0.26 | 0.14 | 0.31 | 0.24 | 0.17 | 0.16 | 0.95 |
| (1) The selected information that is presented for quarterly periods in fiscal 2012 does not reflect the impact of the adoption of the admendments to IAS 19, Employee Benefits. |
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| (2) Net earnings have been adjusted for the net after-tax gain on the sale of plant and brands of $17.7 million in 2012. | ||||||||
The above chart 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.
The chart also highlights the effect the sale of certain non-core brands and the subsidiary that owned the Montreal plant in Q2-2012 had on the quarterly results. The line item in the chart "Net earnings, excluding undernoted items" removes the gain on sale impacts. Also note that revenue and ongoing net earnings have been substantially impacted as well, given the fact the company sold various brands and a contract bottling facility and thus no longer recognizes revenue associated with the brands and activities after the date of sale.
For further information regarding the sale transaction please refer to Note 20 to the audited consolidated financial statements for the year ending June 30, 2013.
New Accounting Pronouncements
New accounting standards
The following new and revised standards and interpretations were effective for Corby on July 1, 2013:
(i) Fair Value Measurement
The IASB issued a new standard, IFRS 13, "Fair Value Measurement" ("IFRS 13") which defines fair value, provides guidance in a single IFRS framework for measuring fair value and identifies the required disclosures pertaining to fair value measurement. IFRS 13 applies to all International Financial Reporting Standards that require or permit fair value measurements or disclosures. IFRS 13 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. This standard is effective for annual periods beginning on or after January 1, 2013, and must be applied prospectively. For Corby, this standard became effective July 1, 2013. The Company determined that the adoption of IFRS 13 had no impact on its results of operations, financial position and disclosures.
(ii) Financial Instruments - Asset and Liability Offsetting
The IASB has issued amendments to IFRS 7, "Financial Instruments: Disclosures" ("IFRS 7 amendment") which clarifies the requirements for offsetting financial instruments and require new disclosures on the effect of offsetting arrangements on an entity's financial position. The IFRS 7 amendment is effective for annual periods beginning on or after January 1, 2013 and must be applied retrospectively. For Corby, this amendment became effective July 1, 2013. The adoption of the IFRS 7 amendment did not have an impact on the Company's consolidated results of operations and financial position.
(iii) Consolidated Financial Statements
The IASB issued new standards, IFRS 10, "Consolidated Financial Statements" ("IFRS 10"), IFRS 11, "Joint Ventures" ("IFRS 11"), and IFRS 12, "Disclosure of Interest in Other Entities" ("IFRS 12"). In addition, the IASB amended IAS 27, "Consolidated and Separate Financial Statements" ("IAS 27") and IAS 28, "Investments in Associates and Joint Ventures" ("IAS 28"). The objective of IFRS 10 is to define the principles of control and establish the basis of determining when and how an entity should be included within a set of consolidated financial statements. IFRS 11 establishes principles to determine the type of joint arrangement and guidance for financial reporting activities required by entities that have an interest in an arrangement that is jointly controlled. IFRS 12 enables users of the financial statements to evaluate the nature and risks associated with its interest in other entities and the effects of those interests on its financial performance.
IFRS 10, 11 and 12, and the amendments to IAS 27 and 28 are effective for annual periods beginning on or after January 1, 2013 and must be applied retrospectively. For Corby, this set of standards and amendments became effective July 1, 2013. The adoption of IFRS 10, 11, and 12 and the amendments to IAS 27 and 28 did not have an impact on the Company's results of operations, financial position and disclosures.
(iv) Employee Benefits
The IASB issued amendments to IAS 19, "Employee Benefits" ("IAS 19 (Amended 2011)"), which eliminate the option to defer the recognition of actuarial gains and losses through the "corridor" approach, replaces the expected return on plan assets calculation with a discount rate methodology in calculating pension expense for defined benefit plans, revises the presentation of changes in assets and liabilities arising from defined benefit plans and enhances the disclosures for defined benefit plans. IAS 19 (Amended 2011) is effective for annual periods beginning on or after January 1, 2013, and must be applied retrospectively.
The adoption IAS 19 (Amended 2011), primarily the elimination of the "corridor" approach and the impact of the replacement of the expected return on plan assets with a discount rate methodology in calculating pension expense, has impacted the Company's net earnings and comprehensive income and it financial position in the comparative periods. The Company has provided a detailed explanation of the impacts in Note 3 of the Company's first quarter 2013 unaudited condensed consolidated interim financial statements
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, 2014, and accordingly, have not been applied in preparing these interim condensed consolidated financial statements:
(v) Financial Instruments - Asset and Liability Offsetting
The IASB has issued amendments to IAS 32, "Financial Instruments: Presentation" ("IAS 32"), which clarify the requirements which permit offsetting a financial asset and liability in the financial statements. The amendments to IAS 32 are effective for annual periods beginning on or after January 1, 2014 and must be applied retrospectively. For Corby, this amendment will become effective July 1, 2014. The Company is assessing the impact of the amendments IAS 32 on its consolidated financial statements.
(vi) 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. IFRS 9 is effective for annual periods beginning on or after January 1, 2015 and must be applied retrospectively. For Corby, this standard will become effective July 1, 2015. The Company is currently assessing the impact of the new standard on its consolidated financial statements.
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.
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.
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 the 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, which complements consumer desires and offers exciting innovation.
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.
Supply chain interruptions, including a manufacturing or inventory disruption, could impact product quality and availability. The Company adheres to a comprehensive suite of quality programs and proactively manages production and supply chains to mitigate any potential risk to consumer safety or Corby's reputation and profitability.
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 experienced a significant amount of 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.
Competition
The Canadian 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. Being 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 and note 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. The Company's note receivable is secured.
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 and also has a note receivable that earns a fixed rate of interest. An active risk management program 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 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 80% 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.
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 chart 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 September 30, 2013 | |||||||||
| Associated Brand | Associated Market | Goodwill | Intangibles | Total | |||||
| Various PR brands | Canada | $ | - | $ | 36.8 | $ | 36.8 | ||
| Lamb's rum | United Kingdom(1) | 1.4 | 11.8 | 13.2 | |||||
| Absolut | Canada | - | 10.3 | 10.3 | |||||
| Corby domestic brands | Canada | 1.9 | - | 1.9 | |||||
| $ | 3.3 | $ | 58.9 | $ | 62.2 | ||||
| (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. |
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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 16 of the consolidated financial statements for the year ended June 30, 2013.
| CORBY DISTILLERIES LIMITED | ||||||
| INTERIM CONDENSED CONSOLIDATED BALANCE SHEETS | ||||||
| (Unaudited) | ||||||
| (in thousands of Canadian dollars) | ||||||
| Sept. 30, | Sept. 30, | June 30, | June 30, | |||
| Note | 2013 | 2012 (1) | 2013 (1) | 2012 (1) | ||
| ASSETS | ||||||
| Deposits in cash management pools | $ 94,994 | $ 112,920 | $ 108,043 | $ 110,113 | ||
| Accounts receivable | 4 | 29,236 | 30,126 | 23,642 | 28,611 | |
| Income and other taxes recoverable | 685 | - | 1,055 | - | ||
| Inventories | 5 | 51,505 | 47,040 | 49,083 | 47,760 | |
| Prepaid expenses | 420 | 280 | 533 | 555 | ||
| Current portion of note receivable | 6 | 600 | 600 | 600 | 600 | |
| Total current assets | 177,440 | 190,966 | 182,956 | 187,639 | ||
| Note receivable | 6 | 600 | 1,200 | 600 | 1,200 | |
| Deferred income taxes | 1,538 | 1,828 | 1,699 | 1,753 | ||
| Property and equipment | 7,897 | 7,245 | 8,092 | 7,524 | ||
| Goodwill | 3,278 | 3,278 | 3,278 | 3,278 | ||
| Intangible assets | 7 | 58,939 | 52,639 | 49,665 | 53,771 | |
| Total assets | $ 249,692 | $ 257,156 | $ 246,290 | $ 255,165 | ||
| LIABILITIES | ||||||
| Accounts payable and accrued liabilities | 8 | $ 24,654 | $ 24,430 | $ 24,185 | $ 22,400 | |
| Income and other taxes payable | - | 712 | - | 3,656 | ||
| Total current liabilities | 24,654 | 25,142 | 24,185 | 26,056 | ||
| Provision for pensions | 20,878 | 21,061 | 20,794 | 20,837 | ||
| Total liabilities | 45,532 | 46,203 | 44,979 | 46,893 | ||
| Shareholders' equity | ||||||
| Share capital | 14,304 | 14,304 | 14,304 | 14,304 | ||
| Accumulated other comprehensive loss | (7,193) | (7,504) | (7,363) | (7,551) | ||
| Retained earnings | 197,049 | 204,153 | 194,370 | 201,519 | ||
| Total shareholders' equity | 204,160 | 210,953 | 201,311 | 208,272 | ||
| Total liabilities and shareholders' equity | $ 249,692 | $ 257,156 | $ 246,290 | $ 255,165 | ||
| 1 | In preparing its comparative information, the Company has adjusted amounts reported previously in the condensed consolidated financial statements as a result of the retrospective application of the amendments to IAS 19, Employee Benefits. Refer to Note 3 for details regarding adjusted amounts. |
| The accompanying notes are an integral part of these condensed consolidated financial statements. |
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| CORBY DISTILLERIES LIMITED | ||||
| INTERIM CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS | ||||
| (Unaudited) | ||||
| (in thousands of Canadian dollars, except per share amounts) | ||||
| For the Three Months Ended | ||||
| Sept. 30, | Sept. 30, | |||
| Note | 2013 | 2012 (1) | ||
| Revenue | 9 | $ 36,735 | $ 35,940 | |
| Cost of sales | (12,799) | (14,038) | ||
| Marketing, sales and administration | (14,027) | (12,475) | ||
| Other income | 10 | 23 | 86 | |
| Earnings from operations | 9,932 | 9,513 | ||
| Financial income | 459 | 452 | ||
| Financial expenses | (319) | (298) | ||
| Net financial income | 11 | 140 | 154 | |
| Earnings before income taxes | 10,072 | 9,667 | ||
| Current income taxes | (2,455) | (2,855) | ||
| Deferred income taxes | (98) | 92 | ||
| Income taxes | (2,553) | (2,763) | ||
| Net earnings | $ 7,519 | $ 6,904 | ||
| Basic earnings per share | $ 0.26 | $ 0.24 | ||
| Diluted earnings per share | $ 0.26 | $ 0.24 | ||
| Weighted average common shares outstanding | ||||
| Basic | 28,468,856 | 28,468,856 | ||
| Diluted | 28,468,856 | 28,468,856 | ||
| 1 | In preparing its comparative information, the Company has adjusted amounts reported previously in the condensed consolidated financial statements as a result of the retrospective application of the amendments to IAS 19, Employee Benefits. Refer to Note 3 for details regarding adjusted amounts. |
| The accompanying notes are an integral part of these condensed consolidated financial statements. |
| CORBY DISTILLERIES LIMITED | |||||||||||||
| INTERIM CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME | |||||||||||||
| (Unaudited) | |||||||||||||
| (in thousands of Canadian dollars) | |||||||||||||
| For the Three Months Ended | |||||||||||||
| Sept 30, | Sept 30, | ||||||||||||
| 2013 | 2012 (1) | ||||||||||||
| Net earnings | $ | 7,519 | $ | 6,904 | |||||||||
| Amounts that will not be subsequently reclassified to earnings: | |||||||||||||
| Net actuarial gains, net of tax $62 (2012 - $17) | 170 | 47 | |||||||||||
| Total comprehensive income | $ | 7,689 | $ | 6,951 | |||||||||
| INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY | |||||||||||||
| (Unaudited) | |||||||||||||
| (in thousands of Canadian dollars) | |||||||||||||
| Note | Share Capital | Accumulated Other Comprehensive Loss |
Retained Earnings |
Total | |||||||||
| Balance as at June 30, 2013 | $ | 14,304 | $ | (7,363) | $ | 194,370 | $ | 201,311 | |||||
| Total comprehensive income | - | 170 | 7,519 | 7,689 | |||||||||
| Dividends | - | - | (4,840) | (4,840) | |||||||||
| Balance as at September 30, 2013(1) | $ | 14,304 | $ | (7,193) | $ | 197,049 | $ | 204,160 | |||||
| Balance as at June 30, 2012(1) | $ | 14,304 | $ | (7,551) | $ | 201,519 | $ | 208,272 | |||||
| Total comprehensive income | - | 47 | 6,904 | 6,951 | |||||||||
| Dividends | - | - | (4,270) | (4,270) | |||||||||
| Balance as at September 30, 2012(1) | $ | 14,304 | $ | (7,504) | $ | 204,153 | $ | 210,953 | |||||
| 1 | In preparing its comparative information, the Company has adjusted amounts reported previously in the condensed consolidated financial statements as a result of the retrospective application of the amendments to IAS 19, Employee Benefits. Refer to Note 3 for details regarding adjusted amounts. |
| The accompanying notes are an integral part of these condensed consolidated financial statements. |
| CORBY DISTILLERIES LIMITED | |||||||
| INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW | |||||||
| (Unaudited) | |||||||
| (in thousands of Canadian dollars) | |||||||
| For the Three Months Ended | |||||||
| Sept. 30, | Sept. 30, | ||||||
| Notes | 2013 | 2012 (1) | |||||
| Operating activities | |||||||
| Net earnings | $ | 7,519 | $ | 6,904 | |||
| Adjustments for: | |||||||
| Amortization and depreciation | 12 | 1,444 | 1,372 | ||||
| Net financial income | 11 | (140) | (154) | ||||
| Gain on disposal of property and equipment | (15) | (69) | |||||
| Income tax expense | 2,553 | 2,763 | |||||
| Provision for pensions | (2) | 35 | |||||
| 11,359 | 10,851 | ||||||
| Net change in non-cash working capital balances | 13 | (6,846) | 2,020 | ||||
| Interest received | 444 | 385 | |||||
| Income taxes paid | (2,799) | (6,288) | |||||
| Net cash from operating activities | 2,158 | 6,968 | |||||
| Investing activities | |||||||
| Additions to property and equipment | (110) | (46) | |||||
| Additions to intangible assets | 7 | (10,293) | - | ||||
| Proceeds from disposition of property and equipment | 36 | 155 | |||||
| Deposits in cash management pools | 13,049 | (2,807) | |||||
| Net cash used in investing activities | 2,682 | (2,698) | |||||
| Financing activity | |||||||
| Dividends paid | (4,840) | (4,270) | |||||
| Net cash used in financing activity | (4,840) | (4,270) | |||||
| Net increase in cash | - | - | |||||
| Cash, beginning of period | - | - | |||||
| Cash, end of period | $ | - | $ | - | |||
| 1 | In preparing its comparative information, the Company has adjusted amounts reported previously in the condensed consolidated financial statements as a result of the retrospective application of the amendments to IAS 19, Employee Benefits. Refer to Note 3 for details regarding adjusted amounts. |
| The accompanying notes are an integral part of these condensed consolidated financial statements. |
CORBY DISTILLERIES LIMITED
NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(in thousands of Canadian dollars, except per share amounts)
1. GENERAL INFORMATION
Corby Distilleries Limited ("Corby" or the "Company") is a leading Canadian marketer of spirits and importer of wines. The Company derives its revenues from the sale of its owned-brands in Canada and other international markets, as well as earning commissions from the representation of selected non-owned brands in the Canadian marketplace. Revenues predominantly consist of sales made to each of the provincial liquor boards in Canada.
Corby is controlled by Hiram Walker & Sons Limited ("HWSL"), which is a wholly owned subsidiary of Pernod Ricard, S.A. ("PR"), a French public limited company that owned 51.6% of the outstanding Voting Class A Common Shares of Corby as at June 30, 2013.
Corby is a public company incorporated and domiciled in Canada, whose shares are traded on the Toronto Stock Exchange. The Company's registered address is 225 King Street West, Suite 1100, Toronto, ON M5V 3M2.
2. BASIS OF PREPARATION
Statement of compliance
These interim condensed consolidated financial statements have been prepared in accordance with International Accounting Standard 34, "Interim Financial Reporting" ("IAS 34"), as issued by the International Accounting Standards Board ("IASB"). These interim condensed consolidated financial statements follow the same accounting policies as the most recent annual consolidated financial statements, except for changes in accounting policies and methods described in Note 3 to these condensed consolidated financial statements. These interim condensed consolidated financial statements should be read in conjunction with the Company's 2013 annual financial statements.
These interim condensed consolidated financial statements were approved by the Company's Board of Directors on November 06, 2013.
Functional and presentation currency
The Company's interim condensed consolidated financial statements are presented in Canadian dollars, which is the Company's functional and presentation currency.
Foreign currency translation
Transactions denominated in foreign currencies are translated into the functional currency using the exchange rate applying at the transaction date. Non-monetary assets and liabilities denominated in foreign currencies are recognized at the historical exchange rate applicable at the transaction date. Monetary assets and liabilities dominated in foreign currencies are translated at the exchange rate applying at the balance sheet date. Foreign currency differences related to operating activities are recognized in earnings from operations for the period; foreign currency differences related to financing activities are recognized within net financial income.
Basis of Measurement
These interim condensed consolidated financial statements are prepared in accordance with the historical cost model, except for certain categories of assets and liabilities, which are measured in accordance with other methods provided for by International Financial Reporting Standards ("IFRS") as described in Note 4 to the Company's annual consolidated financial statements as at and for the year ended June 30, 2013. Historical cost is generally based on the fair value of the consideration given in exchange for assets.
Use of Estimates and Judgements
The preparation of the interim condensed consolidated financial statements in conformity with IFRS requires management to make certain judgements, estimates and assumptions that affect the application of accounting policies, the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenues and expenses during the reporting period. These estimates are made on the assumption the Company will continue as a going concern and are based on information available at the time of preparation. Estimates may be revised where the circumstance on which they were based change or where new information becomes available. Future outcomes can differ from these estimates.
Judgement is commonly used in determining whether a balance or transaction should be recognized in the consolidated financial statements and estimates and assumptions are more commonly used in determining the measurement of recognized transactions and balances. However, judgement and estimates are often interrelated.
The Company has applied judgement in determining the tax rates used for measuring deferred taxes and identifying the indicators of impairment for property and equipment, goodwill and intangible assets. In the absence of standards or interpretations applicable to a specific transaction, management uses its judgement to define and apply accounting policies that provide relevant and reliable information in the context of the preparation of the financial statements.
Estimates are used when estimating the useful lives of property and equipment and intangible assets for the purpose of depreciation and amortization, when accounting for or measuring items such as allowances for uncollectible accounts receivable and inventory obsolescence, assumptions underlying the actuarial determination of provision for pensions, income and other taxes, provisions, certain fair value measures including those related to the valuation of share-based payments and financial instruments, and when testing goodwill, intangible assets and other assets for impairment. Actual results may differ from these estimates.
Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in which the estimates are revised and in any future periods affected.
3. ADOPTION OF NEW AND REVISED STANDARDS AND INTERPRETATIONS
New accounting standards
The following new and revised standards and interpretations were effective for Corby on July 1, 2013:
(i) Fair Value Measurement
The IASB issued a new standard, IFRS 13, "Fair Value Measurement" ("IFRS 13") which defines fair value, provides guidance in a single IFRS framework for measuring fair value and identifies the required disclosures pertaining to fair value measurement. IFRS 13 applies to all International Financial Reporting Standards that require or permit fair value measurements or disclosures. IFRS 13 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. This standard is effective for annual periods beginning on or after January 1, 2013, and must be applied prospectively. For Corby, this standard became effective July 1, 2013. The Company determined that the adoption of IFRS 13 had no impact on its results of operations, financial position and disclosures.
(ii) Financial Instruments - Asset and Liability Offsetting
The IASB has issued amendments to IFRS 7, "Financial Instruments: Disclosures" ("IFRS 7 amendment") which clarifies the requirements for offsetting financial instruments and require new disclosures on the effect of offsetting arrangements on an entity's financial position. The IFRS 7 amendment is effective for annual periods beginning on or after January 1, 2013 and must be applied retrospectively. For Corby, this amendment became effective July 1, 2013. The adoption of the IFRS 7 amendment did not have an impact on the Company's consolidated results of operations and financial position.
(iii) Consolidated Financial Statements
The IASB issued new standards, IFRS 10, "Consolidated Financial Statements" ("IFRS 10"), IFRS 11, "Joint Ventures" ("IFRS 11"), and IFRS 12, "Disclosure of Interest in Other Entities" ("IFRS 12"). In addition, the IASB amended IAS 27, "Consolidated and Separate Financial Statements" ("IAS 27") and IAS 28, "Investments in Associates and Joint Ventures" ("IAS 28"). The objective of IFRS 10 is to define the principles of control and establish the basis of determining when and how an entity should be included within a set of consolidated financial statements. IFRS 11 establishes principles to determine the type of joint arrangement and guidance for financial reporting activities required by entities that have an interest in an arrangement that is jointly controlled. IFRS 12 enables users of the financial statements to evaluate the nature and risks associated with its interest in other entities and the effects of those interests on its financial performance.
IFRS 10, 11 and 12, and the amendments to IAS 27 and 28 are effective for annual periods beginning on or after January 1, 2013 and must be applied retrospectively. For Corby, this set of standards and amendments became effective July 1, 2013. The adoption of IFRS 10, 11, and 12 and the amendments to IAS 27 and 28 did not have an impact on the Company's results of operations, financial position and disclosures.
(iv) Employee Benefits
The IASB issued amendments to IAS 19, "Employee Benefits" ("IAS 19 (Amended 2011)"), which eliminate the option to defer the recognition of actuarial gains and losses through the "corridor" approach, replaces the expected return on plan assets calculation with a discount rate methodology in calculating pension expense for defined benefit plans, revises the presentation of changes in assets and liabilities arising from defined benefit plans and enhances the disclosures for defined benefit plans. IAS 19 (Amended 2011) is effective for annual periods beginning on or after January 1, 2013, and must be applied retrospectively.
As a result of adoption IAS 19 (Amended 2011), primarily the elimination of the "corridor" approach and the impact of the replacement of the expected return on plan assets with a discount rate methodology in calculating pension expense, the following are the impacts on the Company's net earnings and comprehensive income for the three month period ended September 30, 2012 and the year ended June 30, 2013 and its financial position as at July 1, 2012, September 30, 2012 and June 30, 2013:
| 3 months ended | Year ended | ||||||
| Sept. 30, | June 30, | ||||||
| Net earnings and total comprehensive income impacts | 2012 | 2013 | |||||
| Marketing, sales and administration | (62) | (267) | |||||
| Other income | 104 | 597 | |||||
| Earnings from operations | 42 | 330 | |||||
| Financial expense | (161) | (644) | |||||
| Earnings before income tax | (119) | (314) | |||||
| Income tax | 32 | 84 | |||||
| Net earnings | (87) | (230) | |||||
| Other comprehensive income | 64 | 256 | |||||
| Tax impact of other comprehensive income | (17) | (68) | |||||
| Net comprehensive income | 47 | 188 | |||||
| Total comprehensive income | (40) | (42) | |||||
| Decrease in basic and diluted net earnings per common share | $ | (0.01) | $ | (0.01) | |||
| Basic and diluted net earnings per common share, as restated | $ | 0.24 | $ | 0.95 | |||
| Sept. 30, | June 30, | July 1, | |||||
| Balance sheet impacts | 2012 | 2013 | 2012 | ||||
| Provision for pensions | $ | (10,342) | $ | (10,345) | $ | (10,287) | |
| Deferred income taxes | 2,751 | 2,752 | 2,736 | ||||
| Retained earnings | 87 | 230 | - | ||||
| Accumulated other comprehensive loss | 7,504 | 7,363 | 7,551 | ||||
Certain additional information with respect to the net defined benefit expense and liability associated with the Company's pension and post-employment benefit plans, as restated for the impact of IAS 19 (Amended 2011), for the financial year ended June 30, 2013 is as follows:
| Net defined benefit pension expense recognized in Total Comprehensive Income | ||||
| Current service costs | $ | 2,128 | ||
| Interest costs | 1,016 | |||
| Past service costs | (638) | |||
| Net expense recognized in Net Earnings | 2,506 | |||
| Actuarial gains recognized in Other Comprehensive Income | (256) | |||
| Total net expense recognized in Total Comprehensive Income | $ | 2,250 | ||
| Pension | Other Benefit | ||||||
| Plans | Plans | Total | |||||
| Fair value of plan assets | |||||||
| Fair value of plan assets, beginning of year | $ | 43,470 | $ | - | $ | 43,470 | |
| Interest income | 1,584 | - | 1,584 | ||||
| Actuarial gains (losses) | 903 | - | 903 | ||||
| Company contributions | 1,629 | - | 1,629 | ||||
| Plan participants' contributions | 154 | - | 154 | ||||
| Settlement | - | - | - | ||||
| Benefits paid | (3,622) | - | (3,622) | ||||
| Administrative costs | (265) | - | (265) | ||||
| Fair value of plan assets, end of year | $ | 43,853 | $ | - | $ | 43,853 | |
| Present value of defined benefit obligation | |||||||
| Defined benefit obligation, beginning of year | $ | 53,830 | $ | 10,477 | $ | 64,307 | |
| Current service cost | 1,601 | 262 | 1,863 | ||||
| Interest cost | 2,179 | 421 | 2,600 | ||||
| Curtailment | - | (638) | (638) | ||||
| Settlement | - | - | - | ||||
| Plan participants' contributions | 154 | - | 154 | ||||
| Actuarial (gains) losses | 554 | 94 | 648 | ||||
| Benefits paid | (3,671) | (616) | (4,287) | ||||
| Present value of the defined benefit obligations, end of year | $ | 54,647 | $ | 10,000 | $ | 64,647 | |
| Net defined benefit liability | $ | 10,794 | $ | 10,000 | $ | 20,794 | |
The significant actuarial assumptions are as follows:
| Pension | Other Benefit | |||
| Plans | Plans | |||
| Accrued benefit obligation, end of year | ||||
| Discount rate | 4.1% | 4.1% | ||
| Compensation increase | 3.0 - 3.5% | N/A | ||
| Inflation rate | 2.0% | N/A | ||
| Medical cost trend rate | N/A | 6.1% | ||
| Benefit expense, for the year | ||||
| Discount rate | 4.2% | 4.2% | ||
| Compensation increase | 3.0 - 3.5% | N/A | ||
| Inflation rate | 2.0% | N/A | ||
| Medical cost trend rate | N/A | 6.0% | ||
The discount rate has been set based on current market rates at the end of the Company's financial year, assuming a rate of return comparable to high quality fixed income securities of equivalent currency and term that approximate the terms of the pension plan liabilities. A 25 basis points ("bp") increase in the assumed discount rate would decrease the amount of the Company's provision for pensions and pension expense in respect of its registered and non-registered defined benefit plans by $2,274 million and $115, respectively.
Conversely, a 25bp decrease in the assumed discount rate would increase the amount of the Company's provision for pensions and pension expense in respect of its registered and non-registered defined benefit plans by $2,374 and $124, respectively.
A 25bp increase in the assumed rate of inflation, which also impacts compensation rates and medical cost trend rates, would increase the amount of the Company's provision for pensions and pension expense in respect of its registered and non-registered defined benefit plans by $678 and $51, respectively. Conversely, a 25bp decrease in the assumed rate of inflation would increase the amount of the Company's provision for pensions and pension expense in respect of its registered and non-registered defined benefit plans by $626 and $51, respectively.
The medical cost trend rate is based on historical trends and external data. The medical cost trend rate used was 6.1% for 2013, 6.0% being the trend rate for 2014, with 4.6% being the ultimate for 2026 and later years. A 1% increase the assumed medical cost trend rate would result in an increase of $1,220 to the provision for pensions and an increase of $128 on the net benefit expense in respect of its other benefit plans.
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, 2014, and accordingly, have not been applied in preparing these interim condensed consolidated financial statements:
(v) Financial Instruments - Asset and Liability Offsetting
The IASB has issued amendments to IAS 32, "Financial Instruments: Presentation" ("IAS 32"), which clarify the requirements which permit offsetting a financial asset and liability in the financial statements. The amendments to IAS 32 are effective for annual periods beginning on or after January 1, 2014 and must be applied retrospectively. For Corby, this amendment will become effective July 1, 2014. The Company is assessing the impact of the amendments IAS 32 on its consolidated financial statements.
(vi) 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. IFRS 9 is effective for annual periods beginning on or after January 1, 2015 and must be applied retrospectively. For Corby, this standard will become effective July 1, 2015. The Company is currently assessing the impact of the new standard on its consolidated financial statements.
4. ACCOUNTS RECEIVABLE
| Sept. 30, | Sept. 30, | June 30, | June 30, | |||
| 2013 | 2012 | 2013 | 2012 | |||
| Trade receivables | $ 18,032 | $ 18,780 | $ 16,491 | $ 19,759 | ||
| Due from related parties | 11,204 | 11,346 | 7,151 | 8,852 | ||
| $ 29,236 | $ 30,126 | $ 23,642 | $ 28,611 |
5. INVENTORIES
| Sept. 30, | Sept. 30, | June 30, | June 30, | ||||||
| 2013 | 2012 | 2013 | 2012 | ||||||
| Raw materials | $ | 2,150 | $ | 1,969 | $ | 2,132 | $ | 1,597 | |
| Work-in-progress | 39,427 | 38,759 | 39,669 | 40,703 | |||||
| Finished goods | 9,928 | 6,312 | 7,282 | 5,460 | |||||
| $ | 51,505 | $ | 47,040 | $ | 49,083 | $ | 47,760 | ||
The cost of inventory recognized as an expense and included in cost of goods sold for the three months ended September 30, 2013 was $10,823 (2012 - $11,354). During the three month periods ended September 30, 2013 and 2012, there were no significant write-downs of inventory as a result of net realizable value being lower than cost, and no inventory write-downs recognized in previous years were reversed.
6. NOTE RECEIVABLE
| Sept. 30, | Sept. 30, | June 30, | June 30, | ||||||
| 2013 | 2012 | 2013 | 2012 | ||||||
| Note receivable | $ | 1,200 | $ | 1,800 | $ | 1,200 | $ | 1,800 | |
| Less: current portion | 600 | 600 | 600 | 600 | |||||
| $ | 600 | $ | 1,200 | $ | 600 | $ | 1,200 | ||
As part of the Company's sale of the Seagram Coolers brand on March 15, 2011, the purchase price was satisfied in part by a promissory note secured by specific property and issued by the purchaser in favour of Corby for $2,400, which is to be paid in equal annual instalments of $600 plus interest of 5% per annum, with the final payment due January 31, 2015.
7. INTANGIBLE ASSETS
On September 30, 2013, Corby purchased the exclusive rights to represent ABSOLUT vodka and Plymouth gin brands in Canada for an eight year period ending September 29, 2021 for a purchase price of $10,293. The terms of this agreement are further described in Note 15 - "Related Party Transactions". The transaction was accounted for as an increase to Intangible Assets and the purchase price will be amortized, straight-line, over the eight-year term of the agreement. For the three-month period ending September 30, 2013, no amortization has been recognized.
8. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
| Sept. 30, | Sept. 30, | June 30, | June 30, | ||
| 2013 | 2012 | 2013 | 2012 | ||
| Trade payables and accruals | $ 17,325 | $ 19,425 | $ 17,715 | $ 16,584 | |
| Due to related parties | 7,329 | 5,005 | 6,470 | 5,816 | |
| $ 24,654 | $ 24,430 | $ 24,185 | $ 22,400 | ||
9. REVENUE
The Company's revenue consists of the following streams:
| Three months ended | ||||||
| Sept. 30, | Sept. 30, | |||||
| 2013 | 2012 | |||||
| Case good sales | $ 30,540 | $ 28,520 | ||||
| Commissions (net of amortization of representation rights) | 5,023 | 4,289 | ||||
| Other services | 1,172 | 3,131 | ||||
| $ 36,735 | $ 35,940 | |||||
Commissions for the quarter are shown net of long-term representation rights and non-refundable upfront fees of $1,160 (2013 - $1,133). Other services include revenues incidental to the manufacture of case goods, such as contract bottling revenues, logistics fees and miscellaneous bulk spirit sales.
10. OTHER INCOME
The Company's other income consist of the following amounts:
| Three months ended | ||||||||
| Sept. 30, | Sept. 30, | |||||||
| 2013 | 2012 | |||||||
| Foreign exchange gain | $ | 8 | $ | 17 | ||||
| Gain on disposal of property and equipment | 15 | 69 | ||||||
| $ | 23 | $ | 86 | |||||
11. NET FINANCIAL INCOME
The Company's financial income (expense) consists of the following amounts:
| Three months ended | ||||||
| Sept. 30, | Sept. 30, | |||||
| 2013 | 2012 | |||||
| Interest income | $ | 459 | $ | 452 | ||
| Interest expense | - | (44) | ||||
| Net financial impact of pensions | (319) | (254) | ||||
| $ | 140 | $ | 154 | |||
12. EXPENSES BY NATURE
Earnings from operations include depreciation and amortization, as well as personnel expenses as follows:
| Three months ended | ||||
| Sept. 30, | Sept. 30, | |||
| 2013 | 2012 | |||
| Depreciation of property and equipment | $ | 284 | $ | 239 |
| Amortization of intangible assets | 1,160 | 1,133 | ||
| Salary and payroll costs | 5,207 | 4,953 | ||
| Expenses related to pensions and benefits | 445 | 532 | ||
| $ | 7,096 | $ | 6,857 | |
13. NET CHANGE IN NON-CASH WORKING CAPITAL BALANCES
| Three months ended | |||||
| Sept. 30, | Sept. 30, | ||||
| 2013 | 2012 | ||||
| Accounts receivable | $ | (5,579) | $ | (1,515) | |
| Inventories | (2,422) | 720 | |||
| Prepaid expenses | 113 | 275 | |||
| Income tax and other taxes recoverable / payable | 714 | 489 | |||
| Accounts payable and accrued liabilities | 328 | 2,051 | |||
| $ | (6,846) | $ | 2,020 | ||
14. DIVIDENDS
On November 6, 2013 subsequent to the quarter ended September 30, 2013, the Board of Directors declared its regular quarterly dividend of $0.18 per common share, to be paid on December 13, 2013, to shareholders of record as at the close of business on November 29, 2013. This dividend is in accordance with the Company's dividend policy.
15. RELATED PARTY TRANSACTIONS
Transactions with parent, ultimate parent, and affiliates
The majority of Corby's issued and outstanding voting Class A shares are owned by HWSL. HWSL is a wholly-owned subsidiary of PR. Therefore, HWSL is Corby's parent and PR is Corby's ultimate parent. Affiliated companies are subsidiaries which are controlled by Corby's parent and/or ultimate parent.
The companies operate under the terms of agreements that became effective on September 29, 2006. These agreements provide the Company with the exclusive right to represent PR's brands in the Canadian market for 15 years, as well as providing for the continuing production of certain Corby brands by PR at its production facility in Windsor, Ontario, for 10 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.
In addition to the aforementioned 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 expiring October 1, 2013. These brands were acquired by PR subsequent to the original representation rights agreement dated September 29, 2006.
On November 9, 2011, the Company announced that it has entered into an agreement with PR 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 Canadian representation for the other PR brands in Corby's portfolio. Under the agreement, on September 30, 2013, Corby paid $10.3 million for the additional eight years of the new term to PR.
Effective as of July 1, 2012, the Company entered into a five year agreement with Pernod Ricard USA, LLC ("PR USA"), an affiliated company, which provides PR USA the exclusive rights to represent Wiser's Canadian whisky and Polar Ice vodka in the US. Previously, Wiser's Canadian whisky and Polar Ice vodka were represented by an unrelated third party in this market. The agreement is effective for a five year period ending June 30, 2017. 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 an extensive review, in accordance with Corby's related party transaction policy.
Transactions between Corby and its parent, ultimate parent and affiliates during the period are as follows:
| Three months ended | |||||
| Sept. 30, | Sept. 30, | ||||
| 2013 | 2012 | ||||
| Sales to related parties | |||||
| Commissions - parent, ultimate parent and affiliated companies | $ | 5,102 | $ | 4,755 | |
| Products for resale at an export level - affiliated companies | 3,770 | 766 | |||
| Bulk spirits - parent | 6 | 3 | |||
| $ | 8,878 | $ | 5,524 | ||
| Cost of goods sold, purchased from related parties | |||||
| Distilling, blending, and production services - parent | $ | 6,523 | $ | 5,056 | |
| Administrative services purchased from related parties | |||||
| Marketing, selling and administration services- parent and affiliated companies | $ | 1,318 | $ | 511 | |
Balances outstanding with related parties are due within 60 days, are to be settled in cash and are unsecured.
Corby has a number of defined benefit pension plans; contributions to these plans totaled $318 for the three month period ending September 30, 2013. (2012- $330).
During the three month period ending September 30, 2013, Corby sold casks to its parent company for net proceeds of $36 (2012 - $150).
Deposits in cash management pools
Corby participates in a cash pooling arrangement under the Mirror Netting Service Agreement together with PR's other Canadian affiliates, the terms of which are administered by The Bank of Nova Scotia. The Mirror Netting Services Agreement acts to aggregate each participant's net cash balance for the 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 November 06, 2013, as published by Standard & Poor's and Moody's, was BBB- and Baa3, respectively. PR compensates Corby for the benefit it receives from having the Company participate in the Mirror Netting Services Agreement by paying interest to Corby based upon the 30-day CDOR rate plus 0.40%. During the year three month period ending September 30, 2013, Corby earned interest income of $446 from PR (2012 - $430). Corby has the right to terminate its participation in the Mirror Netting Services Agreement at any time, subject to five days' written notice.
16. SEGMENT INFORMATION
Corby has two reportable segments: Case Goods and Commissions. Corby's Case Goods segment derives its revenue from the production and distribution of its owned beverage alcohol brands. Corby's portfolio of owned-brands includes some of the most renowned and respected brands in Canada, such as Wiser's Canadian whisky, Lamb's rum, Polar Ice vodka, and McGuinness liqueurs.
Corby's Commissions segment earns commission income from the representation of non-owned beverage alcohol brands in Canada. Corby represents leading international brands such as ABSOLUT vodka, Chivas Regal, The Glenlivet and Ballantine's scotches, Jameson Irish whiskey, Beefeater gin, Malibu rum, Kahlúa liqueur, Mumm champagne, and Jacob's Creek and Wyndham Estate wines.
The Commissions segment's financial results are fully reported as "Commissions" in Note 9 of these consolidated statements. Therefore, a table detailing operational results by segment has not been provided as no additional meaningful information would result.
SOURCE: Corby Distilleries Limited
CORBY DISTILLERIES LIMITED
John Leburn, Vice-President and Chief Financial Officer
Tel.: 416-479-2400
[email protected]
www.Corby.ca
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