Corby Distilleries announces quarterly dividend and reports first quarter
financial results
For the quarter ended
Corby's financial results for the first quarter of fiscal 2010 were impacted by soft market conditions in several provinces in
"While the global economy appears to be stabilizing, there is still uncertainty as to the sustainability and pace of any recovery" noted Patrick O'Driscoll, President and Chief Executive Officer of Corby. "As a result, we expect fiscal 2010 to be challenging as we cycle against a strong first quarter and a reasonable first half performance in the prior year. However, we are confident that Corby's strong position in the marketplace and its solid balance sheet position will allow it to weather the impact of the downturn as we position ourselves to come out even stronger when the economy recovers."
At the Company's annual meeting of shareholders today,
For further details, please refer to Corby's management's discussion and analysis and consolidated financial statements and accompanying notes for the three months ended
About Corby
Corby's portfolio of owned-brands includes some of the most renowned brands in
The existing Voting Class A Common Shares and Non-voting Class B Common Shares of the Company are traded on the
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.
CORBY DISTILLERIES LIMITED
Interim Management's Discussion and Analysis
September 30, 2009
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The following Interim Management's Discussion and Analysis ("MD&A") dated
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; 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
The Company's fiscal year end is
Business Overview
-----------------
Corby is a leading Canadian manufacturer and marketer of spirits and importer of wines. Corby's national leadership is sustained by a diverse brand portfolio which 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
The Company derives its revenues from the sale of its owned-brands as well as earning commission income from the representation of selected non-owned brands in the Canadian market place. Revenue from Corby's owned-brands are denoted as "Sales" on the consolidated statement of earnings and while it predominantly consists of sales made to each of the provincial liquor boards in
Corby's portfolio of owned-brands include some of the most renowned brands in
In
The Company sources approximately 73% of its spirits production requirements from HWSL at its production facilities in Windsor, Ontario, with the balance of Corby's spirits production being sourced from the Company's owned-plant in
Corby's operations are typically subject to seasonal fluctuations in that the retail holiday season generally results in an increase in consumer purchases over the course of October, November and December. Further, the summer months traditionally result in higher consumer purchases of spirits as compared to the winter and spring months. As a result, the Company's first and second quarter of each fiscal year tend to typically reflect the impact of seasonal fluctuations in that more shipments are typically made during those quarters.
Strategies and Outlook
----------------------
Corby's business strategies are designed to maximize value growth and, thus, deliver exceptional 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 to achieve its current and long-term objectives moving forward.
The Company believes that having a focused brand prioritization strategy will permit it to capture value in those segments and markets where consumers continue to demonstrate their willingness to trade up to premium brands. Therefore, the Company's strategy is to focus its investments and leverage the long-term growth potential of its key brands, while emphasizing less on smaller and less profitable 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. Particular focus has been given to evaluate the strategic importance of the Company's representation of third-party brands, and as a result, Corby has permitted certain of its representation contracts to expire, thus allowing Corby's marketing and sales teams to focus on maximizing value creation within the brand prioritization strategy. The Company believes that effective execution of its strategy will result in value creation for shareholders.
The Company is a strong advocate of social responsibility, especially with respect to its sales and promotional activities. Corby will continue to promote responsible consumption of its products in its activities. The Company stresses its core values throughout its organization, including that of value creation, social responsibility, tradition, substance over style and character above all.
Current Market Environment
--------------------------
While there are signs that the global economy is stabilizing, there is still uncertainty as to the sustainability and pace of any recovery. The bank of
However, it should be noted that over the past several years, the Company has strengthened its operations and financial position, which should allow it to better face an economic downturn. Of particular consideration are the following factors:
- Corby has no long-term debt and, therefore, no financial or other
covenants;
- The Company has significant sources of liquidity via its $69.2
million currently on deposit in a cash management pool with PR's
other Canadian affiliates;
- Corby's largest customers are government-controlled liquor boards in
each province, thus, greatly reducing risk associated with collection
of accounts receivable;
- The Company has an exceptionally diverse and strong brand portfolio,
which is well positioned to meet consumer tastes across spirit
categories at a wide range of price points; and
- Corby is a leader in the Canadian spirits market and has a long
history of profitability and uninterrupted dividends.
Moreover, the spirits business in
- Long term decline in the level of spirits consumption by consumers;
- Deteriorating financial health of key suppliers;
- Valuation of goodwill and intangible assets; and
- Higher pension funding requirements.
To date, the Company has experienced what are expected to be only short-term declines in consumer demand, which has impacted Corby's first quarter financial results. The Company continues to follow its core beliefs and execute upon its brand prioritization strategy, as management believes this course of action will successfully position Corby, both now and in the future. Aside from decreasing consumer demand, the other factors noted above have not had a meaningful impact on Corby's financial position or financial results. However, the Company will continue to closely monitor the ongoing economic environment and take proactive measures, as necessary.
Brand Performance Review
------------------------
Corby's portfolio of owned-brands typically accounts for more than 80% of the Company's total operating revenue. Included in this portfolio are its key brands: Wiser's Canadian whisky, Lamb's rum, Polar Ice vodka, Seagram Coolers, and Corby's mixable liqueur brands. The sales performance of these key brands significantly impacts Corby's earnings and, therefore, understanding each key brand is essential to understand the Company's overall performance.
Shipment Volume and Sales Value Performance
The following chart summarizes the performance of Corby's key brands in terms of both shipment volume (as measured by shipments to customers in equivalent nine litre cases) and sales value (as measured by the change in sales revenue) during the current quarter ended
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SHIPMENT VOLUME AND SALES VALUE PERFORMANCE(1)
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Three Months Ended
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% %
Shipment Sales
Sept. 30, Sept. 30, Volume Value
(Volumes in 000's of 9L cases) 2009 2008 Growth Growth
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Brand
Wiser's Canadian whisky 181 206 (12%) (10%)
Lamb's rum 155 177 (12%) (10%)
Polar Ice vodka 90 110 (18%) (17%)
Mixable liqueurs 45 63 (29%) (25%)
Seagram Coolers 77 99 (22%) (25%)
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Total Key Brands 548 655 (16%) (14%)
All other Corby-owned brands 145 157 (8%) (8%)
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Total 693 812 (15%) (13%)
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(1) The above chart includes shipments to both Canadian and international
markets.
As previously discussed in the "Strategies and Outlook" section of this MD&A, the Company has implemented a premiumization strategy which requires focused investments on key brands and in key markets, with the long-term objective of maximizing value growth. This strategy is designed to leverage the long-term growth potential of Corby's key brands, while emphasizing less on smaller and less profitable brands.
The above chart clearly demonstrates that Corby experienced a challenging start to its fiscal year, with shipments decreasing 15%, when compared to the same period last year. More specifically, shipments to Canadian markets declined 14%, while shipments to international markets decreased 22%.
Softer than expected market conditions were noted in several provinces in
The decline in shipments to international markets is mainly due to higher comparatives in the previous year, as Corby's first quarter of fiscal 2009 included volumes associated with the launch of Polar Ice vodka flavours in the US market.
The change in sales value was largely commensurate with the change experienced in shipment volumes, with higher average selling prices providing for a mild offset to the decline in volumes.
Retail Volume and Retail Value Performance
It is also of critical importance to understand the performance of Corby's brands at the retail level in
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RETAIL VOLUME AND RETAIL VALUE PERFORMANCE - FOR THE CANADIAN MARKET
ONLY(1)
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Three Months Ended
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% %
Retail Retail
Sept. 30, Sept. 30, Volume Value
(Volumes in 000's of 9L cases) 2009 2008 Growth Growth
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Brand
Wiser's Canadian whisky 158 162 (2%) (1%)
Lamb's rum 117 123 (5%) (3%)
Polar Ice vodka 77 81 (5%) (3%)
Mixable liqueurs 49 53 (8%) (7%)
Seagram Coolers 107 124 (14%) (16%)
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Total Key Brands 508 543 (6%) (3%)
All other Corby-owned brands 131 137 (4%) (5%)
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Total 639 680 (6%) (4%)
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(1) Refers to sales at the retail store level in Canada, as provided by
the Association of Canadian Distillers.
As denoted in the chart above, retail volumes have declined 6% this quarter, when compared against the same quarter last year. The decline in retail volumes is far less than that of shipment volumes (as discussed in the previous section of this MD&A). This discrepancy is magnified by several factors, namely changes in customer order patterns, the impact of de-stocking in the retail channel, the effect of the threat of a labour disruption in Ontario, and inclusion of new product launches in the comparative period.
Trends over the past year have shown a shift in consumption patterns as consumers are purchasing fewer products from certain discretionary spirit categories, such as liqueurs, when compared to the spirit staples such as vodka, whisky, and rum. Furthermore, the overall decline in consumer spending has resulted in more at-home consumption, as consumers are trending away from consumption at licensed establishments, such as bars and restaurants.
Corby's own portfolio of brands reflects this shift in consumer consumption pattern, as evidenced by the performance of its mixable liqueurs brands, while the Company's vodka, whisky, and rum brands continue to demonstrate resilience from both a retail volume and retail value perspective.
Summary of Corby's Key Brands
Wiser's Canadian Whisky
Corby's flagship brand, Wiser's Canadian whisky, experienced declines of 2% in retail volumes and 1% in retail value when compared against the same quarter last year. The decline was mainly due to deteriorating market conditions in British Columbia, which is the brand's second largest market by volume. Overall, the brand's performance matched that of the Canadian whisky category as a whole, and is reflective of a challenging segment in a recessionary economy.
The Company has continued to strongly invest behind the brand for the upcoming holiday season, which is a key selling period for whisky. Specifically, the Company has maintained its investment behind the brand's media and television campaign entitled "Welcome to the Wiserhood".
Lamb's Rum
Lamb's rum, one of the top selling rum families in
The Company has taken actions over the past year to improve the brand's performance, such as launching an updated package and increasing its level of investment in the brand's critical Newfoundland and Labrador market. Furthermore, the Company recently launched a Lamb's spiced rum variant in the UK and in certain Canadian markets (entitled "Lamb's Spiced" and "Lamb's Black Sheep", respectively), as the Company looks to capitalize on the growing consumer demand in the spiced rum segment.
Polar Ice Vodka
Polar Ice vodka, which is among the top three largest vodka brands in
Polar Ice shipment volumes in both
Mixable Liqueurs
Corby's portfolio of mixable liqueur brands consist of McGuinness liqueurs (which is Canada's largest mixable liqueur brand family), Meaghers liqueurs, and De Kuyper liqueurs. The Company's mixable liqueur portfolio experienced an 8% decrease in retail sales volumes, while shipment volumes decreased 29% this quarter compared with the same quarter last year. The sharp decline in shipment volumes is partially attributable to the impact of the aforementioned threat of a labour disruption at the LCBO in
Seagram Coolers
Seagram Coolers continues to experience significant challenges in its competitive segment. The brand had a disappointing first quarter, as it saw consumer purchases decrease 14% and experienced a decrease in shipment volumes of 22%, when compared with the same quarter last year. The brand is underperforming relative to its segment due to competitive pressures. Management is in the process of evaluating several strategic options to address this brand.
Financial and Operating Results
-------------------------------
The following table presents a summary of certain selected consolidated financial information of the Company for the three month period ended
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Three Months Ended
(in millions of Canadian ----------------------
dollars, except per share Sept. 30, Sept. 30,
amounts) 2009 2008 $ Change % Change
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Sales $ 37.1 $ 41.8 $ (4.7) (11%)
Commissions(1) 4.0 4.3 (0.3) (7%)
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Operating revenue 41.1 46.1 (5.0) (11%)
Cost of sales 18.1 20.2 (2.1) (10%)
Marketing, sales and
administration 10.4 11.4 (1.0) (9%)
Amortization 0.4 0.3 0.1 33%
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Earnings from operations 12.2 14.2 (2.0) (14%)
Interest income 0.1 0.5 (0.4) (80%)
Foreign exchange gain
(loss) 0.1 (0.1) 0.2 (200%)
Loss on disposal of
capital assets 0.0 (0.1) 0.1 -
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Earnings before income taxes 12.4 14.5 (2.1) (14%)
Income taxes 4.0 4.7 (0.7) (15%)
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Net earnings $ 8.4 $ 9.8 $ (1.4) (14%)
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Per common share
- Basic net earnings $ 0.30 $ 0.35 $ (0.05) (14%)
- Diluted net earnings $ 0.30 $ 0.35 $ (0.05) (14%)
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(1) Amounts are presented net of representation rights amortization of
$1.2 (2008 - $1.2).
Overall Financial Results
Corby's first quarter results largely display the challenges, which exist in the current economic environment, as an 11% decline in first quarter sales led to decreases of 14% in net earnings and earnings per share, as compared to the first quarter in the previous year.
Operating revenue
Operating revenue, consisting of sales and commissions, was
As previously discussed in the brand analysis segment of this MD&A, consumer data regarding sales occurring at the retail level were more encouraging, however, still exhibited a decline in consumption this quarter versus the same quarter last year.
Corby's sales performance was particularly difficult in those provinces most impacted by the economic downturn, namely Alberta and British Columbia. These markets are impacted by de-stocking in the private retail channel in light of the challenging economic conditions which exist in those marketplaces.
Furthermore, first quarter sales in the Ontario market were also impacted by the effect of the aforementioned threatened labour disruption in
Lastly, the current quarter results are up against higher than normal comparatives given the inclusion of some product launches (namely Polar Ice vodka flavours) in the first quarter of last year.
Commissions decreased by
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Three Months Ended
----------------------
(in millions of Canadian Sept. 30, Sept. 30,
dollars) 2009 2008 $ Change % Change
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Commission from PR brands $ 4.4 $ 4.2 $ 0.2 5%
Commission from Agency
brands 0.8 1.3 (0.5) (38%)
Less amortization of
representation rights (1.2) (1.2) - -
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Commissions $ 4.0 $ 4.3 $ (0.3) (7%)
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Commissions from PR brands shows an increase of 5%, however, the current quarter results include Corby's representation of the ABSOLUT vodka brand, whereas the results in the comparative quarter did not as the Company only began representing the brand on
Commission from Agency brands have declined by
Cost of sales
Cost of sales was
Marketing, sales and administration
Marketing, sales and administration expenses were
Furthermore, overhead and administrative costs also declined by
Income taxes
Income tax expense decreased
Liquidity and Capital Resources
-------------------------------
Corby's sources of liquidity come from its deposits in cash management pools balance of
Cash flows
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Three Months Ended
------------------------------------
Sept. 30, Sept. 30, $
(in millions of Canadian dollars) 2009 2008 Change
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Operating activities
Net earnings, adjusted for
non-cash items $ 10.5 $ 11.5 $ (1.0)
Net change in non-cash working
capital - (7.3) 7.3
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10.5 4.2 6.3
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Investing activities
Additions to capital assets (0.1) (1.0) 0.9
Deposits in cash management pools (6.4) 0.8 (7.2)
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(6.5) (0.2) (6.3)
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Financing activities
Dividends paid (4.0) (4.0) -
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Net change in cash $ - $ - $ -
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Operating activities
Cash flows from operating activities were
Partially offsetting the effect of reduced accounts receivable balances was the decrease in net earnings combined with having a higher level of investment in inventories and lower overall accounts payable balances. Refer to the "Financial and Operating Results" section of this MD&A for further details regarding the change in net earnings.
Investing activities
Cash used for investing activities increased
Financing activities
Cash used for financing activities was
Outstanding Share Data
----------------------
There have been no changes in Corby's share data since
Related Party Transactions
--------------------------
Transactions in the Normal Course of Operations
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
The companies operate under the terms of agreements which became effective on
In addition to the aforementioned agreements, Corby signed an agreement on
All of the above-noted transactions are in the normal course of operations and are measured at the exchange amount, which is the amount of consideration established and agreed to by the related parties. For further details regarding the above agreements, readers are encouraged to refer to the most recently prepared annual MD&A and annual financial statements for the year ended
Deposits in Cash Management Pools
Corby participates in a cash pooling arrangement under a Mirror Netting Service Agreement ("Mirror Agreement") together with PR's other Canadian affiliates, the terms of which are administered by The Bank of Nova Scotia. The Mirror 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.
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.
Other Contractual Obligations
As part of the agreement with PR signed on
Accounting Standards - Implemented in Fiscal 2010
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Financial Statement Concepts
Effective
Goodwill and Intangible Assets
Effective
Future Accounting Standards
---------------------------
International Financial Reporting Standards
In
In response, the Company created a transition plan and established a timeline for the execution and completion of the conversion project to guide Corby toward its reporting deadlines. The transition plan included a high-level assessment of the key areas where conversion to IFRS may have a significant impact or present a significant challenge. The key areas identified included employee future benefits, impairment analysis, IFRS 1 choices, capital assets, income taxes, and financial statement presentation and disclosure. Initial findings indicate that changes in accounting policies will be required and are likely to materially impact the Company's consolidated financial statements. The impact on other business activities, disclosure controls and procedures and internal controls over financial reporting will be assessed once the impacts of the standards as a whole are identified.
To date, the Company has engaged an external advisor and established a working team, held an IFRS training session tailored specifically to Corby for key members of management and the Audit Committee. The IFRS team has performed detailed assessments on certain key areas identified and continues to report its progress and results to the Audit Committee on a quarterly basis.
The Company will continue to execute the transition in accordance with its plan and also continue to provide training to its key employees and monitor standards development issued by the International Accounting Standards Board and the AcSB, as well as regulatory developments issued by the Canadian Securities Administrators, which may affect the timing, nature or disclosure of its adoption of IFRS.
Selected Quarterly Information
------------------------------
Summary of Quarterly Financial Results
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(in millions of
Canadian dollars,
except per share Q1 Q4 Q3 Q2 Q1 Q4 Q3 Q2
amounts) 2010 2009 2009 2009 2009 2008 2008 2008
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Operating
revenue - net $41.1 $41.4 $34.0 $47.8 $46.1 $39.6 $33.0 $48.8
Earnings from
operations 12.2 10.1 7.2 11.9 14.2 8.4 8.1 14.4
Net earnings 8.4 7.4 5.1 8.1 9.8 6.0 6.0 10.7
Basic EPS 0.30 0.26 0.18 0.28 0.35 0.21 0.21 0.37
Diluted EPS 0.30 0.26 0.18 0.28 0.35 0.21 0.21 0.37
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The above chart demonstrates the seasonality of Corby's business, as sales are typically strong in the first and second quarter, while third quarter sales (i.e., January, February and March) typically 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 consumption levels during the summer season.
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 Canadian GAAP. 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.
On
Corby's implementation of its new ERP system materially changed the Company's internal control over financial reporting during the quarter. There were no other material changes during the most recent interim period that have materially affected, or are reasonably likely to materially affect, the Company's internal control 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
In addition, certain Canadian whiskies are subject to an increased rate of excise duty effective
The Company continuously monitors the potential risk associated with any proposed changes in 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 current economic outlook and overall consumer confidence in the stability of the economy as a whole. The overall decline in consumer spending has resulted in more at home consumption, as consumers are trending away from consumption at licensed establishments, such as bars and restaurants. As a result, the industry is experiencing declines in product categories which tend to have a higher consumption rate at these establishments, such as liqueurs. Corby offers a diverse portfolio of products across all major spirit categories and 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
Supply chain interruptions could impact product quality and availability, including manufacturing or inventory disruption. 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, are required to handle potentially hazardous materials. As Corby outsources the majority of its production, including all of its storage and handling of maturing alcohol, the risk of environmental liabilities has been reduced to an acceptably low level. In addition, Corby's owned-production facility follows strict industry guidelines for proper use and / or disposal of hazardous materials to further reduce environmental risks. 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
Competition
The Canadian beverage alcohol industry is also extremely competitive. Competitors may take actions to establish and sustain competitive advantage. They 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. Corby appreciates and invests in its employees to partner with them in achieving corporate objectives and creating value.
Credit Risk
Credit risk arises from deposits in cash management pools held with PR via Corby's participation in the Mirror Agreement (as previously described in the "Related Party Transactions" section of this MD&A), as well as credit exposure to customers, including outstanding accounts receivable. The maximum exposure to credit risk is equal to the carrying value of the Company's financial assets. The objective of managing counter party credit risk is to prevent losses in financial assets. The Company assesses the credit quality of its counter-parties, taking into account their financial position, past experience and other factors. As the large majority of Corby's accounts receivable balances are collectable from government-controlled liquor boards, management believes the Company's credit risk relating to accounts receivable is at an acceptably low level.
Exposure to Interest Rate Fluctuations
The Company does not have any short or long-term debt facilities. Interest rate risk exists as Corby earns market rates of interest on its deposits in cash management pools. An active risk management program does not exist, as management believes that changes in interest rates would not have a material impact to 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 via pricing over the long-term.
Foreign Currency Exchange Risk
Foreign currency risk exists, as the Company sources a proportion of its production requirements in foreign currencies, specifically the
Third Party Service Providers
The Company is reliant upon-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 influence 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 relationship with its third-party service providers.
Brand Reputations
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.
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 which 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:
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Values as at September 30, 2009
---------------------------------
Associated Brand Associated Market Goodwill Intangibles Total
----------------- ------------------ ---------------------------------
Various PR brands Canada $ - $ 56.2 $ 56.2
Seagram Coolers Canada 4.0 16.3 20.3
Lamb's rum United Kingdom 1.4 11.8 13.2
Meaghers and De
Kuyper liqueurs Canada 4.5 - 4.5
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$ 9.9 $ 84.3 $ 94.2
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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 asset 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. For further details related to Corby's defined benefit pension plans, readers are encouraged to refer to the most recently prepared annual MD&A and annual financial statements for the year ended
CORBY DISTILLERIES LIMITED
INTERIM CONSOLIDATED BALANCE SHEETS
(Unaudited)
(in thousands of Canadian dollars)
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September September June
30, 2009 30, 2008 30, 2009
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ASSETS
Current
Deposits in cash
management pools $ 69,152 $ 57,743 $ 62,726
Accounts receivable 25,991 27,475 28,640
Income and other taxes
recoverable 1,534 - 1,478
Inventories 57,485 53,934 53,987
Prepaid expenses 959 1,786 1,582
Future income taxes 183 141 551
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155,304 141,079 148,964
Capital assets 14,174 12,658 14,553
Employee future benefits 11,431 8,060 11,382
Goodwill 9,856 9,856 9,856
Intangible assets 84,253 88,932 85,420
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$ 275,018 $ 260,585 $ 270,175
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LIABILITIES
Current
Accounts payable and
accrued liabilities $ 20,694 $ 20,174 $ 20,416
Income and other taxes payable - 1,292 -
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20,694 21,466 20,416
Employee future benefits 6,215 5,311 5,923
Future income taxes 7,446 6,175 7,605
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34,355 32,952 33,944
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SHAREHOLDERS' EQUITY
Share capital 14,304 14,304 14,304
Retained earnings 226,359 213,329 221,927
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240,663 227,633 236,231
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$ 275,018 $ 260,585 $ 270,175
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See accompanying notes to consolidated financial statements
CORBY DISTILLERIES LIMITED
INTERIM CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
(in thousands of Canadian dollars, except per share amounts)
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For the Three Months Ended
----------------------------
September September
30, 2009 30, 2008
----------------------------
OPERATING REVENUE
Sales $ 37,108 $ 41,806
Commissions
(net of amortization of $1,167; 2008 - $1,171) 4,010 4,257
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41,118 46,063
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OPERATING COSTS
Cost of sales 18,144 20,212
Marketing, sales and administration 10,365 11,367
Amortization 446 327
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28,955 31,906
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EARNINGS FROM OPERATIONS 12,163 14,157
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OTHER INCOME AND EXPENSES
Interest income 123 483
Foreign exchange gain (loss) 125 (99)
Gain (loss) on disposal of capital assets 3 (84)
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251 300
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EARNINGS BEFORE INCOME TAXES 12,414 14,457
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INCOME TAXES
Current 3,787 4,859
Future 209 (227)
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3,996 4,632
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NET EARNINGS $ 8,418 $ 9,825
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BASIC EARNINGS PER SHARE $ 0.30 $ 0.35
DILUTED EARNINGS PER SHARE $ 0.30 $ 0.35
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WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
Basic 28,468,856 28,468,856
Diluted 28,468,856 28,468,856
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See accompanying notes to consolidated financial statements
CORBY DISTILLERIES LIMITED
INTERIM CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(in thousands of Canadian dollars)
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For the Three Months Ended
----------------------------
September September
30, 2009 30, 2008
----------------------------
NET EARNINGS $ 8,418 $ 9,825
OTHER COMPREHENSIVE INCOME - -
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COMPREHENSIVE INCOME $ 8,418 $ 9,825
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See accompanying notes to consolidated financial statements
CORBY DISTILLERIES LIMITED
INTERIM CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Unaudited)
(in thousands of Canadian dollars)
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For the Three Months Ended
----------------------------
September September
30, 2009 30, 2008
----------------------------
SHARE CAPITAL
Balance, beginning of period $ 14,304 $ 14,304
Transactions, net - -
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Balance, end of period $ 14,304 $ 14,304
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RETAINED EARNINGS
Retained earnings, beginning of period $ 221,927 $ 207,490
Net earnings 8,418 9,825
Dividends (3,986) (3,986)
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Balance, end of period $ 226,359 $ 213,329
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ACCUMULATED OTHER COMPREHENSIVE INCOME
Balance, beginning of period $ - $ -
Other comprehensive income for the period - -
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Balance, end of period $ - $ -
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See accompanying notes to consolidated financial statements
CORBY DISTILLERIES LIMITED
INTERIM CONSOLIDATED STATEMENTS OF CASH FLOW
(Unaudited)
(in thousands of Canadian dollars)
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For the Three Months Ended
----------------------------
September September
30, 2009 30, 2008
----------------------------
OPERATING ACTIVITIES
Net earnings $ 8,418 $ 9,825
Items not affecting cash
Amortization 1,613 1,498
(Gain) loss on disposal of capital assets (3) 84
Future income taxes 209 (227)
Employee future benefits 243 363
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10,480 11,543
Net change in non-cash working capital balances (4) (7,308)
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Cash flows provided by operating activities 10,476 4,235
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INVESTING ACTIVITIES
Additions to capital assets (67) (1,064)
Proceeds from disposition of capital assets 3 5
(Deposits in) draws from cash management pools (6,426) 810
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Cash flows used in investing activities (6,490) (249)
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FINANCING ACTIVITY
Dividends paid (3,986) (3,986)
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Cash flows used in financing activity (3,986) (3,986)
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NET CHANGE IN CASH - -
CASH, BEGINNING OF PERIOD - -
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CASH, END OF PERIOD $ - $ -
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SUPPLEMENTAL CASH FLOW INFORMATION
Interest received $ 123 $ 483
Income taxes paid $ 3,878 $ 5,015
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See accompanying notes to consolidated financial statements
CORBY DISTILLERIES LIMITED
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2009 AND SEPTEMBER 30, 2008
(in thousands of Canadian dollars, except per share amounts)
1. BASIS OF PRESENTATION
These unaudited interim consolidated financial statements (the "financial
statements") have been prepared by management in accordance with Canadian
generally accepted accounting principles ("GAAP") and include the
accounts of Corby Distilleries Limited and its subsidiaries ("Corby" or
the "Company"). These financial statements do not include all disclosures
required by Canadian GAAP for annual financial statements and therefore
should be read in conjunction with the most recently prepared annual
financial statements for the year ended June 30, 2009.
The interim financial statements should not be taken as indicative of the
performance to be expected for the full year due to the seasonal nature
of the spirits business. Corby's operations are typically subject to
seasonal fluctuations in that the retail holiday season generally results
in an increase in consumer purchases over the course of October, November
and December. Further, the summer months traditionally result in higher
consumer purchases of spirits as compared to the winter and spring
months. As a result, the Company's first and second quarter of each
fiscal year tend to reflect the impact of seasonal fluctuations in that
more shipments are typically made during those quarters.
2. CHANGE IN ACCOUNTING POLICIES
These financial statements follow the same accounting policies and
methods of their application as the most recent annual financial
statements for the year ended June 30, 2009, except as noted below.
Financial Statement Concepts
Effective July 1, 2009, the Company applied the amendments to Section
1000 "Financial Statement Concepts", which clarify the criteria for
recognition of an asset and the timing of expense recognition,
specifically deleting the guidance permitting the deferral of costs. The
new requirements are effective for interim and annual financial
statements for fiscal years beginning on or after October 1, 2008. The
Company applied the amendments to Section 1000 in conjunction with
Section 3064 "Goodwill and Intangible Assets" which is further described
below. The adoption of this standard had no impact on the Company's
financial statements or note disclosures.
Goodwill and Intangible Assets
Effective July 1, 2009, the Company implemented new accounting standard,
Section 3064 "Goodwill and Intangible Assets", which is effective for
fiscal years beginning on or after October 1, 2008. This standard
replaces the existing Section 3062 "Goodwill and Other Intangible
Assets" and Section 3450, "Research and Development Costs". The new
standard prescribes new methods for recognizing, measuring, presenting
and disclosing goodwill and intangible assets, with the objective of
eliminating the practice of deferring costs that do not meet the
definition and recognition criteria of assets. The new standard is
equivalent to the corresponding provisions of International Financial
Reporting Standards ("IFRS") IAS 38, "Intangible Assets". The adoption of
this standard had no impact on the Company's financial statements or note
disclosures.
3. FUTURE ACCOUNTING STANDARDS
International Financial Reporting Standards
In February 2008, the Canadian Accounting Standards Board ("AcSB")
confirmed that Canadian generally accepted accounting principles ("GAAP")
for publicly accountable enterprises will be replaced by International
Financial Reporting Standards ("IFRS") for fiscal years beginning on or
after January 1, 2011. IFRS uses a conceptual framework similar to
Canadian GAAP, however there are significant differences on recognition,
measurement, and disclosures. Accordingly, the conversion from Canadian
GAAP to IFRS will be applicable to the Company's reporting for the first
quarter of fiscal 2012 for which current and comparative information will
be prepared under IFRS.
In response, the Company created a transition plan and established a
timeline for the execution and completion of the conversion project to
guide Corby toward its reporting deadlines. The transition plan included
a high-level assessment of the key areas where conversion to IFRS may
have a significant impact or present a significant challenge. The key
areas identified included employee future benefits, impairment analysis,
IFRS 1 choices, capital assets, income taxes, and financial statement
presentation and disclosure. Initial findings indicate that changes in
accounting policies will be required and are likely to materially impact
the Company's consolidated financial statements. The impact on other
business activities, disclosure controls and procedures and internal
controls over financial reporting will be assessed once the impacts of
the standards as a whole are identified.
To date the Company has engaged an external advisor and established a
working team, held an IFRS training session tailored specifically to
Corby for key members of management and the Audit Committee. The IFRS
team has performed detailed assessments on certain key areas identified
and continues to report its progress and results to the Audit Committee
on a quarterly basis.
The company will continue to execute the transition in accordance with
its plan, and also continue to provide training to its key employees and
monitor standards development as issued by the International Accounting
Standards Board and the AcSB as well as regulatory developments as issued
by the Canadian Securities Administrators, which may affect the timing,
nature or disclosure of its adoption of IFRS.
4. DEPOSITS IN CASH MANAGEMENT POOLS
Corby participates in a cash pooling arrangement under a Mirror Netting
Service Agreement ("Mirror Agreement") together with PR's other Canadian
affiliates, the terms of which are administered by The Bank of Nova
Scotia. The Mirror 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.
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. For further information on these
balances, readers are encouraged to read the Company's most recently
prepared annual financial statements for the year-ended June 30, 2009.
5. INTANGIBLE ASSETS
Included in the intangible asset balance are long-term representation
rights with a net value as at September 30, 2009 of $56,203. This value
reflects the original cost, less accumulated amortization, of the
Company's exclusive right to represent a significant number of PR's
brands in Canada for a fifteen-year period, scheduled to expire on
September 30, 2021.
In July 2009, PR announced the sale of its coffee liqueur brand Tia Maria
to an unrelated third party, which was a brand covered under the long-
term representation agreement. The new owner has since advised Corby that
its representation of the Tia Maria brand would cease effective October
31, 2009. The impact on the Company's future earnings are not considered
significant, as in fiscal 2009, Corby earned less than $275 in annual
commissions from its representation of this brand. In addition, pursuant
to the terms of the long-term representation agreement, Corby is entitled
to receive an early termination payment from PR. Upon receipt, the early
termination payment will be accounted for as a reduction of the original
cost of the intangible asset. It is anticipated the payment will be
received in the second quarter of fiscal 2010, commensurate with the date
Corby will cease its representation of the Tia Maria brand.
6. EMPLOYEE FUTURE BENEFITS
The Company has recorded a charge to earnings in the three month period
ended September 30, 2009 of $851 (2008 - $842) to reflect the expense
associated with its employee future benefit plans. Actual cash payments
for the three month period ended September 30, 2009 totaled $506 (2008 -
$301).
7. 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 include some of the most renowned and respected brands in
Canada, including Wiser's rye whiskies, Lamb's rum and Polar Ice vodka.
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, Kahlua liqueur, Mumm champagne, and Jacob's
Creek and Wyndham Estate wines.
The Commissions segment has no assets or liabilities. Its financial
results are fully reported as "commissions" on the consolidated statement
of earnings and there are no intersegment revenues. Therefore, a chart
detailing operational results by segment has not been provided as no
additional meaningful information would result.
%SEDAR: 00001138E
For further information: CORBY DISTILLERIES LIMITED, Ali Mahdavi, Spinnaker Capital Markets Inc., Tel.: (416) 962-3300; Thierry Pourchet, Vice President and Chief Financial Officer, Tel.: (416) 479-2400, [email protected], www.Corby.ca
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