Colabor Group Inc.

Claude Gariepy - President and Chief Executive Officer Jean-Francois Neault - Vice President and Chief Financial Officer

Mark Neville - Scotia Bank Derek Lessard - TD Securities Leon Aghazarian - National Bank Financial Keith Howlett - Desjardins Capital Markets

Good afternoon, everyone. Welcome to Colabor Group's 2013 second quarter conference call.

With me for his first conference call is Jean-Francois Neault, Vice President and Chief Financial Officer. I will first provide you with a general review of the quarter as well as an update on our action plan and recent corporate events.

Jean-Francois will then review financial data, after which we will be pleased to answer your questions. [Foreign Language] Please note that our press release and financial statements were issued earlier today via the Canada NewsWire news service.

These documents are also available on our website and will be on SEDAR. Second quarter results clearly show that initiatives put forward since last year to optimize operating efficiency, to stimulate organic sales growth, and accelerate the achievement of synergies are bearing fruit.

In the second quarter, Colabor recorded significant sequential improvements in its overall year-over-year performance versus the year-over-year comparison of the first quarter. First, comparable sales were up by 0.5% despite market conditions that remained quite difficult.

Second, the slight year-over-year reduction in EBITDA mainly reflects the termination of an important supply contract in Ontario as of April 1, 2013 and the normal time lag in adjusting expenses according to the new business volume. We have stopped the margin erosion resulting from intense competition.

In fact, our margins have slightly improved from previous quarters. We've been proactive in areas that we can control.

This has been our main priority so far in 2013 and we will sustain our efforts for the balance of the year. Status quo is not an option, as you know, in this current business environment.

At the moment, the main initiatives announced in Q1 are proceeding according to plan. This includes the launch of initiatives to stimulate organic sales growth and to generate more profitable sales.

For example, Power Colabor Program has been launched in Eastern Quebec and is working quite well. A street business development plan in Ontario and at Norref is also ongoing.

A summer wholesale program has been launched of distributors in Boucherville. The transfer of portion meat processing from Ontario and Eastern Quebec to Lauzon has been accomplished.

It was part of the integration plan when we bought this business. Subsequent to that, we have closed the Viandes operation in Quebec City.

An exhaustive review of operations in the Eastern Quebec and New Brunswick division, including the consideration of ways to improve the logistics and supply chain for our distribution centers, are also nearly done. The review of agreements with suppliers regarding procurement costs and revenues is also ongoing.

And finally, we've made an important investment to obtain the HACCP federal certification for the Norref division, which we expect to receive in the next few weeks. This is a very positive development as it will enable Colabor to offer its wide range of fish products in Ontario and beginning with the Ottawa region.

It also increases possibilities to win new contracts while further securing the existing ones. This Norref business has been doing extremely well in the second quarter by the way.

All these measures will allow us to further improve operating efficiency and asset utilization. Our goal is to be ready when market conditions improve, so that we can rapidly achieve additional profitability.

Also, today the Board of Directors declared a quarterly dividend of $0.06 per share payable on August 15 to shareholders of record at the close of business on August 2nd. This new dividend payout will provide Colabor with greater flexibility in pursuing the optimization of its operations and the execution of its business plan.

More importantly, the dividend has been set at a level deemed sustainable for the foreseeable future given the current outlook. It will also allow us to continue our efforts to optimise capital management as additional funds from operations could be applied in different manners, for example, to reduce debt, can be used also if we receive a notice from the Canada Revenue Agency, it can be also reinvested in initiatives that can enhance profitability and create more value for shareholders, and at last, it can be also used for a highly synergistic acquisition.

The dividend amount is below the objective stated in 2012 with regards to payout ratio. We have adjusted our position to reflect the market and economic realities.

In a few moments, Jean-Francois Neault will review our results and financial position. Jean-Francois Neault joined Colabor on June the 10th after spending the past three years as Vice President, Finance and Administration of Cascades Tissue Group within the Cascades operation where he supported the development of a strategic plan mainly focused on sales growth, both through internal expansion and acquisitions.

His vast experience in integrating acquisitions and deep knowledge of financial management of companies holding multiple entities are major assets for Colabor as we implement our development initiatives. So, welcome to Colabor, Jean-Francois.

Thank you, Claude. Total sales for the quarter amounted to $345.8 million in the second quarter of 2013 versus $354.3 million a year earlier.

This 2.4% decrease is mainly attributable to the loss of a supply agreement in Ontario effective April 1, 2013 as Claude mentioned. It also reflects the decision to significantly reduce the distribution of tobacco products which were unprofitable activities since the beginning of 2013, and to a lesser extent, the disposal of the Skor Culinary Concepts Division in December 2012.

On the other hand, the acquisition of Lauzon on March 4, 2013 added sales of $20.3 million during the quarter. Comparable sales, which excludes all aforementioned items, rose 0.5%.

Looking at segmented results, comparable sales in the Distribution segment were up 0.1% while they rose 1.3% in the Wholesale segment. EBITDA was $9.7 million or 2.8% of sales versus $10.7 million or 3% of sales a year ago.

While the decrease in monetary terms is essentially due to the end of the supply agreement in Ontario, the decrease as a percentage of sales results from the normal time lag required to adjust expenses to level consistent with the new business volume, as Claude mentioned. Colabor concluded the quarter with net earnings of $2.4 million compared with $2.9 million last year.

Cash flow, defined as cash flow from operating activities before net change in working capital, less purchases of property, plant and equipment, and interest paid, stood at $4.2 million versus $7.6 million a year earlier. Most of the variation here was due to a $2.9 million investment for upgrading physical installation to obtain the HACCP certification at the Norref division.

As of June 15, 2013, we have drawn $85.4 million from our authorized credit facility. This is down from $100 million at the end of the first quarter.

Also, a few days ago, Colabor and its lending partners have agreed to modify certain terms and conditions related to its credit facilities with an effective date of June 15, 2013. The agreement eliminate the need to meet financial ratios, sets the authorized credit at $135 million and the maturity date to April 28, 2015.

I now turn the call back over to Claude.

The execution of major elements continues exactly on schedule and we believe that this additional benefit spinning from the plan will be felt more significantly in the second half of 2013. More decisions should be made by the end of the third quarter regarding our operations.

At that time, we should be in a position to quantify if there will be any one-time costs as well as additional annual recurring benefits that would be associated with these decisions. With all these initiatives going on, Colabor will be in a far better competitive position, and as I said earlier, we will be fully ready when the market recovers.

Our simplified organizational structure will allow us to achieve important efficiency gains and synergies with regards to any future network expansion initiative. In the short term, I reiterate that our focus is on execution.

Myself and the entire Colabor team are committed to bring back growth, efficiency, and profitability to the levels that are expected from us. In so doing, we will create further value for the shareholders.

At this time, I will open up the call for your questions.

Just as a dividend paying company, can you talk about the thought process behind the size of the current cut as well as plans for your free cash flow moving forward, perhaps in order of preference?

Mark, I just want to clarify the question. You want me or Jean-Francois to comment on how we should perceive now Colabor Group between a yield company and a growth company, is it the hand of the question?

Yes, I guess that's the essence of it, it was a question they're being cut with a lot of free cash flow I suppose going forward, just the size of the cut and your plans, yes, that's fine.

So, that's the way that we think that is going on. We want, as I always said since I joined the Company 18 months ago, we think that the Company was quite leveraged and we have seen that as soon as the economy gets up, when you have a very high leverage in your company, it's pretty tough, and that's the reason why we had so many issues in the first quarter.

So addressing the dividend for the future, we made sure that, firstly, we will have a more comfortable zone in terms of leverage. Secondly, as you know, we don't know yet if we will get a CRA notice, so we needed to make sure, for the best interest of this Company, we wanted to make sure that we could receive this notice without disturbing the operations of the Company.

Thirdly, we have more significant investment that we can make in this Company to improve the efficiency, to improve profitability. And the last point is, as soon as we will be ready to go back, we need to do again some acquisition, some highly synergistic acquisition.

For all these reasons, we thought that it was the right moment now to position the Company with flexibility and this starts with the flexibility in cash, and we have size opportunities in front of us, and that's the reason why we decided that we should keep a little bit more money inside the Company. And again, we will still be – forget where it was before, at $0.06 for the quarter, it's not a bad dividend.

We still think it's a very good dividend but we also have a far better position in terms of flexibility for the future.

Okay. Maybe just a follow-up on that, so do you now have I guess a new target leverage ratio, I believe it was two times debt-to-EBITDA before, are you looking at something lower now?

We eliminated this ratio from our target. I said last year, and about at the same time, that 50% could be good.

We think that we really have to act according to economic reality, market conditions, and so far we believe that $0.06 is the right dividend and we don't have a target. We just kept one target which was important last year, is still important this year, we want as soon as possible the dividend to be smaller than the earnings per share, the EPS.

This is the only target that we kept in mind when we fixed the $0.06 of dividend.

Sure, no my question was on the target leverage ratios. I believe before you were targeting two times debt-to-EBITDA.

I answered that because I said that we don't have any target.

Oh okay, sorry about that. And could you also state, I'm not sure if I heard you correctly, but you see some sizable investment opportunities now or did I misunderstand that?

No, right now what we are doing is that we firstly want to get a better company, operationally speaking, okay, but I think that this part of the action plan will be done I would say within the next months, and we're not talking yearly, we're talking months. Immediately after that, we know exactly where to go to start again the acquisition process.

Okay. And then maybe just one follow-up question, your credit facilities, am I understanding correctly there are no longer any covenants?

No. Yes, you understood correctly, no longer covenants.

Okay, thank you very much.

When do you think that all of the strategic initiatives that you guys are talking about will actually be in place or when will you guys be fully ready to start growing again?

In 2013, the cleaning will be finished.

So by the end of Q4?

Yes.

Okay. And I guess just to follow up on Mark's question, the $135 million that's available, can you just remind, is that different or can you just remind me what it was before?

Yes Derek, it was $150 million before.

Okay, thank you.

And Derek, if I can also add something, there is only one thing that will be left at the end of 2013, it is that we have at this moment three IT systems in the perishable products divisions and a decision will be made in 2013 about which system we should go with, but it should be implemented in early 2014. So the decision will be made but the implementation will not be finished obviously.

Okay. Actually just one follow-up question, maybe if you can talk about the margin compression, you said it was to adjust the expenses to new volumes, are volumes – do you see volumes being down and why is that?

No, adjustment to new volume is the loss of Compass. You know that just to adjust your operation when you lose a very important contract, it takes like a couple of months because the day that you lose it, until the day you lose it, you need to have a full operation.

The day after, you have 85 million less sales but it takes time to adjust operations. So the two first periods, for example of the second quarter, we were adjusting expenses to the new level of volume after Compass, but I can tell you that it's over.

In the third period of the quarter, we were exactly on target.

First question is regarding, can we get an update on the review of the warehouse network in Quebec and New Brunswick, I mean are you expecting closures there, or what's the update?

Good question, Leon. I would read again my paragraph, I said more decisions should be made by the end of the third quarter regarding our operations.

Okay, so that was specifically regarding that area, right?

This and something else, but understand something, that when we're going to have to shut down a [DC] (ph), we will tell our employees first.

Sure, understandable. Do you have any contracts that are maturing soon, I mean we saw a loss of a contract affect this quarter here, and are there any other bids on large contracts that have been made or are you expecting a decision anytime soon on those?

Yes, we don't have any important contracts that are over, so it's a good news. Another good news, we have two very important bids that we are participating right now.

Can you give us an idea on the size on those?

No.

Then another question regarding the CRA, you mentioned that in some of the cash flow that you'll be saving on the dividend cut might (indiscernible) go towards that, is there any other news on that, is there an update regarding the CRA?

No, I just want to remind you – firstly, I just wanted to re-answer your first question. I don't want to size the bid but I said important.

If we talk about it, it's because it's important. So, we're not talking $10 million or something like that, we are talking bigger.

And second part of the question, no there is no development in the CRA. Remember that we are right now waiting a decision from the Anti-avoidance Committee, which is a federal committee, which is not coming from the CRA.

The committee is a federal organism that decides if CRA can notice the Company. So until they give – end their decision, you only have, the news that we will get is, yes, we receive a notice, or no, we don't have a notice.

So we won't have any kind of pre-answer or something like that. So, as soon as we get information about that, we will publish the result.

Okay, one final one for me. Regarding Lauzon, you mentioned that sales were about $20.3 million, was that as expected according to your numbers or I mean maybe you can comment on the performance itself or seasonality?

Yes, it's a little bit soft on the processing side which was called T. Lauzon, but it's better than expected on the wholesale side which was called G.

Lauzon. If you remember, we bought like two different businesses.

Both of them had Lauzon name, but it's a little bit soft on one side, a little bit better on the other side, so it's in line, overall it's in line.

Yes just to follow up on the Lauzon, the T. Lauzon was the higher-margin part of the business I understood, is there any fundamental issue with their sales being this soft or just market issue?

No, market, it's totally related to marketplace, and when I said soft, it's not bad but we would have expected better, but it's been pretty tough, and the summer in Montreal started two weeks ago. So before that, remember that in June, it was pouring rain in Toronto and Montreal.

And now that Lauzon is also selling in Ontario, so we need now to look at the market conditions as much in Ontario as we look at market conditions in Montreal market. So now it's only market related, we are highly, very happy to have made this acquisition, and it will probably be a little bit longer to build up but it's still a very, very important asset and it's totally in line with being the best food service distributor.

We needed this part of the business.

And you mentioned that the margins were improving. Is that that you are able to manage the mix better, or is competition a little less intense, or why is the margin improving a bit?

As in the action plan as I said, one of the initiative was to review all the suppliers agreement and also – so this is the first part of improvement. The second part of improvement, I mentioned a couple of times that we are aiming how to get to more profitable sales.

What it means that we've put in place some programs that is an incentive to sell the products where we make more money. So it comes from within the Company, it doesn't come from the competition level.

Better execution at the plants generated better margins.

And then just on the combination of the Skor and Summit sales force and development of the street business in Ontario, can you sort of update us there?

Yes, I said that it was a positive factor sales-wise. We have put in place initiatives to improve the street business sales of Summit and it works very good.

I would say that we are happy with the growth, and when I'm talking growth, I'm not talking 0.5 to 0.5 comp sales comes from the different businesses, but when I'm looking only at street business in Ontario, we have I would say mid single-digit growth.

And then just on the freight, how was freight trending?

Freight, we've been quite lucky during the last quarter. The gasoline cost has been about the same cost than last year, very minor increase in the gasoline cost.

So it's been very good for the second quarter, and no, there is no issue there at this moment. And we never know because as you know in summers normally the gas companies are raising their prices.

They say that it's because of market but the reality we all know that it's because of consumption, but so far in 2013, we are nearly at the same level than 2012.

Just on your delivery system, the management of the truck fleet and the route planning, is it pretty well where you want it to be?

Yes in Ontario, can be better in Eastern Quebec, and it's going to be certainly showing improvement in the second quarter, but in Ontario we are exactly where we want to be.

And then just on the amendments with the banks, are you now paying a higher interest rate on the amended facility?

For the short term, we are, yes to some extent, but we also are examining some other opportunities at the current ratio for the short-term.

We will have better update at the third quarter, but even if we have a little short-term paying, a little short-term paying, we believe that in the medium term, we will have a better financing cost. We are working on different alternatives.

And just, without going into names, are the contracts that you obtained last year working out as anticipated – the new contracts that you obtained?

Yes, a little bit slower than expected, particularly with the MTY business, but not significantly, but you know that market is tough for everybody including the chains. So it's a little bit softer than expected but we are quite happy to have them because obviously with the loss of Compass, it's very good to have got this excellent business, excellent customer I should say.

Just again to follow-up on the dividend, I guess how some people are looking at it, it's the second dividend cut in less than two years, just wondering what gives you the confidence that now you are at a level where you truly think that it's sustainable?

Firstly, I think that we have a far better comprehension on our cost structure within the Company. As you remember, last year we were in a restructuring session at the same time that we had to decide what is the level of dividend that we should look at.

So, we had many, many initiatives that were going on at the same time. It was quite difficult at that time to really plan what will be the cash needs of this business.

Secondly, remember also that last year we were still in a growing economy, probably the GIP was 2, 2.3 last year. In 2013, particularly Ontario and Quebec, we are in a flat economy.

And if you look at all discretionary money businesses, all of them are getting to problem. So now, we have been able to do I think a very solid forecast for quarters, not for one month, for two months, but many quarters, because we know a lot better our cost structure, we have a lot better financial information because of the merge of the IT system that we did last year.

So, we are very comfortable that it is a sustainable figure. And honestly, it could have been a little bit higher, but again, we want to position this Company to be a better company and to be a consolidator, not now because we still have to finish cleaning the house, but as soon as we can.

So that's the reason why – you know we could have been less aggressive in the cut, but we think that it's better for the Company and in medium-term for the shareholders to have a very solid company which is able to see the opportunities and make them happen.

Okay, and maybe if you can just comment on the competitive conditions and sort of the trends you saw last quarter versus this quarter and how you came out of the quarter?

Honestly, when we are below last year, I don't want to say that we had a good quarter, but if I would be only looking at from where we started the year, remember that quarter one, we were at 40% of last year in EBITDA, quarter two, we are at 91% of last year. So we are filling the gap faster than I would have expected.

But remember also that in the first quarter I told you, don't take first quarter multiplied by four. I seriously think that some analysts have not listened to me and have taken the first quarter and multiplied by four.

But our plans show that we will improve this performance in the next weeks and periods, and honestly, there is competition. It's there, it will not be softer, it's hard competition, but now we are focusing not on the competitors, we are focusing on ourselves, and what is a very good news for us is that we are hitting better margins within the Company.

Yes, I just wanted to ask about T. Lauzon and Norref, what is their sort of shipping distance, how far can you ship from their central facilities?

Norref right now ship up to Quebec City and it depends. Okay, I will answer it differently.

Norref has two businesses. The first one is being a distributor for food service.

So the food service distribution, Norref goes from Ottawa, right now the Quebec side of Ottawa, the Gatineau, to Quebec City for the food service business. For the retail, as you know, we have the contract to supply IGA stores over the whole province of Quebec.

So, we supply fresh fish from Central Quebec until Rouyn-Noranda, Abitibi in the retail segment of Norref business. For Lauzon, the territory is the whole province because what we are doing right now is that Eastern Quebec divisions are now going to Lauzon everyday to get the products and they will be shipping it all over the place.

So, the province of Quebec will be totally covered. And Summit, which is our Ontario division, will cover the whole Ontario.

So, T. Lauzon will have their meat from Manitoba border until the far east end of Quebec.

And then just on the weather, it's been very difficult for all the restaurants, but do you see any improvement, it hasn't been too many weeks?

No, but since the weeks, yes, and you know you cannot imagine how can it be different. Two weeks ago or three weeks ago, it was a flood in Toronto, the restaurants were shut down, the air-condition were cut, and I know that some of you guys are working there, so it was a terrible week.

Last week in Ontario was a great week. And in Quebec City, it was the summer festival and it was packed in the restaurants.

So, it's bad but it's the reality, we are influenced by the weather and we cannot deny it.

I promise last question, guys, maybe just a question for Jean-Francois, maybe just to get an idea about your decision to join the Company and what kind of opportunities and challenges that you see?

They are playing inside of me now. I'm very pleased and excited to join Colabor.

I was in Cascades for the last 17 years, and the last eight years, I was the VP of Finance for a division of Cascades, which obviously some of you know Cascades CFO, so you don't have the full scope as a VP, Finance of a division, so that drove my decision to accept the CFO position here. And as you may know, Cascades was also a supplier of Colabor, so I know Colabor for a long time in that reference and I see very interesting things into the future of this and the retail business that drives my challenge.

And by the way, when he was at Cascades, he always thought that we were asking for too much supplier's revenue, now he's starting to think that, you know what, we can have more.

Thank you very much, ladies and gentlemen, for your participation. I look forward to updating you on our progress on the next quarterly conference call.

Have a great day and I wish to you and us a great weather for the weekend. Bye-bye.