Colabor Group Inc.

Claude Gariepy - President and CEO Jean Francois - VP and CFO

Derek Lessard - TD Securities Keith Howlett - Desjardins Securities Andy Krystal - Royal Capital

Good afternoon, everyone. And welcome to Colabor Group’s 2015 first quarter conference call.

With me is Jean Francois Neault, Vice President and Chief Financial Officer. I will first provide general comments.

Jean-Francois will then review financial results, after which we will be pleased to answer your questions. [Foreign Language] Please note that our press release was issued via the Marketwired News Service earlier in this morning.

It can also be found along with our financial statements and MD&A on our website and will be on SEDAR. I would like to remind you that due to seasonal factors the first quarter has historically produce significantly lower results than other periods in terms of sales and profitability.

Despite this seasonality Colabor had a solid quarter in terms of comparable sales growth with an increase of 2.9%. This achievement was mainly driven by the contribution of new supply agreements by significant market gains in the meat category and further a single digit growth in the fish and sea food category.

In fact excluding the effect of our decision to voluntary cease the sale of tobacco products to some customers in Ontario, comparable sales increased by nearly 5%. As anticipated profitability remained affected by competitive pressures in our main markets and by high operating cost in Eastern Quebec, including cost incurred to stimulate organic sales growth.

On this front we are anticipating operating cost to significantly decrease as we will cease warehousing operations in three rivers in Q3 and transfer the volume to St-Nicolas. This consolidation will enable Colabor to be more efficient and cost competitive in the Eastern Quebec market.

It will also add a direct effect on profitability as organic sales further increase. In regards to driving sales growth, Colabor is extremely pleased to have extended and broadened its long term distribution and supply agreement with Cara earlier this month.

First the agreement extends the current relationship to supply Cara brands in Ontario and Quebec through the end of 2022. So again we have broadened the scope of the agreement to include this supply of additional well-known brands as of November 2015.

These brands which became part of Cara when it acquired prime restaurants in 2014 include East Side Mario's, Casey's, Beer market as well as several brands of Irish parts. These additional brands should represent annual sales of approximately $50 million for Colabor starting in November 2015.

Third, the agreement also provides Colabor with the opportunity to supply restaurants operating under any new banner that may be developed or acquired by Cara or its affiliates in Ontario and Quebec. Since Cara is a growing company, we believe there will be several opportunities for Colabor to increase its business volume over time.

Between September 2014 and November 2015 we have gained $125 million of additional annual sales, of which $100 million is organic sales growth. The rest of the $25 million comes from our market acquisition.

These sales will begin to materialize in 2015 and we will have a full benefit in 2016. At this time I invite Jean Francois to review our first quarter results and financial position.

Thank you Claude. Before I begin I remind you that 2015 fiscal year begin on the last Sunday of the 2014 calendar year as opposed to January 1st in previous years.

As a result, Q1 2015 had three more days than Q1 2014. First quarter consolidated sales reached $304.7 million in 2015, up 9.1% from $279.3 million a year earlier.

This increase reflects the acquisition of Alimentation Marcotte in September. The effect related to the change in the beginning date of our fiscal year as well as higher sales in the meat category.

These factors were partially offset by our decision to stop distributing some tobacco customers in Ontario. Sales of the Distribution segment rose 9.6%, mainly due to the Marcotte acquisition and the new start date to the fiscal year.

Comparable sales increased 0.3% as volume gained from new contract was partially offset by the tobacco decision in Ontario. Wholesale segment revenue increased 8% comparable sales, which exclude wholesale business previously carried out with Marcotte, increased 8.2% driven by important market share gain and price inflation in the meat category.

EBITDA was $464,000 versus $148,000 last year. The increase essentially reflects higher business volume and the new start date to the fiscal year, offset by lower margin on new contracts and higher operating expense mainly incurred to stimulate organic sales growth.

During the first quarter, we recorded cost not related to current operations of $0.8 million related to internal restructuring, mostly the integration of Marcotte. Also we recorded a non-cash impairment loss on equity investments of 1.7 million related to our investments in Colabor.

I would point out that excluding these charges, operating income rose $1.2 million from last year, in part due to a reduction in the amortization of intangibles following impairment charges taken at the end of last year. Turning over to our cash flow and financial position, Colabor generated a cash flow from operating activities after a change in working capital of $7.9 million during the first quarter of 2015 versus 11.9% last year.

The reduction is mainly due to higher level of accounts payable at the beginning of this year compared to last and to a temporary increase in inventory. Excluding these factors Q1 2015 remained in line with typical seasonal working capital variation.

Still working capital provides fund of $9.1 million in Q1 2015. With regards to its financial position, Colabor's total debt include bank borrowings and convertible debt to that $189 million at the end of first quarter 2015 versus $181 million at the end of first quarter 2014.

Our total debt increased by only $8 million over the last 12 months despite a $15.7 million year-over-year increase in inventory and the acquisition of Marcotte for $12 million. On a sequential basis, total debt was down from $193 million at the end of fourth quarter 2014.

I will turn the call back to Claude.

Thank you Jean Francois. In the last few months Colabor has intensely focused on retaining and growing its business volume through new supply contracts as well as renewing and broadening the scope of existing agreements.

Through these long-term agreements we have secured approximately 40% of our total volume. These agreements, despite lower margins are still profitable for Colabor and provide us with opportunities for important synergies.

Beginning now, we will focus on capturing these synergies as quickly as possible. 2015 is a transition year that will provide us with a solid base to generate sustainable profit growth in 2016.

In addition many of our divisions have had good success in gaining further share in their respective markets. This is particularly true with our Décarie and Lauzon meat operations and also with the LAR F [ph] fish and sea food division as I said earlier.

This proves the high estimated value of our product and service offering in the marketplace. Having said this, we have to be more efficient at what we do and we must further operating cost.

In a mature industry like ours, sustained profit growth stems from constantly finding better more efficient ways of doing business. We've done a lot but we will do more by remaining proactive on elements under our control.

As I said during the Q4 conference call, we've made some decisions that are being implemented at the moment in order to offset margin pressures coming from contract renewal or new contracts. We now have a better team in place in Eastern Quebec, more experience managers in our meat operation and other operation.

So we are confident to gradually carry our business in a more efficient and profitable way. But it's going to take some time.

I now open up the call for questions.

In the press release you pointed to important market share gains in the wholesale division. Just wondering if you could maybe add some color there and may just a follow up to that, do you think the meat price inflation that you're able to pass, and I guess the subsequent 8% or 8.2% same stores sales growth is a sustainable number.

At first, we talked about the Décarie business. We were talking wholesale meat business, important market gain share.

And just to let you know why we said that is because we had an 18% tonnage growth excluding inflation. So it's a really good performance.

This being said, for the meat prices, we think they're going stay high at least for the rest of 2015. After that we cannot comment at this moment.

We are really following the markets -- the beef and the pork it's not only – by the way it's nearly all the proteins that we have to follow very closely. On the grocery side, don’t forget that there is no inflation.

So overall Colabor's business -- the inflation is not that big a factor, but on meat and perishable, the protein side of it, it's a factor. That’s the reason why internally we always compare ourselves by tonnage, which is a far better measurement.

So at this moment the tonnage is flat in fish and it's also flat in the process meat but its strong growth in meat distribution.

Okay and I guess what was behind the strong tonnage growth and meat distribution?

I would say that when we merge -- remember that when we bought the Lauzon business, 18 or 20 months -- three years ago now, we had two segment of the business that we bought on at the same moment. There was a meat plant which we kept as is, that we call Lauzon meat.

But the wholesale side of the Lauzon business was integrated into the carry over the weekend. And I would say that the success comes from the fact that we probably into under the same roof the two best team in Montreal market.

The Lauzon team was extremely strong and it came with the Décarie team and together are gaining important market share. I would say that I don’t know who is suffering at this moment.

But our tonnage proves us that we are getting some market share.

And a question on the slow start to spring, at least in Montreal and Ontario, and obviously onset of [indiscernible] season. Is this affecting you at least in the early goings of the quarter?

Yes, particularly at this time, honestly, the very cold winter, we suffered, all of us. So we know exactly what it did to the business.

But and at this time for us it's a crucial time for the season. Remember that we are the number one in the lobster business.

And right now there are no boats going out for getting lobsters. So we hope that it's going to warm-up a bit to get into this lobster business as soon as possible.

On the other hand, we were a bit lucky this year to and we take it that Montreal -- the Montreal region again other was Nethers, there are two markets where we are really present. So it did good for us upto now.

So it compensates a bit, what will last with the weather, but now it has to come that becomes it's really -- at this time normally we have terraces and right now as you know, nobody is sitting on the terrace.

Yes, I am wondering on the Boucherville distribution center, you had reached 80% resigned. I am just wondering where that is now?

We are still at the same number. The reality, as I said I think it was in Q4.

There is one distributor that will not renew. We know it for fact.

And there is only one left which is 10% of our Boucherville distribution which we are talking with. So it's not gone.

It's just a matter of getting to sign agreement. So right now we’re focusing on this one.

There is one that is gone. So we are pretty happy with this renewal, even if we didn't get 100% of the 30 contracts that we have.

We are now -- one only is left to be signed or negotiated.

Is the one who left, left more or less at the end of March? Was that the idea?

April 15.

And then I was wondering on the Lauzon meat business, how that’s going in terms of capacity utilization and profitability?

Profitability, I would say we’re very happy with the turnaround. We had invested lot of money last year to get the new team and to into some equipments.

And so starting from now this is a breakeven and profitable business. So meaning breakeven at this moment going to be a profitable business.

So we are very happy with the turnaround. Sales are growing -- not only inflation, real sales are growing.

Tonnage is up, and the capacity, we still have the lot of capacity in this plant.

And then just in terms of diesel costs, are you getting some benefit yet from that or how is that working?

Never forget that the diesel cost, when it goes up we are predicted because about 40% of our sales we have, what we call fuel up-charge. On the other end when it goes down, we also lose the fuel up-charge.

So it gives us some advantage because at this moment let’s say that last month for example the diesel cost was down about 17% over last year, but the reality is that we get only 40% of that because the fuel up-charge also went down. So it is there, but it's not an important factor in expense portfolio.

So it's about 40% goes has the fuel surcharge or the lack therefore, that 50% you just worked into your other costs?

I would say that when the fuel -- when the fuel goes up or the fuel goes down, it's a matter of hundreds of thousand dollars upgrade within that. But it's not millions of dollar.

So in a company like us, it's not a huge ingredient for success.

And then just in terms of the inventory, which you mentioned it was up – is that up to service new contracts or why is that out?

Both -- two main reasons. The first one, effectively we added about $2 million to service the gas [indiscernible] in Quebec City.

It was for the starting point. So it's going to get out in the next month, because it was just a matter of starting well and servicing the customer on impeccable manner.

Also remember that we have around $3 million in markup which will disappear after October 1st because when it's going to merging Quebec City we don’t need more inventory in Quebec City. It's going to take about three months to eliminate.

And the last point is that we got some very good opportunities in meat and we took advantage of that, but it costed us some inventories. On this side also, we think we will eliminate $3 million to $4 million in the next month.

So I would say that Q2 picture will be more accurate for the needs that we have in terms of inventories.

And just wondering in terms of -- as you get your cost base -- operating cost base down where you wanted to be, do you have sort of target gross margin rate in mind for the business?

Are you talking EBITDA margin.

No I was talking about the gross margin.

The gross margin. We do not disclose gross margin, Keith.

As you know our competitors would be too happy for that.

Just a follow up on that last question, I was wondering what the target would be for the EBITDA margin?

Remember that for the first time in March 11 we gave guidance, and the guidance was stable EBITDA for 2015. So starting from there you can decline -- not decline, I'm sorry.

You can calculate the EBITDA margin in percentage. But as I said, the good side is now that we are getting sales growth.

We have to take our synergies and the synergies will take some time. And we believe that the EBITDA growth will come back in '16.

But in '15 we gave the guidance. Everything that right now we are perfectly in line with the guidance, and we will comment on that in the next quarters.

And in terms of your decision to cease distribution of tobacco products, what was behind that decision?

This was not – we didn’t cease totally the distribution. That’s the reason why we're talking about some customers.

The reason why we stopped selling to some customers is that we don’t want to sell tobacco for tobacco. We are ready to sell tobacco for the customers that are buying something else.

But right now we had some customers that were bearing only tobacco. This is not a profitable way to make business.

So over time and we are sorry to talk about that. It's the last quarter that we talked about that, but its material.

We stopped voluntarily for about $5.5 million in the quarter. But we decided that we're going to stop selling tobacco only to tobacco customers.

We're going to sell tobacco if we also share the restaurant or the convenient store. And so that’s the way that we're looking at tobacco.

We want to minimize the tobacco sales as much as possible because first, it's a non-profitable business, but also it's also a business that can disappear overnight. Don’t know if you are aware, that across Canada, RBH, Rothmans, Benson & Hedges decided January 1st that it will serve their customers directly without any distributors.

So that’s the kind of decision that we don't want to be caught in. So that’s a reason why it's a courageous decision but we think we have to be getting out this non-core activity.

But do you think that over time or in the next year you could see yourself getting out of the tobacco business completely?

No, I don't think because we have some restaurateurs or let's say for example golf courses and now they don't want two trucks in their backyard. So they want us to serve them.

So it's going to be minor, really minor. I think that over 1.5 billion business we’re going to be left with less than $10 million business of tobacco.

So it will be a none factor. So we won't talk about it.

I have question, my next question is on the long-term debt. I noticed the interest rate went up for 9.1% to 9.8%.

How high can this interest rate go?

That comment is on the long-term debt, on the junior debt. That’s for the duration of the contracts.

So that, there was adjustment after one year that was on a spring depending on our debt-to-EBITDA ratio and it triggers an increase of the total interest charge, but is going to be for the remaining of the contract fix at this level.

So it will be 9.8%.

For the duration of the remaining of the contract, yes.

And if for some reason your EBITDA went up a lot, would it be possible for it to come down or is it?

No, it was a one year adjustment.

Do you find that the covenants in the long-term debt agreement are hindering your business in any way?

I want to remind you that we have no covenants now with the ABL. We have only one fixed cover charge ratio to respect.

There is no EBITDA covenants.

Not necessarily financial covenants but I know there were some other covenants in the junior long-term agreement. Do you find that those are hindering the business at all?

Do you find maybe there are sales that you want to have that you can't necessarily have?

Now you know the junior and there is our conference that it states that it's [indiscernible]. So of course there is always covenants into subject agreements.

For now we are in very good relationship with them. So would that come to be an issue, we would have open discussion, I don’t foresee any issue for now.

But we don't foresee any problems for now. But yes like you said there is covenants in any contract.

And I guess my question is really was there an amount of sales that you lost because of this contract?

No. Not at all.

There is -- at this moment the business is not hurt by its financial situation. This is my comment.

As you saw I just said a few minutes ago that had an opportunity to buy some good meat prices in the first quarter and we bought like 5 million or 6 million of meat that we’re going to make more money with it. So we have no issue with our debt level in the day-to-day business.

I was just wondering in a sense that I know I saw some things you can't service arcades or casinos. I don't if you had been servicing those type establishments before you entered this contract.

That’s why I was just wondering.

It's very important that the point being done that the debt level is an issue. It's a concern I should say not an issue.

It's a concern for us constantly but it does not hurt our business.

I guess you are going to looking to try to pay down your debt with the elimination of the dividend.

Yes, and it's very important that this business needs its cash. We took the decision in the March to get out of dividends.

This business needs cash, we’re going to keep the cash. And as we said to support the growth initiatives, the internal CapEx, and hopefully somewhere somehow another acquisition, but it's not for now.

Up to now we were focusing with this money, repay debt and use the money that we need in CapEx to be more efficient.

And then my last question is in terms of the equity investment in investment Colabor. I was just wondering besides the shares of Colabor Group, what else does that equity investment hold?

It's basically only asset of investment Colabor now that has tangible value. So it's only the share of Colabor.

The full impairment loss is related to the decline on our stock price.

It's about 5 million shares deal that’s it.

Okay, and what was the purpose of that structure in the first place?

It's a long story short, because it's been done 10 years ago but the reality is that -- remember that the Colabor investment were the founders of the business, and they sold the business to the public through an income fund and they kept -- they were paid $58 million in cash and 50 million in shares. And so they kept in a company called investment Colabor instead of having the shares in the hands of the each distributors.

So that’s the reason why they are still there. They have 18% of the company which is the 5 million shares they got 10 years ago.

Out of this Colabor group owns 18% of Colabor investment, which owns 18% of Colabor group. The shale which is called Colabor investment at one point will disappear and we will get our shares back in our hands.

So you are looking to try to simplify that structure?

Yes but history is there and we're going to try to simplify as soon as possible.

I was just wondering how the Norref business was doing in the Ottawa region or outside of Quebec.

Outside of Quebec we are only selling in Ottawa, and we are doing well with the restaurant business at this moment, fast growing. And now we're negotiating perhaps to get a retail contract in Ottawa region like we have in the province of Quebec.

So at this moment Keith, it's a starting point. So percentage it's great because we are starting.

But I would say that we are – at this moment we're making some million of business up there and it can be growing fast, if we get the retail contract that we're looking for.

And just on Western Canada, who will be the minimum sort of revenue that a food service distribution facility has to have before you want to open it. Like is there sort of a number like that or not really.

At this moment we are in Ontario, Quebec and New Brunswick, and all the plans for the next two years at least is to focus on these markets, because if we make any kind of acquisition, we want to be able to integrate them into our existing square footage to get more profitable synergies than going out of our existing market. So we – some years ago throughout -- management was looking there but at this moment we're looking to increase our market shares in existing markets.

And just wondering, it's a couple years off but do you have any preliminary thinking on the debenture when it's due I guess at the end of April 2017.

Keith, the debenture as you know, the trigger prices is far and away now today. So for sure we have – we can be proactive on that particular area next year.

But right now it's too early to comment on our initiative put forward on that.

We believe Keith that at this moment the focus of the management has to be get this Company more profitable and it's going to ease your capacity to do something with the debentures. So the board is tough on us, stay focused on getting this Company more profitable and after that we have still some quarters in front of us before thinking about how we're going to manage these debentures.

But if the EBITDA would go up significantly, this question will be with a different answer.

Jean Francois, just a quick question. When does the increase in the rate on the long-term debt kick in?

January 1st. So we have the full effect in the quarter.

It kicked in January 1st?

Yes.

Ladies and gentlemen, thank you operator first. And then ladies and gentlemen thank you participating.

I am looking forward to updating you on our progress during our next quarterly conference call which should be held in July. So between now and then, have a good time.

And thank you.