Colabor Group Inc.

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

Derek Lessard - TD Securities Keith Howlett - Desjardins Securities Markets Christopher Bowes - National Bank Financial

Good morning, everyone. And welcome to Colabor Group’s 2015 second 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 this morning.

It can also be found along with our financial statements and MD&A on our website and will be on SEDAR. Colabor had a solid quarter in terms of comparable sales growth with a 4.2% increase.

This achievement reflects the contribution of new supply agreements in Ontario as well as organic growth mainly in the meat, fish and seafood categories. Five of our six divisions had a solid performance during the quarter.

In the meat category tonnage at the carry group double digits while low zones performance continues to significantly improve. Meanwhile Norref had a good lobster season despite a later start.

In fact this late start contributed to raise selling prices, which was beneficial for us. In Ontario the economy is resilient and this is having a favorable effect on restaurant chains, which is our main business segment in that province.

The only exception remains the Eastern Quebec and Maritimes division where a weak economy and unfavorable weather were not conducive for any volume growth. Colabor’s overall operating profitability was in line with expectations although it remained below year earlier figures.

For this reason, we remain very proactive in putting forward the initiatives to reduce cost, improve efficiency and achieve synergies across the network. Our important initiative was the optimization of our Ontario network in preparation for supplying additional Cara banners as of November 1.

These banners consist of those previously operated by prime restaurants a company acquired by Cara in late 2013 and should represent annual sales of approximately $50 million for Colabor. Since the beginning of July, our Ontario warehouses are operating 24 hours a day, seven days a week and certain volumes have been transferred within the network to improve the efficiency.

We are now ready to supply the prime banners and profitability should directly benefit from growing volume in the last weeks of 2015 when service begins. At this time I invite Jean Francois to review our second quarter results and financial position.

Thank you, Claude. Second quarter consolidated sales reached $366.6 million in 2015 up 5.6% from a year earlier.

This increase reflects the acquisition of Alimentation Marcotte in September 2014 as well as a 4.2% comparable sales increase. Sales in the distribution segment rose 9.4% reflecting the Marcotte acquisition as well as a 4.1% comparable sales increase resulting mainly from new contracts in Ontario and from sustained growth at Norref.

Also segment revenue decreased slightly as we exclude from this segment wholesale business previously carried out with Marcotte. On a comparable basis, sales increased 4.2% driven by important market share gain and price inflation in the meat category.

EBITDA was $8.5 million versus $9.5 million last year. This decrease essentially reflects lower margins on new and renewed contract as well as higher operating expense related to Marcotte.

During the second quarter, we recorded cost not related to current operation of $507,000 related to internal restructuring mostly the integration of Marcotte. Excluding these charges, operating income was $5.1 million up slightly from last year due to a reduction in the amortization of intangible following impairment charges taken at the end of 2014.

Turning over to our cash flow and financial position, Colabor generated a cash from operating activities after change in working capital of $3.6 million during the second quarter of 2015 versus $1.6 million last year. This improvement reflects lower seasonal working capital requirements this year compared to last.

For instance, in Q1 we had flagged a temporary inventory increase due to the beef category and investments required to begin supplying GACEQ in Eastern Quebec. Since inventory reverted to more normal level in Q2 it reduces the seasonal pickup.

Combined with better management of accounts receivable and payable, working capital require only $4 million in Q2 2015 compared with $7.4 million requirement last year. This improved working capital management resulted in only a marginal sequential seasonal increase in our total debt which stood at $191 million at the end of Q2 2015 versus $189 million at the end of Q1 2015.

As a reminder total debt includes bank borrowings and convertible debt. Compared with the same period last year, our total debt is also slightly higher by $4 million despite $13 million year-over-year increase in inventory and the acquisition of Marcotte for $12 million.

I turn the call back to Claude.

Thank you, Jean Francois. Since the beginning of 2015, Colabor has made significant progress in the regards to organic sales growth.

We have also remained proactive in the regards to improving our efficiency and achieving synergies as quickly as possible. As I said during the Q1 conference call 2015 is a transition year that will provide us with a stronger base to generate profit growth in 2016.

We believe the current momentum in our sales growth can be leveraged in 2016 through a leaner and more efficient cost structure. In the last 12 months Colabor has gained $125 million of additional annual sales of which $100 million is organic sales growth.

While these sales gradually begin to materialize in 2015 they will have full effect in 2016. For the third quarter it is important to remember that profitability will reflect the renewed terms of the Cara supply and distribution agreement.

It will also be the first period with the full effect from the renewal of our contracts with affiliated distributor in our Boucherville division. For these reasons we expect third quarter profitability to be relatively similar to that of the second quarter.

However, we expect improvements in the fourth quarter driven by better efficiency and synergies in Eastern Quebec, greater volume from the prime banners in Ontario and continued organic growth. As a result we remain confident to achieve our profitability objectives for the year.

This said we will continue to constantly challenge ourselves and find more ways to reduce our cost and improve how we carry our business in order to generate higher and sustainable profitability. I now open up the call for questions.

Yes, good morning everyone. Just a quick question I guess on the contract signings or the Cara renewal.

I was under the impression that it started November 1, so just wondering why you’re saying the impact will begin in Q3.

Here we are talking about two different things. Okay, the renewal of the existing contract, okay, it started two or three weeks ago, okay.

So this is a huge contract which is as you know big share of our market in Ontario. On top of that we’re going to get new business, $50 million, which is going to start on November 1.

So we are talking two things. The renewal was done with different margins.

Okay and we’re going to get the new business in November 1. So that’s two different things.

That’s the reason why we’re saying that in the third quarter which started a couple of weeks ago. Okay, we will have the full impact of the renewal.

In the fourth quarter, we will have the new bunch of sales coming in.

Okay, thanks Claude that clears it up and a question on can you maybe remind us what the requirement is for your fixed charge coverage ratio and where it is now?

I will ask Jean Francois to answer that.

The record we put in two financial statements is we just disclosed that the fixed cover charge ratio criteria is [met], so you can appreciate is there every quarter under our notes into the financial statements.

Okay, so there is no – you guys don’t ever quantify it.

Never, no we never did, but…

That’s the only ratio that we have and it's met.

Okay and I guess just maybe one question for housekeeping purposes. Maybe just talk about the depreciation, amortization expense and why it’s come down and what level we should be modeling going forward.

Derek it has come down due to our impairment write-off we did in Q4 okay so intangible remember that.

Yes.

I think Q2 will resemble a lot on what you can foresee in the coming quarters.

Okay. Thanks a lot everyone.

Yes, so I had a question on the affiliate distributors in Boucherville you are 80% signed in your - I think talking with another player Lauzon sure what the outcome of that was?

Still talking the - there is only one - important one, which is not yet on their contract for long-term, but we have an agreement a monthly agreement and it goes very well. So still trying to convince this one to sign a long-term agreement but we have the sales and it's business as usual with them it's just a matter of getting a longer-term agreement, but so we are still trying to sign and the rest of the 20%.

But we keep the sales as you can see in our number right now we are not affected at this moment.

Is that there was one player who was definitely not signing I thought.

Yes, that this one is gone.

He is gone.

This one is gone but as of April 15 and honestly we were quite aggressive in getting new sales to compensated and it goes very well.

And then there was mention of a new contract and I wasn't sure what CDA means but…

It’s, see if these - Colabor Food Distributor, it still the qualification that we gave to the Eastern Quebec division. Eastern Quebec division we call it now Colabor foodservice distributor.

Because as you know Colabor is also a wholesaler so we wanted to differentiate itself this division because it’s really a distribution division not a wholesale division.

There was a new contract there or?

Yes, yes we got an hospital contract is a very big contract in the Eastern Quebec and it's called GACEQ it's a central buying group for 100 hospitals and senior homes owned by all the one that are operated by Quebec government. And we got it end of - beginning of February or end of January and so it’s going on right now.

And then I was wondering on the Norref, which has the HACCP approval how it sales outside the you know outside the province or progress?

Yes it goes it goes pretty fast in Ottawa region, but you know we started with a small base so the percentages are pretty good, but it's not yet significant in the Norref business, but you know the market we are in the markets we have a full-time representatives going on and it grows percentage wise we’re very happy, but it still minor in the big business which is the Norref business.

And I notice that there was a some signing bonuses would that have related to the Cara contract or you may not want to say but do all signing bonuses go into intangible assets or to some expense, how does that work?

Keith it’s related to long-term large contract sign in Ontario.

Are all amounts sort of an asset or some expense?

No, all amount when we sign long-term contracts like what we did for the distributors, it’s capitalized under intangible assets and amortize over the duration of the contract.

Oh, great. And then just I was wondering on the Lauzon meat operation I understand things are going every quarter there.

How is that going, if we gone through the breakeven mark or getting close?

Yes, very happy to say yes, so I think that we went there in the second quarter and it’s going to last, we got new contracts as you know it goes very well. It's a double-digit growth and now we are in the breakeven point going on the profitable side of the business and we just gain a couple of very interesting contracts in Montréal in the last two weeks, so the future looks pretty good.

Thanks very much.

Hi, good morning guys. Just wondering if you could discuss how close you are going to get to capacity at Eastern Quebec in the fourth quarter with the new business coming on and maybe adopt that when do you expect the Marcotte charges to stop?

Yes, the Marcotte business will be transferred into the Eastern Quebec warehouses in 2015. We are just trying to do it in an orderly fashion to make sure that we don't [heard] the Marcotte business.

Up to now we are very happy with the Marcotte acquisition. We kept the sales, we were even if the competitors were chasing our customers we kept them.

So we are a little bit cautious in the day that we are going to pick to transfer the business to Quebec City warehouse, but it’s going to be done in 2015. And also just to comment on the capacity, we will be probably at high level of capacity.

I would say the 90% in the two Eastern Quebec warehouses, one in Rimouski and one in Quebec City, but we’re not getting nervous about that. Firstly, we can easily expand the Quebec City warehouse.

We have plenty of land out there and we have a good landlord that could do it for us quite quickly. And secondly, we as you know we are still expecting to become a distributor in Montréal as soon as our financial capacity improves.

So if this happen then we are going to switch some business from Quebec City to Montréal. So we are very pleased with the Marcotte acquisition and we are pretty sure that it’s going to be very good in profitability as soon as we close the facility [until we reverse] and transfer the business to Quebec City and it’s going to be done in 2015.

Okay, great. And just another quick one, can you talk about any working capital requirements to take on the new business in Q3 and Q4 I guess Q4 more specifically and maybe what you think your non-cash working capital flows are going to look like for the full-year?

Okay, good question Chris and welcome to the call. Yes, you cannot look at historically the third quarter and fourth quarter are pretty much in line with what we - when you compare it to this year given the sales organic growth.

Yes, we expect to invest in working capital. So I would not compare to the third quarter last year to be similar to this year.

So I expect third quarter and even fourth quarter [would becoming] a prime business. I expect that investment on working capital mainly in inventory rise.

A bit of the compensation could come from the fact that we have actually nearly $4 million of inventory sitting into the market warehouse and as soon as we transfer the business, we would need only probably 25% of that amount in Quebec City, additional inventory in Quebec City, so we could free up there $3 million of inventory. So we’re going to try to do both at the same time to compensate a bit what the request will be in the working capital for the new business.

All right, that’s helpful. Thank you.

Yes, thanks again. Just wondering if you are able to quantify the margin impact that you are talking about from the new contract signings?

You know that I'm not sure if we want to go as detail in term of margins as you know we are in a very, very competitive environment. What I can say is that obviously we had to invest some margins to renew $600 million of business because this is the amount of business that we renewed this year and they are huge contracts.

I'm adding here the distributors business at the same time then the Cara business. And but what I can say is that in the Cara contract for example we have also some important synergies that comes with the margin investment.

The issue is that the margin investment comes day one, the synergies and the new business, the additional prime business that will come in November are delayed compared to the margin investment. So that's the reason why 2015 I call 2015 is being a transition year because we get that it faster than we get the good side of it.

In 2016, I'm pretty sure that we will compensate this margin it by the synergies and the new – the additional business. So in 2016, we don't see in the significant issue with that or a problem with that.

In 2015 it's a bit different because of the delay between getting the synergies and paying the margin investment.

Okay, so should I assume starting then from Q1 2016 that the benefits outweigh the margin impact?

Yes, pretty much.

Okay and I guess just one final question and is maybe if you can just talk about your market share dynamic and your ability to grow share going forward?

I would say that we are holding I would qualify as you know it’s not like in a retail, we don’t have exact market shares like it my colleagues in the food retail have [their Nilsson] we don't have that in the foodservice. So it's always pretty tough to comment on market share, but with the kind of growth that we published being 5%, 5.6% of growth in second quarter and we expect the trend to continue.

I would say that we hold certainly, because in Ontario there is a growth in the marketplace which is around 5%, okay, with the numbers that we get, but in Quebec right now the growth is zero in foodservice and we experience as you see a good growth. So overall I would say that we are at a minimum we hold the market share position and perhaps that we – if I want to be conservative on below that, but perhaps that we’re gaining a little bit.

Okay and actually just one more questions wondering about what you think about paying down or what’s your outlook for paying down more debt?

Cash availability to reduce debt this year given the recent organic growth we have seen in deferred investment we have to do on working capital is a little bit harder to predict.

Okay.

Clarity on the business need, so but still with the dividend decision we’ll certainly upgrade our capacity to reduce debt and it’s typically happening on the second half of the year.

Second half of 2016?

No second half of – typically our cash generation is mostly during the second half Q3 and Q4 as you can look at historically, but my point is this year with the investment we have to do in working capital ability to accelerate payment on one side, but on the other side with the reduction of the dividend it gives us a greater…

Okay, fair enough, thanks guys.

Yes, I want to ask on the GACEQ contract whether your sort of the exclusive distributor to those group of hospitals or whether you serve an approved supplier one of a number or how that works?

Exclusive distributor.

And would you be – is it possible for you to quantify that contract or is that a confidential?

Yes, I think that we have already said that it’s a $20 million and plus.

$20 million.

Yes.

Thank you. End of Q&A

Thank you operator and ladies and gentlemen thank you for participating. I'm looking forward to updating you on our progress during our next quarterly conference call.

Have a great day. Thank you, bye-bye.