Colabor Group Inc.

Claude Gariepy - President, Chief Executive Officer Jean Francois - Chief Financial Officer, Vice President

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

Thank you. Good morning, everyone, and welcome to Colabor Group's 2015 third 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 registered a solid 4.8% comparable sales increase in the third quarter.

This achievement reflects the contribution of new supply agreements in Ontario and Eastern Quebec, growing business with Cara as well as organic growth. All divisions experienced organic sales growth led by the Carry and Lauzon meat operations, where tonnage grew at double digits.

Meanwhile, our efficiency food division Norref had another excellent quarter with high-single-digit growth. In Ontario, a relatively healthy economy is benefitting restaurant chains, which is our main business segment in that province.

Finally, we recorded modest organic growth in the Eastern Quebec and Maritimes division, which we now refer to as CDA, and this is despite a weak local economy. As anticipated, Colabor's operating profitability reflected the renewed terms of the Cara supply and distribution agreement.

It also included the full effect from the renewal of our contracts with affiliated distributors in the Boucherville division. As a result, although below last year, adjusted EBITDA met our expectations.

We are particularly satisfied with the progress of the CDA division in Quebec, where profitability returned to better levels. I am also pleased to report that Lauzon is now a breakeven and growing business, which provides Colabor with a strong unique selling proposition.

During the third quarter, we proceeded with the reorganization of our Ontario warehouse network in preparation for supplying additional Cara banners and achieve the synergy included in the contract renewal. As I mentioned last quarter, our Ontario warehouse has been operating 20 hours a day, seven days a week since the beginning of July as we get ready to end this additional business.

Certain volumes have also been transferred within the network to improve efficiency. The new Cara business should generate annual sales of approximately 50 million for Colabor, starting November 1.

The operational aspect of this reorganization has been completed, and our focus is now on achieving our objectives. Profitability should directly benefit from growing volume in the last few weeks of 2015, when service begins, but we can achieve more as we continue to strive for optimal efficiency across the Ontario network.

In Quebec, we remain on target with our objective to close the Trois-Rivières warehouse at the end of the fourth quarter and integrate the volume in our Quebec City St-Nicolas facility. This will generate further synergies and efficiencies at the beginning of 2016.

At this time, I invite Jean Francois to review our third quarter results and financial position.

Thank you, Claude. Third quarter consolidated sales reached $366.9 million in 2015, up 6.3% from the previous year.

This increase reflects the acquisition of Alimentation Marcotte in September 2014, as well as a 4.8% comparable sales increase. Sales in the Distribution segment rose 10.2%, reflecting the Marcotte acquisition and a 4.8% comparable sales increase resulting mainly from new contracts, both in Quebec and Ontario, as well as from sustained growth Norref and Lauzon.

Wholesale segment revenues decreased slightly due to the exclusion of wholesale business previously carried out with Marcotte. On a comparable basis, sales increased 4.7%, driven by important market share gains and price inflation in the meat category.

Adjusted EBITDA was $8 million versus $10.2 million last year. As anticipated, this decrease reflects lower margins on new and renewed contracts as well as higher operating expense related to Marcotte.

During the third quarter, we recorded cost not related to current operations of $336,000, mainly to carry out the reorganization of our Ontario activity in order to achieve synergies related to the Cara supply contract. These costs are lower than a year ago and combined with a reduction in amortization charge allowed Colabor to generate pre-tax earnings of $1 million versus $145,000 last year.

We concluded the third quarter with net earnings of $863,000 or $0.03 per share. This is Colabor's second consecutive quarter of net profitability.

Last year's net loss of $15 million included the write-off of deferred tax assets following our agreement with the CRA. Turning over to our cash flow and financial position, Colabor generated a cash flow from operating activities after changes in working capital of 3.1 million during the third quarter of 2015 versus $9.2 million last year.

This variation is mainly due to a decrease in trade accounts and rebates payable in Q3 2015 as opposed to an increase in Q3 2014, related to cyclical punctual adjustments that occur this year. Excluding working capital variations, operations generated a solid cash flow of $7.4 million in Q3 2015, up from $7.1 million a year ago.

This improvement reflects the year-over-year reduction in cash cost not related to operations, which more than offset the reduction in the adjusted EBITDA. Our focus continues to be on debt reduction through further improvements in working capital and cash generation.

For instance, we improved the collections of accounts receivables as their value decreased by $6.5 million in the last 12 months, despite a solid sales increase. With regard to inventories, their value decreased by nearly $5 million during the third quarter as we made further progress in optimizing our supply chain.

Given our focus on cash flow generation, the seasonal increase in bank overdraft was less than Q3 2015 reaching $2.8 million versus $3 in Q3 2014. After nine months, the improvement is even better with a $3.2 million reduction in bank overdraft versus $1.3 million increase last year.

Because of the punctual working capital requirements, Colabor average daily debt was $105 million in the third quarter, up from $101 million in the second quarter. However, we concluded the third quarter with bank borrowings of $95.1 million, down from $97.6 million at the end of second quarter.

Meanwhile, total debt including long-term and convertible debt stood at $191.6 million at the end of the third quarter, essentially stable from $191.1 million at the end of the second quarter. I would turn the call back to Claude.

Thank you, Jean Francois. The organic sales growth achieved since the beginning of 2015 proves Colabor's ability to grow its business volume in a very competitive market.

We are confident that our ongoing initiatives will continue to generate solid organic growth going forward. We must leverage this strength by remaining proactive in our efforts to reduce costs, improve efficiency and achieve synergies across the network.

In so doing, any further volume increase will have a direct favorable impact on profitability. The reorganization of our Ontario activities is one example.

Summit division is now ready to service the former prime banners and we are in a position to do some efficiently and increasingly more profitably over time. We are also continuing to optimize asset utilization at the CDA division as we finalize the integration of the market business and we will close the Trois-Rivières distribution center at the end of the fourth quarter.

With these initiatives and greater volume we remain confident to achieve meaningful improvements in the fourth quarter, so that we can conclude 2015 with relatively stable adjusted EBITDA compared to last year. More importantly, we will benefit from a stronger base to generating sustained profit growth beyond this year.

I would now open up the call for questions.

Yes. Thanks.

Good morning, everyone. Maybe if we can just talk about, you mentioned in your press release significant share gains.

Can you quantify what you mean by that and if you could any color on where that share is coming from?

We were talking personally in our meat and fish divisions. In meat , as we said, the tonnage is the indicator and that we grew double digit in tonnage.

In fish, tonnage is also high-single-digit growth, so I would say that in meat, we gain it from - you know that in the Decarie business, we have like three or four Montreal distributors doing the same job than Decarie and we gain share on them. In the Lauzon business, we gained share from one of the, I would say, major food service distributors in Canada.

I do not want to name personally one, but you can imagine which one. In fish, I think that there is growth in the consumption.

Okay? Also, we gained share from the smarter guys.

I think that since we are a federal proven asset plan, we are gaining interesting customers that want to have the security of a NASEP fish [ph] plant, which is - you know there is a lot of fish plant, which are NASEP and federal approved in Canada.

Okay. Thanks for that.

Maybe just going back to your margin performance, are you able to talk about the dynamics behind? It looks like a much more significant job in EBITDA margin particularly on the wholesale business?

Now, is that all tied to the renewal of the affiliated wholesale contracts?

Yes. I would say that the majority of that is with the renewed contract and also the new contract.

As you know, we have a contract which is not yet one year old in Ontario, which is Popeye’s chicken. In dollars, it is very good, but in margin, because we sell a lot of chicken in percentages, it is less than as we close in dollars, so the majority of the drop comes from the new and renewed contracts.

On the, I would say, regular business, we are holding pretty much the margins, but also if you are talking EBITDA margin, we can improve - we had a tough summer in term of operating costs. Firstly, the implementation of the new system in Ontario cost a lot and it will not be recurrent.

We will add significant synergies in the next month, and also we had a tough summer in the other big division, which is the CDA division. We had tough time to hire people, and as you know, the summer time is a peak time for us and we had very tough time to hire people in the Quebec City area.

As you know Quebec City experienced at this moment a 4% unemployment rate, so it is pretty tough to hire people, so we had a lot of cost, but we are on track and that is the reason why we expect that. It is not only a matter of margins that will generate better EBITDA.

It is a matter of costs. So, the mix of both, okay, we hope will show in the fourth quarter.

Okay. Just, I guess, the follow-up on the cost question or your cost comment.

Can you remind us again the expenses tied to Marcotte and if there are any remedies that you have put in place?

The remedies are very simple. At this moment, we have the cost, because we operate one more distribution center, but we are closing this DC in November 27, so in 2016 we will have immediate synergies, tangible synergies, because only by the lease that we pay at this moment.

Also, we have a lot of administration tasks that will be just included into Quebec City without adding any new people, so we have significant lay-offs that will be done relatively to the Trois-Rivières installation, so it is significant in terms of the expenses. As we know, we have the date now that it is going to be ended.

Okay. Thanks a lot.

Yes. I was just wondering on the freight costs given the lower domestic prices of diesel whether you are seeing some uptick there into your profitability?

It helps. Absolutely, it helps the freight costs at this moment.

We are experiencing, but indeed as you know it is not as big as it is in gasoline, but at this moment we have like 18% less dollars into diesel than last year. This being said, the diesel cost in transportation is, I would not say minor, but it is not that big, because the real picture comes from the operation of the truck itself and the distance that we go to deliver, so we did not see a significant dropping to the freight cost.

Also, in the future, Keith, the freight cost is not going to be lower, because when we are going to shutdown Trois-Rivières we will save a lot in receiving and handling, what we call the warehouse side of the business, but we will spend a little bit more in transportation as you know, because we are going to start from Quebec City instead of starting from Trois-Rivières to service the [indiscernible] area, so I would say that the transportation cost for us is the most important cost that we have to work and that is the reason why we are implementing since the beginning of 2015, we are implementing a new software -- the same software that we had in Ontario is being implemented into all the Quebec division which is Road Net, which is considered as being the best transportation software and it takes time to get how the synergy is coming from this software, but we are pretty sure that it is going to -. It is our main focus on the expense side because we are pretty good at warehouse level and Boucherville after the reorganization of Ontario, but we still have some better results to get from the shipping side.

In terms of your cost per case, are you at similar levels across your operating regions or is one region much better than?

No. We are not because of the nature of the business, nature of the b.

If you go to Summit for example, the Ontario division, where we have a lot change, the change and normally you do less deliveries and bigger drops, so obviously we manage to have better efficiency in term of case per hour, okay? If you go to the CDA division, which is a 90% street business, so the results are pretty different, so in the Boucherville division where we are wholesaler, there we have a cost per case which is very low, but it also deserve a lower margin.

On our three businesses, we have different ratios, but we are improving in all of them. That is the good news is that in Quebec City, in Boucherville and Summit after the reorganization, we will have a better performance than that.

That is the reason why I am saying that warehousing and manipulating the goods is not the biggest challenge at this moment. The biggest is how to deliver at the best cost.

In terms of the street sales in Ontario, how is that business progressing?

Very tough, very tough, I need to say that we are not progressing where we were shooting for. It is something that we addressed actually.

The challenge is that also the Ontario market changes faster than the Quebec market in term of the change gaining more, more bigger share of the marketplace than in Quebec. Right now, in Ontario, we have to focus this year on the new Cara contract plus the new Popeye's contract, so obviously the focused has been put to make sure that we achieved the synergies in these two very big contract as you know and now we are getting ready for another $50 million of chain business, so obviously we did not succeeded the level that we wanted in this three business.

I have to admit.

Then just on Lauzon and Norref, but what is their geographic range now? I think you are thinking of moving Norref in the Ottawa market, maybe Lauzon outside Montreal a little bit.

I am not sure about that part, but?

Yes. Okay.

Both of them are in line with the objective, so Norref is in the Ottawa market and is growing very fastly in the Ottawa market and also in the east part, in Quebec City. For example, Norref is experiencing growth of the high double-digit and the same thing with Ottawa.

It is a pretty spectacular in Ottawa. Lauzon at this moment, through the CDA division is going everywhere in the province of Quebec, and through Summit division is going also everywhere in the Ontario division, because the way that it is - more and more the Lauzon division is going to be a meat plant, which services the broad line divisions being Summit and CDA, so the only piece missing there is that as soon as we are going to be a distributor in Montreal, I think that we are going to have a better penetration of this marketplace, but it is going very well at Lauzon.

Then just finally on Quebec City market, you mentioned there unemployment's slow and the Canadian dollars low, so I do not know if that translated into a good tourist season, but you mentioned the economy is a bit weak in Quebec. It sounds like it would be quite buoyant in Quebec City, so…

No. You have to understand that Quebec division does not serves only the Quebec City area, so and you are right.

Quebec City at this moment is in a very good shape and lower employment, very good tourist season, but even if you were late because it started only after July, I would say second week of July, until this July it was pretty slow, but it started after that, so they had a very good tourist season. The issue is that this division service also the regions, the far away regions Saguenay–Lac-Saint-Jean's economy is slow and the season was slow, but Saguenay–Lac-Saint-Jean was also pretty slow and Maritimes, the economy when we talk about Maritimes, we talk about New Brunswick, the economy is not that good and the season has been okay at the most.

When we reports the CDA, Quebec City is only I would say about 40% of CDA results. The rest is that the far away regions that are nothing, but same good shape as Quebec City.

I see. That is very interesting.

Thanks very much.

Hi. Good morning.

Just wondering really quickly on the Trois-Rivières closure, when that is completed, will you be at full capacity Eastern Quebec?

Nearly at full capacity, we estimate around them 90%, and it is a matter of SKU counts more than a matter of a volume capacity, but we are going to be around in both, you know Rimouski and Quebec City will be trailing at about 90% of capacity, but then it is going to be a good occasion also to - selecting the most profitable customers.

All right, I see. How you can you actually go before you start - when you get the ability to start reducing your customer flow?

I think that we certainly have one more year in front of us, and between now and then we are going to have to decide if we - we can easily expand Quebec City. It is a really, really modern facility and it is already planned into the lease, but before going there we want to see - so we have one more year before deciding.

Also, if we become a distributor in Montreal, we can also move well some business, so we have some alternatives. We are not nervous about that.

For us, it is a pretty good new that we are going to be running at this level of capacity, so normally it is there that you generate more profits.

All right. Perfect.

Then just a last question on your Cara contract, now my understanding is that it goes brand-by-brand within Cara. I am wondering if you guys have any options on any brands acquired by Cara.

We said it will be communicated. We do not have an option, but we have I would say a - I think that's we are going to be invited that I was really trying to pick the right, so in the future acquisition it is not an automatic contract that will come to us, but I think the relationship with Cara is very good.

We are servicing them very good, so it will be easier for them nothing to talk with us.

Yes. Plus in the contract, Chris, there is a incentive for Cara also to go with us and their acquisition of brands over time, so that is an incentive for them, so I guess we will be in a very good position to grow the business with them.

This is the exactly the right expression. We will be in a very good position, but it is not an automatic one.

Okay. For example, they just acquired New York Fries, would you guys be in a position to bid for that or is that going to be marketed or how is it actually…

Yes. We are under discussions.

Okay. Thank you very much.

Yes I just wondered on the impact of the lower Canadian dollar on your business in terms of, I guess, your foreign source produce or other products, whether you can offset that or you have to absorb some of it?

Typically, Keith it is a pass-through, okay? Although we have a week or two, we are a cost less company, so we typically can pass-through pretty much all of the cost if it is in U.S.

currency or if it denominated in the U.S. currency like the meat is index on a U.S.-based price, so but we can manage to pass it over.

We are a cost less company, so we have limited exposure to U.S. currency change.

Great. Thank you.

Yes, guys. Just on the Cara contract.

I just want to follow-up on the last question. Are you the sole provider or sole distributor for their current brands in Quebec?

Yes. We are.

Yes Cara is being also former Prime banners. Yes, we are the unique distributor in the Ontario and Quebec for the existing business, for the future as I said.

We are invited, I would say, to have a first step into the business, but it is not an automatic, but for the existing one, including the prime banners we will be the unique distributor.

Okay. Thank you.

Thank you, operator. Ladies and gentlemen, thank you for participating.

I am looking forward to updating you on our progress during our year end conference call and have a good day. Bye, bye.