Colabor Group Inc.

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

Derek Lessard - TD Securities Keith Howlett - Desjardins Securities

Good afternoon everyone, and welcome to Colabor Group's 2016 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 today. It can also be found along with our financial statements and MD&A on our website at www.colabor.com and will be on SEDAR.

Colabor registered a 0.8% comparable sales increase in the first quarter of 2016. While we are pleased with this increase the significant improvement in profitability is of much greater importance to us.

Adjusted EBITDA was $1.9 million up from $0.5 million last year as a result of cost savings resulting from rationalization plan and from an overall improvement in operating performance. All divisions recorded higher operating profit except Boucherville and Summit in Ontario which are affected for the moment by the year-over-year effect of contract renewals.

This effect is being lapped in the second quarter in Boucherville while it will lap in the third quarter at Summit. In regards to the rationalization plan, I am very proud to say that the implementation was carried out perfectly and it’s execution is mostly completed.

Cost savings are materializing as anticipated. These savings amounted to approximately $1 million in the first quarter.

As a reminder, the rationalization measures will yield cost savings of more than 6 million per year before taxes. These savings will be progressively realized during 2016 and have full effect in 2017.

Furthermore, we remain focused on achieving our synergies related to the renewed contracts on improving network efficiency, on reducing cost and on generating more profitable savings. For example, we re-oriented the market approach of the Décarie meet whereas the focus is now on maximizing gross profit dollars as opposed to maximizing sales.

As a result, although sales declined compared to last year, profitability rose significantly. This was an important contributor to the year-over-year adjusted EBITDA improvement.

We are very confident that Colabor will benefit from more profitability gains resulting from our focused approach. At this time, I invite Jean Francois to review our first quarter results and financial position.

Thank you, Claude. First quarter consolidated sales reached $307.1 million in 2016, up 0.8% from the previous year.

This increase was achieved on a fully comparable basis. Sales in the Distribution segment rose 4.8% as a result of higher sales in Ontario.

This performance in Ontario mainly reflects growing businesses with Cara including the year-over-year effect of extending our supply agreement to new banners as of November 2015. In Quebec sales of the Lauzon division also increased due to market share gain as a result of new supply contracts.

Wholesale segment, revenues decreased 7.6% reflecting lower sales at the Décarie division as Claude mentioned as well as the non renewal of an agreement with an affiliated wholesaler. Adjusted EBITDA was $1.9 million versus $464,000 million last year.

As a percentage of sales, adjusted EBITDA rose by 47 basis points. This increase reflects the cost reduction measures included in our rationalization plan and an overall improvement in operating performance.

These factors were partially offset by lower margins on renewed contracts. As indicated in our January 26, 2016 press release we recorded cost not related to current operations of $3.3 million in connection with the rationalization plan during the first quarter.

Excluding these costs, Colabor operating income i.e. before interest improved by $2.1 million compared with the same period last year.

Turning over to our cash flow and financial position, Colabor generated a cash flow from operating activities after changes in working capital of 2.2 million during the first quarter 2016. This cash generation results from the normal seasonal working capital fluctuation which increased cash by $3.9 million in the first quarter of 2016.

I reflect [ph] that this effect was less pronounced in 2016 as organic sales growth resulted in lower seasonal decrease in accounts receivables and inventory, combined with a lower sequential potential upside due to working capital improvement achieved in the second half of 2015. Because of this working capital factor as well as the 1.8 million payment related to the rationalization plan, our bank over draft increased slightly during the quarter resulting in a 1 million increase in total debt to $184.3 million as of March 19, 2016.

Still on a year-over-year basis Colabor total debt was $4.6 million lower than at the end of the first quarter of 2015. Since our bank borrowings and a portion of our long term debt are scheduled to mature in less than 12 months they were presented as part of current liabilities in our first quarter financial statement.

In this regard, the committee of independent directors continue to analyze Colabor’s debt structures in order to provide the company with the flexibility required to execute its business plans. Going forward, our focus remains on reducing debt through tight working capital management and cash generation.

I’ll turn the call back to Claude.

Thank you, Jean Francois. Our number one priority remains improving profitability.

Colabor has made significant strides with the implementation of its rationalization plan. The execution is progressing as anticipated and we are very confident to achieve our cost saving objectives for this year.

We also remain very proactive on every aspect of the business that we control. This includes further initiatives to improve efficiency, achieve synergies across our network and reduce cost.

We are ready to let go less profitable sales to achieve our profitability objectives. As I said earlier, we will soon lap the two important contract renewals which have overshadowed improvements in virtually all other aspect of our business.

Going forward, we are confident that all the measures being taken at this moment will provide us with greater flexibility in executing our core activities. This will allow Colabor to reach more rapidly a higher and sustainable level of profitability.

I now open up the call for questions.

Thanks gentlemen for taking my question. Actually I have a question on the new, the acquisition of St-Hubert by Cara and what you guys might think that it means to your business?

It’s a very question, Derek. I don’t know if I said that.

I think I said that in the past calls that we don’t have an automatic clause to get a new business acquired from Cara. We are a preferred supplier but we are not an exclusive supplier.

So, I think that St-Hubert is self distributed. So the acquirer will certainly have an opportunity to compare what is to be self distributed compared to be third-party distributed.

We always said and it’s our business to see it. We always said that third-party is better than self.

So, we will know what will be the conclusion of Cara people in some months. And at this moment, we will be certainly more than ready to bid on this business, to be a partner with Cara.

But at the end of the day it’s their decision.

Okay. And just a question on the carry business.

You guys talked about in your opening statement as well as the market strategy to maximize gross margins. Can you maybe just talk more specifically what you mean there?

Yes. It’s a way and firstly, I have to say that we changed the management of the carry in the beginning of January and we together we decided that we would be buying differently.

It’s a wholesale business and you can buy. There are two or three ways to buy differently.

We in the past we were buying a lot more in advance. Now, we are buying more on what we call spot market.

When we were buying long time in advance, we were also -- when the market was going down or was going up, we were in trouble with inventory. So in many occasions last year for example, we had to get rid of huge inventory at very low costs because we were committed to buy regularly eight weeks in advance.

This year we decided that this was too much risky to do that and we decided to buy spot. But when you do that the distributors that were only looking for cheap stuff, last minute cheap deals didn’t come anymore and we know that for a fact.

But what’s good is that now when we sell a case we make money. And also it’s less demanding in the working cap.

So there are a lot of advantages. So, we knew when we decided in early January to change our strategy that it will affect the top line but we were pretty much certain that we would get more gross margin dollars and more EBITDA.

And this at least for the first quarter it worked very well.

And if I can just kind of spread out the year-over-year improvement in EBITDA it’s about $1.4 million. Is it fair to say $1 million and I think you said this in your prepared remarks $1 million was coming from cost savings.

So, I guess the operational improvement is $400,000 or so or $0.5 million?

Yeah. Net, it is $500 million but many divisions did more and as we said in our initial statement, two divisions that are still affected by the renewal, the contract renewals did less.

So overall, the $0.5 million doesn’t look that good but we are very pleased because the reality is that all other businesses that were not affected by the renewal of the contract did very good. And as I said also, I think that -- the Boucherville contract is lapped since P4 of the second week.

So, three weeks ago we went through the one year of this Boucherville contracts. And as we know now by July 1st, we will be lapping the other Ontario contracts.

So the $500 million could have been far better.

Okay. Thanks for that.

Yes. So just wondering on the Skor business, are you still operating a street sales force from there or is that not the case?

Now the Skor business is the distributions Skor business is I’m not committed [ph] into Summit, we only have one division in Ontario. The Skor name which is still alive is the Cash & Carry Division.

We have four Cash & Carry divisions -- four Cash & Carry units I’m sorry into this division, two in Toronto, One in London, One in Peterborough. So it’s quite a small business for us but it’s very profitable business and it’s included into the Ontario numbers.

And then just in terms of the Carry and Lauzon Meat businesses, what percentage of their sales would be internally used by your distribution business?

First thing is that you know that when we report we do not report internal sales. We report only outside sales, external customer sales.

But overall, if we are looking at both businesses I would say that it’s probably around 25%. I can just double-check and see what would be the number but roughly I would have said 25%.

But as I’m saying, okay, the reported numbers are net sales, not including the divisional sales. Okay.

I think it’s more Jean Francois is showing the…

A little less than…

A little less than 25%. It’s about 22%, 23%.

In this -- is there a lot of room to increase internal sales or you are pretty much where you?

Yes. Yes, there is huge opportunity for Lauzon, not for the carry.

The carry is already maximizing its portion but for Lauzon, as you know Lauzon becomes more and more a manufacturing plant, a processing plant for the Broad line divisions. So, we are really progressing well in Quebec City Division.

It is slower into Ontario divisions, so that’s reason why I’m saying yes there are opportunities to continue to build this business. And the biggest opportunity would be at one point if we succeed to be a food distributor in Montreal, not the wholesaler, a distributor in Montreal, there will be a huge opportunity, huge for Lauzon.

And then just in terms of the cost reduction initiative, you indicated that you will get the full benefit of $6 million in fiscal ’17. I’m just wondering why you don’t get sort of the full benefit, let’s say in the back half of fiscal ’16?

Keith, just -- Jean Francois speaking. It’s just because we have the run rate of this saving as part of the early February.

So it’s just one period we are missing that is the main.

I see. So, really we are going to see it as it work through the balance of the year.

Yeah.

Yeah. We are cruising pretty much except a few programs here and there but we are cruising pretty much at the run rate speed as we speak right now.

And then just in terms of sales distribution, I haven't followed Tim Hortons too carefully recently, but is there any talk that restaurant brands might divest the internal distribution at Tim Hortons?

Yes. At least we hear the same than you and I don't if it’s a rumor or if it’s true, but what we hear at the moment is that Tim would be ready to go back to third-party, but as I'm saying I'm not running this company, so I'm taking it as a rumor, but it’s a persistent rumor.

And the business is most Ontario and part of Quebec, is that right or…?

Which business are you talking?

Tim Hortons sales distribution.

Yes. Because I think in the Maritimes, they are going with the third parties.

Normally what we do like St. Hubert, I said St.

Hubert, but is self distributed. St Hubert is self distributed in the urban areas of Quebec and Colabor does their remote areas.

Okay. So the far away regions like Saguenay–Lac-Saint-Jean, New Brunswick and [Indiscernible] Colabor does it already.

Okay. And we've been doing it for, because these regions are far low density and we are – our trucks are going around these areas every day, so we are a perfect match for them.

But they're really -- St. Hubert always focused on Montreal, Quebec, Sherbrooke allowing the St.

Lawrence River, the high density areas, so I think that or probably Tim is doing something like that.

Great. And in terms of your -- you are going to I think start to move some of the truck route and optimization I guess, expertise of summit across other business area, how is that progressing?

It progresses well, okay. The IT system that was in submit has been implemented in the Carry Lauzon, Quebec City.

We did -- last month we did Rimouski. We only have one area where it’s not yet implemented, its [Indiscernible] and we see nice, early nice results.

I know that they have been talking about that since quite a bit of time, but you know that the reality, the toughest part of it is not to implement the IT software, it’s to convince the customers to change their delivery times according to what the software is telling us, because you know, if you have a customer deliveries on Wednesday and my IT software is telling me you don't go there anymore on Wednesday. So it’s one by one that you have to convince the customers that being delivered on Tuesday would be better from him.

So that's the kind of play [Indiscernible] indeed, because when we did that in Ontario we were with the chain operators, which is by fast easier. So now we are addressing three business operators and you have to convince one by one that the route will be changed and it’s going to be good for them.

So, but its progressing at the steady pace, and that's a reason why I said two times in my text that we would -- I'm working on the efficiency and that’s exactly what I mean.

And then just finally, how do you see the overall restaurants sales trends. Are you seeing any good sign or about the same or…?

Now Ontario is very good and Quebec is slow, very slow. Now it’s probably, and I'm talking restaurants sales and I'm talking about restaurants sales.

We have figures about restaurants sales; we do not have figure about distributor sales, but restaurants sales figures that we got. Ontario is growing at a nice way.

It’s up probably 4% and more and Quebec, its less than one. But we have great hope with the summer coming.

Actually even in Montreal and Quebec City I've announced that the hotel booking is better than since many years. We hope that also with the strong Canadian dollar, we hope that the weak Canadian dollar I'm sorry that Canadian will stay at home and American would come.

So we're pretty much optimistic for the summer coming.

Great. Thank you.

Hi, guys. Just a follow up on regarding your debt maturities and they are coming up in the year and I know you again you mentioned it in your opening comments but just where are you guys in terms of where are you in Canadian terms of deciding what's you're going to do next?

There [Indiscernible] you will understand at this moment in due time we'll come to inform in our progress so what we've mentioned the currency continue to work activity in that regard, so we'll comment in due time on our progress.

Are we close to it or….?

Nice try Derek. But I would say that the study is mainly done we are now in execution.

Okay. Thanks guy.

Thank you, everybody. Thank you, operator.

Ladies and gentlemen, thank you for participating. I am looking forward to updating you on our progress during our next quarterly call in July.

Enjoy the rest of your day and have a great spring season. Bye, bye.