Colabor Group Inc.

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

Derek Lessard - TD Securities Keith Howlett - Desjardins Securities

Good afternoon everyone, and welcome to Colabor Group's 2016 second quarter conference call. With me is Jean Francois Neault, Senior Vice President and Chief Financial Officer.

Earlier this morning, we issued our second quarter press release via the Market Wire News service. It can also be found along with our financial statements and MD&A on our website and will be on SEDAR.

We also issued another press release which details a comprehensive recapitalization plan that will reduce Colabor’s debt and enhance its capital structure. This morning we are extremely thrilled with this plan which follows an extensive and rigorous analysis by Colabor’s Board of Directors and Committee of Independent Directors.

We are strongly convinced that it represents a very exciting outcome for Colabor and its various stakeholders. It provides us with great flexibility to invest in our operations and pursue our business plan.

Jean Francois will first provide an overview of the plan after which we will discuss our business and financial results. Jean Francois?

Thank you, Claude and good morning everyone. I'm also very proud of this plan.

It offers a comprehensive solution that solidifies our balance sheet and enhances our capital structure by reducing debt. It also gives us the capacity to generate more free cash flow to competitively pursue and achieve our objectives.

Also, please note that the presentation is available on our website under the investor events and presentations section. Let's begin with Slide number 7, which includes the main elements of the plan, namely, first, a $50 million equity injection via a rights offering whose proceeds will be applied to debt repayment.

This rights offering is supported by the largest actual shareholders of Colabor. It is also fully backstopped by a group of new and existing shareholders.

Second, an agreement to amend and extend our credit facility and subordinated debt. Third, a plan to amend and extend convertible debentures.

This plan is already supported by 18.6 of debentures holders. Also, the plan will result in an important leverage reduction for Colabor and the maturity of our debt schedule will be well-laddered.

In addition, the Board of Directors of Colabor will be expanded to seven directors. Robert Briscoe, a well known operator in the foodservice industry, is joining the Board today as he will become Executive Vice Chairman upon closing.

Finally, Colabor has been granted a three-year option to acquire Dubé Loiselle, an important food service distributor which would allow us to establish a solid footprint in [Montreal] [ph]. I will now provide additional details on certain elements of the plan.

As Claude mentioned, we are very pleased with this plan as it will improve our balance sheet and significantly reduce our interest expense by approximately 3 million per year, eliminate the uncertainty caused by our high debt level, solidify our Board of Directors given the extensive industry experience of new members, immediately reinforce our competitive position in the industry and allow us to focus on growth initiatives, including the potential acquisition of Dubé Loiselle. Turning over to Slide 9.

The main terms of the rights operating consist a proceed of $50 million to be mainly used to repay existing debt and also for general corporate purposes. Rights will be offered to existing shareholders on the basis of one right for each common share owned.

Each right will enable its holder to purchase 2.75 new shares of Colabor. The subscription price is set at 80% of the volume weighted average trading price of our share on the TSX for the last five trading days, which amounts to $0.67 per share.

Certain existing shareholders, namely, the Zucker Trust and Caisse de dépôt et placement du Québec as well as new shareholders, i.e., Investissement Québec, Fonds de solidarité FTQ and Robraye Management, an affiliate of Robert Briscoe, will each subscribe for up to 10 million if rights are not otherwise purchased on a pro rata basis. With the exception of Mr.

Briscoe who will already be a Board member, each of the aforementioned shareholders will have the right to propose one independent director provided that they hold a set minimum percentage of common shares. The rights offering requires a simple majority of 50% plus one.

We already have the support of 25.7% of existing shareholders eligible to vote. As mentioned, proceeds will be used to reduce debt.

As shown on Slide 10, we will repay approximately $30 million of our outstanding credit facility while extending the term by an additional three years from the closing date. We will also repay $17.5 million of Colabor’s secured subordinated debt.

Terms and conditions will be amended so that the maturity will be extended by a four-year period from the closing date which sets the new maturity to the year 2020. We will also benefit from the reduced interest rates based on debt to adjusted EBITDA ratio.

Finally, we plan to amend and extend the convertible debenture due April 30, 2017 by, first, extending the maturity date by a five year period from the closing date; second, reducing the conversion price from $16.85 to $2.50 per share. This provides a higher probability that the share price rise above the conversion price providing a greater upside opportunity.

Finally, increasing the interest rate from 5.7% to 6%. These amendments to the debentures require holders to approve in a proportion of at least 66 and 2/3.

We have so far received support of approximately 18.6% of existing debenture holders. I will specify that closing of the entire recapitalization plan is contingent of obtaining coverable [ph] debenture and shareholder vote, as well as other regulatory approval.

Slide number 11 provides a summary table of sources and uses of fund. Proceeds will allow Colabor to significantly improve its liquidity and flexibility under its credit facility, preserve its remaining long term debt at relatively attractive rates and improve free cash flow.

Turning over to Slide 12. The proposed plan will reduce our ratio of total debt to trading adjusted EBITDA from 6.7 times to 5.1 times on a pro forma basis.

Furthermore, with annual interest savings of approximately $3 million, our free cash flow generation is significantly enhanced as these savings could be applied to further reduce debt or reinvested into our operations. We also believe our improved balance sheet will allow Colabor to benefit from better supplier terms going forward.

For these reasons, it is likely that the ratio may subsequently drop below 5 times. Slide 13 provides a proposed timetable.

Beginning with the vote of debenture holders and shareholders during the week of August 22. Closing is expected to occur in October after the completion of the rights offering.

I now turn the call back to Claude.

Thank you very much, Jean Francois. The Slide 14 provides an overview of our option to acquire Dubé Loiselle, an important foodservice distributor based in Granby, Quebec.

We know this company very well as it is one of our affiliated distributors and a long time partner of Colabor. It generates annual sales of approximately $75 million and it's profitable.

If completed, the highly strategic acquisition would represent a major step forward for Colabor. Dubé Loiselle has a very important presence in the greater Montreal area and the Eastern Townships.

It is also mainly focused on the street business. These two characteristics are our main growth priorities in Quebec.

The option is valid for a 36 month period from the closing of the recapitalization plan and will cost an upfront amount of $500,000. We are convinced that this is a sound investment securing a highly important potential transaction.

This concludes our remarks on the recapitalization plan. Moving on to our second quarter operating results.

Colabor recorded a significant improvement in profitability for the second consecutive period. Net earnings amounted to $3.1 million versus $1 million last year while adjusted EBITDA reached $10.1 million, representing an 18.4% year-over-year increase.

Consolidated revenues remained essentially stable but we recorded a 2.3% increase in the distribution segment which I will get to in a moment. Our significant profitability improvement reflects cost savings from the rationalization plan announced in January but also an overall improvement in operating performance.

In regards to the rationalization plan, its execution has been completed with success and cost savings are materializing as anticipated. We remain on track to achieve the above [ph] anticipated savings.

We are also pleased with our working capital management despite a temporary pressure from certain supplier credit terms. This pressure will reduce with the approval of the proposed recapitalization plan.

On Slide 17, we show that although total sales were relatively stable, we recorded a 2.3% sales increase in the distribution segment. This improvement reflects higher sales of specialty division, especially market share gains for Norref in the fish and seafood category.

The increase in broadline sales reflects a solid performance in Ontario resulting from the growth of our main clients which more than offset lower sales in eastern Quebec. Meanwhile, lower wholesale revenues are attributable to lower sales at the Décarie division as a result of beef price deflation and a voluntary reduction in sales of certain categories.

To a lesser extent, lower wholesale revenues reflect the long non-renewal of a supply agreement in Boucherville effective on April 2015. Jean Francois will now continue the review of the second quarter results.

Thank you, Claude. Slide 18 highlights that our improvement in adjusted EBITDA stems from a $3.1 million reduction in operating expenses on the back of the rationalization plan announced January 26.

Remaining cost reductions reflect our improved overall performance. All divisions recorded higher year-over-year operating profit in the second quarter, except Boucherville and Summit in Ontario which were both affected by the year-over-year effect of contract renewal.

This effect lapped during the second quarter in Boucherville and lapped at the beginning of the third quarter in Ontario. Moving on to Slide 19.

We observed that on a trading 12 month basis, adjusted EBITDA has risen from a low of $26.3 million at the end of 2015 to $29.3 million halfway through 2016. While we will not issue adjusted EBITDA guidance, there is upside potential related to the full effect of the ongoing performance improvements, the rationalization plan and the lapping of the contract renewals over the next few quarters.

Slide 20 shows the variation in net earnings for second quarter. Most of the year-over-year improvement is related to the increase in adjusted EBITDA.

Also noted the reduction in depreciation and amortization expenses mainly attributable to lower intangible assets following write-off charges recorded in Q4 2015. In second quarter 2016 we did not incur any costs, not related to current operation as opposed to $507,000 last year while financial expense held steady year over year.

The only variable that lowers net earnings this year versus last was higher income taxes expense resulting from a significant increase in earnings before income taxes. Slide 21 shows the evolution of working capital items so far in 2016.

At the end of second quarter, accounts receivable were $11.7 million lower than at the same time last year, showing constant progress in our systematic effort to collect faster. Meanwhile inventory was $5.5 million less than a year ago, reflecting a better overall management and the closure of the Trois-Rivières warehouse in late 2015 whose volume was integrated in Seneca [ph].

Moving on to Slide 22. We see that our ratio of total debt to adjusted EBITDA will improve from 6.7 times to 5.1 times on a pro forma basis.

I must flag that we have already seen some improvement since the beginning of 2016 due to the benefit from our rationalization plan. With the additional benefit from our improved operating performance plus the favorable effect of lapping the major contract renewals, adjusted EBITDA is poised to further increase.

Also, as excess cash flow is applied to debt reduction, we should experience additional reduction in the ratio going forward. I turn the call back to Claude for the conclusion.

Thank you, Jean Francois. Second quarter results demonstrate the positive impact of our rationalization plan and a better operating performance.

Going forward we expect benefit from these initiatives to be sustained over the coming quarters. We will also continue to reduce operating costs over which we have control.

These factors will allow Colabor to continue growing its adjusted EBITDA. This trend should be supported by the lapping of the contract renewals of the affiliated distributors in Q2 and the Cara contract at the beginning of Q3 of 2015.

These will no longer overshadow improvements in virtually all other aspects of our business. We are focused on continuing to maximize our cash flow through a sound working capital management.

This fund will be reinvested in operations and applied to further reduce debt. The recapitalization plan is transformative for Colabor and it represents a win-win scenario for our stakeholders as it creates value over the medium term.

It provides us with the flexibility required to carry out our business plan and growth strategy as proven by the option to acquire Dubé Loiselle. More importantly it will eliminate the uncertainty related to our high debt level and allow us to confidently move forward with achieving our business objectives.

I now open up the call for questions. Thank you.

Can you hear me clear?

Yes.

Okay, thanks. I am on vacation in Maine, so I just want to offer congratulations on the deal [Indiscernible] improvement we saw.

Maybe if we can just [indiscernible] I don’t have access to the slide so maybe if you can just paint a picture of how the recap sets you up for better or, I guess, the better way of phrasing it is to more effectively compete within the market and any [indiscernible] from bigger competition?

Yes, we lost many words during when you were talking. Just repeat, or I will ask you the question, tell me if it’s what you mean.

You wanted to know how this recap plan will improve our capacity to compete with the big guys. Is it right?

I think we lost the line.

Yes. I was just wondering on the rights issue, how you determined the price.

Hi Keith, Jean Francois here. The price – it’s in the press release, you can find detail.

Actually there's two press releases this morning. So the price of the rights offering is set at $0.67 and the mechanics is 80% of the last five day weighted average trading of Colabor on TSX.

So it’s basically 20% discount on the last five day VWAP calculation.

You know, that was my question, why a 20% discount? Is that normal or –

Yes, rights offering, there is a guidance from the regulatory approval that you need when you're under certain share price, like we were under $1 price, it’s typically a discount. You have a discount threshold you have to match.

So we respected that regulatory guidance.

Is that a band of guidance or is it – how, what is the guidance I guess?

Just typically they provide a band of guidance and then as you can imagine as the discussion evolves you have to come to a point where you set the discount, you set the line at a certain discount and you move forward. But you would see in a rights offering, you would see typically in a rights offering to have a substantial discount.

And then in terms of the conversion, the proposed new conversion price on the debentures, how do you arrive at the $2.50?

As you can see in our press release we have the support from up to 18.6% of the debenture holders at this point. So we have had the opportunity to have initial consenting debenture holders.

So we have had discussion and again it's a matter of – it reflects what we think reasonable for the debenture holder at this point to accept the amend and extend proposition.

Yeah, and it comes from the balance, so we have done obviously forecast in our business. So it comes from the balance of -- between what you need to do to be attractive and what are the forecasts for the next years.

So at one point you need to fix a price and with a lot of consulting coming from a lot of advisors, we came to this price.

And then just in terms of the option on Dubé Loiselle, can you – is this an asset that has recently traded hands, or it just happens to be an asset of the Briscoe group or what -- how is that - the origin of that option?

It's a very good question. Firstly, Mr.

Briscoe was negotiating with Dubé Loiselle since quite a long time. And we discussed with Mr.

Briscoe, we discussed with him to -- if he wanted to join the recapitalization plan. So this is that we haven't, so Briscoe bought it because he was committed to buy it after negotiations.

And then he decided also to join the recap plan and then we made a deal with the option.

And are there other assets within the Briscoe group that are affiliates of Colabor or might subsequently be acquired or –

No. No, Mr.

Briscoe was not in the foodservice business since two years.

I see. So this is his only foodservice asset.

Exactly.

You may be aware, Dubé Loiselle is an affiliated distributor, a long time customer of us and it was our primary acquisition target to implement [Indiscernible]. So it's a very nice opportunity that we have secured an option to acquire Dubé Loiselle.

So how would their sales break down between Eastern Townships and Montreal?

We don't go into these details because right now it's an option and honestly at this moment we do not look to use this option in 2016. So we don't have published -- when we will decide to go there, then we'll give more details but at this moment, please understand that we have the option and we're going to see later what we do with it and certainly not in ’16.

You know that at this moment we are extremely focused on closing this important transaction and stay focused on getting profitable sales and profit in 2016. So these are the two main focus.

So we will address that at the right timing.

And then just finally, is there anything in the recapitalization structure that results in a team change of control under any of your food service contracts or –

No, actually there's no change in control. And since we have the right plan in place also, Keith, so none of these shareholders are going to backstop the $50 million, can go up to 20%, since we have the provision of the right plan in place.

So it does not constitute a change of control and no, it doesn't trigger any contract effects in that regard.

And also, we don't know how many shares will be bought by the existing shareholders. So you know at the end of the day we're going to know only what are the -- who are the shareholders at the end of the rights offering.

Because I hope that existing shareholders will be as excited as we are with this plan, with this transformative plan.

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

Shareholders and the debenture holders will receive in due time the appropriate material to vote on the plan and to participate in the rights offering. We are looking forward to updating you on our progress during our next quarterly call.

Have a pleasant day. Bye.