Colabor Group Inc.

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

Keith Howlett - Desjardins Securities

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

Please note that a presentation is available on our website at www.colabor.com under the Investor Events and Presentation section. Earlier this morning, we issued our third 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 about the closing of Colabor’s comprehensive recapitalization plan.

We are extremely excited about this outcome, which reduces Colabor’s debt and enhances its capital structure. The plan provides us with greater flexibility to invest in our operations and pursue our business strategy.

It also eliminates the uncertainty related to our high debt level and allows us to confidently move forward with our achieving as our objectives. You may recall that the plan received the overwhelming support of both debenture orders and shareholders at special meeting held in August in proportions of 97.8% and 96.8% respectively.

In regards to the $50 million rights offering under which 74.6 million common shares of Colabor were issued, I’m extremely pleased to report that actual shareholders who were not part of this standby providers group subscribed for up to $24 million and 36.3 million shares. This relatively high proportion shows their confidence and continuous support in our strategy and I want to sincerely thank these shareholders.

The remaining rights were subscribed by a group composed of certain existing shareholders, namely, the Zucker Trust and Caisse de dépôt et placement du Québec as well as new shareholders, like, Investissement Québec, Fonds de solidarité FTQ and Robraye Management, an affiliate of Robert Briscoe. Slide 7 provides a summary of our share ownership prior to the transaction and as of the closing.

In addition to Mr. Briscoe, who has been a Board Member since July and became Executive Vice Chairman today, each member of this standby providers group has the right to propose one Independent Director.

Therefore, as of today, Colabor is pleased to welcome Elaine Zakaib, Marc Baillargeon, and Robert Johnston as Directors of the company. We are looking forward to their assistance as we execute our business plan.

I would like to sincerely thank Robert Panet-Raymond, Richard Lord, Alain Brisebois and Gaétan Brunelle, who are leaving the Board of Directors. They added a tremendous contribution to Colabor over many years and particularly in the last year when we have been working for the recapitalization transaction.

Jean Francois will now provide comments on certain elements of the plan after which we will discuss our business and financial results. Jean Francois?

Thank you, Claude, and good morning, everyone. Before I begin, I’d like to reiterate the important benefits of this plan.

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

With the successful rights offering, Colabor’s debt has been significantly reduced. Proceeds of $50 million have been mainly used to repay existing debt and also for general corporate purposes.

As shown on Slide 9, we repaid approximately $30 million of our outstanding credit facility while extending the term by an additional three years from the closing date. We have also repaid $17.5 million of Colabor’s secured subordinated debt.

Terms and conditions were amended, so that the maturity is extended by a four year period from the closing date, which set the new maturity to October 2020. We will also benefit from a reduced interest rate based on the debt to adjusted EBITDA ratio.

The remaining $2.5 million will be used to pay a portion of the transaction cost. In parallel, Colabor has entered into an agreement to amend the convertible debentures due April 30, 2017, by, one, extending the maturity date by a 5-year period from the closing date; second, reducing the conversion price from $16.85 to $2.50 per share, this increase the probability that the share price rises above the conversion price providing a greater upside opportunity; and finally, increasing the interest rate from 5.7% to 6% as of October 31, 2016.

As a result of the plan, Colabor’s leverage has been significantly reduced and the maturity of the debt schedule is now well laddered. In regards to leverage, Slide 10 shows that the ratio of total debt to trailing adjusted EBITDA has improved from 5.8 times to 4.1 times on a pro forma basis.

On the same basis, the total debt to total capitalization ratio has improved from 72.2% to 52.2%. The reduction of our credit facility provides Colabor with greater flexibility as our excess availability has been significantly increased.

Slide 11 shows that from an authorized amount of $140 million, the pro forma usage of our credit facility stands at $43.5 million versus $76.5 million prior to the transaction. With the lower debt, annual interest charges will be reduced by approximately $3 million a year.

These saving will significantly enhance our free cash flow generation as excess fund could be applied to further reduce debt or reinvested into our operations. As for debt maturity, you will notice that as of September 03, 2016, we had $147.1 million that was part of current liabilities due to the maturity within the next 12 month of our bank debt as well as a portion of our long term debt and convertible debentures.

On a pro forma basis, none of these items will be classified in current liabilities. In fact as shown on Slide 12, the bank borrowing now matures in October 2019, the long term debt in 2020 and the convertible debentures in 2021.

Let’s move on to Slide 14 and our third quarter operating results. Colabor recorded a significant improvement in profitability for the third consecutive quarter.

The adjusted EBITDA margin improved by 36 basis points from last year while EPS amounted to $0.10 versus $0.03 a year ago. Slide 15 shows that although total sales decreased slightly, we recorded a 1.6 increase in the Distribution segment.

This improvement reflects higher broadline sales due to the growth of our main clients in Ontario, partially offset by lower sales in Eastern Quebec. Specialty divisions also registered higher sales mainly driven by further market share gain as well as inflation for the fish products.

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 non-renewal of a contract in Boucherville that had no profitability.

Adjusted EBITDA reached $9.2 million representing a 14.6% year-over-year increase over $8 million last year. This solid profitability improvement reflects cost saving from the rationalization plan announced in January.

We had a slight positive effect from a higher gross margin as the renewal of important contracts in the first half of 2015 is no longer having a negative impact on profitability. Moving on to Slide 17, we see that our trailing 12 month basis adjusted EBITDA has risen from a low of $26.3 million at the end of 2015 to $30.5 million after nine months in 2016.

Slide 18 shows the year-over-year variation in net earning which amounted to $2.7 million in Q3 2016 versus $853,000 last year. In addition to a higher adjusted EBITDA, the improvement reflects a reduction in depreciation and amortization expenses mainly attributable to lower intangible assets following write up charges recorded in Q4 2015.

In Q3 2016, we did not incur any cost not related to current operations as oppose to $336,000 last year while financial expense were $424,000 less than last year due to lower average daily bank debt. 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.

Going forward, net earnings will also be positively impacted by the reduction in interest charges stemming from the debt reduction. Moving over to cash flow generation on Slide 19, our third quarter cash flow from operating activities was very strong at $23 million compared with $3.1 million last year.

The solid improvement reflects a $14.1 million favorable working capital variation this year as oppose to $4.3 million unfavorable variation last year. This gap is mainly explained by fluctuation in accounts payable which increased in the third quarter 2016 versus an important decrease in third quarter 2015.

On a year-over-year basis accounts receivable have been reduced by $9.2 million despite relatively stable sales which show our sustained effort to collect faster. Meanwhile inventory was $10.3 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 St-Nicolas.

Our four accounts payable remain about $8.9 million below last year due to tighter credit limits from protein suppliers. Still accounts payable have increased this quarter bringing the current value more in line with normal patterns.

Going forward we also anticipated that pressure from supplier credit will be reduced with the approved recapitalization plan. I’ll turn the call back to Claude for the conclusion.

Thank you, Jean Francois. So for the third quarter consecutive quarter, Colabor has recorded a strong year-over-year increase in operating profitability.

We acted decisively to reduce cost and our overall operating performance has also steadily improved. Moreover, the renewal of important contracts in the first half of 2016 no longer overshadowed improvements in virtually all other aspect of our business.

Going forward, we expect benefits from these factors to have a sustained positive impact on our profitability. The conclusion of the recapitalization plan is a major step forward for Colabor.

It is also a win-win outcome as we now benefit from greater flexibility to reinvest in our operations and carryout our business strategy which overtime will be favorable for our stakeholders. Another important aspect of our improved financial situation is that we are now able to attract good talent.

This is a perfect example of what it means to reinvest in our operations. For instance, in the last month, we hired three senior managers in important positions as well as certain lead general directors.

We now have our chin-up and the entire Colabor organization is looking at with confidence. We remain committed to executing our plan and we will sustain our efforts to profitably grow our reach in the food service industry in Eastern Canada.

I now open up the call for questions.

Yes. I just wondered if you could outline the deflation that you’re facing in which products and how that affects your margins going forward?

Yes, Keith. It’s about the beef, okay, so it’s not all the proteins but the beef deflation in the last 12 weeks has been as high as 11%.

But it didn’t affected really the gross margin in reality because we have worked hard to maintain gross margin dollars despite the deflation. So percentage wise, we could have effect but gross margin dollars were maintained which was very good.

And in terms of the competitive climate in Ontario and Quebec, is that states both the same or is it improved or?

It is stable. At this moment, we don’t feel any special pressure.

We believe that it is normal marketplace. The summer has been very good in tourism.

So it’s been a normal marketplace, no additional pressure and we don’t estimate that is going to go down. It’s a situation in which we have to be able to work with because this kind of competition will stay stable.

With our new balance sheet, we are in a far better position to be firstly focused on the growth and also be able to be fully competitive.

And can you speak to your - the progress in the street account business?

We are stable in Quebec and about slightly down in Ontario and that’s the reason why as I mentioned we just hired a new VP Sales for Ontario and also we have announced that our President of Ontario division will take a retirement in early spring 2017 and this new VP Sales is the person that will take charge of this division. He came to the company with a great street business experience in a major food service distributor in North America.

So we will be rebuilding sales teams in Ontario and also continue the rebuilding of the team in Quebec where we have successfully hired a couple of very good people. So we believe that it’s definitely the next objective of this company to be better at growing the street sales.

And in terms of the [indiscernible] in the protein side in Montreal, that’s going very well.

Very well.

And the meat and the fish division as well.

Yeah.

And then on the Cash & Carry business, I guess, Skor business, how is that performing?

It’s a minor business for us, but it’s a very good business for us. We would like just to have more of that.

Honestly, it’s a very good business, it’s just too small and this is the only downside of this business.

And just finally on the expansion, Costco is indicating that they are going to open quite a few stores in the year ahead and I think Loblaw’s has repositioned its real Canadian wholesale club a little bit into more of a food service specialist, I guess. Do you feel those moves in the wholesale club channel within your business or within your street business or is it not really…?

No, not yet. It’s a – I don’t want to give a judgment on that because it’s only coming – at this moment, we don’t feel it.

But you know that we think that the business we are in is called food service, it’s about service. And these areas will not be able to be fully competitive with us about service.

So obviously it’s going to be tight on prices, but we believe that our proposal will be still very good if not superior because we not only have good prices but we have very good service. And this is the way that we will – that we are positioning ourselves.

Thank you.

Thank you. Thank you operator.

Ladies and gentlemen, thank you for participating. We are looking forward to updating you on our progress during our next quarterly call.

Have a great day. Thank you very much.

Bye-bye.