Colabor Group Inc.

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

Derek Lessard – TD Securities Keith Howlett – Desjardins

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

Please note that the presentation is available on our website at www.colabor.com under the Investor Events and Presentation section. Earlier this morning, we issued our fourth quarter via the Marketwired news service.

It can also be found along with our financial statements and MD&A on our website and will be on SEDAR. Colabor concluded 2016 on a significantly stronger ground driven by a rigorous execution of its business plan.

On the one end, the restructuring and optimization measured announced at the beginning of the year combined with a constant improvement of our performance, gave rise to a significant profitability improvement. On the other end, the recapitalization transaction concluded last October as well as our next announced working capital management strengthened our balance sheet and provided us with greater flexibility to confidently move forward with achieving our growth objectives.

Today, we are very pleased to announce the appointment of Mr. Michael Horgan to our Board of Directors.

His nomination filled a vacant seat on our board. Mr.

Horgan, who lives in Toronto is a seasoned expert with several decades of experience in the corporate world, mainly in the contractual services industry. We are looking forward to benefit from his expertise and sound advice.

Our successful recapitalization has also allowed us to attract new talent as I said on the last call. Darrell Moss who was appointed in the fall as the new VP, Sales for Ontario will now succeed Jack Battersby who will be retiring at Summit by the end of April 2017.

With a stronger team and the healthy balance sheet, Colabor can confidently look at and focus on key aspects of its business in order to grow sales and profitability. Our one main focus area in 2016 was the optimization of asset utilization and costs reduction.

In this regard, as the lease was expiring, we decided to close our Vaughan, Ontario warehouse effective April 30, 2017. Volume will be transferred to our other Ontario warehouses.

We believe that recurring cost reduction from this initiative will more than offset higher transportation charges. I will now let Jean-Francois to go over our financial results.

Jean Francois?

Thank you, Claude, and good morning everyone. Before I begin, I must point it out that we proceeded with the early adoption of IFRS 15 in regards to revenue from customer contracts.

This norm affects how we recognize sales build to our wholesale customers, but ship to them directly by the suppliers. We have provided a full explanation in Section 6 of our MD&A, but in a nutshell, it reduces sales and cost of goods sold by the same amount.

It does not affect gross margin profit neither adjusted EBITDA nor net earnings. The main highlights of Q4 2016 were that we recorded our fourth consecutive quarter of improved operating earnings and generated a solid cash flow from operations.

Colabor reported sales of $432.5 million in the fourth quarter of 2016, relatively stable from a year ago. Adjusting for the same number of business days, comparable sales were down 4.3%.

Comparable sales in the Distribution segment decreased 2.6% reflecting the loss of a contract in Ontario, partially offset by a solid performance of the Norref division in the fish and seafood market. Comparable sales in the Wholesale segment were down 8.3% due to a sales decrease of more than 20% at the Decarie division.

This decline stems from greater competition in Montreal, following the arrival of a new player. This situation, add a negative impact on Decarie's volumes and margins.

Adjusted EBITDA was relatively stable at $9.1 million versus $9.3 million last year. Operating costs were lower as a result of the rationalization plan announced in early 2016 and better efficiency.

While volume rose mainly due to an extra week. These were offset by the volume and margin squeeze at Decarie as well as higher cost of goods in Ontario and Quebec Broad line division, where we could not beneficiate in 2016 of spot buying saving.

Operating earnings before charge not related to current operations rose 29.3% to $5.6 million versus $4.3 million last year, mainly driven by lower depreciation and amortization charges in 2016. In Q4 2016, we incurred charges not related to current operations of $1.9 million, of which $850,000 is related to the closure of the Vaughan warehouses and about $900,000 consists of severance payment.

In Q4 2015, we had charge of $2.4 million as well as a $33.8 million impairment write-off. Given positive pre-tax earnings, we incurred an income tax charge of $500,000 in Q4 2016 versus $6.3 million tax recovery in Q4 2015.

As a result, Q4 2016 EPS was at breakeven as opposed to negative $1.7 last year. In the fourth quarter, cash flow from operating activities stood at $15.5 million, up from $13.7 million last year.

The improvement reflects a higher favorable variation in working capital item. Taking a brief look at the full year results, Colabor recorded solid improvements in all key metrics, namely adjusted EBITDA, operating earnings, net earnings and cash flow.

We concluded 2016 with sales of $1.4 billion relatively stable compare with the previous year. Adjusting for one more week in 2016 comparable sales declined 0.7%.

This includes a 1.1% increase in distribution sales and 5.8% decrease in the Wholesale segment. Adjusted EBITDA reach $30.3 million, up 15.1% from $26.3 million in 2015, and the margin improved by 27 basis points.

This improvement reflects a reduction in operating expenses as well as higher volume, partially offset by lower margin on contract renewals signed in mid-2015. Operating earnings before charges not related to current operation rose 72.8% to $18.8 million.

Given positive pre-tax earnings in 2016, we incurred an income tax charge of $1.2 million versus an $8 million tax recovery in 2015. Therefore, we concluded 2016 with a net profit of $323,000 as opposed to a $33.8 million last year mainly due to impairment write-up charges.

In 2016, cash flow operating activities reach $33.1 million, which is a $5 million improvement from the previous year, the increased results from improved working capital management and higher profitability. Working capital generated $10.2 million in 2016, this includes a $4.4 million decrease in accounts receivable despite relatively stable sales, which show our sustained effort to collect faster.

Inventories also decreased by $4 million, reflecting a better overall management. Our ability to better manage working capital is also reflected by a steady improvement in working capital expressed as a percentage of sales.

At the end of 2016, it represented 5.8% of sales. Given our solid cash flow and the recap transaction, Colabor balance sheet is significantly stronger.

As shown on this slide, we concluded 2016 with a total debt of $118.1 million. This number includes long-term debt, convertible debenture and bank overdraft.

By comparison, total debt at the end of 2015 was $186.2 million. At the end of 2016, Colabor ratio of total debt on trailing adjusted EBITDA was 3.9 times compared with 5.8 times at the end of third quarter and 7.1 times at the beginning of the year.

It is also better than the 4.1 times pro forma ratio at the closing of the recap transaction. Excluding the convertible debenture, our total debt to adjusted EBITDA ratio was 2.3 times.

At the end of the fourth quarter, we were using only $35.9 million from our authorized credit facility of $140 million versus $76.5 million at the end of the third quarter. With our lower debt, annual interest charges are now reduced by approximately $3 million.

These savings will significantly enhance our free cash flow generation as excess fund could be applied to further reduce debt or reinvested in to our operation. I turn the call back to Claude for the conclusion.

Thank you Jean-Francois. In 2016, Colabor acted decisively to reduce cost and improve its operating performance.

In 2017, we will continue to strictly manage cost, but we will also benefit from a significantly stronger financial position and greater flexibility. As Jean-Francois just mentioned, we are now in a position to reinvest in our operations and this is exactly what we are doing.

We are in the process of investing significantly in our sales team in order to capture more street business. In previous years, investing in growth initiative was quite difficult given our high debt level.

Since we no longer have this issue, Colabor is proactively focusing on where it needs to grow its organic sales and its profitability. With these initiatives, we believe, we will be in a position to improve our gross margin and comparable sales in the second half of 2017.

This improvement will be in addition to the cost reduction measures already announced. We now have our chin up and the entire Colabor team and organization are looking at with confidence.

Our team will build on the progress accomplished to this date. We will sustain our efforts to profitably grow our reach in the food service industry in Eastern Canada, and to create lasting value for our shareholders.

I now open up the call for questions?

Yeah good morning guys. Just wondering if you could provide a bit more color on the increased competition or the new competitor and maybe split what the impact was on Decarie versus the lower beef prices on both margin and volumes or sales?

Yes. Here we are talking increased competition in the wholesale meat market only.

I just want to make it very clear. So, one of the supplier, big supplier in meat in Canada had these different business model in Quebec than for the rest of Canada.

And until September of 2016, they were not delivering directly to customers. There were going only through the wholesalers, meat wholesalers in Montreal market.

And they decided to just supply their normal business model than they had in the rest of Canada and they decided to go with some customers, not with all of them, to go directly to the customer. So, it changes the game plan quite a bit in the marketplace, not only for us but for all the wholesale business in Montreal.

And it's cited in September 2016.

So, who is the supplier?

Cargill.

Cargill, okay.

And it's a major as you know in the beef industry, there is a very few numbers of supplier in Canada, I would say two or three. Two major and couple of independent, so that kind of decision happens, it can hurt I would say everybody in the marketplace.

So, if I understand correctly, they weren't doing that in Quebec, but they were supplying directly in the rest of Canada?

Exactly. But, again, it's not to all customers, okay, because they are not equipped to go to small butcher shops and all that stuff.

But when you are a wholesaler, you can tell in Decarie, was based on distributors, butcher shops and these were the big three of the retail food, retail business. So, as you see, they do not go to small customers, but they have the ability to go, directly to big customers.

Okay, are you able to split out what the impact was on the quarter, because I know you had pointed to – you had pointed to lower beef prices as well as Decarie. Was the Decarie I guess impact much bigger than what lower beef prices were?

Decarie impact in the quarter without this negative impact would have been higher than a year ago in terms of adjusted EBITDA, Derek. I don't want to comment specifically on, but that's what I would tell you this morning.

Volume and variance would have been more favorable and gross margin unfavorable variance would have been lower. So, it impacted both.

So, we'll now be at higher adjusted EBITDA performance without this Decarie impact, that's for sure.

Alright, fair enough. So, I guess despite the extra week, and that's the reason why we didn't see overall volumes up?

Yeah.

Exaclty.

Alright. And you mentioned in your prepared comments about the higher COGS.

I was just wondering what was going on, maybe if you can just add a bit more color and detail?

Yes from time-to-time is when you have a strong balance sheet. At the end of the quarter, supplier will offer you know spot buying opportunities that you can beneficiate.

In 2015, we were able to, you know it's our business we buy a lot of goods. We have strong relationship with suppliers.

But when you'll have difficulties in your balance sheet, then you have less opportunity.

We are not on their list.

We are not on their list. You know.

So, we believe we're not able in able in Q4 2016 to repeat on that on those kind of savings, Derek, and we believe now with this balance sheet going forward that we would be back on good terms with vendors and we will be able to beneficiate again on spot buying opportunities.

Have you seen that ability or your ability to profit from that opportunity comeback in the early, in terms of Q1?

Since the recap the relationship with the financial, the suppliers and the customer is much greater and hence…

But now with this year end, the balance sheet, we've proved, we're much better than the pro forma we've shown on the Q4. So, yes, we've seen the confidence from the main vendors improve in the fourth quarter, what is going to accelerate even further into this year 2017 with this balance sheet.

Yeah, and it's going to start as soon as tomorrow, because as you know, you know we're expecting the fourth quarter results and the year-end results. So, just to let you know that we met all suppliers, all important suppliers on January 30 and February 1 in Toronto and Montreal, and we presented them with the new – what I would say the new balance sheet of the Company based on the pro-forma obviously, because the results weren't public.

But you know the – get out of this room, very enthusiastic and they told us that, yes we are back. And they need – suppliers told us very clearly that they are very happy to have a third option in foodservice being an intelligent option, and we expect that 2017 will erase all the issues we have with suppliers in 2016.

Okay. Thanks, I'll re-queue.

Yes, I had a question on the distribution business in Ontario. Is there any impact from the proposed restaurant brands Popeye's transaction, is there a change of control, or other feature in that contract?

Yes. Jean-Francois will start in that.

Yes. No the contract is solid and the change of contract provides change of control on their side, so the new company we have better, clause in the contract.

It's an important customer for us in Ontario, but I think that we have very, very good relationship with them. So we don't see in the near future any changes.

I don't know where they going to go for the next contract, but at this moment we don't see any change – major change at this moment.

And for the contract in Ontario that was mentioned that longer serving, was that a something you no-longer wanted to serve or there was a bid in, someone else took the contract or?

Okay. In reality, we decided that Keith that there is a limit to get low margin contracts, so we made the bid a very reasonable bid, a fair bid for both parties.

Somebody else decided to go lower and we decide not to follow. And also, we are in this business to create value for shareholders, not necessarily only working for top-line and, and this loss also allows us to take the decision of closing Vaughan.

So in the first step, we are hit by the decision, because we lost the contract on this on October 1. But as soon as the Vaughan will be close in May 1 of 2017, okay, we will recoup everything that we had last.

So I would say that overall is timing at the May 2017 is going to be at the worst a neutral loss, at the best a little bit more profit would come in. And it's our attitude for the future, we want business, but we don't want business at any price.

And what would be the approximate if you can disclose the approximate size of the contract?

It's plus or minus $40 million, and it either does as I said October 1. So it's going to – we will – it's going to be trading for 10 more months or nine more months.

And then just in terms of the sales force, I guess in Ontario, I guess in particular, but also I guess in the Quebec City. What is your broad thinking of outside sales people versus inside sales people?

Or how are you thinking of structuring the sales force?

It's a good question, Keith, and we are restructuring our teams now as being a team of a people on the road and related with people inside, okay, and if the ratio is about 2 for 1, so two people on the road for inside. And as you know we are – since we have the recapitalization has been done.

We are now hiring – it's a major investment that we're going to do in 2017 in the sales force. It's major, and we think that we're going to get these results only as you know trying to get the street business is not overnight, but it's the way to go – it's really the focus that we have and the way that we've going to improve the profitability in the margins.

So we have hired those also people that know about the street business. Darrell Moss was VP of Street business for a major company for many, many years.

And we have hired a few people within that are very knowledgeable, same thing in Quebec City, [indiscernible] the new General Manager in Quebec City was for 25 years that having plus in Montreal which is probably the best independent distributor in street business in Montreal. So, it's not a matter only in investing in number of people, but it's also finding the expertise and people that are knowledgeable about getting into this street business, but it takes time, it's not overnight.

The investment comes first and the result comes second.

And when it comes to the proposition to the customer? I know that there is a test kitchen, or I guess you call it at the Summit facility in London I think it is, but for me it was Mississauga rather.

I am just wondering what sort of the value added proposition that your sales force is offering the customer?

I would say that it's related to the proximity with the customer. We have a perfect DC network in Ontario.

We are in Ottawa. We are in GTA, and we are in London to serve this southwestern Ontario.

In each of these areas, okay, we are transforming the network to become a full broad-line offering in each of them, what was not the case before. Before we have one DC which was more – I would say chain specialized.

Now we're going to have a full broad-line offering in each of the center which are really in the right markets where they should be. So the first thing is, proximity and flexibility that we can offer to the customer.

Also you know, we have a local decisions, okay, to serve the customers. So, listing a product at Colabor being Summit or being CDA division, it's a lot easier than our competitors.

So we can really move quickly to serve the needs. Also, you know, we are developing a qualitative approach not only at good price, but as you said we are refurbishing all the kitchen, all of this kitchen.

By the way, we'll have one test kitchen in each facility that I told you. We have one in Quebec City, we have one in Montreal, and we have three in Ontario.

And so we're going to use them as being also a very good counseling to the customers. Our approach also about private label is quite different.

We have a good brand in private label. We are proposing a good alternative on private label, but we are not forcing customers to go to private label.

So we have different attributes and unique selling points. Also we are very proud of our Lauzon Meat products.

We are a real great specialist in cutting exactly what the restaurant owner would need or also the institution would need. So, we believe we have been doing – I don't want to say all of the assets, I don't want to supply all this information to my competitors, but we have a very distinctive offering and we think and we believe that this offer will be well accepted by the customers.

We didn't have enough legs on the marketplace, now we're going to have more people going and searching for sales and profitable sales.

And then just sort of – I think it's probably an unrelated topic, but maybe not. Has there been any rumors as to whether Tim Hortons might externalize their distribution in Canada?

We already adept, last year, Keith, that they were not so happy with sales distribution, but it has paid up to – up to now it has paid as a rumor. We didn't see anything, so I don't want to comment on things that cannot, but we heard the same thing than you last year.

Thank you.

Yeah. Just one follow-up question, just wondering if you guys could quantify the cost savings you think you can get from the Vaughan closure?

Derek, we don't want to quantify that, but as we said, it's going to be a recurring saving, but starting in 2018. So the first year as you get into closing the facilities, we have to reshuffle the SKUs within our network of the three warehouses in Ontario.

So we forecast there would be recurring saving, but……

When that's really to put the number on it right now, but we know that it's going to be significant, but I don't want to get into numbers until my people in operation are confirming what they can do.

Okay. And maybe just a quick one for Jean-Francois, again in you're prepared comments, you ramp through your debt levels.

Can you maybe just repeat that again?

Sorry, where you…

Your debt levels.

Your debt levels.?

Yeah. The debt level….

3.9.

The debt level to EBITDA, if you have the PowerPoint in front of your, we've hit the – at the year-end is $118 million total debt including the $50 million of convertible debentures and the $25 million of subordinated debt. And that gives 3.9 total debt to adjusted EBITDA ratio.

And if you exclude the $50 million convertible, it's 2.3 times total debt to adjusted EBITDA.

Okay. It's very helpful.

And the debenture as you know the striking price is quite low, so you know it's – yes it's debt, but it could be like transferring to equity within five years.

Right. Okay, Thanks gentlemen.

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

We are looking forward to updating you on our progress during our next quarterly calls. Have a great day.

Bye-bye.