Colabor Group Inc.

Claude Gariépy – President, Chief Executive Officer Jean-François Neault – Chief Financial Officer, Vice President

Derek Lessard – TD Securities

Thank you. Good morning, everyone, and welcome to Colabor Group’s 2017 first quarter conference call.

With me is Jean-François Neault, Senior Vice President and Chief Financial Officer. Earlier this morning, we issued our first quarter press release 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. Please note that the presentation is also available on our website at www.colabor.com under the Investor Events & Presentation section.

Colabor significantly reduced its seasonal loss in the first quarter of ‘17. One of the key factors of this improvement was an important decline in financial charges resulting from our successful recapitalization of last October and cash flows coming from the operations.

Jean-François will provide more detail on our financial results in a moment. We also achieved further progress in the overall performance of the distribution segment.

Although results reflect the year-over-year effect of the last three supply contracts, one of which was a decision to take Distribution in-house, our sales volume with other clients increased in Ontario and eastern Quebec. However, this progress was overshadowed by challenges at the wholesale segment, mainly at the Décarie division which remains affected by an important sales decline due to double-digit beef price deflation and the arrival of a new major competitor.

On a very positive note, Colabor renewed during the quarter an important contract to supply fresh fish and seafood to all Sobeys food stores throughout the province of Quebec. The renewal is for a three year period stretching out to February 2020.

This contract should represent annual sales of approximately $90 million from Norref. We are very pleased to secure this important business volume at this profitable division.

As announced last quarter, we are reorganizing the old distribution network in Ontario. As part of this reorganization, we closed on April 30 our Vaughan facility as the lease was expiring.

We also introduced a new geographic approach for the customers and transferred the volume to other Ontario warehouses. We believe that recurring cost reductions from this initiative will bring in significant savings.

I’ll let Jean-François go over our financial results. Jean-François.

Thank you, Claude and good morning everyone. Colabor recorded sales of $267.2 million in the first quarter of 2017, down 6.2% from a year ago.

Sales in the Distribution segment decreased 5.1% reflecting the contract losses that Claude mentioned, partially offset by a solid performance of the Norref division in the fish and seafood market and by higher sales to our other clients in Ontario and eastern Quebec. Sales in the Wholesale segment were down 9.5% due to a 23% sales decrease at the Décarie division.

This decline reflects greater competition in the Montreal market as well as an important deflation in beef prices. These factors had negative impact on Décarie’s volume and margins.

Adjusted EBITDA was $0.9 million versus $1.9 million last year. The decrease is mostly due to the situation at Décarie.

These factors were partially offset by a better performance in certain division and by a reduction in operating charges. In Q1 2017, we recorded charges not related to current operations of $0.9 million mainly related to the reorganization of the distribution network in Ontario.

In the first quarter of last year, we had incurred charges of $3.3 million in connection with our rationalization plan. Financial charges were significantly lower in the first quarter of 2017, reflecting the success of our recapitalization concluded last October.

In Q1 2017, financial charges were $1.8 million versus $3 million last year. As a result, the seasonal pre-tax loss was reduced by $2.8 million compared with last year, while the net loss was $1.9 million lower than last year.

Cash flow from operating activities was negative $4.5 million versus plus $2.2 million last year. The variation reflects unfavorable working capital fluctuations in Q1 2017 as opposed to last year.

This mainly reflects higher meat inventories due to greater spot buy. Note that this is the only main category in which inventories were up.

However, since payment terms in the meat business are unfavorable, days in payables have been reduced in this year’s first quarter. Colabor’s balance sheet remains healthy.

As at March 31, 2017, our total debt including convertible debentures and bank overdraft stood at $124.9 million. This is down from $187.1 million at the same time last year as a result of the recap transactions and the cash flow generated by operations, but slightly higher than $118.1 million at the end of 2016 due to working capital requirements.

With this sequential increase in total debt, Colabor’s ratio of total debt to trading adjusted EBITDA was 4.3 times at the end of Q1 2017 compared with 3.9 times three months earlier. Note that this remains well below the level of 6.7 times at the end of Q1 2016.

Excluding the convertible debenture, our total debt to adjusted EBITDA ratio was 2.6 times. At the end of the first quarter, we were using only $42.8 million from our authorized credit facility of $140 million, leaving us plenty of flexibility to continue to reinvest into our operations.

I turn the call back to Claude for the conclusion.

Thank you, Jean-François. Historically, the first quarter has only represented a very small proportion of our annual adjusted EBITDA.

This is due to seasonal factors resulting in lower sales and higher winter related costs compared with other quarters and also causing more volatility in operating profit. For these reasons and given the measures we have put in place, we remain confident to achieve our objectives for 2017.

With its greater financial flexibility, Colabor is proactively focusing on growing its organic sales and profitability as well as on improving its operating efficiency. For instance, we have aggressively reinvested into our operations, most particularly in our sales team in order to capture more street business.

This initiative will begin to have a positive contribution in the second half of this year. At that time, we will be in a position to improve our gross margin and comparable sales.

In addition, we will begin to lap the last contract mention earlier. The reorganization of our Ontario distribution network is another initiative that will, over time, improve our efficiency and profitability.

Given the potential of our measures put forward up to now, Colabor is looking ahead to the future with confidence. We remain fully committed and focused to profitably grow our reach in the food service industry in eastern Canada to create value for our shareholders.

I now open the up for questions.

Yeah, good morning everybody. Can you hear me?

Yes.

Okay perfect. So congratulations on the Sobeys renewal, just a couple of questions here.

In terms of the $90 million in annual revenue just wondering how much of that is incremental?

There is no incremental business in itself, but it’s a growing business year-after-year the segment of fish and the way that Canadian eat is a growing segment. So we’re extremely happy to be part of this growing segment.

So each year, we do better than the year before, but there is no incremental in itself. It’s a normal growth coming year after year.

So like three years ago, it was around $80 million, now we’re at $90 million. So it’s a steady growth coming from this segment of the business.

Okay. Are you able to tell me if it was renewed at a higher or lower margin?

Quite about the same. We are at the – in both parties with the renewal, we are giving Sobeys a way to really distinguish themselves in the marketplace.

We have by far I think the best fish and seafood offering and we are part of it and we are happy with the kind of relation and the kind of profitability of this contract.

Okay. Have you guys been able to secure any other additional contracts outside of Sobeys?

No this was, I would say, this was the only big one in 2017 and we are very happy to achieve this in the first quarter of ‘17. For the rest of the year, we don’t have important contracts that are coming to term, so I think the next one – I don’t have in mind when is the next big one but it’s not in ‘17.

Okay. And then just maybe on the contracts in the Distribution segment, you talked about the decline in sales.

Can you just remind us of those -- what those lost contracts were and the timing of them?

Yeah, we in October 17(sic), we lost an MTY contract which was between $35 million and $40 million and this was a very aggressive bid and very low margin contract and we lost it in October ‘16. In April ‘16, we had lost a New Brunswick contract with a buying group which is called Unit Co.[ph] which was $15 million contract.

And we lost it not necessarily because -- we were very competitive in discount right, but the issues is that we have no distribution center in New B. So we were servicing the New B.

from Rimouski and they decided to go local with a small distributor located in Monten which was a serious competitive advantage for us. So we were competitive in these contracts but it’s different.

I think that it’s good for them that they add a local guide to serve them and we didn’t have a facility in New Brunswick.

Okay. And what was the third one, you mentioned MTY and Unit Co.?

The third one was a smaller one but it was St-Hubert. We were servicing St-Hubert in the remote regions, far away regions.

So we only contract with 10 restaurants. And for the rest, St-Hubert has always been self-distributed.

So they decided, and it was before the closure of the acquisition from Cara, we decided to complete the self-distribution for all restaurants. So we lost to the sales, but we are still doing the transportation.

So EBITDA wise, we were not affected by this one.

Okay. Has there been any pickup since the Cara transaction?

No, at this moment, I don’t know and I know if you follow also Cara business, but I think that Cara is striving a bit with same store sales. So we didn’t get new businesses or new business from them.

So for the rest, the rest of the business is growing but Cara and the last contract.

Okay. Let’s just maybe talk about the margin pressure going on at Décarie and the drop in sales, is this still -- number one, is this still tied to the Cargill’s entrance into the market?

And maybe if you could just talk about the dynamic that’s going on there and when you expect things to stabilize on the meat side?

I would say that is quite stabilized. We have -- Cargill decided to get into Montreal market in late August and we had a decline from August to I would say November.

But since then, because we are comparing against last year, so it’s going to lap into next September. But it is stabilized, it is stabilized since couple of months, what has been lost has been lost and it’s a big guy arriving in the market place.

I’m pretty sure that the whole Montreal wholesale meat business is quite affected and we are part of it.

Any opportunity to pick some of that share up in other markets from other competitors what have you?

Right now, actually, we are picking up a little bit into the other categories, not necessarily the beef because Cargill is beef, but we are gaining shares in the pork actually and one of the reason why we have more inventory that we are trying also to gain shares in other categories than beef which could be a point of differentiation for… The lamb, we imported a lot of lamb and that explains a bit higher inventory in the meat. So we are trying to distinguish ourselves elsewhere than the beef.

But the beef is still, despite it is declining every year, the consumption is declining, it’s still by far the biggest category. So the gains that we are doing right now in lamb, in pork is not compensating and don’t forget about the deflation.

I think that in a couple of months, we will lap the biggest deflation and the figures will be a lot more comparable. But the first quarter was like the fall again, this deflation started in the second quarter of ‘16.

So we are now, I think we will be lapping, I cannot imagine that there will be another 10% deflation on top of the 10% deflation at one point, the producer will be dying, the meat… So we hope that the deflation will stop in the second or third quarter.

Okay. Thanks for that color.

Back to more of lobster prices, I guess you know have spiked, just wondering if you could talk about the market dynamics there and what impact you’re seeing on Norref?

At this moment, okay, we are late, the season is late as you probably experienced in Toronto, the same kind of shitty weather that we have here. But we cannot say, I know that this week, the prices were a lot higher than last year same week.

But the biggest week is coming in front of us, as you know it’s Mother’s Day which is the biggest lobster season week. But the prices will be probably higher, but it’s a daily thing, so I cannot – it’s exactly like the weather, I cannot predict what will be the price, but we do not expect a huge variance into Norref performance, because not only if the price are going really low like it was the case last year, it’s less profitable per kilo.

So overall, we should manage around and be in the same kind of water than last year, but it’s too early because the season is late, it’s too early to tell you exactly where the pricing will be sitting.

Okay. I mean sort of along the same lines, obviously weather, you’ve talked about it, it’s been pretty crap and there is no I guess there is no relief in sight for the next couple of weeks or so.

Just wondering what impact that had on you guys as well I mean obviously patio season’s been delayed and people are still indoors, so just wondering what impact that’s having on you?

Tough to measure and honestly I’m not the guy that will use the excuse of bad weather, I should, but I do not do that and my Board does not allow me to use it. So, it’s a sort of issue which impacts our business.

We are a weather related business and over the weekend, if it falls and rains, no patio business, no barbecue. So it impacts us but we cannot measure it properly.

The only figures that I get week after week that the restaurant business is not as bad as we could expect, but I think for the rest it’s suffering. And also, good for us, compared to last year, we got at least one week of oddly – and it was good.

The week that the Montreal Canadian and the Toronto Maple Leaf were in, we failed it, but it’s too bad for us that they were out too quick, but the Ottawa Sens[ph] are still there, so our business in Ottawa is growing. And not only related to hockey, we are picking up market share in Ottawa business.

So hopefully they’re going to go to the Stanley Cup – been compensating for the bad weather.

Okay. And then I guess one final one and I think you touched a bit on it, on your remarks it was the unfavorable non-working capital position where there was the use of cash this quarter.

Just wondering if that has stabilized in terms of your inventory, you talked about lamb and pork, are you where you want to be in terms of your inventory levels going forward?

Yes, the – has improved after the end of the quarter already, we’re a few million down in the meat business and however, other businesses are building the inventory for the busy seasons to come. But we should recuperate some of the working capital used over the next few quarters.

And I will quantify it as a temporary issue because we have solid initiatives going on to manage and we’ve been getting very good with last year’s difficulties. So it’s very temporary and we have some initiatives going on and we will generate cash from the working cap that’s for sure.

Okay. Well you did generate cash last year as well, so maybe just remind me on some of those work initiatives or the initiatives that you think will drive the cash flow?

We, as you know, we were highly penalized by the suppliers line of credit and we are gaining some momentum every quarter with them. And we still have room to improve this initiative and we think that by the third quarter, we will be back to market conditions.

We are not yet at market conditions and our balance sheet is in market conditions. So we are getting back the room that we lost in ‘16 and late ‘15 and 2016.

So this will certainly be helpful in the working cap. So this is one of the most important one.

Also, don’t forget that we shut down a warehouse on April 30. So we will eliminate this inventory in the next three months.

So it’s another $3 million to $4 million that will come from this elimination. I’m telling you working cap situation in Q1 is not reflecting what it’s going to be for 2017.

Okay. Thanks for that guys.

That’s all the questions I have.

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

Have a pleasant day. Thank you.