Colabor Group Inc.

Good morning, everyone. And welcome to Colabor Group's 2019 second quarter results conference call.

This is Lionel Ettedgui, President and Chief Executive Officer. And with me here today is Pierre Gagné, Senior Vice President and Chief Financial Officer.

Earlier this morning, we issued our earnings press release. It can be found along with our financial statements and MD&A on our Web site and on SEDAR.

First, let me introduce Pierre Gagné who joined us on May 27, 2019. Pierre has had quite an extensive career as a CFO at large private and public companies, such as FLS Transportation Services Limited, GDI Integrated Facility Services and Cogeco Communication.

Thank you, Lionel. Good morning, everyone.

It's my pleasure to join Colabor, especially at this time in the company's transformation. I look forward to working with the team and all our stakeholders in achieving our plan to improve profitability and further strengthen our balance sheet.

After Lionel's introduction, our review Colabor's financial results for the 84 day period ended June 15, 2019. Lionel?

Yes. Our result for the second quarter of 2019 has progressed as planned.

Revenue growth came from the Distribution segment and improved cost control with the significant year-over-year adjusted EBITDA growth. On May 10, 2019, we concluded the sale of our Viandes Decarie division for gross proceeds of $20 million.

Of which, $17.8 million was used to reimburse our debt. This sale allows us to focus on the transformation of Colabor in 2019.

We can now focus on the Broadline Distribution activity and further integrate and optimize our other businesses. We know that the road to recovery will take some time.

We are implementing measures to drive synergy, and while viewing our relationships to ensure that they still remain mutually beneficial. The significant improvement we have seen over the last two quarters are the result of our strategic plan.

We will continue on this path and keep working on our pillars, which are; grow our Broadline Distribution activities, further integrate our business unit and reduce the level of debt. We're starting to once deliver shareholder value, and we intend to stay the course.

I would now like to turn the call over to Pierre for his review of our second quarter financial results. Pierre?

Thank you, Lionel. Consolidated sales for the second quarter reached $274.2 million compared to $273.6 million during the corresponding quarter of last fiscal year, representing an increase of 0.2%.

Sales in the Distribution segment increased by 1.1%, mainly due to a retailer promotion but mitigated by changes in the customer mix. Sales in the wholesale segment decreased by 6%, mainly due to the non-renewal of non-profitable contracts.

As for adjusted EBITDA for the second quarter of 2019, it reached $7.3 million, an increase of $2 million compared to the corresponding period of 2018. This improvement is explained by the deployment of operational optimization measures, improved cost control resulting from the implementation of the rationalization plan announced last November and sales growth from the Distribution segment.

Net earnings from continuing operations was $1.4 million, up 177% compared to the corresponding quarter of 2018. This increase is due to lower operating expenses and higher sales, which were partially offset by higher taxes.

As of June 15, 2019, the company's total debt, including the convertible debentures and bank indebtedness, amounted to $97.7 million, down $24.7 million from the same period June 16, 2018. This reduction is mainly due to the proceeds from the sale of the Viandes Décarie division, $5.2 million was applied to the repayment of the portion of the credit facility and $5 million towards the repayment of a portion of our subordinated debt.

The remainder was used to finance higher working capital requirements for our peak season. Our total debt to the last 12 months adjusted EBITDA ratio now stands at 5 times, which is down sequentially from the first quarter of 2019 when the ratio stood at 5.5 times.

Excluding the convertible debentures, this ratio stands at 2.5 times versus 3 times in the first quarter of 2019. I would now like to turn the call over to the operator for the Q&A period.

Operator?

I have a question on the Distribution side. You saw a very strong improvement in EBITDA there.

Just wondering if can maybe talk about some of the drivers and more specifically, some of the margin improvement we saw there?

Yes. Sure.

So on the Distribution side, as we had implemented during previous quarter several initiatives, just like cost reductions at warehouses and shipping. Also, as you remember last quarter of last year, we have implemented rightsizing plan, which is delivering quite good results and specific contracts, which were not profitable we decided to stop them.

And another one where we had still a potential, we worked with our partners and customers to find solutions to bring them to a sustainable profitability. So that's mainly what is delivering our results.

And then maybe in your prepared remarks, you did talk about Ontario and its going to take a little bit longer. Can you maybe just talk about some of the challenge that you are seeing there and maybe a timeframe on rightsizing Ontario?

So Ontario activities are depending on one main customer with a challenging contract. We are working with this customer for many years, and we're working together to solutions to be sustainable in Ontario.

So according to me, we should be able to find the right solution by the end of this year. And for us, it's a high priority to get to a turnaround in Ontario.

And do you think you are -- would you consider yourself close to a turnaround there?

Well, to be honest, as we have proceeded in Quebec, we have many choices and many options, depending of the outcome of the discussion we are going to have. So we didn't hesitate to take courageous decision in Quebec to close contract.

And when it's possible to find win-win solution for both parties, we improve our profitability. So I think that we take some time, because so far we have noticed some progress in Ontario with what we have implemented.

But it has to come to a smart and a fair discussion with our main partner there.

And maybe just on the -- care to get your view on the competitive front, and now with some -- you're well into the re-org. How do you view the company or Colabar competing, going forward?

Well, I think that when you have some basis, it is here to be a bit more competitive. We are one of the leaders in the province of Quebec.

So I think that we need to keep on having a healthy business. So not fighting on pricing, but more about the quality of service we're delivering and added value solution we can bring to our customers.

So to be honest, so far I don't see a big challenge regarding competition because according to us from now we're not going to fight anymore with very challenging contract or bid on -- which are only declining our margin and our pricing. So, I think that the sun is rising for everyone and we are not going to fight on pricing and the market is big enough to satisfy everyone.

So, I guess may be following up on that, is that the -- I guess the realization of both the competitors and customers now? Are they more -- and on the customer side, are they more geared towards getting better quality service but not necessarily competing on or putting any two companies against each other on price?

Well, I think that you have to put that into the accurate context. Everyone is facing issues regarding labor.

So, so far it’s -- we are more struggling regarding the lack of labor in our activity than on fighting regarding pricing. So, it can be at the customer level.

In all restaurants, they're struggling regarding issues with the lack of labor. We have the same issues for all distributors.

So, I think that's the focus. It’s mainly on delivering the good service.

And together I think that everyone has to agree on fair contract and smart win-win deal to be able to deliver that. Because at the end of the day even if you have some most competitive contract at the very low pricing but if you don't have the quality of service, what you’re not selling today is not going to be sold tomorrow.

Right. And so, I guess can I sum that up, the competitive environment has become more rational than it has in the past?

Is that fair?

That's fair.

Okay. Okay.

May be just switching gears on to the Wholesale side, there was a decrease in the revenues and you pointed to the loss of contract. I guess I'm just wondering when do you start lapping that contract and the flipside though there was a significant improvement in the margin performance this quarter.

So again, looking for your thoughts there? And may be if you could just remind me why the EBITDA margin there’s so much higher in Wholesale versus Distribution?

I think that’s -- what is good for us regarding Wholesale is optionality, you decide with courage to shut down non-profitable contract, it increases the profitability on the remaining business, okay? So, I think that's the first statement.

Wholesale business is a bit more easier operations side compared to Broadline business. It’s -- you are not doing any sales by unit.

It's only -- mainly by pallets. So you can be very productive on the warehouse side.

Moreover, on Wholesale business, it’s a FOB warehouse. That means that we're not in charge of the shipping costs.

So -- and then it’s regarding all kind of free base we can get from supplier revenues because we concentrate all the volume of purchase. So, it's -- let's say that Wholesale is less challenging regarding operation.

The main challenge is about deliver the good service to independent distributors and getting the fair pricing with suppliers.

And maybe just touch on the -- when you lap the non-renewal of contract? When you fully lap that?

Well, I think that it will be done by end of this year. Of course, we keep on -- have got several contracts up to the end of last year.

Let me just -- talking about your -- the level of debt, I just wondering how you think about your debt level? Did pay some down with the sale of the Decarie.

So looking for: one, where your comfort level is? And do you expect leverage to come down mainly because of improved operations, or you're going to be paying down debt?

And just wondering if you have any other non-core assets, let's call it that you think you'd be able to divest those?

First, I would like to say that according to me the debt is still too high, okay? So I think that we're looking to get a sustainable activity with a fair leverage regarding the debt.

So, as you mentioned, we -- and we told that previous quarters, we have two ways to get back to a good leverage regarding debt ratio. It's first we can increase EBITDA from what -- all initiatives we implemented; and second is to reimburse and advance by cash payment our debt.

So we had an amazing opportunity to sell Viandes Decarie with a very good deleveraging principal valuation. And we had the discipline to use all this amount to pay back the debt.

And so far, I guess that compared to last quarter -- to second quarter last year, it's decreased by 20% of our debt. So we keep on having this type of discipline.

We want to focus as we said regarding our vision on our core business. So depending on what kind opportunities of divesting we will have, we look at it, but with no rush.

And I prefer honestly to focus on the improvement on our EBITDA, which is more sustainable and to put back Colabor on success regarding growth.

So I mean -- so you're always looking -- there's always -- you're always looking, if there is an opportunity to sell -- like everything that you have right now, is that -- would you consider core, all the assets that you have, that you're running right now?

Well, let's say that I'm very happy with everything I have now. But if I have an unreasonable offer, because it's really high on one of non-core asset, we'll look at it and sell it as we've done for Viandes Decarie, which was quite a good business.

Okay. You fully lapped the Montana supply contract now, and let me just talk about -- there was -- it seems like you did get some organic revenue growth on the Distribution side.

Just talk about some of the drivers of the organic growth there?

Well, we have improved our mix of product. So it helps to get higher margin on our Distribution side.

Also we -- as I said with several customers, we improved our contract on a win-win basis, so that helps too. We gained also good revenues for developing penetration in our existing customers and mainly in the province of Quebec in Broadline business.

Each month you’re earning new independent customers and unfortunately you have to let go some others and the balance of that is positive so far.

Okay. And the -- when you say improved mix line, what do you mean exactly?

While, let’s say that when you are able to sell a bit more of produce, it’s quite interesting as a category. All center of the plate strategy, just like selling more protein.

It has increasing your revenues and also your profitability in dollars. So it's more about to sell more added value product and a bit less of commodities.

And what’s driven that improvement or that mix towards that center of that plate?

Mainly execution. When I joined the company I was a bit shocked about the industry and I found out that the level of execution was really too low compared to other industries just like retail.

And I think that you should take your destine in your hand. So we decided to change the culture of the company and the go-to-market.

And so far we’re quite successful. Very far from what we -- where we want to grow but it’s -- I’m quite optimistic that we will be able to deliver better execution further over the next quarters.

Okay. And maybe if -- maybe some questions for Pierre.

You've only been on -- with the company now for two months, just wondering how you view your learning curve and maybe just touch on some of the expertise that you are bringing to the table?

Well my expertise is really on the accounting process, financing, helping operation to analyze and being proactive to support the progress of the company. That would be my key focus area.

Of course I have done M&A before, on both sides, buying and selling. So that will be helpful to Colabor.

Okay. It seems like there is a little bit less disclosures.

Just -- is this just some -- just housekeeping for myself, a little bit less disclosures on the cost side split between COGS and SG&A and intersegment stuff. Was that on purpose?

The reason we've done that is for competitiveness reason. That's why we didn't break it down into two segment of the business.

But you have it on a consolidated basis in a note to the financial statement.

Okay. And just to clarify, you guys are now showing the results pro forma the carry, right?

Right. So what we -- what you have to do is to go to the Note 4 to the financial statements.

This is where you will see the carry. But on the face of the financial statements, all the carry, if you want, profit and loss statement has been taken up on a comparative basis.

So you're comparing really apple-with-apple.

And maybe just one final one for me. You did -- one of the initiatives was to try and improve your private label penetration line.

I'm just wondering where you are in that initiatives and has any of that contributed to some of the better results that we're seeing today?

Well, to be honest, we're still working on it, because we're revamping our private label. We're proceeding with also with category management to be sure that our private label is going to fit with our new vision for the company.

So, so far, we didn't get any significant improvement in the result from private label, but let's say that it's quite positive regarding the next following period when we will be able to introduce our new vision for private label.

So again, maybe just on the timeline for that Lionel?

Well, I think that it will be early 2020.

Thank you, operator. And thanks Derek for your questions.

We continue to work with discipline and rigor to transform Colabor. We are concentrating on our core business, optimizing our operation and remain focused on reimbursing our debt.

This concludes our call for the second quarter of 2019. Thank you for joining us.

I look forward to discussing our progress at our next conference call to discuss our 2019 third quarter results in October. Have a nice rest of the summer.

Thank you.