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Edited Transcript of GCL.TO earnings conference call or presentation 29-Jul-19 1:00pm GMT

Q2 2019 Colabor Group Inc Earnings Call

Boucherville Aug 21, 2019 (Thomson StreetEvents) -- Edited Transcript of Colabor Group Inc earnings conference call or presentation Monday, July 29, 2019 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Lionel Ettedgui;President & CEO

* Pierre Gagné

Colabor Group Inc. - VP & CFO

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Conference Call Participants

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* Derek J. Lessard

TD Securities Equity Research - Research Analyst

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Presentation

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Operator [1]

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Good morning, ladies and gentlemen. Thank you for standing by. Welcome to Colabor's Second Quarter 2019 Earnings Call. (Operator Instructions)

Before turning the meeting over to management, I would like to remind listeners that this conference call contains forward-looking information within the meaning of applicable Canadian securities laws and subject to a number of risks and uncertainties that could cause actual results to differ materially from those anticipated. I refer the audience to the forward-looking statements as detailed in the presentation supporting this conference call and available on the company's website in the Investors section under Events and Presentations at www.colabor.com.

Furthermore, risks are discussed throughout the MD&A for the 16- and 52-week periods ended December 29, 2018, under the heading Risk.

I would like to remind everyone that this conference call is being recorded today, July 29, 2019.

I would now like to turn the call over to Lionel Ettedgui, President and CEO. Please go ahead, sir.

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Lionel Ettedgui;President & CEO, [2]

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Good morning, everyone, and welcome to Colabor Group 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 website 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 Communications.

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Pierre Gagné, Colabor Group Inc. - VP & CFO [3]

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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, I will review Colabor's financial results for the 84-day period ended June 15, 2019.

Lionel?

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Lionel Ettedgui;President & CEO, [4]

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Our result for the second quarter of 2019 has progressed as planned. Revenue growth came from the Distribution segment and improved cost controls with the significant year-to-year adjusted EBITDA growth. On May 10, 2019, we concluded the sale of Viandes Décarie 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 our Broadline Distribution activities and further integrate and optimize our other businesses. We know that the road to recovery will take some time by implementing measures to drive synergy and while viewing our relationships to ensure that they still remain mutually beneficial.

The significant improvements we have seen over the last few quarters are the results of our strategic plan. We will continue on this path and keep working on our 3 pillars, which are: grow our Broadline Distribution activities, further integrate business units and reduce the level of debt, by starting to once again 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?

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Pierre Gagné, Colabor Group Inc. - VP & CFO [5]

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Thank you, Lionel. Consolidated sales for the second quarter reached $274.2 million compared to $273.6 million during the corresponding quarter of the 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 nonrenewal of nonprofitable contracts.

As far as 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 control -- sorry, 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 of June 16, 2018. This reduction is mainly due to the proceeds from the sale of Viandes Décarie division. $5.2 million was applied to the repayment of a 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-month adjusted EBITDA ratio now stands at 5x, which is down sequentially from the first quarter of 2019 when the ratio stood at 5.5x. Excluding the convertible debentures, this ratio stands at 2.5x versus 3x in the first quarter of 2019.

I would like -- I would now like to turn the call over to the operator for the Q&A period. Operator?

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from the line of Derek Lessard from TD Securities.

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Derek J. Lessard, TD Securities Equity Research - Research Analyst [2]

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I have a question on the Distribution side. We saw very strong improvement in EBITDA there. Just wondering if you can maybe talk about some of the drivers and, more specifically, some of the margin improvement we saw there.

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Lionel Ettedgui;President & CEO, [3]

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Yes. Sure. So on the Distribution side, as we had implemented during the previous quarters several initiatives, just like cost reductions at warehouses and shipping, we showed you a number. Last quarter of last year, we had implement a rightsizing plan, which is delivering quite good results. And on 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 solution to bring them to a sustainable profitability. So that's mainly what is delivering our results.

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Derek J. Lessard, TD Securities Equity Research - Research Analyst [4]

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Okay. And then maybe -- in your prepared remarks, you did talk about Ontario and it's going to take a little bit longer. Can you just maybe talk about some of the challenges that you're seeing there, and maybe a time frame on rightsizing Ontario?

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Lionel Ettedgui;President & CEO, [5]

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Yes. Sure. So Ontario activities are depending on 1 main customer with a challenging contract. We are working with this customer for many years, and we're working together on solutions to be sustainable in Ontario. So according to me, we should be able to find better solution by the end of this year. And for us, it's a high priority to get to a turnaround in Ontario.

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Derek J. Lessard, TD Securities Equity Research - Research Analyst [6]

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Okay. And do you figure -- would you consider yourself close to a turnaround there?

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Lionel Ettedgui;President & CEO, [7]

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Well, to be honest, as we have proceeded in Québec, we have many choices and many options depending on the outcome of the discussion we're going to have. So we didn't hesitate to take courageous decision in Québec to close contract. And when it's possible to find renewed solution for both parties, we improved our profitability. So I think that we take some time because of how 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.

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Derek J. Lessard, TD Securities Equity Research - Research Analyst [8]

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Okay. And maybe just on the -- curious to get your view on the competitive front, and now with some -- you're well into the reorg, how do you view the company or Colabor competing going forward?

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Lionel Ettedgui;President & CEO, [9]

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Well, I think that when you have strong basis, it's easier to be a bit more competitive. We are one of the leader in the province of Québec, 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 solutions 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 a very challenging contract or bid on -- which are only declining our margin and our pricing. So I think that is something we'll do if we want, and we're not going to fight on pricing, and the market is big enough to satisfy everyone.

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Derek J. Lessard, TD Securities Equity Research - Research Analyst [10]

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So I guess on -- maybe 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 there more geared towards getting better quality service but not necessarily competing on -- or putting 2 companies against -- any 2 companies against each other on price?

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Lionel Ettedgui;President & CEO, [11]

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Well, I think that you have to put that into the context. Everyone is facing issues regarding labor. So far, it's -- we're more struggling regarding the lack of labor in our activities 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 the focus is mainly on delivering a good service. And to get there, I think that everyone has to agree on fair contract and a smart win-win deal to be able to deliver that. Because at the end of the day, even you have the most competitive contract at very low pricing but you don't have the quality of service, what you're not selling today is not going to be sold tomorrow.

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Derek J. Lessard, TD Securities Equity Research - Research Analyst [12]

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

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Lionel Ettedgui;President & CEO, [13]

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Yes. That's fair.

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Derek J. Lessard, TD Securities Equity Research - Research Analyst [14]

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Okay. Maybe 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 flip side, though, there was a significant improvement in the margin performance this quarter. So again, looking for your thoughts there. And maybe if you could just remind me why the EBITDA margins are so much higher in Wholesale versus Distribution?

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Lionel Ettedgui;President & CEO, [15]

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Well, I think that's the -- what is good for us regarding Wholesale is actionality that we do -- we decide with courage to shut down nonprofitable contract. It increased the profitability on the remaining business, okay? I think that it's the first statement.

Wholesale business, it's a bit more easier on operations side compared to Broadline business. It's -- you're not doing any sales by units, it's only -- mainly by pallets. So you can be productive on the warehouse side. Moreover, on Wholesale business, it's a FOB warehouse. So that means that we do not have to -- 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 a good service to independent distributors and getting the fair pricing with suppliers.

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Derek J. Lessard, TD Securities Equity Research - Research Analyst [16]

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Okay. And maybe just -- you touched on the -- when do you lap the nonrenewal of the contract? When do you fully lap that?

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Lionel Ettedgui;President & CEO, [17]

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

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Derek J. Lessard, TD Securities Equity Research - Research Analyst [18]

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Okay. All right. Maybe just talking about your -- the level of debt. I'm just wondering how you think about your debt level. You did pay some down with the sale of Décarie. 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? I'm just wondering if you have any other noncore assets, let's call it that, that you think you'd be able to divest those.

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Lionel Ettedgui;President & CEO, [19]

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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 the fair leverage we got in the debt. So as you mentioned, we -- and we told that in previous quarters, we have 2 ways to get back to a good leverage regarding that ratio. It's first, we can increase EBITDA from what -- all initiatives implemented, and second is to reimburse and advance by cash payment our debt. So we had an amazing opportunity to sell Viandes Décarie 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 of opportunities of divesting we 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 in success regarding those.

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Derek J. Lessard, TD Securities Equity Research - Research Analyst [20]

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

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Lionel Ettedgui;President & CEO, [21]

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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 noncore asset, we'll look at it and sell it, as we've done for Viandes Décarie, which was quite a good business.

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Derek J. Lessard, TD Securities Equity Research - Research Analyst [22]

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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. Maybe just talk about some of the drivers of the organic growth there?

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Lionel Ettedgui;President & CEO, [23]

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Well, we had 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 gain also good revenues for developing penetration in our existing customers. And mainly in the province of Québec, in the 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.

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Derek J. Lessard, TD Securities Equity Research - Research Analyst [24]

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

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Lionel Ettedgui;President & CEO, [25]

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Well, let's say that's 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.

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Derek J. Lessard, TD Securities Equity Research - Research Analyst [26]

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

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Lionel Ettedgui;President & CEO, [27]

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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 destiny in your hands. So we decided to change the culture of the company and the go-to-market. And so far, we are 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 a better execution further in the next quarters.

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Derek J. Lessard, TD Securities Equity Research - Research Analyst [28]

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Okay. And maybe if -- I'll maybe some questions for Pierre. You've only been on -- in -- with the company now for 2 months. Just wondering how you view you learning curve. And maybe just touch on some of the expertise that you're bringing to the table?

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Pierre Gagné, Colabor Group Inc. - VP & CFO [29]

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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've done M&A before on both sides, buying and selling, so that will be helpful to Colabor.

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Derek J. Lessard, TD Securities Equity Research - Research Analyst [30]

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Okay. It seems like there's 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?

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Pierre Gagné, Colabor Group Inc. - VP & CFO [31]

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Well, the reason we've done that is for competitiveness reason. That's why we didn't break it down in the 2 segment of the business. But you had it on a consolidated basis in notes of the financial statement.

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Derek J. Lessard, TD Securities Equity Research - Research Analyst [32]

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

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Pierre Gagné, Colabor Group Inc. - VP & CFO [33]

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Correct. 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 statements has been taken up on a comparative basis. So you're comparing really apple with apple.

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Derek J. Lessard, TD Securities Equity Research - Research Analyst [34]

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Okay. 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?

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Lionel Ettedgui;President & CEO, [35]

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

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Derek J. Lessard, TD Securities Equity Research - Research Analyst [36]

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Yes. So again, maybe just on the time line for that, Lionel?

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Lionel Ettedgui;President & CEO, [37]

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Well, I think that it will be early 2020.

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Operator [38]

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As there are no further questions at this time, I will turn the call back over to the presenters.

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Lionel Ettedgui;President & CEO, [39]

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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.

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Operator [40]

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This concludes today's conference call. You may now disconnect.