Earnings Transcript for COLFF - Q2 Fiscal Year 2020

Operator: Good morning, ladies and gentlemen. Thank you for standing by and welcome to Colabor's Second Quarter 2020 Results Conference Call. At this time all participants are in a listen-only mode. Following the presentation we will conduct a question-and-answer session open to analysts only. Instructions will be provided at that time for you to queue up for questions. [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 the actual results to differ materially from those anticipated. I refer the audience to the forward-looking statement 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 28, 2019, under the heading Risks. I would like to remind everyone that this conference call is being recorded today, July 27, 2020. I would like to now turn the conference over to Louis Frenette, President and CEO. Please go ahead sir.

Louis Frenette: Thank you Joan. Good morning everyone and welcome to Colabor Group 2020 second quarter results conference call. This is Louis Frenette, President and Chief Executive Officer. On Friday afternoon we released our earnings results for the 12 and 24 week period ended June 13, 2020. The press release and disclosure document can be found on our website at www.sedar.com. I'm joined today by Pierre Gagné our Senior Vice President and Chief Financial Officer. The last few months have been unprecedented in recent history and I can't express how proud I am of all our employees. We stood up the challenge and worked tirelessly to help us navigate through this crisis. We entered our second quarter two weeks after the Quebec government declared a state of emergency in the wake of rising COVID-19 cases. The hospitality industry had already been preparing for a virtual shut down of their operations and only restaurants offering takeout and delivery services could remain in operation. We also saw our suppliers starting to experience shortages and many food -- of many food categories and essential goods. As an essential provider of goods and services to the public our mission was and still remained critical. We immediately implemented rigorous health and hygiene practices and social distancing measures, furloughed one third of our staff, relocated -- reallocated resources where possible, and implemented liquidity preservation measures which include applying for the Canadian emergency wage subsidy program and temporarily reducing the remuneration of our Executive Team and Board Member. Thankfully the transformation initiative that we had started deploying during the last two weeks such as the right sizing of our operations, selling non-core assets and various efficiency measures contributed to strengthening our balance sheet as we entered the pandemic. These measures together with a tight control over expenses and working capital during the second quarter, helped us successfully navigate this unprecedented storm. And as a result, during this period, with only two thirds of our staff, we managed to keep our customers well stocked while navigating a constantly changing operational environment. The good news is that we surpassed our own revenue and EBITDA guidance. And as we speak, I've been able to call back half of our furloughed employees. We owe to reintegrate our remaining employees gradually as conditions continue to improve. We also completed the sale of our Ontario broad line distribution activities in the middle of the second quarter, and we are proud to have come to an agreement during these difficult times. This will allow us to concentrate even more on our core activities, further our transformation plan, and improve our ability to raise our overall profitability. I would now like to quickly review our environment and operational performance during the second quarter. As we navigated the confinement period, the restaurants and hospitality industry came to a virtual halt. With the mandatory closure of our in dining operations, only restaurants offering takeout and delivery services were able to remain open, resulting in the aggregate operating capacity in the range of 20% to 25%. Thankfully, what was set apart from other food service distributer is our diversified customer base and wide geographical reach within the province of Quebec. We serve a complete range of customers in what the industry refers as to the food away from home markets. It is physically targeting the whole town restaurants and institutional market. We serve this market either directly through our distribution activities or indirectly by selling to smaller distributor through our wholesale business. This diversification allow us to minimize the effect of the pandemic on our consolidated sales, which were down by 47.2%, and compared favorably to other distributors that primarily exposed to the restaurant industry. During the second quarter our specialized distribution sales of fish, seafood, and meat saw an important volume reduction from the end of a distribution contract and from a lower demand from fine dining establishments from the effect of COVID-19. Anecdotally, the pandemic resulted in a shift towards more affordable cuts. Our broad line distribution activities performed well considering the context from a diversified hotel, restaurant, and institutional customer base and reaching most of the region in Quebec that were less affected by COVID-19. And lastly, our wholesale business fared relatively well during the pandemic, with revenues that were down only by 24% from the contribution of a new customer -- from new customers in the retail and institutional market such as food banks and from a diversified end customer base being served by our distributor clients. Their end customers include smaller retailers, institutions, and small convenience stores. Since June 15th restaurants in Quebec have been allowed to gradually reopen and are now -- we are now helping many of our restaurant customer restart their dining operation and helping them implement the new sanitary guide. As we speak, 90% of our restaurant customers have started ordering again, although this was a very difficult time for many of our customers, particularly independent restaurants. We have yet to witness significant closure of the bad debt. We are in a good position to serve our customers and help them reopen and adapt to this new reality. Our main priority still remains the health and safety of our employees, customers, and the community. We are keeping all safeguards measures in place, we remain focused on managing the effect of the pandemic on our business, and pursuing the transformation of Colabor in this new context. With this Pierre I turn the call over to you for a review of our financial results.

Pierre Gagné: Thank you, Louis and good morning everyone. As Louis said in his opening remarks, because of our improving financial situation entering the quarter, diversified customer base and our team's ability to adapt and innovate we've exceeded our own guidance for the second quarter of 2020. In the second quarter of 2020, consolidated sales from continued activities were down 47.2% to 95.5 million, which was higher than our revenue guidance of $80 million to $90 million. Sales in the distribution segment decreased by 56.4% to 60.4 million. Specialty distribution activities were down by 50.5 million from the end of the distribution contract, which represented 40 million in the equivalent quarter of last year and from lower volume related to the COVID-19 pandemic during the entire quarter. Our broad line distribution sales were down by 27.6 million from lower volume of sales from our restaurant and institutional customers due to the pandemic and from our earlier decision to stop serving unprofitable regions in the fourth quarter of 2019. Sales in the wholesale segment decreased by 24% to $43 million, mainly from the effect of the pandemic and from lower inter segment sales. Adjusted EBITDA from continuing operations reached 7.6 million or 8% of sales, compared with $8.7 million or 4.8% in the second quarter of last year, which was higher than our EBITDA guidance range of $5 million to $6 million. The improvement in margins stems from the Canadian emergency wage subsidy program for $4.4 million, the adoption of IFRS 16, which reduce rent expenses by $2 million, the decision to stop serving less profitable contract, and the efficiency measures we implemented. This was mitigated by the lower volume of sales experienced during the quarter and the favorable reversal of a provision of $400,000 taken in the second quarter of last year. When removing the effect of the adoption of IFRS 16 on our 2020 second quarter EBITDA and adjusting for the positive effect of $400,000 provision reversal in the second quarter of 2019, our adjusted EBITDA as a percentage of sales stands at 5.9%, compared with 4.6% last year. Net earnings from continuing operation was 1.6 million or $0.02 a share, down from net earnings of $2.9 million or $0.03 a share in the corresponding quarter of 2019. This results from a lower adjusted EBITDA, higher depreciation charges and expenses not related to current operation. This was mitigated by lower financing charges and income taxes. Net loss was 2.9 million or $0.02 a share, compared to a net earnings of 9 million or $0.09 a share in Q2 2019. The reduction in the contributable -- sorry, the reduction is attributable in large part to the increase of 10.6 million and the net loss attributable to discontinued operation and from the items just explained. Cash flow from operating activities amounted to $3.2 million in Q2 2020, up from $1.2 million in Q2 of 2019. This increase is mainly due to a lower use of our working capital. On June 1, 2020, we announced the extension of the terms of our credit facility and subordinated debt. In our view, this is an important reminder that we have the support of our key financial partners and provide us with additional flexibility required in case of additional issues arising from the pandemic and to support any potential future investment projects. As of June 13, 2020 our net debt including convertible debentures and bank indebtedness, amounted to $62.9 million, compared to $68.2 million at the end of fiscal 2019. Higher cash flows since the start of the year were used to reimburse a portion of the debt. Our financial ratio -- leverage ratio now stands at 2.3 times versus 2.5 times in fiscal 2019. By excluding the effect of IFRS 16, our leverage ratio stands at 2.6 times, which includes the convertible debenture. As these numbers demonstrate, Colabor remains in a good financial position. At the end of the second quarter of 2020 we had $15 million outstanding on our subordinated debt, which is now due on February 15, 2022, which was extended by 10 months. Our bank facility, which was extended by 12 rounds, is now due in October 2021 remained unused and on which we still have 34.1 million of available borrowing capacity. In addition, the Federal Government Canadian Emergency Wage Subsidy was extended until December 2020 and we should remain eligible for this subsidy, thereby offsetting part of the expected decrease in sales and profitability year-over-year. Although the pandemic will continue to have an impact on our sales and short-term adjusted EBITDA, we do not expect this situation to have a material impact on our available liquidity. I would now like to turn the call over to our operator, Joan, for the Q&A period, Joan.

Operator: [Operator Instructions]. Your first question comes from the line of Derek Lessard from TD Securities. Your line is now open.

Derek Lessard: Good morning, everyone. And I guess I'd say congratulations on navigating through a pretty tough period here. I guess the number one question is in terms of the guidance you gave in Q2 could you talk about what I guess drove the better results on both the sales side and EBITDA? And I guess more specifically on EBITDA, was it due more to a greater than expected benefit from the CW or cost control?

Pierre Gagné: Look, Derek very good question. So, what happened is during the quarter sequentially, so when you take the first period of the second quarter, the second and third, we saw a better improvement as a result of takeout becoming more prominent from different restaurants or more restaurants were starting to reopen with takeout, which we were not expecting originally. And so the additional volume has helped us improve if you want to the margins, the gross margin, and by constraining the costs it does trickle down to our -- so essentially, if I'm trying to broad strokes of what happened during the quarter, this is what happened. It is better and better sales sequentially, period over period which trickled down to our EBITDA lying having the costs relatively fixed.

Derek Lessard: Okay, that's very helpful. Are you providing any type of guidance for Q3?

Pierre Gagné: Well, good question. So essentially, look we were -- for all the investors when we came in into our second quarter, everybody was navigating most of us anyway, in the dark. We were very concerned and we wanted to reassure the financial community at the time that look, although it's a difficult time, we could well navigate and we'll be if you want on the EBITDA line. We will be positive, which is more than positive, it's a very good quarter. Now, knowing that sequentially now with the reopening of restaurants, our view is that sequentially again we're hoping to see an improvement in sales. Although I cannot comment on Q3 but that's what you should expect to see sequentially months after months with a lower wage subsidies because now we're -- we will potentially be below the 30% threshold the government has put in place. So now there is a new calculation, so we're in the process of calculating what will be the impact of that. But sequentially, we should be more -- if you want to have more sales than we have in the quarter before.

Derek Lessard: Okay, yeah, that's helpful. I guess excluding COVID maybe could you talk about what you're seeing operationally both in wholesale where you exited those unprofitable contracts at the end of the year and as well in Quebec broad line distribution?

Louis Frenette: Yes, thanks Derek. The -- we cleaned out the contracts that were unprofitable in the quarter. As you know, we closed the summit sale. So all of that is improving the margin at the bottom line and we gained some new customers there during this pandemic, helping, managing the growth and their profitability. So the mix is favorable. Good thing that we were not only in the restaurants business as some of our distributors that lost sales up to 90% during their confinement. So our position are mixed what was done personally to work on productivity efficiencies as being helping quite a bit.

Derek Lessard: Louis, can you remind me again and I think you might have mentioned it in your prepared remarks who these new customers or what segments of the industry they're in?

Louis Frenette: Yeah, I can't name the customers one by one and for confidentiality also. But we made significant gains on the institutional side. We won some contracts to serve the prison. I'm not allowed to name also the food banks that we gained as new customers. Also, lots of retailers, as I said, that the Q1 report the last time that we were starting to gain some retailers to help them fill in their orders as suppliers was a challenge with the suppliers. And we had some inventory that they didn't have so that was important and we gained. Now, while most of the -- some of the restaurants were shut down, we regain few new customers for when we reopen and we're seeing that in our results now.

Derek Lessard: Okay, Louis, I remember you telling us that the retailers or I guess the growth from the retailers, or the volumes from the retailers would likely be more temporary. Is it something that you're seeing that, part of that can actually be more permanent going forward?

Louis Frenette: Well, the good news is that we thought it would be just for that period and some of the retailers said that they want to continue with us. We called back, we have two roles, be the fillers when they have issues with their suppliers, so we can help on that. But also be open to what we call their back door. So most of the stores are allowed to order let’s say around 10% of their volume through back door, which means not through their own wholesalers. So we capitalize on that and we have some retailers that were very appreciative about the service levels we were able to give and in a timely manner during these difficult times for operations and they ask us to continue to service them on a regular basis. Of course we will. The filler, the filling part was quite big at beginning, it's less and less, but we keep that orders from them, which is incremental to what we used to have as a business.

Derek Lessard: Okay, and maybe just again, I guess still on the COVID, I was wondering if you could maybe talk about the current macro environment that you're seeing, how much of the industry remains shut, and I guess what kind of business are you doing or able to do, given that social distancing measures are still in place?

Louis Frenette: Yeah, so comparing our -- because where we have -- as I said, we have a diversified portfolio with the hospitals and institutional retail. But if we focus only on the restaurant business that we're managing directly to date, only 10% of our restaurants did not open. So the way it works, every year there is about without surprises, there are restaurants closing all over Canada, in the U.S. But here there is above thousand stores that closed and reopened under another name. So let's say that the orders we have after confinement, as I said, only 10% of our restaurants we had did not order. So that's a good news. The thing we should look for is for more volume per orders. So the good news is that most of them are reopened, but they have smaller menus. With the distanciation and the measures that are in place in dining is it's about 50% less people can be in the restaurant. So they continue. The good news is that they're continuing for -- to sell for takeout and ordering. So that's better than we thought. And if you remember, we didn't know if it would be 20%, 30%. We're reading all sorts of things. And also note that our restaurant business is more in Eastern Quebec as we don't do much on the Island of Montreal and the rest of Quebec is quite active, such I guess busy as we speak in those regions -- that we are very strong.

Derek Lessard: Okay, and I think a few years back there was and that's a good point, I guess but a few years back there was a move to become, I guess for lack of a better word, stronger in the Montreal region. Is that something you're still attempting to attack or is it more of a longer-term strategy, like what's COVID once we move past the COVID impact?

Louis Frenette: So yes, that's something that we want to grow at one point in time, but today we have distributors that covers well Montreal. And the distributors that we cover, that we sell to, and we made decision to focus on our strengths and gain market share where we are. Okay, it is especially during COVID that it's not -- that we didn't want to open new markets as we had to focus on our operations with the third of this test not working. And there are different contexts, conditions. And we decided to focus on that. So yes, that's a possibility. And for now, we were really focused on where we're good.

Derek Lessard: Okay, and I think you mentioned just actually just previously, you were looking for the volume per customer to pick up. Have you seen any indication of that beginning to happen?

Louis Frenette: Yes, of course. And although we don't have a crystal ball, what we can tell you is that the volume per order has increased since the confinement but not to the level it was before. So, like I said, we were surprised with -- that for many restaurants that we are doing deliveries or takeout are good. They were with their volumes with reduced staff and everything. And we're very pleased with that. But with the in dining opening so of course the size of the orders are increasing, but not to the level it will be worth.

Derek Lessard: Right, okay, okay. And maybe one last one for me. I was wondering if you -- what the competitive side of the business looks like as the industry begins to open up. Has it gotten more competitive as some of your competitors might have lost volumes and they're looking to rebuild those or get those volumes back as you are just, maybe touch on what the competition looks like right now?

Louis Frenette: Well, the whole industry was affected. And as I mentioned earlier, our volumes dropped. We were 47.2% down. But the industry is at minus 75. So in general, for the ones that are focused on restaurants and mainly restaurants and the big competitors, so it varies between minus 65 and 85 depending on their mix. Ours is at 47%. And we focus on gaining, acquiring new customers during that period, so our sales and development team, knock at doors or virtually knock at restaurants to gain new business. And also into institutional and houses for the older people. And the many, many activities were new things or tried during this period by our competitors and by us. But overall, the answer is no. People are trying to catch back and do as much as they can. Favorably we gain some customers.

Derek Lessard: So I guess the question is, if maybe if I could drill down just a bit further into that, there's been no moves from some of the bigger competitors who are more focused on the restaurants into the smaller, I guess, the smaller markets or the institute -- like some of the I guess industries where you've been more successful over the last quarter or so?

Louis Frenette: Exactly. So imagine they -- a distributor that is down 90%. They're in a survival mode. They had to shut down almost all of their operations and they just wanted to keep trying selling a bit but no big moves in the market. No.

Derek Lessard: Okay, alright. Gentlemen, that's it for me. Thanks for taking my questions.

Louis Frenette: Thank you, Derek.

Operator: Your next question comes from the line of Brandon Moyse from Stornoway. Your line is now open. Brandon Moyse from Stornoway, your line is now open.

Brandon Moyse: Sorry. Hi, Louis. Hi, Pierre.

Louis Frenette: Hi.

Brandon Moyse: I was surprised, especially given the sales EBITDA, that you used 3 million of cash in the quarter. It looked like it was all from discontinued operations. So can you help me bridge the 7.7 million of sale proceeds you got from the sale to Flanagan, so the 3.4 million of cash used in discontinued ops, so what does that 11 million?

Pierre Gagné: And so what you have is severances. You have the termination cost of certain leases of the equipment plus you had the operations during Q1 period of mid-March till mid-May. So two months where you've had negative EBITDA impact for the quarter and some working capital situation that had to take care. So that's what happened in a nutshell.

Brandon Moyse: Right. So, I mean, the losses must've been pretty large because my look at kind of how exiting the Cara Summit, you know, the Cara contract in the Summit business as a whole was presented. You know, it kind of looked like it'd be a net source of cash of at least 10 million, because you said Cara would be paid for by the working capital releases and then you'd be selling Summit for $10 million, when it looks like now it's basically zero net proceeds for that whole business, if I'm not wrong?

Pierre Gagné: Well, if you look after six months, you're looking at the quarter but if you look after six months, it's positive, you know.

Brandon Moyse: Yeah, but don't you still have 4.8 million in payables that you haven't paid off those because of restructuring and exit costs?

Pierre Gagné: Yeah, we still have some costs to be paid. But at the end of the day, what we've said to the financial community last fall is the fact that the closure of the Ontario operations would at the end of the day the cash we receive and the closure of that would essentially offset one and the other. We still have some money to be received, by the way, from Flanagan in a year’s time based on the contracts. So there's still money to be had.

Brandon Moyse: That you're talking of $1.6 million earn out or is there more?

Pierre Gagné: Yeah. The earn out, the earn out is that we were able to return to give them a lot of our brand new equipment, which for us there was a customer avoidance in terms of contract terminations. So but at the end of the day if we could -- at the end of the day if we could -- if it's not -- if the plan is to close it and with the working capital and the amounts left, we should be close to a breakeven or a little bit better in terms of cash, if you want the cash in and out. So we should be a little bit better. That's the plan. There's still adjustments to be made, but that's hard to do.

Brandon Moyse: And just to close that off, is there anything -- is there anything you're still carrying that Flanagan didn't take related to that business that call it owner?

Pierre Gagné: Yeah, so good question. So we have two leases. We have one in Mississauga and one in London and we are in the process of subleasing that. So I don't want to -- there's some very good prospects who are looking at these facilities. The London facility right now is subleased at 60% for a short period of time. But there may be a party that could be interested for a longer period of time. And in Mississauga, there's a party currently very interested in the facility. So if everything goes according to the plan we should get out of these leases.

Brandon Moyse: And what's the cost of those leases today as it is under the status quo?

Pierre Gagné: It's about roughly a million each year.

Brandon Moyse: Okay, thank you.

Operator: There are no further questions at this time, I will now turn the call back over to Louis Frenette.

Louis Frenette: Thank you, Joan and thanks Derek and Brandon for your questions. I am very happy with our performance this quarter and our ability to efficiently manage both our operations and financial situation. We achieved better than expected results, beating our own revenue and EBITDA guidance. We successfully negotiated the extension of our credit facility and subordinated debt, demonstrating the support of our key financial partners. We concluded the sales of our Summit division, which for years was a drag on our earnings. We managed to increase our cash flow from operations, pay down debt, and further strengthen our balance sheet. We are cautiously optimistic that we are coming out from the worst part of the crisis. Of course, we cannot predict the future effect of the pandemic and the hospitality industry. Additional measures required by the government to contain any further outbreak or the pandemic’s effect on the economy in general. But I believe that the crisis demonstrated our resiliency, ability to adapt with operational excellence. Our priority remains the safety and health of our employees, customers, and community. With strict safety measures in place our old team was able to stay healthy. As for our remaining employees that are still furloughed we are working hard to be in a position to call back as conditions improve. In the long-term we remain committed to pursuing the transformation of Colabor by focusing on our broad line distribution activities in Quebec, delivering efficiencies, and improving our employee engagement level. We are grateful to be able to count on dedication and hard work of our employees and the support from the labor unions, our financial partners, shareholders, our customers, and our suppliers. Thank you. This concludes the…

Operator: Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.