Earnings Transcript for COLFF - Q3 Fiscal Year 2021

Operator: Good morning, ladies and gentlemen. And welcome to Colabor's Third Quarter 2021 Results Conference 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 the 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 statement as detailed in the presentation supporting this conference call and available on the company's website in the Investors' section under events and presentation at www.colabor.com. Furthermore, risks are discussed throughout the most recent MD&A under the heading “Risks”. I would like to turn the conference over to Louis Frenette, President and CEO of Colabor Group. Please go ahead, sir.

Louis Frenette: Thank you, Sylvie. Good morning, everyone and welcome to Colabor Group 2021 third quarter results conference call. This is Louis Frenette, President and Chief Executive Officer. Last evening we released our earnings results for the 12th and 36-week period ended September 4, 2021. The press release and disclosure documents can be found on our website and on sedar.com. Joining me today on this call is Pierre Blanchette, our Chief Financial Officer who following my initial remarks will provide an overview of our financial results. During the third quarter consolidated revenues were up 8.8% year-over-year from reopening of on-premise dining activities, our channel diversification and the initial implementation of our growth plan. This represents our second consecutive quarter of growth after the execution of our transformation plan and lapping of difficult COVID comparable. Consolidated adjusted EBITDA margin stood at 5.9% down from the equivalent quarter last year. Lower subsidy expense related to our spring buying show that happened in the third quarter versus the second quarter of this year. Additional labor expense explained most of this variance, as many sector are experiencing the pandemic as worsened the effect of an already constrained labor force in the whole supply chain of our industry. And this has been particularly the case during the summer season. We believe that the combination of the gradual easing of lockdown measures and the ongoing labor scarcity has made it difficult to deliver more growth in the third quarter. Now looking at our balance sheet, we have maintained a leverage ratio of 2.1 times and therefore remain in a comfortable situation. The inflationary pressure and labor shortage we are experiencing are slowing down our growth plan and putting pressure on our margins. However, the successful transformation of our operations over the past two years, the renewal of the management team and our focused efforts on our value-added activities will allow us to reduce the impact. With the refinancing of our balance sheet at the end of the first quarter that resumption of the restaurant business and growth opportunity both organically and through acquisition, we are well positioned to continue creating value for all of our stakeholders. Looking at our strategic priorities remain the same. Grow our distribution activities in the province of Quebec, further improve our operations and raise our employee engagement. Before turning the call over to Pierre for review of our financial results, I will quickly review our initial progress against these three pillars. There are one and two grow our distribution activities in Quebec and further improve our operations. As you know during the pandemic, we dedicated our efforts to diversify our channel gain, new institutional and retail clients. In recent quarters with the imminent recovery of the restaurant industry, we have now turned our intention to profitably grow our distribution activities in Quebec. As stated before, since the first quarter of 2021, we have prudently invested in various growth initiatives that should start paying off in 2022. These initiatives include hiring sales professional to focus on our new strategic markets, implementing cross selling initiatives to create synergies between our specialty offering and distribution network, aligning our offering with changes in consumer preference. And on September 9, we launched our redesigned private label line. I am encouraged by the preliminary progress we are seeing from each of these action item that aims to set the table for a stronger 2022 by improving our value added offering and competitive positioning. As for our third pillar, raising employee engagement, the pandemic as brought this issue front and center, since joining [indiscernible] in November of 2019, have paid significant attention to our employer brand and continually strive to improve our employee experience. This effect we have recently concluded an agreement in principle to renew and improve the collective agreement with our unionized employees at our largest distribution center. This five-year agreement was approved by 99% of the employees. It better aligns our compensation practices with the industry, improve our competitiveness as an employer and will help us attract and retain the best employees. As we are emerging from the worst of the crisis and preparing for the recovery of the restaurants and hospitality industry, our motivated and engaged workforce is key for our next phase of growth. Also, yesterday we announced the appointment of Mr. Jean Gattuso as a new board member. Mr. Gattuso was still recently President and COO at Lassonde, where he started to work in 1987. His extensive food industry knowledge, management experience and business successes will greatly benefit Colabor. With this, Pierre, I turn the call over to you for a review of our financial results.

Pierre Blanchette: Thank you, Louis, and good morning, everyone. I'm pleased to be here today to discuss our key financial results for the third quarter of 2021. Third quarter consolidated sales from continuing operations were up 8.8% to 131.6 million. Sales in the distribution segment increased by 11.7% to 90.8 million, mainly from the gradual reopening of restaurants since the end of May 2021. Sales in the wholesale segment increased by 2.3% to 52 million, again, primarily from the easing of lockdown measures affecting the restaurant industry from the growth of certain customer accounts and small customer gains, mitigated by the partial loss of volume from a single customer. Intercompany relations were in line with last year. Consolidated adjusted EBITDA from continuing operation reached 7.8 million, or 5.9% of sales, compared to 10.1 million or 8.4% in the third quarter of last year. Reduction of 0.9 million in subsidies received, a reduction of revenue of 0.5 million related to our spring buying show, which last year occurred in the second quarter and additional labor costs in the current context of labor shortage, combined with retroactive adjustments for the renewal of our collective agreement, as well as investment for the repositioning of our private brand to expand our territory. Net earnings from continuing operations were 2.3 million or $0.02 per share down by 33.5% from 3.4 million or $0.03 per share during last year's third quarter. Net earnings stood at 2 million or $0.02 per share up from 1.8 million or $0.02 per share last year, resulting primarily from a lower loss associated with abandoned activities, which last year generated a loss of 1.7 million, compared to a smaller loss of 0.3 million in the third quarter of this year. Cash flow from operating activities generated 7.4 million in the third quarter of 2021 compared to 16.4 million in the equivalent quarter of last year. Higher utilization of working capital from the timing of inventory purchase, and payment of suppliers, and higher collection of receivables in 2020. As of September 4, 2021, our net debt amounted to 53.2 million, compared to 52.1 million at the end of fiscal 2020 and down from 57.2 million at the end of the second quarter of 2021. Our financial leverage ratios stands at 2.1 times versus 1.8 times at the end of fiscal 2020. And two times at the end of the second quarter of 2021 resulting from a higher use of the lending facility to fund the working capital requirements. The pandemic and associated labor shortage and supply chain disruptions will continue to have somewhat of an impact on our results. We remain dedicated to maintaining a prudent approach to managing our infrastructure and protecting our financial situation. I would now like to turn the call over to the operator for the Q&A period.

Operator: Thank you, Mr. Blanchette. Ladies and gentlemen, we will now take questions from analysts. [Operator Instructions] And the first question will be from Kyle McPhee at Cormark Securities.

Kyle McPhee: Hi, everyone. Thanks for the time this morning. Starting on the revenue line, I'm hoping for some color on the individual moving pieces feeding that revenue growth you delivered which was above my expectations, which is good to see. So let's start with what you call them the press release, the first milestones of the strategic plan. Can you offer some color on how much growth came from those strategic initiatives, which I assume is the distribution sales in new regions and the cross selling?

Louis Frenette: Hi, Kyle. Thanks for your question. Well, there's three items that covers the growth for this quarter and the first one is the wholesale and distribution business went up and in proportion that's the biggest one, because of the restaurants reopening in Q3 of this year. So we had more days open. So that helped quite a bit. Although in terms of capacity, we're not back to pre-COVID levels yet because of sanitary measures and labor scarcity and so we're still running at reduced capacity. However, and the good news just announced yesterday, the restaurants in Quebec and bars will all be reopened in November. So this is a great news. On the wholesale business. Well, we got, as I mentioned on the previous calls, we got more smaller distributors that join Colabor in Q2. And it mitigates some volumes that were lost with a larger distributor. The second impact on this growth in sales is coming from the price increases. So when there's inflation, our suppliers sells their products to a higher price. While we sell it, we pass it through and so that's helping. And the third part is to lesser extent is the contribution of our strategic plan. And this is, okay, I can put some color around that that was the first part of your question. And since we initiate the implementation of strategic plan, our revenues contribution remained small. But we are very satisfied with the evolution, these initiatives are helping us improve our customer and product mix. So we put a new sales team, we added the sales rep in Q1. And the western part of Quebec is doing well. Also, we relaunched our private label brand. So it's a bit of a facelift of the brand, and the sales improving to our internal targets and we are happy with this.

Kyle McPhee: Okay. Just to unpack some of that stuff a bit more. So the pricing game, are you able to quantify how much your revenue growth with pricing [indiscernible]?

Louis Frenette: Well, the volume was the biggest influence because of the reopening of -- we have more way of selling to restaurants. So the answer is mainly coming from that. And the pricing is smaller portion in this quarter.

Kyle McPhee: Got it. Okay. So on the COVID recovery, the restaurant reopening driver, the biggest driver of your growth is that continuing into Q4 or has it kind of flatlined, but I'm wondering how much drag you still have versus pre-COVID levels, I think it was kind of 10%, 15% drag last quarter, wondering what it is this quarter. And what you're seeing into Q4?

Louis Frenette: We're seeing Q4 is going to be better than last year, because I just said the full reopening of the restaurant, it's going to be helpful. And last year, as you remember, there was it was only half of the restaurants open especially they were doing takeout only some restaurants or add capacity. So now it's going to be to full capacity. So that's encouraging. But it will not be to the pre-COVID level yet, because we still have some restaurants that are close and they did not reopen and the issue take downtown Montreal, we expect that the workers and the same thing in Quebec City and the big centers that the workers won't get back in the offices till January of next year. So we won't be at pre-COVID level yet.

Kyle McPhee: Got it. Okay. And can you offer any color on kind of the difference -- those restaurants remain closed? I mean, how does that picture look first in Montreal versus the eastern parts of the province where you're more exposed? Is it kind of the situation?

Louis Frenette: Montreal is more effective than [indiscernible] to a ballpark number. But we have some internal data from our official key distributions about 25% of the restaurants that did not reopen. And the rest of the province where we're stronger. It's about between 10% and 15% of the restaurants that reopen. But this is ballpark internal data. We don't have data that covers 100% of the market.

Kyle McPhee: Got it. Okay, that's helpful. Moving on to margin performance, your gross margin percentage remains stronger in line with what you delivered in recent quarters. And so it seems like you're handling food and food cost inflation very well. But I just want to dig in a bit on what's going on your gross margin line. So can you confirm if you are able to pass on all food inflation during the quarter or is there a bit of a timing lag with that process meaning your more normalized gross margins are actually even higher than what we saw this quarter.

Pierre Blanchette: Hi, Kyle. It’s Pierre. Good morning. Thank you for the question. I’d say the general way is we are able to pass it through. But there is a small timing lag.

Kyle McPhee: Yes, I got it.

Pierre Blanchette: Okay, great. Okay, sorry. Sorry, because I thought I was on mute when I was talking. So yes, that's the answer to your question there.

Kyle McPhee: Okay. Is it fair to say that, all else equal with your business mix that your margin would be even higher --a little bit higher next quarter went when all the pricing is passed through? Your gross margins are a little bit understated, because of this timing like?

Pierre Blanchette: No. No, I wouldn't say it's understated, I would say the fast chew is kind of -- actually it’s a small lag, but I don't think it will -- the Q4 would improve on that.

Kyle McPhee: Okay. So it's not an overly material gross margin drag, it showed up from the timing like?

Pierre Blanchette: No.

Kyle McPhee: Got it. On labor costs, inflation, you guys call that out in your press release as a headwind, but it seems like a very minor impact in the numbers from what I can see. So I'm hoping you can confirm that that was the case, it's very minor. And maybe comment on whether or not the issue is getting worse or better into Q4?

Louis Frenette: Hi, Kyle. It’s Louis. The labor inflation is not short term pass through, like the food cost inflation, okay? So when our suppliers sell with higher price, we pass it through with -- what happened in the last quarter, which were living inflation, the labor costs, the labor shortage, the we added sales reps and marketers. And the fuel cost is increasing quite a bit. So it's not a pass through, a direct pass through like we add, like we do with the pricing from our suppliers. So the idea is to implement that, to pass it in, and other forms such as pricing. So it's not happening, there's a lag there, so it's not happening instantly. So we can do it through that or through internal productivity. So there's a lot to do. And the important is to manage our price structure accordingly and to see to pass the inflation back to our customers, but there's a limit probably that can be attained. There's so much you can pay for it, like just internally for a club sandwich. And the point is that that catch up is not as easy to do. Also in the fourth quarter and the fourth quarter, we have a great news that we signed a five year agreements with workers of the largest distribution center, but there was a full week of strike. So that affected the -- we have to catch up with the salary increases and everything and we are working on that as we speak. So we estimate that most of the additional HR costs are resulting from the current context of the labor shortage, such as overtime. And the bit of that collective agreement, there's a retroactive adjustment associated with the collective agreement that was -- that we see in the Q3. So and will continue to do the investment in repositioning our private label and beefing up our sales force in Western Quebec.

Kyle McPhee: Got it. Okay. Can you quantify that retroactive adjustment in the Q3 numbers? Can you give me an idea of the -- how big it was?

Louis Frenette: No.

Kyle McPhee: Okay. I tried. And moving on to private label. You pointed out you relaunched your private label offering during the quarter so I'm hoping you can give some color on what the relaunch entail. What exactly did you do and what are the ultimate goals here for private label and how it could impact your margins over time?

Louis Frenette: Yes. So the background behind our private label is that this brand called the menu brand needed a bit of attention and affection. So nothing much was done over the last many years. And we made the decision that we would prioritize this to have a larger portion of our sales coming from our private brand is very important. So what it entails that we added brand managers, the brand director, brand manager. And as soon as they started the work at improving the image of the brand. So we're changing the packaging, a new design. So that's what I call face lift is more moderate and that was tested with the chefs in the restaurants and they prefer that, easier to understand what are the products and overall, it's all good in terms of the cosmetic and the content or launching a bit of new products. And more importantly is that our sales force is excited about it. So they have something to say now about private label that we're improving. And that's a great, these are great products. And so far we see the results are in line, even during the COVID period are in line with what we projected. So we're very, very happy with the development of our -- the relaunch of the menu brand. That it was millions of dollars of course of marketing over to support that over the people working on it.

Kyle McPhee: Got it. Were there kind of any one-time costs associated with this relaunch in Q3? And if so, can you quantify that?

Louis Frenette: Well, I won't quantify it. But yes, when you're doing repackaging and a bit of video support material and the -- it's not a B2C business we're in. So we're not talking millions of dollars that we have to put on air on TV. So it's B2C marketing. It's not as expensive, but for us it was the investment made, we're 100% more than the years before.

Kyle McPhee: Got it. Okay, last question for me. Acquisitions, your press release called delays with your growth programs because of the food inflation and labor supply. So I'm wondering if you're referring to your upcoming acquisitive growth? Or are you referring to delays with your organic growth or both?

Pierre Blanchette: Hi, Kyle. It’s Pierre. Again, thanks for the question. It's more around the organic plan. The reason is that, as we as everybody knows, there's labor shortage everywhere. So really, we're in a situation where it's not a demand issue, it's a supply issue. So we have demand. There's the men out there, we just have a hard time getting enough labor, to supply all of that -- to support all of that demand. It's an industry wide situation, I mean, it goes from manufacturers to restaurant owners, who are sometimes not even able to open their doors as much as they have demand because they can’t supply the people to support that demand. So our situation is more like that. From an M&A point of view, we are active and if we find something attractive at the right price. We're open for business, but as it's not from that front. It's more from the organic front.

Kyle McPhee: Got it. Okay. That's it for me. I appreciate all the color and overall, it's like good numbers. Thanks a lot guys.

Operator: And at this time, gentlemen, we have no other questions, please proceed.

Louis Frenette: Well, thank you Sylvie and Kyle, thanks file for your questions. During the pandemic, we demonstrated the resiliency of our business model and our ability to adapt and even strengthen our business model while reducing debt. Our second and third quarter results demonstrated that we're back on a growth trajectory. The summer season was a challenge as we face the end of the lockdown measures and labor shortage. As we mentioned, looking at within improve offering, stronger operations and potential organic and non-organic growth opportunities, we are well positioned to benefit from the recovery of the restaurant and hospitality industry and into our new phase of profitable growth. Once again, I would like to reiterate my gratitude to our employees, who on a daily basis continue to impress, and rise up to the challenge brought on by the pandemic and labor shortage, but also who are helping us improve our overall customer experience and operations. This concludes our call for the third quarter of 2021. Thank you for joining us and stay safe and healthy. Thank you.

Operator: Thank you, Mr. Frenette. Ladies and gentlemen, this does indeed conclude your conference call for today. Once again, thank you for attending. And at this time, we do ask you to please disconnect your lines.