Earnings Transcript for COLFF - Q4 Fiscal Year 2019

Operator: Good morning, ladies and gentlemen. Thank you for standing by. Welcome to Colabor’s Fourth Quarter and Fiscal Year 2019 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. And 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 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 16th 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, February 27, 2020. I will turn the conference over to Pierre Gagné, Senior Vice President and CFO. Please go ahead.

Pierre Gagné: Thank you very much. Good morning, everyone. Last night, we released our earnings press release which can be found, along with our annual financial statements and MD&A, on our website at www.sedar.com. I'm joined today with Louis Frenette, who was appointed the President and Chief Executive Officer of Colabor, effective November 23, 2019. Louis has an impressive track record in the food and consumer products industry. He was most recently President and CEO of Parmalat Canada, born and raised in North America and then in Canada. I will now turn the call over to Louis for his introductory comments and review of operational results. Louis?

Louis Frenette: Thank you, Pierre. [Foreign Language] And good morning, everyone. I'm pleased to be here with you today to review the key highlights of fiscal 2019, discuss our latest operational results and our recent progress with the Summit Foods division in Ontario. Since joining the company at the end of November, I had the chance to sit down with our teams at all major locations. I had very constructive meetings with our major customers, distributors and suppliers here in Quebec and in Ontario. Throughout these initial meetings, I found that Colabor's brand is strong in Quebec and that we enjoy long-lasting relationship with most of our customers and suppliers. And although, we are operating in a competitive industry, we have a strong foundation on which to build and the opportunities for us to grow in Quebec. To this effect, we just made some simple structural changes to our sales team to facilitate cross-selling and grow our customers' share of wallet, particularly in our Broadline Distribution business in Quebec. Since I come from the supplier side of the business, many years, I can also see many quick actionable items that we can implement to continue optimizing our activities and offerings while building constructive and mutually beneficial relationship with our suppliers. For instance, we recently started working on improving our category management, which will lead to a lower number of SKUs and improve inventory management. A lot of work still remains to be done to further our transformation and raise profitability. We are dedicated to make this happen and build shareholder value. We are currently developing a more detailed action plan that we'll be presenting at our upcoming shareholder meeting, which is scheduled for April 30. In 2019, Colabor successfully implemented various initiatives that drove an improvement of 17% of our operating profitability and reduced our level of debt. These measures include the implementation of a $2.9 million rationalization plan, which started demonstrating results in early 2019. The ceasing of nonprofitable activity – or activities, including the early termination of Recipe Unlimited supply agreement in Ontario; the selling of Viandes Decariea, an non-core asset, deploying various optimization measures and refocusing the company effort on our core Broadline Distribution activities in Quebec, where we have a clear competitive advantage. In the fourth quarter of 2019 and into the first quarter of 2020, our management team continued to work tirelessly to complete the optimization of our business in Ontario. On January 8, we announced that we were consolidating our distribution activities in Ontario into our Mississauga distribution center, resulting in the closing of the Ottawa and London sites. The transition is progressing well, and we retain our key customer relationship. There is still some work to be done, but we are on track on rightsizing this business. On another note, on February 23, the option to acquire Dube Loiselle expired. This option was originally acquired in 2016, along with the recapitalization transaction. The company decided not to exercise the option under the terms and conditions set forth in the original agreement. We remain dedicated to strategically grow in the Broadline Distribution market in Quebec and continue looking at all opportunities to profitably grow our offering and reach. We believe that this is the best path forward to building lasting shareholder value. I would like now to turn the call back over to Pierre for a review of the financial results of the last quarter and the fiscal year.

Pierre Gagné: Thank you, Louis. And now for a review of our financial results for the 16 and 52-week periods ended December 28, 2019. Our results for the fourth quarter 2019 have progressed as planned from the continued implementation of Colabor's transformation plan. Consolidated sales were down 6.9% to $312 million. Sales in the Distribution segment decreased by 6.4%. The results from a $6.1 million loss of volume in Ontario and the decrease in the Broadline Distribution sales in Quebec, mainly related to the decision to cease serving some nonprofitable regions in Quebec and the Maritimes and other nonprofitable contracts. This was mitigated by an increase in volume from other clients. Sales in the wholesale segment decreased by 9.1%, mainly from lower intersegment sales, the nonrenewal of unprofitable agreements and by the timing of orders. Adjusted EBITDA was stable at $5.4 million. As a percentage of sales, adjusted EBITDA represented 1.7% of sales for the fourth quarter against 1.6% last year. So it's a small improvement. This improvement stemmed from the deployment of the operational optimization measures and implementation of the rationalization plan, as explained by Louis. Net earnings from continuing operations stood at $600,000 against a loss last year of $1.9 million for the fourth quarter. This improvement is from lower amortization and depreciation expense, an improvement of $1.7 million in cost not related to current operation and lower financial expenses. For fiscal 2019, consolidated sales were down 3.3% to $1.060 billion. The sales in the Distribution segment decreased by 3.3%. And this is primarily attributable to lower sales volume in Ontario in an amount of $26.9 million, of which $13.2 million is from the loss of the Recipe supply agreement as well as other customers. A decrease in the Broadline Distribution sales in Quebec are mainly related to the decision to cease serving nonprofitable regions and of other nonprofitable contract agreements. This was mitigated by an increase in specialty distribution sales, mainly from a retailer-led promotion. Sales in the wholesale segment decreased by 5.3%. This reduction is from a decrease of $5.4 million in intersegment sales, and – as well as the nonrenewal of nonprofitable contracts and some timing of orders. Adjusted EBITDA, as Louis mentioned, was up by 17%, reaching $90 million for the year. And on a percentage – as a percentage of sales, adjusted EBITDA represented 1.8% in 2019 against 1.5% in 2018. This improvement stems from the deployment of the operational optimization measures and implementation of the rationalization plan throughout 2019. Net earnings from continuing operations reached $700,000 or $0.01 per share compared to a loss of $4.9 million or a loss of $0.05 per share in fiscal 2018. This improvement is from lower amortization and depreciation expenses, lower impairment of $2.7 million and decreased costs not related to current operation for $300,000. Now turning our attention to free cash flow. Debt leverage – debt level, sorry and leverage. Cash flow from operating activities amounted to $22 million in fiscal 2019, up from $14 million in 2018. This increase is mainly due to a lower use of our working capital, lower financial expense and a higher adjusted EBITDA. On December 28, 2019 – sorry, the company's net debt, including convertible debentures and bank indebtedness, amounted to $72 million compared to $102 million at the same period a year before. The amount received of nearly $80 million coming from the sales of the assets of the Viandes Decarie division as well as higher cash flows from current operations allowed the $10 million on repayment of the subordinated debt and a reduction of $32 million on the credit facility. Our financial leverage ratio now stands at 3.8x, which is down sequentially from the third quarter of 2019 when the ratio stood at 4.3x and down significantly from the end of the fiscal 2018 when leverage stood at 6.3x. If we exclude the convertible debentures, this ratio would stand at 1.2x versus 3.5x last year. Now we'll turn the call over to the operator for the question-and-answer period.

Operator: Thank you. [Operator Instructions] Your first question comes from the line of Derek Lessard with TD Securities. Please go ahead.

Derek Lessard: Yes, good morning and nice talking to you, Louis. Louis, I know it's early into your tenure. Just wondering where you are in terms of your ramp-up and learning curve?

Louis Frenette: Thanks, Derek and thanks for the question. I've been here for 90 days. I had a chance to see almost all of our employees here in Quebec and Ontario. I haven't finished yet, but most of our customers, also distributors, saw some restaurants and some of our retail customers, and I'm impressed with the reception from our customers. I noticed that we have a strong brand, much stronger in Quebec than Ontario. And I knew this business from my previous lines. And definitely, in Quebec, sure we have a competitive advantage, and our brand is stronger. So we have still work to do. Like the plan that was put in place to improve the efficiencies, and we’re – I think the team did a very good job. Very important decisions were made and still other decisions will have to be made to continue our progression. So it’s a good business. There’ a market, the customers are happy, my employees are happy with the results. They’re happy with the plan. So it’s pretty good.

Derek Lessard: Okay. So I guess, maybe back to that plan, it seems like there wasn’t a lot of changes – or there’s not a lot of changes to the original plan that you, I guess, you see or need going forward. So is it just a question of fine-tuning it? And if so, can you maybe just add some color to some of the areas that you think need that fine tuning?

Louis Frenette: Well, we made – the plan was a very good plan and exactly fine-tuning is the world. And the – so we made some important decisions on how to execute the rationalization of the warehouses in Ontario and especially that was the big first thing. And securing and explaining to our important customers, the biggest one in Ontario that we’re not closing and – after the Recipe termination of the contract. That is now in execution, and it goes very well. So it was important to secure our customers, and our employees also, most importantly. So some fine-tuning and other activities, yes.

Derek Lessard: Okay. I guess, maybe a question on the decision to not renew the Dube Loisell option?

Louis Frenette: So that decision – what’s the question directly, exactly?

Derek Lessard: I was just wondering what the – I guess, what the idea or the thoughts were behind not renewing it or picking up?

Louis Frenette: You mean not exercising it, the option?

Derek Lessard: Yes.

Louis Frenette: See. Okay. Well, first, Dube Loisell is a great company with excellent employees and great ownership. We’ve decided not to go ahead with exercising the option because of the terms and conditions that were agreed in 2016. That’s it. They are an important customer of ours. And we have plans to grow the business. And like we do with other distributors, but it doesn’t say that we don’t want to grow our Broadline business. So we’re looking at all alternatives to grow our Broadline Distribution in Quebec, organically or not organically.

Derek Lessard: Okay. All right. That makes sense. I just – and you pointed in your MD&A to a marketing analysis that you guys did in 2019. Could you add some color to it as to where you do see growth? And maybe just – maybe, I guess, some clarification of what you mean by repositioning your private brands in some strategic categories?

Pierre Gagné: Sure. Very good audit – marketing audit was made last year, if I – looking at our brands, our private brands, the market, the competition and what could be done. So I saw many of those audits in my career. That was a good one. And need some fine tuning, and we’ll prioritize a few things. So I cannot disclose what we’ll do. Like there are competitors. So – but there is an opportunity. The Menu brand as our house brand, private label or whatever, is well appreciated by our clients. And – so I had the chance to ask them. So what they like about it, would they don’t like? But the audit was quantitative versus my perception, which is qualitative. And the plan is interesting, and we have action plans with this. We’ll tell you more at the AGM, we’ll be able to show you a bit more.

Derek Lessard: Okay. So when you say well appreciated, so well appreciated but under-penetrated, is that, I guess, is that a fair?

Louis Frenette: Again, it’s a decision to differentiate ourselves. Which share of our business, we want to have under our private label versus the two biggest competitors? So we have a plan, and we – what I can tell you is that we need to grow it, but not go crazy with this. Because we had a point of differentiation, and we were very well with our suppliers, national suppliers and some of our customers prefer national brands. And some of the people in the market, they’re pushing their private brand. And sometimes, it’s not the right decision. So we’ll balance that. But the base and the foundation is very good. So it’s us to decide exactly how to execute it.

Derek Lessard: Okay. All right. That’s fair, Louis. How much of the improvement – or, I guess, the decline in operating expenses was due to improved cost controls from the rationalization plan versus just the strict drop in sales?

Pierre Gagné: Look. You won’t – we are not developing that specifically, but most of it relates to that as well as we’ve – during the year, with our new VP operation that started midyear, we’ve started to reduce costs in our operation in Quebec. And then more will come in 2020, strictly by becoming more efficient within our operation so we have a series of initiatives related to that in Quebec. In Ontario, of course, is with the rationalization going from three plans to one. There will be a first phase that should be completed sometime during March. And post to that, of course, we’ll go along, we’ll find – the team is already looking at finding ways to become more efficient. So – whether it’s related to transport logistics or within the warehouse itself. So – but that, Derek, is becoming our, if you want, our Moto internally to work on continuous improvement of our results, or operating costs as we go along. But I would say, to answer your question, most of it comes from a combination of what happened in late 2018, together with 2019. So you cannot look at if you want the full year or a quarter. It’s improving quarter upon quarter. So we have to keep that in mind when we look at our results. So there’s more coming, first quarter, second and so on and so forth into 2020.

Derek Lessard: Okay. Thanks for that, Pierre. On the departure of the Senior VP of Summit, has he been replaced?

Pierre Gagné: Well, currently, no. To answer your question, we’re looking at people but we want to find for the size of the organization that we will have – we will find – we’ll look at to find somebody. Now that being said, currently, the person responsible for that is our Head of Finance, because we’re in a, if you want, an attrition process as we go along for the next few months. So I think it gives us time to find the appropriate person to manage and to step on, on the next phase of growth. So at this stage, I think it’s really appropriate to have that. We felt – the team felt that he was the appropriate person for the time being and gives us enough time to find the right – and the right person.

Derek Lessard: Okay. And then just maybe a couple more for me. I just want to get your view on the competitive activity out there. Has there been any change? Has it increased in terms of intensity? And second, maybe, do you guys anticipate any – or have you seen, I guess, any indication or drop in potential restaurant sales or what have you due to the, I guess, some corona fears that might be out there?

Louis Frenette: Okay. On the – on your first question on the competitive side. No. The answer is no. No big changes. Everybody is fighting to increase their share of wallet with the with their customers but no breakthroughs or breakdowns regarding competition. Regarding the coronavirus situation, we’re concerned. And the – yes, we haven’t been affected yet. But if it gets here, trust us that customers will stay home more and more. So that’s the market. We see – the Canadians would see that and the – but there could be an effect.

Pierre Gagné: If I may add to what Louis is saying is it’s always normal in the first quarter that it’s a lower season. So we said it in our public communication that Q1 is always a low month, if you are, a low quarter. But we’re on the lookout for the Corona.

Derek Lessard: Okay. Okay. I guess, have you – I know it’s so early to say, and I’m not expecting like an affirmative, but have you, I guess, started to think about contingency plans in the event that it does get worse or?

Louis Frenette: In our risk management, internal procedure, this is on the target. So yes, we were drafting – we’re at this stage of the – we just started to draft some possibilities and action plan so – to mitigate the situation, but there’s more work to do.

Derek Lessard: Okay. That’s fair enough. Gentlemen, that’s all for me. Thanks for taking the questions.

Louis Frenette: Thank you, Derek.

Operator: [Operator Instructions] There are no further questions at this time. I will turn the call back over to the presenters for closing remarks.

Louis Frenette: Okay. Thank you, Julie, and thank you, Derek, for your questions. We’re entering in 2020 on a positive note, like what was initiated before and try to execute it well in a good time frame. We intend to continue our transformation and optimization efforts, which are aimed at increasing profitability and creating shareholder value. Our action plan for 2020 is anchored around the three pillars

Operator: This concludes today’s conference call. You may now disconnect.