Earnings Transcript for COLFF - Q4 Fiscal Year 2020

Operator: Ladies and gentlemen, thank you for standing by, and welcome to the Colabor's Fourth Quarter 2020 Results Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. [Operator Instructions] I'd like to remind you that this conference call contains forward-looking information within the meaning of applicable Canadian Securities Laws, and I refer audience to the forward-looking statements as detailed in the Presentation supporting the conference call. Furthermore, risks and uncertainties are discussed throughout the December 26, 2020 MD&A under the heading Risk Factors. I would now like to hand the conference over to your speaker today, Louis Frenette, President and CEO. Thank you. Please go ahead, sir.

Louis Frenette: Thank you, [Catherine] [Ph]. Good morning everyone, and welcome to Colabor's Group 2020 fourth quarter and year-end results conference call. This is Louis Frenette, President and Chief Executive Officer. Last Friday evening, we released our earnings results for the 16 and 52-week period ended December 26, 2020. The press release and disclosure documents can be found on our Web site, and at www.sedar.com. I'm joined today by Marie-France Laberge, our Corporate Controller and Interim Chief Financial Officer. Given the current context, we're very pleased with our financial results for fiscal 2020. We successfully managed the effect of the pandemic on our operating profitability and cash flow generation. We de-risked our balance sheet ending the year with a comfortable leverage ratio of 1.8 times. We also recently concluded an important milestone with the announcement on February 18 of the refinancing of our lending facility, and of our intention to redeem all of the outstanding convertible, unsecured subordinated debentures. We replaced our previous $90 million ABL facility with a new $80 million secured credit facility that is comprised of a revolving credit of $50 million, and a term loan of $30 million with an accordion of $20 million. This new facility is more suited to our needs, because it's no longer tied to the level of inventory and receivables. We also entered into a new five-year $20 million subordinated loan with Investissement Québec, of which $15 million has been disbursed. We concurrently reimbursed the balance of $12 million remaining on our previous subordinated debt with FSDQ, which was due in February 2022. In addition, we'll be redeeming all of the 6% outstanding convertible debenture, which have a principal amount of $50 million. All information documents pertaining to this transaction are available on SEDAR. This refinancing demonstrates the support of existing financial partners and of new lenders. It strengthened our balance sheet, provides additional financial flexibility, and reduced our overall financial expenses. We now have the financial resources to focus on growing our core distribution activities in Quebec. Before I review our operational results for the period ended December 26, 2020, I would once again take this moment to thank our team members for their dedication and contribution to this landmark here. Together, we successfully navigated 2020 as the COVID-19 pandemic brought the hospitality industry to a virtual standstill for the majority of the year. Together, we demonstrated the resiliency of our business model and the benefits of the transformation plan that our entire group has been working on in the past two years. Because of everyone's contribution, we were able to end the year in a very good position financially, all while safeguarding the health of our employees healthy and our customers well-supplied. When we entered 2020, we were in the last inning of our transformation plan. In January, we first announced the consolidation of our broad line distribution activities in Ontario. And later in May, we concluded the sales of most of our remaining activities in that province. This transaction provides us with the financial support and additional bandwidth to concentrate on our Quebec platform, and manage the effects of the COVID-19 pandemic. Our diversified customer base and wide geographical reach within the Province of Quebec also served us well during this unprecedented year. With the restaurant industry brought to a virtual standstill during a good portion of 2020, our consolidated sales were only down 30.7%. The majority of the revenues lasting for a historical contract loss in the specialty distribution agreements, followed by lower revenue from our hospitality customers, who were affected by COVID-19 pandemic, and our decision to stop serving less profitable contracts in our broad line distribution business. During the fourth quarter, as we were facing the threat of the second wave, the Government of Quebec issued a decree requiring the closure of all dine-in operations of bars and restaurants located in Red zones. As we predicted on this call in November, the second wave did not hit as hard as the first. We further improve our customer mix with the conclusion of the three new institutional supply agreements and continue to serving all of our new retail customers that were onboarded during the pandemic. On the profitability front, the transformation initiatives that we started deploying over the last two years, and the cost mitigation measures quickly implemented at the start of the pandemic including the support of the Canadian Emergency Wage Subsidy supported higher operating profitability in 2020. Our adjusted EBITDA margin grew to 4.4% compared to 4.2% last year. This is net of the IFRS 16. To summarize 2020, I would say that the right-sizing of our operation which includes the sale of our non-profitable activities in Ontario, our diversified customer base, and quick implementation of various cost preservation measures provided us with the necessary liquidity and borrowing capacity to weather the pandemic. As we stand today, the Province of Quebec remains in lockdown. However, restaurants located in less affected regions have been allowed to reopen their dine-in operations starting on February 8th 2021. Since we have a wide geographical reach within the province, we should be well-positioned to benefit from the alleviation of certain restrictive measure. The situation is constantly evolving. But what remains certain is that we are ready to help our customers resume their operation gradually as restrictive measures are allowed to ease throughout the province. With this, Marie-France, I turn the call over to you for review of our financial result.

Marie-France Laberge: Thank you, Louis, and good morning everyone. I am pleased to be here with you today to review our financial result for the fourth quarter and fiscal 2020. Fourth quarter consolidated sales from continued activity were down 30.9% to $133.3 million. Sales in the distribution segment decreased by 35.5% to $86.5 million, mainly from the end of specialty distribution contract which represented $20.5 million in the equivalent quarter of last year, our decision to stop serving less profitable client starting at the fourth quarter of 2019, which represented $3.5 million in the equivalent quarter of last year, and from lower volume related to the COVID-19 pandemic during the quarter. This was mitigated by an increase in retail and institutional sales from existing and new customers on-boarded in the second, third, and fourth quarters of 2020. Sales in the wholesale segment decreased by 22.5% to $58.8 million mainly from the effect of the pandemic and from lower inter-segment sale resulting from the sale of our Ontario division, and mitigated by growth in certain customer account and new wholesale customers. The adjusted EBITDA from continuing operations reached $7.5 million or 5.6% of sales compared with $8.2 million or 4.2% in the fourth quarter of last year. The improvement in margin stems from the decision to stop serving less profitable contract, efficiency measures, the adoption of IFRS 16, which reduced rent expenses by $2.6 million, a reduction of salary expenses, and $1.8 million in subsidy. Fiscal 2020 consolidated sales from continued activity were down 3.7% to $461.3 million. Sales in the distribution segment decreased by 37.1% to $309.3 million. Distribution activities were down by $182.4 million from the end of the specialty distribution contract which represented $84 million in 2019, our decision to stop serving less profitable clients starting in the fourth quarter of 2019 which represented $27.1 million in fiscal 2019, and from lower volume related to the COVID-19 pandemic starting in the second quarter of 2020. This was mitigated by an increase in retail sales from existing and new customers on-boarded in 2020. Sales in the wholesale segment decreased by 16.3% to $192.4 million mainly from the effect of the pandemic and from lower inter-segment sales resulting from the sale of our Ontario division, and mitigated by growth in certain customer account and new wholesale customers. The adjusted EBITDA from continuing operation reached $28.9 million or 6.2% of sales compared with $27.6 million or 4.2 last year. This comes from the improvement in gross margin from the adoption of IFRS 16, $7.4 million received in subsidy, efficiency measures, and mitigated by the effect of the COVID-19 pandemic on sales. Net earnings from continuing operation was $3.8 million down from $7.5 million last year. Net loss for fiscal 2020 stood at $8.6 million compared to net earnings of $7.7 million in 2019. Cash flows from operating activity amounted to $37.3 million in 2020, up from $31.5 million in 2019. This increase is mainly due to a lower use of working capital, the effect of IFRS 16, and increase in adjusted EBITDA. As of December 26 2020, our net debt, including the convertible debentures and net of cash, amounted to $52.1 million compared to $72.4 million at the end of fiscal '19. Higher cash flows since the start of the year from operating activities and the sale of the Ontario division were used to reimburse a portion of the debt specifically $3 million towards the subordinated debt and $2 million to the credit facility. Pursuant to the new credit arrangement that we discussed in the opening remarks, our financial leverage ratio does not materially change from yearend, and currency stands at 8.8 times versus 2.6 times in fiscal 2019. By excluding the effect of IFRS 16, our leverage ratio stands at 2.6 which include the convertible debentures. The pandemic will continue to have an impact our sales and short-term adjusted EBITDA. However, because of the quick implementation of cost preservation measure and the support of the subsidy, we do not expect the situation to have a material impact on our available liquidity. I will now like to turn the call over to the Operator for a Q&A period.

Operator: [Operator Instructions] Your first question comes from Kyle McPhee of Cormark Securities. Your line is open.

Kyle McPhee: Hi, everyone. Louis, the first question on your distribution segment, the revenue for the segment was down 36% year-over-year in Q4, and based on your disclosures, we know about 18% of that was the on-purpose contract termination and ceasing serving some clients [indiscernible]. So, my question specific to the remainder of that year-over-year decline for the distribution segment that implied 18% hit. Can you shed some light on the moving parts feeding that? I know there would be a net negative from COVID in there, but also wondering if there is any permanent gains in there from new clients, market share gains, things that will persist even when COVID is over?

Louis Frenette: Well, thanks, and good morning Kyle. Yes, the COVID part, I think it's important to isolate the COVID part in our result for distribution. So, for Q4, the impact on distribution was minus 21% due to the COVID for the distribution part, but for the year, that impacted our sales by 19% in that part. And for Colabor Group, we made the calculation of what did the COVID did specifically, was a decline of 17%. So, the rest of the shortfall comes from what we stopped in last year, again of 2019, the contracts that were not as profitable and also in February of this year, a contract that was stopped with a big customer with one of our divisions. So, this is the -- for 2020, and as we said, the impact of COVID, and as I said earlier, in Q4, was not as drastic as in Q2. And to give you a bit of color for the future, the reopening of the restaurants is to come shortly, I guess. And just restarted in the north of Quebec, and we're expecting that they may start back in orange zones in other regions, probably in March 8, but we don't have a crystal ball, but this is how it looks for now. The one major thing that affected Q4 results was the -- the Wholesale business, was that there were no Christmas parties, and the hospitality business was down, and the -- so we expect that this should come back this year, hopefully. And the -- we gain to finish on that. We did gain some institutional customers during that first -- that last quarter, and we did gain during the pandemic new retail customers where we're doing backdoor business. And so, overall, we'll keep some of it in [portfolio] [Ph] ongoing, and we'll lose some of them such as food banks, Breakfast Club of Canada, we're not expecting that once the pandemic is gone that we'll continue serving them. But for retail and in new retail backdoor customers we're happy because they like our service and quality. And we expect to keep something for the new customers that we want.

Kyle McPhee: Got it, okay, that's helpful color. Just to clarify, the institutional customers you're adding, would that land in the Distribution segment?

Louis Frenette: Both, that in the Wholesale business and in the Distribution segment.

Kyle McPhee: Got it, okay. Okay, and based on the numbers you gave me about isolating COVID, it sounds like these institutional retail customers that should prove permanent is -- is actually material kind of low single-digit year-over-year growth contribution. Does that math sound right?

Louis Frenette: Sounds right, yes.

Kyle McPhee: Okay, got it. Okay, moving on to your gross margin line, so you continue to show year-over-year gains in your gross margin percentage. And I know some of the contracts and clients you cut out helped that mix. But wondering if COVID is also helping that mix, for example, maybe the parts of your business that are hit by COVID just happened to be lower margin business. So can you help me understand if we should expect any material gross margin shifts as COVID fades?

Louis Frenette: No, I don't expect on the gross margin, absolutely not. We have -- that's a result of the price we're selling, and the cost of the acquisition of the products and the -- I don't see any big swings on that because it's fairly stable in terms of the contracts we have with the institutions are long-term contracts, and with our distributors. So I don't see any swing on the margin.

Kyle McPhee: Got it, okay. And then on the -- your balance sheet, these new debt facilities, you press released the senior and subordinated facilities. It looks like you have more than enough to repay and replace all your existing debt, including the converts, plus you'd still have a lot of excess liquidity. So can you help us understand some of your priorities for this excess liquidity, are there any major organic growth or acquisitions plans that you tend on pursuing to utilize all this liquidity?

Louis Frenette: Yes, sir. And it was well summarized. And so, of course, we're looking at organic growth. Colabor, there is more retail up in Eastern Quebec, and the opportunities in Western Quebec. So we'll work on that. We're looking at it, and there's lots of room to grow out there. And as Marie alluded to acquisition, well, we're looking for good, small, accretive opportunities that are very synergistic. The context of COVID may slow down the process, but the -- we're looking at opportunities, yes.

Kyle McPhee: Got it, okay, thanks for that color. And just last one for me just on your CapEx, can you offer the latest update on what your CapEx should look like in 2021?

Marie-France Laberge: In 2020, it was about $2 million, so in '21, should be higher, so another $2 million, I would say, so a total of maybe $4 million -- around $4 million for next year.

Kyle McPhee: Got it. Okay, thanks for all the updates. That's it for me.

Operator: There are no further questions at this time. I return the call back over to Louis Frenette for closing remarks.

Louis Frenette: Thank you, Catherine and Kyle, for your question. As I said in my opening remarks, we are very happy with our performance this year. We are starting 2021 on a more solid footing, with the resources concentrate on profitability growing our operation. Because of the cost mitigation measures that we quickly implemented for the onset of the pandemic and the rightsizing of our operations, we are in a good financial situation, and are ready to serve our restaurant customers as they start reopening their dining rooms. Looking ahead, we remain committed to pursuing a transformation of Colabor by focusing on Broadline distribution activities in Quebec, delivering efficiencies and improving our employers' brand. We are grateful to be able to continue to count on the dedication and hard work of our employees and the support from the labor union, all financial partners, shareholders, our customers, and our suppliers. This concludes our call for the fourth quarter of 2021. I look forward to speaking with you, in May, at our next conference call, and AGM, which will be held virtually again this year. Thank you for joining us. Be safe and healthy.

Operator: And this concludes today's conference call. Thank you for participating. You may now disconnect.