Earnings Transcript for COLFF - Q4 Fiscal Year 2021

Operator: Good morning, ladies and gentlemen. And welcome to the Colabor's Fourth Quarter 2021 Results Conference Call. [Operator Instructions]. At this time, all lines are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session open to analysts only. [Operator Instructions] This call is being recorded on Monday February 28, 2021. 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 now like to turn the conference over to Mr. Louis Frenette, President and CEO of Colabor Group. Please go ahead, sir.

Louis Frenette: Thank you Anase [ph]. Good morning everyone and welcome to Colabor Group’s 2021 fourth quarter and year-end results conference call. This is Louis Frenette, President and Chief Executive Officer of Colabor. Last Friday evening, we released our earnings result for the 16th and 52-week period ended December 25, 2021. The press release and disclosure documents can be found on our website and@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. We ended fiscal 2021 on a strong note, and less restricted operating environment for restaurants in the fourth quarter of 2021. Our diversification strategy within various channel of the hospitality restaurant, institutional or HRI market, as we call it, and the implementation of our strategic plan help us revenue and margin improvements. As a result, fourth quarter consolidated revenues grew for a third consecutive quarter $150 million, which represent close to 13% growth from last year equivalent quarter. Ending fiscal 2021, consolidated revenues grew by 3.1% and reach $476 million. We are very proud of this achievement given the labor constraints faced by the entire supply chain from producers, manufacturers, distributors, and all the way to the restaurants operated. Even more so we operate in the context of tight COVID restriction which particularly affected the Quebec restaurant industry. Only off-premise binding was allowed during half of the year, significantly reducing demand from this customer channel. During the year and into the fourth quarter, we executed our strategic plan and continue to make significant improvements to our business. Noteworthy improvements include the completion of the revamping of our private label; we now have over 500 products which 70% are locally sourced. And together with an attractive selection of national brands, we now have a very attractive and differentiated product offering to meet our customer’s needs. We also introduce new compensation practices that aim to improve our competitiveness as an employer and help us attract and retain the best employees and we continue to improve our internal process which has provided synergies. All these initiatives are steadily contributing for growth in the distribution segment, and more specifically with three businesses. In 2021, we also significantly strengthened our balance sheet, which now provides us with more flexibility, with liquidity at a lower borrowing cost. With the addition of Pierre Blanchette who joined us as CFO, we now have more management bench strength and available lending capacity, should we find opportunities at the right price to accelerate our growth strategy. Another important achievement in the fourth quarter was our ability to dynamically manage the effect of rising input costs and a scarce labor market brought on -- network and more efficient operation, we are well positioned for the recovery of the restaurant the hospitality industry. In order to get there, our focus for 2022 will follow in the successful footsteps of our 2021 plan. First, further improve its profitability by continuing to nurture our private brand by growing our value added specialty distribution activities in fish and meat and improving our category management. Second, develop the new territory for our distribution activities and entertain accreted M&A opportunities. And third, raise our operational efficiency through investment and modern urbanization of our distribution centers and finalize the integration of certain business functions. Before I turn the call over to Pierre for his review of our financial results, I want to reiterate once again how proud I am of all our team members who contributed to our success. They have allowed us to emerge in a stronger position after two years of global pandemic with a diversified business, improving profitability and accessing exciting growth opportunities. Pierre, with this, I will turn the call over to you.

Pierre Blanchette: Thank you, Louis. And good morning, everyone. I'm pleased to be here today to discuss our key financial results for the fourth quarter of 2021. Fourth quarter consolidated sales from continuing operations were up 12.9% to $150.5 million. Sales in the distribution segment increased by 19.8% to $103 million, mainly from the growth of our restaurant channel from a less restrictive operating environment in 2021, when compared to the fourth quarter of last year, when restaurants dining rooms were fully closed. Sales in this in the wholesale segment increased by 5.6% to $62.1 million, again primarily from the easing operating restriction affecting the restaurant industry from the growth of certain customer accounts and small customer gain mitigated by the partial loss of volume from a single customer. Consolidated adjusted EBITDA from continuing operation reached $7.1 million, or 4.7% of sales, compared with $7.5 million or 5.6% in the fourth quarter of last year. The effect of growing revenues was mitigated by a reduction of 1.6 million in subsidies received, rising costs associated with the pandemic induced labor shortage. And a one week strike at our levy distribution center in September 2021. Also since the start of the year, we have invested in sales and marketing to grow our distribution market share and reposition our private brand. As Louis highlighted in his opening remarks, adjusted EBITDA improved if we exclude subsidies received from 4.3% of sales in Q4 2020, to $4.6 in 2021. Net earnings from continuing operations were $5.3 million, up $0.6 million during last year's four quarter. The majority of this variance comes from a non-recurring element primarily instead of a settlement gain of a portion of a 2017 tax assessment with the Ontario Ministry of Finance, in relation to tobacco sales done by our Ontario division, which was sold in 2020. Net earnings stood at $5.1 million or $0.05 per share, up from point $0.8 million or $0.01 per share in the corresponding quarter last year, resulting primarily from the aforementioned non-recurring amounts, distribution and financial expenses. Cash flow from operating activities generated $9 million in the fourth quarter of 2021 compared to $13 million in the equivalent quarter of last year. Higher working capital requirements in Q4 2021 in the context of a less restrictive operating environment for restaurants during the fourth quarter of this year explain the bulk of this variance. As of December 25, 2021 our net debt amounted to $48.4 million down from $52.1 million at the start of fiscal 2021 and down from $53.2 million at the end of the third quarter of 2021. Our financial leverage ratio stands at 1.9 times versus 1.8 times at the end of fiscal 2020 and compares favorably with 2.1 times at the end of the third quarter of 2021. We expect that the pandemic and the associated labor shortage in supply chains disruption will continue to have somewhat of an impact on our results. For instance, restaurants were once again required to close their on-premise dining activities between December 31, 2021 and January 31, 2022. As demonstrated during the last -- these last two years, we remain dedicated to maintain a prudent approach to manage our cost structure in line with demand and protect our financial situations. I will now like to turn the call over to the operator for the Q&A question.

Operator: Thank you. [Operator Instructions] One moment please for your first question. And the first question will be from Kyle McPhee with Cormark Securities.

Kyle McPhee: Hoping to get a little more color on some of the moving parts feeding year, year-over-year revenue growth in Q4, the 12.9% lift. So I know most of that would have been the COVID re-openings versus last year, but on other moving pieces in there first, can you give me an idea of how much of that would have been pricing game?

Louis Frenette: Hi Kyle thanks for your question. Yes, as you said the dining operation were reopened in the last quarter. There was a lot of inflation last year. And as I explained before, it's a pass through business. So the inflation was estimated at 3.5% for the fiscal 2021. And we also have some gains from action under our goal plan but to a certain extent since we are still in the initial phase.

Kyle McPhee: Kind of okay, that's helpful color on the pricing. So that second part, though your initiative to grow on Western Quebec. So is that is that a noticeable moving piece in your numbers? Or is it still pretty small as you build on the return the return on those details higher?

Louis Frenette: Well, the good news is that the plan is on track. We're achieving what we had as targets, and it's not very material as we speak. And, but its growing. And it's, we're happy with the results, the sales team is doing a fantastic job. And we're also as I mentioned before, we complete the revamping of our private label, and sales are also meeting our expectations.

Kyle McPhee: Okay, thanks for that color. And then just one follow up on the sales hires to grow in Western Quebec. Are there going to be -- is there going to be more investment and more sales headcount or is it all about leveraging your current headcount there?

Louis Frenette: Yes, there will be, the more the more restaurants that will gain will need more sales headcount over time, and it's going to happen with levels thresholds. When we achieve crush certain thresholds, we add reps and the idea is to do more bit business in Western Quebec. So yes, we'll add more headcount.

Kyle McPhee: Got it, okay. Thanks, moving on. So just regarding the Omicron wave that led to dining closures, in January in Quebec, I'm hoping you cannot make get a feel for the impact on your business. So like, were your dining clients still active with things like takeout and delivery in January? And is there anything notable with whether or not these restaurant clients have fully opened into February?

Louis Frenette: Well, the -- on December 31, of 2021 till January 31 of this year 2022, the main dining and the restaurants were closed, and they re-opened on Feb 1st. Our customers have reopened gradually, since the start of February. And we have a report from the industry that tells us that 17% of the restaurants then apply to for their permit to operate. So this tells us there's a low amount of restaurants that are closed. That may or may not reopen eventually.

Kyle McPhee: Okay. I suspect that the total sector spend, though on casual dining would be less than that given, people open are just taking up that chair. Do you think that's fair?

Louis Frenette: I didn't understand you're…sorry.

Kyle McPhee: 17 restaurants have closed, but that probably doesn't equate to 17%, last demand opportunities for your given it would just shift to other restaurant?

Louis Frenette: No. The -- as an example, if the average is 17% that did not open, maybe 25% are in Montreal, and less in the rest of Quebec where we operate, but the ones that closed usually are the smaller one. So it doesn't represent a straight line 17% dimension.

Kyle McPhee: Got it. That makes sense. Okay, that’s helpful. During the temporary closures in December 31 to January 31 did you lighten up on headcount or did you just hold on to all your stuff during the closure?

Louis Frenette: We hold on, because it’s very difficult to hire people so you have to have in mind that this is the smallest month of the year historically and the we do that people take vacation in that period and the so it’s managed as usual. And sales last year it was closed, this year was [Indiscernible] so we're it’s not significant, but with the sale starting February, we see that the business is coming back.

Kyle McPhee: Got it. Okay. Moving on. I see in your filings that you may get a sizable payment from the Ontario Ministry of financing. I just want to confirm I understand that properly. So are you getting $6.4 million in cash into your pocket? And is that the right dollar amount? And when should the money be showing up?

Pierre Blanchette: Good morning Kyle, it’s Pierre. Thank you for the question. 6.4 is the claim, is the tax assessment that we received from the Ministry of Ontario back in 2017, for tobacco sales on our from our Ontario division, when we add that division. And as mentioned as well, in the financials, it's a partial; it's a partial recovery that we got. And we are not at liberty to disclose the amount, but the money was received last week. So Ministry of Ontario did that was good for that.

Kyle McPhee: Okay, that's helpful. And then last question from me, can you offer any color on what your CapEx will be in 2022?

Pierre Blanchette: So, again, the, we don't expect to exceed our normal CapEx. The last two years, they've been a little bit on the low side because of the pandemic situation and management was acting prudently to, to make sure we spend what we what we earned and not more. So we expect in 2020, to increase it slightly, if the conditions are, are winning conditions for us to invest. But our intention is to invest for to meet demand on our specialty divisions, and also to improve efficiencies in the specialty area and the regular distribution. So we, with the hiring being more difficult, obviously, it's worth it to get some efficiency gains for the EBITDA also, but for just to have a stronger and more efficient operation.

Kyle McPhee: Got it. Okay, thank you. That's it for me. Thanks for all the answers.

Operator: Thank you. [Operator Instructions] There are no further questions at this time. Mr. Frenette, you may proceed.

Louis Frenette: Thank you Anase and thanks Kyle, for your questions. For second quarter, for second year in a row we demonstrated their resiliency of our business model and our ability to adapt. We have successfully transformed our business, improve our customer and product mix, and have steadily gained market share within the street business channel. Our fourth quarter results also demonstrate our ability to manage the effects of an inflationary environment. We remain in very good financial health [ph] with a strong balance sheet and available liquidity to invest in growth initiatives and potential accretive non organic opportunities to accelerate growth. Before I let you go, 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 down by the pandemic and labor shortage, but also who are helping us improve our overall customer experience and operation. This concludes our calls for the fourth quarter of 2021 Thank you for joining us. Stay safe and healthy.

Operator: Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines. Have a great day.