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Good morning, ladies and gentlemen. Thank you for standing by. Welcome to Colabor's Second Quarter 2018 Financial Results Conference Call. [Operator Instructions]Before turning the meeting call over to management, please be advised that this conference call will contain statements that are forward-looking and subject to a number of risks and uncertainties that could cause actual results to differ materially from those anticipated. I would like to remind everyone that this conference call is being recorded today, July 20, 2018.I will now turn the conference over to Lionel Ettedgui, President and Chief Executive Officer. Please go ahead, sir.
Good morning, everyone, and welcome to Colabor Group's 2018 Second Quarter Conference Call. This is Lionel Ettedgui, President and Chief Executive Officer. With me today is Jean-François Neault, Senior Vice President and Chief Financial Officer of Colabor.Earlier this morning, we issued our second quarter result press release. It can be found, along with our financial statement and MD&A, on our website and on SEDAR. Please note that the presentation is also available on our website at ww.colabor.com (sic) [ www.colabor.com ], under the Investor, Events and presentations section.First, let me talk to you about our Distribution segment. As expected, the anticipated loss of volume in our Broadline Distribution activities in Ontario continue to weigh on our result and account for most of this quarter's challenges. However, we are starting to see some benefits from sales force investment made in our Broadline Distribution activities in eastern Québec. Our aim was to raise our profile within higher-value markets, such as hotels, restaurants and institutional market. As a result, we have reinforced our presence in the market and are being more competitive. This translated into an increase in the volume of sales and improvement on our gross margin in the second quarter.The recent renewal of an important institutional supply contract, which include an additional territory, is also a direct result of our dedication to grow our share of the market in Québec. This success is -- was somewhat mitigated by higher operating expenses from the underabsorption of fixed cost, which put additional pressure on our EBITDA in the quarter.As for the Wholesale segment, we lost some sales volume in our Specialty and Broadline activities by letting go of nonprofitable business. This reflected well on our gross margin as a percentage of sales and on our bottom line. This is a result of our efforts to improve procurement, cost and inventory management and form a decision to focus on higher-velocity sales.I will now turn the call over to Jean-François for a review of our financial results. We will then open the call for questions. Jean-François?
Thank you, Lionel, and good morning, everyone. Colabor Group's consolidated sales for the second quarter that ended June 16, 2018 stood at $299.9 million, representing a decrease of 9.5% from the equivalent period in 2017. For the Distribution segment, sales decreased by 8.9% to $226.3 million, mostly coming from the anticipated loss of supply agreements for Popeyes Louisiana Kitchen and Montana's BBQ & Bar restaurant chain in our Ontario activity. Sales of the Wholesale segment stood at $73.6 million, down 11.3%, resulting from the nonrenewal of nonprofitable contracts.Adjusted EBITDA stood at $6.1 million or 2% of sales compared to $9 million or 2.7% of sales in the second quarter of 2017. Here, the -- this is mainly the result of the aforementioned loss of volume on our consolidated sales. The fact that in the second quarter of 2017, we reversed a nonrecurring provision relating to an executive retention program, which reduced our comparable period's adjusted EBITDA by $0.8 million and from the underabsorption of fixed costs mainly from our distribution activities in Québec. All this was compensated, in part, by an improvement of margin as a percentage of sales across the organization.Colabor concluded the second quarter of 2018 with net earnings of $0.8 million or $0.001 (sic) [ $0.01 ] per share compared to net earning of $3.1 million or $0.03 per share in the equivalent quarter of 2017.Our cash flow from operating activities stood at negative $4.1 million in the second quarter of 2018 compared with positive $2.2 million for the equivalent quarter of 2017. This is explained by a higher sequential increase in net working capital during the second quarter of 2018 and lower adjusted EBITDA when compared with the equivalent quarter of 2017.As at June 16, 2018, the company's total debt, including the convertible debentures and the bank overdraft, amounted to $122.4 million, down from $125.1 million during the equivalent period of last year.$39.8 million was drawn from our authorized credit facility of $140 million compared with $28.1 million at the end of last year, leaving us with sufficient flexibility.Our total debt-to-trailing adjusted EBITDA ratio now stands at 6.2x compared with a ratio of 4.4x at the end of the second quarter of 2017. This leverage deterioration is the direct result of a continued declining last 12-month adjusted EBITDA, stemming mostly from the performance of our activities in Ontario rather than from the level of debt. In fact, our current debt level is in line with typical seasonal sequential fluctuation between Q1 and Q2 and is even slightly lower than it was at the same time last year.As for the performance of our Ontario activities, we are operating in a busy season with less efficient network, following the loss of Montana's business. We decided to perform warehouse layout and route delivery change at a later time in the year in order not to disturb our distribution activities during our busiest season and maintain the highest possible level of service. Lionel?
Yes, indeed, Jean-François. If I might add, it is very important for us not to disturb our operations during our busiest season in order to maintain the highest level of customer. Once the summer season is behind us, we would resume our optimization measures with further rightsizing and rerouting initiatives. This measure should start providing benefits starting in 2019.Operator, I would now like to open the call over for questions.
[Operator Instructions] Your first question comes from the line of Derek Lessard from TD Securities.
Just wondering where you guys are in terms of the updated strategic roadmap, and if we should still expect something, I guess, some time closer to the end of the year.
Well, I think that we have just hired advisers to assist us for our strategic planning. So we -- at the moment, we are focusing a lot to fix our operation in Ontario in the short term, and we're preparing the future regarding the vision and a good way to have differentiation in the highly competitive market.
Okay. And you'll be able to give up, I guess, a better sense of like the opportunities and kind of some financial metrics attached to that this year?
Later in the year, direct, yes. We're still -- that's exactly what we -- the reason why we hired the adviser, yes. Later in the year, we should be better positioned to open up on that, yes.
Okay, perfect. So there was further margin compression in the Broadline Distribution business. I was just wondering if you can give us a sense of how much of that do you think is more self-inflicted, whether it be the contract losses versus market conditions in terms of competitive activity or what have you. I mean, you did mention that it was -- the different -- while it's a great summer than last year. You would've -- and you would've expected margins to be up, given how crappy it was last year. But I think you already mentioned it in your prepared comments that -- regarding the inefficiency of the business at the moment. But I was just wondering if you could just, maybe, again, just what's -- what do you think, it's self-inflicted versus, like, competitive activity.
Okay, for the record, Jean-François speaking. The margin, overall, in the entire organization are -- the gross margin, I mean, are positive year-over-year. So we're doing good as a percentage of sale, so let me clarify that. So now your question is on the EBITDA margin, obviously, into the Broadline Distribution. Again, in our Québec activities, we're doing better year-over-year, okay. So it's truly related to our Ontario operation where EBITDA margin are affected. And Derek, you have to remember, over the last 18 months, we lost around $120 million of business with Popeyes, MTY and Montana's, and we've shut down one DC, okay. And -- so this is truly affecting our EBITDA margin in that region, okay. We have lived through similar situation in Québec City. You will remember that in 2013, '14 and '15. EBITDA was stressed to a very low level, and we overcame all of that issue over a 2 to 3 years' period. So it takes time when you have such a drastic change in your book of business, reduced volume. It takes time to redo your routing and warehouse routing -- and layout, sorry. So it's just a matter of getting back to a more normal absorption of fixed costs. So that's what we've just mentioned. And I think, later in the year, we'll be in a position to further compress our cost and align our efficiency better.
Okay. So I mean, just a follow-up to that. Then when do you think or where do you think or what inning do you think you're in, in -- with respect to the Ontario optimization, whether it's on the volume or route optimization?
Yes [indiscernible] 2019...
Not yet. I think, at the beginning of 2019, we will be in good shape. Just to remind you that on the short term, we have put focus on Ontario regarding rightsizing, which is -- meaning reducing the headcount, a huge cleanup regarding inventory management, which means several write-off on inventories. And the second step after the high season would be rerouting optimization, redoing the layout and also to implement a new go-to-market strategy regarding sales for Q3 and Q4. So we'll benefit of all these initiatives in the beginning of 2019.
Okay. And I'm just going to follow up on the -- on your comment regarding the net debt to EBITDA. And I get it. I see that total debt is coming down. Maybe just wondering what your thoughts are or the -- is the plan to increase EBITDA or pay down debt to address the leverage ratio?
Obviously, Derek, total debt is always increased sequentially from Q1 to Q2 as we get into busy season. So it's -- and year-over-year, the debt is lower. So obviously, we're dedicating our free cash, which we're still -- we're generating free cash flow to reduce debt. And as you would remember, we always generate our free cash flow for the second half of the year. So going forward, working capital will remain stable, and we will generate free cash flow that will be able to reduce debt. So we should end the year with lesser debt dollars than it was at the year-end of 2017. But definitively, the result of this leverage ratio is clearly the direct impact of the adjusted EBITDA performance. And like Lionel mentioned, we're dedicated and focused to readdress our situation in Ontario to get the last 3-month EBITDA to go up again, Derek. That would be definitively -- that's the way to go, it's to improve our EBITDA. And by the way, in Québec operation, we're not in the same situation. Pretty much of all of our business unit are doing good. So clearly, it's -- we're focused on the Ontario business.
In Ontario, do you see any risk or I guess, have you seen an increased competitive behavior, as you guys try to, kind of, skate -- not skate, or improve those operations?
No. Honestly, we have seen improvement for the last 2 period. So it's -- we're quite positive regarding that. On the top of that, we are hiring talent in Ontario to consolidated -- to consolidate the team. And we just hired, 1 month ago, a very good talent in operation. We're very close to fulfill the position of General Manager with someone who will know quite well the business. So far, we're quite confident on what we're doing. We're on the right path to go back to -- on track for Ontario.
Okay. And maybe just one final one for me, and it's in respect to the renewal of the contract. Just wondering what it means in terms of sales and were the renewal terms more favorable. And maybe just the final one on that is, I'm interested in your comment about getting the additional territory. What that means?
Okay. First, let tell you is that we are quite transparent with our customer in Ontario. So we have already renewed several contracts. We have all their support, and we're focusing on trying to keep on having a very high delivery and about customer service. Now regarding Québec, we are growing our market share. We managed to bring organic growth, and we have been quite competitive on institutions. So we are quite happy with the result we got from all our initiatives with our sales strategy there.
And more specifically, Derek, about the contract we gained, and we renewed the contract in Québec, Lionel. And the territory, it's just that it was for an institution for health care in Québec City, and they expanded the territory which was originally mostly focused on Québec and eastern. We had a more central Québec territory to it. So it's few -- it's not material enough so we can talk about it. But it's still -- it's showing how good we're doing in Québec that they renewed our -- the trust they're having to us. And so we're very happy about this renewal.
Okay. I guess the -- I don't know if you answered it, but the -- like, were the renewal terms, like, were they more favorable, less favorable or equal to last?
We don't want to go and disclosing terms. You would understand that. I would say, similar terms and so we're happy with the contract. It's a good customer, a good contract. We're happy with it.
[Operator Instructions] Ladies and gentlemen, this concludes today's conference call. You may now disconnect. Thank you, and have a great day.