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Good morning, ladies and gentlemen, and welcome to Colabor's Second Quarter 2020 Results Conference Call. [Operator Instructions] This call is being recorded on Friday, July 22, 2020.
Before turning the meeting all 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 statement as detailed in the presentation patients supporting this conference call and available on companies website in the Investors section under Events and Presentations 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 Louis Frenette, President and CEO of Colabor Group. Please go ahead, sir.
Thank you, Joanna. Good morning, everyone, and welcome to Colabor Group's 2022 Second Quarter Results Conference Call. This is Louis Frenette, President and Chief Executive Officer.
Last evening, we released our earnings results for the 12 and 24-week period ended June 11, 2022. The press release and disclosure documents can be found on our website and at sedar.com. Joining me today on this call is Pierre Blanchette, our Chief Financial Officer, who, following my initial remarks, we'll provide an overview of our financial results.
I am very happy with our second quarter results. They represent a fifth consecutive quarter of revenue growth and one of our better quarters in a long time. I believe this once again demonstrates the resiliency of our business model and the benefits of our growth and profitability plan.
In the second quarter, consolidated revenues grew by 27.4% from the easing of restrictions in the restaurant channel. Our ability to pass through food inflation and from the contribution of our recent acquisitions. Our consistent and dedicated efforts to enhance our customer and product mix, supported gross margin improvement of 8.3% to 18.3% of sales.
Adjusted EBITDA also grew to 5.8% of sales, representing a 16% improvement when removing the $1.2 million receiving subsidies during the equivalent quarter of last year. Furthermore, we maintained a very conservative leverage ratio of 1.8x at the end of Q2 and down from 1.9x at the end of the previous fiscal year.
As discussed on this previous call, given our strong financial position and the ongoing recovery of the restaurant industry, we have reinstated our nonorganic growth strategy earlier in the quarter. Both business acquired in April are performing well and contributed as expected to our top and bottom line this quarter.
On the organic side, we remain dedicated to profitably growing our distribution business and developing new territories. We continue to work on repositioning and promoting our private label brand, increasing specialty distribution of fish and meat products and improving our category management practices.
In the context of rising inflation, there are many levers that we are pulling that are helping us manage its effects on our bottom line. First, our business model allows us to pass through food cost inflation. And second, we are paying special attention to proactively manage rising input costs, primarily on labor and fuel to mitigate their effect on our bottom line.
Given the industry-wide labor shortage, we are also working on various operational improvements to help us stay ahead of the curve. We are continuously looking at how we operate and finding ways to improve our efficiencies and continue to nurture our employer brand to help us attract and retain the best talent.
We are entering the second half of 2022 in a good position. Our product mix continued to improve. Our distribution network is growing. We have further organic and nonorganic growth opportunity, and we are building a more efficient business while investing for the future.
I also believe that our diversified customer base within the restaurant and institutional channel remains a key attribute of our resiliency going forward.
That, with this, I'll turn the call over to you.
Thank you, Louis, and good morning, everyone. I am pleased to be here today to discuss our key financial results for the second quarter of 2022.
Second quarter consolidated sales were up 27.4% to $138 million. Sales in the Distribution segment increased by 27.7% to $93.6 million. Strong growth results mainly from the easing of restrictions in the restaurant channel, price increases reflecting food inflation pass-through of 11% and customer list acquired in the Outaouais and Laurentian regions. Sales in the Wholesale segment increased by 23.1% to $56.3 million. Again, this results primarily from a less restrictive operating environment in the restaurant channel, food inflation and customer gains.
Consolidated adjusted EBITDA from continuing operations reached $8 million or 5.8% of sales compared to $6.7 million or 6.2% in the second quarter of last year. As Louis mentioned in his opening remarks, adjusting for subsidies received last year, adjusted EBITDA in Q2 2022 grew 16% from 5% in Q2 2021. Growing sales volume, improving gross margin, on the heels of a better product and customer mix helps mitigate growing input costs.
Net earnings were in line with last year at $1.7 million or $0.02 per share. Cash flow from operating activities recorded $1.2 million in the second quarter compared with the use of cash of $2.9 million in the equivalent quarter of last year. Improving use of cash from operation results primarily from seasonal working capital requirements and higher adjusted EBITDA.
Cash on hand at the end of the quarter represented $2 million with a $43 million of available borrowing capacity on our credit facility. As at June 11, 2022, our net debt amounted to $46.1 million, down from $48.4 million at the end of fiscal 2021.
Our financial leverage ratio stands at 1.8x versus 1.9x at the end of fiscal 2021.
I would now like to turn the call over to the operator for the Q&A period.
[Operator Instructions] First question comes from Kyle McPhee at Cormark Securities.
Hi, everyone. Good update -- just to start, I just wanted to confirm the number you gave on pricing gains in Q2. Did you say 11%?
Yes, I did.
Okay. And then another revenue-related question. Can you just give us a progress update on the efforts with your new sales hires and market share gains? I know you're not going to exactly quantify it for me, but is it tracking better or worse versus your internal plan? And are you still looking for kind of breakeven on that investment in people by the end of the year?
Kyle, it's Louis. Thank you for your question. I'm absolutely happy with the progress of our investment in the new sales team forward development of Western Quebec. We are on schedule and budget. The initiative is untargeted and will achieve breakeven very soon on this. Very happy. Tangible growth on our private label sales as they were the important projects we had at the same time. So both are doing very well. .
Okay. Good to hear. And then were there any more sales hires in Q2 and into the current quarter beyond what you told us about last quarter? Or is that kind of investment and you had done for now?
No, we're -- we slowed down the hiring of sales reps due to an industry challenge in terms of labor scarcity. The -- we're constantly hiring people in our distribution center, and we're still missing some very -- the workforce, the labor force is definitely the challenge to the growth, but we will press on the gas pedal pretty soon to reaccelerate the development of the Western Quebec. .
Got it. Okay. Just moving on to margins. It's great to see your gross margin percentage is up year-over-year and quarter-over-quarter. Can you just help me understand some of those moving parts? So I suspect pricing kind of allows your margins to stay neutral, but where is that margin gain coming from? And is there anything or any temporary benefits I should know about?
Kyle, it's Pierre. Well, the inflation has a marginal impact, as you can expect, if you -- when you pass on the inflation, the higher price brings you a marginal higher margin, but it's also -- but mainly, it comes from the customer mix. So a different -- we have a different -- we had a different playing field in Q2 versus the Q2 last year due to restriction in 2021. No restriction in 2022. So the customer base was different. And that improved our margin.
And also the product mix. So as Louis mentioned earlier, private labels comes and gives its little $0.02 in the gross margin as well.
So is that private label that Louis already said you're happy with the progress? So is that a material part of the gross margin gain? Or is it still pretty small as you slowly increased price?
Pretty small. Still pretty small. Customer mix is the #1, 2 and 3 answer, I would say. And the other ones are more marginal but positive impact.
Got it. Okay. And sorry, just going back to that first moving part, the pricing. Were you indicating that that's taking your margin percentage up or maintain it?
Can you repeat the question, please?
Just on the pricing gains, is that actually accretive to your gross margin percentage? Or is it...
Well, if you -- in cost plus business situation. If your plus is on a higher number, then there's a marginal gain there as well. So for example, $100 sale at a 10% % markup, and if you do the $110 sales at the same 10%, you have a higher margin. So it's a marginal impact, but it is a positive impact.
Got it. Okay. Thanks for clarifying that. Just a question on the inflationary environment. So beyond your Q2 period, are you still seeing food inflation with more pricing gains you're going to have to take as we get into the next quarters? Or is inflation now tapering off, indicating prices maybe already be?
Yes. Louis here. As for the -- where the inflation is going, we're expecting the inflationary environment to remain high for the rest of the year. However, we do not expect to see the same pace of growth as we experienced in the last 6 to 12 months we started to see at the end of the second quarter, the lapping -- the COVID comparables that came in the later at the end of the month of May.
So what happened is in May 2021, the restaurant reopened, okay? And part of our growth -- part of our growth is the -- as Pierre mentioned, there is -- you see the inflation, but also the volume or accelerating that what helped and the -- and now we're facing more comparable period because restaurants were fully opened last year.
So to come back to the management of the inflation regardless of where inflation goes, we sell most of our businesses on a cost-plus basis. So therefore, the input cost inflation is almost entirely passed through. And about the internal cost, we have mechanism in place to mitigate some of the effect of prices -- the rising input costs, primarily fuel that we can, in some portion, pass-through.
Got it. Okay. Okay. Moving on, just maybe a question on the macro and demand situation in Quebec. So you guys are well diversified by channel. I think some clients are probably highly recession-resilient, others likely not as resistant. So for those pockets of your business that might be exposed to recession, are you seeing any demand disruption to date? Is anything already showing up as consumers pull back? Or what's your thought?
Well, not much. The business is growing steadily in all channels, as I said, like it's all reopened, and we're seeing -- we're seeing good growth. And as you know, we have a -- we're very diversified in the different channels. And in the event that there is a slowdown in consumer spending in restaurants, if it happens, we have to keep in mind that our business model is resilient and diversified.
So we did get some great experience with the shutdowns and navigating through that period in 2020 and 2021. So we're in a good position if it happens. We don't expect to go where it was before you included that, not at all. But if it happens, we're in a solid position to manage it in a good position to manage.
Got it. Okay. Just moving on to a capital deployment question. So in the current macro environment, are you still seeing M&A opportunities that you're willing to deploy capital on? Or is that part of your growth plan on hold?
Kyle, it's not necessarily on hold. We're open for business. We have a good pipeline, but we are in no hurry, that's for sure. And we're looking for smart acquisition. So something that would be accretive and that we could integrate quickly and leverage the assets that we just acquired. So we're not closed for business. Our balance sheet is in a good position. .
Okay. And then last question. So on the 2 recent acquisitions you've already done, how is progress to date with delivering growth beyond the revenue acquired from those businesses as you exploit the new geographies in Quebec? Is there any traction at all on growing those acquired businesses?
It's going well. Very well, both with following a very good integration with great people, new people joining Colabor, and we're maintaining our revenue run rate for now. We just acquired them 3 months ago, and they already contributed to this quarter's profitability. These are strong businesses with lots of potential for Colabor in the future. So we are on track and very happy with the results so far.
Got it. Okay. That's it for me. I appreciate all the answers.
I will now turn the conference back over to Louis Frenette for closing remarks.
Thank you, Joanna, and thanks, Kyle, for your questions. I remain grateful to our employees who continue to impress and will contribute to Colabor's successful turnaround. Because of our team's hard work, Colabor has been able to continue to grow and even improve its profitability, all in the context of a pandemic and important labor shortage, rising inflationary pressures and supply chain challenges.
At the same time, we are investing in our business and setting the stage for our continued success and remain open to an accretive acquisition to accelerate the growth of our distribution activities and the products. In the second half of this year, we will continue to prioritize the execution of our strategic plan to drive profitable growth and tightly managing costs to deliver future shareholder value. This concludes our call for the second quarter of 2022. Thanks for joining us. Stay safe and healthy.
Ladies and gentlemen, this concludes your conference call for today. We thank you for participating, and we ask that you please disconnect your lines.