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Good morning, ladies and gentlemen, and welcome to the Colabor Group Inc. Second Quarter 2023 Results Conference Call. Following the presentation, we will conduct a question-and-answer session open to analysts only. [Operator Instructions] . This call is being recorded on Wednesday, July 26, 2023. 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 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 Louis Frenette, President and CEO of Colabor Group. Please go ahead, sir.
Thank you, Eric. Good morning, everyone, and welcome to Colabor Group's second quarter of the fiscal 2023 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 17, 2023. The press release and disclosure documents can be found on our website and on SEDAR also, accompanying presentation can also be accessed online in the Investors Section on www.colabor.com.
Joining me today on this Pierre Blanchette, our Chief Financial Officer; who following my initial remarks, we'll provide an overview of our financial results. I am very pleased with our second quarter results for a 9th consecutive quarter, our transformation strategy has paid off. Once again, this quarter, we have -- we are delivering sustained revenue growth and improving profitability. Please refer to Slide #4 for a snapshot of our performance in the quarter. In the second quarter, consolidated revenues were up 19%, primarily from our organic and nonorganic push in Western Quebec, including the new major accounts we announced in Q4 of last year, food inflation and sustained demand from our existing customer base. This is also our first full quarter lapping the year-over-year effect of the restrictions that affected the restaurant industry following the COVID-19 pandemic. Gross margin percentage was lower by 30 basis points but increased year-to-year by 50 basis points from improvement to our product and customer mix and from the contribution of our April 2022 acquisition. Adjusted EBITDA grew by 16.1% from the effect of a growing volume of sales. And our leverage ratio also improved to 2x compared to 2.3x at the end of last year. We are now entering in the second phase of our 5-year strategic plan in a strong position with sustained demand in both our existing and coveted markets. Looking ahead to the next phase of growth. Our priorities remain on executing the 4 pillars of our strategic plan, as set out on Slide #5 of the presentation. The first one is generating profitable growth, improving our customer mix and product offering primarily our private label brand and working on our category management practices remains a top profitability driver. Since the start of 2023, these initiatives contributed to 50 basis points improvement to our gross margin and 136 basis points improvement on our adjusted EBITDA margin. Now the second one is growing our reach from 30% to 90% of the potential HRI market. During the last 2 years, we have taken a prudent approach to test the Western Quebec market, and the results have been conclusive with street and chain customer wins. We continue to take a prudent approach and are investing to extend our reach in the province. M&A is a key part of our future growth plan. Although our pipeline of opportunities remain strong, we have taken a more opportunistic approach for now concentrating our resources and prioritizing our capital allocation on our new strategic facility in St-Bruno. This customer built state-of-the-art facility will allow us to greenfield our distribution activities in Western Quebec while conducting our wholesale operations from the same facility, providing significant operating and cost synergies. I will provide an update on the progress of the bill in just a few minutes.
The third pillar is improving our employer brand, attracting and retaining the best talent is key success factor for Colabor, and our HR team is highly focused on this objective. Because of our team's effort, despite the ongoing tight labor market, we have access to additional temporary workers during the busy summer season, contributing to one of our best summer season in recent memory.
In the longer term, we believe that the new facility will also help our attractiveness as an employer of choice in the region by providing a stimulating working environment with easy access to public transit. Our fourth pillar is renew and refreshing our brand, raising the quality and local components of our offering is becoming an important differentiation factor for Colabor and one that our customers appreciate. After obtaining the Blue Fork certification in the first quarter at testing the quality and local sourcing of our fish and seafood offering.
We recently strengthened our partnership with [ Mitsuwa ] by making a minority investment in their business to support their growth and reinforce our commercial agreement [ Mitsuwa ] is an online marketplace, allowing our customers to access locally sourced products and food products. And now for an update on one of our most exciting projects in a long while. Please turn to Slide #6. Since the groundbreaking ceremony, which took place in May, we have been busy overseeing the construction and planning for our upcoming move to our strategic facility in St-Bruno. We have put together several committees that meet on a regular basis and comprise of key personnel and consultants to ensure that we remain on time and on budget.
And so I am also very happy with our seamless collaboration with the entire team from Montoni, the promoter of the project. I have personally overseen a dozen of such projects successfully in my past responsibilities and I am highly confident that we can seamlessly complete the move and start our new distribution activities as scheduled. Total CapEx dedicated to this project since the start of the year was immaterial. The pace of disbursement will start accelerating in Q3 and plateau by the end of Q4, beginning of next year. High teens and low 20s remain our target CapEx range.
Pierre with this, I will turn the call over to you.
Thank you, Louis, and good morning, everyone. I'm pleased to be here today to discuss our key financial results for the second quarter of 2023. Please refer to Slide 7, 8 and 9 of the presentation available on our website for highlights of our financial performance in the quarter. Second quarter consolidated sales were up 19% to $164.2 million. Sales in the Distribution segment increased by 25.6% and [ $117.5 ] million. This results from higher sales primarily from new chain customers announced in Q4, price increases reflecting food inflation of approximately 6% and M&A for 1/3 of the quarter. Sales in the Wholesale segment increased by 1.7% to $57.3 million, primarily from food inflation. Consolidated adjusted EBITDA from continuing operations reached $9.3 million or 5.7% of sales compared to $8 million or 5.8% in the second quarter of last year. Growing sales volumes explain the higher adjusted EBITDA. Net earnings grew by 38.1% to $2.3 million or $0.02 per share, up from $1.7 million or $0.02 per share in the second quarter of 2022. Our higher revenue run rate is helping us mitigate the effect of our investment in growth, higher amortization, financial and income tax expenses. Cash flows from operating activities were $11.3 million in the second quarter, primarily resulting from a lower working capital utilization and a higher adjusted EBITDA. This compares to negative $1.2 million in the second quarter of last year.
In Q2, our strategic investments amounted to approximately $0.3 million out of a total of $1.2 million in CapEx. Strategic investment mainly went towards the new St-Bruno facility. We ended the second quarter with a slightly lower net debt of $47.3 million down from $47.8 million at the end of 2022. Our financial leverage ratio improved in the quarter to 2x from 2.3x at the end of fiscal 2022. At the end of Q2, we had $38 million of available borrowing capacity on our credit facility.
I would now like to turn the call over to the operator for the Q&A questions.
[Operator Instructions] Your first question comes from Kyle McPhee with Cormark Securities.
First one, the implied organic volume growth in Q2 is very impressive. And I know it includes the 2 new chain clients you previously announced, but there seems to be more new volume beyond those 2 chain clients. Can you tell us if there are any new notable volume wins in Q2? Or are you still benefiting from those past wins you haven't left?
Karl, it's Louis. Thanks for your questions. So the growth is of 19% and of that 19%, 6% of the 19% was inflation. So the rest is the new major accounts and the steady demand for our new customers and the existing accounts which are growing.
Got it. Okay. Okay. So nothing major in terms of new accounts since existing clients winning and ongoing smaller ones.
We do win accounts, small accounts, but no major account.
Got it. Okay. And then can you help us understand when the new facility will actually be ready to take on new client volume?
Yes. The -- okay, the idea is that we will move our Wholesale business at the end of the year to the new facility. So that's not distribution, just the Wholesale business. So once it will be settled in the -- in early -- in the first quarter, then we will start to move some volume that was shipped to Montreal from our Quebec -- sorry, Lévis distribution center. So that's in Q1. We will move that and then we expect that if you're talking about gaining new customers, both for the St-Bruno facility and distribution and the new space available in Lévis that will be sometime starting in Q2 of next year. So everything is on, as I said, earlier, everything is on time and on budget. So we're confident with that.
Got it. Thanks for that timing -- color. So we're getting a good feel for how organic volume growth is landing this year. But looking forward with your new facility online and ready to take on new clients in Q2 next year, do you think 2024 can be at least the same level of organic volume gains that we're seeing this year? I suspect you have visibility on sources of new volume when the new facility is available. So just any thoughts you can share on the growth goals for 2024.
Well, I'm smiling here, but we don't give guidance. Our objective currently is to grow our activities across the province, which we didn't have access before. So with that new capacity in St-Bruno, we'll be able to serve the Western part of Quebec now very well at normal cost versus shipping from Lévis. And the idea is that we hope to beat long term the market and gain market share. So you may know that as we take the last 12, 13 years of the food service industry, growth was around 4%. And hopefully, you will lead that.
Okay. And then -- have you -- I'm curious if you've continued to add new salespeople in 2023 and through Q2? Or is the volume growth you're showing right now, all the benefit of the past hires?
No, no, it's both. We continue to invest, especially in marketing and sales to export the actual growth and future growth in our plan. So the answer is it's both. It's the organic growth from current customers and new customers supported by marketing and sales.
Got it. Okay. And then last one. Can you -- I see you took a 13% stake in a farm platform. Can you share your strategic thinking on that 13% equity stake you took, I know you were already a distributor of their local offerings. But what's the thinking on having the equity stake as well?
Well, part of our strategic plan is to being more local and offering local products to our customers, which they like. And there are products that in a normal distribution center, you could not manage because there are zillions of them and small quantities. So the aggregator is [ Mitsuwa ] and we received the order ready to ship like a cross-dock. So we're helping them. So this deal is a -- this investment is a very small investment for Colabor, and it strengthened our distribution agreement with them. That's the most important thing. Our -- as I said, our clients -- clients like to have [ Mitsuwa ] locally sourced offering. So this is in line with our local content strategy, as I said, which adds to our Blue Fork certification as an example. This is a big focus of ours. And I mentioned also to have more locally sourced product for our own private label.
Got it. Okay. Makes sense. That's it for me.
At this time, there are no further questions. I'll now turn the conference over to management for closing remarks.
Well, thank you, and thanks for your question. After execution of the first half of our strategic plan and a very successful turnaround, we are moving to the second phase of our plan with an impressive growth runway and a solid balance sheet. We are resolutely dedicated to ensuring a smooth build and transition of our wholesale activities by the end this year, as I just mentioned. We are also aiming to be in a position to start our Western Quebec distribution activities in the course of the second quarter of 2024. I'm excited about the potential of this new facility and how it will allow us to provide a great working environment for employees. This move also signals a new era for Colabor. We are modernizing our operations, improving our customer service levels, attracting and retaining more employees, differentiating our offering from our main competitors and starting to generate interesting operational leverage. This would not be possible without the hard work and dedication of all of our employees across the province. I'm excited about what the future holds for Colabor. I'm happy to be on this journey with such dedicated people. This concludes our call for the first (sic) [ second ] quarter of 2023. Thank you all for joining and have a great summer, stay safe and healthy.
This concludes your conference for today. You may now disconnect your lines.