© 2024 Alpha Spread Limited. All Rights Reserved.
www.alphaspread.com is not operated by a broker, a dealer, or a registered investment adviser. Under no circumstances does any information posted on www.alphaspread.com represent a recommendation to buy or sell a security. The information on this site, and in its related newsletters, is not intended to be, nor does it constitute, investment advice or recommendations. The information on this site is in no way guaranteed for completeness, accuracy or in any other way. In no event shall Alpha Spread Limited be liable to any member, guest or third party for any damages of any kind arising out of the use of any content or other material published or available on www.alphaspread.com, or relating to the use of, or inability to use, www.alphaspread.com or any content, including, without limitation, any investment losses, lost profits, lost opportunity, special, incidental, indirect, consequential or punitive damages. Past performance is a poor indicator of future performance.
You don't have any saved screeners yet
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good morning, ladies and gentlemen. Thank you for standing by. Welcome to Colabor's Third Quarter 2018 Financial Results Conference Call. [Operator Instructions]Before turning the meeting 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, October 18, 2018.I will now turn the conference over to Lionel Ettedgui, President and CEO. Please go ahead, sir.
Yes. Good morning, everyone, and welcome to Colabor Group's 2018 Third Quarter Conference Call. This is Lionel Ettedgui, President and Chief Executive Officer.Earlier this morning, we issued our third quarter earnings 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 www.colabor.com under the Investors/Events and Presentations section.During the quarter, and most recently, we made structuring changes to our executive team. First, let me introduce Mario Brin, who was appointed as Interim Senior Vice President and Chief Financial Officer of Colabor. Mario joined the company on September 10. He has a successful track record and very significant experience, having held various senior executive position at Garda World, Naya Waters and CGI Group. John Hemeon join us as Senior Vice President and General Manager in Ontario. John has an extensive experience in the food service industry, having held senior executive positions at Tim Hortons and SYSCO. Mathieu Dumulong, who was previously General Manager of our Wholesale Division in Boucherville, was appointed Vice President of Sales of Colabor. Mathieu has a significant experience in the food service industry, including as a Sales Executive at [ Morzen Coles ]. Élisabeth Tremblay was appointed Vice President of Human Resources and Communication. She has over 20 years of experience in human resources management mainly at Saputo and Grupo Bimbo. And finally, Daniel Valiquette was appointed Vice President of Central Procurement and Private Label. Daniel has over 7 years of procurement experience and held various senior executive positions at Alimentation Couche-Tard.Despite some remaining challenges in our Broadline Distribution activities in Ontario, we have addressed some challenges and are still working on improving our operations. We have a new General Manager in place, a dedicated team, and we continue to work on initiatives that matter.Our Broadline Distribution activities in Québec continue to perform well, resulting from our focus on the hotel, restaurant and institutional market.Our wholesale business remain strong with higher quality sales. In the quarter, despite the consolidated loss of sales volume, we were able to keep the same level of EBITDA.Improved management of our working capital and stronger operational performance allowed us to grow our cash flow from operations and reduce our level of debt. Our team is highly motivated and committed to change the trend of recent years.I will now turn the call over to Mario for a review of our financial result. We will then open the call for questions. Mario?
Thank you, Lionel, and good morning, everyone. It is a pleasure to be here today to discuss Colabor's third quarter financial results. Colabor Group consolidated sales for the third quarter ended September 8, 2018, stood at $291 million compared to $319 million in the equivalent period of 2017. In the Distribution segment, sales decreased by 9.2% to $222 million, mostly from the loss of the supply agreement for Popeyes Louisiana Kitchen and Montana's BBQ & Bar restaurant chain in our Ontario activities. This was mitigated by an improvement of sale from Broadline Distribution activities in Québec.Sales in the Wholesale segment stood at $68.8 million, down 7.6%, resulting primarily from the nonrenewal of nonprofitable contracts.Even with the lower volume of sale, adjusted EBITDA remained flat at $7.6 million compared to $7.7 million in the third quarter of 2017. This result from our improving gross margin as a percentage of sales, a lower operating expense, which were down by $1.5 million, including the reversal of provision amounting to $700,000.Colabor concluded the third quarter of 2018 with net earnings of $1.2 million or $0.01 per share compared to a net loss of $18.8 million or $0.18 per share in the equivalent quarter of 2017. The 8.9% loss on sales volume weighted on earnings. However, this was mitigated by a pretax reduction of $14.1 million in asset impairment losses, a pretax reduction of $8.2 million in cost not related to current operations, continued gross margin improvement as a percentage of sales and a reduction of operating expenses, as explained above.Our cash flow from operating activities stood at $12 million in the third quarter of 2018, up from $8.9 million in the equivalent quarter of 2017. This is mainly explained by an improving working capital situation resulting from better management of account receivable and inventories to reflect the level of sales.On October -- on September 4, 2018, we announced the extension of the term of our credit facility for an additional period of 1 year until October 13, 2020, and the extension of the term of our subordinated loan with the Fonds de solidarité FTQ for an additional 6-month period until April 13, 2021. Both extension were provided without any changes to other underlying conditions.We also reduce our debt level. As at September 8, 2018, the company total debt amounted to $115.4 million, down from $122.4 million in the second quarter of 2018 and from $118.9 million from the equivalent period of last year.Our total debt to trailing adjusted EBITDA ratio now stands at 5.9x, which is down sequentially from the second quarter of 2018, when our leverage ratio reached 6.2x. This compare with a ratio of 4.5x at the end of the third quarter of 2017.This conclude my review of our financial result. Jessa, I would like to open the call for question now.
[Operator Instructions] Your first question comes from the line of Derek Lessard from TD Securities.
Lionel, you've been in the chair now for about 6 months. I was just wondering if you're now in a better position to talk about where you envision Colabor as a sales organization, where it could be or should be.
Well, for sure, I will say that we decided to take the right decision regarding our activity by letting go nonprofitable contract regarding sales. We were looking to stabilize the activity in Ontario region. And now it's achieved regarding the relationship we have with our customers. So we are definitely in better shape now to focus on growing as a business. Moreover, we have -- I have built a whole new team to support the turnaround of the activity and to make sure that we're going to grow the business. So we're still working now and of -- and finalizing an action plan and a vision for the whole company.
Okay. That's helpful. And clearly, I mean, that was my next question. You've made some moves to improve your management bench strength. Just wondering, maybe could you talk about some of the moves you've made to fill those critical spots? And maybe are there still some areas that you feel need some more attention?
Yes, sure. So we -- at the end of the day, we are a very basic business, okay. And my whole point is to go back to basics and to be close to operations. So I wanted highly professional individuals with huge experience in different important departments of the company, just like operating finance, just like sales, but sales for both side for Broadline and also Wholesale. Procurement was critical. So I think that with fresh, new people, we can change the future of Colabor and improves the way we are doing thing, just bring back some discipline, some rigor, some vision and be able to achieve what we put on budget, which is quite basic to me.
Okay. Maybe just touch on the -- and add some color around the gross margin improvements. It looks like you had some nice expansion in both Wholesale and Distribution segments. And maybe as a follow-up to that, could you talk about the -- perhaps the sustainability that you see there?
Yes, sure. So as I said previously, honestly, it's mainly because of good decision taken. Just -- I know that it seem to be simple. But on a day-to-day basis, it's not that simple. But just instilling discipline, rigor and focus is mainly the reason why we managed to improve the gross margin. It's not easy to decide one day to let go some sales. Even if it's not a very profitable contract because you're also focusing on market share. But if you have decision to take, and at the end of the day, you're managing the company or so by the bottom line. So that's the first thing. In our activity, we're delivering our customers many times per week. So you are as strong as a good quality service you've done as a previous delivery. So instilling discipline is just not -- it's a core value for us for the way we have to work, and it's on a daily basis, which is not an easy one. It's the same for rigor and focus. So mostly, by implementing this in culture through the company, we can improve our efficiency on warehousing, on shipping, on distribution, so -- which are the key things for us regarding the driven keys for profitability.
Okay. So I guess, in -- it's fair to say, in the 6 months or 7 months that you've been there, these were -- I guess, these -- the discipline and the rigor and the focus is something that you viewed wasn't part of the organization prior.
No, not at all. It's just that it's a huge challenge for all organizations, to be fair, okay. It's a very competitive market. It's a very demanding industry. On average, you're going to -- you can ship up to -- from 60,000 to 80,000 cases per day. It's really tough, okay. So my point is, it's -- mostly -- if you want to make a turnaround, you need to think as simple as possible. And just by focusing on very simple things just like discipline, rigor and focus on several key initiatives, you just make your people focusing day-by-day on those things, and you're going to collect results. And that's what's happening for us.
Okay. And I guess, along the same lines, is it fair to say -- and I think you had mentioned it or answered in the previous question, but is the shorter-term strategy to emphasize profitability over sales volumes? And I guess, what would your view -- like what in your view constitutes profitable volume growth, whether by product category or private label or by end customer?
Honestly, we are competitors. So we want to fight for both sales and profitability. But to be fair, it would be only for quality sales. We're not looking to buy market share or this kind of stuff. So I think that we want to manage a healthy business. And that's what we're focusing at the moment.
Okay. Maybe switching gears, and welcome aboard, Mario. Congratulations.
Thank you, Derek.
Operating expenses were down. I calculated $2.1 million, but in your prepared remarks, you said $1.5 million. But you called out the $700,000 due to a reversal in provisions. Just wondering where the other majority of the lower cost were coming from?
As you were mentioning, there's a portion related to a settlement of CSSB and the equivalent in Ontario. And to the honest, it's part of our business because we need to properly manage that. So from that perspective, every quarter, it's part of our business. And remaining, the improvement of the OpEx, it's really related to what Lionel was describing in a sense that we were able to have a better cost, having better rigor, better efficiency, and I would say that it's almost everywhere.
Okay. And in the MD&A, you called out that you guys are in a good position now to serve independent restaurants and to ensure a better penetration of private label. Maybe could you just talk about or add some color around what you mean by that?
Yes. Well, I guess, that's -- the main focus of Colabor has always been to focus on independent restaurants. Because it's nicest part of the business, let's say, or, let's say, the most profitable part of the business. And you are not depending of several players, but you're serving large number of customers. And that division and the objective of Colabor to serve the most part of independent restaurants and support them to grow their own business. If they have a healthy business, it will be very positive for Colabor because we have quite a significant market share, specifically in Québec on independent restaurants. Now when you were referring to private label, it's part of the food service industry for Colabor and also for our competitors. You're serving your customers with national brand. And you also offer them some alternatives regarding private label. So regarding the penetration of private label, we are not a private label-oriented company. We want to -- we have an amazing partnership with vendors on national brand. And we just want to be sure that we can offer all services to our customers with a fair part of the business into private label.
Okay. And Lionel, maybe just coming back on the first part of your answer there, is there a competitive difference between the independents and, say, the larger chain QSRs from your perspective? Just wondering, why it's a healthier margin for yourself? And I guess, I don't know if that infers that the competition is less? Or there's just more players vying to get the business from the larger chains?
No, it's -- it depends where you want to compete. When you're talking about large-chain business, you're talking about less SKUs regarding what they are looking for. So you -- it's a business of efficiency, of logistic efficiency. When you're talking about independent street restaurants, you're talking about 9,000 different SKUs they can have access to. So it's a different -- it's more about getting flexibility and to make sure that you can supply them well regarding service. So it's almost a different playbook. So Colabor has managed to be very efficient on independent restaurants business. It's because when you -- it's really because to do both of those activities through the same warehouse. It's not just same game. It's not the same business. And to be honest, it's one of the reason we were -- we're having some difficulties in Ontario because we were mainly chain, and we tried to have the same alignment as independent restaurants. And now we're just -- by coming back to what we used to do, we think it's -- it make a huge difference.
Okay. That's very helpful. And maybe one last question for me. And it's -- could you maybe just talk a little bit about the progress that you are making in Ontario, whether it's the -- or optimizing the Ontario operations, whether it's on volumes? The, I think, route optimization was a big one for you, and do you see reconfiguration?
Yes, sure. I will say that when I joined the company, the first thing which was important to me was to really understand what were -- where we had real issues, and was it about the volume we had, was it about logistics or efficiencies on operation side and so on. And then it was to decide if I had the right team in place. So first what we did, we built a team. We started initiatives regarding inventory management, regarding customer relationship, regarding some initiatives at warehouse label, at shipping label. And first step of the plan was to stabilize our relationship with our customers to make sure that the business is stabilized, and we are not going to lose volume again and again, because when you're losing volume, it's quite difficult to make a turnaround for sure. So this step is almost completed. So we achieved what we wanted to do at this stage. Now the second part is to focus a bit more about improving our efficiency on operation to be able to bring back the activity to success. And then with solid basis, we are going just to grow the business as we are doing that in the Québec region.
Okay. And that's very helpful as well. Have you had any -- you said part one essentially is done in terms of the customer relationship and stabilizing volumes in Ontario. Have you had any -- are you able to quantify it? Or are you able to point to any, I guess, customer feedback that's able to confirm what you're saying?
Yes, what I was referring to was about -- our business is food service. It's all about service. So you need to make sure that you're providing a very good service to your customers. At this point, it's not at any cost. But what you have to understand is, when you do not manage, for instance, to supply some products to restaurants, they're not going to sell them on the day they need them, and it's a pure loss. So it's very important for us to make sure that our feed rate were back to where they should be. And now we achieved this part which is important part. So it's more about servicing the customers. And now we are going to make sure that customer are asking for us and stand for us to be able to keep the same level of service and to improve our bottom line by bringing back efficiencies, by reviewing the layout on warehouse efficient and all the initiatives regarding efficiency.
Okay. Are you able to provide, like, a percentage, I guess, in -- or a completion percentage of -- or progress percentage of where you are in terms of the turnaround there?
Honestly, not at all, because I'm not satisfied at this point where we are, okay. I'm very ambitious for the activity, and we're still working. I just build a full new team who is here to support, and we need couple of weeks to be really efficient. And I'm pretty sure that we -- so far, it's not that bad. I'm satisfied with the flat quarter. And I think that it's time for us to bring more discipline, more rigor, more focus to be able to achieve the goals we wanted to achieve.
There are no further questions at this time. I'll turn the call back over to Mr. Ettedgui.
Thank you, operator, and thanks, Derek, for your questions. As closing remarks, we have a new executive team in place as of the date. They are highly experienced, motivated and committed industry professionals. They are fully aligned with our strategy and dedicated to improve our profitability, grow our cash flow and reduce the debt level. This conclude our call for the third quarter of 2018. Thank you for joining us, and I look forward to our next conference call to discuss our 2018 fourth quarter and year-end result in February. Have a good day, everyone.
This concludes today's conference call. You may now disconnect.