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Good morning, ladies and gentlemen, and welcome to Colabor Third Quarter 2023 Results Conference Call. [Operator Instructions] Also note that this call is being recorded on Thursday, October 19, 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 statements 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. And I would like to turn the conference over to Louis Frenette, President and CEO of Colabor Group. Please go ahead, sir.
Thank you. Good morning, everyone, and welcome to Colabor Group's third quarter of 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 36-week periods ended September 9, 2023. The press release and disclosure documents can be found on the -- on our website at -- on our website and at sedarplus.com. And accompanying presentation will also be accessed online in the Investors section at colabor.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. I am thrilled to report another strong quarter for Colabor. Once again for a 10th consecutive quarter, our transformation strategy has proven to be a success. Our ability to capture market share and sustain demand experienced in our established markets has allowed us to consistently achieve robust revenue growth and improvement to profitability. Please refer to Slide #4 for a snapshot of our performance in the third quarter. We reported a 13.1% consolidated revenue growth primarily from the contribution of our major account wins in Q4 of last year. Gross margin percentage grew by 80 basis points year-over-year from sustained improvement to our products and customer mix. Adjusted EBITDA grew by 24.1% from our growing volume and dedication to continuous improvement to our business. Finally, it is worth noting that even with the increased disbursement in Q3 associated with our strategic capital expenditure project, our enhanced profitability has enabled us to sustain a favorable leverage ratio of 2.2x, a slight improvement from the 2.3 ratio that we had at the beginning of the year. Regarding our strategic investment program, I'm excited to share an update and confirm that we are on track to relocate to our customer -- custom-build facility by year-end. In our accompanying presentation on Page 5, you will find some visual updates showcasing our progress. Throughout my career, I witnesses -- witnessed numerous projects, and I'm pleased to declare that this facility construction stands out as one of the best executed one has encountered. I extend my heartfelt appreciation to all those who are dedicated and committed to this endeavor. Our collaborative efforts involve close coordination between our team, a group of consultant and the team at Montoni, the facility builders. To all involved, I would like to say that your incredible efforts are sincerely acknowledged. As seen in the images -- this presentation, we are near completion of the installation of the racking system, and we anticipate finalizing the installation of our freezer in the upcoming weeks. This keeps us both on schedule and within budget for the relocation of our wholesale operation and headquarter before the end of the year. And of course, to commence distribution activities in Western Quebec during the first semester of 2024. This project holds strategic significance for Colabor. It will help accelerate growth and enhance our talent acquisition and retention capabilities. The opening of our distribution center in Western Quebec broadened our reach, allowing us to efficiently reach 90% of the HRI market. This represents a remarkable expansion from our distribution coverage primarily concentrated in Eastern Quebec, where we reached efficiently extend to only 1/3 of our addressable market. Our new facility has the additional benefit of being built as an eco-responsible and carbon-neutral building. And this strategically located close to public transit and major routes, which -- sorry, which also helped position us as an attractive employer in a competitive labor market. We are excited about the transformative potential of this upcoming move and what it means for the future of Colabor. We are now more than halfway through our 5-year strategic plan. Our focus remains on pursuing the following 4 pillars as set out on Slide #7 of the presentation as our top priorities moving forward. The first one is generating profitable growth. Improving our customer mix and product portfolio, particularly through the development of our private label brand and further refining our category management practices remain drivers of profitability. Since the start of 2023, these initiatives contributed to a 60 basis point improvement to our gross margin and 35% improvement to our adjusted EBITDA. Second, growing our reach from 30% to 90% of HRI market. Over the last 2 years, we have taken a prudent approach to test the Western Quebec market, and the outcome has been concluded, marked by street and chain customer wins. Our upcoming move to the new hybrid facility in St-Bruno will play a pivotal role featuring of this endeavor. Furthermore, M&A remains a key part of our future growth plans. However, in the short term, we are allocating capital by prioritizing the ongoing strategic CapEx and the reimbursement of the debt. Our objective is to maintain a healthy level of leverage and flexibility for future growth projects. The third pillar is improving our employer brand. Attracting and retaining the best talent is a key success factor for Colabor. This strategic -- this strategy allows us to have the necessary resource to face one of our busiest summer season in recent history. The facility in St-Bruno will also contribute to this effort, and we look forward through the upcoming launch of our new employer brand, which we hope will further galvanize our troops. The fourth pillar, renew and refreshing our brand and enhancing the quality and incorporating locally sourced components into our offering is an important differentiation factor for Colabor and one that is appreciated by our customer base. Moreover, our identity as a Quebec-based business and our personalized approach to customer service set -- sorry, sets us apart from the larger distributors operating within the province. In the earlier part of the year, we obtained the Blue Fork certification from the Quebec government, attesting to the quality and local sourcing of our offering. We also made a minority investment in Mathurin, an online marketplace that allows our customers to access locally sourced, produced and food products. Both these initiatives help reinforce our commitment to locally source and sustainable food offering. We also conclude various partnerships with industry players to foster a stronger and more sustainable ecosystem. Now 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 third quarter of 2023. Please refer to Slide 7 to 10 of the presentation available on our website for highlights of our financial performance in the quarter. Third quarter consolidated sales were up 13.1% to $164.7 million. Sales in the Distribution segment increased by 20.4% to $120.2 million. This results from higher sales volume, including from the new chain customers announced in Q4 2022 and price increases reflecting food inflation pass-through of approximately 3.7%. Sales in the Wholesale segment declined by 8.6% to $52.9 million, approximately half of which is lower volume from the wholesale segment and half of which results from a supply optimization project between our warehouses, reducing our internal sales to the distribution segment, mitigated by the impact of inflation. Consolidated adjusted EBITDA from continuing operation reached $11 million or 6.7% of sales compared to $8.9 million or 6.1% in the third quarter of last year. Growing sales volume explains the higher adjusted EBITDA.. Net earnings grew by 25% from $2.8 million in Q3 of last year to $3.5 million in Q3 2023 or equivalent to $0.03 per share in both periods. 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 $8 million in the third quarter compared to $8.8 million in Q3 of last year, primarily resulting from higher working capital utilization needed to fund higher inventory levels in the context of growing sales. In Q3, our CapEx investment amounted to approximately $9.1 million, of which the vast majority went to the preparation of our new strategic facility in St-Bruno. We ended the third quarter with higher net debt of $53.4 million, up from $47.8 million at the end of 2022. Because of our growing adjusted EBITDA, our financial leverage ratio was still below what it was at the start of the year. It now stands at 2.2x compared to 2.3x at the end of fiscal 2022. At the end of the quarter, we had $34 million of available borrowing capacity on our credits facility. I would now like to turn the call over to the operator for the Q&A period.
[Operator Instructions] And your first question will be from Kyle McPhee at Cormark Securities.
First question, are you able to narrow down the CapEx budget yet for the total cost of the new facility versus -- I think your prior guidance had kind of high teens to low $20 millions of dollars.
Yes, Kyle, it's Pierre. Thank you for the question. Yes, as you -- as we are getting closer, we are expecting a low teen -- high teens, I'm sorry, CapEx, it's going to be -- obviously, it's going to be shared between Q3 and Q4. As you recall, there was a minimal amount in Q2. Q3, we just had a $9.1 million investment, of which about $8.8 million was related to the new facility. And we are confident that high teens will be the target with some spillover in terms of cash flow into Q1.
Okay. Should we expect there to be any kind of unavoidable revenue disruption in Q4 during this transition to the new facility?
Kyle, it's Louis. No, we don't expect that because it's well planned. We -- what we did is we met all the big distributors that are ordering from our wholesale business, we make sure that they will put in place a system where big orders will be placed before they move. And so we've been planning that -- preparing that for a long time with them, and it found good, some very minimal disruption in terms of volume. There may be some, but very minimal.
Okay. Are you able to quantify and share the size of the onetime cost to execute the facility transition in Q4.
We will not quantify, Kyle, but what we can say is that we are doing all the moves with internal resources. So we have workers coming from other plants to assist, and we're going to mobilize all of our equipments as well. So we don't expect to be a large number, and it's going to be well executed. It's well planned. So -- but we're not going to share an amount.
Okay. Understood. Do you anticipate or foresee any kind of issues hiring staff for the new facility? Or are you largely starting with your existing staff just moving over to the new site?
Yes, it's Louis again. The -- so the answer is no, we don't anticipate any issues as all of our staff will transition to the new facility. It's only 7 kilometers away from their current location. And actually, that new place, brand-new will improve our attractiveness as an employer, okay? The new facility is actually a key pillar to attract workers and head office people [indiscernible] when it's brand new, it's fun for them and us. And it's also very close to public transport, so -- which is different from where we are. So it should be easier if we need to be -- try hiring hire new people.
Okay. Are you able to get a little more specific with timing guidance for when the new facility will be ready to service new distribution clients in Western Quebec. I know you kind of said first semester, but is it fair to say at some point during Q1 next year, you can start servicing new distribution clients?
Well, we're saying before the end of first semester. So you have to understand that, first, when we make the move, it's for the wholesale business. So that's the focus and operations for distribution are continuing as they are now. Then we will move some volume from our Quebec facility for distribution to the new facility. So that will happen at the end -- the beginning -- end of the first quarter, beginning of the second. And then we're planning to bring in new customers. So we just want to make sure that we have almost perfect service levels and so -- which should happen at the end of the second quarter.
Okay. That's helpful. Are you seeing any signs of demand weakness starting to show up among your clients for the wholesaler distribution business a this point just because of consumer pressures in the economy? Anything showing up?
Yes. It's not only the whole seller business, it's distribution, especially that does the last mile. So the -- so as you read in the papers, yes, there is a slowdown in high-end restaurants in big cities. So we're not that affected because we're more in the eastern part of Quebec and -- but we're seeing a bit of a slowdown. But remember, the restaurant channel is not -- is half of our business in distribution, but we're very strong in the -- even sorry, it's 1/3 business in distribution, and we're strong in the institutions and the rest. So we're well diversified. So we're not as affected. And our numbers are showing good growth because we're gaining customers. So you don't see the decline. But restaurant-by-restaurant, there is a small effect. But we know how to manage that, we're well diversified and we're gaining new business. So this is encouraging.
Okay. And then last one, your gross margin percentage keeps landing higher than I expect, is a big moving part with gross margin percentage, your private label penetration? Like is your private label penetration much higher now than it was this time last year?
So our private label is doing well, and we're continuing to invest behind, do more marketing new products. So we'll continue to push that. But in Q3, we gained 80 basis points primarily because of good customer mix and especially the seasonal customers, okay? So the -- all the business, the growth, this is the biggest quarter for consumption in restaurants and hotels, and it's very helpful during the summer when the small -- the golf course, the small shops open, and we sell with higher margins to these summer seasonal customers. So that's helping a lot.
And at this time, Mr. Frenette, we have no other questions. Please proceed with any closing remarks.
Well, thank you, and thanks, Kyle, for your questions. This is an exciting time for Colabor and all of our employees. We are on budget and on schedule to move into the new facility in St-Bruno by the end of the year, and accelerate our distribution activities in Western Quebec in the course of the first half of 2024, as I mentioned. We remain dedicated to maintaining a solid balance sheet, gaining market share and continue optimizing our operations. We will enter 2024 with distribution capabilities that now reach the entire province of Quebec. We remain dedicated to delivering value to all our stakeholders, and I am extremely excited about what the future holds for Colabor. This concludes our call for the third quarter of fiscal 2023. Thank you for joining us and stay safe and healthy.
Thank you, sir. Ladies and gentlemen, this does indeed conclude your conference call for today. Once again, thank you for attending. And at this time, we ask that you please disconnect your lines. Enjoy the rest of your day. RECONNECT