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Good morning, ladies and gentlemen, and welcome to the Colabor's Fourth Quarter 2022 Results Conference Call. [Operator Instructions] This call is being recorded on Thursday, March 2, 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 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, Ales. This is Louis Frenette, President and Chief Executive Officer of Colabor. Last evening, we released our earnings results for the [ 17-week period ] ended December 31, 2022. The press release and disclosure documents can be found on our website at www.sedar.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. Our fourth quarter marks the seventh consecutive quarter of revenue growth and our highest adjusted EBITDA in over 2 years. Our success during the last 2 years is entirely attributable to the dedication and hard work of our employees at all levels of our organization who have worked hard to implement our strategic initiatives leading to sustained growth, improved operations, higher service levels and a stronger financial situation.
In the fourth quarter, consolidated revenues were up 28%. Gross margin was up 160 basis points to 18.3% of sales, and adjusted EBITDA grew by 39.2% to $9.9 million. We are also ending the year on a strong note. Annual consolidated revenues grew by 20.3% to $574 million. Gross margins reached 18% of sales and were up 120 basis points. Adjusted EBITDA grew by 14.4% to $29.1 million, and cash flow from operations grew by 3% to $19.3 million.
Our strong cash flow and disciplined capital allocation approach allowed us to execute our organic growth strategy, conclude 2 acquisitions at the end of the year, with a lower level of net debt at $47.8 million down from $48.4 million. Our balance sheet remains solid with a conservative leverage ratio of 1.6x adjusted EBITDA -- of the adjusted EBITDA, down from 1.9 at the end of the previous fiscal year.
These strong financial results stem from the execution of our growth and profitability initiatives since 2020. They are also attributable to our ability to pass through food inflation to our increasingly diversified customer base within the hospitality, restaurants and institutional channel, and to our ability to dynamically manage rising input costs. These key attributes provide us with a resilient business model, allowing us to manage the effect of the pandemic and face a rising inflationary environment.
Before I turn the call over to Pierre, I would like to update you on the evolution of our 2020-2025 strategic initiatives and continued path to profitable growth. Since joining the company at the end of 2019, I have been working with our team to outline a dynamic plan that would transform our business and position Colabor as the local ingredient for the success of all [ catering, artisan ] in the province.
Our strategic priorities are anchored in the following 4 pillars: profitability, growth, people and our brand. I refer to the accompanying presentation supporting this call on Page 7. First, profitability. Our objective is to generate profitable growth. We started improving our category management practices, optimizing our process, improving our product mix and cross-selling whenever possible. There is still a lot of work to do, and this pillar remains a top priority across our organization.
Second, growth. Our objective is to increase the market share of our Distribution business in the province. Building on our strong presence in Eastern Quebec, we started investing in developing our customer base in Western Quebec. This has been a slow and prudent process, which started with investment in our sales team in the spring of 2021, followed by 2 small but accretive acquisitions in April of 2022, including a purchasing group that will help us gain market share in the region.
Last September, we also announced a plan to move our Boucherville facility and head office to a new strategic location not far from here in St-Bruno at the end of 2023. This move is intended to accelerate our growth in Western Quebec by providing the distribution capacity and footprint necessary to efficiently serve the most densely populated area in the province, which includes the Greater Montreal area. With this initiative, we are growing our reach from 30% of the Quebec population to cover approximately 90% of the food service customers in the province.
A growing reach means that we are increasingly attractive for restaurant chains. As a result, we signed 2 new supply agreement at the end of the quarter with local chains. The first is with a full-service restaurant chain with 38 establishments across the province. The second is with a group that operates more than 200 food counters in the grocery stores. We started servicing these accounts towards the end of the fourth quarter of 2022.
Third, about people. Our objective is to attract, retain and develop our talent. We started abating our HR practices and plan, concluded new labor contracts in 2022 and implemented a new health and safety and environment approach. As a result, we are starting to see employee's retention rates improve, and we expect that the new St-Bruno facility will significantly contribute to this objective. The facility is ideally located near public transport and will offer many amenities to our employees for a more enjoyable and greener working environment.
Our fourth pillar is our brand. Our objective is to renew and refresh the Colabor brand. In 2021, we updated and relaunched our private label products, which have been very well received by customers and complement our national brand offering. We currently offer 600 private label products, most of which are sourced locally.
Being able to offer local, high-quality products that support a sustainable agricultural and fishery ecosystem is becoming a competitive advantage for Colabor. It is one that is increasingly attracting our focus and allowing us to differentiate ourselves from our larger international competitors. Through our agreement with Mathurin, a digital marketplace, we can offer a vast selection of fresh quality products from our local farmers. These are only a few examples of our increasing focus on improving our brand.
As we stand today, we are currently halfway through our 2020-2025 strategic initiatives. Our business is back to profitable growth, and we have the financial and managerial strength to pursue our plan. We see significant room for Colabor to grow in the province and we have the means to achieve our goal. With 2 years of strong results and a strengthened balance sheet, we are well advanced in completing Colabor's turnaround. We are now more competitive and attractive for our customers and increasingly have the footprint to improve our reach and efficiencies. I'm very enthusiastic about what the future holds for Colabor.
Pierre, with this, I will 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 fourth quarter of 2022. Fourth quarter consolidated sales were up 28% to $193.2 million. Sales in the Distribution segment increased by 28.9% to $132.8 million. This results from higher volume normalizing in the restaurant channel, the additional week in the quarter, price increases reflecting food inflation pass-through of approximately 8% and customer list acquired in the Outaouais and Laurentians. Sales in the Wholesale segment increased by 16.8% to $73.1 million. This results primarily from food inflation pass-through and the additional week in the last quarter of the year. Consolidated adjusted EBITDA from continuing operations reached $9.9 million or 5.1% of sales compared to $7.1 million or 4.7% of -- in the fourth quarter last year. Growing sales volume and improving gross margins from an improving product and customer mix helped mitigate higher input costs and continued investment in our private label brand.
In addition, I would like to highlight that our financial expenses were 6.4% lower this year resulting from the refinancing concluded in 2021 and from our strategy to fix a portion of our interest rates in order to mitigate the impact of rising borrowing costs. Net earnings were $1.7 million or $0.02 per share compared to $5.3 million or $0.05 per share. Last year's net earnings were higher from income not related to current operations of $4 million.
Cash flow from operating activities were negative $0.7 million in the fourth quarter, primarily resulting from a higher working capital requirement and expenses related to increased activity and from the recently mentioned income -- not related to current operations. This compares to $9 million of cash flows from operations generated in Q4 2021. As Louis mentioned, we ended the year with a lower net debt of $47.7 million, a financial leverage ratio of 1.6x and $42 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 period.
[Operator Instructions] Your first question comes from Kyle McPhee with Cormark Securities.
Good quarterly update. I just wanted to start by digging into the revenue performance a bit. You mentioned pricing was 8% for the Distribution segment, would it have been similar in Wholesale as well?
[ With the peak pricing ]?
Kyle, it's Pierre. Thanks for the question. Yes, yes, it's a blended rate for both segments.
Got it. Okay. And then just trying to quantify the impact of that extra week, can I approximate that just based on the extra number of days? Or is there something abnormal about sales performance in that specific extra week?
So from the growth that we had in general of 29% for the quarter, that extra week was definitely 5 days more than the last -- same period last year. But the way we look at it, the growth we had was part of the 29% of the growth we had. 40% was coming from our organic growth and new chain customers that I mentioned. Inflation was 30% and the 17-week and the M&A, to give you an idea, was 30% of the growth.
Okay. That helps. And then just regarding the 2 new contracts you press released that started to kick in right at the end of the quarter. Can you help us quantify the annualized impact we'll see throughout 2003 (sic) [ 2023 ] just from those -- that new business?
Well, we're very happy that we gained those 2 customers. But without clearly stating what is the annualized revenues from these new chains, we can say that we started servicing them at the end of the last quarter. Therefore, you can expect higher quarterly contribution from these new customers in the coming quarters, but I can't divulge the volumes.
Okay. Like is it enough to be noticeable in your consolidated organic growth that we'll see in 2023 though? Or are these 2 things kind of...
Sure. Sure. Yes.
Okay. And then your results and your comments aren't suggesting there's any signs of demand deterioration linked to the consumer. Am I reading that right? Is that true? And is it still holding true into Q1 of this year?
Yes, I can say we are feeling any new effects from what we discussed in the previous call of potential lower consumer spending. So we don't see it. Restaurants are still a bit challenged. They're still operating in a context of difficult labor shortage. That's the problem. That being said, we have a diversified customer mix. We're strong in institutional as an example, also, so I think that helps [ to balance ]. We continue to gain market share, okay? So our sales are increasing, we gained market share, so we don't see it necessary. And also, our -- as you know, our geographical footprint is outside of the major centers for now, so it's also a definite positive. So growth is -- we see growth and not that many problems.
Got it. Okay. That's helpful color. Just shifting to gross margins. Gross margin percentage outperformed again. You pointed out strategic management of customer and product mix as a tailwind. Was there anything abnormal about your gross margin performance in Q4? Or is this approximately a good, normalized number for you?
Kyle, it's Pierre. Yes, it is a normal or sustainable gross margin that we expect. However, as you can probably figure out, our strategic plan is to grow and reach more major accounts, which will add pressure on the gross margin -- the nature of those large accounts. So at the current customer mix, this margin is sustainable. We target differentiate a little bit the customer mix and that will put pressure. But we also bet on the private label to grow and help mitigate partially the effect of the larger accounts. So we're working on both fronts to make sure that we generate the best gross margin we can.
Got it. Okay. And are the 2 new contracts you announced examples of incremental volume coming at a slightly lower gross margin? Does that apply to that new business?
Yes, that would be that type of account that put pressure, yes.
Got it. Okay. Just shifting focus to the new facility you're building. Can you guide us at all on CapEx for 2023, including that one-off new facility build? And what should we expect for kind of a more normalized CapEx figure in 2024 and beyond?
I'll answer the later part of your question. So 2024, we don't -- we expect to be back to our normal -- maintenance CapEx normal level. But 2023 or any part that would be related to the new facility, which is expected to be mainly in the second half of 2023, we will -- we are expecting CapEx of high teens, low 20s in order to put in place that very, very strategic facility for us. So you have to remember that this is going to be a very strategic and very powerful facility for us.
Got it. Okay. And when you get that range, is that -- that's incremental to your normal maintenance CapEx? Or that's kind of the total we'll see?
It's incremental.
Got it. Okay. And...
Because we still have facilities elsewhere. We have our specialized distribution on the fish and the meat. So these are -- these businesses are going on and required maintenance.
Got it. Okay. And then your CapEx was a bit higher than usual in the Q4 you just reported. Was that the start of CapEx for the new facility? Or is there something else going on there?
No, it's something else. It's not the new facility. It was a scheduled maintenance for other facilities. We have a plant in the Rimouski, Quebec and those specialized distribution that I just mentioned.
Got it. Okay. And then just on your working capital, you had a big inventory investment in Q4. Can you explain that and just guide us on how working capital should evolve throughout 2023? Like do you need to be putting a lot more capital in working capital to support all your growth plans?
That's exactly it. It's the volume that -- when you compare versus 2021, the last quarter, especially around the last period of the year, the volume this year was much, much stronger than last year. Last year, Omicron was coming in. If you remember, January, the government closed restaurants in January of 2022. So we could feel the impact in December of 2021. Versus this year, where the volume -- or volume of sales are very, very high.
Okay. So your working capital is kind of normalizing higher and supporting that rebound and that growth. How should we think about 2023 as a whole? Like how much capital are you going to -- like is working capital a neutral number? A big drag? Will you be monetizing it at all? Can you guide us on that?
Well, I don't expect -- well, I would like to say that end of 2023 would be as significantly higher than this year, but it's -- that's a hard one to predict. So I would say, if anything, it will normalize.
Got it. Okay. And then last question, just on labor costs. So you settled a handful of new labor union contracts in 2022. Is there anything material left that could lead to another round of labor inflation beyond what we already know about and is kind of showing in your results now?
No, nothing material. These 2 big ones were signed in 2021 and 2022, and they have contracts of 4 and 5 years. So nothing material. Adjustments here and there and -- when needed to attract people, but nothing material.
Okay. All right.
Kyle, it's Pierre. I'd just like the complement, as I mentioned, the CapEx. I meant to also mention that our current facility is sufficient to support us. So we don't have any issue. We don't have any -- we won't feel any pressure in terms of funding those CapEx.
Got it. All internally funded. Okay.
Yes. Great. Thank you for your question, Kyle.
There are no further questions at this time. Mr. Frenette, back over to you.
Yes. Thank you, Ales, and thanks, Kyle, for your questions. Since 2020, we have significantly improved our offering, level of service and financial situation. With 7 consecutive quarters of solid results and as we go through our 2020-2025 strategic initiatives, I look to the future with confidence and enthusiasm. Our diversified customer base, inflation pass-through model and ability to manage the impact of rising input costs, continues to position us well in the current macro environment.
I believe Colabor has a bright future with a solid financial situation, high cash flows and room to grow in the province. I believe that 2023 will be a pivotal year as we complete the move to our new facility, as we just discussed, and start seeing even more momentum as we grow our Distribution footprint later in 2024.
As discussed in these most recent account, our focus remains on the execution of our strategic plan, driving profitable growth, tightly managing costs and optimally allocating capital to drive shareholder value. We remain on the lookout for acquisition, and are excited by the potential that lies in the relocation to our new strategic facility in St-Bruno Ecoparc at the end of this year.
Thank you. This concludes our call for the fourth quarter and year-end of fiscal 2022. Thanks again for joining us. Stay safe and healthy.
Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.