Colabor Group Q2 2023 Earnings Call Transcript

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July 26, 2023

There are 4 speakers on the call.

Operator

Good morning, ladies and gentlemen, and welcome to the Colabor Group Incorporated Second Quarter 2023 Results Conference Call. At this time, all lines are in listen only mode. Following the presentation, we will conduct a question and answer session open to analysts only. 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.

Operator

I refer the audience to the in the Investors section under Events and Presentation at www.calabal.com. Furthermore, risks are discussed throughout the most recent MD and A under the heading Risks. I would now like to turn the conference over to Louis Frenet, President and CEO of Calabas Group. Please go ahead, sir.

Speaker 1

Thank you, Eric. Good morning, everyone, and welcome to Caliban Group's 2nd quarter of the fiscal 2023 Conference Call. This is Louis Frenette, President and Chief Executive Officer. Last evening, we released our earnings results for the 12 24 week period ended June 17, 2023. The press release and the disclosure documents can be found on our website and on SEDAR Also, accompanying presentation can also be accessed online in the Investors section on calabar.com.

Speaker 1

Joining me today on this call, Pierre Banchette, our Chief Financial Officer, who, following my initial remarks, We'll provide an overview of our financial results. I am very pleased with our 2nd quarter results. For a 9th consecutive quarter, our transformation strategy has paid off. Once again, This quarter, we are delivering sustained revenue growth and improving profitability. Please refer to Slide number 4 for a snapshot of our performance in the quarter.

Speaker 1

In the Q2, consolidated revenues were up 19%, primarily from our organic and non organic 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 1st full quarter lapping the year over year effect of the restrictions that affected the restaurant industry following the COVID-nineteen 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 2 times compared to 2.3 times at the end of last year.

Speaker 1

We are now entering in the 2nd phase of our 5 year strategic plan in a strong position with On slide number 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 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 With street and chain customer wins, we continue to take a prudent approach and are investing to extend our reach in the province. M and A is a key part of our future growth plan.

Speaker 1

Although our pipeline of opportunities remains strong, We have taken a more opportunistic approach for now, concentrating our resources and prioritizing our This customer built State of the art facility will allow us to greenfield our distribution activities in Western Quebec, while conducting our wholesale operation 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 3rd pillar is improving our employers' brand. Attracting and retaining the best talent is Key success factor for Calabar 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 temporary workers during the busy summer season, contributing to one of our best summer season in recent memory.

Speaker 1

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 4th pillar is renew and refreshing our brand. Raising the quality And local components of our offering is becoming an important differentiation factor for Calabar and one that our customers appreciate. After obtaining the BlueFork certification in the Q1, testing the quality and local sourcing of our fish and seafood offering, We recently strengthened our partnership with Metzure by making a minority investment in their business to support their growth and reinforce our commercial agreement. Metzerain is an online marketplace allowing our customers to access locally sourced product and food product.

Speaker 1

And now for an update On one of our most exciting project in Langhwa, please turn to Slide number 6. Since the groundbreaking ceremony, which took place in May, we have been busy overseeing the construction and planning for our up This can 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 dozens of such Project successfully my past responsibilities, and I am highly confident that we can We 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.

Speaker 1

The pace of disbursement will start High teens and low 20s remain our target CapEx range. Yes. With this, I will turn the call over to you.

Speaker 2

Thank you, Louis, and good morning, everyone. I'm pleased to be here today to discuss our key financial results for the Q2 of 2022. Please refer to Slide 7, 89 of the presentation available on our website for highlights of our financial performance in the quarter. 2nd quarter consolidated sales were up 19 percent to $164,200,000 Sales in the Distribution segment increased by 25.6 percent to $117,500,000 This results from higher sales primarily from new chain customers announced in Q4, Price increases reflecting food inflation of approximately 6% and M and A for 1 third of the quarter. Sales in the wholesale segment increased by 1.7 percent to $57,300,000 primarily from food inflation.

Speaker 2

Consolidated adjusted EBITDA from continuing operations reached $9,300,000 or 5.7 percent of sales compared to $8,000,000 or 5.8 percent in the Q2 of last year. Growing sales volumes explained the higher adjusted EBITDA. Net earnings grew by 38.1 percent to $2,300,000 or $0.02 per share, up from $1,700,000 or $0.02 per share in the Q2 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 $11,300,000 in the 2nd quarter, primarily resulting from the lower working capital utilization and a higher adjusted EBITDA.

Speaker 2

This compares to negative $1,200,000 in the Q2 of last year. In Q2, our strategic investments amounted to approximately $300,000 out of a total of $1,200,000 in Strategic investment mainly went towards the new Sailunu facility. We ended the 2nd quarter with a slightly lower net debt of $47,300,000 down from $47,800,000 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 $38,000,000 of available borrowing I would now like to turn the call over to the operator for the Q and A questions.

Speaker 2

Cheers.

Operator

Thank you. Ladies and gentlemen, we will now begin the question and answer Your first question comes from Kyle McPhee with Cormark Securities. Please go ahead.

Speaker 3

Hi, everyone. Thanks for taking my questions. 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 And 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?

Speaker 1

Hi, Kyle. It's Louis. Thanks for your questions. So the growth is of 19% And of that 19%, 6% 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 Seeing accounts which are growing.

Speaker 3

Got it. Okay. So nothing Major in terms of new accounts, just existing clients winning and ongoing smaller wins?

Speaker 1

We do win accounts, small accounts, but no major accounts.

Speaker 3

Got it. Okay. And then can you help us understand when the new facility will actually be Ready to take on new client volume?

Speaker 1

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 Q1, then we will start to move some volume that was shipped to Montreal from our Quebec sorry, Levy Distribution Center. So that's in Q1.

Speaker 1

We will move that. And then we expect that You're talking about gaining new customers both for the same guno facility and distribution and the new space available in 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.

Speaker 2

Got it.

Speaker 3

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, 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?

Speaker 1

Well, I'm smiling here, but we don't give guidance. Our objective currently is to grow activities across the province, which we didn't have access before. So with that new capacity, when Saint Bruno will be able to serve The western part of Quebec now very well at normal cost versus shipping from Livy. And the idea is that we hope to beat long term The market and gain market share. So you may know that if we take the last 12 to 13 years of the foodservice Industry growth was around 4% and hopefully we'll be back.

Speaker 3

Okay. Thanks for that. And then have you I'm curious if you've continued to add new sales In 2023 and through Q2 or is the volume growth you're showing right now all the benefit of the past hires?

Speaker 1

No, no, it's both. We continue to invest, especially in marketing and sales to escort the Actual growth and future growth in our plans. So the answer is it's both. The organic growth from the current customers and new customers supported by marketing and sales.

Speaker 3

Got it. Okay. And then last one. Can you I see you took a 13% stake in a 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?

Speaker 1

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 in small quantities. So the aggregator is And we received the order ready to ship like a croissant. So we're helping them. So this deal is a This investment is a very small investment for Carabao and it strengthened our distribution agreement with them.

Speaker 1

That's the most important thing. Our as I said, our clients, our clients like Swabs are the Nexa local resource offering. So this is in line with our local content strategy, as I said, which adds to our BlueFork 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.

Speaker 3

Got it. Okay. Makes sense. That's it for me. Thanks for the answers.

Speaker 1

Thank you.

Operator

At this time, there are no further questions. I'll now turn the conference over to management for closing remarks.

Speaker 1

Well, thank you. Thanks for your questions, Fa. After execution of the first half of our strategic plan and a very successful turnaround, We are moving to the 2nd phase of our plan with an impressive growth runway and a solid balance sheet. We are reasonably dedicated to ensuring a smooth build and transition of our wholesale activities by the end of 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 Q2 of 2024.

Speaker 1

I'm excited about the potential of this new facility and how it will allow us to provide a greater A great working environment for employees. This move also signals a new era for Calabar. We are modernizing our operations, improving our customer service levels, attracting and retaining more employees, differentiating our offerings 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 Calabar, and I'm happy to be on this journey with such dedicated people.

Speaker 1

This concludes our call for the Q1 of 2023. Thank you all for joining

Operator

This concludes your conference for today. You may now disconnect your lines.

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Earnings Conference Call
Colabor Group Q2 2023
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