Colabor Group Q3 2024 Earnings Report

Colabor Group EPS Results

• Actual EPS: C$0.01
• Consensus EPS: C$0.02
• Beat/Miss: Missed by -C$0.01
• One Year Ago EPS: N/A

Colabor Group Revenue Results

• Actual Revenue: $162.03 million
• Expected Revenue: $164.27 million
• Beat/Miss: Missed by -$2.24 million
• YoY Revenue Growth: N/A

Colabor Group Announcement Details

• Quarter: Q3 2024
• Date: 10/17/2024
• Time: N/A
• Conference Call Date: Friday, October 18, 2024
• Conference Call Time: 9:30AM ET

Colabor Group (TSE:GCL) Inc is a wholesaler and distributor of food and related products in Canada. The company operates in two segments Distribution and Wholesale segment. Its Distribution segment operations include the distribution of food products and related products in hotels, restaurants and institutions (HRI) and retail market. Its products such as meat, fish, and sea food (Specialty Distribution) as well as general food related products (Broadline Distribution). The company generates maximum revenue from Distribution segment.

Colabor Group Q3 2024 Earnings Call Transcript

Key Takeaways

• Distribution sales grew 1.5% in Q3, driving market share gains to 11.1% from 10.3%, demonstrating the company’s resilience in a challenging restaurant market.
• Consolidated adjusted EBITDA declined to CAD 9.5 million (5.9% of sales) from CAD 11 million (6.7%), and net earnings fell to CAD 1.2 million (CAD 0.01 per share) versus CAD 3.5 million (CAD 0.03 per share), reflecting underutilized capacity and higher operating expenses.
• A key institutional contract representing about 11% of fiscal 2024 revenue was renewed at significantly lower margins, although management has identified mitigation measures to offset the impact on future earnings.
• Operating cash flow rose to CAD 9.9 million from CAD 8 million year-over-year, enabling net debt reduction to CAD 50.7 million from CAD 61.5 million and maintaining CAD 28.5 million in available borrowing capacity.
• The transition to the new hybrid distribution facility in Saint-Bruno is substantially complete, with ongoing operational efficiency improvements and new customer onboarding supporting future growth.

Presentation

[Operator]

Third quarter twenty twenty-four results. Results du troisième trimestre vingt vingt-quatre de Colabor conference call. At this time, all lines are in listen-only mode. Following the presentation, we will conduct a question-and-answer session. If at any time during this call you require immediate assistance, please press star zero for the operator. This call is being recorded on Friday, October eighteenth, twenty twenty-four. I would now like to turn the conference over to Louis Frenette, President et chef de la direction, President and Chief Executive Officer. Please go ahead.

[Louis Frenette, CEO at Colabor Group]

Thank you. Good morning, everyone, and welcome to Colabor Group's third quarter of fiscal twenty twenty-four results conference call. This is Louis Frenette, President and Chief Executive Officer. Last evening, we released our earnings results for the twelve and thirty-sixth week period, ended September seventh, twenty twenty-four. The press release and disclosure documents can be found on our website at SE.ca. The accompanying presentation, including our statement on forward-looking information and non-IFRS performance measure, can 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.

[Louis Frenette, CEO at Colabor Group]

Considering ongoing headwinds in the restaurants and retail channels that have resulted in a flat to no growth across the restaurant industry, our ability to grow our distribution business with new customers and growing purchasing volume among certain distribution customers demonstrated that we can still win in a challenging macroeconomic market. According to Restaurants Canada, last available data point, commercial food service sales in Quebec in July were up 2.2% on a nominal basis, and when adjusting for menu inflation, real sales were down 0.8%. During the third quarter of 2024, Colabor's distribution sales grew 1.5%. This growth contributed to market share gains of 6.8% year over year, bringing our market share to 11.1%, up from 10.3% in the equivalent quarter of last year.

[Louis Frenette, CEO at Colabor Group]

I believe this once again demonstrates the resiliency of our business and unique value proposition, which continues to position us well in organic and non-organic market share gains. Our focus on growing our distribution platform allowed us to mitigate a reduction of 10.1% in the wholesale revenue in second quarter of 2024. Our wholesale customer are more exposed to restaurant industry than we are and to the effect of a weaker consumer backdrop. Higher cash flows from operation allows us to reduce our net debt. This demonstrate the cash generation capabilities of our platform, even as lower volumes weighed on our operating profitability. Let's keep in mind that we are just starting to prudently scale our recently completed growth CapEx, which contributes to operating efficiencies as we grow ourselves.

[Louis Frenette, CEO at Colabor Group]

It has now been three quarters since we moved into the new hybrid distribution facility in Saint-Bruno-de-Montarville, and five months since we completing the transition of our existing customer to the new facility. We continue to work on many fronts to further improve our productivity and operational efficiency, and we are achieving good service levels. We started onboarding new customers, mainly smaller, independent restaurants. We remain confident in our ability to continue gaining market share, compensating for the effect of the reduction in spending in the restaurant industry. Just this morning, we received confirmation that the agreement between Colabor and the institutional customer, which was subject to a public bid solicitation process, was renewed. The press release just hit the wire. The two-year agreement, effective December 2024, includes two six-month renewal options at the customer's direction.

[Louis Frenette, CEO at Colabor Group]

This agreement represent approximately 11% of our expected revenues for fiscal year 2024. This contract was awarded based upon a prevailing economic condition in the market, with significantly lower margins than currently in force. In order to proactively manage the situation, Colabor has already identified several opportunities and measures in order to reduce the impact on future earnings. This demonstrate that we can win in a competitive market against large players. Please turn to slide number 6 of the document to see how our 2020 and 2025 plan is evolving. Efficiently managing our customer mix and product portfolio has allowed us to raise our gross margin in the past few years.

[Louis Frenette, CEO at Colabor Group]

As we onboard new clients with a varying profitability profile, our job will be to pull on these levers to raise the lifetime value of a diversified customer base within the HRI and retail market. We can do this by increasing the share of private label we sell to our customers by improving our routes and field capacity. We also remain focused on growing our distribution platform, both organically and with accretive acquisitions. New customer acquisition in and around Montreal in a slower market demonstrate that we are still in a very good competitive position. Our pipeline of M&A opportunities is also filled with accretive targets of varying size, so we are confident in our ability to improve efficiencies as we gain new customers organically and non-organically in the medium and long term.

[Louis Frenette, CEO at Colabor Group]

The new facility, along with continued improvement to our employer brand and better communication practices, are helping us keep our employees motivated and engaged. Our focus on quality and locally sourced offering is serving us well and is becoming a hallmark of our differentiated offerings. It is helping us keep and win new business, and it is key pillar of our success. Our private label sales are also doing well, and they contribute to our competitiveness with a well-priced and differentiated quality offering. We are just wrapping up a very busy summer season. Our team is dedicated to improving the efficiency of our new distribution activities and working to grow our presence in all territories. Pierre, on this, I will turn the call over to you, please.

[Pierre Blanchette, CFO at Colabor Group]

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 fiscal 2024. Please refer to slides 7 to 10 of the presentation for highlights of our financial performance in the quarter. In the third quarter of 2024, sales were down 1.6% at CAD 162 million. Revenue from our distribution activities increased by 1.5%, while our wholesale activities were down by 10.1%. Volume growth from M&A, market share gains, existing customers, and the contribution of 1.1% inflation pass-through allowed us to mitigate the effect of lower customer spending in the restaurants and retail channels, which had a larger impact on our wholesale business.

[Pierre Blanchette, CFO at Colabor Group]

Consolidated Adjusted EBITDA from continuing operations reached CAD 9.5 million, or 5.9% of sales, compared to CAD 11 million or 6.7% in the third quarter of last year. As Louis mentioned, consumer spending was relatively strong in Q3 of last year before slowing down towards the end of the year. So lower volume, combined with higher operating expense, underutilization of our new distribution center, and investment in sales and marketing, weighed on the profitability. Net earnings were CAD 1.2 million or CAD 0.01 per share, down from CAD 3.5 million or CAD 0.03 per share in the third quarter of 2023, mainly from front-loading of interest expense associated with the amortization of the new lease obligation in Saint-Bruno and lower Adjusted EBITDA.

[Pierre Blanchette, CFO at Colabor Group]

Cash flow from operating activities were CAD 9.9 million in the third quarter, up from CAD 8 million in the equivalent quarter of last year, resulting from lower utilization of working capital. There were no significant CapEx investments aside from our regular basic maintenance. In 2024, we continue to guide our total annual CapEx in the range of CAD 2 million, primarily for maintenance and smaller optimization projects. We ended the quarter with lower net debt of CAD 50.7 million, down from CAD 61.5 million at the end of 2023. We have made some adjustments to how we report leverage ratio to better align with the ratio used by its lender and to reflect its actual financial position. At the end of the quarter, we had CAD 28.5 million of available borrowing capacity on our credit facility.

[Pierre Blanchette, CFO at Colabor Group]

I would now like to turn the call over to the operator for the Q&A period.

[Operator]

Thank you, ladies and gentlemen. We will now begin the question-and-answer session. Should you have a question, please press star followed by the one on your touchtone phone. You will hear a prompt that your hand has been raised. Should you wish to decline from the polling process, please press star followed by the two. If you are using a speakerphone, please lift the handset before pressing any keys. One moment, please, for your first question. Your first question comes from Kyle McPhee with Cormark Securities. Your line is now open.

[Kyle McPhee, Analyst at Cormark Securities]

Hi, everyone. Thanks for taking my questions. To start, so your filings mentioned that your distribution platform has added volume in new territories. I'm trying to better understand the size of that moving part so far. It sounds like you're adding independent restaurants. Can you ballpark quantify the year-over-year volume impact from these new wins in new territories? Or just broadly, you know, are we over, under 1% range?

[Louis Frenette, CEO at Colabor Group]

Hi, Kyle. Thanks for your question. It's Louis. We estimate that it's about 4% new volume from existing and new customers. Of that, you have to take into consideration that we did a small M&A, and that's around 2.2%, and inflation is 1.1%.

[Kyle McPhee, Analyst at Cormark Securities]

Got it. Okay. And like, are you continuing to see these new independent restaurant wins kind of snowball into Q4, or is the macro environment, you know, creating a headwind for you to be winning new business?

[Louis Frenette, CEO at Colabor Group]

We continue to develop the business. We're positioned to win more business in Q4 and into twenty twenty-five. We continue to develop in the new and existing territories. So, as you remember, we put more reps in Western Quebec to develop that market, and it's working well. And it's helping our results in the tough macroeconomic environment, especially the restaurants business. So we're confident that we'll continue to win new business and grow the share of wallet.

[Kyle McPhee, Analyst at Cormark Securities]

Got it. Okay. And you mentioned, you know, a volume benefit from one of your clients is increasing purchasing volume. What do you mean by that? Can you explain that?

[Louis Frenette, CEO at Colabor Group]

Yes, certain.

[Kyle McPhee, Analyst at Cormark Securities]

I can-

[Louis Frenette, CEO at Colabor Group]

Yeah. What's that?

[Pierre Blanchette, CFO at Colabor Group]

Go ahead, Louis. Go ahead.

[Louis Frenette, CEO at Colabor Group]

Okay. Okay, yeah, yes, certain existing customers are growing, adding more restaurants and ordering more volumes. So some are, some are gaining. Yeah.

[Kyle McPhee, Analyst at Cormark Securities]

Okay, so the clients themselves are just gaining share, and they happen to be your clients. So that's what you meant by that?

[Louis Frenette, CEO at Colabor Group]

Yeah.

[Kyle McPhee, Analyst at Cormark Securities]

Okay. Shifting over to operating costs, you know, most of the moving parts in your operating costs were perfectly as expected, so great cost control from all of you during this tough macro period. But the line item that you referred to as other operating costs was higher than I thought, higher than recent quarters. Can you explain the source of the increase for that line item? Is it marketing costs that are buried in there, you know, as you pursue growth?

[Pierre Blanchette, CFO at Colabor Group]

Good morning, Kyle, it's Pierre. Thanks for the question. Yes, what's in there is that we have a purchasing group for which we report the revenue, you know, in the revenue section, but there's a volume rebate or there's a customer rebate that comes with those purchasing group, and that rebate gets recorded in that line. Therefore, it's like when this line increases because of that, that's a good news. It means that the purchasing group had higher volume year over year. Therefore, the rebate, the volume rebate given to participant of that purchasing group is higher, which looks like bad news, but it is a good news.

[Kyle McPhee, Analyst at Cormark Securities]

Got it. Okay. Okay, yeah, I understand that moving part. It's good to know that that's what it was.

[Pierre Blanchette, CFO at Colabor Group]

Yep.

[Kyle McPhee, Analyst at Cormark Securities]

And then last one for me here. On your gross margin percentage, so there was a minor year-over-year decline in Q3. I just wanna make sure I understand the moving parts that may be triggering this. So am I correct to assume that independent restaurants are experiencing the biggest macro hit within your distribution business, and that also happens to be the highest margin portion of your volume mix? Is that what's going on here?

[Louis Frenette, CEO at Colabor Group]

Yeah, exactly, Kyle. It's the effect of the lower restaurants and stable institutional sales. So, definitely the restaurant is the larger piece in there.

[Kyle McPhee, Analyst at Cormark Securities]

Got it. Okay, I'll pass the line. Thank you for the answers.

[Louis Frenette, CEO at Colabor Group]

Thanks.

[Operator]

Your next question comes from Frédéric Tremblay with Desjardins. Your line is now open.

[Frédéric Tremblay, Analyst at Desjardins]

Thank you. Good morning. First of all, congrats on renewing the large contract with the institutional customer. In the press release, there's a mention about, and you spoke about it as well, about the contract having lower margins than the current contract. Is there any way for you to maybe clarify a little bit the magnitude of the margin decline initially, and provide a bit of color on some of the opportunities that you may have going forward to bring that margin up over time?

[Louis Frenette, CEO at Colabor Group]

Merci. Thanks, Frédéric. Yes, there will be an impact. The new contract that was renewed was renewed at a lower margin, as it is in every bid process. We bid low, and we try to improve the margins over time. There will be an impact on profitability, but we have already determined and will implement mitigating measures to reduce the impact. Okay? Yes, there will be an impact, and we don't share numbers. We don't provide that to the public.

[Frédéric Tremblay, Analyst at Desjardins]

Okay, that's fair. Just in terms of the mitigating measures then, does that include things like, you know, private label products, or are we talking about something else? And like, typically, in a situation like this, how long would it take for those mitigating measures to have an impact on the contract margin?

[Louis Frenette, CEO at Colabor Group]

Usually, it doesn't happen day one, but we already prioritize some projects. As mentioned before by Pierre or the comment of Kyle, we're working hard on cost management, so this will cover a portion. Yes, we're pushing our business on the private label side, which has greater margins. We continue to develop our organic business to gain customers and gaining with targets of gaining market share so all of these are helping. Also, we're looking at accretive M&As opportunities so all of that should reduce the impact, and at one point in time over time will be covered.

[Frédéric Tremblay, Analyst at Desjardins]

Okay. Yeah, that's really helpful. Thank you for that. Maybe a last one for me. Has there been one category in particular in Western Quebec, where you've been more successful in driving new business lately? And just maybe provide a bit of color in terms of where you're at, in terms of your, you know, volumes being gained there versus initial expectations. I know it's a difficult environment in the restaurant space, so has that had an impact on your initial volume ramp-up in Saint-Bruno, or are you on track with what you're expecting?

[Louis Frenette, CEO at Colabor Group]

Yeah, we're even though the restaurant market is a strong headwind, as you all know, we were able to gain smaller independent restaurants, and more in the full-service category. You were asking about categories, but the restaurants we're gaining in Western Quebec are mainly especially independent restaurants with a better margin. So our plan... The fact that the restaurant business is slower doesn't block us to gain customers. It's not, there's no relation between the trends, if restaurants are strong or weak. We continue our development path as planned in our strategic plan, and our job is to fill the capacities in Saint-Bruno as soon as possible.

[Louis Frenette, CEO at Colabor Group]

Nothing has changed in regards of our strat plan, and I'm happy with the gains we're making in Western Quebec. Some gains in Eastern Quebec also, where we're much more developed, so a lot to win in Western Quebec.

[Frédéric Tremblay, Analyst at Desjardins]

That's very helpful. Thank you very much.

[Louis Frenette, CEO at Colabor Group]

Thank you.

[Operator]

Ladies and gentlemen, as a reminder, should you have a question, please press star one. Your next question comes from Michael Glen with Raymond James. Please go ahead.

[Michael Glen, Analyst at Raymond James]

Hey, good morning. Just on the cost mitigation that you're looking at, should I think we should probably think about that more on the SG&A line. Is that a fair assumption?

[Louis Frenette, CEO at Colabor Group]

Hi, Michael. Thank you for the question. If I understand, you're looking for the geography of our mitigation?

[Michael Glen, Analyst at Raymond James]

Yeah. It would be, like, you're referencing you're gonna take some cost mitigation effects.

[Louis Frenette, CEO at Colabor Group]

Yes

[Michael Glen, Analyst at Raymond James]

... to offset the pressure from the new contracts. Would that predominantly be SG&A initiatives that you're looking at?

[Louis Frenette, CEO at Colabor Group]

Predominantly, I wouldn't say that. I would say it's all over P&L. So we have measures on the top-line operational efficiencies and SG&A as well.

[Michael Glen, Analyst at Raymond James]

And then, like, just stepping back and looking at some of the challenging situation facing the industry right now, as you're onboarding, I'm just trying to get a sense, like, how do you assess some of the credit risk element associated with the independent restaurant space when you're thinking about adding these new clients on?

[Louis Frenette, CEO at Colabor Group]

There's very little risk because they usually pay before we send the next order. So this industry is managed tightly. It's not only Colabor. This is a practice of the industry, and as you saw, there were many standalone restaurants that closed during the year, but around across Canada, and maybe a couple of hundreds in the province of Quebec over the last year. We have good credit checks. Sorry for my English, but we're good at being paid, and there's very little risk on that.

[Michael Glen, Analyst at Raymond James]

Okay. It looks excellent. Just the lease payments on the cash flow statement are coming in, I guess, lower than I would have thought. At one point, lease liability payment was CAD 1.8 in the quarter. Is that the good run rate, or should we expect that number to step higher at some point in the future?

[Louis Frenette, CEO at Colabor Group]

You're correct. I think we did a good job in negotiating the lease, and we had a free period, three months at the beginning of the lease, the new lease. But yes, it will. It's not the actual run rate that you have so far after 36 weeks. But it's gonna recover or go back to norm shortly.

[Michael Glen, Analyst at Raymond James]

And are you able to say what the, like, the call it, let's call it CAD 2 million average year to date in quarterly lease liability payments. Are you able to say, like, is it, is it up CAD 1 million or something like that on a quarterly basis? Just trying to get a sense of how much the increase could be.

[Louis Frenette, CEO at Colabor Group]

The run rate will be close to 2023, I would say. I think it's a fair estimate that we will go back to closer to 2023.

[Michael Glen, Analyst at Raymond James]

Okay. And, any thoughts on working capital from here? You had a small inflow in the quarter, which was, positive. Like, from here, should we think that working capital is in the right place, or should we-

[Louis Frenette, CEO at Colabor Group]

Yes.

[Michael Glen, Analyst at Raymond James]

expect some further growth?

[Louis Frenette, CEO at Colabor Group]

No, no, no. It's in, it's in the right place. It's in the right place.

[Michael Glen, Analyst at Raymond James]

Okay, and then just the update on the CapEx spending you're looking at for the year?

[Louis Frenette, CEO at Colabor Group]

And-

[Michael Glen, Analyst at Raymond James]

-and maybe an early read on next year.

[Louis Frenette, CEO at Colabor Group]

In my prepared remarks, I mentioned that, you know, CAD 2 million is probably where we're gonna end the year, in or about, you know. And I'd say next year, I don't expect anything much greater than that. You know, we have small, like, the regular maintenance CapEx and some optimizations. So in the range of CAD 2 million-CAD 3 million, as we mentioned earlier, this year is a good range. This year, you know, considering headwinds and stuff, we slowed down. That's part of our prioritization, so may not reach CAD 2 million this year or close to. And next year, well, it's gonna be back to about the same range.

[Michael Glen, Analyst at Raymond James]

Okay, excellent. Thank you for taking the questions.

[Louis Frenette, CEO at Colabor Group]

Welcome. Thank you for being there.

[Operator]

Your next question comes from Kyle McPhee with Cormark Securities. Your line is now open.

[Kyle McPhee, Analyst at Cormark Securities]

Just one follow-up from me. I'm just trying to better understand the margin impacts on this contract renewal. I know you're not gonna quantify it for us, but is it fair to say that that client would have already been a much lower gross margin percentage type client versus, you know, the average for Colabor as a whole? Given, you know, big clients typically have lower gross margin attached to the client. Like, is that a reasonable starting point?

[Louis Frenette, CEO at Colabor Group]

The clients had a good gross margin, and, as I mentioned, it's gonna be reduced significantly. We have the mitigation actions to reduce that margin reduction. Kyle, if you remember when we were in COVID, we changed the mix of our customers to... We were way too long in restaurants, and we went through COVID perfect in an excellent position because we diversified our portfolio. So when you bid on schools, on hospitals, jails, the margins are okay. They start low, and we can adjust them over time, okay, by selling more, sorry, our private label brand. So at the end of the contract, the margins are good.

[Louis Frenette, CEO at Colabor Group]

But when we start, it's always much lower, and we know how to navigate with this. And the more we'll have, the more institutional contracts we'll have, margin will be maybe the gross margin may be reduced, but the at the end of the day, we capture up, we grow it over time. So, it's something that we have in our cards, and we plan to do, continue to do, and the focus of the team is to minimize the effect at the beginning and maximize the revenues on the mid and long term.

[Kyle McPhee, Analyst at Cormark Securities]

Got it. Okay. So I think I understand all those moving parts, but I guess as one last final sanity check, is it fair to say that these types of institutional clients would be lower gross margin than, let's say, an independent restaurant?

[Louis Frenette, CEO at Colabor Group]

Absolutely.

[Kyle McPhee, Analyst at Cormark Securities]

Okay. Okay, thank you.

[Operator]

There are no further questions at this time. I will now turn the call over to management for closing remarks.

[Louis Frenette, CEO at Colabor Group]

Thank you, and thanks, Kyle, Frédéric, and Michael, for your, for your questions. I'm proud of our team and our ability to navigate through these macroeconomic headwinds. Our diversified customer base and efforts to grow our business clearly contribute this quarter. As we look ahead, we are laser focused on penetrating new markets and improving the lifetime value of our customers. Our teams and facilities are in great shape to receive more volume as we gain market share. We continue to grow and improving our product mix and operations to support our profitability targets, and we are managing our balance sheet and operational cash flows to position us well in the current context, and to be able to execute our strategic plan in a proactive and opportunistic manner. We are ready for our second phase of growth.

[Louis Frenette, CEO at Colabor Group]

Our teams have worked hard to help us achieve this solid position and maintain our competitive edge. I'm excited about our growth prospects and of the unique value proposition that we are increasingly recognized for in the marketplace. This concludes our call for the third quarter of the fiscal year twenty twenty-four. Thank you all for joining us, and stay safe and healthy.

[Operator]

Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.

Participants

Executives

• Pierre Blanchette, CFO
• Louis Frenette, CEO

Analysts

• Michael Glen, Analyst at Raymond James
• Kyle McPhee, Analyst at Cormark Securities
• Frédéric Tremblay, Analyst at Desjardins