Colabor Group Q2 2024 Earnings Report

Colabor Group EPS Results

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

Colabor Group Revenue Results

• Actual Revenue: $161.28 million
• Expected Revenue: $162.20 million
• Beat/Miss: Missed by -$920.00 thousand
• YoY Revenue Growth: N/A

Colabor Group Announcement Details

• Quarter: Q2 2024
• Date: 7/24/2024
• Time: N/A
• Conference Call Date: Thursday, July 25, 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 Q2 2024 Earnings Call Transcript

Key Takeaways

• Gross margin improved to 18.6% from 18%, enabling adjusted EBITDA to rise by $0.4 M to $9.7 M despite a slight revenue decline.
• Volume growth from new and existing distribution customers, a small acquisition, and inflation pass-through helped offset weakness in the wholesale and restaurant channels, resulting in market share gains.
• Financial discipline lowered the leverage ratio from 2.4× to 2.1× adjusted EBITDA, reduced net debt to $56 M from $61.5 M, and left $24.5 M of undrawn credit capacity.
• Sales fell 1.8% to $161.3 M—distribution revenue edged up 0.7% while wholesale dropped 8.4%—and net earnings declined to $1.7 M from $3.2 M due to higher lease-related financial charges.
• The migration to the new Saint-Bruno hybrid distribution facility is complete for Western Quebec customers, improving operational efficiency and supporting further territory expansion.

Presentation

[Operator]

Good morning, ladies and gentlemen, and welcome to the Colabor Group Inc, Q2 2024 results. 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. If at any time during this call you require immediate assistance, please press star zero for the operator. This call is being recorded on Thursday, 25 July, 2024. 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 forward-looking statement as detailed in the presentation supporting this conference call and available on the company's website in the investor 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.

[Louis Frenette, Former President and CEO at Colabor Group Inc]

Thank you, Joelle. Good morning, everyone, and welcome to Colabor Group's Q2 of fiscal 2024 results conference call. This is Louis Frenette, President and Chief Executive Officer. Last evening, we released our earnings results for the 12 and 24-week period ended June 15, 2024. The press release and disclosure document can be found on our website and on the SEDARplus.ca. The accompanying presentation, including our statement of 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. The efforts dedicated over the last four years at diversifying our customer base and most recently to grow into new markets, continue to provide resiliency in current macroeconomic environment.

[Louis Frenette, Former President and CEO at Colabor Group Inc]

Considering the ongoing challenges in the restaurant and retail channels, we achieved excellent results and even gained market share. Higher volume from new and existing distribution customer, the small acquisition we concluded towards the end of last quarter and inflation pass-through, helped mitigate anticipated weakness in our wholesale channel and headwinds affecting the restaurant industry. A favorable customer and product mix also supported higher gross margin at 18.6% of sales versus 18% in the equivalent quarter last year. This allowed us to lessen the effect of lower revenues on our Adjusted EBITDA, which grew by CAD 400,000 to CAD 9.7 million. We have further reduced our debt, reflecting our dedication to financial discipline. Our leverage ratio, as disclosed, is now down from 2.4x at the start of this year to 2.1 Adjusted EBITDA.

[Louis Frenette, Former President and CEO at Colabor Group Inc]

This demonstrates the cash generation capabilities of our platform, especially since we have started scaling our recently completed growth CapEx. Now for an update on our growth initiatives. It has now been more than two quarters since we moved into our new hybrid distribution facility in Saint-Bruno-de-Montarville. The transition of our existing customers to the new facility was completed in May. We are now getting more efficient, and we are slowly onboarding new customers. As seen on slide 6 of the presentation, our top priorities remain aligned with our 2025 plan. Efficiently managing our customer mix and product portfolio has allowed us to raise our gross margin in the past few years. As we onboard new clients with 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.

[Louis Frenette, Former President and CEO at Colabor Group Inc]

We also remain focused on growing our distribution platform, both organically and with accretive acquisitions. We could not have achieved our successful transformation and recent move to our new strategic facility without the dedication and passion of our employees. Our workforce is engaged and motivated, and we want to continue improving our employer brand and HR practices. Lastly, prioritizing quality and locally sourced offering has been hallmark of our differentiated offering and a key pillar of our success. We will further nurture our brand and private label, and we remain dedicated to raising customer satisfaction as we grow our business. We are now in the middle of a busy summer season. Our teams are dedicated to improving the efficiency of our new distribution activities and working to grow our presence in all our territories. Pierre, with this, I will turn the call over to you.

[Pierre Blanchette, CFO at Colabor Group Inc]

Thank you, Louis, and good morning, everyone. I'm pleased to be here today to discuss our key financial results for the Q2 of fiscal 2024. Please refer to slides 7 to 10 of the presentation for highlights of our financial performance in the quarter. In the Q2 of 2024, sales were down 1.8% at CAD 161.3 million. Revenues from our distribution activities increased by 0.7%, while our wholesale activities were down by 8.4%. Volume growth from new and existing distribution customer, the contribution of 1.5% inflation pass-through and M&A allowed us to mitigate the effect of lower customer spending in the restaurant and retail channels.

[Pierre Blanchette, CFO at Colabor Group Inc]

Consolidated adjusted EBITDA from continuing operations reached CAD 9.7 million or 6% of sales, compared to CAD 9.3 million or 5.7% in the Q2 of last year. Despite a small revenue decline, our strong gross margins allowed us to improve our adjusted EBITDA, as Louis mentioned earlier. Net earnings were CAD 1.7 million, down from CAD 3.2 million in the Q2 of 2023, mainly from higher financial charges related to the lease obligation associated with our new facility in Saint-Bruno. Cash flows from operating activities were CAD 5 million in the Q2, down from CAD 11.3 million in the equivalent quarter of last year, resulting from higher utilization of working capital. There were no significant CapEx investment aside from our regular basic maintenance.

[Pierre Blanchette, CFO at Colabor Group Inc]

In 2024, we continue to guide our total CapEx in the range of CAD 1.5 million-CAD 2 million, primarily for maintenance and small optimization projects. We ended the quarter with a lower net debt of CAD 56 million, down from CAD 61.5 million at the end of 2023. At the end of the quarter, we had CAD 24.5 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]

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 touch tone phone. You will hear three-tone prompt acknowledging your request, and your questions will be pulled in the order they are received. 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. Your line is now open.

[Kyle McPhee, Analyst in Institutional Equity Research at Cormark Securities]

Hi, everyone. First, on the topic of new territory development, Colabor had sales reps out in the field developing new sales regions in Quebec, similar to the sales efforts that led to the big organic growth wave in 2022 and 2023 before you ran out of capacity. I'm curious if the current round of sales reps chasing new clients is delivering similar momentum and client conversions relative to what you experienced in recent years, or maybe things like revitalized company brand and private labeling, your new local offerings. Is that kind of paying off with better momentum this time around?

[Louis Frenette, Former President and CEO at Colabor Group Inc]

So yes, Kyle, it's Louis. Thank you for the question. Yes, for both part of your question. So, we're continuing to grow organically. We're gaining new customers, month after month, month after month, and, we're selling more and more of our private label and some... Our spin is to sell more locally made products, versus our competitors, our American competitors. So, we're continuing. So, the momentum is good, and, our plan is working.

[Kyle McPhee, Analyst in Institutional Equity Research at Cormark Securities]

Got it. Okay. And it sounds like you recently added another round of sales reps. Is that it for now, or will you be adding another round throughout the rest of this year as well?

[Louis Frenette, Former President and CEO at Colabor Group Inc]

Well, we don't want to divulge our strategic plan and our action plan to the whole population, but I'm telling you, it's going well, and we're gaining new territories. So by rebound, yes, we need more people.

[Kyle McPhee, Analyst in Institutional Equity Research at Cormark Securities]

Okay, got it. On inventory, your sales are kind of flat to down right now due to the macro headwinds, as expected. Food inflation is muted, but your inventory levels have expanded quarter-over-quarter, and I think that's despite your inventory turnover, you know, improving with the new facility. So should I read this dynamic as you've stocked up on inventory in support of meaningful new client volume that you've landed? Or I know there's a seasonal dynamic for inventory heading into the summer season, but it seems like you've stocked up beyond just that seasonal dynamic. Any color on that?

[Pierre Blanchette, CFO at Colabor Group Inc]

Yes, Kyle, it's Pierre. Thanks for the question again. It's a combination of seasonality, but mainly it's the fact that we have moved the distribution customers from our Lévis distribution center to the Saint-Bruno distribution center, and the Saint-Bruno distribution center needed the inventory related to the distribution customers. So, mainly a lot of fresh products that were not sold to the wholesale or to the distributor via our wholesale activities.

[Pierre Blanchette, CFO at Colabor Group Inc]

... therefore, we expected that increase in inventory. It's to serve retail and restaurants from the Saint-Bruno. So our distribution customers from Saint-Bruno, that's the reason, and it combined with the seasonality.

[Kyle McPhee, Analyst in Institutional Equity Research at Cormark Securities]

Got it. Okay. On CapEx, any changes to CapEx plan versus what you kind of messaged to us on the last conference call? Your filings do mention some efforts to modernize existing facilities, but I suspect that was, that's kind of minor and included in your prior guidance. Can you clarify that?

[Pierre Blanchette, CFO at Colabor Group Inc]

Absolutely. So, I just said a few minutes ago, between CAD 1.5-CAD 2 for the year. And, as you know, the Saint-Bruno facility is new, so needs, like, really no CapEx. So, yes, slight-

[Kyle McPhee, Analyst in Institutional Equity Research at Cormark Securities]

Okay.

[Pierre Blanchette, CFO at Colabor Group Inc]

Slight change I just announced a few minutes ago, but nothing major.

[Kyle McPhee, Analyst in Institutional Equity Research at Cormark Securities]

Okay. And last one for me, I think I know the answer, but can you confirm whether or not all your Western Quebec distribution clients were being serviced from your new Saint-Bruno facility during the full Q2 period, or were some pockets still being kind of inefficiently serviced out of your Eastern Quebec facilities during the quarter?

[Louis Frenette, Former President and CEO at Colabor Group Inc]

They're all serviced from Saint-Bruno. Well, all transferred. So-

[Kyle McPhee, Analyst in Institutional Equity Research at Cormark Securities]

Okay.

[Louis Frenette, Former President and CEO at Colabor Group Inc]

It's working. Remember, as mentioned before, so it's freeing up some capacity in the Lévis that we filled with the new acquisition that we made a couple of months ago. But all the customers that were served in western Quebec from the Québec Lévis plant is now served by the Saint-Bruno distribution center.

[Kyle McPhee, Analyst in Institutional Equity Research at Cormark Securities]

Okay. Thank you for all the answers. That's it for me.

[Louis Frenette, Former President and CEO at Colabor Group Inc]

Thank you.

[Operator]

Ladies and gentlemen, as a reminder, should you have a question, please press star followed by the one. Your next question comes from Frédéric Tremblay with Desjardins. Your line is now open.

[Frédéric Tremblay, Director of Equity Research at Desjardins Capital Markets]

Thank you. Good morning.

[Louis Frenette, Former President and CEO at Colabor Group Inc]

Morning, Frédéric.

[Frédéric Tremblay, Director of Equity Research at Desjardins Capital Markets]

Um-

[Louis Frenette, Former President and CEO at Colabor Group Inc]

Good morning.

[Frédéric Tremblay, Director of Equity Research at Desjardins Capital Markets]

Good morning. Now that the Saint-Bruno distribution center is serving distribution customers, have you noticed an intensification of discussions with potential customers in western Quebec? In other words, I mean, how has the reception been so far in the market, now that Colabor is active and becoming more and more active in western Quebec?

[Louis Frenette, Former President and CEO at Colabor Group Inc]

Thank you, Frédéric, and welcome to the analyst meeting.

[Frédéric Tremblay, Director of Equity Research at Desjardins Capital Markets]

Thank you.

[Louis Frenette, Former President and CEO at Colabor Group Inc]

The thing is happening that we're gaining customers in western Quebec, new customers, independent restaurants. We got a chain, and we've demonstrated our ability to serve well our distribution customers. So the word is in the street, and the idea of this doing distribution from Saint-Bruno was that we're now able to have access to customers that are across the province: small chains, larger chains, and new customers available in the western part of Quebec.

[Louis Frenette, Former President and CEO at Colabor Group Inc]

So, this was the idea, and we did the transition from Lévis in distribution to Saint-Bruno step by step, and we're just ending the second step of having an excellent distribution service level, and we will be able to take more customers towards the end of the year, okay? Over the H2. And now that we're able to serve, it's proven, it works. Big customers wanted to see that, and it's working. So it's encouraging to be able to gain Quebec customers eventually, and so that are in the province of Quebec entirely. So, that's the idea.

[Frédéric Tremblay, Director of Equity Research at Desjardins Capital Markets]

Okay, great. And have you seen a notable response from competitors to your arrival in those new territories? Or also, we can maybe expand that question in terms of the competitive environment. Just given what's happening in the restaurant channel, are you in general seeing some competitors being more aggressive on pricing or discounts and things like that?

[Louis Frenette, Former President and CEO at Colabor Group Inc]

No, it's fairly stable about pricing, and, of course, they know that we're gaining business, and we're gaining market share. So, competition, they have their eyes open and ears, ears and eyes open, and they know what's going on. And so far it's been good. Our batting average to gain new customers, independent restaurants, has been as expected, so... And we're continuing. So, the pie is big, and we have many opportunities over time.

[Frédéric Tremblay, Director of Equity Research at Desjardins Capital Markets]

Great. Last question for me. You mentioned potential accretive acquisitions in your prepared remarks. Just wondering if you had any comments on your pipeline and if you think that... I'm just curious to see if the current environment in the restaurant channel, if that's generating maybe more opportunities for acquisitions in the distribution business.

[Louis Frenette, Former President and CEO at Colabor Group Inc]

Frédéric, it's Pierre. I think right now the answer would be no. Maybe if it drags on, if the headwinds are, you know, for a longer period, maybe. But currently, we don't feel that that is bringing additional opportunity. But we have a significant amount of opportunity at different phase that we're looking at. Again, making sure that we are, you know, prudently looking at M&A strategy and making sure that it's going to be accretive when we pull the trigger.

[Frédéric Tremblay, Director of Equity Research at Desjardins Capital Markets]

Great. Very helpful. Thanks for taking the question.

[Louis Frenette, Former President and CEO at Colabor Group Inc]

Thank you, Fred.

[Frédéric Tremblay, Director of Equity Research at Desjardins Capital Markets]

Thank you.

[Operator]

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

[Louis Frenette, Former President and CEO at Colabor Group Inc]

Thanks, Joelle, and thanks, Kyle and Frédéric, for your questions. I'm proud of what our team has achieved in the last few years. Our diversification strategy has provided resiliency in the context of ongoing headwinds affecting the restaurant industry. Improvements made to our customer and product mix, as well as to our operations, have supported higher profitability. Our balance sheet and operational cash flow position as well in the current context, and allows us to continue to execute our strategic plan in a proactive and opportunistic manner. Sorry. Looking ahead, when the restaurant and retail channel gradually return to growth, the investment we've made in our distribution platform will contribute to our continued success. We have worked hard to be in this position, and I'm proud of my team. This concludes our call for the Q2 of FY 2024.

[Louis Frenette, Former President and CEO at Colabor Group Inc]

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

• Louis Frenette, Former President and CEO
• Pierre Blanchette, CFO

Analysts

• Frédéric Tremblay, Director of Equity Research at Desjardins Capital Markets
• Kyle McPhee, Analyst in Institutional Equity Research at Cormark Securities