Earnings Call: Q2 2021

Jul 22, 2021

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to Calabrio's Second Quarter twenty twenty one Earnings Call. At this time, all participants are in a listen only mode. Following the presentation, we will conduct a question and answer session open to analyst only. Instructions will be provided at that time for you to queue up for questions. Before turning the meeting over to management, I I would like to remind listeners that this conference call contains forward looking information within the meaning of applicable Canadian securities law 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 the conference call and available on the company's website in the Investors section under Events and Presentations at www.colabar.com. Furthermore, risks are discussed throughout the MD and A for the twelve and twenty four week periods ended 06/12/2021 under the heading Risks. I would like to remind everyone that this conference call is being recorded today, 07/22/2021. I will now turn the conference over to Luis Granet, President and CEO. Please go ahead, sir. Thank you, Anas, and good morning, everyone, and welcome to Calabant Group's twenty twenty one second quarter conference call. This is Luis Fanepe, President and Chief Executive Officer. Last evening, we released our earnings results for the twelve week period ended 06/12/2021. The press release and disclosure documents can be found on our website and on cedar.com. Joining me today on this call is Pierre Lachey, who recently joined Calabar as Senior Vice President and Chief Financial Officer. Pierre has over twenty five years of experience in corporate finance and was most recently Senior Vice President, Global Treasury and Taxation at Sierra Capital Corporation. Pierre also has an extensive experience in operations, team building, M and A, deal structuring and financing with a long standing track record of successful integration and value creation. He is a strong and complementary addition to our team, and we can quickly put this experience to contribution as we execute our strategic growth and optimization plan. Before I discuss our highlights for the quarter, I would like to take a moment to thank all of our team members for their dedication and hard work during these unprecedented times. As soon as the government started easing restriction at the May, our team members were up and running and ready to help our restaurant customer reopen to their on premise dining operation. Like many industries, we are dealing with supply chain and labor challenges. In this context, I'm even more grateful for all our team members' efforts. And now for a quick review of this quarter's results. I'm very happy with our financial and operational performance in the second quarter of twenty twenty one. Our consolidated revenues have grown by 13.2%, primarily from the easing of restriction affecting the restaurant industry. Our adjusted EBITDA margin, excluding subsidies, have improved by almost 50% year over year to reach 5% of consolidated revenues, up from 3.4% last year. And because of our ability to right size our business prior to the pandemic and properly align our cost structure since the start of the out crisis, we have maintained a comfortable leverage ratio of two times. During the last few years, Calabar made important decision that allowed the company to successfully execute its turnaround. These decision include selling non core assets to reimburse debt, terminating non profitable contracts and improving our customer mix to raise profitability. During the pandemic, we dedicated additional efforts to diversify our channels and gain new institutional and retail clients. We improved our mix of products sold, started developing new territories and refinanced our debt. We also implemented significant and sustainable cost saving measures that have allowed us to maintain a good level of profitability and solid balance sheet. We are emerging from the worst of the health crisis with an improved business model and streamlined operations. We are now in a good position to benefit from the recovery in the restaurant and hospitality industry. Although we remain cautiously optimistic, considering the industry's ongoing challenges and potential threat of new variant, our geographical diversification outside the bigger centers and our mix of institutional and retail customers allows us to mitigate some of the potential lingering risk. Looking ahead, our focus can now return to growing our distribution business, which in the longer term should set the stage for further operational leverage. In order to do so, and as explained on this call last quarter, we have prudently invested in various growth initiatives such as hiring sales and marketing professionals and implemented cross selling initiatives. We have also better aligned our offering with changes in consumer preferences and are repositioning our private label. These organic growth initiatives should start paying dividends in 2022. I'm happy to say that we are entering the second half of twenty twenty one in a good position and ready for the recovery of the restaurant and hospitality industry. With this, Pierre, I turn the call over to you for a review of our financial results. Thank you, Louis, and good morning, everyone. I'm pleased to have joined the Colabar team and I'm very excited about the prospects of our business. I will now review our financial results for the second quarter of twenty twenty one. Second quarter consolidated sales from continuing operations were up 13.2% to 108,100,000 Sales in the distribution segment increased by 21.7% to $73,300,000 mainly from the gradual reopening of restaurants since the May and generally less restrictive environment during the second quarter of twenty twenty one compared to last year. Sales in the wholesale segment increased by 5.7% to $45,500,000 again, primarily from the easing of lockdown measures from the growth of certain customer accounts and small customer gains mitigated by the partial loss of volume from a single customer. Intercompany elimination increased by $2,900,000 to $10,700,000 resulting from higher volume of sales in both segments. Adjusted EBITDA from continuing operation reached $6,700,000 or 6.2% of sales compared to $7,600,000 or 8% in the second quarter of last year. Excluding subsidies, which were higher last year, our adjusted EBITDA grew to 5% from 3.4% in the second quarter of twenty twenty from higher level of sales and higher gross margins. Net earnings from continuing operation was $1,600,000 and in line with last year's second quarter. Net earnings stood at $1,700,000 up from a net loss of $2,900,000 in the second quarter of last year, resulting primarily from abandoned activities, which last year generated a loss of $4,500,000 Cash flow from operating activities required $2,900,000 in the second quarter of twenty twenty one, while $3,200,000 was generated equivalent quarter of last year. Higher working capital was required in anticipation of the reopening of restaurant activities and of the summer season. As at 06/12/2021, our net debt amounted to $57,200,000 compared to $52,100,000 at the end of fiscal twenty twenty. All outstanding convertible debentures were redeemed at the start of the second quarter on 03/23/2021. Our financial ratios stands at two times versus 1.8 times at the end of fiscal twenty twenty one, resulting from higher use of the lending facility to fund the working capital requirement. Finally, the pandemic will continue to have somewhat of an impact on our results. We remain dedicated to maintaining a prudent approach to managing our cost structure and protecting our financial situation. I would now like to turn the call over to the operator for the Q and A period. Thank Your first question comes from Kyle McFee with Cormark Securities. Kyle, please go ahead. Hi guys. Thanks for the prepared remarks. I have a list of questions here. So starting on the revenue growth you delivered, great to see you shifted back to growth. That growth this quarter included gains from lapping last year's COVID dynamics. But beyond that, are there pockets of organic growth buried in the numbers beyond that COVID stuff? So growth from stuff like new clients and gains with existing clients beyond pre COVID levels. And if so, can you maybe help us understand how meaningful that growth is and whether or not it's accelerating? Hi, Kyle. Thanks for your question. Yes, we have growth in both segments, the wholesale and distribution segments. There's a bit of there's gains of organic growth with new customers in both business distribution and wholesale. Also, it's the results are helped with the restaurant reopening gradually. So that's helping. And that covers the loss like Pierre said, the loss of a part of business with a customer in the wholesale business. So there's a mix of everything, but it's positives on distribution and wholesale. And maybe this is hard to do, but if you were to isolate the COVID stuff and all these new clients, how much is that organic growth? Is it still very slim? Is it maybe a few points of year over year growth? Any color there. Well, we're happy with the results that we have. It's in line with our plan of gaining some business, especially on the distribution side. This is affected though with the restaurants as they're not 100% reopened. So they're gradually reopening. And there's a mix of supplies from our suppliers, the service levels and the supply chain is a bit affected. So but we're in line. At the end of the day, we're in line with our plan and we're happy with that. Got it. Okay. And just to follow-up on these growth efforts, in recent quarters, you added some sales bodies to help that broad line business push into Western Quebec. Can you update us on how those sales bodies are performing? And also are you adding even more bodies beyond what you already did last quarter? Okay. Yes, it's going as planned. And we're happy with the performance of the new sales bodies. And to answer the second part of your question, if we'll add more bodies, well, we have in our plan, we have milestones, steps to make decision on when we will put more bodies. So we will hire when the sales reps will have the full plate and we'll add more people. But that will come in times and we're happy with the decision we made. Got it. Okay. And one last follow-up on the growth efforts. Can you offer any commentary on your initial efforts to boost the cross selling between your specialty and broadline businesses, which I don't think historically had much overlap. Yes. So a bit the same answer as the previous answer. We just started and we're happy with the results and we're confirming that we'll continue to do that as we see some efficiencies, savings. And the idea is that more salespeople sell products from other divisions. And we see the progress. It's slowly growing, but it is as planned. So we're satisfied again with that strategic decision we made to do this. Got it. Okay. And then shifting gears to the COVID reopening. What is the state of COVID restrictions in your core regions throughout Quebec? And as the opening is progressing, is there anything surprising as you see businesses reopen or is it pretty much business and all your clients getting back to the old status quo? Yes. What we have to take into consideration is that the reopening is not as easy for the restaurant owner as they are short on finding employees to work in their restaurants. So the situation is that most of our business is not in Montreal, the downtown, it's in the region. So that's helping us because they don't have office towers like you have in Montreal as an example. So the large centers are more affected. So good for us for now. We're stronger in the smaller regions. So it's reopening gradually. It's not it doesn't go from 0% to or 50% to 100%. It goes from 50% to 85%. So it's gradually reopening. The tourists are not in we don't have tourists in Canada, so you know that. And there's a shortage of employees. So what could be what could affect the future? And as I said, we're not in the big centers yet, but the people returning to work at the office and the towers, we don't know when that will happen. And there's probably 10% to 15% of the restaurants that are not that did not reopen. So we'll see the numbers will get smaller over time, but there's lots of factors to consider. Okay. Thanks for that color. On your gross margin, it increased again more than I expected again. So I'm wondering if there's anything unusual in the gross margin mix this quarter or is Q2 kind of a good representation of your current mix of business and where you have your platform during it? Good morning, Kyle. It's Pierre. I will answer this question. Essentially, it's really the client mix that made that evolution of the gross margin. Volume, obviously, restaurants, smaller distributors, a little bit more of our private label sales. So these can explain. And as you know in the past, a lot of work, a lot of investing was done to eliminate the lower revenue generating assets. So I think it's a that explains the reason. And we are still in an environment where the capacity is reduced as Louis just explained. So lower no tourism yet. So it's hard to know that is this quarter, is this an appropriate reflection of the continuing gross profit. Got it. Okay. On your labor supply and costs, I'm just hoping for an update there. So specifically your ability to find supply of labor as volume ramps back up. You mentioned restaurants are having trouble, but wondering if you have the necessary supply of labor to ramp your own business back up. And then also the cost of labor and whether or not it's starting to eat into margin or you expect it to eat into margin? It's kind of like all of the labor intensive businesses, there is a labor shortage. We did put in place a strong hiring program, but this is still difficult. This is still a difficult situation that we're facing and have to deal with. We have many, many programs to increase and being faster at hiring. So we have incentives for referral. We have a radio campaign. We're working with agencies to find more people and we did other activities like Open Door Day. So and we're also working on improving our employers brand. So we're working hard on that. Yes, there we like in my comments earlier, I'm very happy with my employees that are working extremely hard. And yes, we're paying overtime, but it comes with the new business and we're good. But this is a key priority for the whole industry to find more employees. And a bit of color around the reopening. The reopening is happening in the high, high season. So usually when back to school comes, the business comes back to a normal level and it will be more manageable than it is now. That's for the old industry and across Canada. Got it. Okay. And last question from me on your CapEx. Can you offer any updated guidance on the CapEx spend for this year and maybe even next year? Yes, for sure, Kyle. Well, as you're aware, I mean, it's a very low CapEx intensive business. We are and as I mentioned in my prepared remarks, we're taking a very prudent approach with the conditions that we are in now. So obviously, when we allocate capital to CapEx, we expect to have a because we're going to get a good return on that money that we are spending. So the first half of the year was very light and CapEx, we expect in the second half to deploy a little bit more, but we are also monitoring the situation of the business to make sure that we don't get ahead of ourselves on investing in certain areas of the business where we will not see the benefit as soon as we deploy the cash. Got it. Okay. And you probably don't have exact numbers to give me or anything, but for next year, is there anything big and chunky or is this kind of going to be similar or maybe only a little bit higher than this year? Well, it's difficult for me to say. And I recently joined, as you're aware. So telling you exactly where we believe next year, I don't foresee any major high temp if we can leave it at that. Okay. That's good enough for now. All right. That's all my questions. Great update and appreciate all the answers. Thanks, guys. Thank you. Thank you. There are no further questions at this time. Mr. Frenet, you may proceed. Thank you, Anas, and thanks, Fayan, for your questions. Our good financial performance in the second quarter demonstrates the resiliency and agility of our business model. The improvements made to our business over the last two years are positioning us well moving forward, especially as the restaurants and hospitality industry recovers from the pandemic. Looking ahead, we remain committed to pursuing our strategic growth plan by focusing on our broad line distribution activities in Quebec, delivering efficiencies, improving our employers' brand and creating shareholders' value. This concludes our call for the second quarter of twenty twenty one. Thank you 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.