Earnings Call: Q4 2020

Mar 1, 2021

Ladies and gentlemen, thank you for standing by and welcome to the Colabor's Fourth Quarter twenty twenty Results Conference Call. At this time, all participants are in a listen only mode. I would like to remind listeners that this conference call contains forward looking information within the meaning of applicable Canadian securities laws and I refer the audience to the forward looking statements as detailed in the presentation supporting this conference call. Furthermore, risks and uncertainties are discussed throughout the 12/26/2020, MD and A under the heading Risk Factors. I would now like to hand the conference over to your speaker today, Luis Fernead, President and CEO. Thank you. Please go ahead, sir. Thank you, Takane. Good morning, everyone, and welcome to Calabao's Group twenty twenty fourth quarter and year end results conference call. This is Luis Fannet, President's Chief Executive Officer. Last Friday evening, we released our earnings results for the sixteen and fifty two week period ended 12/26/2020. The press release and disclosure documents can be found on our website and at www.sedar.com. I'm joined today by Marie France Laberge, our Corporate Controller and Interim Chief Financial Officer. Given the current context, we are very pleased with our financial results for fiscal twenty twenty. We successfully managed the effect of the pandemic on our operating profitability and cash flow generation. We derisked our balance sheet, ending the year with a comfortable leverage ratio of 1.8 times. We also recently concluded an important milestone with the announcement on February 18 of the refinancing of our lending facility and of our intention to redeem all of the outstanding convertible unsecured subordinated debentures. We replaced our previous $90,000,000 ABL facility with a new $80,000,000 secured credit facility that is comprised of a revolving credit of $50,000,000 and a term loan of $30,000,000 with an accordion of $20,000,000 This new facility is more suited to our needs because it's no longer tied to the level of inventory and receivables. We also entered into a new five year twenty million dollars subordinated loan with Investec Ma Quebec, of which $15,000,000 has been disbursed. We concurrently reimbursed the balance of $12,000,000 remaining on our previous subordinated debt with FSTQ, which was due in February 2022. In addition, we'll be redeeming all of the 6% outstanding convertible debenture, which have a principal amount of $50,000,000 All information documents pertaining to this transaction are available on SEDAR. This refinancing demonstrates the support of existing financial partners and of new lenders. It strengthened our balance sheet, provides additional financial flexibility and reduce our overall financial expenses. We now have the financial resources to focus on growing our core distribution activities in Quebec. Before I review our operational results for the period ended 12/26/2020, I would once again take this moment to thank our team members for their dedication and contribution to this landmark year. Together, we successfully navigated 2020 as the COVID-nineteen pandemic brought the hospitality industry to a virtual standstill for the majority of the year. Together, we demonstrated the resiliency of our business model and the benefits of the transformation plan that our entire group has been working on in the past two years. Because of everyone's contribution, we were able to end the year in a very good position financially, all while safeguarding the health of our employees, LP and our customers' well supplied. When we entered 2020, we were in the last inning of our transformation plan. In January, we first announced the consolidation of our Broadline distribution activities in Ontario. And later in May, we concluded the sales of most of our remaining activities in that province. This transaction provides us with the financial support and additional bandwidth to concentrate on our Quebec platform and manage the effect of the COVID-nineteen pandemic. Our diversified customer base and wide geographical reach within the province of Quebec also served us well during this unprecedented year. With the restaurant industry brought to a virtual standstill during a good portion of 2020, our consolidated sales were only down 30.7%. The majority of the revenues loss came for a historical contract loss in the Specialty Distribution Agreement, followed by lower revenue from our hospitality customers who were affected by COVID-nineteen pandemic and our decision to stop serving less profitable contracts in our Broadline distribution business. During the fourth quarter, as we were facing the threat of the second wave, the government of Quebec issued a decree requiring the closure of all biannual operations of bars and restaurants located in red zones. As we predicted on this call in November, the second wave did not get as hard as the first. We further improved our customer mix with the conclusion of the three new institutional supply agreement and continued serving all of our new retail customers that were on boarded during the pandemic. On the profitability front, the transformation initiative that we started deploying over the last two years and the cost mitigation measures quickly implemented at the start of the pandemic, including the support of the Canadian emergency wage subsidy, supported higher operating profitability in 2020. Our adjusted EBITDA margin grew to 4.4% compared to 4.2% last year. This is net of IFRS 16. To summarize 2020, I would say that the rightsizing of our operations, which includes the sale of our non profitable activities in Ontario, our diversified customer base and quick implementation of various cost preservation measures provided us with the necessary liquidity and borrowing capacity to weather the pandemic. As we stand today, the province of Quebec remains in lockdown. However, restaurants located in less affected region have been allowed to reopen their dine in operations starting on 02/08/2020. One, since we have a wide geographical reach within the province, we should be well positioned to benefit from the elevation of certain restrictive measure. The situation is constantly evolving, but what remains certain is that we are ready to help our customers resume their operations gradually as restrictive measures are allowed to ease throughout the province. With this, Marie France, 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 be here with you today to review our financial results for the fourth quarter and fiscal twenty twenty. Fourth quarter consolidated sales sales from continued activities were down 30.9% to $133,300,000 Sales in the distribution segment decreased by 35.5% to $86,500,000 dollars mainly from the Herbes specialty distribution contract, which represented $20,500,000 in the equivalent quarter of last year, our decision to stop serving less profitable clients starting in the fourth quarter of twenty nineteen, which represented $3,500,000 in the equivalent quarter of last year and from a lower volume related to the COVID-nineteen pandemic during the quarter. This was mitigated by an increase in retail and institutional sales from existing and new customers on boarded in the second, third and fourth quarter of twenty twenty. Sales in the wholesale segment decreased by 22.5 to $58,800,000 mainly from the effect of the pandemic and from lower inter segment sales resulting from the sale of our Ontario division and mitigated by growth in certain customer account and new wholesale customers. The adjusted EBITDA from continuing operation reached 7,500,000 or 5.6% of sales compared with $8,200,000 or 4.2% in the fourth quarter of last year. The improvement in margin stems from the decision to stop serving less profitable contract efficiency measure, the adoption of our IFRS 16, which reduced rent expenses by $2,600,000 a reduction of salary expenses and $1,800,000 in subsidies. Fiscal twenty twenty consolidated sales from continued activities were down 3.7% to $461,300,000 Sales in the distribution segment decreased by 37.1% to $309,300,000 dollars Distribution activities were down by $182,100,000 from the end of the specialty distribution contract, which represented $84,000,000 in 2019. Our decision to stop serving less profitable clients starting in the fourth quarter of twenty nineteen, which represented $27,100,000 in fiscal twenty nineteen. And from lower volume related to the COVID-nineteen pandemic starting in the second quarter of twenty twenty. This was mitigated by an increase in retail sales from existing and new customers on boarded in 2020. Sales in the wholesale segment decreased by 16.3% to $192,400,000 mainly from the effect of the pandemic and from lower intersegment sales resulting from the sale of our Ontario division and mitigated by growth in certain customer accounts and new wholesale customers. The adjusted EBITDA from continuing operation reached $28,900,000 or 6.3% of sales compared with $27,600,000 or $4,200,000 last year. This comes from the improvement in gross margin from the adoption of our IFRS 16, 7 point 1 million dollars received in subsidy, efficiency measures and mitigated by the effect of the COVID-nineteen pandemic on sales. Net earnings from continuing operation was $3,800,000 down from $7,500,000 last year. Net loss for fiscal twenty twenty stood at $8,600,000 compared to net earnings of $7,700,000 in 2019. Cash flows from operating activities amounted to $37,300,000 in 2020, up from $31,500,000 in 2019. This increase is mainly due to a lower use of working capital, the effect of IFRS 16 and increase in adjusted EBITDA. As of 12/26/2020, our net debt including the convertible debentures and net of cash amounted to $52,100,000 compared to $72,100,000 at the end of fiscal twenty nineteen. Higher cash flow since the start of the year from operating activities and the sale of the Ontario division were used to reimburse a portion of debt, specifically $3,000,000 towards the subordinated debt and $2,000,000 to the credit facility. Pursuant to the new credit arrangement that we discussed in his opening remarks, our financial leverage ratio does not materially change from year end and currently stands at 8.8x versus 2.6x in fiscal twenty nineteen. By excluding the effect of IFRS 16, our leverage ratio stands at 2.6, which includes the convertible debenture. The pandemic will continue to have an impact on our sales and short term adjusted EBITDA. However, because of the quick implementation of cost preservation measure and the support of the subsidy, we do not expect this situation to have a material impact on our available liquidity. I will now like to turn the call over to the operator for a Q and A period. Your first question comes from Kyle Macfey of Cormark Securities. Your line is open. Hi, everyone. Louis, the first question on your distribution segment. The revenue for the segment was down 36% year over year in Q4. And based on your disclosures, we know about 18% of that was the on purpose contract terminations and ceasing serving some clients that stuff wasn't yet lapped. So my question is specific to the remainder of that year over year decline for the distribution segment that implied 18% hit. Can you shed some light on the moving parts feeding that? I know there would be a net negative from COVID in there, but also wondering if there's any permanent gains in there from new clients, market share gains, things that will persist even when COVID is over? Well, thanks and good morning, Kyle. Yes, the COVID part I think it's important to isolate the COVID part and our results for distribution. So for Q4, the impact on distribution was minus 21% due to the COVID for the distribution part. But for the year, that impacted our sales by 19% on that part. And for Caraval Group, we made the calculation of what did the COVID did specifically with a decline of 17%. So the rest of the shortfall comes from what we stopped in last year at the end of twenty nineteen, contracts that were not as profitable. And also in February of this year, a contract that was stopped with a big customer with one of our divisions. So this is the for 2020 and the as we said, the impact of COVID, as I said earlier in Q4 was not as drastic as in Q2. And to give you a bit of color for the future, the reopening of the restaurant is to come shortly, I guess. It just restarted in the North Of Quebec, and we're expecting that it may start back in Orange Zone in other region probably in March 8, but we don't have a crystal ball, but this is how it looks for now. The one major thing that affected the Q4 results for the wholesale business was that there were no Christmas parties and hospitality business was down and the so we expect that this should come back this year, hopefully. And we gain to finish on that, we did gain some institutional customers during that first that last quarter. And we did gain during the pandemic new retail customers where we're doing backdoor business. And so overall, we'll keep some of it and for for ongoing and we'll lose some of them, such as food banks, breakfast clubs of Canada. We're not expecting that once the pandemic is gone that we'll continue serving them. But for retail and new retail backdoor customers, we're happy because they like our service and quality and we expect to keep some same for the new customers that we want. Got it. Okay. That's helpful color. Just to clarify, the institutional customers you're adding, would that land in the distribution segment? Both. A bit in the wholesale business and in the distribution segment. Got it. Okay. Okay. And based on the numbers you gave me about isolating COVID, it sounds like these institutional and retail customers that should prove permanent is actually material kind of low single digit year over year growth contribution. Does that math sound right? Sounds right, yes. Okay. Got it. Okay. Moving on to your gross margin line. So you continue to show year over year gains in your gross margin percentage. And I know some of the contracts and clients you cut out helps that mix, but wondering if COVID is also helping that mix. For example, maybe parts of your business that are hit by COVID just happened to be lower margin business. So can you help me understand if we should expect any material gross margin shifts as COVID fade? No, I don't expect on the gross margin, absolutely not. We have that's the result of the price we're selling and the cost of the acquisition of the products and the no, I don't see any big swings on that because it's fairly stable in terms of the contracts we have with the institutions, our long term contracts and with our distributors. So I don't see any swing on the margin. Got it. Okay. And then on your balance sheet, these new debt facilities, you press released the senior and subordinated facilities. It looks like you have more than enough to repay and replace all your existing debt, including the converts, plus you'd still have a lot of excess liquidity. So can you help us understand some of your priorities for this excess liquidity? Are there any major organic growth or acquisition plans that you tend on pursuing to utilize all this liquidity? Yes, sure. And it was well summarized. And so of course, we're looking at organic growth. Calabar is more developed in Eastern Quebec and the opportunities in Western Quebec. So we'll work on that. We're looking at it and there's lots of room to grow out there. And as May alluded to acquisition, while we're looking for good, small, accretive opportunities that are very synergetic, the context of COVID may slow down the process, but we're looking at opportunities. Got it. Okay. Thanks for that color. And just last one for me, just on your CapEx, can you offer the latest update on what your CapEx should look like in 2021? In 2020, it was about $2,000,000 So in 2021, should be higher from another 2,000,000, I would say. So a total of maybe 4,000,000, around 4,000,000 for NII. Got it. Okay. Thanks for all the updates. That's it for me. There are no further questions at this time. I return the call back over to Luis Annette for closing remarks. Thank you, Sasan and Kyle for your question. As I said in my opening remarks, we are very happy with our performance this year. We are starting 2021 on a more solid footing with the resources concentrate on profitability growing our operations. Because of the cost mitigation measures that we quickly implemented for the onset of the pandemic and the rightsizing of our operations, we are in a good financial situation and are ready to serve our restaurant customers as they start reopening their dining room. Looking ahead, we remain committed to pursuing the transformation of Calabar by focusing on broad line distribution activities in Quebec, delivering efficiencies and improving our Employers brand. We are grateful to be able to continue to count on the dedication and hard work of our employees and the support from the labor union, all financial partners, shareholders, our customers and our suppliers. This concludes our call for the fourth quarter of twenty twenty one. I look forward to speaking with you in May at our next conference call and AGM, which will be held virtually again this year. Thank you for joining us. Stay safe and healthy. And this concludes today's conference call. Thank you for participating. You may now disconnect.