Good morning, ladies and gentlemen. Thank you for standing by and welcome to the Colabor's third quarter 2020 results conference call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question and answer session. To ask a question during the session, you will need to press star one on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star zero. I will refer you to the forward-looking statements in the accompanying presentation available on the company's website. This call is only open to analysts. I would now like to turn the conference over to your speaker today, Louis Frenette, President and CEO. Thank you.
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[Non-English content] Julie. Good morning, everyone, and welcome to Colabor Group 2020 third quarter results conference call. This is Louis Frenette, the President and Chief Executive Officer. Last evening, we released our earnings results for the 12 and 36 week period ended September 5th, 2020. The press release and disclosure documents can be found on our website at www.sedar.com. I am joined today by Marie-France Laberge, our Corporate Controller and Interim Chief Financial Officer. It has already been over six months since we started dealing with the onset of the COVID-19 pandemic. I would like to reiterate once again how proud I am of all of our employees who have stood up to the challenge and continue to work tirelessly to help Colabor and our customers navigate these unprecedented times. Given the current context, we are very pleased with our financial results for the third quarter and year to date.
Our profitability is up, our balance sheet is stronger, and we are now in the best position we have been in many years. At the start of our third quarter, the government of Quebec started easing restrictive measures, which allowed restaurants and gradually reopen their dine-in operations across the province. Interregional travel restrictions were also lifted, which helped the tourist industry, particularly outside of the large metropolitan areas. Our wide geographical reach within the province positioned us well to capture some of this momentum during the summer months. Our diversified customer base also continued to serve us well. We serve a variety of retail and institutional clients, such as hospital, long-term care center, military base, food banks, and other not-for-profit organizations. In the second and third quarter, we further broadened our diversification and adding new retail and institutional relationships, which have allowed us to continue capturing food spending.
On the revenue front, although our consolidated sales were down by 27.1% or CAD 45 million, we estimated that only approximately 10% came from the effect of COVID-19 pandemic. The balance of the variance comes from the effect of the historical contract loss in our specialty distribution activities from our decision to stop serving non-profitable contracts and lower intercompany sales, mainly resulting from divestiture of our Ontario activities. On the profitability front, the transformation initiative that we started deploying over the last two years and cost mitigation measure quickly implemented at the start of the pandemic, including the support of the Canadian Emergency Wage Subsidy, supported higher operating profitability in the third quarter. Higher cash flow from operations and proceed from the sales of the Ontario division has allowed us to reimburse debt and improve our leverage ratio.
As a reminder, the Ontario division had an annual Adjusted EBITDA drag of approximately CAD 8 million and of about CAD 2 million in the third quarter of last year. Together with various cash preservation measure and our continued eligibility to the Canadian Emergency Wage Subsidy, we are in a good financial position. As we stand today, and for the entire month of October, the government of Quebec is requiring that all restaurants located in maximum alert zones close their dine-in operation. As we stand today, the major effects areas are located around Greater Montreal, Quebec City, and some other areas. The situation is constantly evolving, and we do not yet know if these restrictions will be reinstated when they come due at the end of October.
As we are entering the second wave, we believe that restaurants and consumers have adapted to dine-out option, and this will not bring us back to where we were during the first wave. I also remain confident that we have demonstrated the resiliency of our team, of our diversified business model, and of our ability to manage through the crisis. We are also stronger from our COVID lessons learned. We have a more resilient supply chain. Many of our restaurant customers have now added takeout and delivery options. We developed new retail and institutional relationships, and we implemented new and more rigorous health and safety measures. As our third quarter results show, we have adapted and become more agile. We are also pursuing the transformation of Caraffe by working to further improve the efficiency of our network, create synergies, adapt our offering, and even grow in key markets.
We remain focused on navigating through this new environment and continuing to raise profitability, all while keeping our employees, customers, and the community safe. With this, Marie-France Laberge, I turn the call over to you for a review of the 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 third quarter of fiscal 2020. Consolidated sales from continued activities were down 27.1% to CAD 120.9 million. Sales in the distribution segment decreased by 33.5% to CAD 81.7 million, and it's explained by the specialty distribution activity, down by CAD 23.7 million from the end of the distribution contract, which represented CAD 18 million in the equivalent quarter of last year, and from lower volume related to the COVID-19 pandemic during the entire duration of the quarter. It's also explained by our broad line distribution sales, down by CAD 17.4 million from our earlier decision to stop serving non-profitable contracts in the fourth quarter of 2019, which represented CAD 9 million in the equivalent quarter of last year.
From lower volume of sales from our restaurant and institutional customers in the context of the COVID-19 pandemic. This was mitigated by an increase in retail and institutional sales from current and new customers onboarded in the second and third quarters of 2020. Sales in the wholesale segment decreased by 10.5% to CAD 50.8 million, mainly from the effect of the pandemic and from lower inter-segment sales resulting from the sale of our Ontario division. Adjusted EBITDA from continuing operation reached CAD 10.1 million or 8.4% of sales, compared with CAD 8.5 million or 5.1% in the third quarter of last year. The improvement in margin comes from the decision to stop serving less profitable contracts, efficiency measures, the adoption of IFRS 16, which reduced rent expenses by CAD 2 million, a reduction of salary expenses, and a CAD 0.9 million contribution from the Canadian Emergency Wage Subsidy.
This was mitigated by the lower volume of sales experienced during the quarter and the favorable reversal of a provision of CAD 0.2 million taken in the third quarter of last year. When removing the effect of the adoption of IFRS 16 on our 2020 Q3 EBITDA of the Canadian Emergency Wage Subsidy and adjusting for the positive effect of the CAD 0.2 provision reversal, our Adjusted EBITDA as a percentage of sales stands at 5.8%, compared with 5.1% last year. Net earnings from continuing operation was CAD 3.4 million or CAD 0.03 per share, down from net earnings of CAD 3.7 million or CAD 0.00 per share in the corresponding quarter of 2019. This results from higher depreciation charge and income taxes mitigated by higher Adjusted EBITDA and lower financing charge.
Net earnings were CAD 1.8 million or CAD 0.02 per share, compared to net earnings of CAD 1.7 million or CAD 0.02 per share in Q3 2019. This slight improvement is attributable to the above explained items and to a reduction of CAD 0.3 million in the loss from discontinued activities. Cash flows from operating activities amounted to CAD 17.2 million in Q3 2020, down from CAD 18.6 million in the equivalent quarter of 2019. This decrease is mainly due to our higher use of working capital, mitigated by the effect of IFRS 16, an increase in Adjusted EBITDA.
As at September 5, 2020, our net debt, including the convertible debentures and bank indebtedness, amounted to CAD 56.2 million compared to CAD 68.2 million at the end of fiscal 2019. Higher cash flows since the start of the year from operating activities and from the proceeds of the sale of the Ontario division were used to reimburse a portion of debt. Our financial leverage ratio now stands at 1.9 times versus 2.5 times in fiscal 2019. By excluding the effect of IFRS 16, our leverage ratio stands at 2.4 times, which includes the convertible debentures. As these numbers demonstrate, Colabor remains in a good position financially. At the end of the third quarter of 2020, we had CAD 15 million outstanding on our subordinated debt, which was extended in Q2 and now is due on February 15, 2022.
Our banking facility was also extended in Q2 and now due in October 2021, remain unused and on which we have CAD 40.6 million of available borrowing capacity. Although the pandemic will continue to have an impact on our sales and short-term Adjusted EBITDA, we do not expect this situation to have a material impact on our available liquidity. I would now like to turn the call over to the operator for a Q&A period.
Thank you. At this time, if you'd like to ask a question, press star one on your telephone. To withdraw your question, press the pound key. Please wait while we compile the question. Your first question comes from the line of Kyle McPhee with Cormark Securities. Please go ahead.
Hi, guys. Thanks for taking my questions. Starting on the revenue line, specifically the moving parts feeding that year-over-year revenue change, I just wanted to confirm a couple of things. First, on the specialized distribution contract elimination that has been hitting the year-over-year trend, will that be fully lapped after one more quarter, so allowing your revenue line to look far more stable entering 2021, all else equal? Is that year-over-year dynamic from that specialty distribution contract going to extend into next year?
The contract has been terminated in February 2020, so we'll continue to see an impact until the Q1 2021.
Got it. Okay. Similar question on the revenue line. The broad line volume that you've been choosing to cut out, the lower margin stuff you've been getting rid of. Is that cleanup process now largely done at Colabor so that year-over-year dynamic will also finally be lapped exiting this year?
Okay. Well, yes, this is very helpful. We stopped those contracts at the end of 2019. That effect is going to continue. That's a big reason why the margin is better. The margins are better. Also in our day-to-day operations, we look at productivities, making some synergies, and we work on the variable costs. This is our day-to-day job to do this. It's there to continue.
When you say it'll continue, does that mean we'll see more significant kind of volume cutouts that will take your margins higher?
No
Can you confirm that process is largely done?
Yes. Sorry. Yeah, that process is largely done, and of course, we look at all of our contracts, and we pay attention to them and try to have them positive. Got it. Okay. That's helpful. Moving over to the gross margin line. You've obviously seen some nice gross margin % pickup in recent quarters versus what we saw last year. That's obviously related to getting rid of the lower margin stuff and getting rid of Ontario. The gross margin took another big jump higher this quarter to 17.8%, and I'm just hoping you can offer some color on what we should expect going forward. Is it reasonable to expect you hold gross margin in the 17%-18% range, or it's kind of your first half results in the 16% range more reasonable going forward? Any color there would be appreciated.
Well, I don't want to give much color, the idea is that we work on our gross margin in our business development, that it improves. We add a better product mix during the period, favorable, that help the margin, and our customer mix also is helping. This should continue.
Got it. Okay. Moving on to COVID. It looks like the COVID impact on volume was much lower in Q3 versus what we saw in Q2, and that makes sense given the restaurants were reopened for most of Q3. I'm wondering now, can you offer any color on what you're seeing in Q4 so far as the restaurant channel has been forced to reclose as you mentioned? Is that Q4 drag that you're seeing similar to what you saw in Q2 when things were closed for most of the quarter? Is the drag now not as bad given everyone seems to be more prepared this time around with things like delivery and takeout?
Well, that's a good question, and hopefully not. What happened in Q2 was a total economy shutdown at one point in time, and there was very little restaurants that were offering takeout or home delivery service at the beginning of the pandemic and over time, until it reopened on June 15th. Over time, the restaurant adapted and adjusted with takeout and home delivery service. What happened in the second wave is that the day after it was announced, they were already up and running, most of them with what they had at the end of the first wave of the pandemic. It should not be the same. It should not be as drastic as it was. A great majority of restaurants are staying open with that system, and they were all installed. They were equipped to do takeout and home delivery.
They had that big practice in the first wave of Q2. Yeah.
Got it. That's helpful. Is it fair to say that Are there more of these new retail and institutional clients versus what you had in Q2 to offset this restaurant hit?
Yeah, we have some of those retail customers that have stayed with us in Q3. We count that as new customers and we'll continue to serve them. About institutional business, well, we're looking in our day-to-day job is to gain new customers and that's helpful. Yeah.
Got it. Okay, thanks for that color. Last question from me on CapEx. Can you offer any guidance going forward on what does a normal maintenance CapEx year look like? What we should expect in a year like 2021?
For the first part of the year, we have at this point, CAD 1.3 million of CapEx. We expect to have another CAD 1.5 million for the rest of the year, so for a total of around CAD 3 million this year. With the COVID, we clearly postponed some projects. We are actually revisiting the project for 2021. Normally we should expect to have higher CapEx next year.
Got it. Okay. That's all the questions from me. Thank you very much.
Thank you.
Thank you.
There are no further question at this time. I will turn the call back over to the presenters for closing remarks.
Thank you, Judy, and thanks Kyle for your questions. As I said in my opening remarks, we are very happy with our performance this quarter, and especially with our ability to efficiently manage both our operations and financial situation through the unprecedented situation. In this current context, we were able to improve our profitability, generate significant cash flow, reimburse debt, and strengthen our balance sheet. We are now in the best situation that we have been in many years. Looking ahead, we remain committed to pursuing the transformation of Colabor by focusing on our broad line distribution activities in Quebec, delivering efficiencies and improving our employer 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, our financial partners, shareholders, our customers and our suppliers.
This concludes our call for the third quarter of 2020. Thank you very much for joining us. Stay safe and healthy.
This concludes this conference call. You may now disconnect.