Good morning, ladies and gentlemen. Thank you for standing by, and welcome to Colabor's second quarter 2020 results conference 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 analysts only. Instructions will be provided at that time for you to queue up for questions. If anyone has any difficulties hearing the conference, please press star followed by zero for operator assistance at any time. 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 the actual results to differ materially from those anticipated.
I refer the audience to the forward-looking statements as detailed in the presentation supporting this conference call, and available on the company's website in Investor section under Events and Presentation at www.colabor.com. Furthermore, risks are discussed [crosstalk] throughout the MD&A for the 16-week and 52-week periods ended December 28th, 2019, under the headings Risks. I would like to remind everyone that this conference call is being recorded today, July 27th, 2020. I would like to now turn the conference over to Louis Frenette, President and CEO. Please go ahead, sir.
Thank you, Joan. Good morning, everyone, and welcome to Colabor Group 2020 second- quarter results conference call. This is Louis Frenette, President and Chief Executive Officer. On Friday afternoon, we released our earnings results for the 12-week and 24-week period ended June 13, 2020. The press release and disclosure document can be found on our website at www.sedar.com. I'm joined today by Pierre Gagné, our Senior Vice President and Chief Financial Officer. The last few months have been unprecedented in recent history, and I can't express how proud I am of all our employees who stood up the challenge and worked tirelessly to help us navigate through this crisis. We entered our second quarter two weeks after the Quebec government declared a state of emergency in the wake of rising COVID-19 cases.
The hospitality industry had already been preparing for a virtual shutdown of their operations, and only restaurants offering takeout and delivery services could remain in operation. We also saw our suppliers starting to experience shortages of many food categories and essential goods. As essential provider of goods and services to the public, our mission was and still remain critical. We immediately implemented rigorous health and hygiene practices and social distancing measures, furloughed 1/3 of our staff, reallocated resources where possible, and implemented liquidity preservation measures, which include applying for the Canadian Emergency Wage Subsidy program and temporarily reducing the remuneration of our Executive Team and Board Member. Thankfully, the transformation initiative that we had started deploying during the last two weeks, such as the right-sizing of our operations, selling non-core assets, and various efficiency measures, contributed to strengthening our balance sheet as we entered the pandemic.
These measures, together with a tight control over expenses and working capital during the second quarter, helped us successfully navigate this unprecedented storm. As a result, during this period, with only two-thirds of our staff, we managed to keep our customers well-stocked while navigating a constantly changing operational environment. The good news is that we surpassed our own revenue and EBITDA guidance, and as we speak, have been able to call back half of our furloughed employees. We hope to reintegrate our remaining employees gradually as conditions continue to improve. We also completed the sale of our Ontario broadline distribution activities in the middle of the second quarter, and we are proud to have come to an agreement during these difficult times. This will allow us to concentrate even more on our core activities, further our transformation plan, and improve our ability to raise our overall profitability.
I would now like to quickly review our environment and operational performance during the second quarter. As we navigated the confinement period, the restaurants and hospitality industry came to a virtual halt. With the mandatory closure of all in-dining operations, only restaurants offering takeout and delivery services were able to remain open, resulting in an aggregate operating capacity in the range of 20%-25%. Thankfully, what was set apart from other food service distributor is our diversified customer base and wide geographical reach within the province of Quebec. We serve a complete range of customers in what the industry refers as to the food away from home markets, specifically targeting the hotel, restaurant, and institutional market. We serve this market either directly through our distribution activities or indirectly by selling to smaller distributor through our wholesale business.
This diversification allows us to minimize the effect of the pandemic on our consolidated sales, which were down by 47.2% and compare favorably to other distributors that primarily exposed to the restaurant industry. During the second quarter, our specialized distribution sales of fish, seafood, and meats saw an important volume reduction from the end of a distribution contract and from a lower demand from fine dining establishments from the effect of COVID-19. Anecdotally, the pandemic resulted in a shift towards more affordable cuts. Our broadline distribution activities performed well, considering the context from a diversified hotel, restaurant, and institutional customer base and reach in most of the region in Quebec that were less affected by COVID-19.
Lastly, our wholesale business fared relatively well during the pandemic, with revenues that were down only by 24% from the contribution from new customers in the retail and institutional market, such as food banks and from a diversified end customer base being served by our distributor clients. Their end customers include smaller retailers, institutions, and small convenience stores. Since June 15th, restaurants in Quebec have been allowed to gradually reopen and we are now helping many of our restaurant customer restart their dining operation and helping them implement the new sanitary guide. As we speak, 90% of our restaurant customers have started ordering again. Although this was a very difficult time for many of our customers, particularly independent restaurants, we have yet to witness significant closure of the bad debt.
We are in a good position to serve our customers and help them reopen and adapt to this new reality. Our main priority still remains the health and safety of our employees, customers, and the community. We are keeping all safeguards measures in place. We remain focused on managing the effect of the pandemic on our business and pursuing the transformation of Colabor in this new context. With this, Pierre, I turn the call over to you for a review of our financial results.
Thank you, Louis, and good morning, everyone. As Louis said in his opening remarks, because of our improving financial situation, entering the quarter diversified customer base and our team's ability to adapt and innovate, we've exceeded our own guidance for the second quarter of 2020. In the second quarter of 2020, consolidated sales from continued activities were down 47.2% to $95.5 million, which was higher than our revenue guidance of CAD 80 million-$90 million. Sales in the distribution segment decreased by 56.4% to $60.4 million. Specialty distribution activities were down by $50.5 million from the end of a distribution contract, which represented $40 million in the equivalent quarter of last year, and from lower volume related to the COVID-19 pandemic during the entire quarter.
Our broadline distribution sales were down by $27.6 million from lower volume of sales from our restaurant and institutional customers due to the pandemic and from our earlier decision to stop serving non-profitable regions in the fourth quarter of 2019. Sales in the wholesale segment decreased by 24% to $43 million, mainly from the effect of the pandemic and from lower inter-segment sales.
Adjusted EBITDA from continuing operations reached $7.6 million or 8% of sales, compared with $8.7 million or 4.8% in the second quarter of last year, which was higher than our EBITDA guidance range of $ 5 million-$6 million. The improvement in margin stems from the Canadian Emergency Wage Subsidy program for $4.4 million, the adoption of IFRS 16, which reduced rent expenses by $2 million, the decision to stop serving less profitable contract, and the efficiency measures we implemented.
This was mitigated by the lower volume of sales experienced during the quarter and the favorable reversal of a provision of $400,000 taken in the second quarter of last year. When removing the effect of the adoption of IFRS 16 on our 2020 second quarter EBITDA and adjusting for the positive effect of $400,000 provision reversal in the second quarter of 2019, our adjusted EBITDA as a percentage of sales stands at 5.9%, compared with 4.6% last year. Net earnings from continuing operation was $1.6 million or $0.02 a share, down from net earnings of $2.9 million or $0.03 a share in the corresponding quarter of 2019. This results from a lower adjusted EBITDA, higher depreciation charges and expenses not related to current operation. This was mitigated by lower financing charges and income taxes.
Net loss was $2.9 million or $0.02 a share, compared to a net earnings of $9 million or $0.09 a share in Q2 2019. The reduction is attributable in large part to the increase of $10.6 million, and the net loss attributable to discontinued operation and from the items just explained. Cash flow from our operating activities amounted to $3.2 million in Q2 2020, up from $1.2 million in Q2 of 2019. This increase is mainly due to a lower use of our working capital.
On June 1st, 2020, we announced the extension of the terms of our credit facility and subordinated debt. In our view, this is an important reminder that we have the support of our key financial partners and provide us with additional flexibility required in case of additional issues arising from the pandemic and to support any potential future investment projects.
As of June 13, 2020, our net debt, including the convertible debentures and bank indebtedness, amounted to $62.9 million compared to $68.2 million at the end of fiscal 2019. Higher cash flows since the start of the year were used to reimburse a portion of the debt. Our financial leverage ratio now stands at 2.3x versus 2.5x in fiscal 2019. By excluding the effect of IFRS 16, our leverage ratio stands at 2.6x , which includes the convertible debenture. As these numbers demonstrate, Colabor remains in a good financial position. At the end of the second quarter of 2020, we had $15 million outstanding on our subordinated debt, which is now due on February 15, 2022, which was extended by 10 months.
Our bank facility, which was extended by 12 rounds, is now due in October 2021, remained on use and on which we still have $ 34.1 million of available borrowing capacity. In addition, the federal government Canadian Emergency Wage Subsidy was extended until December 2020, and we should remain eligible for this subsidy, thereby offsetting part of the expected decrease in sales and profitability year-over-year. 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 our operator, Joan, for the Q&A period. Joan?
As a reminder, to ask a question, you will need to press star one on your telephone. To withdraw your question, press the pound or hash key. Please stand by while we compile the Q&A roster. Your first question comes from the line of Derek Lessard from TD Securities. Your line is now open.
Good morning, everyone, and I guess I'd say congratulations on navigating through a pretty tough period here. I guess number one question is, in terms of the guidance you gave in Q2, could you talk about what, I guess, drove the better results on both the sales side and EBITDA? I guess more specifically on EBITDA, was it due more to a greater-than-expected benefit from the CW or cost control?
Look, Derek, a very good question. What happened is during the quarter sequentially, when you take the first period of the second quarter, the second and third, we saw a better improvement as a result of takeout becoming more prominent from our different restaurants. More restaurants were starting to reopen with takeout, which we were not expecting originally. The additional volume has helped us improve, if you want, the margin, the gross margin, and by constraining the costs, it has trickled down to our EBITDA. Essentially, if I'm trying to do broad strokes of what happened during the quarter, this is what happened. Better sales sequentially, period-over-period, which trickled down to on our EBITDA line, having the cost relatively fixed.
Okay. That's very helpful. Are you providing any type of guidance for Q3?
Well, good question. Essentially, for all the investors, when we came in into our second quarter, everybody was navigating, most of us anyway, in the dark. We were very concerned, and we wanted to reassure the financial community at the time that although it's difficult time, we'll navigate and if you want on an EBITDA line, we will be positive, which is more than positive. It's a very good quarter. Knowing that sequentially now with the reopening of restaurants, our view is that sequentially, again, we're hoping to see an improvement in sales. Although I cannot comment on Q3, but that's what you should expect to see sequentially, months after months, with a lower wage subsidy. Because now we'll potentially be below the 30% threshold the government has put in place.
Now there's a new calculation, so w e're in the process of calculating what will be the impact of that. Sequentially, we should, if you want, have more sales than we had in the quarter before.
Okay. Yeah, that's helpful. I guess, excluding COVID, maybe could you talk about what you're seeing operationally, both in wholesale where you exited those unprofitable contracts at the end of the year and as well in Quebec broadline distribution?
Yes. Thanks, Derek. We cleaned out the contracts that were non-profitable in the quarter. As you know, we closed the Summit sale. All that is improving the margin, the bottom line. We gained some new customers during this pandemic, helping managing the growth and the profitability. The mix is favorable. Good thing that we were not only in the restaurant business as some of our distributors that lost sales up to 90% during the confinement. Our position, our mix, what was done operationally to work on productivity, efficiencies, has been helping quite a bit.
Louis, can you remind me again, and I think you might have mentioned it in your prepared remarks, who these new customers or what segments of the industry they're in?
Yeah. I can't name the customers one by one and for confidentiality also. We made significant gains on the institutional side. We won some contracts to serve prisons. I'm not allowed to name also the food banks that we gain as new customers. Also, lots of retailers. As I said at the Q1 report, the last time that we were starting to gain some retailers to help them fill in their orders as suppliers was a challenge with the suppliers. We had some inventory that they didn't have, so that was important. While some of the restaurants were shut down, we gained a few new customers for when they would reopen. We're seeing that in our results now.
Okay. Louis, I remember you telling us that the retailers or, I guess, the growth from the retailers or the volumes from the retailers would likely be more temporary. Is it something that you're seeing that a part of that can actually be more permanent going forward?
Well, the good news is that we thought it would be just for that period, and some of the retailers said that they want to continue with us. We have two roles. Be the fillers when they have issues with their suppliers, so we can help on that. Also, they open their, what they call their back door. Most of the stores are allowed to order, let's say around 10% of their volume through back door. Which means not through their own wholesaler. We capitalize on that, and we have some retailers that were very appreciative about the service levels we're able to give and in a timely manner during these difficult times for operations.
They ask us to continue to service them on a regular basis. Of course, we will. The filling part was quite big at beginning, i t's less and less, but we keep have orders from them, which is incremental to what we used to have as a business.
Okay. Maybe just, again, I guess, still on the COVID beat. I was wondering if you could maybe talk about the current macro environment that you're seeing. How much of the industry remained shut? I guess what kind of business are you doing or able to do given that social distancing measures are still in place?
Yeah. Because as I said, we have a diversified portfolio with the hospitals and institutional retail. If we focus only on the restaurant business that we are managing directly, to date, only 10% of our restaurants did not open. The way it works every year there's about without surprises, there are restaurants closing all over Canada and the U.S. But here, there's above 1,000 stores that close and reopen under another name. Let's say that the orders we have after confinement as I said, only 10% of our restaurants we had did not order. That's a good news. The thing we look for is for more volume per orders. The good news is that most of them are reopened, but they have smaller menus.
With the distanciation and the measures that are in place in dining, it's about 50% less people can be in the restaurant.
Right.
They continue. The good news is that they're continuing to sell for takeout and ordering. That's better than we thought. If you remember, we didn't know if it would be at 20%, 30%. We're reading all sorts of things. Also note that our restaurant business is more in Eastern Quebec. We don't do much on the island of Montreal, and the rest of Quebec is quite active, such as Gaspésie as we speak, in those regions, Côte-Nord and where we're very strong.
Okay. That's a good point. I guess, a few years back there was a move to become, I guess, for lack of a better word, stronger in the Montreal region. Is that something you're still, I guess, attempting to attack? Or is it more of a longer-term strategy, like once we move past the COVID impact?
Yes, that's something that we want to grow at one point in time. Today we have distributors that covers well Montreal, and distributors that we cover, that we sell to. We made decision to focus on our strength and gain market share where we are. Especially during COVID, we didn't want to open new markets as we had to focus on our operations with 1/3 of this test not working and under different context, conditions. We decided to focus on that. Yes, that's a possibility. For now, we're really focused on where we're good.
Okay. I think you mentioned just actually just previously, you were looking for the volume per customer to pick up. Have you seen any indication of that beginning to happen?
Yes, of course. Although we don't have a crystal ball, what I can tell you is that the volumes per order has increased since the confinement but not to the level it was before. Like I said , we were surprised for many restaurants that were doing deliveries or takeout how good they were with their volumes, with reduced staff and everything. We're very pleased with that. With the in-dining opening, so of course, the size of the orders are increasing, but not to the level they worth .
Right. Okay. Maybe one last one for me. I was wondering what the competitive side of the business looks like as the industry begins to open up. Has it gotten more competitive as some of your competitors might have lost volumes and they're looking to rebuild those or get those volumes back as you are? Just maybe touch on what the competition looks like right now.
Well, the whole industry was affected. As I mentioned earlier, our volumes dropped. We were 47.2% down. The industry is at -75%. In general, for the ones that are focused on restaurants and mainly restaurants and the big competitors, it varies between -65% and -85%, depending on their mix. Ours is at 47%. We focus on gaining, acquiring new customers during that period. Our sales development team knock at doors or virtually knock at restaurants to gain new business, and also in the institutional and houses for older people. New things were tried during this period by our competitors and by us. Overall, the answer is no. People are trying to catch back and do as much as they can. Favorably, we gained some customers.
Okay. I guess the question is, maybe if I could drill down just a bit further into that, there's been no moves from some of the bigger competitors who are more focused on the restaurants into the smaller markets or like some of the industries where you've been more successful over the last quarter or so?
Exactly. Imagine a distributor that is down 90%. They're in survival mode. They had to shut down almost all of their operations, and they just wanted to keep trying, selling a bit, but no big moves in the market. No.
Okay. All right. Gentlemen, that's it for me. Thanks for taking my questions.
Thank you, Derek.
Your next question comes from the line of Brandon Moyse from Stornoway. Your line is now open. Brandon Moyse from Stornoway, your line is now open.
Sorry. Hi, Louis. Hi, Pierre.
Hi.
I was surprised, especially given the sales EBITDA beat, that you used $3 million of cash in the quarter. It looked like it was all from discontinued operations. Can you help me bridge the $7.7 million of sale proceeds you got from the sale to Flanagan to the $3.4 million of cash used in discontinued ops? What was that $11 million?
Yeah. What you had is severances. You had termination cost of certain leases of equipment. Plus, you had the operations, during, if you want, the period of mid-March till mid-May. Two months where you had, if you want, negative EBITDA impact for the quarter and some working capital situation that had to take care. That's what happened in a nutshell.
Right. The losses must have been pretty large because when I look at kind of how exiting the Cara contract in the Summit business as a whole was presented. It kind of looked like it'd be a net source of cash of at least $10 million because you said Cara would be paid for by the working capital releases, and then you'd be selling Summit for $10 million. It looks like now it's basically zero net proceeds for that whole business, if I'm not wrong.
Well, if you look after six months, you're looking at the quarter, but if you look after six months, it's positive, no?
Yeah, don't you still have $4.8 million in payables that you haven't paid of those called restructuring and exit costs?
Yeah, we still have some costs to be paid. At the end of the day, what we've said to the financial community last fall is the fact that the closure of the Ontario operations would, at the end of the day, the cash we receive and the closure of that would essentially offset one and the other. We still have some money to be received, by the way, from Flanagan in a year's time based on the contract. There's still money to be had.
You're talking the $1.6 million earn-out or is there more above?
Yeah, the earn-out is that w e were able to return to give them a lot of our brand-new equipment, so which for us it was a cost avoidance in terms of contract terminations. At the end of the day, if the plan is to close it and with the working capital and the amounts left, we should be close to a breakeven or a little bit better, in terms of cash, if you want, the cash in and out. We should be a little bit better. That's the plan. There's still adjustments to be made, but that's our view.
Just to close that off, is there anything you're still carrying that Flanagan didn't take related to that business that call its owners ?
Yeah. Good question. We have two leases. We have one in Mississauga, and one in London, and we're in the process of subleasing that. There's some very good prospects who are looking at these facilities. The London facility right now is subleased at 60% for a short period of time. There may be a party that could be interested for a longer period of time. In Mississauga, there's a party currently very interested in the facility. If everything goes according to the plan, we should get out of these leases.
What's the cost of those leases today as it is under the status quo?
It's about roughly $1 million each a year.
Okay. Thank you.
There are no further questions at this time. I will now turn the call back over to Louis Frenette.
Thank you, Joan, and thanks Derek and Brandon, for your questions. I'm very happy with our performance this quarter and our ability to efficiently manage both our operations and financial situation. We achieved better than expected results, beating our own revenue and EBITDA guidance. We successfully negotiated the extension of our credit facility and subordinated debt, demonstrating the support of our key financial partners. We concluded the sales of our Summit division, which for years was a drag on our earnings.
We managed to increase our cash flow from operations, pay down debt, and further strengthen our balance sheet. We are cautiously optimistic that we are coming out from the worst part of the crisis. Of course, we cannot predict the future effect of the pandemic on the hospitality industry. Additional measures required by the government to contain any further outbreak or the pandemic's effect on the economy in general.
I believe that the crisis demonstrated our resiliency, ability to adapt with operational excellence. Our priority remains the safety and health of our employees, customers, and community. With strict safety measures in place, our old team was able to stay healthy. As for our remaining employees that are still furloughed, we are working hard to be in a position to call back as conditions improve. In the long term, we remain committed to pursuing the transformation of Colabor by focusing on our broadline distribution activities in Quebec, delivering efficiencies, and improving our employee engagement level. We are grateful to be able 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. Thank you. This concludes. Yeah.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.