Earnings Call: Q1 2020

Apr 30, 2020

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to Colabor's First Quarter of Fiscal twenty twenty 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. 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. 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 Investors section under Events and Presentation at www.colabor.com. Furthermore, risks are discussed throughout the MD and A for the sixteen and fifty two week periods ended December 2839, under the heading Risks. I would like to remind everyone that this conference call is being recorded today, 04/30/2020. I will now turn the conference over to Luis Renette, President and CEO. Please go ahead. Thank you, Simon. Good morning, everyone, and welcome to Carabance Group twenty twenty first quarter results conference call. This is Louis Renet, President and Chief Executive Officer. Last evening, we released our earnings press release. It can be found on along with the interim financial statement and the MD and A on our website or at www.sedar.com. Today, I'm joined by Pierre Garnier, our Senior Vice President and Chief Financial Officer. A lot has changed since we last hosted this call at the February. Although the COVID-nineteen crisis started affecting our sales and operations during the last two weeks of the first quarter, I'm happy to say that our first quarter results were encouraging. Thankfully, the measures that we have started deploying during the last two years contributed to strengthening our balance sheet. Furthermore, the rightsizing of our operations, the sales of non core assets and the measures implemented to improve our efficiency supported the growth of our operating profitability despite the lower level of sales. In the first quarter of twenty twenty, we also stopped serving the non profitable recipe contract on March 2, completed the transfer of our Ottawa and London distribution center activities to Mississauga distribution center and reach an agreement for the sale of the rest of the distribution activities in Ontario. We ended the quarter in a strong position with higher operating cash flow and $41,800,000 available capacity on our credit facility. With a stronger balance sheet and the cash preservation measure that Pierre will discuss later, including the recent request made to benefit from 75% Canadian emergency wage subsidy program, we should be in a good position to weather this storm. As a provider of essential goods and service to public, we remain committed to to maintaining a strong supply chain. As such, our top priorities in the context of COVID-nineteen pandemic remains the health and safety of our employees and customers. In order to maintain a safe working environment, we implemented rigorous health and hygiene practices and social distancing measures. Unfortunately, the ongoing pandemic has caused a significant reduction in the level of activity in the restaurant and hospitality industry. At this time, the impact is important and it's hard to predict how future demand will unfold. Currently, the restaurant business in Canada and Quebec is at minus 80% around that. Thankfully, Calabar has a diversified customer base, which is what sets us apart from other food service distributors. We serve the whole range of customers in the hotel, restaurants and institutional market. And with the contribution of new retail customers, our sales dropped by 50%. On the basis of continuing activities, which compares favorably to other or most of the other distributors who are less diversified than us, where they lose sales at the level of 70%. Since the start of the pandemic, our share of the revenue from institutional customers such as hospital, military base, food banks and breakfast clubs of Canada, Club Bites De Genie, has grown. We're also seeing stronger demand from retailers, both new and existing customers who have been scrambling to secure their supplies. In addition, many smaller distributors have had to shut down their operation and their customers are now turning to us. In the first quarter of twenty twenty, our growing share of revenues from the institutional and retail market have partially compensated for the large volume coming from the restaurant and hospitality industry. In order to further grow our distribution channel and diversified our business, we also started testing a business to consumer market in certain location, delivering frozen and fresh meat and seafood directly to the consumer's house. This remains a small initiative and if conclusive, we will update investors on any interesting development. The ongoing pandemic and resulting rapid change experienced on product categories and channel has obviously created significant operational challenges. In order to deal with this constantly evolving situation, we relocated resources where possible and implemented liquidity preservation measures. Unfortunately, after the end of the quarter, this resulted in a temporary layoff of approximately one third of our workforce, including cutbacks of our working hours when possible and the temporary reduction in the remuneration of our executive team and board members. These measures together with a tight control over expenses and working capital will help as we navigate this situation. The industry is facing an unprecedented shift in demand from food service to retail. This has its challenges and we're working hand in hand with our suppliers. We are all facing the same situation and trying to ensure a steady supply of goods by looking for alternative source and substitution for certain product category in high demand, such as flour, legumes, pasta, cleaning products. As Quebec largest independent food distributor, we have a significant role to play in our local ecosystem. We need to work closely with all our partners, especially distributors with whom we exchange best practices to ensure that our industry comes out of this crisis in a relatively good shape. Before I turn the call over to Pierre to review our financial results and latest mitigation measures, I would like to provide an update on the sales of the Summit division in Ontario. The transaction to sell the assets of this division in Ontario was originally announced on March 12. It has since received a non objection notice from the Canadian Competition Bureau. However, with the ongoing pandemic created additional delays in closing the transaction. We expect to close in May, which is a slight delay from our April 27 target date. With this, I turn the call over to Pierre. Thank you, Louis, and good morning, everyone. I'm pleased to be here with you today to review our financial results for the first quarter of twenty twenty and the recent measures deployed to help mitigate the effect of the ongoing crisis. Our results for the first quarter of twenty twenty have progressed as planned from the continued implementation of our transformation plan. As Louis mentioned in his opening remarks, we experienced an overall improvement of our operational profitability, higher operating cash flows and reduce our leverage. In the first quarter of twenty twenty, consolidated sales were down by 11.8% to $111,600,000 Sales in the distribution segment decreased by 15.9% or $15,200,000 7 point 7 million dollars of the reduction comes from our specialty distribution activities resulting from the end of a distribution contract and from lower volume related to the COVID-nineteen pandemic during the last two weeks of the quarter. The other $7,500,000 reduction comes from our broad line distribution sales in Quebec, where we stopped serving non profitable regions in the fourth quarter of twenty nineteen and from lower volume from our restaurant customers resulting from the pandemic. The reduction in broadline restaurant revenues resulting from the pandemic was partially compensated by our growing broad line sales to retailers and institutional clients. Sales in the wholesale segment decreased by 2.5%, mainly from lower inter segment sales. Adjusted EBITDA from continuing operations reached $3,700,000 or 3.3% of sales compared to $2,300,000 or 1.8% in the first quarter of last year. This improvement stems from the adoption of IFRS 16 on leases, which reduced rent expenses by $2,100,000 and from the improvement of gross margins, which were slightly mitigated by lower sales volume from the ongoing pandemic. When removing the effect of the adoption of IFRS 16 on our twenty twenty Q1 EBITDA and adjusting for the positive effect of a $400,000 provision reversal in Q1 of twenty nineteen. Our adjusted EBITDA as a percentage of sales stands at 1.4%, which is equal to last year, but comparing favorably because of lower volume of sales achieved in Q1 of this year's this year, sorry. Net loss from continuing operations was $1,900,000 down from a net loss of $1,100,000 in the corresponding quarter of 2019. This result stemmed mainly from one time charges. The net loss was $8,300,000 compared to a loss of $2,700,000 last year same period. The reduction is attributable in large part to the increase of $4,800,000 and the net loss attributable to discontinued operation, stemming primarily from $6,300,000 in expenses related to the closing of the London and Ottawa distribution centers, from higher depreciation expense and from one time charges of $800,000 Cash flow from operating activities amounted to $5,600,000 in Q1 twenty twenty, up from $3,800,000 last year. This increase is mainly due to a lower usage of our working capital and from the effect of the adoption of IFRS 16. As of 03/21/2020, the company's net debt including the convertible debentures amounted to $61,000,000 compared to $68,200,000 just three months ago or at the December 2019. Our financial leverage ratio now stands at 2.1 times versus 2.5 times three months ago. But by excluding the effect of IFRS 16, our leverage ratio would stand at 2.3 times. Now if we remove the current divestiture of the calculation, our ratio now stands at 0.4. As you can see financially, we are in a good position. In order to preserve cash during the pandemic, we deployed several cost saving measures as Louis mentioned. We've tightly managed our working capital. At quarter end, our banking facility had $42,000,000 or $41,800,000 of available borrowing capacity. In addition, we are looking into other support measures available to us, such as the federal government's Canadian emergency wage subsidy, and we believe that we would be eligible for this subsidy in the second quarter, thereby offsetting part of the expected decrease of sales and profitability. Under these unusual circumstances and from our current assessment of the situation, we decided to provide guidance for the second quarter of fiscal twenty twenty. We expect sales from continuing operations to be between $80,000,000 and $90,000,000 We also estimate that the adjusted EBITDA will be between $5,000,000 and $6,000,000 taking into account the recent developments, IFRS 16 and the qualification for the federal wage subsidy as I've discussed before. Although the pandemic is expected 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. Now, I would like to turn the call over to the operator for the question and answer period. Simon? Thank you. Thank you. Your first question comes from the line of Derek Lessard with TD Securities. Your line is open. Yes, good morning gentlemen and hope everybody is staying safe. Thanks for taking my questions. I just wanted to talk maybe about the sale of Summit. I wanted to get maybe your strategic or your rationale behind that transaction. And does that mean you're now fully out of Broadline distribution in Ontario? And I guess my follow-up to that is what are your plans for Broadline distribution as a whole for the company? Hi, Derek. It's Louis here. Yes, the answer to your question is, yes, it would be out of Ontario. And as mentioned previously, we keep the same in our strategic plan, the same focus on increasing our broad line distribution in Quebec, in Northern Quebec. And we have the center of Quebec and we have opportunities to go close to Montreal also. Okay. Is there any I guess what's the main difference then between the wholesale and the broad line? And is there any potential cannibalization between the two segments? I missed the end of your question. Is there what? Cannibalization. No, the wholesale business or in French francais is a see it as the wholesaler selling to other distributors in Quebec. So we have 20 of them. And the broad line distribution is the operations we have in Lizzie, in Saint Nicolas, distributes to the end user. So the restaurants directly to the restaurants, hotels, hospitals. So there's a difference. So the wholesale is linked to a distributor like in Quebec, like we have in Quebec or in Granby or in Des Moines, Delmorea, Bende, and there's lots of them. Okay. Yes, I guess I was wondering why you wouldn't just maybe get another like try to bring on board another wholesaler instead of running a like instead of running a distribution, a pure distribution business? Well, I don't think there is many wholesalers in Quebec that we could acquire. We're one of the largest. And I think that there is potentially more possibility in the distribution part of our business over time because of our position, strategic position in Quebec as a wholesaler. Okay. All right. That makes sense. And just maybe could you provide us with the sales and EBITDA impact of that divestiture? And like how does your what is your margin profile now look like in the distribution business following the sale? Well, that's a very good question. We haven't totally disclosed that. But if you look at the statements on the discontinued operation on the notes to the financial statement, you have the first quarter loss, which is somewhat skewed because we've during the first quarter, we've integrated from three to one warehouse. But it's fair to assume that on an ongoing basis, the loss would have been in the vicinity of $3,000,000 to $4,000,000 on an EBITDA. And it's fair to assume that's pre COVID the numbers I'm giving you. So I just want to make clear of that and sales have been on a yearly basis of about $150,000,000 1 hundred and 50 million dollars for sales? Yes, but yes, it's strictly on the business that $150,000,000 1 hundred and 60 million dollars yes. Okay, thanks for that. Okay, I guess some questions on COVID-nineteen. Do you have like in terms of your business mix, do you have the split between restaurants versus the essential services that you continue to distribute to like the hospitals and military bases and food banks? Okay. Yes, we have that and the 60% of our pre COVID business was in the restaurants. After COVID, it has changed quite a bit. And what I was saying is that we're lucky because we have customers we have a diversified customer base, such as some retailers, some new retailers that never ordered from us. We're getting them. We have institutional new customers such as The Breakfast Club of Canada, the Quebec food banks and many new small restaurants that are open for takeout that were served by other distributors that closed the shop during the COVID. So we also have big contracts with the hospitals in the province of Quebec and CACHE FLD and the senior houses and the army. So these are still running full capacity and more. Our business is increasing. The ratios change. I said that we're affected by 50% compared to some distributors that only serves restaurants. They are down their business is down 995%. And the average is probably down 70%. And because of our mix, our favorable in the circumstances, our mix is better and puts us in a good competitive advantage to come out of that. Okay. All right. Yes, and I mean, yes, everything is relative in light of the of COVID nineteen. Yes, exactly. Yes, you did I mean, you just spoke about it, about the increased retail penetration. Do you think this is an alternative avenue for you guys if we look past COVID-nineteen? Is this another channel that has been underserved in general an opportunity for you guys to bulk up in? Yes. There's an opportunity to as I mentioned, we have some new retailers that mentioned that they would like to continue this after COVID. So yes, we're expecting to have new customers. But think about the large retailers in Canada, they don't need us to survive in normal times, okay? So they have their own supply chain, suppliers, and we share we have the same suppliers. And today, what we're doing is what we call we're authorized by those chains to do backdoor sales to some of the grocery stores to complete their orders or to look after what's missing in their stores and that we may have in inventories. So the old distribution, the old supply chain is affected because there are some products that are missing. But if they're missing to us, they're also missing to the other large retailers. So the answer is yes, we'll keep some. But don't I'm not expecting to have the top three grocers to need Caliban on a regular basis except for two stores here and there. Okay. So this is more of an emergency response? And I can add that, but there we have commitments already from some that we will continue after. So that's a good news. Okay. All right. Maybe and thanks for giving us some of the preliminary. I know it's tough to do in this environment, but it's helpful for some of the preliminary estimates on sales and EBITDA. Can you just maybe walk me through the assumptions there? And what is the implied year over year decline? In other words, I'm looking for what last year's, I guess, adjusted numbers would be? That's a good question. So last year, we had about $276,000,000 of revenues. But when you have to factor down the loss of recipe, the closure of or with Flanagan of the sale and the pandemic. So if you want to compare it, it would be in the vicinity of 45%, fifty %. And here, why I'm saying that is because I've excluded some of the business that we've decided to get rid of that were unprofitable. If you're comparing what we would call same store sales, for example, the business with the COVID, we anticipate to be in the 45% -ish range of decline. Okay. So I should do both of it. And in terms of EBITDA, sorry, in terms of EBITDA now last year, we have an EBITDA of about 7.6%. That's what we've shown to do in the market. Now you would have to factor in the if you want the summit business that is out, so which would increase it. So there you would have something to the range of about 50% decline in terms of NITA. Okay. So I guess I get that. It's a very, very, very brush stroke. So it's not Yes. No, and I appreciate that. So I'm looking at $135,000,000 in revenues and 3.8 ish roughly in EBITDA. You're talking last year? Last year, yes. No, we had $140,000,000 and something like $11,000,000 We were losing money out of Summit and other costs. Okay. But on a comparable basis, so I would be looking at $140,000,000 in sales roughly last year? Well, if you wanted to say roughly $140,000,000 last year and EBITDA of about, say, $9,500,000 to $10,000,000 Okay. And that would be a comparable number? Yes. I think so, yes. Okay. I'm not going to hold it to you. It's just for my own. Please don't because it's there's a lot of items that we have to move in and out. But the issue is that from what you could see is we've cut on the labor, which is not totally in line with our sales because we have a fixed portion of the business. So for us, as you know, in March, we've lost a little bit over 15% of our sales and we factored in the losses for April, May and June. And you've asked me also in your question, how did we come about this projection is, we've looked at when we prepared the budget, the first three weeks of the business, if you want, post COVID March fifteen. And then we factored in as do we mentioned the accounts such as Breakfast Clubs and the other accounts that came in and the anticipated sales that we have from that. So this is how we derived it. So but we cannot go further than the June. It would be foolish of us to do that. And the reason for that is we don't know when they are going to release the current confinement with respect to restaurants. So we didn't want to venture ourselves on providing guidance for Q3, Q4. And from what I understand, it's the first for Colabor to provide guidance. But we felt that with all the moves of that was happening since last year, sales and plan to plan again, so on and so forth, that we needed to set the record a little bit more straight in terms of providing some guidance. That's what we're seeing now. Yes, I appreciate the fluidity of the situation. And obviously, you guys aren't alone. Plenty of companies have withdrawn guidance much bigger than yourself. So nobody really knows where this is going, but I do appreciate the effort on that front. Maybe one last, maybe just got a couple more here. Which division do you expect to have the I guess the biggest impact on sales and EBITDA because of COVID or is it pretty much spread equally amongst the two? Well, we have the divisions that do are more focused on restaurants, our fish and meat business are more affected. The wholesale is not as affected because we have distributors that sell to are strong in their on the retail side of the business. And the our Broadline business is affected not to the level of the meat and fish business, that they're affected to a level that is more manageable, acceptable in these days. And the overall average, when you put everything together, we're as I said, we're down 50%. But the restaurant business varies at minus 70% to 90% for some distributors. So that's why we started Yes, sorry about that. So that's why we started, as I mentioned, very likely a B2C business in our fish and meat business. And so that's helpful to manage the inventories and test the market also. So as I mentioned, this is a small scale, and we'll see if it has legs or not after COVID. But this was not our priority, but we part of the mitigation was to manage our inventories and this is helpful. Okay. And the meat and fish, is that broad line distribution or that's wholesale? That's broad line. Okay. Okay. They usually sell to restaurants, casinos and yes. Okay. Thank you. It's more specialty, specialty broad line that when we're referring to that, the big screen. Okay. And the subsidy, the Canada emergency wage subsidy, what is can you maybe just talk about that? How is it applied? And what that could mean financially or as an offset? Yes. Good question. So essentially, if we in the month of March, what the government is saying is that if a business lost more than 15% of its revenue compared to there are two mechanisms. The first one is compared to the year before, the other one is compared to January, February. Once we've applied that methodology, so if you apply that it's March against March, then you have to do a call against April, May against May. If you apply against January, February, then you have to continue under the same method. You could do it on a consolidated basis or unconsolidated basis, meaning, with each of your business units. Now all this being said is that if your sales are down, as I said in March, '15 percent, in April, it's 30% over the comparative year last year and for May, May, May this year, May last year. Then if it's done by fifteen thirty or thirty, you could apply every month for 75% of the wages of the employees that you're keeping up to a level of $847 a week. And it's based on what you paid to the employees during that period. So without going through all the mechanics, but at the end of the day, we're anticipating to have something in the vicinity of about $5,000,000 for the quarter. Okay. And that's fact that was but that's factored into the five to six years. Your guidance. Yes. All right. And maybe just one last one again on that and more housekeeping. I was just maybe if you could help me understand the jump in restated EBITDA in both divisions in Q1 twenty nineteen? Okay. So the capital lease, so before operating lease were expensed and it was creating differences when investors or analysts were looking at the numbers. Some companies were acquiring assets, some others were leasing it. So essentially the IFRS 16, the implementation of that, what it does is it capitalizes. So if you look on our balance sheet, we have assets and liabilities in the vicinity of $40 odd million when you look at our balance sheet. And so it's the way it works is it's no longer expands. So we haven't restated the year before, but what we've provided during the quarter is the impact of about $2,000,000 that it has helped on our EBITDA line because we don't have the expense anymore. It's depreciation in this quarter, it's depreciation and financial expense. So if you look at the year before, you would see it's an expense. So you see a $2,000,000 roughly, I'm rounding up figures. So $2,000,000 of expense reduction. However, if you want to compare it with the year before, we haven't done it. So what we've done instead is mention what it is for this quarter. So So if you want to compare it to apple with apple, you could reduce our EBITDA by that $2,000,000 and then that would compare with last year. So when you look at that on an EBITDA front, because we've lost some sales due to the pandemic in the last two weeks of the quarter, we would have done much better in terms of EBITDA because the cost reduction measures that Louis mentioned just started right away after the end of the quarter when we had a better view of what was happening. So that's unfortunate, but in our view, we had a very, very good quarter. Yes. So like just to be clear on that, the number you're showing, the restated EBITDA number is comparable and like that's excluding COVID is comparable to this quarter in terms of IFRS 16. Well, last year you don't have IFRS 16 in Q1. This year you have it. I just want to make clear. Okay. So what you have to do is take so you take the 3,700,000 EBITDA, you subtract the $2,000,000 of IFRS 16, so you're down to $1,700,000 But last year, you had the windfall of $400,000 EBITDA because of the workman's comp adjustments. So if you want to compare, it's a one time. So if you want to compare apple with apple, that's what you would have to do. Okay. Thank you very much for that. That's it for me. Gentlemen, thanks for taking my questions. Thanks. Thank you. Your next question comes from the line of Adam Suisse with Yacktman Asset Management. Your line is open. Hello, everyone. Thanks for taking my question. My first one is around working capital management into this decline. Do you expect a big inflow as sales fall and working capital unwinds with working capital roughly staying similar as a percentage of sales on this lower sales number? Yes, it should remain above the same, yes. The inventory, it will take time to just want to specify something here in your question is that the inventory that we have because of the abrupt, if you want, decline in sales. So and as Louie mentioned, demands from retailers and so on, so forth. Some of our inventory has shifted. So this should curtail over time in terms of, if you want, days outstanding in terms of inventory. But as far as inventory sorry, as far as receivables and accounts payable, though, it should follow the sales volume. I think the inventory will decline, not I think it will decline. It's just it will maybe it will take a little bit longer than normal because of the abrupt decline in sales. And on the inventory front, is there just a rough kind of breakdown of how much of that inventory is shelf stable products or napkins versus the potential for a big inventory write off because of fresh food spoiling? Yes. So what you're talking about is fresh, frozen and dry. So on the dry, there shouldn't be much of an issue. The fresh, depending on the situation, I'm not talking here about vegetables and fruits because this is moving rather quickly and hasn't been an issue. When you're talking about fresh meat or fish, what you could do is you could freeze it. So and then keep it for a while. So this is where you may have some higher level, but I mean, it's a number, but I don't want to hear the listeners on the call to feel that, hey, it's going to be statistically significant. They will have some, but not statistically significant. But overall, we haven't so far, we haven't had to, if you want to destroy or to get rid of, if you want, food because of spoilage or outdated if you want meal meat or fish and so on and so forth. It hasn't if it happened, it's de minimis amount. Okay. And my last question is around your debt facility and how kind of your big picture thoughts on how you intend to fund this business going forward? Your debt is facility is up for renewal, I believe, with the first year. Many companies have been really cautious in drawing down their facilities. And just curious how you see that renewal upcoming and long term plans for that? Well, we're in discussion with banks right now. It's going well. When we have something to announce, we will be announcing it. That's as much as I could comment at this stage. But we don't need to draw on a bank line to support the business. We're not using at the end of the quarter, we're not using our bank facility. We're using it very, very small amount currently, so it's not even an issue. We have good relationship with our suppliers. Customers are paying us in these circumstances very well. So at this stage, I don't have a concern. Thank you very much. Good luck managing through this. Thank you. And there are no further questions at this time. I turn the call back over to Mr. Frenet. Well, thank you, Simone, and thanks, Derek and Adam, for your questions. I'm happy, as as I said with our first quarter and past our first quarter results and the guidance we're providing for the second quarter, the mitigation measures in place and our diversified customer base, we're confident that we'll have the necessary resources and cash to weather the storm. We are keeping an eye on this situation and taking action to mitigate the effect on our activities by remaining agile and flexible. We are grateful to be able to count on the dedication and hard work of our employees and the support from the labor unions, also our financial partners, shareholders and customers and our suppliers. In these challenging times, we are also see an opportunity for Calabar to accelerate its path to transformation. We continue to look for opportunities to address new and growing markets and right size our business. We're working hard to emerge from this situation in a favorable competitive position. I look forward to our upcoming AGM on May 26 at 10:30AM, which under these circumstances, there will be a virtual one meeting. We encourage all shareholders to vote ahead of the meeting by submitting their proxy or to do so during the virtual AGM. All important details are available on our website. So this concludes our call for the first quarter of twenty twenty. Thank you very much for joining us and stay safe and healthy. Thank you. Thank you. Ladies and gentlemen, this concludes today's conference call. You may now disconnect.