Good morning, ladies and gentlemen. Thank you for standing by. Welcome to Colabor's first quarter of fiscal 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 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 investor section under Events and Presentation at www.colabor.com. Furthermore, risks are discussed throughout the MD&A for the 16 and 52-week periods ended December 28th, 2019, under the heading Risks. I would like to remind everyone that this conference call is being recorded today, April 30th, 2020. I will now turn the conference over to Louis Frenette, President and CEO. Please go ahead.
Thank you, Simon. Good morning, everyone, welcome to Colabor Group 2020 first quarter results conference call. This is Louis Frenette, President and Chief Executive Officer. Last evening, we released our earnings press release. It can be found along with the interim financial statement and the MD&A on our website or at SEDAR.com. Today, I'm joined by Pierre Gagné, our Senior Vice President and Chief Financial Officer. A lot has changed since we last hosted this call at the end of February. Although the COVID-19 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 started deploying during the last two years contributed to strengthening our balance sheet.
The right sizing 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 sale. In the first quarter of 2020, we also stopped serving the non-profitable Recipe contract on March 2nd, completed the transfer of our Ottawa and London distribution center activities to Mississauga distribution center and reached 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 CAD 41.8 million 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% Canada 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 maintaining a strong supply chain. Our top priorities in the context of COVID-19 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 in Quebec is at -80%, around that. Thankfully, Colabor 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.
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 hospitals, military bases, food banks, and Breakfast Club of Canada, Club des petits déjeuners, 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 2020, our growing share of revenues from the institutional and retail market have partially compensated for the lost volume coming from the restaurant and hospitality industry. In order to further grow our distribution channel and diversify our business, we also started testing a business-to-consumer market in certain locations, 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 the resulting rapid change experience on product categories and channel has obviously created significant operational challenges. In order to deal with this constantly evolving situation, we reallocated 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 a 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 sources and substitution for certain product categories 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 12th. 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 27th target date. With this, I turn the call over to Pierre.
Thank you, Louis. Good morning, everyone. I'm pleased to be here with you today to review our financial results for the first quarter of 2020 and the recent measures deployed to help mitigate the effect of the ongoing crisis. Our results for the first quarter of 2020 have progress as planned from the continued implementation of our transformation plan. As Louis mentioned in his opening remarks, we experience an overall improvement of our operational profitability, higher operating cash flows, and reduce our leverage. In the first quarter of 2020, consolidated sales were down by 11.8% to CAD 111.6 million. Sales in the distribution segment decreased by 15.9% or CAD 15.2 million. CAD 7.7 million 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-19 pandemic during the last two weeks of the quarter.
The other CAD 7.5 million reduction comes from our broad line distribution sales in Quebec, where we stopped serving non-profitable regions in the fourth quarter of 2019 and from lower volume from our restaurant customers resulting from the pandemic. The reduction in broad line 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 CAD 3.7 million or 3.3% of sales compared to CAD 2.3 million 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 CAD 2.1 million 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 2020 Q1 EBITDA and adjusting for the positive effect of a CAD 400,000 provision reversal in Q1 of 2019. 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. Net loss from continuing operations was CAD 1.9 million, down from a net loss of CAD 1.1 million in the corresponding quarter of 2019. This result stemmed mainly from one-time charges. The net loss was CAD 8.3 million compared to a loss of CAD 2.7 million last year's same period.
The reduction is attributable in large part to the increase of CAD 4.8 million in the net loss attributable to discontinued operation, stemming primarily from CAD 6.3 million in expenses related to the closing of the London and Ottawa distribution centers, from higher depreciation expense, and from one-time charges of CAD 800,000. Cash flow from operating activities amounted to CAD 5.6 million in Q1 2020, up from CAD 3.8 million 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 March 21, 2020, the company's net debt, including the convertible debentures, amounted to CAD 61 million, compared to CAD 68.2 million just three months ago, or at the end of December 2019. Our financial leverage ratio now stands at 2.1x versus 2.5x three months ago.
By excluding the effect of IFRS 16, our leverage ratio would stand at 2.3x . If we remove the debenture from the calculation, our ratio now stands at 0.4x. 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 of CAD 42 million or CAD 41.8 million of available borrowing capacity. In addition, we're looking into other support measures available to us, such as the federal government's Canada 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 2020.
We expect sales from continuing operations to be between CAD 80 million and CAD 90 million. We also estimate that the adjusted EBITDA will be between CAD 5 million and CAD 6 million, 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. I would like to turn the call over to the operator for the question and answer period. Simon?
Thank you. Ladies and gentlemen, we will now begin the question and answer period. If you would like to ask a question during this time, simply press star, then the number one on your telephone keypad. If you would like to withdraw your question, please press the pound key. Thank you. We will pause for just a moment to compile the Q&A roster. Your first question comes from the line of Derek Lessard with TD Securities. Your line is open.
Yeah. Good morning, gentlemen, 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. Does that mean you're now fully out of broad line distribution in Ontario? I guess my follow-up to that is, what are your plans for broad line distribution as a whole for the company?
Hi, Derek. It's Louis here. The answer to your question is, yes, we would be out of Ontario. 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, we have the center of Quebec, we have opportunities to go close to Montreal also.
Okay. I guess what's the main difference then between the wholesale and the broad line, and is there any potential cannibalization between the two?
I missed the end of your question. Is there what?
Cannibalization.
The wholesale business or in French, see it as the wholesaler selling to other distributors in Quebec. We have 20 of them. The broad line distribution is the operations we have in Lévis in Saint-Nicolas distributes to the end user. Directly to the restaurants, hotels, hospitals. There's a difference. The wholesale is selling to a distributor like in Quebec, like we have in Quebec or Dubé & Loiselle in Granby, there's lots of them.
Okay. Yeah, I guess I was wondering why you wouldn't just maybe try to bring on board another wholesaler instead of running a pure distribution business?
Well, I don't think there's many wholesalers in Quebec that we could acquire. We're one of the largest. I think that there's potentially more possibility in the distribution part of our business over time because of our strategic position in Quebec as a wholesaler.
Okay. All right. That makes sense. Just maybe could you provide us with the sales and EBITDA impact of that divestiture and what does your margin profile now look like in the distribution business following the sale?
Yeah. 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 during the first quarter, we've integrated from three to one warehouse. It's fair to assume that on an ongoing basis, the loss would have been in the vicinity of CAD 3 million-CAD 4 million on an EBITDA. It's fair to assume that's pre-COVID.
the numbers I'm giving you. I just want to make clear of that.
Of course.
have been on a yearly basis of about CAD 150 million.
150 for sales?
Yeah.
Okay.
Strictly on the business that, yeah, CAD 150 million, CAD 160 million. Yeah.
Okay. Thanks for that. Okay. I guess, some questions on COVID-19. In terms of your business mix, do you have a 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. What I was saying is that, we're lucky because 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 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 their shops during the COVID.
We also have big contracts with the hospitals in the province of Quebec and the CHSLD and the senior houses and the army. These are still running at 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 serve restaurants. Their business is down 90%, 95%.
The average is probably down 70%. Because of our mix, under circumstances, our mix is better, and it puts us in a good competitive advantage to come out of that.
Okay. All right. Yeah. Everything is relative in light of COVID-19, right?
Yeah.
You did-
Exactly.
Yeah. 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-19? Is this another channel that has been underserved in general, and an opportunity for you guys to bulk up in?
Yes. As I mentioned, we have some new retailers that mentioned that they would like to continue this after COVID-19. Yes, we're expecting to have new customers. Think about the large retailers in Canada. They don't need us to survive in normal times. Okay. They have their own supply chain suppliers. We have the same suppliers. Today, 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 our inventories. The whole supply chain is affected because there are some products that are missing. If they're missing to us, they're also missing to the other large retailers. The answer is yes, we'll keep some.
I'm not expecting to have the top three grocers to need Colabor on a regular basis, except for a few stores here and there.
Okay. This is more of an emergency response.
I can add that we have commitments already from some that they will continue after, so that's the good news.
Okay. All right. 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? 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. Last year, we had about CAD 276 million of revenues. When you have to factor down the loss of Recipe, the closure with Flanagan of the sale-
Yep
and the pandemic. If you want to compare it would be in the vicinity of 45%-50%. 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.
In terms of EBITDA, now last year, we had an EBITDA of about CAD 7.6 million. That's what we've shown to the market.
Yeah.
You would have to factor in, if you want the Summit business that is out, so which would increase it. There, you would have something to the range of about 50% decline in terms of EBITDA.
Okay. I get that.
It's very brush stroke.
Yeah, no, and I appreciate that. I'm looking at CAD 135 million in revenues and CAD 3.8-ish, roughly in EBITDA.
You're talking last year?
Last year, yes.
No, we had CAD 140 and something like CAD 11 million.
Although, I mean-
We were losing money out of Summit and other costs.
Okay. On a comparable basis, so I would be looking at CAD 140 million in sales, roughly last year?
Well, if you want me to say, roughly CAD 140 million last year.
Yeah
EBITDA of about, say, CAD 9.5 Million, CAD 10 million.
Okay. That would be a comparable number?
Yeah. I think so. Yeah.
Okay. I'm not going to hold it to you.
Please don't, because there's a lot of items that we have to move in and out. The issue is that, from what you can see, is we've cut on the labor, which is not totally in line with our sales, because you have a fixed portion of the business
For us, as you know, in March, we've lost a little bit over 15% of our sales. We factored in the losses for April, May, and June. 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 15. Then we factored in, as we mentioned, the accounts such as Breakfast Clubs and the other accounts that came in, and the anticipated sales that we have from that. This is how we derived it. We cannot go further than the end of June. It would be foolish of us to do that. The reason for that is we don't know when they're going to release the current confinement with respect to restaurants.
We didn't want to venture ourselves on providing guidance for Q3, Q4. From what I understand, it's the first for Colabor to provide guidance. We felt that with all the moves that was happening since last year, sales and plan to plan again, so on so forth, that we needed to set the record a little bit more straight in terms of providing some guidance. That's as far as we can.
I appreciate the fluidity of the situation and, obviously, you guys aren't alone. Plenty of companies have withdrawn guidance, much bigger than yourselves. Nobody really knows where that's going, but I do appreciate the effort on that front. 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? Is it pretty much spread equally amongst the two?
Well, we have the divisions that 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 on the retail side of the business. Our broad line business is affected, not to the level of the meat and fish business. They are affected to a level that is more manageable, acceptable in these days. The overall average, when you put everything together, as I said, we're down 50%. The restaurant business varies at minus 70% to 90% for some distributors.
Yeah. Just remind me again.
That's why we started.
Yeah, sorry about that.
That's why we started, as I mentioned, very lightly a B2C business in our fish and meat business. That's helpful to manage the inventories and test the market also. As I mentioned, this is a small scale. We'll see if it has legs or not after COVID. This was not our priority, but part of the mitigation was to manage our inventories, and this is helpful.
Okay. The meat and fish, is that broad line distribution or that's wholesale?
It's not broad line.
Okay.
They usually sell to restaurants, casinos, and yeah.
Okay. Thank you.
It's more specialty broad line when we're referring to that typically.
Okay. The subsidy, the Canada Emergency Wage Subsidy, can you maybe just talk about that? How is it applied, and what it could mean financially or as an offset?
Yeah. Good question. Essentially, in the month of March, what the government is saying is that if a business lost more than 15% of its revenue. 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 April 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%, in April, it's 30% over the comparative year last year, and for May this year, May last year.
If it's down by 15%, 30% or 30%, you could apply every month for 75% of the wages of the employees that you're keeping up to a level of CAD 847 a week. It's based on what you paid to the employees during that period. Without going through all the mechanics, but at the end of the day, we're anticipating to have something in the vicinity of about CAD 5 million for the quarter.
Okay. That's factored into the-
CAD 5 million-CAD 6 million EBITDA
factored into your guidance.
Yeah.
All right.
Yeah.
Maybe just one last one on that, and more housekeeping. Maybe if you could help me understand the jump in restated EBITDA in both divisions in Q1 2019.
Okay. 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. Essentially, the IFRS 16, the implementation of that, what it does is it capitalize. If you look on our balance sheet, we have assets and liabilities in the vicinity of about CAD 40 odd million, when you look at our balance sheet. The way it works is it's no longer expense. We haven't restated the year before, but what we've provided during the quarter is the impact of about CAD 2 million 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.
When I look at it.
Yeah. If you look at the year before, you would see it's an expense. You see a CAD 2 million, roughly, I'm rounding up figures.
Yeah
of expense reduction. If you want to compare it with the year before, we haven't done it. What we've done instead is mention what it is for this quarter. If you want to compare it apple with apple, you could reduce our EBITDA by that CAD 2 million, and then that would compare with last year. 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. 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. That's unfortunate, but in our view, we had a very good quarter.
Yeah. Just to be clear on that, the number you're showing, the restated EBITDA number is comparable and 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.
What you have to do is take the CAD 3.7 million EBITDA.
Yeah
you subtract the CAD 2 million of IFRS 16, so you're down to CAD 1.7 million. last year, you had a windfall of CAD 400,000 in the EBITDA.
Okay
because of the workman's comp adjustments. If you want to compare, it's a one-time. If you want to compare it 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.
Ladies and gentlemen, again, if you would like to ask a question, please press star then the number 1 on your telephone keypad. Your next question comes from the line of Adam Sues 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?
Yeah, it should remain about the same. Yes.
Okay.
The inventory, 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. As Louis mentioned, demands from retailers and so on and so forth, some of our inventory has shifted. This should curtail over time in terms of, if you want, the days outstanding in terms of inventory. As far as receivables and accounts payable, though, it should follow the sales volume. I think the inventory will decline, but it's just Maybe it'll take a little bit longer than normal because of the abrupt decline in sales.
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?
Yeah. What you're talking about is fresh, frozen, and dry. 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 it hasn't been an issue. When you're talking about fresh meat or fish, what you could do is you could freeze it, and then keep it for a while. This is where you may have some higher level. I mean, it's a number, but I don't want here the listeners on the call to feel that, hey, it's going to be statistically significant. It will have some, but not statistically significant.
Overall, we haven't so far had to, if you want to destroy or to get rid of, if you want, food, because of spoilage or outdated meat or fish and so on and so forth. If it happened, it's de minimis amount.
Okay. My last question is around your debt facility and how your big picture thoughts on how you intend to fund this business going forward. Your debt facility is up for renewal, I believe, later this year. Many companies have been.
Yeah
really cautious in drawing down their facilities. Just curious.
Yeah
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. We don't need to draw on a bank line to support the business. At the end of the quarter, we're not using our bank facility. We're using it very small amount currently, so it's not even an issue. We have good relationship with our suppliers. Customers are paying us, in the circumstances, very well. At this stage, I don't have a concern.
Thank you very much. Good luck managing through this.
Thank you.
Thank you.
There are no further questions at this time. I turn the call back over to Mr. Frenette.
Well, thank you, Simon, and thanks, Derek and Adam, for your questions. I'm happy, as I said, with 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 also see an opportunity for Colabor to accelerate its path to transformation. We continue to look for opportunities to address new and growing markets and rightsize 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 26th at 10:30 A.M., which, under these circumstances, that 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. This concludes our call for the first quarter of 2020. 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.