Earnings Call: Q4 2019

Feb 27, 2020

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to Calabar's Fourth Quarter and Fiscal Year twenty nineteen 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 statements 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 ODM to the forward looking statements as detailed in the presentation supporting this conference call and available on the company's website in the Investors section under Events and Presentations at www.colabor.com. Furthermore, risks are discussed throughout the MD and A for the sixteenth and fifty two week period ended December 2839 under the heading risks. I would like to remind everyone that this conference call is being recorded today, 02/27/2020. I will turn the conference over to Pierre Darnier, Senior Vice President and CFO. Please go ahead. Thank you very much. Good morning, everyone. Last night, we released our earnings press release, which can be found along with our annual financial statements and MD and A on our website at www.sedar.com. I'm joined today with Louis Frenet, who was appointed President and Chief Executive Officer of Calabor effective November 2539. Louis has an impressive track record in the food and consumer products industry. He was most recently President and CEO of Tugmanate Canada, Bonduelle North America and Danone Canada. I will now turn the call over to Louis for his introductory comments and review of operational results. Louis? Thank you, Pierre. Bonjour, gratosse, and good morning, everyone. I'm pleased to be here with you today to review the key highlights of fiscal twenty nineteen, discuss our latest operational results and our recent progress with the Summit Foods division in Ontario. Since joining the company at the November, I had the chance to sit down with our teams at all major locations. I had very constructive meetings with our major customers, distributors and suppliers here in Quebec and in Ontario. Throughout these initial meetings, I found that Calabar's brand is strong in Quebec and that we enjoy long lasting relationship with most of our customers and suppliers. And although we are operating in a competitive industry, we have strong foundation on which to build and opportunities for us to grow in Quebec. To this effect, we just made some simple structural changes to our sales team to facilitate cross selling and grow our customers' share of wallet, particularly in our broad line distribution business in Quebec. Since I come from the supplier side of the business many years, I can also see many quick actionable items that we can implement to continue optimizing our activities and offerings while building constructive and mutually beneficial relationships with our suppliers. For instance, we recently started working on improving our category management, which will lead to a lower number of SKUs and improve inventory management. A lot of work still remains to be done to further our transformation and raise profitability. We are dedicated to make this happen and build shareholder value. We are currently developing a more detailed action plan that we'll be presenting at our upcoming shareholder meeting, which is scheduled for April 30. In 2019, Carabar successfully implemented various initiatives that drove an improvement of 17% of our operating profitability and reduced our level of debt. These measures include the implementation of a $2,900,000 rationalization plan, which started which started demonstrating results in early twenty nineteen. The ceasing of non profitable activity or activities including the early termination of Recipe Unlimited supply agreement in Ontario, the selling of Vien Descartes, a non core asset, deploying various optimization measures and refocusing the company effort on our core broad line distribution activities in Quebec where we have a clearer competitive advantage. In the fourth quarter of twenty nineteen and into the first quarter of twenty twenty, our management team continued to work tirelessly to complete the optimization of our business in Ontario. On January 8, we announced that we were consolidating all distribution activities in Ontario into our Mississauga distribution center, resulting in the closing of the Ottawa and London sites. The transition is progressing well and we retained our key customer relationship. There is still some work to be done, but we are on track on rightsizing this business. On another note, on February 23, the option to acquire Zubei Loisel expired. This option was originally acquired in 2016 along with the recapitalization transaction. The company decided not to exercise the option under the terms and conditions set forth in the original agreement. We remain dedicated to strategically grow in the broadline distribution market in Quebec and continue looking at all opportunities to profitably grow our offering and reach. We believe that this is the best path forward to building lasting shareholder value. I would like now to turn the call back to over to Pierre for a review of the financial results of the last quarter and the fiscal year. Thank you, Louis. And now for a review of our financial results for the sixteen and fifty two week periods ended December 2839. Our results for the fourth quarter twenty nineteen have progressed as planned from the continued implementation of Calabor's transformation plan. Consolidated sales were down 6.9% to $312,000,000 Sales in the distribution segment decreased by $6,400,000 The results from a $6,100,000 loss of volume in Ontario and the decrease in the broad line distribution sales in Quebec mainly related to the decision to see serving some non profitable regions in Quebec and the Maritimes and other non profitable contracts. This was mitigated by an increase in volume from other clients. Sales in the wholesale segment decreased by 9.1%, mainly from lower inter segment sales, the non renewal of unprofitable agreements and by the timing of orders. Adjusted EBITDA was stable at $5,400,000 As a percentage of sales, adjusted EBITDA represented 1.7% of sales for the fourth quarter against 1.6% last year. So it's a small improvement. This improvement stemmed from the deployment of the operational optimization measures and implementation of the rationalization plan as explained by Louie. Net earnings from continuing operations stood at $600,000 against a loss last year of $1,900,000 for the fourth quarter. This improvement is from lower amortization depreciation expense, an improvement of $1,700,000 in costs not related to current operation and lower financial expenses. For fiscal twenty nineteen, tonsil dated sales were down 3.3% to $1,060,000,000 The sales in the distribution segment decreased by 3.3%, and this is primarily attributable to lower sales volume in Ontario in an amount of $26,900,000 of which $13,200,000 is from the loss of the recipe supply agreement as well as other customer. A decrease in the broad line distribution sales in Quebec mainly related to the decision to see serving nonprofitable regions and of other nonprofitable contract agreements. This was mitigated by an increase in specialty distribution sales mainly from a retailer led promotion. Sales in the wholesale segment decreased by 5.3%. This reduction is from a decrease of $5,400,000 in inter segment sales and as well as the non renewal of non profitable contracts and some timing of orders. Adjusted EBITDA, as Louis mentioned, was up by 17% reaching $19,000,000 for the year. And on the percentage as a percentage of sales, adjusted EBITDA represented 1.8% in 2019 against 1.5% in 2018. This improvement stems from the deployment of the operational optimization measures and implementation of the rationalization plan throughout 2019. Net earnings from continuing operations reached $700,000 or $0.01 per share compared to a loss of $4,900,000 or a loss of $0.05 per share in fiscal twenty eighteen. This improvement is from lower amortization and depreciation expenses, lower impairment of $2,700,000 and decreased costs not related to current operation for $300,000 Now turning our attention to free cash flow, debt leverage debt level, sorry, and leverage. Cash flow from operating activities amounted to $22,000,000 in fiscal twenty nineteen, up from $14,000,000 in 2018. This increase is mainly due to a lower use of our working capital, lower financial expense and a higher adjusted EBITDA. On December 2839, sorry, the company's net debt including convertible debentures and bank indebtedness amounted to $72,000,000 compared to $102,000,000 at the same period a year before. The amount received of nearly $18,000,000 coming from the sales of the assets of the Vien Des Caries division, as well as higher cash flows from current operations, allowed the $10,000,000 repayment on the subordinated debt and a reduction of $32,000,000 on the credit facility. Our financial leverage ratio now stands at 3.8 times, which is down sequentially from the third quarter of twenty nineteen when the ratio stood at 4.3 times and down significantly from the end of the fiscal twenty eighteen when leverage stood at 6.3 times. If we exclude the convertible debentures, this ratio would stand at 1.2x versus 3.5x last year. Now, we'll turn the call to over to the operator for the question and answer period. Thank you. Your first question comes from the line of Derek Lessard with TD Securities. Please go ahead. Yes, good morning and nice talking to you, Louis. Louis, I know it's early into your tenure. Just wondering where you are in terms of your ramp up and learning curve? Okay. Thanks, Derek and thanks for the question. I've been here for ninety days. I had a chance to see almost all of our employees here in Quebec and Ontario. Haven't finished yet, but most of our customers also distributors saw some restaurants and some of our retail customers. And I'm impressed with the reception from our customers. I noticed that we have a strong brand, much stronger in Quebec than Ontario. And I knew this business from my previous slides. And definitely in Quebec, I feel we have a competitive advantage and our brand is stronger. So we have still work to do. Like the plan that was put in place for to improve the efficiencies and we're I think the team did a very good job. Very important decisions were made and still other decisions will have to be make to continue our progression. So it's a good business. There's a market. IP with the plant. So it's pretty good. Okay. So I guess maybe back to that plan, it seems like there wasn't a lot of changes or there's not a lot of changes to the original plan that you I guess you see a need going forward. So is it just a question of fine tuning it? And if so, can you maybe just add some color to some of the areas that you think need that fine tuning? Well, we made the plan was a very good plan and exactly fine tuning is the word. And so we made some important decisions on how to execute the rationalization of the warehouses in Ontario and especially that was the big first thing and securing and explaining to our important customers, the biggest one in Ontario that we're not closing and after the recipe termination of the contract that is now in execution and goes very well. So it was important to secure our customers and our employees also most importantly. So some fine tuning and other activities, yes. Okay. I guess maybe a question on the decision to not renew the Jupita was as an option. So that decision what's the question directly exactly? No, I was just wondering what the I guess what the idea or the thoughts were behind not renewing it or picking up? You mean not exercising it, the option. Yes. Yes. Okay. Well, first, Bill Roselle is a great company with excellent employees and great ownership. We decided not to go ahead with exercising the options because of the terms and conditions that were agreed in 2016. That's it. They are an important customer of ours and we have plans to grow the business and like we do with other distributors. But it doesn't say that we don't want to grow our broadline business. So we're looking at all alternatives to grow our broadline distribution in Quebec, organically or not organically. Okay. All right. That makes sense. I just and you pointed in your MD and A to a marketing analysis that you guys did in 2019. Could you add some color to where you do see growth? And maybe just add just maybe, I guess, some clarification of what you mean by repositioning your private brands and some strategic categories? Sure. Very good audit marketing audit was made last year. Looking at our brands, our private brands, the market, the competition and what could be done. So I saw many of those audits in my career that was a good one and need some fine tuning and we'll prioritize few things. So I cannot divulge what we'll do like our competitors. So, but there's an opportunity. The menu brand as our house brand private label or whatever is well appreciated by our clients. And so I had the chance to ask them, so what do you like about it, what do you like, but the audit was quantitative versus my perception, which is qualitative and that plan is interesting and we have action plans with this. We'll tell you more at the AGM. We'll be able to show you a bit more. Okay. So when you sell when you say well appreciated, so well appreciated, but under penetrated, is that I guess, is that a fair? Again, it's a decision to differentiate ourselves, what share of our business we want to have under our private label versus the two biggest competitors. So we have a plan and we what I can tell you is that we need to grow it, but not go crazy with this because we have a point of differentiation and we work very well with our suppliers, national suppliers and some of our customers prefer national brands and some of the people in the market they're pushing their private brand and sometimes it's not the right decision. So we'll balance that, but the basis the base and the foundation is very good. So it's us to decide exactly how to execute it. Okay. All right. That's fair, Louis. How much of the improvement or I guess the decline in operating expenses was due to improved cost controls from the rationalization plan versus just the strict drop in sales? Look, you want We're not divulging that specifically, but most of it relates to debt as well as we've during the year with our new VPA operation that started mid year, we've started to reduce costs in our operation in Quebec. And more will come in 2020 strictly by becoming more efficient within our operation. So we have a series of initiatives related to that in Quebec. In Ontario, of course, is with the rationalization going from three plants to one. There will be a first phase that should be completed sometime during March. And post to that, of course, as we go along, we'll find the team is already looking at finding ways to become more efficient. So whether it's related to transport logistics or within the warehouse itself. So but that direct will is becoming our, if you want, our motto internally to work on continuous improvement of our results or operating costs as we go along. But I would say to answer your question, most of it comes from a combination of what happened in late twenty eighteen together with 2019. So you cannot look at, if you want, the full year or a quarter. It's improving quarter upon quarter. So we have to keep that in mind when we look at our results. So there's more coming first quarter, second and so on and so forth in 2020. Okay. Thanks for that, Pierre. I guess on the departure of the senior VP of Summit, has he been replaced? Well, currently, no, to answer your question, the people, but we want to find for the size of the organization that we will have, we will find, we'll look at to find somebody. Now that being said, currently the person responsible for that is our Head of Finance, because we're in a, if you want, in an attrition process as we go along for the next few months. So I think it gives us time to find the appropriate person to manage and to step on the next phase of growth. So at this stage, I think it's really appropriate to have that. We felt the team felt that it was the appropriate person for the time being and gives us enough time to find the right and the right person. Okay. And then just maybe a couple more for me. I just wanted to get your view on the competitive activity out there. Has there been any change? Has it increased in terms of intensity? And second, maybe do you guys anticipate or any or have you seen I guess any indication or drop in potential restaurant sales or what have you due to the I guess some corona fears that might be out there? Okay. On the on your first question on the competitive side, no. The answer is no big changes. Everybody is fighting to increase their share of wallets with their customers, but no breakthroughs or breakdowns regarding competition. Regarding the coronavirus situation, we're concerned and the year we haven't been affected yet, but if it gets here, plus us that customers will stay home more and more. So that's the market we'd see the Canadians would see that and the but there could be an effect. If I may add to what Louis is saying is, it's always normal in the first quarter that it's a lower season. So we said it in our public communication that Q1 is always a low month if you are a low quarter, but we're on the lookout for the corona. Okay. Okay. I guess, have you I know it's so early to say and I'm not expecting like an affirmative, but have you, I guess, started to think about contingency plans in the event that it does get worse or? In our risk management internal procedure, this is on the target. So, yes, we were drafting we're at this stage of we just started drafting the to draft some possibilities and action plans to mitigate the situation, but there's more work to do. Okay. That's fair enough. Gentlemen, that's all for me. Thanks for taking my questions. Thank you, Derek. There are no further questions at this time. I will turn the call back over to the presenters for closing remarks. Okay. Thank you, Julie, and thank you, Derek, for your questions. We're entering in 2020 on a positive note like what was initiated before and tried to execute it well and in a good timeframe. We intend to continue our transformation and optimization efforts, which are aimed at increasing profitability and creating shareholder value. Our action plan for 2020 is anchored around three pillars. The first one is grow our broad line distribution activities two, optimize our operations to continue driving efficiencies and three, driving employee engagement to retain and attract the industry best talent. So I look forward to providing more color on this plan in a timely manner at our upcoming AGM and first quarter earnings call on 04/30/2020. This concludes our call for the fourth quarter and year end of 2019. Thank you very much for joining us and have a great day and a good weekend. This concludes today's conference call. You may now disconnect.