Earnings Call: Q3 2019

Oct 18, 2019

Welcome to Kolabo's Third Quarter twenty nineteen Earnings 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 Presentations at www.colaball.com. Furthermore, risks are discussed throughout the MD and A for the sixteen and fifty two week periods ended December 2938 under the headings Risks. I would like to remind everyone that this conference call is being recorded today, October 1839. I will now turn the conference over to Pierre Gagne, Interim CEO and CFO. Please go ahead, sir. Thank you. Good morning, everybody. Welcome to Calabore's Group third quarter results conference call. I'm Pierre Guernier. I'm the Senior Vice President and Chief Financial Officer as well as currently the Interim Chief Executive Officer. Yesterday, we issued our earnings press release can be found along with our financial statements and MD and A on our website and on SEDAR. As you are aware, Calabore has seen some changes to its leadership during the last two months. Following Lionel Epegy resignation, we appointed Mr. Briscoe, shareholder and accomplished food distribution entrepreneur and then myself to take over the interim. Mr. Briscoe remains on the Board and has made himself available to support our team. There have been no further changes to our leadership team and everyone at the executive level remains dedicated to executing our transformation plan. Our Board of Directors is also actively engaged in this executive search process and it's advancing well. We will communicate any updates. Concurrently with the recent changes to our leadership, we announced the extension of the option to purchase Jupidozel for a period of ninety days following the nomination of the new full time CEO. During the last fifteen months, Calabore has implemented a transformation plan that aims to improve our competitive position and profitability. This plan revolves around three pillars. The first one, grow our broad line distribution activities the second one, integrate and optimize our business units and thirdly, reduce the level of debt. Since starting this plan, we have successfully executed several initiatives that have driven results over the last few quarters. Most importantly, we improved our customer mix and profitability by not renewing non profitable contracts. We grew our street business in Quebec and we sold Jean de Carre allowing us to reduce our debt. Yesterday with the release of our financial results, we concurrently announced a mutual agreement to early terminate our supply agreement with Recipe Unlimited, which had been weighing significantly on our past year's financial and operational results. With our decision to concentrate on profitability, growing our broad line distribution activities and optimizing all our business units, we took the necessary decision to negotiate the early termination of this logistic contract. We are very pleased with the outcome and with our customers' collaboration. We will gradually stop servicing this contract until March 2020. There are no penalties associated with the end of this contract and no liabilities will remain after this termination. Initially entered into in 02/2007, the contract with Recipe was renewed in 2015 and currently generates annual sales of approximately $255,000,000 and represents approximately a negative adjusted EBITDA of $4,000,000 when you look at it on an annual basis. Over the next five months, as we gradually see supplying the recipe banners, we will be evaluating various alternatives and opportunities to strengthen our operations in Ontario and leverage our existing resources. Depending on the various alternatives that we are currently evaluating, it can be reasonably expected that there will be a restructuring cost in the amount of $8,000,000 to $9,000,000 Now I want to underline that in the near term, these restructuring costs will be essentially paid for by the realization of recipe inventory and accounts receivable net of related accounts payable. Under the termination agreement, Recipe will purchase the remaining inventory on 03/31/2020. We also believe that this is an opportunity for us to refocus and strengthen our activities in Ontario by improving our ability to serve our existing customers and grow our broad line business with smaller independents. This contract termination frees up important human and financial results resources, my apologies. In the coming months, we will dedicate these resources to further optimizing our distribution centers, use only our newest state of the art refrigerated trucks and trailers that provide better quality control and on time delivery, leverage our experienced drivers and customer representative, and finally improve our overall responsiveness. In the coming quarters, we will work to manage the effect of the loss of volume on this business unit's profitability and constantly evaluate the effectiveness of our optimization measures. We believe that starting in the second half of twenty twenty, our objective is to be in a position to start delivering margin improvements and raise this business unit's contribution to our group's operating profitability. And now for a review of our financial results for the eighty four and two fifty two day periods ended 09/07/2019. Our results for the third quarter progress as planned from the continued implementation of Calabore's transformation plan. Consolidated sales were down by 1.5% or $4,000,000 in the third quarter to $261,500,000 Sales in the distribution segment decreased by 2.2%. Although we experienced growth in the specialty distribution activities of fish and seafood, this was offset by lower volume in Ontario and from our decision to concentrate on more profitable routes in Quebec and the Maritimes. Sales in the wholesale segment increased by 1.8%. Our new targeted sales strategy started generating good results in the recent months and contributed to revenue growth, which was slightly mitigated by the original effect of the non renewal of non profitable contracts. Adjusted EBITDA for the third quarter reached $6,200,000 It's a decrease of $600,000 compared to the corresponding period of 2018. If we factor in a reversal of $1,100,000 of provision that took place in the third quarter of last year, we have an improvement in the adjusted EBITDA of 8.5% year over year. Net earnings from continuing operations stood at $1,600,000 up almost double compared to the corresponding quarter of 2018. This improvement stands from lower net earnings in the third quarter of twenty eighteen from a $2,400,000 impairment loss and from a $1,200,000 in costs not related to operation. For the same reasons, net earnings for the third quarter reached $1,700,000 or $0.02 per share compared to $1,200,000 or $0.01 per share for the corresponding period of last fiscal year. Cash flow from operating activities amounted to $21,200,000 during the third quarter compared to $10,900,000 for the corresponding period of 2018. This increase is mainly due to a lower use of working capital. As of 09/07/2019, the company's total debt, including convertible debentures and bank indebtedness, amounted to $81,600,000 dollars down $33,800,000 from 12 ago. The net proceeds from the sale of the Vianca de Carre division and the increase in cash flow from operating activities have allowed the reimbursement of $5,000,000 of subordinated debt and the reduction of the amount outstanding on the credit facility. Our total debt to last twelve month adjusted EBITDA ratio now stands at 4.3 times, which is down sequentially from the second quarter of twenty nineteen when the ratio stood at five times and down significantly from the equivalent quarter last year when the ratio stood at 6.8 times. Now if we exclude the convertible debentures, this ratio now stands at 1.7 times versus 2.5 times in the second quarter of twenty nineteen. That concludes my initial remarks and I would like now to turn the call over to the operator for the Q and A period. Thank you. Your first question comes from the line of Derek Lessard from TD Securities. Please go ahead. I was wondering if maybe you could clarify again how much EBITDA the recipe contract was generating and what the impact was on EBITDA margin? Well, the contract, as we said in the press release, generated a negative EBITDA of $4,000,000 with sales of $255,000,000 dollars Okay. What's the So $4,000,000 that's on a yearly basis. Okay. So I guess like going into this contract, did we know did you guys know that it would be I guess a negative EBITDA contributor? And I guess, if so, do you know what the rationale was? Well, there's been I don't want to deflect your question. It's just I don't know when they took the contract. If you want the rationale behind it, I could just tell you that as we went through the process this year of looking at, as we said, as optimizing our business, we look at, if you remember, Lionel was doing that and we continue to do that is to look at our contracts and see what makes sense for the company. And I cannot comment as to what was done in the past. I just could tell you that when we did our analysis, we concluded that this contract on our business was draining resources. So with the collaboration of the recipe, we came to the conclusion that it was better for everybody to move on. And as far as we're concerned is, I cannot go back and try to determine what was done or not. I have to look at what it is. It's a contract as you know that there's still three years to go with an option of two years left after that at the recipes desire. And we felt that we couldn't continue and it was better off to move on. So I don't want to judge or qualify how it was done in the past. We look at what it is today and move on. Okay. Thanks for that. But I mean, I understand how it could be unprofitable, but what happens to like your route and plant efficiencies when you lose $255,000,000 in annual volumes? And I guess, how do you expect to recoup those volumes? And I guess get that $4,000,000 in EBITDA back? Well, it's as we've looked at the route before we made that decision, we're of the view with the plan that we put in place that this $4,000,000 will should not longer subside as we've said in the press release in the second half starting the second half of twenty twenty. So as we go along, the plan is already in place to re affect if you want to readjust these routes. So despite the I guess so I guess, we should be modeling a drop in volumes, but an increase so $255,000,000 in sales roughly and expect a $4,000,000 bump to your EBITDA starting in the second half of twenty twenty. Yes. And but I would just caution you not to it's not day one. It will start gradually as we go along and reach a late twenty twenty probably or more likely early twenty twenty one that we will be at a more at a cruising speed, if I may put it this way, to improve the EBITDA. It won't happen if you want the first day of Q3. I think we have to be cognizant of that fact. Okay. Still on the distribution business, I guess I'm going back two quarters. You guys did have two quarters of margin expansion and that was no longer the case in Q3. And I don't know if you add back the $1,200,000 reversal in that segment particularly. And even at that, you would be flat year over year in terms of the margin. Just wondering what was driving the margin compression there and why it was either negative or flat versus being up in the first two quarters? Good question. I wouldn't use the word margin compression. I think as we've said in the past, Derek, is that every quarter has its situations. As you rightly pointed out, last year there were some one time favorable adjustments. When you factor that out of the equation, the EBITDA margin is essentially flat with last year for that segment. So to me is that we cannot look at one specific situation for one quarter. We're working towards improving the margin quarter over quarter and that's what's happening. There's nothing more specific in this quarter. I think we did very good cost reduction in that segment of the business, adjusting it with our revenue coming down. Sometimes it's not coming at exactly the timing may not be exactly perfect, but this is what we're aiming at. Okay. And I guess like in your prepared remarks and in the MD and A, you had spoke to a desire to refocus the broad line distribution on more profitable niches. Could you maybe just add some color to what those niches would be? Yes. So one element that we need to focus much more is in the street business. And I'm assuming you're referring to Ontario right now. The street business is something that we need to really address and spend a lot of time. And this is what we've started to do this summer and that's what we'll be focusing of course for the future. Okay. So basically Because the street business is a higher margin as you know. Yes. All right. And maybe just switching gears to the wholesale business. It looks like it was a good it was a decent quarter there. Just wondering what were the drivers in that in the wholesale segment this quarter? Yes. What we're focusing now is and it's been successful and the sales team had a very good strategy is to what we call the all in all out strategy in Quebec, where the smaller, if you want for our smaller client base now are buying much more from our business and we did some great strides on that segment with the strategy that we put forward. Yes, maybe could you just clarify what that is, the all in, all out? The clarification of that for people on the call is that what we're trying to do is not just trying to for a specific customer is not to sell specifically or the customer not just coming for specific product because we have a better pricing, but try to offer a pricing for their complete, if you want to satisfy their full needs and aiming towards that. So what it does is that you get a better share of wallet from these customers. So we saw some great progress with many customers and we've been working at it now for a few quarters. And of course, things sometimes take time, but it seems to be working and our customer seems to be very pleased with this, if you want new feature, a new option for them. Is that what you mean by when you said that you targeted or that the improvement was due to a targeted sales strategy? I wouldn't use a targeted sales strategy, but I think that when you sit down with a customer and trying to find out what are their needs and how you go how do you go about it and not just sell like if you have a product A that is the lowest price and then he buys it from you but goes to somewhere else to buy product B is how could you organize a situation or organize a setup with the customer that he could purchase essentially all of its product directly to with Calabore. And it's a win win, win in the sense that it's easier for the customer in terms of logistics and for us it still make a profitable venue to do that. So that's why you saw the sales coming up and it's starting to take strides. So I think we're progressing well on that front and the team the sales team is very, very excited about that. Okay. I just want to I guess I want to still get clarification on how you expect to fill in or recover from a loss of a significant loss in volumes on the distribution side? I thought What do you mean? I'm not sure I understand to recover. I think you should look at it more as to right size it or to shrink it to make money. I think that's what it should be looked at. The team in Ontario, I mean, understands the situation. They knew that this contract was not profitable. And the management, both in Ontario and here, understood the situation. And we think it's going to be beneficial for our shareholders over time. So in the last fifteen months, if you look for example, by not renewing certain contracts in Quebec as well, It has helped us by reorganizing our operation to improve our profit. So I think you should look at that along the same path. There's nothing very different in that scenario than it is. Now when you're losing $4,000,000 of EBITDA, that's the $4,000,000 you don't have to invest elsewhere in your business if need be or reduce debt. So we think that as we sat down and look at that as a management team that it was the better scenario. Of course, we would have liked to keep and continue with recipes should it have been profitable for us. So it's not an easy decision to make, but it's a decision for us that we needed to make in order to achieve the objective of improving results. Okay. So maybe if I ask the question in a different way. So after you rightsize the business, at some point, I guess, you would expect that you would have to go out and get organic sales growth. I'm sorry, it's going to be done at the same time. It's not sequential. So it's not because we right size on one side that we wait until we right size to start selling. So these two things, it's the focus has been there, but the focus is going to be amplified to do so. So I just want to outline that. It's not sequential, it's together. So right now, are you driving organic growth in your base business? We do. Yes, we do. Okay. Can you and I guess what We haven't disclosed I don't want to get into the specific disclosure in the statements, but we do grow the business. Okay. One final one for me then. Or actually I have two more. In your search for a new CEO, I guess I'm wondering on whether or not the strategy continues as is or do you expect changes or I guess what are the criteria that you're looking for in a new leadership? As you will appreciate, Derek, I'm not a candidate for one. And for two, the Board hasn't asked me to my to decide on what type of candidate. But let's put it this way. The strategy that Lionel put forward is continuing. Yesterday at the Board, we haven't heard or seen any changes. Maybe with the new CEO, there may be some tweaks. I don't know. We'll have to see. A strategy over time evolve, a strategy over time could take a tweak here and there, but the main objective is still the same, grow our broad line, reduce debt and be more efficient operator at the end of the day. So these three pillars are still there. Now they could take shades and different shades over time, but this will remain for in my opinion, foreseeable future. I haven't heard anything different at the Board yesterday. Okay. Thanks for answering my questions, Kiara. Well, thank you very much. Thank you. Thank you. And is there another question? Yes. Your next question comes from the line of John Riccotta from Colette. Please go ahead. Yes. Good morning. Hi, guys. Thanks for taking my questions. I have a couple of questions. First one, going back to the loss of volumes at the Recipi, you mentioned that you are losing $4,000,000 of EBITDA in the move. So I was just wondering strictly on a cash flow basis, how much you're losing here? I'm sorry, how much cash flow we're losing? Say that again? Yes. How much of a on the cash flow on a from a cash flow perspective, how much you're losing here? Well, the well, if we have a negative EBITDA of $4,000,000 if I understand your question properly, you would have a $4,000,000 cash flow drain basically, essentially, and that's maybe to the penny, but it would be very close. Okay. Where are your operations in Ontario right now? Where do you stand at in Ontario? Is there still does it still make sense for you to stay in Ontario after this? Or you're kind of also reviewing the size and scope of your business there? No. But as I said, there is a plan in place to you said that there is a restructuring charge. So the restructuring charge is aiming at optimizing with the new volume of the business and that's what's going to be. So to answer your question, yes, we'll continue in Ontario. But putting the right resources with the right for the right customers, which is the remaining business in terms of profitability. Not that recipe was not the right customer. They were excellent customer. But in terms of for us to be profitable, that was the objective for us to and now we need to now we're going to work on the rightsizing of the operation. We have a plan for that effect. And we'll communicate it as we go along very shortly. I don't want to commit to a specific date. As you know, we have still three months plus to serve the KAREC contract and we'll serve it appropriately and be responsive to their needs. So for the next three months, there shouldn't be that much of a change in our operation. Okay. Maybe a last one for me switching gears. Have you decided anything regarding the option to buy Dubelle Roselle? No. As we said, because of the situation, I think it's better off to wait for the new permanent CEO and you would have ninety days to assess. Of course, we did a lot of work on that front. So it would be essentially to bring him up to speed and see his point of view and then go from there. So we haven't make any decision, but we would have ninety days post its coming, its venue, then we would take a decision. Okay. Maybe a very last one. With the sale of Beyond Decari and the weighing down of your business in Ontario, do you think you have the right size, you have the right assets right now? You're still reviewing the portfolio of assets also still? That's a good question. To us is that there's always things that you may look at, but at this stage, there's nothing to announce. So I don't want to make any comments on that front. But if there's something to be announced, we would announce it. But that's all that's as much as I could tell you at this stage. Okay. That's it for me. Thank you again for taking the questions. Thank you for taking the time. Still another question, operator? Yes. We have a follow-up from Derek Lessard from TD Securities. Please go ahead. Yes. Thanks, Pierre. Just one final one for me. I was just wondering if you still have a long way to go with addressing the unprofitable contracts in the balance of your portfolio? Well, as you know, I've been here for four months now, four or five months. I cannot pretend I know all of the contracts. So, save and except for that, I think we're making great progress with I would say that the bulk of it is done. Is all of it done? That I cannot say, but I would say we've probably covered now the big ones at this stage. But I'll just make an exception that I'm new here. So I do not pretend to know them all, but the big stuff has been done. I would say that the big few on the big rocks have been moved. Okay. Thank you, Pierre. Thank you. And your next question comes from the line of Adam Suisse from Yatman Asset Management. Please go ahead. Good morning. Hi, Pierre. Good morning. Another question on the recipe contract. Is there any material difference in the amount of working capital used in the recipe contract versus the broader kind of overall group average? That's a good question. Let me yes, it's a bit more working capital than the remainder of our business, a tad more. I don't have the specific percentage related to that, but I could tell you in terms of day sales outstanding, it's a little bit higher. In terms of inventory, it's a bit higher. But for the payable side, it's not much difference than the remainder of our business. So I would say a tad more. I don't think it's going to move in terms of DSO and the sales outstanding or DOI, the outstanding inventory. It will move the needle, but not by much. Okay. And other restructuring charges that you're anticipating, is all of that going to be cash or is there going to be some non cash in there as well? Those are I'm going yes, it's I would say the most part is cash. And as I said during the call, when you look at the working capital that will free up from the recipe business, we should be essentially covered with the charge that we're planning to spend in order to terminate or to write off or to terminate the type of agreements and severances. And okay. And my last question on recipe, if you gain back the $4,000,000 in EBITDA that you were losing on the contract, but given you're doing much lower volumes overall, do you lose EBITDA in other areas just via less fixed cost absorption or is it a straight $4,000,000 will help improve the bottom line? It looks to us that the based on the agreement that or sorry, based on the analysis that we've done, we won't lose with and if you're referring to suppliers rebate or suppliers revenue in your question, this is something we looked at and it's de minimis in terms of, if you want, impact. With respect to the fixed charges you refer to, by rightsizing the organization, it's obvious that we will have to and it's included in the restructuring charges that we will have to do certain things with fixed charges. All right. Thank you very much. Thank you. Well, I'll let the operator I don't think there's any more questions, operator. No, there's no further questions. I turn the call back over to you for closing remarks. Well, thank you everybody for your questions. Thank you for the continuous listening of our conference call. I just want to point out that ColorBold continues to work with discipline and rigor to continue the transformation plan that we set forth fifteen months ago. We believe that our recent decision to terminate our supply agreement with Recipe will accelerate our path to higher operating profitability starting later in the second half of twenty twenty. Until then, we continue to focus our attention on our value creating niche and growing where it makes sense for Calabore. We have just scratched the surface and there remains a lot of work to further optimize our business and continue reducing debt. This concludes our call for the third quarter of twenty nineteen. Thank you for joining us, and I look forward to discussing our progress at our next conference call of the fourth quarter of twenty nineteen or year end twenty nineteen. We don't have a specific date at this stage, but it will be more likely than at the February, early March. Again, thank you very much and have a great weekend. Bye bye. Thank you. Ladies and gentlemen, this concludes today's conference call. Thank you.