Good morning, ladies and gentlemen. Thank you for standing by. Welcome to Colabor's Second Q uarter 2019 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. Instruction 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. Risks are discussed throughout the MD&A for the 16 and 52-week periods ended December 29th, 2018, under the heading Risk. I would like to remind everyone that this conference call is being recorded today, July 29th, 2019. I would now like to turn the call over to Lionel Ettedgui, President and CEO. Please go ahead, sir.
Good morning, everyone, and welcome to Colabor Group's 2019 second quarter results conference call. This is Lionel Ettedgui, President and Chief Executive Officer, and with me here today is Pierre Gagné, Senior Vice President and Chief Financial Officer. Earlier this morning, we issued our earnings press release. It can be found along with our financial statements and MD&A on our website and on SEDAR. First, let me introduce Pierre Gagné, who joined us on May 27, 2019. Pierre has had quite an extensive career as a CFO at large private and public companies such as FLS Transportation Services Limited, GDI Integrated Facility Services, and Cogeco Communications.
Thank you, Lionel. Good morning, everyone. It's my pleasure to join Colabor, especially at this time in the company's transformation. I look forward to working with the team and all our stakeholders in achieving our plan to improve profitability and further strengthen our balance sheet. After Lionel's introduction, I will review Colabor's financial results for the 84-day period ended June 15, 2019. Lionel?
Yes. Our results for the second quarter of 2019 have progressed as planned. Revenue growth came from the distribution segment and improved cost controls lead to significant year-to-year adjusted EBITDA growth. On May 10, 2019, we concluded the sale of our Viandes Décarie division for gross proceeds of CAD 20 million, of which CAD 17.8 million was used to reimburse our debt. This sale allows us to focus on the transformation of Colabor in 2019. We can now focus on our broad line distribution activities and further integrate and optimize our other businesses. In Ontario, the road to recovery will take some time. We are implementing measures to drive synergies, and we are reviewing all relationships to ensure that they still remain mutually beneficial. The significant improvements we have seen over the last few quarters are the results of our strategic plan.
We will continue on this path and keep working on our three pillars, which are, grow our broad line distribution activities, further integrate our business units, and reduce the level of debt. We are starting to once again deliver shareholder value, and we intend to stay the course. I would now like to turn the call over to Pierre for his review of our second quarter financial results. Pierre?
Thank you, Lionel. Consolidated sales for the second quarter reached CAD 274.2 million compared to CAD 273.6 million during the corresponding quarter of last fiscal year, representing an increase of 0.2%. Sales in the distribution segment increased by 1.1%, mainly due to a retailer promotion, but mitigated by changes in the customer mix. Sales in the wholesale segment decreased by 6%, mainly due to the non-renewal of non-profitable contracts. As for adjusted EBITDA for the second quarter of 2019, it reached CAD 7.3 million, an increase of CAD 2 million compared to the corresponding period of 2018. This improvement is explained by the deployment of operational optimization measures, improved cost control resulting from the implementation of the rationalization plan announced last November, and sales growth from the distribution segment. Net earnings from continuing operations was CAD 1.4 million.
Up 177% compared to the corresponding quarter of 2018. This increase is due to lower operating expenses and higher sales, which were partially offset by higher taxes. As of June 15, 2019, the company's total debt, including the convertible debentures and bank indebtedness, amounted to CAD 97.7 million, down CAD 24.7 million from the same period on June 16, 2018. This reduction is mainly due to the proceeds from the sale of the Viandes Décarie division. CAD 5.2 million was applied to the repayment of a portion of the credit facility, and CAD 5 million towards the repayment of a portion of our subordinated debt. The remainder was used to finance higher working capital requirements for our peak season. Our total debt to the last 12 months adjusted EBITDA ratio now stands at 5x , which is down sequentially from the first quarter of 2019, when the ratio stood at 5.5x .
Excluding the convertible debentures, this ratio stands at 2.5x versus 3x in the first quarter of 2019. I would now like to turn the call over to the operator for the Q&A period. Operator?
At this time, I would like to remind everyone, in order to ask a question, press star then the number one on your telephone keypad. Again, to ask a question, press star one on your telephone keypad. Your first question comes from the line of Derek Lessard from TD Securities. Your line is open.
Yeah. Good morning, everybody. I have a question on the distribution side. Saw a very strong improvement in EBITDA there. Just wondering if you could maybe talk about some of the drivers and more specifically, some of the margin improvement we saw there?
Yeah, sure. On the distribution side, as we had implemented during the previous quarters, several initiatives, just like cost reductions at warehouses and shipping. If you remember, last quarter of last year, we had implemented a right-sizing plan, which is delivering quite good results. On specific contracts which were not profitable, we decided to stop them. On other one where we had skill potential, we worked with our partners and customers to find solution to bring them to a sustainable profitability. That's mainly what is delivering our results.
Okay, maybe, in your prepared remarks, you did talk about Ontario and it's going to take a little bit longer. Can you maybe just talk about some of the challenges that you're seeing there and maybe a timeframe on right-sizing Ontario?
Yeah, sure. Ontario activities are depending on one main customer with a challenging contract. We are working with this customer for many years, and we working together on solutions to be sustainable in Ontario. According to me, we should be able to find better solution by the end of this year. For us, it's a high priority to get to a turnaround in Ontario.
Okay, would you consider yourself close to a turnaround there?
To be honest, as we have proceeded in Quebec, we have many choices and many options depending on the outcome of the discussion we're going to have. We didn't hesitate to take courageous decisions in Quebec to close contracts. When it's possible to find win-win solutions for both parties, we improve our profitability. I think that we take some time because so far we have noticed some progress in Ontario with what we have implemented. It has to come to a smart and a fair discussion with our main partners there.
Okay. Maybe just curious to get your view on the competitive front and now you're well into the reorg. How do you view the company or Colabor competing going forward?
I think that when you have strong bases, it's easier to be a bit more competitive. We are one of the leaders in the province of Quebec, I think that we need to keep on having a healthy business. Not fighting on pricing, but more about the quality of service we're delivering and added value solutions we can bring to our customers. To be honest, so far, I don't see a big challenge regarding competition because, according to us, from now we're not going to fight anymore with a very challenging contract or bid which is only declining our margin and our pricing. I think that the sun is rising for everyone, and we're not going to fight on pricing, and the market is big enough to satisfy everyone.
I guess maybe following up on that, is that the realization of both the competitors and customers now? On the customer side, are they more geared towards getting better quality service, but not necessarily competing or putting two companies against pegging two companies against each other on price?
Well, I think that you have to put that into the actual context. Everyone is facing issues regarding labor. So far we're more struggling regarding the lack of labor in our activities than on fighting regarding pricing. It can be at the customer level. In all restaurants, they're struggling regarding issues with the lack of labor. We have the same issues for all distributors. I think that the focus is mainly on delivering a good service. To get there, I think that everyone has to agree on fair contract and a smart win-win deal to be able to deliver that. Because at the end of the day, even if you have the most competitive contract at a very low pricing, but you don't have the quality of service, what you're not selling today is not going to be sold tomorrow.
Right. I guess could I sum that up as the competitive environment has become more rational than it has in the past? Is that fair?
Exactly. Yeah, that's fair.
Okay. Maybe just switching gears onto the wholesale sales side. There was a decrease in the revenues, and you pointed to the loss of contract. I guess I'm just wondering, when do you start lapping that contract? The flip side, though, there was a significant improvement in the margin performance this quarter. Again, looking for your thoughts there, and maybe if you could just remind me why the EBITDA margins are so much higher in wholesale versus distribution.
Well, I think that what is good for us regarding wholesale is as soon as you decide with courage to shut down non-profitable contract, it increase the profitability on the remaining business. Okay? I think that it's a fair statement. Wholesale business is a bit more easier on operation side compared to broad line business. You're not doing any sales by unit, it's only mainly by pallet. You can be very productive on the warehouse side. Moreover, on wholesale business, it's FOB warehouse. That means that we're not in charge of the shipping cost. It's regarding all kind of rebates we can get from supplier revenues because we concentrate all the volume of purchase. Let's say that wholesale is less challenging regarding operation. The main challenge is about deliver a good service to independent distributors and getting the fair pricing with suppliers.
Okay. Maybe just touch on the, when do you lap the non-renewal of the contract? When do you fully lap that?
Well, I think that it will be done by the end of this year.
Okay.
Of course, we keep on have cut several contracts up to the end of last year.
Okay. All right. Maybe just talking about the level of debt. I'm just wondering how you think about your debt level. You did pay some down with the sale of Décarie. Looking for one, where your comfort level is, and do you expect leverage to come down mainly because of improved operations, or are you gonna be paying down debt? I'm just wondering if you have any other non-core assets, let's call it, that you think you'd be able to divest of?
Well, first, I would like to say that according to me, the debt is still too high. Okay? I think that we're looking to get a sustainable activity with a fair leverage regarding the debt. As you mentioned, and we told that previous quarters, we have two ways to get back to a good leverage regarding debt ratio. It's first, we can increase EBITDA from what all initiative we implemented, and second is to reimburse in advance by cash payment our debt. We had an amazing opportunity to sell Viandes Décarie with a very good double-digit multiple valorization. We had the discipline to use all this amount to pay back the debt. I guess that compared to second quarter last year, it's decreased by 20% of our debt. We keep on having this type of discipline.
We want to focus, as we said, regarding our vision, on our core business. Depending on what kind of opportunities of divesting we will have, we'll look at it, but with no rush. I prefer honestly to focus on the improvement on our EBITDA, which is more sustainable, and to put back Colabor on success regarding growth.
Okay. You're always looking If there is an opportunity to sell, everything that you have right now, is that what you consider core? All of the assets that you have, that you're running right now?
Well, let's say that I'm very happy with everything I have now.
Okay.
If I have an unreasonable offer because it's really high on one of non-core asset, I will look at it and study it, as we've done for Viandes Décarie, which was quite a great business.
Okay. Are you fully lapped the Montana supply contract now? Maybe you just talk about, it seems like you did get some organic revenue growth on the distribution side. Maybe just talk about some of the drivers of the organic growth there.
Well, we have improved our mix of product, so it helps to get a higher margin on our distribution side. Also, as I said, with several customers, we improved our contract on a win-win basis, so that helps, too. We gain also good revenues for developing penetration in our existing customers. Mainly in the province of Quebec, in a broad line business, each month you're earning new independent customers, and unfortunately, you have to let go some others, and the balance of that is positive so far.
Okay. When you say improve mix, Lionel, what do you mean exactly?
Well, let's say that when you are able to sell a bit more of produce-
Okay
it's quite interesting as a category. All center of the plate strategy, just like selling more protein, it helps increasing your revenues, and also your profitability in dollars. It's more about to sell more added value product and a bit less of commodities.
What's driven that improvement or that mix towards that center of the plate?
Mainly execution. When I joined the company, I was a bit shocked about the industry, and I found out that the level of execution was really too low compared to other industries, just like retail. I think that you should take your destiny in your hands. We decided to change the culture of the company and the go-to-market. So far we were quite successful. Very far from where we want to go, but I'm quite optimistic that we will be able to deliver a better execution for the next quarters.
Okay. Maybe some questions for Pierre. You've only been with the company now for two months, just wondering how you view your learning curve and maybe just touch on some of the expertise that you're bringing to the table.
Well, my expertise is really on the accounting process, financing, helping operation to analyze and being proactive to support the progress of the company. That would be my key focus area. Of course, I've done M&A before, and on both sides, buying and selling, so that will be helpful to Colabor.
Okay. It seems like there's a little bit less disclosures. This is just some housekeeping for myself. A little bit less disclosures on the cost side, split between COGS and SG&A and inter-segment stuff. Was that on purpose?
The reason we've done that is for a competitiveness reason. That's why we didn't break it down in the two segments of the business. You have it on a consolidated basis in a note to the financial statement.
Okay. Just to clarify, you guys are now showing the results pro forma Décarie, right?
Correct. What you have to do is to go to the note four to the financial statements. This is where you will see Décarie, but on the face of the financial statements, all Décarie, if you want profit and loss statements, has been taken up on a comparative basis. You're comparing really apple with apple.
Okay. Maybe just one final one for me. One of the initiatives was to try and improve your private label penetration. Lionel, just wondering where you are in that initiative and has any of that contributed to some of the better results that we're seeing today?
Well, to be honest, we're still working on it because we're revamping our private label. We're proceeding also with category management to be sure that our private label is going to fit with our new vision for the company. So far we didn't get any significant improvement in the result from private label. Let's say that it's quite positive regarding the next following period when we will be able to introduce a new vision for private label.
Yeah. again, maybe just on the timeline for that, Lionel.
Well, I think that it will be early 2020.
Okay. All right. Thanks for taking my questions, everybody.
Yeah. You're welcome. Thank you.
There are no further question at this time. I will turn the call back over to the presenters.
Thank you, operator, and thanks, Derek, for your questions. We continue to work with discipline and rigor to transform Colabor. We are concentrating on our core business, optimizing our operation, and remain focused on reimbursing our debt. This concludes our call for the second quarter of 2019. Thank you for joining us. I look forward to discussing our progress at our next conference call to discuss our 2019 third quarter results in October. Have a nice rest of the summer. Thank you.
This concludes today's conference call. You may now disconnect.