Earnings Call: Q4 2018

Feb 22, 2019

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to Colabo's Fourth Quarter and Year End twenty eighteen Financial 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 Before turning the meeting over to management, please be advised that this conference call will contain statements that are forward looking and subject to a number of risks and uncertainties that could cause actual results to differ materially from those anticipated. I would like to remind everyone that this conference call is being recorded today, February 2239. I will now turn the conference over to Leonette Etegui, President and Chief Executive Officer. Please go ahead, sir. Thank you. Good morning, everyone, and welcome to Colabor Group's twenty eighteen fourth quarter and year end conference call. This is Lionel Ettedgui, President and Chief Executive Officer. Earlier this morning, we issued our fourth quarter and year end earnings press release. It can be found along with our financial statements and MD and A on our website and on SEDAR. Please note that the presentation is also available on our website at www.colabor.com in the Investors section under Events and Presentations. Our fourth quarter consolidated revenues were down 8.8%, both in the fourth quarter and year to date, resulting from the loss of volume in Ontario and from our decision to not renew nonprofitable contracts. This was mitigated by continued growth of our distribution activities in Quebec. Even as we lost sales volume over the year, our gross margin in dollars of sales improved by 6% both in the fourth quarter and year to date. This comes from our decision to not renew nonprofitable contracts, which improves our customer mix, growing sales of private label and value added products and from our growing distribution activities in Quebec. Our Q4 adjusted EBITDA stood at $5,900,000 compared to $7,100,000 last year. During the quarter, we took a $700,000 inventory write off from our Ontario division and took a $400,000 retention provision, which resulted in $1,100,000 of noncash items for the fourth quarter of twenty eighteen. By removing the effect of these noncash items, adjusted EBITDA in the quarter would have been flat. 2018 was a year of transition. We implemented several initiatives to change the trend of the previous years. These initiatives included a focus on our core business, important organizational changes and managing our bottom line and cash flow. During the second half of the year, this initiative started to support higher gross margin as a percentage of sales and generate positive cash flows to reimburse debt. We are starting 2019 with a stronger team that is highly committed to changing the trend of recent years. We are also highly focused on improving our operating profitability. We will keep on expanding our board line activities in Quebec, integrating and optimizing our business units and reducing our level of debt. Our management team is fully dedicated to deliver more value to our shareholders. Before turning the call over for questions, I will now review our results for the fourth quarter of twenty eighteen. Colabor Group consolidated sales for the fourth quarter ended December 2938, were down 8.8% to $366,100,000 This results from the loss of volume in Ontario and the non renewal of non profitable contract in the wholesale segment, which was mitigated by improving sales from our board line distribution activities in Quebec. Adjusted EBITDA was lower at $5,900,000 compared to $7,100,000 in the fourth quarter of twenty seventeen. As explained in my initial remarks, the difference comes entirely from the $1,100,000 of noncash items for Q4 twenty eighteen. Colabor ended the fourth quarter of twenty eighteen with a net loss of $1,900,000 compared to net earnings of $500,000 in the equivalent quarter of 2017. This gap is mainly explained by a charge not related to current operation of $2,500,000 associated with changes made to the executive team and implementation of the rationalization plan. By removing the $1,100,000 noncash item that I just referred to, net earnings would have been higher than the comparable quarter of last year. All these non cash, one time non recurring items result from our efforts to execute the turnaround of the company and are required in a year of transition. Cash flow from operating activities was positive at about $11,000,000 A better management of working capital mitigated the effects of a lower EBITDA. We remain dedicated to reducing our level of debt. At year end, the company's total debt amounted to $106,900,000 down from $110,600,000 in the equivalent quarter of 2018. Our total debt trading adjusted EBITDA ratio now stands at 5.8 times, which is down from the third quarter of twenty eighteen. By removing the debentures, this ratio stands at 3.1 times. This concludes my review of our financial results. Operator, I would now like to open the call for questions. Thank you. Ladies and gentlemen, we will now conduct the question and answer session. Your first question comes from the line of Derek Lessard from TD Securities. Please go ahead. Hi. It's Evan in for Derek. So I just have a few questions for you this morning. I guess the first one, when do you expect to update us on your strategic roadmap? And is it dependent on finding a new CFO? And as a follow-up to that one, could you update us on the search process for a CFO? Okay. So for the update regarding the strategic plan, I guess that's the best time for us would be at the AGM in May. So that's where we're going to introduce the whole strategy. And regarding the second question of the search of the CFO, we have very good candidates. We're still in process. So we're very confident to have the right person in place quickly. In the meantime, I'm very well supported by my whole financial team. Great. Thanks. So in terms looking at your assets, are there any more cost saving opportunities that you see? And can you give us a bit more color on the $3,000,000 in cost savings that you announced? Okay. So cost savings we announced was related to the reorganization of the company. So we just cut down the double position we have in our organization. And we take advantage also to have a stronger team in place. So all savings was by cutting down the labor, so it's full saving in our P and L. So we expect to see the benefit of such initiatives in Q1. Great. That's helpful. So turning to the consumer, there have been some signs of consumer pressure late in this economic cycle. Just wondering what you're seeing in terms of the Quebec and Ontario consumer? And does this change your thinking on the strategy to focus on independence rather than the chains? I think that our position is a bit different between those two markets. Let's say that in the Quebec region, we are quite very strong regarding independent customers, and we have a solid book of customers. So I think that we still have an amazing potential, and that's what we notice in our figures regarding the growth of board line in Quebec region. Okay. So we're quite confident that we will still have this kind of growth for the following years, and we have the right strategy to catch the opportunity. Regarding Ontario, our book club business is a bit different. We have very solid customers, which are more chain oriented. And we adapt a bit of a different strategy to satisfy those customers and try to find better way and better opportunities to have win win partnerships. And so far, it's coming to be quite positive. Okay. And in the past, you've mentioned having improved fill rates and improved customer satisfaction. Can you give us an update on the current trends and any driving factors? And as well, is there any way to further improve customer loyalty? And can it be done without using price? Okay. That's a good point. Our level of service is back on track. So now to sign this position, we can remove what we used to do regarding over servicing. So we expect some good result on that point. So the most important thing for your customers is the level of service, okay, to be sure that they receive what they have ordered without any back order and in time. So they can be efficient because what they are not going to sell today, they won't sell it tomorrow. Regarding the pricing, I guess that our market is not that sensitive to pricing. We need to imply a change, and that's what we're trying to implement for the last couple of months, which is we don't want to be seen as cutting pricing to get the loyalty of the customer. We just need to bring them solution, solution regarding the large offer of products we have and solution regarding the quality of service we're delivering. Okay, thanks. And last question from me. Can you talk a bit about the executive management changes in the provisions that you have taken? Okay. Well, the provision taken is regarding retention for key employees. So it's going beyond the top executive management because they're brand new, so it's not related to them. And regarding now the new management team, we are quite happy with the new key people we have put in place. They have contributed to the strategy that I will present during the next AGM. So we're stronger regarding procurement. We're stronger regarding operation and sales. And it's refreshing as we can challenge ourselves and be able to change our business model, which is maybe the key essential things to succeed regarding this turnaround. Thank you very much. That's it for me. There are no further questions at this time. Mr. Echegui, I turn the call back over to you. Thank you, operator, and thanks, Derek, for your questions. It has been one year since I joined the Collabour. Twenty eighteen was a year where we redefined our strategy, reinforced our team and started implementing initiatives to reverse the trend of the last few years. We are now starting 2019 in a better position with a strong team dedicated to deliver more values to our shareholders. This concludes our call for the fourth quarter and fiscal year of 2018. Thank you for joining us, and I took and I look forward to our next conference call to discuss our twenty nineteen first quarter results in May. Have a good weekend, everyone. Thank you. This concludes today's conference call. You may now disconnect.