Good morning, ladies and gentlemen. Thank you for standing by. Welcome to Colabor's third quarter 2018 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 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, 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, October 18, 2018. I will now turn the conference over to Lionel Ettedgui, President and CEO.
Please go ahead, sir.
Good morning, everyone, and welcome to Colabor Group's 2018 third quarter conference call. This is Lionel Ettedgui, President and Chief Executive Officer. Earlier this morning, we issued our third quarter earnings press release. It can be found along with our financial statement and MD&A on our website and on SEDAR. Please note that the presentation is also available on our website at www.colabor.com under the Investors/Events and Presentation section. During the quarter, and most recently, we made structuring changes to our executive team. First, let me introduce Mario Brin, who was appointed as Interim Senior Vice President and Chief Financial Officer of Colabor. Mario joined the company on September 10. He has a successful track record and brings significant experience, having held various Senior Executive positions at GardaWorld, Naya Waters, and CGI Group. John Amion joined us as Senior Vice President and General Manager in Ontario.
John has an extensive experience in the food service industry, having held Senior Executive positions at Tim Hortons and Sysco. Mathieu Dumoulin , who was previously General Manager of our wholesale division in Boucherville, was appointed Vice President of Sales of Colabor. Matthew has significant experience in the food service industry, including as a sales executive at Molson Coors. Elisabeth Tremblay was appointed Vice President of Human Resources and Communication. She has over 20 years of experience in human resources management, mainly at Saputo and Groupe Bibeau. Finally, Daniel Valiquette was appointed Vice President of Central Procurement and Private Label. Daniel has over 30 years of procurement experience and held various Senior Executive positions at Alimentation Couche-Tard. Despite some remaining challenges in our broad line distribution activities in Ontario, we have addressed some challenges and are still working on improving our operations.
We have a new general manager in place, a dedicated team, and we continue to work on initiatives that matter. Our broad line distribution activities in Quebec continue to perform well, resulting from our focus on the hotel, restaurant, and institutional market. Our wholesale business remains strong with higher quality sales. In the quarter, despite the consolidated loss of sales volume, we were able to keep the same level of EBITDA. Improved management of our working capital and stronger operational performance allowed us to grow our cash flow from operations and reduce our level of debt. Our team is highly motivated and committed to change the trend of recent years. I will now turn the call over to Mario for a review of our financial results. We will then open the call for questions. Mario.
Thank you, Lionel, good morning, everyone. It is a pleasure to be here today to discuss Colabor Group's third quarter financial results. Colabor Group consolidated sales for the third quarter ended September 8, 2018, stood at CAD 291 million compared to CAD 319 million in the equivalent period of 2017. In the distribution segment, sales decreased by 9.2% to CAD 222 million, mostly from the loss of the supply agreement for Popeyes Louisiana Kitchen and Montana's BBQ & Bar restaurant chain in our Ontario activities. This was mitigated by an improvement of sales from broadline distribution activities in Quebec. Sales in the wholesale segment stood at CAD 68.8 million, down 7.6%, resulting primarily from the non-renewal of non-profitable contracts.
Even with a lower volume of sale, adjusted EBITDA remained flat at CAD 7.6 million compared to CAD 7.7 million in the third quarter of 2017. This result from our improving gross margin as a percentage of sales, a lower operating expense, which were down by CAD 1.5 million, including the reversal of provision amounting to CAD 700,000. Colabor concluded the third quarter of 2018 with net earnings of CAD 1.2 million or CAD 0.01 per share compared to a net loss of CAD 18.8 million or CAD 0.18 per share in the equivalent quarter of 2017. The 8.9% loss on sales volume weighed on earnings.
This was mitigated by a pre-tax reduction of CAD 14.1 million in asset impairment losses, a pre-tax reduction of CAD 8.2 million in costs not related to current operations, continued gross margin improvements as a percentage of sales, a reduction of operating expenses as explained above. Our cash flow from operating activities stood at CAD 12 million in the third quarter of 2018, up from CAD 8.9 million in the equivalent quarter of 2017. This is mainly explained by an improving working capital situation, resulting from better management of account receivable and inventories to reflect the level of sales. On September 4, 2018, we announced the extension of the term of our credit facility for an additional period of one year, until October 13, 2020, and the extension of the term of our subordinated loan with the Fonds de solidarité FTQ for an additional six-month period until April 13, 2021.
Both extensions were provided without any changes to other underlying conditions. We also reduced our debt level. As at September 8, 2018, the company total debt amounted to CAD 115.4 million, down from CAD 122.4 million in the second quarter of 2018, and from CAD 118.9 million from the equivalent period of last year. Our total debt to trailing adjusted EBITDA ratio now stands at 5.9 times, which is down sequentially from the second quarter of 2018, when our leverage ratio reached 6.2 times. This compares with a ratio of 4.5 times at the end of the third quarter of 2017. This concludes my review of our financial results. Jessa, I would like to open the call for questions now.
Thank you. Ladies and gentlemen, we will now conduct a question-and-answer session. If you have a question, please press star followed by the number 1 on your touch tone phone. You will hear a tone acknowledging your request. Your questions will be pulled in the order they are received. Please ensure you lift the handset if you are using a speakerphone before pressing any keys. Your first question comes from the line of Derek Lessard from TD Securities. Please go ahead.
Good morning, gentlemen. Lionel, you've been in the chair now for about six months. I was just wondering if you're now in a better position to talk about where you envision Colabor as a sales organization, where it could be or should be.
For sure, I will say that we decided to take the right decisions regarding our activity by letting go non-profitable contracts regarding sales. We were looking to stabilize the activity in Ontario region. Now it's achieved regarding the relationship we have with our customers. We are definitely in better shape now to focus on growing the business. Moreover, I have built a whole new team to support the turnaround of the activity and to make sure that we're going to grow the business. We're still working now on finalizing an action plan and a vision for the whole company.
Okay. Thanks for that. That's helpful. Clearly, that was my next question. You've made some moves to improve your management bench strength. Just wondering if maybe could you talk about some of the moves you've made to fill those critical spots and maybe are there still some areas that you feel needs more attention?
Yeah, sure. At the end of the day, we're a very basic business, okay? My whole point is to go back to basics and to be close to operations. I wanted highly professional individuals with huge experience in the different important department of the company, just like operating finance, just like sales, but sales for both sides, for broad line and also wholesale. Procurement was critical. I think that with fresh new people, we can change the future of Colabor and improve the way we are doing things. Just bring back some discipline, some rigor, some vision, and be able to achieve what we put on budget, which is quite basic to me.
Okay. Maybe just touch on and add some color around improvements. It looks like you had some nice expansion in both wholesale and distribution segments. Maybe as a follow-up to that, could you talk about perhaps the sustainability that you see there?
Yeah, sure. As I said previously, honestly, it's mainly because of a good decision taken. I know that it seems to be simple, but on the day-to-day basis, it's not that simple. Just installing discipline, rigor, and focus is mainly the reason why we managed to improve the gross margin. It's not easy to decide one day to let go some sales, even if it's not a very profitable contract, because you're also focusing on market share. It's a hard decision to take, and at the end of the day, you're managing the company also by the bottom line. That's the first thing. In our activity, we're delivering our customers many times per week. You are as strong as the good quality service you've done the previous delivery.
Installing discipline, it's a core value for us for the way we have to work, and it's on a daily basis, which is not an easy one. It's the same for rigor and focus. Mostly by implementing discipline culture through the company, we can improve our high efficiency on warehousing, on shipping, on distribution. Which are the key things for us regarding the driven keys for profitability.
Okay. I guess it's fair to say in the six months or seven months that you've been there, the discipline and the rigor and the focus is something that you viewed wasn't part of the organization prior.
No, not at all. It's just that it's a huge challenge for all organizations, to be fair.
Right.
It's a very competitive market. It's a very demanding industry. On average, you can ship up to from 60,000 to 80,000 cases per day. It's really tough. Okay. My point is, mostly when you want to make a turnaround, you need to think as simple as possible. Just by focusing on very simple things, just like discipline, rigor, and focus on several key initiatives, you just make your people focusing day by day on those things, and you're going to collect results. That's what's happening for us.
Okay. I guess along the same lines, is it fair to say, I think you had mentioned it or answered it in the previous question, is the shorter-term strategy to emphasize profitability over sales volumes? I guess, what in your view constitutes profitable volume growth, whether by product category or private label or by end customer?
Honestly, we are competitors, we want to fight for both sales and profitability. To be fair, it would be only for quality sales. We're not looking to buy market share or this kind of stuff. I think that we want to manage a healthy business, and that's what we're focusing at the moment.
Okay. Maybe switching gears, welcome aboard, Mario. Congratulations.
Thank you, Derek.
Operating expenses were down. I calculated 2.1, in your prepared remarks, you said 1.5. You called out the CAD 700,000 due to a reversal in provisions. Just wondering where the other majority of the lower costs were coming from.
Yeah, as you were mentioning, there's a portion related to a settlement of the CSST and the equivalent in Ontario. To be honest, it's part of our business because we need to properly manage that. From that perspective, every quarter, it's part of our business. Remaining the improvement of the OPEX, it's really related to what Lionel was describing in a sense that we were able to drive a better cost, having better rigor, better efficiency. I would say that it's almost everywhere.
Okay. In the MD&A, you called out that you guys are in a good position now to serve independent restaurants and to ensure a better penetration of private label. Maybe could you just talk about or add some color around what you mean by that?
Yeah. Well, I guess the main focus of Colabor has always been to focus on independent restaurants because it's the nicest part of the business, let's say, or let's say the most profitable part of the business. You're not depending of several players, but you're serving a large number of customers. That's the vision and the objective of Colabor, to serve the most part of independent restaurants and support them to grow their own business. If they have a healthy business, it will be very positive for Colabor because we have quite a significant market share, specifically in Quebec on independent restaurants. When you were referring to private label, it's part of the food service industry. For Colabor and also for our competitors, you're serving your customers with national brands, you also offer them some alternative regarding the private label.
Regarding the penetration of private label, we're not a private label-oriented company. We have an amazing partnership with vendors on national brands, and we just want to be sure that we can offer all services to our customers with a fair part of the business into private label.
Okay. Lionel, maybe just coming back on the first part of your answer there. Is there a competitive difference between the independents and, say, the larger chain QSRs from your perspective? Just wondering why it's a healthier margin for yourself and I guess, I don't know if that infers that the competition is less or there's just more players vying to get the business from the larger chains.
No, it depends where you want to compete. When you're talking about large chain business, you're talking about less SKUs regarding what they're looking for. It's a business of logistic efficiency. When you're talking about independent street restaurants, you're talking about 9,000 different SKUs they can have access to. It's different. It's more about giving flexibility and to make sure that you can supply them well regarding service. It's almost a different playbook.
Okay.
Colabor has managed to be very efficient on the independent restaurant business. It's very difficult to do both of those activities through the same warehouse. It's not the same game. It's not the same business. To be honest, it's one of the reason we're having some difficulties in Ontario, because we were mainly chain, and we try to have the same alignment as independent restaurants. Now just by coming back to what we used to do, we think it makes a huge difference.
Okay. That's very helpful. Maybe one last question from me. Could you maybe just talk a little bit about the progress that you are making in Ontario, whether it's optimizing the Ontario operations, whether it's on volumes, the, I think, route optimization was a big one for you and the DC reconfiguration?
Yeah, sure. I will say that when I joined the company, the first thing which was important to me was to really understand where we had real issues, and was it about the volume we had? Was it about logistics or efficiencies on operation side and so on? Then it was to decide if I had the right team in place. First, what we did, we built a team. We started initiatives regarding inventory management, regarding customer relationship, regarding some initiatives at warehouse level, at shipping level. First step of the plan was to stabilize our relationship with our customers to make sure that the business is stabilized and we're not going to lose volume again and again. When you're losing volume, it's quite difficult to make a turnaround, for sure. This step is almost completed.
We achieved what we wanted to do at this stage. Now, the second part is to focus a bit more about improving our efficiency on operation to be able to bring back the activity to success. Then with solid basis, we're going just to grow the business as we're doing that in the Quebec region.
Okay. That's very helpful as well. You said part one essentially is done in terms of the customer relationship and stabilizing volumes in Ontario. Are you able to quantify it or are you able to point to any Confirm what you're saying?
Yeah. What I was referring to was about our business is food service. It's all about service. You need to make sure that you're providing a very good service to your customers. At this point, it's not at any cost, but what you have to understand is when you do not manage, for instance, to supply some products to restaurants, they're not going to sell them the day they need them, and it's a pure loss. It's very important for us to make sure that our fill rate, we're back to where they should be. Now we achieve this part, which is the important part. It's more about servicing the customers.
Now we are going to make sure that customer are keen for us, and it's time for us to be able to keep the same level of service and to improve our bottom line by bringing back efficiencies, by reviewing the layout and warehouse efficiency and other initiatives regarding the efficiencies.
Okay. Are you able to provide a percentage, I guess, a completion percentage or progress percentage of where you are in terms of the turnaround there?
Honestly, not at all, because I'm not satisfied at this point where we are, okay? I'm very ambitious for the activity, and we still working. I just built a full new team who is here to support, and they will need a couple of weeks to be really efficient. I'm pretty sure that so far it's not that bad, even if I'm not satisfied. It's a flat quarter, and I think that it's time for us to bring more discipline, more rigor, more focus to be able to achieve the goals we wanted to achieve.
Okay. Well, thanks for that, gentlemen. That's all for me, and good luck.
Thank you very much.
Thank you, Derek.
There are no further questions at this time. I turn the call back over to Mr. Ettedgui.
Thank you, operator, thanks, Derek, for your question. As closing remarks, we have a new executive team in place, as I said. They are highly experienced, motivated, and committed industry professionals. They are fully aligned with our strategy and dedicated to improve our profitability, grow our cash flow, and reduce the debt level. This concludes our call for the third quarter of 2018. Thank you for joining us, and I look forward to our next conference call to discuss our 2018 fourth quarter and year-end results in February. Have a good day, everyone.
This concludes today's conference call. You may now disconnect.