Earnings Call: Q2 2018

Jul 20, 2018

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to Collabao's Second Quarter twenty eighteen Financial Results Conference Call. 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, 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, July 2038. I will now turn the conference over to Lionel Ettedgui, President and Chief Executive Officer. Please go ahead, sir. Good morning, everyone, and welcome to Calabar Group's twenty eighteen second quarter conference call. This is Lionel L'Epedgui, President and Chief Executive Officer. With me today is Jean Francois Naud, Senior Vice President and Chief Financial Officer of Collabor. Earlier this morning, we issued our second quarter results press release. It can be found along with our financial statement 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 under the Investor and Events and Presentations section. First, let me talk to you about our distribution segment. As expected, the anticipated loss of volume in our broad line distribution activities in Ontario continue to weigh on our results and account for most of this quarter's challenges. However, we are starting to see some benefits from sales force investment made in our broad line distribution activities in Eastern Quebec. Our aim was to raise our profile within higher value markets such as hotels, restaurants and distributional markets. As a result, we have reinforced our presence in the market and are being more competitive. This translated into an increase in the volume of sales and improvement on our gross margins in the second quarter. The recent renewal of an important institutional supply contract, which includes an additional territory, is also a direct result of our dedication to grow our share of the market in Quebec. These successes were somewhat mitigated by higher operating expenses from the under absorption of fixed costs, which put additional pressure on our EBITDA in the quarter. As for the Wholesale segment, we lost some sales volume in our Specialty and broad line activities by letting go of nonprofitable business. This reflected well on our gross margin as percentage of sales and on our bottom line. This is the result of our efforts to improve procurement, cost and inventory management and from a decision to focus on higher velocity sales. I will now turn the call over to Jean Francois for a review of our financial results. We will then open the call for questions. Jean Francois? Thank you, Lionel, and good morning, everyone. Colabar Group's consolidated sales for the second quarter that ended June 1638, stood at $299,900,000 representing a decrease of 9.5% from the equivalent period in 2017. For the Distribution segment, sales decreased by 8.9% to $226,300,000 dollars mostly coming from the anticipated loss of supply agreements for Popeye, Louisiana Kitchen and Montana's Barbecue and Bar restaurant chain in our Ontario activities. Sales of the wholesale segment stood at $73,600,000 down 11.3% resulting from the non renewal of non profitable contracts. Adjusted EBITDA stood at $6,100,000 or 2% of sales compared to $9,000,000 or 2.7% of sales in the second quarter of twenty seventeen. Here, this is mainly the result of the aforementioned loss of volume on our consolidated sales. The fact that in the second quarter of twenty seventeen, we reversed a non recurring provision relating to an executive retention program, which reduced our comparable period adjusted EBITDA by $800,000 and from the under absorption of fixed costs mainly from our distribution activities in Quebec. All this was compensated in part by an improvement of margin as a percentage of sales across the organization. Colabar concluded the second quarter of twenty eighteen with net earnings of $800,000 or $0.01 per share compared to net earnings of $3,100,000 dollars or $0.03 per share in the equivalent quarter of 2017. Our cash flow from operating activities stood at negative $4,100,000 in the second quarter of twenty eighteen compared with positive $2,200,000 for the equivalent quarter of twenty seventeen. This is explained by a higher sequential increase in net working capital during the second quarter of twenty eighteen and lower adjusted EBITDA when compared with the equivalent quarter of 2017. As at June 1638, the company's total debt, including the convertible debentures and the bank overdraft amounted to DKK122.4 million, down from DKK125.1 million during the equivalent period of last year. DKK39.8 million dollars was drawn from our authorized credit facility of $140,000,000 compared with $28,100,000 at the end of last year, leaving us with sufficient flexibility. Our total debt to trailing adjusted EBITDA ratio now stands at 6.2 times compared with a ratio of 4.4 times at the end of the second quarter of twenty seventeen. This leverage deterioration is the direct result of a continued declining last twelve months adjusted EBITDA stemming mostly from the performance of our activities in Ontario rather than from the level of debt. In fact, our current debt level is in line with typical seasonal sequential fluctuation between Q1 and Q2 and is even slightly lower than it was at the same time last year. As for the performance of our Ontario activities, we are operating in a busy season with a less efficient network following the loss of Montana's business. We decided to postpone warehouse layout and route delivery change at a later time in the year in order not to disturb our distribution activities during our busiest season and maintain the highest possible level of service. Lionel? Yes, indeed, Jean Francois. If I might add, it is very important for us not to disperter our operations during our busiest season in order to maintain the highest level of customer. Once the summer season is behind us, we will resume our optimization measure with further rightsizing and reworking initiatives. This measure should start providing benefits starting in 2019. Operator, I would now like to open the call over for questions. Thank Your first question comes from the line of Derek Lessard from TD Securities. Please go ahead. Yes. Good morning, everybody. Just wondering where you guys are in terms of the updated strategic roadmap and if we should still expect something, I guess, sometime closer to the end of the year? Well, I think that we have just hired advisers to assist us for a strategic planning. So we at the moment, we are focusing a lot to fix our operation in Ontario in the short term, and we're preparing the future regarding the vision and a good way to have differentiation in the highly competitive market. Okay. And you'll be able to give up, I guess, a better sense of like the opportunities and kind of some financial metrics attached to that this year? Later in the year direct, yes, we're still that's exactly what we the reason why we hired advisor, yes. Later in the year, we should be better positioned to open up on that, yes. Okay, perfect. Thank you. So there was further margin compression in the Broadline distribution business. I was just wondering if you can give us a sense of how much of that do you think is more self inflicted, whether it be the contract losses versus market conditions in terms of competitive activity or what have you? I mean, you did mention that it was the different well, it's a great summer and last year you would have expected margins to be up given how crappy it was last year, but I think you already mentioned it in your prepared comments that regarding the inefficiency of the business at the moment. But I was just wondering if you could just maybe again just what do you think is self inflicted versus like competitive activity? Okay. First, Derek, Jean Francois speaking. The margin overall in the entire organization are the gross margin, I mean, are positive year over year. So we're doing good as a percentage of sales. So let me clarify that. So now your question is on the EBITDA margin obviously into the broad line distribution. Again, in our Quebec activities, we're doing better year over year, okay? So it's truly related to our Ontario operation where EBITDA margin are affected. And Derek, you have to remember over the last eighteen months, we lost around $120,000,000 of business with Popeye's, MTY and Montana's, and we've shut down one DC, okay? And so this is truly affecting our EBITDA margin in that region, okay? We have lived through similar situation in Quebec City. You will remember that in 2013, '20 '14 and 2015. EBITDA was stressed to a very low level, and we overcome all of that issue over a two to three years period. So it takes times when you have such a drastic change in your book of business, reduce volume, it takes times to redo your routing and warehouse routing and layout, sorry. So it's just a matter of getting back to a more normal absorption of fixed costs. So that's what we just mentioned. And I think later in the year, we'll be in a position to further compress our costs and align our efficiency better. Okay. So I mean, just a follow-up to that then. When do you think or where do you think or what inning do you think you're in with respect to the Ontario optimization, whether it's on the volumes or route optimization? Yes. Exactly. I think at the beginning of 2019, we will be in good shape. Just to remind you that on the short term, we have put focus on Empireio regarding rightsizing, which is meaning reducing the headcount. A huge cleanup regarding inventory management, which mean several write off on inventories. And the second step after the high season would be rerouting optimization, reviewing the layout and also to implement new go to market strategy regarding sales for Q3 and Q4. So we benefit of all those initiatives in beginning of twenty nineteen. Okay. And I'm just going to follow-up on your comment regarding the net debt to EBITDA. And again, as I see that total debt is coming down. Maybe just wondering what your thoughts are or is the plan to increase EBITDA or pay down debt to address the leverage ratio? Obviously, Derek, full debt is always increased sequentially from Q1 to Q2 as we get into busy season. So it's and year over year, the debt is lower. So obviously, we're dedicating our free cash, which we still we're still generating free cash flow to reduce debt. And as you would remember, we always generate our free cash flow for the second half of the year. So going forward, working capital remains stable and we will generate free cash flow that will be able to reduce debt. So we should end the year with lesser debt dollars than it was at the year end of 2017. But definitively, the result of this leverage ratio is clearly the direct impact of the adjusted EBITDA performance. And like Lionel mentioned, we're dedicated and focused to redress our situation in Ontario to get the last twelve months EBITDA to go up again. That would be definitively, that's the way to go is to improve our EBITDA. And by the way, in Quebec operation, we're not in the same situation. Pretty much of all of our business units are doing good. So clearly, we're focused on the Ontario business. In Ontario, do you see any risk or I guess have you seen any increased competitive behavior as you guys try to kind of skate not skate or improve those operations? No. Honestly, we have seen improvement for the last two periods. So we are quite positive regarding that. On the top of that, we are hiring Thailand in Ontario to consolidate the team. And we just hired one month ago a very good talent in operation. We're very close to fulfill the position of general manager with someone who know quite well the business. So far, we're quite confident on what we're doing. We're on the right path to go back to on track for Ontario. Okay. And maybe just one final one for me, and it's in respect to the renewal of the contract. So wondering what it means in terms of sales and were the renewal terms more favorable? And maybe just a final one on that is I'm interested in your comment about getting the additional territory, what that means. Okay. First, let's tell you that we are quite transparent with our customer in Ontario. So we have already renewed several contracts. We have all their support, and we're focusing on trying to keep on having very high delivery and about customer service. Now regarding Quebec, we are growing our market share. We managed to bring organic growth, and we have been quite competitive on institutions. So we are quite happy with the result we got from all our initiatives with our sales strategy there. Okay. And more specifically, Derek, about the contract, we gained and we renewed the contract in Quebec, Lienel. And the territory is just it was for an institution for healthcare in Quebec City and they expanded the territory, which was originally mostly focused on Quebec and Eastern. We had a more Central Quebec territory to it. So it's few it's not material enough so we can talk about it. But it's still it's showing how good we're doing in Quebec that they renewed the trust they have in The Us. And so we're very happy about this renewal. Okay. I guess the I don't know if you add to that, but the like were the renewal terms like were they more favorable, less favorable or equal to last? We don't want to go in disclosing terms, you would understand that. I would say similar terms and so we're happy with the contract. It's a good customer, good contract. We're happy with All right. That's it for me, gentlemen. Thanks. Thank you. Ladies and gentlemen, this concludes today's conference call. You may now disconnect.