Good morning, ladies and gentlemen. Thank you for standing by. Welcome to Colabor's second 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, July 20th, 2018.
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 Colabor Group's 2018 second quarter conference call. This is Lionel Ettedgui, President and Chief Executive Officer. With me today is Jean-François Neault, Senior Vice President and Chief Financial Officer of Colabor. Earlier this morning, we issued our second quarter results 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 investor events and presentations section. Let me talk to you about our distribution segment. As expected, the anticipated loss of volume in our broadline distribution activities in Ontario continued 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 broadline distribution activities in eastern Quebec.
Our aim was to raise our profile within higher value markets such as hotels, restaurants, and the institutional market. 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 broadline activities by letting go of non-profitable business. This reflected well on our gross margin as a 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-François for a review of our financial results. We will then open the call for questions. Jean-François?
Thank you, Lionel. Good morning, everyone. Colabor Group's consolidated sales for the second quarter that ended June 16th, 2018, stood at CAD 299.9 million, representing a decrease of 9.5% from the equivalent period in 2017. For the distribution segment, sales decreased by 8.9% to CAD 226.3 million, mostly coming from the anticipated loss of supply agreements for Popeyes Louisiana Kitchen and Montana's BBQ & Bar restaurant chain in our Ontario activities. Sales of the wholesale segment stood at CAD 73.6 million, down 11.3%, resulting from the non-renewal of non-profitable contracts. Adjusted EBITDA stood at CAD 6.1 million or 2% of sales, compared to CAD 9 million or 2.7% of sales in the second quarter of 2017.
Here, this is mainly the result of the aforementioned loss of volume on our consolidated sales. The fact that in the second quarter of 2017, we reversed a non-recurring provision relating to an executive retention program, which reduced our comparable period's Adjusted EBITDA by CAD 0.8 million, 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. Colabor concluded the second quarter of 2018 with net earnings of CAD 0.8 million or CAD 0.001 per share compared to net earning of CAD 3.1 million or CAD 0.03 per share in the equivalent quarter of 2017.
Our cash flow from operating activities stood at negative CAD 4.1 million in the second quarter of 2018, compared with positive CAD 2.2 million for the equivalent quarter of 2017. This is explained by a higher sequential increase in net working capital during the second quarter of 2018 and lower Adjusted EBITDA when compared with the equivalent quarter of 2017. As at June 16th, 2018, the company's total debt, including the convertible debentures and the bank overdraft, amounted to CAD 122.4 million, down from CAD 125.1 million during the equivalent period of last year. CAD 39.8 million was drawn from our authorized credit facility of CAD 140 million, compared with CAD 28.1 million 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 2017. This leverage deterioration is the direct result of a continued declining last 12 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?
Yeah, indeed, Jean-François. If I might add, it is very important for us not to disturb 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 right-sizing and routing initiatives. This measure should start providing benefits starting in 2019. Operator, I would now like to open the call over for questions.
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 one on your touchtone 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, 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.
I think that we have just hired advisors to assist us for strategic planning. At the moment, we're 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.
You'll be able to give a, I guess, a better sense of the opportunities and kind of some financial metrics attached to that this year?
Later in the year, Derek, yes. That's exactly the reason why we are the advisor. Yes. Later in the year, we should be better positioned to open up on that. Yep.
Okay, perfect. Thank you. There was further margin compression in the broad line distribution business. I was just wondering if you could 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. You did mention that it's a great summer, and last year, and you would have expected margins to be up given how crappy it was last year. I think you already mentioned it in your prepared comments regarding the inefficiency of the business at the moment. I was just wondering if you could just maybe, again, just what do you think is self-inflicted versus competitive activity?
Okay. First, Derek Lessard, Jean-François Neault speaking. The margin overall in the entire organization are the gross margin, I mean, are positive year-over-year. We're doing good as a percentage of sales. Let me clarify that. 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? It's truly related to our Ontario operation, where EBITDA margin are affected. Derek, you have to remember, over the last 18 months, we lost around CAD 120 million of business, with Popeyes, MTY, and Montana's, and we've shut down one DCs. Okay? This is truly affecting our EBITDA margin in that region. Okay? We have lived through a similar situation in Quebec City. You will remember that in 2013, 2014, and 2015.
EBITDA was stressed to a very low level, and we overcome all of that issue over a two to three years period. It takes times when you have such a drastic change in your book of business, a reduced volume. It takes times to redo your routing and warehouse layout. It's just a matter of getting back to a more normal absorption of fixed costs. That's what we just mentioned, and I think later in the year, we'll be in a position to further compress our cost and align our efficiency better.
Okay. 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 volume or route optimization?
Lionel, early 2019?
Exactly. I think that the beginning of 2019, we will be in good shape. Just to remind you that on the short term, we have put focus on Ontario regarding right-sizing, which means reducing the headcount. A huge cleanup regarding inventory management, which means several write-off on inventories. The second step after the high season would be rerouting optimization, reviewing the layout, and also to implement a new go-to-market strategy regarding sales for Q3 and Q4.
Okay.
We'll benefit of all those initiatives in beginning of 2019.
Okay. I'm just going to follow up on your comment regarding the net debt to EBITDA. Again, 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 Lessard, total debt is always increased sequentially from Q1 to Q2 as we get into busy season. A year-over-year the debt is lower. Obviously, we're dedicating our free cash, which we're still generating free cash flow, to reduce debt. As you would remember, we always generate our free cash flow for the 2nd half of the year. Going forward, working capital remains stable, and we will generate free cash flow that will be able to reduce debt. We should end the year with a lesser debt dollars than it was at the year-end of 2017. Definitely, the result of this leverage ratio is clearly the direct impact of the adjusted EBITDA performance. Like Lionel Ettedgui mentioned, we're dedicated and focused to redress our situation in Ontario to get the last month EBITDA to go up again, Derek Lessard.
That would be definitely, that's the way to go, is to improve our EBITDA. By the way, in Quebec operation, we're not in the same situation. Pretty much of all of our business units are doing good. Clearly, we focus 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 improvements for the last two periods, we're quite positive regarding that. On top of that, we are hiring talent in Ontario to consolidate the team, 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 knows quite well the business. Far, we're quite confident on what we're doing. We're on the right path to get back on track for Ontario.
Okay. Maybe just one final one for me, it's in respect to the renewal of the contract. Just wondering what it means in terms of sales were the renewal terms more favorable? Maybe just the 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, we have already renewed several contracts. We have all their support, we're focusing on trying to keep on having a very high delivery about customer service. Regarding Quebec, we are growing our market share. We managed to bring organic growth, we have been quite competitive on institutions. We are quite happy with the result we got from all our initiatives with our sales strategy there.
Okay.
More specifically, Derek, about the contract we gained, we renewed the contract in Quebec, Lionel.
Yeah.
The territory, it was for an institution for healthcare in Quebec City, they expanded the territory, which was originally mostly focused on Quebec and Eastern.
Okay.
We had a more central Quebec territory to it. It's not material enough, we can talk about it.
Got it.
It's showing how good we're doing in Quebec that they renewed the trust they have in us, we're very happy about this renewal.
Okay. I guess I don't know if you answered it, were the renewal terms, were they more favorable, less favorable, or equal to last?
Similar. We don't want to go in disclosing terms. You would understand that.
Okay.
I would say similar terms, we're happy with the contract.
Okay.
It's a good customer, a good contract. We're happy with it.
Okay. All right. That's it for me, gentlemen. Thanks.
Thank you.
Ladies and gentlemen, if there are any additional questions at this time, please press star followed by the number one on your telephone keypad. As a reminder, if you are using a speakerphone, please lift the handset before pressing any keys. Ladies and gentlemen, this concludes today's conference call. You may now disconnect.