Colabor Group Inc. (GCL) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen, and welcome to Colabor's Fourth Quarter 2024 Results Conference Call. [Operator Instructions] This call is being recorded on February 26, 2025. And I would like to turn the conference over to Mr. Louis Frenette.

Thank you, Sylvie. Good morning, everyone, and welcome to Colabor Group's Fiscal 2024 Fourth Quarter and Year-end Results Conference Call. This is Louis Frenette, President and Chief Executive Officer. Last evening, we released our earnings results for the 16- and 52-week period ended December 28, 2024. The press release and disclosure documents can be found on our website at SEDAR -- on the website, sedarplus.ca and on our website, colabor.com. Joining me today on this call is Pierre Blanchette, our Chief Financial Officer, who following my initial remarks, will provide an overview of our financial results. Our fourth quarter and full year results demonstrate that we can win even in challenging macroeconomic environment. Because of our diversification strategy within the HRI market and investments made to expand our presence in Western Quebec, we've managed to offset the effect of challenging backdrop in the restaurant and retail channel and set the table for a bright future for Colabor. In the fourth quarter, sales grew by 3.2%, driven by distribution sales growth at 5.6%, which compensates for weaker wholesale revenues. Weakness in restaurant channel put pressure on our adjusted EBITDA margins, which still represents a healthy 5.6% of sales in the fourth quarter of 2024, down from 5.9% in the equivalent quarter of last year. Because of our efficient management of working capital, we increased our cash flows from operations by 18.6% to $10.6 million. By prioritizing sound capital allocation, we've also ended the year with a strong balance sheet. Our leverage ratio represents 2.4x adjusted EBITDA from 2.7x at the end of last year. Fiscal 2024 was a milestone year in the second half of our 2020 to 2025 strategic plan. We entered the year having completed an important CapEx project that would provide us with a base to triple the size, the market of our distribution activities. Starting in Q1, we slowly ramped up the facility by serving our new chain customers. And once we felt we had the required level of service, we started going after market share. While headwinds affected the restaurant industry in 2024, our diversification strategy and ability to gain market share allowed us to grow our distribution sales, mitigating the effect of the difficult macro environment in this activity. We also completed a small acquisition of the Beaudry & Cadrin asset, which helped us raise synergy at our Eastern Quebec facility and create cross-selling opportunities. For fiscal 2024, we generated $35.4 million of adjusted EBITDA, down by $2.2 million. Margins stood at 5.4%, down from 5.6% last year from the effect of a lower sales volume. However, by soundly managing operations and prudently allocating capital, we ended the year in a strong financial situation with healthy cash flows. This provides us with the means to accelerate our growth and profitability plan. On February 19, we announced the conclusion of a highly strategic acquisition, which will further consolidate our position as the largest food distributor and boost our presence in Western Quebec. This follows into the footstep of the ramp-up of our new facility in Saint-Bruno. I would like to once again go over the strategic rationale and key benefits of this transaction, which is expected to close before the end of the current -- which is the second quarter. The price paid was $51.5 million, and the deal represents annual revenues of $225 million. We acquired certain distribution assets of Alimplus, which operates under Mayrand Plus, all of the equity of Tout-Pret, a processor and distributor of ready-to-use fresh cut fruits and vegetables and concurrently concluded a 6-year supply agreement for the 4 Mayrand Depot stores. This was a cost-effective way to accelerate our presence in Western Quebec with an added value and complementary customer mix. The distribution asset purchased are primarily working capital, sorry, customer contracts and certain tangible assets. By adding this volume to our legacy business, we will increase our purchasing power and supplier revenues, which will benefit everyone. We can also extract cross-selling opportunities with our private label and specialty products, seafood and meat with our Norref and Lauzon division, adding also the Tout-Pret opportunity. On Slide 6, we can see that together on a pro forma basis, our new customer mix move in favor of restaurants and retail, which represent 58% of revenues, up from 48% prior to the transaction. Institutional accounts will practically maintain their share of revenues at 19%, down from 20%, while wholesale customers will represent 18% -- sorry, 18% of revenues down from 25%. Overall, this transaction favorably impact our customer mix, allowing us to achieve an optimal risk/reward profile. Along with revenue synergies, this transaction bring potential efficiency gain and operating synergies, including some interesting route optimization, capacity and geographical utilization that we aim to gradually realize over the next 2 years. Efficiently managing our customer mix and product portfolio has allowed us to raise our gross margin in the past few years. We will maintain this approach in the years to come to mitigate any possible headwinds. In conclusion, the acquisition announced last week is highly strategic and accretive to earnings per share. Because of our sound financial situation and financing structure accompanying the deal, our leverage ratio will also remain manageable as we expect it to land in the mid-3s upon closing of the transaction. 2025 marks the last year of our 5-year strategic plan. The Alimplus acquisition rounds off this journey quite nicely. We now have a catalyst for growth and operational efficiency and stronger foundation on which to realize our longer-term ambition. The acquisition of Alimplus raised our market share in the Quebec foodservice market from 11% to 16%. As the third largest distributor in a highly fragmented market, our long-term ambition is to consolidate the market and create a strong and competitive Quebec supplier focused on supporting our local artisans, producers and manufacturers. We are all very excited by the potential of Alimplus brings to Colabor and look forward to welcoming new customers and employees to our platform shortly. Pierre, on this, I turn the call over to you.

Thank you, Louis, and good morning, everyone. I'm pleased to be here today to discuss our key financial results for the fourth quarter of fiscal 2024. Please refer to Slides 7 to 10 of the presentation for highlights of our financial performance in the quarter. In the fourth quarter of 2024, sales were up 3.2% to $202.6 million. Revenue from our distribution activities increased by 5.6%, while our wholesale activities were down by 3.8%. Volume growth from our effort to develop new territories, 1.9% inflation and contribution of our Q1 '24 acquisition allowed us to mitigate the effect of lower customer spending in the restaurant and retail channel, which continues to impact our wholesale business. Consolidated adjusted EBITDA from continuing operations reached $11.3 million or 5.6% of sales compared with $11.7 million or 5.9% in the fourth quarter of last year, mainly from a decrease in gross margin, reflecting the decline in the restaurant industry. Net earnings from continuing operations were $0.5 million or $0.01 per share, slightly up from $0.4 million in the fourth quarter of 2023. Cash flows from operating activities were $10.6 million in the fourth quarter, up from $8.9 million in the equivalent quarter of last year, resulting from lower utilization of working capital. There were no significant CapEx investment aside from our regular basic maintenance, which landed our total annual CapEx for fiscal 2024 at $3.1 million. Looking at 2025, we don't expect significant changes to maintenance and capital expenses. We ended the year with a lower net debt of $47.8 million, down from $61.5 million at the end of 2023 and a leverage ratio of 2.4x adjusted EBITDA, also down from 2.7x at the end of last fiscal year. Total available borrowing capacity on our credit facility before the recently announced financing structure concurrent with the acquisition of Alimplus stood at $29.5 million. I would now like to turn the call over to the operator for the Q&A period.

[Operator Instructions] First, we will hear from Kyle McPhee at Cormark Securities.

Great results. First one for me. The Distribution business seems to be benefiting from volume wins that are more than offsetting the macro headwinds by more than I thought. Were the year-over-year benefits of the volume wins in Q4 just wins from prior periods that are not yet lapped? Or have you also landed yet another round of new wins during Q4? And if that's the case, what kind of client types or channels is that weighted to?

Kyle, thanks for your question. It's a mix of a lot of things. But yes, we have new customers in parts that we won in the last quarter. We start servicing, and they're mainly in the independent restaurant business. And also, as we said -- as I just said, the inflation for -- was at 1.9%. And also in our results, we have a portion of the M&A we made in the spring, existing customer net growth and -- but that was mitigated by the retail business as it was not as solid as it was before.

Got it. Okay. And when you quote that 1.9% inflation, is that including the offset from the downward pricing hit on the repriced contract we learned about last quarter? Or is the 1.9% just the pure inflation number before any impact from...

Pure inflation number, nothing to do with the contract.

Okay. And that restaurant channel data that's out in the market seems to indicate there are some meaningful tailwinds into Q1 2025 from the GST HST break for consumers. Have you noticed any benefits for your business that align with this type of data that I've seen?

We have mixed signals on that and mixed reporting from the industry. But to us, it was minimal. And some restaurants are saying, no, there's nothing happened with that and some others said yes, it happened. But overall, we think at Colabor, it was minimal.

Next question will be from Michael Glen at Raymond James.

Just maybe to follow on the last question. To what degree are you seeing any incoming inquiries for you based on your positioning as a Quebec-only distribution company an alternative to some of the large competitors that are U.S.-based. Is that serving as any type of tailwind for your business right now?

I hope, Michael, thanks for the question. The -- we have -- in summary, the market was tough, okay? And our results are above average because we gained 10% market share last year, okay, with a similar gross margin. And the future of the restaurants business is shown as it will progress slightly in the year. But the fact of the -- what's going on with the tariffs, the potential tariffs and everything and the crisis that could come with politically wise, we're in a good position because most of our products are from Canada and Quebec, especially in the rest of Canada and only 3% of our purchases comes from the U.S. So we don't see a major shift in pricing for us, while it may be more difficult for competitors that have a large portion of their products coming straight from the U.S. So in general, I hope to report same date next year that we gain market share with a good gross margin.

Okay. And then just to circle back on the contract renewal. Just can you just remind us, it was active for about 5 weeks in the quarter, I believe. Is that accurate? And was there -- I guess you don't have to quantify it but the gross margin you reported would have been impacted by that contract renewal. I just looking for you to maybe confirm that.

Yes, it's not material. Effectively, it's 5 weeks in the year. But yes, it does affect the margin ratios. And the idea is with what Pierre and I shared with the acquisition that over time, we'll recover that to the levels we want. Yes.

Okay. And just on the cash flow statement. So the lease liability line in the financing section, are you able to -- like that number continues to track below where I thought it would be. Do you have some updated guidance on where that number will be in 2025? And this is, of course, before -- I'm not talking about the acquisition, but just for your stand-alone -- for your business as it is today, where that lease liability payments line will be in 2025?

Yes, Michael, it's Pierre. What did happen between 2023 prior years and 2024 is when we took on the new lease in Saint-Bruno, it's a 20-year lease. And as -- and the accounting now is like a mortgage. So the liability goes down slower and the payments go to interest. So you'll see in the financing charges a higher number without having a higher debt necessarily. And the portion in the cash flow that goes to the liability is lower. It's like a new mortgage. It's kind of not easy to figure out but -- so the payments are there. It's just that it's the allocation that is different. So some goes to financing charges and some goes to the balance sheet against the liability. So to the cash flow, it's the same -- it goes at the same place, like same lines.

I see. Okay. And just to clarify, though, I think in a couple of the prior quarters, you maybe had received a lower rate from the landlord. I don't know if I'm correct on that, but I seem to recall it.

You are correct.

Is that for the quarter...

No, no, no. It's like the quarter is fully loaded.

Next question will be from Frederic Tremblay at Desjardins.

Just on the contract renewal, I think there were some margin enhancement initiatives that you were contemplating related to that. Can you give us maybe an update on where you're at? I realize it's early stage but just a quick update on that would be helpful.

Yes, Frederic, thank you for the question. We have implemented mitigation measures in Q4. And again, to your comment in the question, it's early stage but we did what we expected or what we wanted to do as mitigation. And as a reminder, the new acquisition will reduce the impact as it will make it less -- a lower percentage of total sales.

Okay. Great. And just on the St. Bruno facility, how is the ramp-up there going, I guess, on some of the key KPIs that you're tracking in terms of customer service and sort of order flow and quality of service? Anything to highlight there?

Frederic, it's Louis. Yes, good improvement. We're not there yet, but we're close to our target. So since we move in early 2024, one of the KPIs is to measure the case per hour per employee, and it's improving. The delivery rates, service levels are almost where it's expected to be. And we reduced the overtime, and we're overall happy with the progression, okay? So it's a slow ramp-up. It takes a few months to achieve it but we're close to it. So we're happy.

Great. Last question for me. Just on the sales force. You obviously invested in the sales force in 2024 to break into some regions in Western Quebec. Just wondering if the investments in the sales force are largely done or is there more to do there? And yes, just your overall comments on where you're positioned on that aspect?

So Frederic, we operate in a competitive environment. So I don't share my game plan for the future. But the strategy we use, we declared that going after Western Quebec, hiring reps with no sales, we call them the hunters, paid off quite nicely. So that was part of the standard of actions that we had on the decision of do we go Western Quebec, Greater Montreal or we continue to develop only Eastern Quebec. So it did work. And with the -- acquisition of Alimplus will have a bunch of new more sales reps that are excellent reps over there to help us develop further our market -- competitive market.

And at this time, Mr. Frenette, we have no other questions. Please proceed.

Thank you, Sylvie. Thanks, Kyle, Frederic and Michael, for your questions. We're now entering in the last year of our 5-year strategic plan on a high note. Over the last 4 years, we have built a diversified and resilient business by paying special attention to our customers and product mix. We've significantly improved our cash flow generation capabilities and strengthened our balance sheet. We are now eager to start integrating the activities of Alimplus and Tout-Pret and start serving 4 Mayrand depot stores. This will provide us with scale and efficiencies that will benefit all our stakeholders and strengthen our position and open the door to new possibilities. As we look further ahead, we are getting closer to ambition of consolidating the Quebec distribution market, strengthening our local ecosystem and supply chain. This concludes our call for the fourth quarter of fiscal 2024. Thank you very much for joining us and stay safe and healthy. Thank you.

Thank you, sir. Ladies and gentlemen, this does indeed conclude your conference call for today. Once again, thank you for attending. And at this time, we ask that you please disconnect your lines. Enjoy the rest of your day.