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

Good morning, ladies and gentlemen, and welcome to Colabor First Quarter 2024 Results Conference Call. [Operator Instructions] Also note that this call is being recorded on Friday, May 3, 2024. Before turning the meeting over to management, I would like to remind listeners that this conference call contains forward-looking information within the meaning of the applicable Canadian securities laws and subject to a number of risks and uncertainties that could cause actual results to differ materially from those anticipated. I refer the audience to the forward-looking statements as detailed in the presentation supporting this conference call and available on the company's website in the Investor section under Events and Presentation at www.colabor.com. Furthermore, risks are discussed throughout the most recent MD&A under the heading Risks. And I would like to turn the conference over to Louis Frenette, President and CEO of Colabor Group. Please go ahead, sir.

Thank you, Sylvie. Good morning, everyone, and welcome to Colabor Group's First Quarter Fiscal 2024 Results Conference Call. This is Louis Frenette, President and Chief Executive Officer. Last evening, we released our earnings results for the 12-week period ended March 23, 2024. The press release and disclosure documents can be found on our website at sedarplus.ca and 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. I'm happy to report that our commercial strategy, which aims to diversify our customer base and develop new territories is providing resiliency in the current context of weaker demand in restaurant channel. During the first quarter, our distribution revenues remained essentially flat while revenues from our wholesale activities, which represent approximately 1/4 of our business were down 8.7%. By actively managing our product mix, we were also able to maintain our gross margin in line with the first quarter of last year. Although lower revenue affected our adjusted EBITDA level, we improved our cash flow from operations, which amount to $11.7 million, up from $800,000 in the equivalent quarter of last year. This robust cash flow have allowed us to reduce our debt, reflecting our strong financial discipline. Our leverage ratio was 2.3x at the end of the first quarter, down from 2.4x at the start of the year. This demonstrates the cash generation capabilities of our platform, especially since we have started scaling our recently completed growth CapEx. Now for an update on our growth initiatives, by the end of 2023 and during the first quarter, we began delivering certain chain customers from our new hybrid distribution facility in St-Bruno. More recently, we started training our warehouse and delivery employees to prepare them for the upcoming transition of our existing Western Quebec distribution customers to the new facility. Once the transition is completed, it will unlock capacity at our other distribution centers. The start-up of the new facility is progressing well, and we are maintaining our target customer service levels. On the M&A side, we disclosed on March 15, the acquisition of certain assets of a food service distributor in Eastern Quebec. The new clients acquired represent an annual revenue run rate of approximately $15 million. Since we closed the transaction about 1 week prior to the end of the quarter, this had virtually no contribution to our Q1 revenues. We are now almost 2 months since the close of the transaction and are happy with the pace of the integration. We have successfully integrated our new customers within our distribution activities in Lévis near Quebec City, and this is already providing operational synergies. Now let's review the evolution of our new key pillars, as shown on Slide 6 of the accompanying presentation and our top priorities for the rest of the year. First, generating profitable growth. Our priority remains on further improving our customer mix and product portfolio and raising the penetration rate of our private label to achieve an optimal mix with our national brand; second, going after a significantly larger addressable HRI market. We are working to scale our distribution business in Western Quebec to onboard new customer later in the second half of the year. We are also looking at accretive nonorganic growth initiatives. Third, improving our employers brand. Our priority is to create an attractive and enjoyable work environment for our employees and for them to try. Since we launched our new employee value proposition, improve our communication and training practices, we are in a better position to attract and retain our talent. Our workforce is engaged and motivated, and we have the resources necessary to scale our business. Lastly, continue to renew and refreshing our brand. We are focused on building our differentiated offering and service. We are prioritizing quality and locally sourced offering and are always working to improve our personalized approach through customer service. As we stand today, we are now more than 1 month into the second quarter and adding into the busy summer season. Our new distribution facility is running smoothly. Our customers are happy with the service level and our employees are motivated. Although there is still some weaknesses in the restaurant channel. We remain confident that the demand will continue picking up slowly as it's showing at the end of the quarter. We remain dedicated to winning market share in our new markets and have the necessary resources to successfully execute our business plan. Pierre, with this, I will 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 first quarter of fiscal 2024. Please refer to Slide 7 to 10 of the presentation for highlights of our financial performance in the quarter. As a quick update on our financial disclosure, we are no longer reporting 2 distinct segments for our distribution and wholesale activities. Our business processes are now unified such as our procurement and distribution activities. This change better reflects how we now operate as one Colabor. Please refer to Note 2 of our financial statements for more information. In the first quarter of 2024, sales, as we now report them under 1 segment, were down 2% at $131.2 million. As Louis said earlier, revenue from our distribution activities increased by 0.4%, while our wholesale activities were down by 8.7%. Our diversified customer base, market share gains and the effect of 2.7% price inflation helped mitigate weakness in the higher-end segment of our restaurant channel. Consolidated adjusted EBITDA from continuing operations reached $4.9 million or 3.7% of sales compared to $5.6 million or 4.2% in the first quarter of last year. Despite holding steady on our gross margin, our adjusted EBITDA was impacted by lower sales volume. Net loss was $1.8 million compared to a net loss of $0.2 million in the first quarter of 2023. Lower adjusted EBITDA and higher amortization and financial charges, mainly lease obligation related to our new facility in St-Bruno explain most of the variance. Cash flows from operating activities were $11.7 million in the first quarter compared to $0.8 million in the equivalent quarter of last year, resulting from lower utilization of working capital this quarter. There were no significant CapEx investment aside from our regular basic maintenance. In 2024, our CapEx will be primarily for maintenance and smaller optimization projects. We ended the quarter with lower net debt of $56.8 million, down from $61.5 million at the end of 2023. We also maintained a conservative financial leverage ratio at 2.3x versus 2.4x at the end of last year. At the end of the quarter, we had $25 million of available borrowing capacity on our credit facility. As previously disclosed, we renegotiated the facility during the quarter extending the maturity by 3 years until February 2028 and providing more flexibility. It has an authorized amount of $71.8 million comprised of $50 million revolving loan and $21.8 million term loans and comes with a $35 million accordion. I would now like to turn the call over to the operator for the Q&A period.

[Operator Instructions] Your first question will be from Kyle McPhee at Cormark Securities.

First on the macro backdrop. Restaurant channel conditions are weak. It seems to have gotten worse in Q1 versus the prior quarter. And we see it mainly for your wholesale business. Can you provide color on how the trend is playing out after Q1? Is the macro backdrop the same? Is it getting worse? Any color on that?

Kyle, it's Louis. Thanks for your question. Yes, the restaurant industry was worse in Q1 than Q4. We are aligned with Restaurants Canada view on the market and that segment, the restaurant segment should be back on track towards the end of the year, beginning of next year. So our diversification strategy and the new facility that we have in St-Bruno will continue to shield us somewhat some weakness in this sector with regard to the wholesale customers, it's impossible for us to know exactly what are the customers of the distributors. However, from what we understand and what the number seems to be indicating this quarter is that they are most likely less diversified than we are.

Understood. Okay. And as we wait for hopefully more normalized conditions back half of this year or next year, like is it -- do you think it's getting worse before it gets better? Or is it kind of the same level of headwind that you're seeing in Q2 here?

Well, Restaurants Canada is showing -- predicting here a slight improvement in Q3, Q4. And us, we do better than what they're predicting as we gain market share. And we have -- we're hunting, fishing for new customers eventually that should come in the second part of the year. So the idea is to secure the transition first from our Montreal customers who are delivered from Quebec City to the new facility in St-Bruno starting tomorrow actually.

Got it. Okay. Just before getting into that stuff, just sticking with the macro, are you noticing any changes with the competitive environment given the weak macro? Like is it triggering any more aggressive behavior among competitors that are chasing volume? And vice versa, have you had to change your strategy?

No, we aren't going to have to change our strategy. We keep staying on course. And no, there's no changes in the competitive landscape. And as I just said, even though the restaurant channel is affected, we are gaining market share across Quebec. So that's the good news. So our plan, our strategy works.

Got it. Okay. Shifting focus to the new distribution facility. Can you provide an update on the staffing and training progress ahead of ramping up distribution activities in the new Western Quebec facility? And when do you think you'll be comfortable with your service levels ability coming out of that new facility to start onboarding new distribution clients.

I'm very happy about my team that made that transition of that new site. Very happy about the service level from that new site already. And we're ramping up nicely, and we are in a good position to start serving the -- as I just said, the stores, the restaurants that are in Western Quebec that were served by our Quebec facility now from St-Bruno. So it's going well. We're training with that move that starts tomorrow, where we did train in the last month, weeks, our existing wholesale employees on best practices from our other sites that new distribution. So we are hired and trained handlers. As I said tomorrow, we're starting to shift from St-Bruno to Montreal and all the staff is there, prepare, train and the inventory is there. So we're on track in a great or in a good position to do it.

Sounds good. Okay. The staffing and training costs in support of upcoming growth all kind of hit the financial statements in Q1? Or what we see kind of more incremental wage onboarding in Q2?

Kyle, it's Pierre. No, there will be some spillover in Q2. So Q1 was impacted slightly, and we expect Q2 also to have some of that training and additional costs, but nothing material. And we are now ready to serve customers from our new facility.

Got it. Okay. And is the macro environment impacting the size of the demand pipeline or the timing of the demand pipeline, so you can start ramping up and utilizing your new capacity. Like you would have had a decent feel for pent-up demand when you decided to build the new facility, so has anything changed with that?

Well, since we decided to go and say, but we know the environment has changed, but there's nothing -- there's no material impact that we see. The opportunities are out there. And our restaurant channel represents a little bit over 1/3 of our revenue. So we don't -- we feel we have a -- we're in a good position for the second half of the year, as previously mentioned, to start building that capacity.

Got it. Okay. And have you already secured any new distribution clients that will see the revenue in upcoming quarters? Or are you still kind of in the process of formally securing the new business?

Well, we're doing -- kind of we're doing this by steps. So we moved our wholesale business. We wanted to stabilize it at great customer service. We started to distribute to our chain accounts from our previous Boucherville distribution facility. It's doing great. We have good customer service levels. Phase 2 is what starts tomorrow to start servicing the Montreal and Western Quebec customers from our St-Bruno, our new facility. And third, once it's going to be stabilized and with great customer service levels, we'll be able in a position to introduce new accounts. So the answer to do you have any new big accounts coming, no, we don't divulge that. And it's -- the message here is that we'll be able to start in the second half of this year with new customers. So we're fishing left, right and center to add new customers eventually to serve them later in the year.

Got it. Okay. And then last topic just quick on the capital spend. Pierre, you mentioned it's just kind of a normal maintenance CapEx year. Is the dollar amount for 2024 still consistent with what you said last quarter, $3 million to $4 million.

At this point, I think it could be a little bit even lower, I would say, maybe instead of $3 million, $4 million, it would be $2 million, $3 million. We can see how it goes, and we can reduce a little bit that amount.

Got it. Okay. And then on the working capital front, can you just kind of orient us on the timing and size of the working capital ramp in support of growth? Like will we see a meaningful inventory increase in Q2 and Q3 beyond normal trends? And if so, I mean, how meaningful is it going to be.

But it's not going to be beyond normal trend. Of course, it's going to be a little bit higher than the normal trend because we're -- we have to now fill a new warehouse with the distribution customer in St-Bruno. But we normally end the Q2 with higher inventory because of the high season, the summer high season, so I think that there's a normal trend there, and it's going to happen again this year, slightly higher because of the new distribution facility.

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

Thank you, Sylvie, and thanks, Kyle, for your questions. This quarter was our first quarter of softer results after 11 consecutive quarters of solid improvements to our revenue and profitability. As demonstrated by this quarter financial results, our transformation strategy and diversified customer base provide resiliency in the face of weaker demand from the restaurant channel, the busy summer season is upon us. We have everything in hand to ensure we meet expected demand. We have a motivated workforce and the necessary available capacity to set ourselves up for success. I'm proud of my team for having brought us this far, and this is only the beginning of a new era for Colabor. Regardless of the current macroeconomic environment, there are many levers that we have yet to pull to grow our distribution activities, continue improving our operations, generate efficiencies and deliver value to our shareholders. I hope that you will join us to our upcoming virtual AGM, which will be on May 16 at 10:30 a.m. This concludes our call for the first quarter of the fiscal year 2024. Thank you very much for joining us and stay safe and healthy. Thank you.

Thank you. Ladies and gentlemen, this does indeed conclude your conference call for today. Once again, thank you for attending. At this time, we ask that you please disconnect your lines. Have a good weekend.