Colabor Group Inc

TSX:GCL

Earnings Call Analysis

Earnings Call Transcript 2024-Q2

[Operator]

Good morning, ladies and gentlemen, and welcome to the Colabor Group, Inc. Second Quarter 2024 Results.

[Operator Instructions]

This call is being recorded on Thursday, July 25, 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 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 statement as detailed in the presentation supporting this conference call, and available on the company's website in the Investors section under Events and Presentation at www.colabor.com.

Furthermore, risks are discussed throughout the most recent MD&A under the heading Risks. I would now like to turn the conference over to Louis Frenette, President and CEO of Colabor Group. Please go ahead, sir.

[Louis Frenette, executive]

Thank you, Joelle. Good morning, everyone, and welcome to Colabor Group Second Quarter of Fiscal 2024 Results Conference Call. This is Louis Frenette President and Chief Executive Officer. Last evening, we released our earnings results for the 12 and 24-week period ended June 15, 2024. The press release and disclosure documents can be found on our website and on sedarplus.ca. The accompanying presentation, including our statement of forward-looking information and non-IFRS performance measures can also be accessed online in the Investors section at 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. The efforts indicated over the last 4 years at diversifying our customer base and most recently to grow in two new markets continue to provide resiliency in current macroeconomic environment. Considering the ongoing challenges in the restaurant and retail channels, we achieved excellent results and even gain market share. Higher volume from new and existing distribution customer, the small acquisition we concluded towards the end of last quarter and inflation pass-through, help mitigate anticipated weakness in our wholesale channel and headwinds affecting the restaurant industry. A favorable customer and product mix also supported higher gross margin at 18.6% of sales versus 18% in the equivalent quarter last year. This has allowed us to lessen the effect of lower revenues on our adjusted EBITDA, which grew by $400,000 to $9.7 million.

We have further reduced our debt, reflecting our dedication to financial discipline. Our leverage ratio as disclosed, is now down from 2.4x at the start of this year to 2.1x adjusted EBITDA. 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, has now been more than 2 quarters since we moved into our new hybrid distribution facility in St-Bruno-de-Montarville. The transition of our existing customers to the new facility was completed in May. We are now getting more efficient, and we are slowly on-boarding new customers.

As seen on Slide 6 of the presentation, our top priorities remain aligned with our 2025 plan, efficiently managing our customer mix and product portfolio has allowed us to raise our gross margin in the past few years. As we onboard new clients with varying profitability profile, our job will be to pull on these levers to raise the lifetime value of a diversified customer base within the HRI and retail market. We also remain focused on growing our distribution platform, both organically and with accretive acquisitions. We could not have achieved our successful transformation and recent move to our new strategic facility, without the dedication and passion of our employees. Our workforce is engaged and motivated, and we want to continue improving our employer brand and HR practices.

Lastly, prioritizing quality and locally sourced offering has been hall mark of our differentiated offering and a key pillar of our success. We will further nurture our brand and private label, and we remain dedicated to raising customer satisfaction as we grow our business. We are now in the middle of a busy summer season. Our teams are dedicated to improving the efficiency of our new distribution activities and working to grow our presence in all our territories. Pierre, with this, I will turn the call over to you.

[Pierre Blanchette, executive]

Thank you, Louis, and good morning, everyone. I'm pleased to be here today to discuss our key financial results for the second quarter of fiscal 2024. Please refer to Slide 7 to 10 of the presentation for highlights of our financial performance in the quarter.

In the second quarter of 2024, sales were down 1.8% at $161.3 million. Revenues from our Distribution activities increased by 0.7%, while our Wholesale activities were down by 8.4%. Volume growth from new and existing distribution customers, the contribution of 1.5% inflation pass-through and M&A allowed us to mitigate the effect of lower customer spending, in the restaurant and retail channels. Consolidated adjusted EBITDA from continuing operations reached $9.7 million or 6% of sales, compared to $9.3 million or 5.7% in the second quarter of last year. Despite a small revenue decline, our strong gross margins allowed us to improve our adjusted EBITDA, as Louis mentioned earlier.

Net earnings were $1.7 million down from $3.2 million in the second quarter of 2023, mainly from higher financial charges related to the lease obligation associated with our new facility in St-Bruno. Cash flows from operating activities were $5 million in the second quarter, down from $11.3 million in the equivalent quarter of last year, resulting from higher utilization of working capital. There were no significant CapEx investment aside from our regular basic maintenance. In 2024, we continue to guide our total CapEx in the range of $1.5 million to $2 million, primarily for maintenance and small optimization projects. We ended the quarter with a lower net debt of $56 million, down from $61.5 million at the end of 2023. At the end of the quarter, we had $24.5 million of available borrowing capacity on our credit facility.

I would now like to turn the call over to the operator for the Q&A period.

[Operator]

[Operator Instructions] Your first question comes from Kyle McPhee with Cormark.

[Kyle McPhee, analyst]

First, on the topic of new territory development, Colabor's had sales reps out in the field, developing new sales regions in Quebec similar to the sales efforts that led to the big organic growth rate in 2022 and '23 before you ran out of capacity. I'm curious if the current round of sales reps chasing new clients is delivering similar momentum and client conversions relative to what you experienced in recent years?

Or maybe things like revitalized company brand and private label and your new local offerings? Is that kind of paying off with better momentum this time around?

[Louis Frenette, executive]

So yes, Kyle, it's Louis. Thank you for the question. Yes, for both the part of your question. So we're continuing to grow organically. We're gaining new customers month after month -- month after month, and we're selling more and more of our private label and some -- our spin is to sell more locally made products versus our competitors, American competitors. So we're continuing. [ So income ] is good, and our plan is working.

[Kyle McPhee, analyst]

Got it. Okay. And will you be -- it sounds like you recently added another round of sales reps. Is that kind of -- is that it for now? Or you will be -- will you be adding another round throughout the rest of this year as well?

[Louis Frenette, executive]

Well, we don't want to divulge our [ strategy ] plan and our action plan to the whole population, but I'm telling you it's going well and we're gaining new territories. So by rebound, yes, we need more people.

[Kyle McPhee, analyst]

Okay. Got it. On inventory, your sales are kind of flat to down right now due to the macro headwinds as expected. Food inflation is muted, but your inventory levels have expanded quarter-over-quarter. And I think that's despite your inventory turnover, improving with the new facility. So should I read this dynamic as you've stocked up on inventory in support of meaningful new client volume that you've landed? Or, I know there's a seasonal dynamic for inventory heading into the summer season, but it seems like you've stocked up beyond just that seasonal dynamic. Any color on that?

[Pierre Blanchette, executive]

Yes, Kyle, it's Pierre. Thanks for the question again. It's a combination of seasonality, but mainly, it's the fact that we have moved the distribution customers from our Lévis distribution center to the St-Bruno distribution center. And the -- that St-Bruno distribution center needed the inventory related to the distribution customers. So mainly a lot of fresh products that were not sold to the wholesaler to the distributor via our wholesale activities. Therefore, we expected that increase in inventory, it's to serve retail and restaurants from the St-Bruno. So our distribution customers from St-Bruno -- that's the reason. And combined with the seasonality.

[Kyle McPhee, analyst]

Got it. Okay. On CapEx, any changes to CapEx plan versus what you kind of messaged to us on the last conference call? Your filings do mention some efforts to modernize existing facilities, but I suspect that was -- that's kind of minor and included in your prior guidance. Can you clarify that?

[Pierre Blanchette, executive]

Absolutely. So I just said a few minutes ago, between 1.5% to 2% for the year. And as you know, the St-Bruno facility is new, so needs like really no CapEx. So yes, slight change I just announced a few minutes ago, but nothing major.

[Kyle McPhee, analyst]

And last one for me. I think I know the answer, but can you confirm whether or not all your Western Quebec distribution clients were being serviced from your new St-Bruno facility during the full Q2 period? Or were some pockets still being inefficiently serviced out of here in Eastern Quebec facilities during the quarter?

[Louis Frenette, executive]

They're all serviced from St-Bruno, all transferred. So it's working. Remember, as mentioned before, so it's freeing up some capacity in Lévis, that we fill with the new acquisition that we made a couple of months ago. And -- but all the customers that were served in Western Quebec from Quebec Lévis plant is now served by the St-Bruno distribution center.

[Operator]

[Operator Instructions] Your next question comes from Frederic Tremblay with Desjardins Bank.

[Frederic Tremblay, analyst]

Now that the St-Bruno distribution center is serving distribution customers. Have you noticed an intensification of discussions with potential customers in Western Quebec? In other words, I mean, how has the reception been so far in the market, now that Colabor is active in becoming more and more active in Western Quebec?

[Louis Frenette, executive]

So thank you, Frederic, and welcome to the analyst meeting. The thing is happening that we're gaining customers in Western Quebec, new customers, independent restaurants. We've got a chain, and we've demonstrated our ability to serve well our distribution customers. So the word is in the street. And the idea of this, doing distribution from St-Bruno was that we are now able to have access to customers that are across the province, small chains, larger chains and new customers available in the western part of Quebec. So this was the idea.

And we did the transition from Lévis in distribution to St-Bruno step-by-step. And we're just ending the second step of having excellent distribution service level, and we will be able to take more customers towards the end of the year, okay, over the second half, and that now that we're able to serve is proven, it works. Big customers wanted to see that, and it's working. So it's encouraging for -- to be able to gain Quebec customers eventually that are in the province of Quebec entirely. So that's the idea.

[Frederic Tremblay, analyst]

Okay. Great. And then have you seen a notable response from competitors to your arrival in these new territories? Or also, we can maybe expand that question in terms of the competitive environment, just given what's happening in the restaurant channel? Are you in general seeing some competitors being more aggressive on pricing or discounts and things like that?

[Louis Frenette, executive]

No, it's fairly stable about pricing. And of course, they know that we're gaining business, and we're gaining market share. So competition -- they have their eyes open and -- ears and eyes open and they know what's going on. And so far, it's been good. Our dinning average to gain new customers, independent restaurants has been as expected, so -- and we're continuing. So the pie is big and we have many opportunities over time.

[Frederic Tremblay, analyst]

Last question for me. You mentioned potential accretive acquisitions in your prepared remarks. Just wondering if you had any comments on your pipeline? And if you think that -- I'm just curious to see if the current environment in the restaurant channel, if that's generating maybe more opportunities for acquisitions in the distribution business?

[Pierre Blanchette, executive]

Fredric, it's Pierre. I think the -- right now, the answer would be no. Maybe if it drags on, if the headwinds are for a longer period, maybe. But currently, we don't feel that, that is bringing additional opportunity, but we have a significant amount of opportunity at different ways that we're looking at, again, making sure that we are prudently looking at M&A strategy and making sure that it's going to be accretive when we pull the trigger.

[Operator]

There are no further questions at this time. I will now turn the call over to Louis Frenette, CEO, for closing remarks.

[Louis Frenette, executive]

Thanks Joelle. And thanks, Kyle, and Fredric, for your questions. I'm proud of what our team has achieved in the last few years. Our diversification strategy has provided resiliency in the context of ongoing headwinds, affecting the restaurant industry. Improvements made to our customer and product mix, as well as to our operations have supported higher profitability. Our balance sheet and operational cash flow positions us well in the current context and allows us to continue to execute our strategic plan in a proactive and opportunistic manner. Looking ahead when the restaurant and retail channel gradually returned to growth. The investment we've made in our distribution platform will contribute to our continued success.

We have worked hard to be in this position, and I'm proud of my team. This concludes our call for the second quarter of fiscal year 2024. Thank you all for joining us and stay safe and healthy.

[Operator]

Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.