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spk00: Good morning, ladies and gentlemen, and welcome to Colobor's third quarter 2021 results conference call. At this time, all lines are in a listen-only mode. Following the presentation, we will conduct a question and answer session open to analysts only. If at any time during this call you require immediate assistance, please press star zero for the operator. This call is being recorded on Friday, October 15, 2021. 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 statement 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.calabor.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 Calabor Group. Please go ahead, sir.
spk05: Thank you, Sylvie. Good morning, everyone, and welcome to Calabas Group's 2021 third quarter results conference call. This is Louis Frenette, President and Chief Executive Officer. Last evening, we released our earnings results for the 12th and 36th week period ended September 4th, 2021. The press release and disclosure documents can be found on our website and on cdar.com. Joining me today on this call is Pierre Banchet, our Chief Financial Officer, who, following my initial remarks, will provide an overview of our financial results. During the third quarter, consolidated revenues were up 8.8% year over year from reopening of on-premise dining activities. Our channel diversification and the initial implementation of our growth plan. This represents our second consecutive quarter of growth after the execution of our transformation plan and lapping of difficult COVID comparables. Consolidated adjusted EBITDA margins stood at 5.9%, down from the equivalent quarter last year. Lower subsidies, expense related to our spring buying show that happened in the fall Third quarter versus the second quarter this year additional Labor expense explain most by explain most of this variance. As many sector are experiencing the pandemic has worsened the effect of an already constrained Labor force force in the whole supply chain of our industry, and this has been particularly the case during the summer season. We believe that the combination of the gradual easing of lockdown measures and the ongoing labor scarcity has made it difficult to deliver more growth in the third quarter. Now, looking at our balance sheet, we have maintained a leverage ratio of 2.1 times and therefore remain in a comfortable situation. The inflationary pressure and labor shortage we are experiencing are slowing down our growth plan and putting pressure on our margins. However, the successful transformation of our operations over the past two years, the renewal of the management team and our focused efforts on our value-added activities will allow us to reduce the impact. With the refinancing of our balance sheet at the end of the first quarter, the resumption of the restaurant business and growth opportunity both organically and through acquisition, we are well positioned to continue creating value for all of our stakeholders. Looking ahead, our strategic priorities remain the same. Grow our distribution activities in the province of Quebec, further improve our operations, and raise our employee engagement. Before turning the call over to Pierre for a review of our financial results, I will quickly review our initial progress against these three pillars. Pillar one and two, grow our distribution activities in Quebec and further improve our operations. As you know, during the pandemic, we dedicated our efforts to diversify our channel, gain new institutional and retail clients. In recent quarters, with the imminent recovery of the restaurant industry, we have now turned our attention to profitably grow our distribution activities in Quebec. As stated before, since the first quarter of 2021, we have presently invested in various growth initiatives that should start paying off in 2022. These initiatives include hiring sales professionals to focus on our new strategic markets, implementing cross-selling initiatives to create synergies between our specialty offering and distribution network, aligning our offering with changes in consumer preference. And on September 9th, we launched our redesigned private label line. I am encouraged by the preliminary progress we are seeing from each of these action items that aims to set the table for a stronger 2022 by improving our value-added offering and competitive positioning. As for our third pillar, Raising employee engagement, the pandemic has brought this issue front and center. Since joining Calabar in November of 2019, I've paid significant attention to our employer brand and continually strive to improve our employee experience. This effect, we have recently concluded an agreement in principle to renew and improve the collective agreement with our unionized employees at our largest distribution center. This five-year agreement was approved by 99% of the employees. It better aligns our compensation practices with the industry, improves our competitiveness as an employer, and will help us attract and retain the best employees. As we are emerging from the worst of the health crisis and preparing for the recovery of the restaurants and hospitality industry, A motivated and engaged workforce is key for our next phase of growth. Also, yesterday we announced the appointment of Mr. Jean Gattuso as the new board member. Mr. Gattuso was still recently president and COO at Lassonde, where he started to work in 1987. His extensive food industry knowledge management experience and business successes will greatly benefit Calabar.
spk04: With this, Pierre, I turn the call over to you for a review of our financial results.
spk02: Thank you, Louis, and good morning, everyone. I'm pleased to be here today to discuss our key financial results for the third quarter of 2021. Third quarter consolidated sales from continuing operations were up 8.8% to 131.6 million. Sales in the distribution segment increased by 11.7% to 90.8 million, mainly from the gradual reopening of restaurants since the end of May 2021. Sales in the wholesale segment increased by 2.3% to 52 million, Again, primarily from the easing of lockdown measures affecting the restaurant industry, from the growth of certain customer accounts and small customer gains, mitigated by the partial loss of volume from a single customer. Intercompany eliminations were in line with last year. Consolidated adjusted EBITDA from continuing operation reached 7.8 million or 5.9% of sales. compared to 10.1 million or 8.4% in the third quarter of last year. A reduction of 0.9 million in subsidies received, a reduction of revenue of 0.5 million related to our spring buying show, which last year occurred in the second quarter, and additional labor costs in the current context of labor shortage, combined with a retroactive adjustment for the renewal of our collective agreement, as well as investment for the repositioning of our private brand and to expand our territory. Net earnings from continuing operations were $2.3 million or $0.02 per share, down by 33.5% from $3.4 million or $0.03 per share during last year's third quarter. Net earnings stood at $2 million or $0.02 per share, up from $1.8 million or $0.02 per share last year, resulting primarily from a lower loss associated with abandoned activities, which last year generated a loss of $1.7 million compared to a smaller loss of $0.3 million in the third quarter of this year. Cash flow from operating activities generated $7.4 million in the third quarter of 2021, compared to $16.4 million in the equivalent quarter of last year. Higher utilization of working capital from the timing of inventory purchase and payment of suppliers and higher collection of receivables in 2020. As at September 4, 2021, our net debt amounted to $53.2 million, compared to $52.1 million at the end of fiscal 2020, and down from $57.2 million at the end of the second quarter of 2021. Our financial leverage ratio stands at 2.1 times versus 1.8 times at the end of fiscal 2020, and two times at the end of the second quarter of 2021, resulting from a higher use of the lending facility to fund working capital requirements. The pandemic and associated labour shortage and supply chain disruptions will continue to have somewhat of an impact on our results. We remain dedicated to maintaining a prudent approach to managing our infrastructure and protecting our financial situation. I would now like to turn the call over to the operator for the Q&A period.
spk00: Thank you, Monsieur Blanchet. Ladies and gentlemen, we will now take questions from analysts. If you would like to ask a question, please press star followed by one on your touch-tone phone. You will then hear a three-tone prompt acknowledging your request. And if you would like to withdraw your question, simply press star followed by two. And if you're using a speakerphone, we do ask that you please lift the hands up before pressing any keys. Please go ahead and press star 1 now if you have a question. And your first question will be from Kyle McPhee at Cormark Securities.
spk03: Hi, everyone. Thanks for the time this morning. Starting on the revenue line, I'm hoping for some color on the individual moving pieces feeding that revenue growth you delivered, which was above my expectations, which is good to see so. Let's start with what you called in the press release the first milestones of the strategic plan. Can you offer some color on how much growth came from those strategic initiatives, which I assume is the distribution sales in new regions and the cross-selling?
spk05: Hi, Kyle. Thanks for your question. Well, there's three items that covers the growth of this quarter and the The first one is the wholesale and distribution business went up, and in proportion, that's the biggest one because of the restaurants reopening in Q3 of this year. So we had more days open, so that helped quite a bit. Although in terms of capacity, we're not back to pre-COVID levels yet because of sanitary measures and labor restrictions, scarcity, and so we're still running at reduced capacity. However, and good news, and just announced yesterday, the restaurants in Quebec and bars will all be reopened in November. So this is great news. And the wholesale business, well, we've got, as I mentioned on the previous call, we've got more smaller distributors that join Colabar in Q2, and it mitigates some volumes that were lost with a larger distributor. The second impact on this growth in sales is coming from the price increases. So when there's inflation, our suppliers sell their products to a higher price. Well, we sell it, we pass it through, and so that's helping. And the third part is, to a lesser extent, is the contribution of our strategic plan. And if you're okay, I can put some color around that. That was the first part of your question. And since we initiated the implementation of our strategic plan, our revenues contribution remained small, but we are very satisfied with the evolution. These initiatives are helping us improve our customer and product mix. So we put a new sales team. We added sales rep in Q1 in the western part of Quebec and it's doing well. Also, we relaunched our private label brand. So it's a bit of a facelift of the brand and the sales are improving to our internal target. So we're happy with this.
spk03: Got it. Okay. Just to unpack some of that stuff a bit more. So the pricing gains, are you able to quantify how much your revenue growth was pricing passes?
spk04: Well, the, uh,
spk05: The volume was the biggest influence because of the reopening. We had more day of selling to restaurants. So the answer is mainly coming from that. And the pricing is a smaller portion in this quote.
spk03: Got it. Okay. Okay, so on the COVID recovery, the restaurant reopening driver, the biggest driver of your growth, is that continuing into Q4 or has it kind of flatlined? I'm wondering how much drag you still have versus pre-COVID levels. I think it was kind of 10%, 15% drag last quarter. I'm wondering what it is this quarter and what you're seeing into Q4.
spk05: Well, we're seeing Q4 is going to be better than – in last year because with what I just said, the full reopening of the restaurant, so it's going to be helpful. And last year, as you remember, it was only half of the restaurants open, especially they were doing takeout only, some restaurants are half capacity. So now it's going to be to full capacity. So that's encouraging. But it will not be to the pre-COVID level yet because we still have some restaurants that are closed that did not reopen. And if you take downtown Montreal, we expect that the workers, and same thing in Quebec City and the big centers, that the workers won't get back in the offices until January of next year. So it won't be to pre-COVID level yet.
spk03: Got it. Okay. And can you offer any color on kind of the difference? Those restaurants remain closed. I mean, how does that picture look in Montreal versus, you know, the Eastern parts of the province where you're more exposed? Is it the same kind of situation?
spk05: It's the Montreal is more affected than you have up to a ballpark number, but we have some internal data from our, specialty distribution that about 25% of the restaurants did not reopen. And the rest of the province where we're stronger, it's about between 10 and 15% of the restaurants not reopen. But this is ballpark internal data. We don't have data that covers 100% of the market.
spk03: Got it. Okay, that's helpful. Moving on to margin performance, your gross margin percentage remains strong. It is in line with what you delivered in recent quarters, and so it seems like you're handling food cost inflation very well, but I just want to dig in a bit on what's going on on your gross margin line. So can you confirm if you were able to pass on all food inflation during the quarter, or is there a bit of a timing lag with that process, meaning your more normalized gross margins are actually even higher than what we saw this quarter?
spk02: Hi, Kyle. It's Pierre. Good morning. Thank you for the question. I'd say the general way is we are able to pass it through, but there is a small timing lag.
spk04: Can you hear me? Yeah. Okay. Did you hear my answer?
spk02: Yeah, I got it all. Okay, okay, great. Okay, sorry, sorry, because I thought I was on mute when I was talking. So, yes, that's the answer to your question there.
spk03: Okay, so is it fair to say that, you know, all else equal with your business mix, that your margin would be even higher, you know, a little bit higher next quarter when all the pricing is passed through? So, you know, your Q3 gross margins are a little bit understated because of the timing like?
spk02: no no i wouldn't say i wouldn't say it's understated i would say uh um the the the pass-through is kind of uh actually it's a small lag but i don't think it will the the q4 would improve on that b on that okay so okay so it's not an overly material gross margin trick that showed up from the timing like no no got it okay um on
spk03: On labor cost inflation, you guys called that out in your press release as a headwind, but it seems like a very minor impact in the numbers from what I can see. So I'm hoping you can confirm that that was the case. It's very minor. And maybe comment on whether or not the issue is getting worse or better into Q4.
spk04: Yes, Kyle, it's Louis.
spk05: Labor inflation is not a short-term pass-through like the food cost inflation. So when our suppliers sell with a higher price, we pass it through. With what happened in the last quarter, what we're living, the inflation, the labor cost inflation, The labor shortage, we added reps, sales reps, and marketers, and the fuel cost is increasing quite a bit. So it's not a direct pass-through like we do with the pricing from our suppliers. So the... The idea is to implement that, to pass it in other forms such as pricing. So it's not happening. There's a lag there. So it's not happening instantly. So we can do it through that or through internal productivity. So there's a lot to do. And the important is to manage our price structure accordingly and to see... uh, to pass the inflation back to our customers. Uh, but there's a limit probably that, uh, can be attained. There's so much you can pay for, uh, like, like just internally for a club sandwich. Uh, and, uh, the point is that the catch up is not as easy as easy to do. Also in the fourth quarter and the fourth quarter, we had the, we, we have a, Great news that we signed a five-year agreement with our workers at the largest distribution center, but there was a full week of strike. So that affected the... We have to catch up with the salary increases and everything, and we are working on that as we speak. So we estimate that most of the additional HR costs uh are resulting from the current context of the labor shortage such as overtime and the bit of that that collective agreement there's a retroactive adjustment associated with the collective agreement that that was that we see in the q3 so uh and we'll continue to do the investment in repositioning our private label and beefing up our sales force in western quebec
spk03: Got it. Okay. Can you quantify that retroactive adjustment in the Q3 numbers? Can you give me an idea of how big it was?
spk05: No. No.
spk03: Okay. I tried. Okay. Moving on to private label, you pointed out you relaunched your private label offering during the quarter, so I'm hoping you can give some color on What does a relaunch entail? What exactly did you do, and what are the ultimate goals here for Private Label and how it should impact your margins over time?
spk05: Yeah, so the background behind our Private Label is that this brand, called the Menu Brand, needed a bit of attention and affection, so nothing much was done over the last many years, and we made the decision that we would prioritize... this to have a larger portion of ourselves coming from our private brand. It's very important. So what it entails, we added brand managers, a brand director, brand manager, and as soon as they started the work at at improving the image of the brand. So we're changing the packaging and new design. So that's what I call the facelift, more modern. That was tested with the chefs in the restaurants, and they prefer that. Easier to understand what are the products and what Overall, it's all good in terms of the cosmetic and the content. We're launching a bit of new products. More importantly is that our sales force is excited about it. They have something to say now about our private label that we're improving. These are great products. So far, we see the results are in line even during the COVID period. are in line with what we projected. So we're very, very happy with the development of the relaunch of the menu brand. There was amounts of dollars, of course, of marketing to support that over the people working on it.
spk03: Got it. Were there kind of any one-time costs associated with this relaunch in Q3? And if so, can you quantify it?
spk05: Well, I won't quantify it, but yes, when you're doing repackaging and a bit of video support material and the, you know, it's not a B2C business we're in. So we're not talking millions of dollars that we have to put on air on TV. So it's B2C marketing. it's not as expensive, but for us, it was the investment made were 100% more than the years before.
spk03: Got it. Okay. Last question for me on acquisitions. Your press release called out delays with your growth programs because of the food inflation and labor supply. So I'm wondering if you're referring to your you know, upcoming acquisitive growth, or are you referring to delays with your organic growth or both?
spk02: Hi, Kyle. It's Pierre. Again, thanks for the question. It's more around the organic plan. The reason is that, you know, as everybody knows, there's labour shortage everywhere. So, really, we're in a situation where it's not a demand issue, it's a supply issue. So, So we have demand. There's demand out there. We just have a hard time getting enough labor to support all of that demand. It's an industry-wide situation. I mean, it goes from manufacturers to restaurants, owners who are sometimes not even able to open their doors as much as they have demand because they can't supply the demand. the people to support that demand. So our situation is more like that. From an M&A point of view, it's, you know what, we are active, and if we find something attractive at the right price, we're open for business. But it's not from that front. It's more from the organic front.
spk03: Got it. Okay, that's it for me. I appreciate all the color and overall it looks like good numbers.
spk01: Thanks a lot guys. Thank you, Kyle. And at this time, gentlemen, we have no other questions. Please proceed.
spk04: Well, thank you Sylvie and Kyle for your questions.
spk05: During the pandemic, we demonstrated the resiliency of our business model and our ability to adapt and even strengthen our business model while reducing debt. Our second and third quarter results demonstrated that we're back on a growth trajectory. The summer season was a challenge as we faced the end of the lockdown measures and a labor shortage, as we mentioned. Looking ahead, with an improved offering, stronger operations and potential organic and non-organic growth opportunities we are well positioned to benefit from the recovery of the restaurant and hospitality industry and enter our new phase of profitable growth. Once again, I would like to reiterate my gratitude to our employees who on a daily basis continue to impress and rise up to the challenge brought on by the pandemic and labour shortage, but also who are helping us improve our overall customer experience and operations. This concludes our call for the third quarter of 2021. Thank you for joining us and stay safe and healthy. Thank you.
spk00: Thank you, Monsieur Frenette. Ladies and gentlemen, this does indeed conclude your conference call for today. Once again, thank you for attending. And at this time, we do ask that you please disconnect your lines.
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