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spk01: Good morning, ladies and gentlemen, and welcome to Colabor's second quarter 2022 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 need assistance, please press star zero for the operator. This call is being recorded on Friday, July 22, 2022. Before we turn 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 Luis Renet, President and CEO of Colabor Group. Please go ahead, sir.
spk03: Thank you, Joanna. Good morning, everyone, and welcome to Colabor Group's 2022 Second Quarter Result 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 11, 2022. The press release and disclosure documents can be found on our website and at cdar.com. Joining me today on this call is Pierre Blanchet, our Chief Financial Officer. who, following my initial remark, will provide an overview of our financial results. I am very happy with our second quarter results. They represent a fifth consecutive quarter of revenue growth and one of our better quarters in a long time. I believe this once again demonstrates the resiliency of our business model and the benefits of our growth and profitability plans. In the second quarter, consolidated revenues grew by 27.4% from the easing of restrictions in the restaurant channel, our ability to pass through food inflation, and from the contribution of our recent acquisition. Our consistent and dedicated efforts to enhance our customer and product mix supported gross margin improvement of 8.3% to 18.3% of sales. Adjusted EBITDA also grew to 5.8% of sales, representing a 16% improvement when removing the $1.2 million received in subsidies during the equivalent quarter of last year. Furthermore, we maintain a very conservative leverage ratio of 1.8 times at the end of Q2 and down from 1.9 at the end of the previous fiscal year. As discussed in this previous call, given our strong financial position and the ongoing recovery of the restaurant industry, we have reinstated our non-organic growth strategy earlier in the quarter. Both business acquired in April are performing well and contributed as expected to our top and bottom line this quarter. On the organic side, we remain dedicated to profitably growing our distribution business and developing new territories. We continue to work on repositioning and promoting our private label brand, increasing specialty distribution of fish and meat products, and improving our category management practices. In the context of rising inflation, there are many levers that we are pulling that are helping us manage its effect on our bottom line. First, our business model allows us to pass through food cost inflation. And second, we are paying special attention to proactively manage rising input costs, primarily on labor and fuel, to mitigate their effect on our bottom line. Given the industry-wide labor shortage, we are also working on various operational improvements to help us stay ahead of the curve. We are continuously looking at how we operate and finding ways to improve our efficiencies and continue to nurture our employer brand to help us attract and retain the best talent. We are entering the second half of 2022 in a good position. Our product mix continues to improve. Our distribution network is growing. We have further organic and non-organic growth opportunities, and we are building a more efficient business while investing for the future. I also believe that our diversified customer base within the restaurant and institutional channel remains a key attribute of our resiliency going forward. Yeah, with this, I'll turn the call over to you.
spk02: Thank you, Louis, and good morning, everyone. I am pleased to be here today to discuss our key financial results for the second quarter of 2022. Second quarter consolidated sales were up 27.4% to 138 million. Sales in the distribution segment increased by 27.7% to 93.6 million. Strong growth results mainly from the easing of restriction in the restaurant channel. Price increases reflecting food inflation passed through of 11% and customer list acquired in the Ottaway and Laurentian regions. Sales in the wholesale segment increased by 23.1% to 56.3 million. Again, this results primarily from a less restrictive operating environment in the restaurant channel, food inflation and customer gains. Consolidated adjusted EBD from continuing operation reached 8 million or 5.8% of sales compared to 6.7 million or 6.2% in the second quarter of last year. As Louis mentioned in his open remarks, adjusting for subsidies received last year Adjusted EBITDA in Q2 2022 grew 16% from 5% in Q2 2021. Growing sales volume, improving gross margin on the heels of a better product and customer mix helps mitigate growing input costs. Net earnings were in line with last year at $1.7 million or $0.02 per share. Cash flow from operating activities required $1.2 million in the second quarter compared with the use of cash of $2.9 million in the equivalent quarter of last year. Improving use of cash from operation results primarily from seasonal working capital requirements and higher adjusted EBITDA. Cash on end at the end of the quarter represented $2 million with a $43 million of available borrowing capacity on our credit facility. As of June 11, 2022, our net debt amounted to $46.1 million, down from $48.4 million at the end of fiscal 2021. Our financial leverage ratio stands at 1.8 versus 1.9 times at the end of fiscal 2021. I would now like to turn the call over to the operator for the Q&A period.
spk01: Thank you. Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press the star followed by the one on your touchtone phone. You will hear a three-tone prompt acknowledging your request. If you wish to decline from the polling process, please press star followed by two. And if you are using a speakerphone, please lift the handset before pressing any keys.
spk00: This question comes from Kyle McPhee at Cormac Securities. Please go ahead.
spk05: Hi, everyone. Good update, and thanks for taking my questions. Just to start, I just wanted to confirm the number you gave on pricing gains in Q2. Did you say 11%? Good morning, Kyle. Yes, I did. Okay. Thank you. And then... Another revenue-related question. Can you just give us a progress update on the efforts with your new sales hires and market share gains? I know you're not going to exactly quantify it for me, but is it tracking better or worse versus your internal plan? And are you still looking for kind of break-even on that investment in people by the end of the year?
spk03: Hi, Kyle. It's Louis. Thank you for your question. I'm absolutely happy with the progress of our investment in a new sales team for development of Western Quebec. We are on schedule, on budget. The initiative is on target and we'll achieve break-even very soon on this. Very happy. And we're also seeing tangible growth on our private label sales as they were an important project we had at the same time. but both are doing very well.
spk05: Okay, good to hear. And then were there any more sales hires in Q2 and into the current quarter beyond what you told us about last quarter or is that kind of investment and you had done for now?
spk03: No, we slowed down the hiring of sales reps due to an industrial challenge in terms of labour scarcity. We're constantly hiring people in our distribution centre and we're still missing some. The workforce, the labor force is definitely the challenge to the growth, but we'll press on the gas pedal pretty soon to re-accelerate the development of western Quebec.
spk05: Moving on to margins, it's great to see your gross margin percentage is up year-over-year and quarter-over-quarter. Can you just help me understand some of those moving parts? I suspect pricing allows your margins to stay neutral, but where is that margin gain coming from, and is there anything temporary, any temporary benefits I should know about?
spk02: Hi, Kyle. It's Pierre. Well, the inflation as a marginal impact, as you can expect, when you pass on the inflation, the higher price brings you a marginal higher margin, but it's also, but, but mainly it comes from the, the customer mix. So a different, uh, we have a different, we add a different playing field in Q2 versus the Q2 last year due to restriction in 2021, no restriction in Q in 2022. So, uh, the, the, the, the, the customer base was different and, uh, that improves our margin. And also the product mix. So as Louis mentioned earlier, the private labels comes and gives its little two cents in the gross margin as well.
spk05: So is that private label that Louis already said you're happy with the product? So is that a material part of the gross margin gain or is it still pretty small as you slowly
spk02: Pretty small, still pretty small. Customer mix is the number one, two and three answer, I would say. And the other ones are more marginal, but positive impact. Got it. Okay.
spk05: And sorry, just going back to that first moving part, the pricing. Were you indicating that that's taking your margin percentage up or maintaining it?
spk02: Can you repeat the question, please?
spk05: Just on the pricing gains, is that actually accretive to your gross margin percentage or is it?
spk02: Well, yeah. In a cost plus business situation, if your plus is on a higher number, then there's a marginal gain there as well. So example, $100 sale, at the 10% markup. And if you do the $110 sales at the same 10%, you have a higher margin. So it's a marginal impact, but it is a positive impact.
spk05: Okay. Thanks for clarifying that. Just a question on the inflationary environment. So beyond your Q2 period, are you still seeing food inflation with more pricing gains you're going to have to take as we get into the next quarter, or is inflation now tapering off, indicating prices may be already peaked?
spk03: It's Louis here. As for where the inflation is going, we're expecting the inflationary environment to remain high for the rest of the year. However, we do not expect to see the same pace of growth as we experienced in the last 6 to 12 months. We started to see at the end of the second quarter the lapping difficult COVID comparables that came in later at the end of the of the month of May. So what happened is that in May 2021, the restaurant reopened, okay, and part of our growth, part of our growth is the, as Pierre mentioned, you see the inflation, but also the volume or accelerating, that's what helped. And now we're facing more comparable period because restaurants were fully open last year. So to come back to the management of the inflation, regardless of where inflation goes, we sell most of our businesses on a cost-plus basis. So therefore, the input cost inflation is almost entirely passed through. And about the internal cost, we have a mechanism in place to mitigate some of the effect of the rising input cost, the primary fuel.
spk04: that we can in some portion pass through.
spk05: Moving on, just maybe a question on the macro and demand situation in Quebec. You guys are well diversified by channel. I think some clients are probably highly recession resilient, others likely not as resistant. For those pockets of your business that might be exposed to recession, are you seeing any demand destruction to date? Is anything already showing up as consumers pull back? What's your thoughts?
spk03: Well, not much. The business is growing steadily in all channels. As I said, it's all reopened. and uh we're seeing uh uh uh we're seeing uh good growth and and as you know we have a diver we're very diversified in the the different channels and uh uh in the again in the event that there is a slowdown in consumer spending in restaurants if it happens uh we have to keep in mind that our business uh model is resilient and diversified. So we did get some great experience with the shutdowns and navigating through that period in 2020 and 2021. So we're in a good position if it happens. We don't expect it to go where it was before during COVID, but not at all. But if it happens, we're in a solid position to manage it, in a good position to manage it.
spk05: Got it. Okay. Thanks for that, Collar. Just moving on to a capital deployment question. So, you know, in the current macro environment, are you still seeing M&A opportunities that you're willing to deploy capital on, or is that part of your growth plan on hold?
spk02: Kyle, it's not necessarily on hold. We're open for business. We have a good pipeline, but we are in no hurry. That's for sure. And we're looking for smart acquisition. So something that would be accretive and that we could integrate quickly and leverage the assets that we just acquired. So we're not closed for business. Our balance sheet is in a good position.
spk05: Okay, and then last question. So on the two recent acquisitions you've already done, how is progress to date with delivering growth beyond the revenue acquired from those businesses? You know, as you exploit the new geographies in Quebec, is there any traction at all on growing those acquired businesses?
spk03: It's going well, very well, both with following a very good integration with great people, new people joining collaborations. And we're maintaining our revenues run rate for now. We just acquired them a few months ago, and they are already contributed to this quarter profitability. These are strong businesses with lots of potential for Calabong in the future. So we're on track and very happy with the results so far.
spk04: Got it. Okay, that's it for me. I appreciate all the answers. Okay, thank you.
spk00: Thank you. I will now turn the conference back over to Louis Sennette for closing remarks.
spk03: Thank you, Joanna, and thanks, Kyle, for your questions. I remain grateful to our employees who continue to impress and who contribute to Calabar's successful turnaround. Because of our team's hard work, Calabar has been able to continue to grow and even improve its profitability. All in the context of a pandemic and important labor shortage, rising inflationary pressures and supply chain challenges. At the same time, we are investing in our business and setting the stage for our continued success and remain open to a creative acquisition to accelerate the growth of our distribution activities in the province. In the second half of this year, we will continue to prioritize the execution of our strategic plan to drive profitable growth and tightly managing costs to deliver future shareholder value. This concludes our call for the second quarter of 2022. Thanks for joining us.
spk04: Stay safe and healthy.
spk00: Ladies and gentlemen, this concludes the conference call for today. We thank you for participating and we ask that you please disconnect your lines.
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