Colabor Group Inc.

Good morning, ladies and gentlemen, and welcome to Colorbor's first quarter 2025 results conference call. At this time, note that all participant lines are in a listen-only mode. Following the presentation, we will conduct a question and answer session. And if at any time during this call you require immediate assistance, please press star zero for the operator. Also note that this call is being recorded on Friday, May 2, 2025. At this time, I would like to turn the conference over to Louis Frenette, President and Chief Executive Officer. Please go ahead, sir.

Thank you, Sylvie. Good morning, everyone, and welcome to Carabao Group's fiscal 2025 first quarter results conference call. This is Louis Frenette, President and Chief Executive Officer of Carabao. Last evening, we released our earnings results for the 12-week period ending March 22, 2025. The press release and disclosure documents can be found on our website at cdarplus.ca. The accompanying presentation, including our statement on forward-looking information and non-IFRS performance measures, can also be accessed online in the Investors section on colabar.com. Joining me today is Pierre Blanchet, our Chief Financial Officer, who, following my initial remarks, will provide an overview of our financial results. Our first quarter results demonstrate that we continue to execute against our plan and we are winning market shares. Our diversification strategy within the HRI market and investment made to expand our presence in western Quebec allowed us to offset some of the effect of the ongoing challenging backdrop in the restaurant industry. In the first quarter, total revenues grew by 0.4%. And our distribution sales grew by 3%, resulting from higher volume from new and existing clients, market share gains, as I said, and M&A. This positive trend underlying our distribution activities was mitigated by the effect of the major contract renewal. As for our wholesale revenues, we experienced a slowdown of the pace of decline, with wholesale revenues down by 3.8%. a much lower pace of decline than what we have been experiencing since the start of 2024. On the profitability front, the combination of softness in restaurants industry and the previously announced repricing of a major contract had a significant impact on our adjusted EBITDA margin this quarter. In order to manage the effect of the repricing of this major contract, we have implemented various mitigation measures, including reducing our operating expenses and diligently working to add more products that are outside of our scope of contract. During the first quarter, we also prudently managed our capital allocation and further reimbursed debt. With our demonstrated ability to grow our distribution sales in our new and coveted market, we remain on a solid ground. On February 19, 2025, we announced a highly strategic acquisition, which once concluded, aimed to further consolidate our position as the largest Quebec food distributor and boost our presence in the western part of the province. Our management team is working diligently on the conclusion of the transaction. Looking ahead, our primary focus lies on growing our presence in the Western market, market all while continuing to improve our product and customer mix. We will continue to work on all fronts to improve productivity, raise efficiencies, and tightly control our operating expenses. This will allow us to mitigate the effect of the major contract renewal. Before I turn the call over to Pierre, I would like to discuss the ongoing tariff situation. As we currently stand, food products exported from U.S. into Canada are generally subject to the United States-Mexico-Canada agreement, the USMCA, and remain mostly duty-free and quota-free. Over 90% of all products that Caraval buys from suppliers are from Quebec or the rest of Canada. In addition, the majority of our private label is sourced from Quebec suppliers, manufacturers, and farmers. Because of our strong local supply chain and efforts to promote local brands, we are starting to experience demand tailwind that has started to translate into market share gains with independent restaurants. These trends along with customers looking for value, is also benefiting our private label brand, sales of which continue to grow in Q1. Pierre, on 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 2025. Please refer to the presentation for highlights of our financial performance in the quarter. In the first quarter of 2025, sales were up 0.4% to $131.7 million. Revenues from our distribution activities increased by 3%. Distribution volume growth came from new and existing clients and the contribution of the acquisition of the assets from Baudry-Cadrin concluded in the first quarter of last year. This allowed us to mitigate the effect of the major contract renewal, which took effect in December of 2024. Please note that the effect of inflation was nil in the quarter. Our wholesale activities were down by 3.8%, and as Louis indicated earlier, declining at a lower pace than we have experienced since the start of 2024. Consolidated adjusted EBITDA from continuing operations reached 2.3 million or 1.7% of sales compared to 4.9 million or 3.7% in the first quarter of last year, mainly from the effect of the major contract renewal at the lower margin, which occurred in December of 2024. Our first quarter is always a more sensitive quarter with lower seasonal revenue patterns, limiting our ability to absorb our fixed cost structure. As of note, we managed to reduce our operating expenses this quarter and continue to be an area of focus for the team. Net loss from continuing operation was $4 million, or $0.04 per share, down from a net loss of $1.8 million or $0.01 per share in the equivalent quarter of last year. Cash flow from operating activities were $6.2 million in the first quarter, down from $11.7 million in the equivalent quarter of last year, resulting from higher utilization of working capital and lower adjusted EBITDA. Higher utilization of working capital is to fund inventory buildup ahead of the busy summer season. CAPEX investment amounted to $0.3 million in Q1 and we're part of a regular basic maintenance. For 2025, we expect our maintenance and capital expense to be slightly lower than last year at approximately $2 million. We ended the first quarter of 2025 with a lower net debt of $47.1 million, down from $47.8 million at the end of 2024, and a leverage ratio of 2.8 times adjusted EBITDA, up from 2.4 times at the end of last fiscal quarter, a level at which we remain comfortable. Total available borrowing capacity on our credit facility stood at $36.7 million. I would now like to turn the call over to the operator for the Q&A period.

Thank you, sir. Ladies and gentlemen, if you do have any questions, please press star followed by one on your touch-tone phone. You will then hear a prompt that your hand has been raised. And should you wish to decline from the polling process, please press star followed by two. And if you're using a speakerphone, you will need to lift the handset first before pressing any keys. Please go ahead and press star one now if you do have any questions. First, we will hear from Kyle McPhee at Cormark Securities. Please go ahead, Kyle.

Hi, everyone. I want to dig into the impact of the institutional client contract repricing. You had disclosed that this client was 11% of 2024 revenue. But on a quarterly basis, is this client a much higher percentage of revenue in Q1 periods, given the institutional client may not be seasonal, but a lot of your other business is seasonal to the downside in Q1? Can you provide any clarity on that?

Hi, Kyle. It's Louis. Yes, you're right. That client represented 11% last year. And yes, in the Q1, it was a bigger proportion. the proportion of the institutional customers in Q1 is higher because of the restaurants have lower volume in that period. So the mix is unfavorable on that. So the answer is yes, yeah.

Okay. Can you tell us how much of your revenue weight this client was in Q1 of last year? How much what? Sorry? How much revenue, percentage of your revenue, this institutional client was in Q1 of 2024?

I don't have that. In cases, it's fairly similar, year over year, but I don't know the proportion of that client last year.

Okay. Okay, so it looks like us analysts may have kind of underestimated the margin impact simply because of this seasonality dynamic. And now the opposite should be true going forward. Is that correct? This client is a lower percentage of revenue than 11% and kind of 2, 2, 3, 4?

Yeah, the average of last year was 11%. So in Q1, it was higher. So it will readjust over the year in case of the seasonality and that. the golf courses opening and the campaigns and yeah, so absolutely.

Okay. And your press release and comments mentioned steps taken to mitigate the impact of the repriced institutional contract. It looks like your wages expense line was a favorable moving part that helped in the key one you just reported. But was Q1 a full quarter benefit of these cost mitigation efforts with wages, or will we see more progress with that in Q2 to claw back more margin dollars?

It's Pierre. The answer to this is that, yes, we've taken action. It did not hit the full Q1. So the full effect has not been seen in Q1. And we continue to look at operational efficiencies and any other factor to help us.

Got it. Okay. And then beyond wage adjustments and operational efficiencies, are there other mitigation efforts that may start to help in Q2 and beyond, you know, specific to how much margin you can make with this specific institutional client? Maybe, you know, things like more volume on the truck to this client or shifting around margin mix. Has that begun at all?

Yeah, the answer is yes. And as usual, we work to improve our margin mix with all of our customers. If you're talking specifically about that customers, so the more products we sell that are outside of the contract that helps the margins, and they're very happy to have products from outside the contract, such as our private label. As an example, we're selling more private labels, so by definition, it helps raising the margin over time. And other products from meat, proteins, and vegetables, that we find that are good for them. And so, yes, it's helping.

Okay. And would any of that had started in Q1 or is that kind of more Q2 and beyond?

Yeah, that contract was renewed, I think, December 1 or 2nd, whatever, of last year. And we did add some products. So we saw a small improvement, yeah.

Okay. And then your press release also mentioned that beyond this contract repricing dynamic that impacted margins in Q1, there was also some other unfavorable client mix that was margin drag. Can you explain what that means and if this was unique to Q1 or something we should be aware of going forward?

Yeah, I explained the Q1 seasonality by the fact that restaurant sales are lower than the proportion of our institutional clients was higher, so that affects directly the mix and the margins, as you understand. To give a bit of color about the market and all of this, I think I should add that our market share in cases is increasing in the distribution segment. The client mix, as you understand, was unfavorable. The good news is that we keep gaining customers at a faster pace than last year in the quarter, partly due to our push from ourselves in the western part of Quebec and the effect of buy local or buy Canada brought on by the tariff war. And you know that we're very little affected by the tariffs, but I think that's important to mention. And the... So the mix, talking about the mix and more about the restaurant, that's the one that was hurt. The equivalent of same store, same restaurant sales are lower by restaurants versus last year in that quarter. But we showed growth. It's only because we gained new customers, and I was seeing at a faster pace. So that's... That's great, and we will continue to develop the business, to do the push, and it's a good situation. So when it comes back, it will be the effect like after COVID. So if you remember, we were really hurt, but we gained stores during a difficult period, and then when it reopened or things got settled, business came over to Calabar. The growth of that 3% comes from the M&A we did last year, the new customers that we got, okay, which is important, and the sum of the existing customers at growth. I'm talking restaurants here, but very few of them, but at least that helped. And this result was mitigated in sales by the reduction in pricing at our institutional level. contract that we talk about and the poor performance of the restaurant sales per store.

Okay. Appreciate all that, Collin. I'll pass the line.

Thank you.

Next question will be from Michael Glenn at Raymond James. Please go ahead, Michael.

Hey. Good morning. So just to start off, can you Maybe, are you able just to give us some ideas or thoughts surrounding how we should think about gross margin trending through the rest of 2025?

Yes, good morning.

The mix will, by default, adjust, okay, because of seasonality. So by definition, it should be... better and going on forward for the rest of the year. Okay. So this is the, and the mix is affected by the seasonality and the new stores that we're getting. And you understand that we make more margins when we're getting new independent restaurants. And that's what we're doing on a daily basis. Our market shares proves it.

Okay.

And to think about where you start the year relative to where you were last year on gross margin, are the factors you're speaking about, how much are we thinking about in terms of sequential improvement? Is it 50 basis points? Is it 100 basis points? Is there enough in hand to view...

We don't give forward-looking, as you know, so it will improve. It should not get to the levels we had before, last year as an example, because of the significant impact of the margin reduction on the institutional contract. But the more independent restaurants we have, it will increase, and over time it will readjust.

And Louis, I would add that the industry will also dictate where it goes. If restaurants are picking up faster or not picking up, then it definitely drives the margin as well.

Louis, you spoke about

gaining some market share among the independent restaurants, just given your positioning in Quebec. I'm just wondering, are there any emerging opportunities with national chains who might be looking to change their sourcing strategy?

Depending on the definition of national, yes, the national Quebec, the answer is yes. You understand that we don't ship outside in the western provinces. We ship a little bit in Ontario, and we're good in New Brunswick. But the answer is yes, that trend is favorable for us. As I was saying in my comments, the push from our sales organization is working well. plus the inbound calls because of tariffs. So we're invited to present our business case because we're a large supplier, a large distributor, and we can compete straight with Cisco and JFS, and we can replace them in the province of Quebec as we're organized today.

Okay. And just on the transaction that we're waiting for the closing for, can you provide just some thoughts as to what we should think about for expected closing? Are you able to indicate it feels like it's been a little bit longer than expected to close? Are there some specific items that are delaying the close that you can speak to?

Michael, it's Pierre. We're not going to get into the specifics, but there are closing conditions that we are working on. And we agree, I agree with you, it's a little bit longer than expected. Okay.

I will leave it there. Thank you.

Thank you.

Next question will be from Frédéric Tremblay. At Desjardins. Please go ahead, Frédéric.

Thanks. Good morning. Just a bit of a follow-up on the last question there. In the financials, we see a note that says that the required closing conditions must be met by May 20, 2025. That's pretty soon. So I'm just wondering, what's your level of confidence that the conditions will be met by that date? And if they're not, is there a possibility for an extension of the deadline there?

Thanks for the question. Yes, May 20th is the outside date. Our level of confidence is good, and yet the possibility of the extension could happen. In any contract, everything is negotiable. Okay.

Moving back to the contract renewal, this is a two-year contract with two potential six-month extensions. I was just, given those timelines, I was just curious to know what your internal expectations are in terms of getting the full benefits of your mitigating actions on the margin. Are we talking about a year from now, you would expect the full impact or full benefit from that, or is it sooner or later than that? Just a bit of a timing perspective on implementation of your actions there.

We did have mitigations to absorb the loss of profits on that. It's in part met, but not entirely. The idea is to keep working on productivities We adjusted our workforce to help mitigate this. And the idea is to work on the top line with better margins. And over time, it will be covered. But it takes time. It takes time to do this. But I like the pace we're on. Gaining market shares like this is cool at a same margin with normal customers or better margins. So that's cool. And as I was saying, we're gaining customers at a faster pace than last year. Same quarter is going to be the same thing in Q2. So that's the only forward looking I'm going to give you on that. But the trend is good.

Okay. I appreciate that. And last question for me, just on the distribution volume, uh, increase, um, some of it is from market share gains, obviously. Um, I was just curious though, on the, um, the existing customers, like generally speaking, their volume demand, is it stable up down over a year? And we obviously know that the restaurant industry is in a bit of a challenging place right now, but in terms of your own clients, like what's the general trend that you're seeing with your existing?

Frédéric, we're in food service. We don't have access to the same data as retail with AC Nielsen. So what we know is that we're all sellers. We have around 125 distributors that order from us. And we're also a distributor, and we all see sales per restaurants did decline versus last year. So it's our data, internal data. We have other reports, such as Restaurants Canada and others, that shows that in March, that's the last data that we have, in March it improved by a point. one percent over last year. So that's a good sign from minus four in February. So that's encouraging, but this is not a plus eight, nine, ten percent that we should see.

Thanks for taking the question. Merci.

Next question will be from Don Angelo Volpe at Beacon Securities. Please go ahead.

Hey, good morning, everyone. Just looking at the wholesale activities, I noticed it was down as a result of restaurant industry slowdown. I was just looking for any commentary regarding the slowdown you guys are seeing. Is it mostly slowdown across independents, or is it more of a broad-based slowdown? And you guys kind of touched on it, I guess, on the last question, but have there been signs of a pickup of activity throughout the first month of the second quarter?

All right, Don Angelo, and welcome to the analyst, guys. So the answer is yes. There's a slowdown. Although the pace is better, the decline is not as great as it was in the previous quarters. So that's a good sign. But yes, there's a slowdown with the independent restaurants. So that's the answer. And the second part of your question, I missed it.

I guess you guys kind of touched on it with, I guess you guys said the March data was the most recently available and you did see a little uptick, up 1%. The second part of my question was just relating to if you guys have been seeing signs of a pickup of activity throughout the first month of the second quarter.

Yeah, we don't share that information. So I can't answer that. The market is... is relatively stable overall.

Okay.

Okay. Okay. Thank you. I'll hop back in the queue.

So our job is in that pie, that shrink on the restaurant side, we've got more market shares. Okay. And with the M&A and the gain of customers, so that's why we look good with a 3% increase. On that side, if you take into consideration the effect of the institutional contract that dragged down ourselves, we're on the right. I'm very happy with my team and the excitement we have at gaining customers. So this is an adjustment period, and I'm very satisfied with those gains of customers.

Okay, perfect. Thank you for the color.

I'll hop back in the queue.

Once again, ladies and gentlemen, a reminder to press star one if you have any questions. And at this time, Mr. Frenette, it appears we have no other questions. Please proceed.

Thank you, Sylvie. Thank you, Kyle, Cédric, Michael, and Angelo for your questions. Our ability to continue gaining market shares, as I said, in a challenging restaurant and industrial environment is a testament of our diversification strategy and validates our expansion into western Quebec. We are about to enter the busy spring and summer season. Our focus remains on, as Pierre mentioned, closing and integrating the LN Plus acquisition. expanding our presence organically and inorganically in Western Quebec, promoting our locally sourced offering, including our private label brand, which benefits from the buy local, tell when, generating revenues and operating efficiencies, improving our product mix, and leveraging our position as the province's largest locally focused supplier to the food service industry. Again, we're in a good position, and I'm enthusiastic about our position in the marketplace and our ability to continue on the path to profitable growth. This concludes our call for the first quarter of fiscal 2025. Thank you for joining us. Stay safe and healthy, and see you at our upcoming virtual AGM on May 8th.

Thank you, sir. 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.