K-Bro Linen Q3 2023 Earnings Call Transcript

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Provided by Quartr
November 10, 2023

There are 7 speakers on the call.

Operator

Good morning, ladies and gentlemen, and welcome to the Cabral Linen Systems Third Quarter 2023 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. This call is being recorded on November 10, 2023. I would now like to turn the conference over to Christi Plakken.

Operator

Please go ahead.

Speaker 1

Thank you, operator, and good morning, everyone. Thank you for joining us today, and welcome to our Q3 results conference call. On the line with me today is Linda McCurdy, President and Chief Executive Officer. Following our remarks today, we will open it up for any questions. Before we begin, I'd like to remind everyone that statements made during our prepared remarks or in the Q and A portion of the conference call with reference to management's Expectations or our predictions of the future are forward looking statements.

Speaker 1

All statements made today, which are not statements of Historical facts are considered to be forward looking statements. Certain material factors or assumptions were applied in Drawing a conclusion or making a forecast or projection as reflected in the forward looking information. Investors are also cautioned not and Public Filings. I'll now turn the call over to our CEO, Linda McCurdy, who will provide her insights and remarks on the quarter. Linda?

Speaker 2

Thank you, Christie. Good morning, everyone, and thank you for joining us today to review our 2023 Q3 results. I'll focus on the main highlights for the 3rd quarter and Christy will provide more details on our financial performance and balance sheet. I will then come back to you and update you on our outlook. So in the Q3, we are pleased to have reported Record revenues of $87,000,000 and EBITDA of $17,700,000 Throughout the pandemic, we've worked hard to meet the changing needs of our customers, While managing the impact of inflation, volatile energy prices and local labor market shortages, our 3rd quarter results highlight the resilience of our business model and the responsiveness of our team.

Speaker 2

The improvement in EBITDA and margins was in line with our And reflects our disciplined approach to managing operations combined with price increases that we secured to offset inflation related cost pressures. Consistent with the first half of the year, we saw continued growth in healthcare revenue and significant growth in hospitality revenue as Business and Leisure Travel volumes have returned. Overall consolidated revenue increased 18% compared to Q3 2022 with healthcare revenue having increased by 9.2% and hospitality revenue by 30.1%. With the return in hospitality revenue, healthcare revenues represented approximately 54% of consolidated revenue in the 2nd quarter compared to approximately 58% in 2022. On November 1, we announced the acquisition of Vilaray, our will close its Granby facility and consolidate existing volumes into Villarey's larger and more modern plant.

Speaker 2

The new plant is strategically located close to customers and we are investing to expand capacity, consolidate volumes, enhance operating efficiency, reduce fixed costs and support significant growth opportunities. As part of the transition, we'll incur certain one time costs Over the next two quarters, which are anticipated to be approximately $500,000 for severance, decommissioning and other transition related items. Our transition plans also include the sale of our existing Granby facility, which we anticipate to bring to market early in 2024. We remain well positioned from a balance sheet and liquidity perspective with $68,000,000 of additional borrowing capacity on our revolving line of credit and with an additional $25,000,000 accordion for growth purposes. As we emerge from the pandemic, we're excited about our future.

Speaker 2

We continue to have an active M and A pipeline and remain well positioned from a balance liquidity perspective to fund acquisitions, organic growth and our normal course issuer bid. I'll now turn the call over to Christi to discuss our detailed financial results for the quarter, after which I'll return to talk about our outlook. Christi, over to you.

Speaker 1

Thank you, Linda. The information that we are discussing today is also highlighted in our 2023 Q3 earnings press Release, which we issued yesterday and detailed supplemental financial information can also be found on our Investor Relations website under the heading Financial Documents. As a result of increased activity in the Hospitality segment, price increases, the acquisition of ParaNet and the elimination of Over the comparable 2022 period and the corporation saw a 9.2% increase in consolidated healthcare revenue for an overall increase in consolidated revenues of 18%. Consolidated EBITDA increased in the quarter to $17,700,000 from 11,000,000 in 2022, which is an increase of 60.5%. The consolidated EBITDA margin increased to 20.4% in 2023 compared to 15% in 2022.

Speaker 1

For the Canadian division, The EBITDA margin in the 3rd quarter increased to 20.4% in 2023 from 16.4% in 2022. The increase in EBITDA margin is primarily related to the impact of price increases as well as labor and delivery cost efficiencies and reduced fuel rates. For the U. K. Division, in the Q3, the EBITDA margin increased to 20.3% from 10.7% in 2022.

Speaker 1

The increase in EBITDA margin is primarily related to the impact of price increases, increased productivity and delivery cost efficiencies. Net earnings in the Q3 of 'twenty three increased by $4,200,000 to $6,700,000 compared to $2,500,000 in the comparative period of 20 2 and as a percentage of revenue increased by 4.3% to 7.7%. The increase in net earnings is primarily related to the flow through and EBITDA items. Wages and benefits in the Q3 of 'twenty three increased by $3,100,000 to $32,900,000 compared to $29,800,000 in the comparative period of 2022 and as a percentage of revenue decreased by 2.6 percentage to 37.9%. The decrease as a percentage of revenue is primarily related to the impact of price increases and labor efficiencies achieved.

Speaker 1

Linen in the Q3 of 'twenty three increased by $700,000 to $8,800,000 compared to $8,100,000 in the comparative period of 2022 and as a percentage of revenue decreased by 0.9 percentage points to 10.1%. The decrease as a percentage of Revenue is primarily related to the change to the mix of linen and higher hospitality volumes processed compared to the prior year. Utilities in the Q3 of 'twenty three increased by $500,000 to $6,600,000 compared to $6,100,000 in the comparative period of 2022 and as a percentage of revenue decreased by 0.6 percentage points to 7.6%. The decrease as a percentage of revenue is primarily related to the impact of price increases coupled with lower gas costs in the Canadian marketplace. Delivery in the Q3 of 'twenty three increased by $200,000 to $10,000,000 compared to $9,800,000 in the comparative period of 2022 and as a percentage of revenue decreased by 1.8 percentage points to 11.5%.

Speaker 1

The decrease as a percentage of revenue is primarily related to the optimization of high frequency routes, resulting in delivery cost efficiencies combined with lower fuel rates. Occupancy costs in the Q3 of 2023 increased by $200,000 to $1,400,000 compared to $1,200,000 in the comparative period 2022 and as a percentage of revenue remained constant at 1.6%. Materials and supplies in the Q3 of 2023 increased by $600,000 to $3,000,000 compared to $2,400,000 in the comparative period of 2022 and as a percentage of revenue increased by 0 point 3 percentage points to 3.5 percent. Repairs and maintenance in the Q3 of 'twenty three increased by 0 point $6,000,000 to $3,200,000 compared to $2,600,000 in the comparative period of 2022 and as a percentage of revenue increased by to 3.7%. The increase as a percentage of revenue is primarily related to timing and price increases.

Speaker 1

Corporate costs in the Q3 of 'twenty three increased by $600,000 to $3,300,000 compared to $2,700,000 in the comparative period of 2022 And as a percentage of revenue remained constant at 3.7%. Now looking at our capital resources, Distributable cash flow for the Q3 of 'twenty three was $11,200,000 The company paid out $0.3 per share in dividends during the quarter for total consideration of $3,200,000 The corporation had net working capital of $39,600,000 at September 30, 23 compared to its working capital position of $36,600,000 at December 31, 2022. With regards to credit and liquidity, we have a strong balance sheet and ample undrawn capacity on our credit Facility with an operating line of $125,000,000 and a further $25,000,000 accordion for growth purposes. At the end of Q3, we had an undrawn balance of close to $68,000,000 on our operating line and the additional $25,000,000 accordion for growth purposes, reinforcing our strong liquidity. Debt to total capitalization for the period ended September 30, 2023 was 24.2%.

Speaker 1

The debt decreased in the quarter from $63,600,000 to $55,200,000 And was primarily due to the change in working capital items. Our debt to EBITDA ratio excluding leases was just under 1.5 times. I'll now turn things back over to Linda for additional commentary. Linda?

Speaker 2

Thank you, Christy. Q3 marks an important milestone for Cabro as we put the headwinds of the pandemic behind us. Throughout the pandemic, We worked hard to meet customers' evolving needs as dependable partners. At the same time, we encountered volatile energy prices, local labor market Shortages and Cost Inflation. We've been successful in securing price increases to offset inflation related costs And going forward, we expect EBITDA margins to follow historical seasonal trends.

Speaker 2

We continue to see momentum in both Health Care and Hospitality segments. Our Healthcare segment remains steady and our Hospitality segment continues to see good levels of activity with the return of business and international travel. Strategic acquisitions of high quality operators with leading market positions in key regions continue to be an important contributor to Cabro's overall growth profile. We're pleased with our acquisitions of Villarey and Parinet and believe they will further enhance Kaypro's growth profile. The events of the past 3 years have been a catalyst for certain strategic opportunities that were previously not actionable.

Speaker 2

We have an active M and A pipeline and remain well positioned from a balance sheet and liquidity perspective, and we'll continue to be disciplined as we evaluate acquisitions. We're proud of our history of responsible growth and we're committed to a sustainable future by putting people first, being dependable partners and embracing environmental stewardship. We're finalizing our inaugural sustainability report, which will be published by year end. On May 15, we announced a normal course issuer bid to purchase up to 881,000 common shares during the 12 month period commencing May 18, 23, and ending May 17, 2024. During the Q3, approximately 50,000 shares were repurchased And on a year to date basis, we've repurchased just over 100,000 shares for approximately $3,300,000 In summary, we're pleased to put the headwinds of the pandemic behind us.

Speaker 2

We're excited about our outlook and we continue to see momentum in both segments of our business. Going forward, we expect EBITDA margins to follow historical seasonally adjusted trends. I'll now turn it over to answer any questions you have with

Operator

One moment for your first question. Okay. And your first question comes from Derek Lessard from TD Cowen. Derek, please go ahead.

Speaker 3

Good morning. This is Cheryl calling in for Derek. Thanks for taking our questions and congrats on the strong quarter.

Speaker 2

Thank you, Sheryl.

Speaker 3

So our first question is on the outlook. So in the press release, you noted that you expect margins to follow historical seasonal Going forward, just wondering if you could clarify that for us. Is it fair to interpret it as you see yourself Going back to the 2019 margin level starting Q4?

Speaker 2

There's still some recovery to happen in Q4. But yes, That's basically in line with what we're saying, Sheryl.

Speaker 3

Okay. That's very helpful. And my second question is on Hospitality segment. Obviously, very strong performance year to date. I'm curious how much more momentum do you see in both leisure and business travel given the macro backdrop?

Speaker 3

And my follow-up to that is, if we look at business travel specifically, industry data centers suggest that it's still down versus 2019. Just wondering, like, if you feel there's more recovery in business travel and if you expect that to get fully back to pre pandemic? Thank you.

Speaker 2

So I would say that it is difficult for us to know what is a business and what is a leisure traveler from our Discussions with our hospitality partners, I think that's what you said is consistent. Business travel is still down. And Their commentary is that it will continue to take extended periods of time for it to fully recover, if it does fully recover. In terms of our outlook of the strength of hospitality and the outlook for it, again, as we talk to our partners, Our hospitality partners, they do expect a strong 2024.

Speaker 3

Okay. That's very helpful. Thank you. I'll requeue. Thank you.

Operator

Your next question comes from Kyle McPhee from Cormark Securities. Kyle, please go ahead.

Speaker 4

Hello, everyone. First question, regarding the facility consolidation moving your Montreal site into the Milray facility, Do you expect that to trigger any disruption for your adjusted EBITDA margin in the first half of next year when you're doing the consolidation beyond the $500,000 of cost, one time cost that I assume won't hit adjusted EBITDA margins? And then looking out to the back half of next year, should we expect to see noticeable synergies that maybe you can Help quantify for us.

Speaker 2

Yes. So the transition of our existing customer base is happening between now and the end of the year. And we don't expect a lot of dislocation as the result of that transition outside of what we For one time costs of approximately $500,000 which will happen over the balance of this year and into Q1. And in terms of your second question, I was just thinking, Kyle, what that was. And it's, do we expect synergies In the back half of the year.

Speaker 2

Yes, we are also, as announced in our press release, upgrading the Vilaraay facility with some additional capital, which will go into the first half of the year. And we would expect operating efficiencies to result in the back half of the year in the Vilaray facility. And we have not disclosed the synergies, but we definitely will see synergies and operating efficiencies as the result of Both the consolidation and the efficiency enhancing equipment that we've ID'd and are moving forward with.

Speaker 4

Got it. Is it fair to say with all these synergies in hand kind of back half of next year that You should be starting to push over the 2019 type margin profile?

Speaker 2

I would say that we would expect some improvements, but haven't disclosed anything outside of The fact that we expect to get back to 2019 margins, but there is upward opportunities with the synergies and consolidation and efficiency enhancing equipment for sure. Okay.

Speaker 4

Thank you. And then do you have more site consolidation plans specifically in the Quebec City area, given I think you now have 2 sites out there after the Parana deal?

Speaker 2

We do not have any plans at the moment to consolidate those two operations, and It remains to be a conversation and a discussion we have. But at this point, we Expect to maintain 2 facilities and are assessing the market and the growth potential in that market.

Speaker 4

Okay. Thank you. And then last one, your CapEx jumped in Q3, specifically the project CapEx. Can you provide some color on what that looks for?

Speaker 2

Sure, Christy. I'll take that over to you.

Speaker 1

Yes, absolutely. Mainly just the ongoing maintenance and strategic CapEx that we had previously disclosed. There was some increase just in the 1st part of the year for ongoing cards We're still required for the AHS transition, but really the bump in Q4 is consistent with our initial disclosure of $8,000,000 annually.

Speaker 4

Okay. Thank you. That's it for me.

Speaker 2

Thanks, Kyle.

Operator

Your next question comes from Michael Glen from Raymond James. Michael, please go ahead.

Speaker 5

Okay. Just to go back on to the CapEx, because it The number that you give in the MD and A is $8,000,000 for the year. So is like what would be the expectation for Q4 then for CapEx, because I guess if you're spending on Villarey, are you spending on Villarey then in Q4 or that all falls into the first half of next year?

Speaker 1

We'll make some we'll Likely make some deposits in Q4 for the Belray CapEx. Having said that, the equipment won't arrive until 2020 Or so the flow through on the current CapEx until 2024.

Speaker 5

Okay. And for CapEx in 2024, it would be like the $5,000,000 for Villa Ray and then Your regular ongoing maintenance, so that would which I think you usually talk about, is that $8,000,000 or 8,000,000 for that number. So I'm just trying to get a sense of what CapEx in 2024 might look like.

Speaker 3

Yes. Absolutely.

Speaker 1

So for So you're right, there'll be the $5,000,000 for VILRAY. And then in addition to that, we anticipate Spending $8,000,000 in CapEx to support operations similar to what we've disclosed in 2023 as well as an additional one time $4,000,000 investment in the U. K. And this one time investment in our Perth locations Will be made to improve margin and support significant ROI and capacity growth.

Speaker 5

Okay. And for the ParaNet and the Villa Ray acquisition, Can you if I'm looking if I'm thinking about both of those on a combined basis, are you able to give Like a rough idea of the split between healthcare and hospitality revenue from both of those Or either one, however, we can get it.

Speaker 2

Yes. Go ahead, Christy. Yes.

Speaker 1

So on the Ville Ray transaction, it'd be about 40% healthcare, 60% hospitalities. So just under or just over, sorry, 1 third, 2 thirds. And on the Parana, it would be, fairly similar, about half and half.

Speaker 5

Okay. And for organic, I'm just like for the organic growth that you're seeing in Canada So far this year on Healthcare. I'm just trying to back into what the number might look like. It does look like It's been it was up on an organic basis in Q3. I'm just wondering, is that I'm just wondering what's underlying that if it is the case.

Speaker 2

I'd say half of that is Made up from price increase and half of it is increased activity during the fall period. A small amount of it would be new business.

Speaker 5

Okay. And then new business wins next year, is there a good pipeline there?

Speaker 2

We're feeling good about growth opportunities on the Healthcare segment in a number of our markets, yes.

Speaker 5

Okay. Thank you.

Speaker 2

Thanks, Michael.

Operator

Your next question comes from Justin Keywood from Stifel Canada. Justin, please go ahead.

Speaker 6

Good morning. Thanks for taking my call.

Speaker 3

Good morning, Justin.

Speaker 6

On the proposed dismantling of AHS, Is that expected to have an impact for the Alberta business?

Speaker 2

We do not expect Anything to change from a supply chain and procurement perspective. As we understand it, it It's more clinically based and delivery of clinical services. So we would expect it to be business as usual for us.

Speaker 6

So no change to the recently expanded contract, guess it was about a year and a half ago.

Speaker 2

Certainly no changes to that. I mean, if there were any changes, it would Really the reporting structure and organizational structure and how procurement fits into the overall restructuring, But certainly nothing as it relates to our contract.

Speaker 6

Okay, understood. And then just with the 2 acquisitions in the Quebec or Montreal Regent, just trying to understand if there is a broader strategy here, any particular attributes that are compelling for the area and if there is opportunity for additional M and A?

Speaker 2

I would say we're very pleased with these two acquisitions, very solid operators, good infrastructure, Great reputations in the market. And so we look and have been very pleased with The earlier one in the year and are very excited about the Montreal acquisition and able to shore up our position in both of those key markets. In terms of additional acquisitions, as I guided, we feel very good about the pipeline. And After a 3 year hiatus, we feel that things are moving in the right direction and are quite excited about it.

Speaker 6

And is the pipeline pretty broadly based as far as geographies?

Speaker 2

Key focus is Canada and the U. K. But as I've said over the last Jade, we continue to look at other geographies as well. But for us, the key focus at the moment is Canada and the UK.

Speaker 6

Okay, thanks. And then a question for Christy. I think I heard 1.5 times leverage, If you can verify that and then also the pro form a net debt to EBITDA and capacity post the recent transactions.

Speaker 1

Yes, it was just under 1.5x, Justin. And I guess in terms of Capacity post VILRAY, we had about $68,000,000 undrawn on the line of credit Before the acquisition of VILRAY, so roughly 58 left. And the acquisition of Bill Ray would bring the funded debt to EBITDA level to around 1.5 times.

Speaker 6

What's the comfort level?

Speaker 1

Probably in 2 to 3 times. Sorry, go ahead, Linda.

Speaker 2

No, no. That was what I was going to say as well.

Speaker 6

Okay, great. Thank you for taking my questions.

Speaker 3

Thank you, Justin.

Operator

We have a follow-up question from Derek Lessard from TD Cowen. Please go ahead.

Speaker 3

Hi. Thanks, Elena and Christy. I just wanted to circle back on labor. You noted that Some markets are stabilizing. I'm just wondering if you could highlight the any sequential improvement from last quarter and Any markets that you are particularly seeing the improvements and those that you feel are still under pressure?

Speaker 2

I think one of the reasons that Q3 was strong is the improvement in the labor line, combined with the optimization that we've seen as the result of streamlining the Alberta EHS expanded contract. And I would say in many of our markets, labor has Been much more accessible and we chalk that up to inflationary pressures that have resulted in More activity and more people looking for work and getting out and having to work to fight off higher inflation, The cost of higher inflation. There are some tighter markets. I would say that certainly Alberta and in particular Edmonton has faced some tightness with rising energy costs. But overall, we have seen an improvement Across the board in Canada and in the U.

Speaker 2

K.

Speaker 3

Awesome. And then last one from me is on pricing. Just given where your costs are trending, do you expect any additional pricing actions from here?

Speaker 2

Most of the hard work that we went through last year in terms of working with our customers to Your out of contract price increases have flowed through. And so from a go forward standpoint, I would say there would be More normal contractual increases that take into account increases in labor and Increases in general inflation. So most of our all of our the high percentage of our one time increases have are reflected in the results.

Speaker 3

Okay. That's very helpful. Thanks again.

Operator

We also have a follow-up question from Michael Glen from Raymond James. Michael, please go ahead.

Speaker 5

Hey. So coming off of the Q3 in the hotel business, Q4 is always seasonally slower in that segment. But for example, I'm just going to ask you to get a little bit specific with the guidance for Q4 like the $18,400,000 in Canada In hotel, like what's realistic to think about for Q4, just thinking about everything that's going on?

Speaker 2

We still are seeing strong activity. And so I would say we expect to be Double digit over last year.

Speaker 5

Okay. Okay. So and that would be pretty much the same between both Canada and the U. K, I guess.

Speaker 2

Yes.

Speaker 5

Yes. Okay. Thank you.

Operator

And we have another follow-up question from Kyle McPhee from Cormark Securities, Kyle, please go ahead.

Speaker 4

So you guys have some pretty expensive UK natural gas hedges rolling off Exiting next year, based on where gas prices are now, I think that means a good amount of margin expansion for you heading into 2025, Just from that one moving part, do you guys consider locking in the lower gas prices over a longer period of time at this point, Given all the turmoil on that side of the world.

Speaker 2

To your point, our hedge in the UK comes off at the end of 24, and we are definitely looking at extending our hedges since there has been some Reduction in costs in that geography, yes, it's something that we are looking to move forward with.

Speaker 4

Okay. Thanks for confirming that.

Operator

There are no further questions at this time. I'll turn it back to Linda for closing remarks.

Speaker 2

Well, thank you everyone for joining today. And if there's any follow-up, please reach out to Christy or myself. And hope everyone has a great day. Thank you so much.

Operator

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

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