K-Bro Linen Q1 2023 Earnings Call Transcript

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Provided by Quartr
May 16, 2023

There are 7 speakers on the call.

Operator

Good morning, ladies and gentlemen, and welcome to the Cabro Linen Systems Inc. 1st 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. Call is being recorded on May 16, 2023.

Operator

I would now like to turn the conference over to Christi Plaqulin. Please go ahead.

Speaker 1

Thank you, operator, and good morning, everyone. Thank you for joining us today, and welcome to our Q1 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 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 are considered to be forward looking. Certain material factors or assumptions were applied in drawing a conclusion or making a forecast or projection as Investors are cautioned not to place undue reliance on these statements.

Speaker 1

Actual results could differ materially from those anticipated. Risk factors that could affect the results are detailed in the corporation's 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, Christy. Good morning, everyone, and thank you for joining us today to review our 2023 Q1 results. I'll focus on the main highlights of our Q1 and Christy will provide more details on our financial performance and balance sheet. I'll come back to you and update you with an outlook for the remaining quarters of 2023. In terms of the highlights we reported, q1 2023 revenue of $71,000,000 and EBITDA of $10,300,000 for the quarter.

Speaker 2

I'm pleased with our quarterly revenue continues to exceed pre COVID levels set in 2019 while showing strong growth in EBITDA, which is $3,300,000 better than last year. I'm also pleased at the improvement in our EBITDA margins, which is an important step in getting to historical pre pandemic margins in the second half of this year. We saw continued growth in health Compared to Q1 2022 with Healthcare revenue having increased by 1.4% and Hospitality revenue by 48.2%. With a return in hospitality revenue, Healthcare represents approximately 62% of consolidated revenue, which is lower compared to approximately 70% in 2022. For the Canadian division, healthcare revenues represented approximately 60% of revenue, which is lower compared to approximately 68% in 2022.

Speaker 2

Q1 results continue to reflect a few key factors that we spoke about in Q4. While our revenue has Turning to pre COVID levels, our EBITDA margins continue to be impacted by temporary laser inefficiencies and higher inflation related and energy costs stemming from the COVID pandemic and certain geopolitical events. We are actively managing these factors and working with many of our Canadian and U. K. Customers but there are still additional increases to be implemented in the second and third quarter.

Speaker 2

We're pleased with the success we've seen in working with our customers on these increases. As we move into Q2, we expect to continue to benefit from strong hospitality activity in both Canada and the UK and stable healthcare trends. We anticipate achieving the full benefit of our new AHS province wide contract by the second half through to the end of 2024. As I noted earlier, we've been successful in working with many of our Canadian and UK customers To implement price increases to offset inflation related costs, we continue to benefit from these price increases during the quarter and we'll see the full impact in the back half of twenty twenty three. We remain well positioned from a balance sheet and liquidity perspective with $44,400,000 of additional borrowing capacity on our revolving line of credit and with an additional 25,000,000 accordion for growth purposes.

Speaker 2

With the acquisition of Paranaet, total debt increased in the quarter from $39,100,000 to 53 $700,000 and our funded debt to EBITDA excluding leases at the end of Q1 still remained conservative at 1.8 times. While we continue to face challenges, we feel very positive about our performance going forward. We anticipate continued organic growth in both Canada and the UK. Our M and A pipeline remains active and our balance sheet has the flexibility to provide for our near term growth. Given our expectations, given recent trading levels for our stock and our conservative balance sheet, we've also announced an NCIB.

Speaker 2

I'll now turn the call over to Christy to discuss our detailed financial results for the year, after which time I'll return to talk about our outlook for the remainder of the quarters of 2023. Christie, over to you.

Speaker 1

Thank you, Linda. The information we are discussing today is also highlighted in our 2023 Q1 earnings press release issued As a result of COVID-nineteen pandemic restrictions being used, consolidated hospitality revenue for the 3 months ended March 31, 2023 increased by approximately 48% over the comparable period of 2022, and we saw a 1 point 4 percentage increase in consolidated healthcare revenues for an overall increase in consolidated revenue of 15.2%. Consolidated EBITDA increased in the quarter to $10,300,000 from $7,100,000 in 2022, which is an increase of 46.3 percent. The consolidated EBITDA margin increased to 14.6% in 2023 compared to 11.5 percent in 2022. For the Canadian division, the Q1 EBITDA margin increased to 16 point Margin is primarily related to stronger client activity across the Hospitality segment, price increases, labor efficiencies and the natural Gas Hedge, which we put in place in Q2 of 2022 as well as delivery cost efficiencies.

Speaker 1

Net earnings increased by $2,400,000 from a loss of $400,000 in 20.22 to $2,000,000 in The change in net earnings is primarily related to the flow through items in EBITDA, higher finance costs related to increased interest rates for the revolving $7,000,000 compared to $24,700,000 in the comparative period of 2022 and as a percentage of revenue decreased by 1 percentage point to 39.1%. The decrease as a percentage of revenue is primarily related to price increases, The stabilization of labor in certain markets and production efficiencies gained from the transition of HS. On a year to date basis, linen remained constant at $7,400,000 compared to the comparative period of 2022 and as a percentage of revenue decreased by 1.5 percentage points to 10.5 percent. The decrease as a percentage of revenue is primarily related to the change in the mix of linen and a higher hospitality volume process compared to the previous year. On a year to date basis, utilities increased by $400,000 to $6,000,000 compared to $5,600,000 in the comparative period of 20 primarily related to the National Gas Hedge Strategy implemented in the UK in Q2 of 2022.

Speaker 1

Delivery on a year to date basis increased by $900,000 to $9,100,000 compared to $8,200,000 In the comparative period of 2022 and as a percentage of revenue decreased by 0.6 percentage points to 12 The decrease in the percentage of revenue is primarily related to improved client activity, which yielded delivery cost efficiencies. On a year to date basis, occupancy costs increased by $300,000 to $1,300,000 compared to $1,000,000 in the comparative period of 2022 and as a percentage of revenue remained relatively constant at 1.8%. The increase in spend is related to higher facility rent as well as increased properties and insurance costs. On a year to date basis, Materials and Supplies increased by $500,000 to $3,100,000 compared to $2,600,000 in the comparative period 2022 and as a percentage of revenue remained constant at 4.3%. On a year to date basis, Repairs and maintenance increased by $700,000 to $2,900,000 compared to $2,200,000 in the comparative period of On a year to date basis, corporate costs increased by $400,000 to $3,000,000 compared to $2,600,000 Comparative period of 2022 and as a percentage of revenue remained relatively constant at 4.3%.

Speaker 1

Now looking at our capital resources, distributable cash flow for the Q1 of 'twenty three was $5,100,000 and our payout ratio was 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 $33,500,000 at March 31, 2023 compared to its working capital position of 36 point With regards to the credit and liquidity, we have a strong balance sheet At the end of Q1, we had an undrawn balance of close to $44,400,000 on our operating line, which reinforces our strong liquidity. Debt to total capitalization for the period ended March 31, 2023 was 23.4%. Total debt increased in the quarter from $39,100,000 to $53,700,000 and was primarily due to the change in working and the acquisition of ParaNet. As Linda said earlier, our debt to EBITDA ratio, excluding leases, was just over 1.8 I'll now turn things back over to Linda for any additional commentary. Linda?

Speaker 2

Thank you, Christy. So Q1 was an important step in our return to pre pandemic margins and our whole team is excited about our outlook. We've seen the benefit of price increases and there's still additional increases that will be realized throughout the balance of the year. We're actively managing the factors that have reduced our margins through COVID and continue to expect to expect a return to a pre pandemic Margin profile in the second half of the year. Going forward, we see continued momentum in both Healthcare and Hospitality.

Speaker 2

Our Healthcare segment remains steady and we expect that that have accumulated during the pandemic. Our Hospitality segment continues to see good levels of activity with the return of business and international travel. Since the pandemic, labor availability remains constrained. We've experienced some progress and anticipate improvements in our labor recruitment and retention and are managing more challenging regional labor availability with complementary temporary foreign worker programs. In the second half of the year, we anticipate returning to historical 2019 margin levels consistent with historical Seasonal trends.

Speaker 2

Our anticipated margin recovery remains dependent on our ability to attract and retain staff in each of the markets in which we operate. Strategic acquisitions have been an important contributor to Cabra's overall growth profile And with continued momentum in our business, we're refocusing on M and A. We're pleased with our acquisition of Parinet in Quebec in March and remain well positioned from our balance sheet and liquidity perspective and we'll continue to be disciplined as we evaluate acquisitions. We're proud of our 7 decade history of responsible innovative growth. And while delivering industry leading services, we've embraced our Responsibility to society.

Speaker 2

We prioritize customer and employee relationships, environmental stewardship and creating positive impact where we do business. We're excited to extend our sustainability strategy for the long term and intend to publish our inaugural sustainability report by the end of the year. In summary, we see continued momentum in both healthcare and hospitality. We are actively managing factors that affected our results since the pandemic and are eager to see the full benefit of price increases. In the second half of the year, we anticipate Returning to historical 2019 margin levels consistent with historical seasonal trends.

Speaker 2

Before I open up the line for questions, I want to acknowledge Those who are impacted by the Alberta wildfires, and we will continue to do everything to support the needs of the province. I'll now turn it over to answer any questions you may have as it relates to our Q1 results. Operator, we can open up the line to questions.

Operator

Thank you. Ladies and gentlemen, we will now begin the question and answer One moment please for your first question. First question comes from Derek Lessard of TD Cowen. Please go ahead.

Speaker 3

Good morning, Linda and Christy.

Speaker 1

Good morning.

Speaker 3

I just want to start, maybe Could you compare and contrast Q4 on pricing and supply chain and the margin contraction you saw there, Sort of with the strong performance that you're seeing in Q1 and almost a 180 this quarter?

Speaker 2

Sure. Well, I think as we telegraphed Last quarter, I mean, throughout the Q1 of 'twenty three as well as going forward, price increases Play a meaningful role. There's just no denying that. And we worked most of last year, or I'd say at least 3 quarters of last As we saw inflationary pressures to put in place price increases, which played out partially or in Q1 and expect throughout the balance of the year. I will also say that we have seen positive signs in labor.

Speaker 2

And I don't want to get out too far in front of ourselves here, because the busiest quarters are obviously Q2 and Q3, where demand And volumes pick up dramatically and that will be the true test of labor. But we are seeing Some signs that we haven't seen in the past of a softening labor market. In many of our plants, we are seeing Potential employees come through the door, which applying for jobs, which has been somewhat of Not what we've seen over the last 2 years. And secondary to that is We are down the road in terms of putting in place temporary foreign worker programs and We have had a number of employees come to our plants from overseas and expect that to continue to happen throughout Q2 and Q3. So it's certainly not one single factor, but We have seen positive signs

Speaker 1

on the latest front and

Speaker 2

have had price increases that are impacting Obviously, the margin and bottom line.

Speaker 3

Okay. That's helpful, Linda. Thank you for that. And the second question is, could you maybe talk about, you alluded to some of that in your opening comments, but The early performance of ParaNet and how the integration is going?

Speaker 2

Sure. That operation is half Healthcare and hospitality, it's still early days, but it's certainly a target that we've known for many, many years. We're working Very effectively with the management team, working with customers on the transition. But what I would say is It's more of an administrative integration at this point versus an operational one. There's operational Changes and improvements to be made, but we continue to operate 2 facilities.

Speaker 2

It's not like we've moved into one location. So again, it's much more Back of the house integration versus an operational integration, but very pleased with working with the team, Good responses from customers to date, and we'll continue to put in place Operational efficiencies make capital investments that make sense to improve operations going forward.

Speaker 3

Okay. And I guess one final one for me is the improvement in the labor That you mentioned, are you seeing that on in the UK as well as in Canada?

Speaker 2

Yes. I would say that it's certain markets in Canada are tougher than others. But as it relates to both the UK and Canada, we are seeing again, we're cautiously optimistic, but we are Seeing some softening in those markets in both markets.

Speaker 3

Okay. Thanks everyone.

Speaker 2

Thanks, Derek.

Operator

Thank you. The next question comes from Endri Leno of National Bank. Please go ahead.

Speaker 4

Good morning. Thanks for taking my questions. Congrats on the good quarter. First question I have, I was wondering, Elena, you mentioned a few times in the prepared remarks is that there have been some price increases in Q1, but there are more to come in Q2 and in Q3. Is there a way you can quantify What is yet to come in terms of percentage increase or percentage of volume?

Speaker 4

Or I mean, anyway, is there any way to quantify what is yet Okay, great. Thank you. And then the other question I have, I just wanted to ask a little bit and put this into context with the linen Charge, which is flat in dollar terms and it has declined 1.5 percentage points as a percent of revenue, but revenue is up 15%. Is there Can we use that as a directional for volumes as sort of like what the quantum whereas the increase in revenue would be with price whereas the flat linen is kind of more on the volume that you're seeing. Is that a good way of seeing it?

Speaker 2

So I mean, this isn't True in 100% of the case, but for the highest majority on As we see hospitality revenue pickup, linen as a percentage of revenue will go down. It's for the most part only on the healthcare business where we provide linen. So as healthcare revenue stays Flat or stable or minimal increases, you will see flat linen expenditures as well, And the percent goes down as hospitality revenue goes up because we don't provide the linen to our hospitality customers for the most part. Certainly in Canada, that's not true in the U. K, where we do provide the linen.

Speaker 5

Okay. No, that's great.

Speaker 4

Thank you. And that would refer to the change in mix in the linen commentary in the MD and A. Yes. Okay, okay, great. Thank you.

Speaker 4

Thank you. My last question and I'll jump in the queue. I just wanted to talk a little bit about the NCIB. Just kind of the thought process On it, I mean, especially as the share the stock is fairly liquid. And you're also talking about an active pipeline, which I would think Perhaps you should pay some debt down so you could be more active.

Speaker 4

I was just kind of I was wondering if you can talk a little bit about the thought process in terms of putting an NCIB, how would you deploy it and how would you

Speaker 2

Well, we continually look at capital allocation strategies. I mean, as we have been I think we've been fairly clear in the fact that Growth in M and A is a key priority. We've also previously communicated that we're comfortable up to a level of 3 times to EBITDA. But I think the reality is, Andrew, is that we just don't think our current share price Appropriately reflects our outlook. We'll be active in balancing the NCIB with other uses of capital.

Speaker 2

But at this point, we just feel that the current share price doesn't reflect our outlook.

Speaker 4

Okay. Thank you for that. I'll jump in the queue.

Speaker 2

You bet. Thanks, Endri.

Operator

Thank you. The next Question comes from Justin Keywood of Stifel. Please go ahead.

Speaker 6

Hi, good morning. Thanks for taking my call.

Speaker 2

Good morning, Justin.

Speaker 6

Hi. On the EBITDA margin in the quarter, I didn't And adjusted EBITDA, was there anything one time in nature?

Speaker 2

Not particularly, Justin, Christy. Nothing comes to mind, no?

Speaker 1

No, no. Nothing would come to my mind either.

Speaker 6

Okay. And understand the expectation of margins to return to historical levels, which I assume is 2019 in the back half of the year. But are you able to help us bridge the margin progression, If there is any in Q2 and then what the expectations are for Q3 and Q4?

Speaker 2

We have said that they will continue to be gradual. So we've made progress obviously in Q1. There will be more progress. And again, if we're using the baseline of 2019, there will be improvement in Q2, but we do expect that It will be the back half where we more closely track 2019 levels.

Speaker 6

Okay. That's helpful. And then on the cash generation, it rebounded Quite substantially. Was there anything unusual in that?

Speaker 1

No, nothing unusual From that perspective, either Justin, I'd say just stronger earnings really pushing stronger cash flows.

Speaker 6

Okay. And then just finally on ParaNet, I'm not sure if this was disclosed, but what's roughly the revenue contribution Either in the quarter or on an annual basis and what are the margin expectations for that asset?

Speaker 2

Kristi, I'll let you respond to that.

Speaker 1

Yes. So for the quarter, it was Closed in one of the notes to the financial statements, Justin, and it's about $750,000 for the quarter. Annually, we said revenue would be about $10,000,000 and consistent margins with our existing base business.

Speaker 6

Thank you very much.

Speaker 2

Thanks, Justin.

Operator

Thank you. The next question comes from Michael Glen, Raymond James. Please go ahead.

Speaker 5

Hi, Linda And Christy, can you provide an update with just with the Alberta transition, where things sit and how much Additional we should think about from a margin perspective to the rest of the year?

Speaker 2

You bet. So again, well, we finished transitioning the volume a year ago. There were supply chain Challenges that we experienced and as it relates to receiving certain Carts that distribute that we use to distribute linen, we expect to fully receive all of those And the related delivery and labor efficiencies by the end of Q2.

Speaker 5

Okay. And can you just help understand like the cart This cart dynamic that you referred to, like what exactly is happening there? What's the issue? And how does the new carts getting receipt of the new carts resolve this?

Speaker 2

Just in terms of the capacity of the cart to hold the appropriate amount of linen, The efficiency of being able to pack the cart again Efficiently in our plant, put them on a vehicle, so the vehicle is fully cubed out. When you're dealing with different dimension carts, old carts that have broken wheels, it just It impacts our whole operation, cleaning the carts. So those are some of the in the weeds details That have resulted in inefficiencies in processing some of the volume for this contract. And as new cards come in, we expect those efficiencies to go away.

Speaker 5

Okay. And most of those cards are replaced now and all of them will be done by the end of Q2, that's the expectation?

Speaker 2

Yes.

Speaker 5

Okay. And then can you give us an update just in terms of The natural gas hedge over in the UK and how that will impact through the balance of the year?

Speaker 2

You bet. Christy, you can provide those details if you would.

Speaker 1

Yes, for sure. So in I guess in terms of the U. K, the natural The gas hedge that we put in place in 2022 is for all of our volume and extends all the way to the end of 2024. So really Q2 of 2022 reflected The hedged price already, Q1 of 2022 did not.

Speaker 5

Okay. But is it like I'm not sure how the pricing works, but is that a headwind to your margins through the balance of the year Over in the

Speaker 1

UK? No. The pricing will be consistent quarter Q2 over Q2 Q2 of 'twenty two compared to Q2 of 'twenty three because it was already in place for Q2 of 2022.

Speaker 5

Okay. And then maybe just as we think about putting through price increases to customers, If we're thinking of that transportation line and the fuel costs embedded in that transportation line, is that something That you think you could eventually embed into contracts fuel price or is that something that you'll continue to Take on yourself.

Speaker 2

So listen, the it's an ever changing market and Competitive landscape. And so if it becomes commonplace in the industry, we'll have much more success in doing so. Of all the input costs, and I'm not saying that fuel is insignificant, but it's Certainly not as material as a labor cost line. We will try obviously to put in place all of the Cost increases to protect against margin contraction, and we do that In every single contract we negotiate, Michael, and we have had success when minimum wage started to increase in embedding that into In some of our contracts, it's easier to work with our customers to do it. And in others, they Aren't willing to accept those types of unknown price increases.

Speaker 2

What I can say and I think it's reflective in our Q1 Results is that we have a very strong history of working with our customers to receive price increases in Situations that are unpredictable, whether it be COVID or Unprecedented inflationary cost increases that we've seen. So we work as hard as we can, and we would love to cover all Potential cost increases to be a flow through item, but I and we try, But don't know that we'll be successful 100% of the time on every single cost item.

Speaker 5

Okay. Thank you for taking the questions.

Speaker 2

You bet, Michael.

Operator

Thank you. The next question comes from Endri Leno. Please go ahead.

Speaker 4

Hi, thanks again. Thanks for the follow-up. Just a couple ones for me. The first one, I was just wondering to we're talking about price increases. Are these the ones at least that you have negotiated at the current?

Speaker 4

Are these kind of more backward looking sort of you're trying to recoup the cost and what has happened, let's say, in the last 12 or 24 months or is there a certain degree when you're looking at in the future? And I'm trying to relate this especially when it comes to Minimum wage increases that are yet to come in several of your geographies.

Speaker 2

Yes. So I mean, I would say that it's a combination of both. A number of the price increase First of all, we started to embed minimum wage price increases and have worked very hard over even pre pandemic. Like if we think back When we first saw material pricing or sorry, minimum wage increases in Alberta 6, 7 years ago It was really when we when the government empowered that they committed to a $15 minimum wage. That's what really started us putting in place increases that were tied to minimum wage.

Speaker 2

What we saw in the last year Cost increases far exceeded minimum wage price increases. And so that gave rise to All that to say, Andrea, I would say that We do have protection in many, many of our contracts as it relates to minimum wage price increases. The price increases that we've seen so far are a bit of a combination of both Backwards looking and anticipating Further increases in certain lines like labor. I mean, when we think of our price increases in the UK, The largest driver there was not necessarily minimum wage increases, it was entirely energy, which we are We're protected from to some extent, but we also negotiated out of contract price increases.

Speaker 4

Great. Thank you, Liza. No, I mean, I think that natural gas hedge was a great move, by the way. The and My last question is, if you can just talk a little bit about inflation in linen. I mean, is there any are you able to offset because of your footprint?

Speaker 4

Or are you working through Still lower priced inventory because if I recall correctly, you hold a lot of linen inventory?

Speaker 2

Sure. Of all the cost lines, we have been quite yes, we've worked Through linen that has been inventoried, but I would say this is not a line item that we're particularly worried about, having even anywhere close to CPI levels. This is a cost item that It remains a fairly competitive market and suppliers able to move production around and source elsewhere. So I'm not saying there's 0% inflation on linen, but it's not in the neighborhood of the High single digits that we've seen like we've seen in other areas.

Speaker 4

Thank you very much. Appreciate it.

Operator

Thank you. The next question comes from Michael Glen, Raymond James. Please go ahead.

Speaker 5

Okay. Linda, maybe just on the labor, are you able to give an indication about how your turnover trends Have tracked in Canada over the last 12 months?

Speaker 2

So I you know what, I would say that we are not seeing a dramatic Decreased from a 300% turnover to a 100% or a 100% to a 20%. I think for us, The leading indicators are, are we attracting staff? There is always Hi, turnover in our business. Whether it's individuals coming in and after a shift an hour a day a week deciding this just isn't The business that they want to work in. I think what we are finding though is that there is more foot Traffic, there's more people coming through the door.

Speaker 2

We have a higher We have employees who are coming in who we are more effectively being able to train and Achieve productivity numbers that we're looking for. But I wouldn't say that a dramatic decrease in turnover, A, have we seen or B, is it something that we would expect to track to see a huge improvement in productivity, Michael?

Speaker 5

Okay. That's it for me.

Speaker 2

Thanks, Michael.

Operator

Thank you. There are no further questions at this time. I will turn the call over to Linda McCrude for closing remarks.

Speaker 2

Well, thank you everyone for joining today our Q1 conference call. And if there's any Follow-up questions, Christy and I will be available at your convenience. Thanks so much everyone and have a great day.

Operator

Ladies and gentlemen, this does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines.

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