K-Bro Linen Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
August 9, 2023

There are 6 speakers on the call.

Operator

Ladies and gentlemen, and welcome to the Cabral Linens Systems Second 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. Manner. This call is being recorded on August 9, 2023.

Operator

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

Speaker 1

Thank you, operator, and good morning, everyone. Thank you for joining us today, and welcome to our 2nd quarter results conference call. On the line with me today is Linda Purdy, President and Chief Executive Officer. Following our remarks today, we will open it up for questions. 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 fact, are considered to be forward looking statements. Certain material Investors are also cautioned not to place undue reliance on these statements. 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 and remarks on the quarter.

Speaker 1

Linda?

Speaker 2

Thank you, Christie. Good morning, everyone, and thank you for joining us today to review our 2023 Second Quarter Results. I'll focus on the main highlights of the quarter and Christy will provide more details on the financial performance and balance sheet. I'll then come back to you and update you on our outlook for the remainder of the year. In terms of overall highlights, we reported revenue of 81,000,000 and EBITDA of $14,500,000 for the quarter.

Speaker 2

Our strong second quarter results with significant growth in EBITDA and margins were in line with our expectations. The improvement in margins reflects our disciplined approach to managing operations combined with price increases that we have Secured to offset inflation related costs. We continue to expect a return to pre pandemic margins in the second half of the year consistent with historical seasonal trends. As with our Q1 results, we saw continued growth in healthcare revenue and significant growth Overall consolidated revenue increased 13.9% compared to q222 with healthcare revenue having increased by 4.4% and hospitality revenue by 29%. With a return on hospitality revenue, healthcare revenues represented about 56% of consolidated revenue in the 2nd quarter compared to approximately 61% in 2022.

Speaker 2

We continue to actively manage the impact of energy price increases and local market labor shortages. We remain well positioned from a balance sheet and liquidity perspective with 34 $500,000 of additional borrowing capacity on our revolving line of credit and with an additional $25,000,000 accordion for growth purposes. Total debt increased in the quarter from $53,700,000 to $63,600,000 and our funded debt to EBITDA excluding leases at the end of Q2 remained conservative at 1.8 times. On May 15, we announced a normal course issuer bid and repurchased 52,756 shares during the 2nd quarter. We anticipate continued organic Growth in both Canada and the U.

Speaker 2

K, our M and A pipeline remains active and our balance sheet has the flexibility to provide for our near term growth. I'll now turn the call over to Kristi to discuss the detailed financial results for the year, after which I'll return to talk about our outlook for the remainder of the year. Christie, over to

Speaker 1

you. Thank you, Linda. The information we are discussing today is also highlighted in our 2023 Second Quarter Earnings Press release, which we issued yesterday and detailed supplemental financial information can be found on our Investor Relations website under the heading Financial Documents. As a result of price increases that took effect in Q4 2022 and the 1st 2 quarters of 2023, The acquisition of ParaNet and COVID-nineteen pandemic restrictions being used, consolidated hospitality revenue for the 3 months ended June 30, 2020 3 increased by 29% over the comparable 2022 period, and the corporation saw 4.4% increase in consolidated healthcare revenue for an overall increase in consolidated revenues of 13.9%. Consolidated EBITDA Increased in the quarter to $14,500,000 from $9,700,000 in 2022, which is an increase of 49.8%.

Speaker 1

The consolidated EBITDA margin increased 18% in 2023 compared to 13.7% in 2022. For the Canadian division, the EBITDA margin in the 2nd quarter increased to 18.1% in 2023 from 15.1 percent 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.

Speaker 1

Division, in the second quarter, The EBITDA margin increased to 17.6% from 9.2% in 2022. The increase in EBITDA margin is primarily related to increases in client activity, price increases, labor efficiencies, the natural gas hedge which we put in place during Q2 of 2022 and delivery cost efficiencies along with reduced fuel rates. Net earnings increased by $3,100,000 from $1,600,000 in 20.22 to 4 point in 2023 and net earnings as a percentage of revenue increased by just over 150% to 5.8% in 2023 from 2.3% in 2022. The increase in net earnings is primarily related to the flow through items in EBITDA. Wages and benefits in the Q2 of 2023 increased by $2,500,000 to $31,000,000 compared to $28,500,000 in the comparative period of 20 And as a percentage of revenue decreased by 1.7 percentage points to 38.4 percent.

Speaker 1

The decrease as a percentage of revenue is primarily related to stabilization of labor in certain markets, production efficiencies Gained from the AHS transition and price increases secured across various markets. Linen in the Q2 of 2023 Increased by $700,000 to $8,300,000 compared to $7,600,000 in the comparative period of 2022 and as a percentage of revenue decreased by 0.5 percentage point to 10.2%. The decrease as a percentage of revenue Is primarily related to changes in the mix of Linham and higher Hospitality's volumes processed compared to the prior year. Utilities in the Q2 of 2023 increased by $300,000 to $6,300,000 compared to $6,000,000 in the comparative period of 2022 and as a percentage of revenue decreased by 0.7 percentage points to 7.8%. The decrease as a percentage of revenue is primarily related to the natural gas hedge strategy implemented in the U.

Speaker 1

K. During Q2 of 2022. Delivery in the Q2 of 2023 decreased by $100,000 to $9,400,000 compared to $9,500,000 in the comparative period of 2022 and as a percentage of revenue decreased by 1.7 percentage points to 11.7%. The decrease as a percentage of revenue It's primarily related to optimization of high frequency routes resulting in delivery cost efficiencies as well as lower fuel rates. Occupancy costs in the Q2 of 2023 increased by $200,000 to $1,400,000 compared to $1,200,000 in the comparative period of 2022 and as a percentage of revenue remain constant at 1.7%.

Speaker 1

Materials and supplies in the Q2 of 2023 Increased by $300,000 to $3,200,000 compared to $2,900,000 in the comparative period of 2020 and as a percentage of revenue decreased by 0.2 percentage points to 3.9%. Repairs and maintenance in the Q2 of 2023 Increased by $600,000 to $3,100,000 compared to $2,500,000 in the comparative period of 2022 and as a percentage of revenue increased by 0.3 percentage points to 3.8%. The increase as a percentage of revenue is primarily related to the timing of maintenance activities, inflationary increases and one time expenditures. Corporate costs In the Q2 of 2023, increased by $700,000 to $3,700,000 compared to $3,000,000 in the comparative period of 2022 and as a percentage of revenue increased by 0.4 percentage points to 4.6%. The increase as a percentage of revenue in the 2nd quarter relates Integration costs associated with the acquisition of Parana and certain other one time costs.

Speaker 1

Now looking at our capital resources, Distributable cash flow for the Q2 of 2023 was $8,800,000 and our payout ratio was 30 0.7%. 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 $44,500,000 at June 30, 2023 compared to its working capital $36,600,000 at December 31, 2022. The change in cash from operations is primarily due to the change in working capital items, which is driven mainly from the timing of collections from healthcare customers. 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 $100,000,000 and a further 25,000,000 accordion for growth purposes. At the end of Q2, we had an undrawn balance of close to $34,500,000 on our operating line, reinforcing our strong liquidity.

Speaker 1

Debt to total capitalization for the period ended June 30, 2023 was 26.8%. Total debt increased in the quarter from $53,700,000 to $63,600,000 and was primarily due to the change in working capital items and the repurchase of shares under the NCIB. As Linda said earlier, our debt to EBITDA ratio excluding leases With 1.8 times. I'll now turn things back over to Linda for additional commentary. Linda?

Speaker 2

Thank you, Christy. So Q2 was another step towards our return to pre pandemic margins, and I'm excited about our Look, price increases that we successfully secured over the last three quarters along with our disciplined approach to managing operations Position us well into the second half of the year. Going forward, we see continued momentum in both healthcare and Hospitality. Our Healthcare segment remains steady and our Hospitality segment continues to see good levels of activity with the return of business and international travel. Since the pandemic, labor availability has been constrained in some markets.

Speaker 2

We've experienced progress and anticipate improvement in our labor recruitment and retention. We're managing more challenging regional markets with complementary temporary foreign worker programs and our anticipated margin recovery remains dependent on our ability to and continue to attract and retain staff in each of the markets in which we operate. Strategic acquisitions have been an important contributor to Capro'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 integration is progressing well. 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.

Speaker 2

We're focused on advancing our sustainability program for the long term. We've assembled an ESG working group that includes an inexperienced and diverse group of subject matter Hospitality and Healthcare. 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. I'll now turn it over to answer any questions you have with regards to the Q2 of 2023.

Speaker 2

Mode.

Operator

Thank you. Ladies and gentlemen, we will now begin the question and answer session. Your First question comes from Derek Lessard from TD Securities. Please go ahead.

Speaker 3

Good morning. This is Cheryl calling in for Derek, who's in another call right now. Thanks for taking our questions and congrats on the strong quarter.

Speaker 2

Hi, Cheryl. Great to hear from you. Thank you.

Speaker 3

Thank you. So our first question is on margin expectations. You said that you expect the return to 2019 level to occur in the latter half of the year. Just wanted to get a sense of the Timing, are you expecting it to be more in Q3 or more towards Q4?

Speaker 2

I think we'll see progress in both quarters And the narrowing gap as we get back to the 2019 levels, we've obviously made progress in Q2, Expect to make further progress in Q3 as well and even more so in Q4.

Speaker 3

Okay, got it. And could you talk about what you see as stabilization in the labor market? Also, what level of wage inflation are you seeing or expect to see in the market? And also, which markets are still more challenged than the others?

Speaker 2

Sure. I can say quite happily that we have seen certain markets. We're finding it easier to recruit and retain people, which is quite a shift from what we saw a year ago. In D. C, Alberta, Saskatchewan, We are having people actually walk through our door and apply for positions, which is, we haven't seen in a number of years.

Speaker 2

Victoria still, I said BC, but Victoria still tends to be a tight labor market. And we see some tightness in Ontario and Quebec. But as I mentioned in our remarks, we are assessing the temporary foreign worker program in many of our markets and there have been a number of employees who have come in from overseas to help Augment our domestic labor force in certain markets. And that's a strategy that we will continue to execute on. But we are seeing movements in the right direction.

Speaker 2

In terms of wage inflation, I think it's fair to say that Throughout the balance of the year, there will be changes in minimum wage. We don't pay minimum wage, but From time to time, we see pressure as the result of changes in minimum wage. Those changes have been factored into our outlook.

Speaker 3

Okay. That's awesome. Thank you. I'll reach you.

Speaker 2

You bet. Thanks, Sheryl.

Operator

Thank you. Next question comes from Andre Lino at National Bank. Please go ahead.

Speaker 4

Good morning. Thanks for taking my question and congrats on the quarter. The question I have, it's more a little bit on the pricing, but I was wondering Linda or Both, if you can talk a little bit about how much more of the pricing is left to do, is there any? And margin improvements For the balance of the year, where do you expect most of these to come from, pricing, labor, efficiencies, volumes, etcetera?

Speaker 2

Yes, sure. Good morning and happy to answer that question. I'd say a large portion of the price increases have been Reflected maybe not at the beginning of Q2, but throughout Q2. So in terms of further improvement in margin, I'd say The key components would be comprised of some price increases, some labor improvement as well as Relative to Q2, some normalization of corporate costs. There were I'm sure It's noted that it's higher in the quarter as the result of costs associated with growth initiatives, but we would expect improvements in each of those areas.

Speaker 4

Okay, great. Thank you. And The other question I have, I mean, it's just kind of looking at the 2 countries, Canada and the U. K. I would say U.

Speaker 4

K. Performed better than Canada, even accounting for size differences. So I was wondering if you can talk a little bit about what drove this outperformance relative outperformance in the U. K. And then if you can compare and contrast the two regions?

Speaker 2

To a certain extent, interestingly enough, well, first of all, in the U. K, we hedged our natural gas, right, which Lock that down and took the volatility away from what we saw a year ago. In certain cases, I think we are finding a more stabilized workforce in the UK, Where most of our plants are some of our plants in Canada are having more challenges in that area than others, but we're not seeing it as dramatic in the U. K. Again, as I mentioned, we're accessing the temporary foreign Worker program in Canada and we have seen stabilization, but probably not as Significant as in the U.

Speaker 2

K. I'd say that's the biggest factor.

Speaker 4

Great. Thank you. And I'll ask one more and I'll jump in the queue. I have a few more. But if you can talk a little bit about the Working capital outflow in the quarter, I think it was more receivables, but if you can talk a little bit about it and when do you expect it to revert?

Speaker 2

Absolutely. Christy, I'll let you handle that.

Speaker 1

Sure. Thanks, Linda. Andrey, so predominantly the increase in AR would just be Would be timing. There's a small investment as a result of the acquisition of Paranaet when you compare it to December. But for the most part, we would anticipate that the large majority of that would get picked up in Q3.

Speaker 4

Okay, great. Thank you.

Operator

Thank you. The next question comes from Justin Keywood at Stifel. Please go ahead.

Speaker 5

Hi, good morning. Thanks for taking my call.

Speaker 2

Good morning, Justin.

Speaker 5

Great. Good to see the margin improvement in the quarter. And also just to help understand The comments on the improvement to margins historically in the back half of the year. Is there anything unique expected in Q2 either positive or negative. Just trying to bridge the comments of improved Margins in the back half, but obviously with a good Q2.

Speaker 2

Sure. I mean, as we said in Q1, a number of things have To play out in order for it to happen in the back half of the year, there has to be improvements in labor, price increases and All of those just took time. Price increases were scheduled, and we're committed to, but scheduled over the period of the year. And on the labor front, we obviously needed help from just the overall general economic landscape and I would say that we are very positively seeing those where it has been easier to attract labor. And even attracting labor, people have to be trained, they have to be integrated into the facilities, Which all takes time.

Speaker 2

So again, as we expected, it would take time for margins to come back, but we are confident and You know, have seen the trajectory over the last two quarters and expect it to continue into Q3 and Q4. So really to answer that, Justin, I don't think there's anything that's unexpected or things that happened in Q1 or Q2 that make us any More or less confident in our ability in Q3 and Q4 other than this is pretty much how we expected it to play out.

Speaker 5

Great. And just to maybe put some parameters around it. If we look at the historical margin, And I guess this is going back pre pandemic. I think for Q3, it typically exceeded 20%. Would that be a good rule of thumb to use?

Speaker 2

That's fair. Yes, slightly above the 20% mark. That's correct.

Speaker 5

Good. And then just on use of capital, we saw the share buyback start to be a bit Active and obviously the Parinet acquisition, just as how you see capital deployment Going forward, where do you see the best uses?

Operator

So given

Speaker 2

My comments on the M and A pipeline between the between our growth opportunities as well as continuing to be active on The NCIB, those would be the 2 primary focuses, Justin. And we expect to be able to Pursue both of those use of funds, as we continue into the back half of the year.

Speaker 5

And maybe a question for Christy, are you able to provide an updated leverage ratio in the quarter and remind us of the comfort range?

Speaker 1

Absolutely. So it's just over 1.8 times for the quarter, Justin, excluding the leases. And we have the ability to draw up to just over 3 times, 3.25 times.

Speaker 5

And what would be the comfort range? Would it be up to that 3 times?

Speaker 1

I'd say in the range of 2 to 3 times, somewhere in there.

Speaker 5

Thank you for taking my questions.

Speaker 3

Thanks, Justin.

Speaker 4

Mode. Thank

Operator

you. And the next question is a follow-up from Andre Alino, National Bank. Please go ahead.

Speaker 4

Thanks again. I didn't think I'd get my turn so But I was wondering, I mean to the extent that you can talk about it, obviously, Linda, but in terms of transactions, the opportunities, Where do you see them? Is it more of a Canada? Is it more of a U. K?

Speaker 4

What kind of volumes, volume mix and Size if you can, I mean, obviously, to the extent you can disclose these things?

Speaker 2

Yes, you bet. I'd say that Canada and the U. K. Remain the key focuses. We've been fairly transparent in terms of our aspirations to continue to grow in the U.

Speaker 2

K. To be a national player. That hasn't changed and opportunities for further consolidation Continue in the UK, both in healthcare and in hospitality. And I'd say the same holds true in Canada, Andrey, there are both healthcare and hospitality opportunities. And I think the range As previously referenced, ranges anywhere from $10,000,000 up to possibly on the larger or the Outer range of $100,000,000 So there's a number of opportunities out there.

Speaker 2

And As things have stabilized, business has stabilized, volumes have stabilized, it becomes easier to have those conversations with targets.

Speaker 4

Great. Thank you. My other question, it's a bit longer term looking, so perhaps a bit harder to answer. But Assuming we get back to the 2019 levels in the second half, no problem, right? Like where do you see margin situation Beyond that, is that a good level generally speaking to be in?

Speaker 4

Or is there any room for further improvements? And where could that Those further improvements come from potentially?

Speaker 2

I mean, obviously, looking into the crystal ball, it's Hard to say how we could or would be impacted by a whole host of Factors. But what I would say is we continue to have plants that operate on single shifts or single and A shift and a half, which means that there is excess capacity in most of our plants to take on additional volume. We continue to want to be market leaders and grow our market share. So those are all positive factors for Further ongoing margin expansion into the future. Okay.

Speaker 4

Okay, great. Thanks. And the last One for me, foreign labor, you mentioned you're having some success with that. Are you able to talk a little bit about How much of that is in? How much more do you expect?

Speaker 4

And then as they kind of again, like looking into the future, which we don't know, but I mean, it's worth an ask. Is that, I mean, there are reports out there that there is a structural labor Just in advanced economies, like are you comfortable, for example, having forward label as a more permanent solution to your ops?

Speaker 2

So to the first part of your question, Andri, I'd say that the majority of Our approved labor market, LMIO, foreign workers, Most have come in by the end of Q2. There are some more to come, but I'd say the majority has arrived, but They arrived mostly at the end of Q2. Are we comfortable with this program as a long Term strategy, I would say, yes, I think, the government has been fairly constructive in when there are labor shortages of making the rules around the temporary foreign worker program more accessible and when there's higher inflation, They narrow our ability to bring in temporary foreign workers. So I'd say, in the past, we have used it extensively. We obviously haven't in the last number of years because of different factors, including Restrictions on people traveling and foreign workers traveling, but it has made it has played a meaningful part over the last decade and I would expect that it would continue.

Speaker 2

By no means is it going to make up 20%, 30%, 40% of our workforce, But even being able to bring in 10% to 15% to 20% of your workforce Is extremely helpful in being able to provide stability.

Speaker 4

Yes. No, that's great color. Thank you.

Operator

Thank you. The next question is a follow-up from Derek Lessard at TD Securities. Please go ahead.

Speaker 3

Yes. Thank you. So another follow-up we have is, you mentioned the optimization of high frequency routes in your prepared remarks. And Just curious if you could provide some maybe quantify that and how much

Speaker 2

So this predominantly relates to optimization of the routes in Alberta from taking on the rural volume for AHS. Some of you may remember the supply chain constraints that we had and disruptions that we had as it relates to linen cart. So most of this impact comes from Alberta. And we think we're pretty much at the end of the road there. And I think it's a percentage point Improvement on the delivery line that we've seen as the result of that.

Speaker 3

Okay. Thanks, Linda. Just to confirm that the improvement in linen cart is part of the ROE optimization efficiency, correct?

Speaker 2

Yes, that's correct. Perfect. Thank you.

Operator

Thank you. There are no further questions at this time. You may proceed.

Speaker 2

Well, thank you everyone for joining today. Christy and I are available if there's any follow-up questions.

Operator

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

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K-Bro Linen Q2 2023
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