K-Bro Linen Q4 2023 Earnings Call Transcript

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March 22, 2024

There are 7 speakers on the call.

Operator

Good morning, ladies and gentlemen, and welcome to the K. Bruleman and Systems Inc. 4th Quarter 2023 Results Conference Call. Note that all phone lines are in a listen only mode. Following the presentation, we will conduct a question and answer session.

Operator

Also note that this call is being recorded on March 22, 2024. And now I would like to turn the conference over to Kristi Plakken. Please go ahead.

Speaker 1

Thank you, operator, and good morning, everyone. Thank you for joining today, and welcome to our Q4 results conference call.

Operator

On the line with

Speaker 1

me today is Linda McCurdy, President and Chief Executive Officer. Following our remarks today, we will open it up for 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. All statements made today, which are not statements of historical fact, are considered to be forward looking. Certain material factors or assumptions were implied in drawing a conclusion or making a forecast or projection as reflected in the forward looking information.

Speaker 1

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 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 Q4 and annual results. I'll focus on the main highlights of the Q4 and Christy will provide more details of our financial performance and balance sheet. I'll come back to you and update you on our outlook for 2024. We're pleased to have reported record results for 2023 with revenue of $321,000,000 and EBITDA of $56,800,000 for the year.

Speaker 2

Our 2023 results highlight the resilience of our business model and the responsiveness of our team. The improvement in EBITDA and margins was in line with our expectations and reflects our disciplined approach to managing operations combined with the stabilization of energy prices, labor market shortages and inflationary pressures. In 2023, we saw continued growth in healthcare revenue and significant growth in hospitality revenue due to the return of business and leisure travel volumes. Overall consolidated revenue increased by 16% compared to 2022 with health care revenue having increased by 6.3% and hospitality revenue by 32.3%. Healthcare revenue represented approximately 58% of consolidated revenue for the year compared to 63% in 2022 due to increased hospitality activity.

Speaker 2

In 2023, we enhanced Cabros position in Quebec through completing the acquisitions of Vilarie and Parana. In November, we closed our Grand B facility and consolidated existing volumes into Vilarie's larger and more modern plant. Our transition plan also includes the sale of the existing Granby facility, which we anticipate bringing to market in Q2 2024. On May 15, we announced a normal course issuer bid purchase up to 881,000 common shares during the 12 month period commencing May 18, 2023 and ending May 17, 2024. At the end of 2023, we've repurchased just under 200,000 shares for $6,500,000 We remain well positioned from a balance sheet and liquidity perspective with $52,900,000 of additional borrowing capacity on our revolving line of credit and with an additional $25,000,000 accordion for growth purposes.

Speaker 2

We're proud of our 7 decade history responsible innovative growth. While delivering industry leading service, we've embraced our responsibility to society. In December, we published our inaugural sustainability report as the latest step in our ESG program. Our report provides a framework to move forward on future objectives and initiatives. I'll now turn the call over to Christi to discuss our detailed financial results for the year, after which I'll return to talk about our outlook.

Speaker 2

Christi?

Speaker 1

Thank you, Linda. The information we are discussing today is also highlighted in our 2023 4th quarter earnings press release that we issued yesterday and detailed supplemental financial information can be found on Investor Relations website under heading Financials. As a result of increased activity in the Hospitality segment, price increases and the acquisitions of Paranaet and Ville Ray, consolidated hospitality revenue for 2023 increased by 32.3% over the comparable 2022 period and the corporation saw a 6.3% increase in consolidated healthcare revenue for an overall increase in consolidated revenue of 16%. Consolidated EBITDA increased in the year to $56,800,000 from $36,500,000 in 2022, which is an increase of 55.7 percent. The consolidated EBITDA margin increased to 17.7% in 2023 compared to 13.2% in 2022.

Speaker 1

The increase in margin is primarily related to the impact of price increases implemented as well as increased productivity and delivery route optimization coupled with lower fuel costs. The increase in EBITDA margin was also due to the contingent the gain on settlements of contingent consideration related to the Parana acquisition. While Paranaat's performance was in line with expectations, the performance target was not achieved and the contingent consideration was not paid out. This gain is a non cash item outside of core operations. Consolidated adjusted EBITDA increased in the year to 55,900,000 dollars from $36,500,000 in 2022, which is an increase of 53.1%.

Speaker 1

The consolidated EBITDA margin increased to 17.4% in 2023 compared to 13.2% in 20 For

Speaker 3

the Canadian

Speaker 1

division, the EBITDA margin

Speaker 3

in the 4th quarter

Speaker 1

was $1,000,000 For the Canadian division, the EBITDA margin in the 4th quarter increased to 18.6% in 2023 from 14.2% in 2022. The increase in margin is primarily related to the impact of stronger client activity, price increases across various markets serviced, labor efficiencies and delivery route optimization combined with reduced fuel rates. The increase in EBITDA margin was also due to the gain on settlements of contingent consideration. Again, this relates to the derecognition of contingent consideration for the ParaNet acquisition. For the U.

Speaker 1

K. Division, in the 4th quarter, the EBITDA margin increased to 13.2% in 2023 from 6% in 2022. The improvement in EBITDA margin is primarily related to the impact of stronger client activity, price increases, increased productivity and delivery cost efficiencies. Adjusted EBITDA for the U. K.

Speaker 1

Division was consistent with EBITDA. Net earnings increased by $13,700,000 or 350.8 percent from $3,900,000 in 2022 to 17.6 $1,000,000 in 2023, and net earnings as a percentage of revenue increased by 4.1 percentage points to 5.5 percent in 2023 from 1.4% in 2022. The change in net earnings is primarily related to the flow through items in EBITDA mentioned earlier as well as the de recognition of contingent consideration for Parana. Wages and benefits increased by $12,400,000 to $123,400,000 compared to $111,000,000 in the comparative period of 2022 and as a percentage of revenue decreased by 1.6 percentage points to 38.5%. The decrease as a percentage of revenue is primarily related to the impact of price increases secured across various markets and labor efficiencies achieved.

Speaker 1

Linen increased by $1,700,000 to $33,000,000 compared to $31,300,000 in the comparative period of 2022 and as a percentage of revenue decreased by 1 percentage point to 10.3%. The decrease as a percentage of revenue is primarily related to the change of mix in linen and higher hospitality volumes processed compared to the prior year. Utilities increased by $1,300,000 to $25,100,000 compared to $23,800,000 in the comparative period of 2022 and as a percentage of revenue decreased by 0.8 percentage points to 7.8%. The decrease as a percentage of revenue is primarily related to the impact of price increases secured, the UK Natural and the UK Natural Gas hedge, which was put in place during Q2 of 2022. Delivery increased by $1,400,000 to $38,700,000 compared to $37,300,000 in the comparative period of 2022 and as a percentage of revenue decreased by 1.4 percentage points to 12.1%.

Speaker 1

The decrease as a percentage of revenue is primarily related to the optimization of high frequency routes resulting in delivery cost efficiencies as well as lower fuel prices. Occupancy costs increased $5,900,000 to $5,400,000 compared to $4,500,000 in 2022 and as a percentage of revenue remained relatively constant at 1.7%. Materials and supplies increased by $1,200,000 to $12,100,000 compared to 10,900,000 dollars in the comparative period of 2022 and as a percentage of revenue remained relatively constant at 3.8%. Repairs and maintenance increased by $2,400,000 to $12,800,000 compared to $10,400,000 in the comparative period of 2022 and as a percentage of revenue remained relatively constant at 4%. Corporate costs increased by $3,400,000 to $14,400,000 compared to $11,000,000 in the comparative period of 2022 and as a percentage of revenue increased by 0.5 percentage point to 4.5.

Speaker 1

The increase as a percentage of revenue is primarily related to financing costs, compliance related advisory and professional fees along with acquisition related costs. Included within the quarter are approximately $1,000,000 of transition and transaction related costs as it pertains to 20 2023 acquisition initiatives. The gain on settlements of contingent consideration relates to the de recognition of the contingent consideration for Peranat since it was not paid out. The derecognition of this liability resulted in a one time gain, which is non cash in nature. Now looking at our capital resources, distributable cash flow for the Q4 of 2023 was $7,200,000 and our payout ratio was 40 point 4 percent.

Speaker 1

The company paid out $0.3 per share in dividends during the quarter for total consideration of 3,200,000 dollars The corporation had net working capital of $41,400,000 at December 31, 'twenty three 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 Q4, we had an undrawn balance of close to $52,900,000 on our operating line and an additional $25,000,000 accordion for growth purposes, which reinforces our strong liquidity. Debt to total capitalization for the period ended December 31, 23 was 29.4%. Total debt increased in the quarter from $55,200,000 to 70,200,000 and was primarily related to the acquisition of Bill Ray as well as the change in net working capital in the NCIB.

Speaker 1

Our debt to EBITDA ratio excluding leases was under 1.5 times. I'll now turn things back over to Linda for additional commentary. Linda?

Speaker 2

Thank you, Christy. So as we start 2024, we see a positive outlook. Both of Cabral's Healthcare and Hospitality segments continue to experience steady growth trends. In the Healthcare segment, we expect activity levels to remain strong from continued focus on reducing wait times and enhancing patient care. In the Hospitality segment, we expect solid activity levels from both business and leisure travel reflecting historical seasonal trends.

Speaker 2

Going forward, we expect EBITDA margins to follow historical seasonal trends. As we emerge from pandemic, we're focused on organic growth and potential M and A opportunities. Strategic acquisitions of high quality operators with leading market position in key regions continues to be an important contributor to Capra's overall growth profile. We're pleased with our acquisitions of VilleArray and Parinet and believe they will further enhance Cabral'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 will continue to be disciplined as we evaluate acquisitions. We pleased to have published our inaugural sustainability report. We've always prioritized being responsible corporate citizens and our report was an important milestone in extending our current best practices into our long term program. We look forward to providing annual updates on our progress. In summary, we're pleased to put the headwinds of the past 3 years behind us.

Speaker 2

We're excited about our outlook as we continue to see momentum in both healthcare and hospitality and are focusing on our growth opportunities. I'll now open it up to any questions you might have with regards to the 4th quarter results.

Operator

Thank And your first question will be from Derek Lesson at TD Cowen. Please go ahead.

Speaker 4

Yeah. Good morning, Linda and Christy. Congratulations on a solid quarter and solid year.

Speaker 2

Thank you, Derek, and good morning.

Speaker 4

I wanted to maybe just one thing that stood out to me was the higher level of corporate costs in the quarter. Could you just maybe add some color to the jump that we saw there and whether or not this is a sort of a one time bump and then it settles back to normal levels? Yes,

Speaker 2

you bet, Derek. I think we had guided back last quarter that with the acquisition of Vilaray, we intended to close down and transition our volumes from our Granby facility into the larger Billeray facility, which happened, we've guided about $500,000 of costs associated with that. So those would be part of it, as well as other transaction costs associated with the balance would be additional transaction costs associated with our growth initiatives for the year. So totaling about $1,000,000 Yes.

Speaker 4

Yes. Okay. Absolutely. And you don't I guess that you don't expect that that's non recurring?

Speaker 2

It's non recurring. The only thing I would add to it, Derek, is obviously as we continue with an aggressive M and A pipeline and our outlook is for additional growth there will be associated costs going forward. But steady state operations and business as usual, I would think our corporate costs would be in line with what they have been for the last number of quarters excluding those transition and transaction costs.

Speaker 4

Yes, Linda, that's helpful. Thank you for that. And just maybe on the hospitality side, the hotel occupancy rate recovery, that's pretty much done in Canada and the UK. Just curious about your thoughts on the outlook of hospitality, just given the macro backdrop and where you think maybe consumer spending and interest rates are?

Speaker 2

To your point, we've seen a very large recovery in the last year, that being driven by price increases, which we telegraphed and worked on with our customers throughout all of last year. I still think there's room for additional growth in occupancies and there is some level of additional price increase that will come through in 2024. By no means do I think it'll be the same growth that we've seen in 2023, however, but I still think it'll be a meaningful increase, 24 over 2023.

Speaker 4

Okay. And maybe just switching gears, just looking at your November presentation, it looks like there's about $60,000,000 of contracts expiring in 2024. Just curious about how you feel around the potential of renewing the contracts and just in terms of opportunities and any sense of how much RFPs are coming up for renewal that could be

Speaker 3

an opportunity for you? There's

Speaker 2

I'd say in 2024, there's no large single contracts coming due. It's a number of contracts spread over many geographies. I think we feel very good about renewing a number or all of them really. And in terms of new opportunities coming to the table, I think there's more to look at in 'twenty five. I think there'll be contracts coming due for opportunities for Cabral in 2024, but not as meaningful as 2025.

Speaker 2

Okay.

Speaker 4

Thanks for answering my questions. I'll re queue.

Speaker 2

Thank you. Thank you.

Operator

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

Speaker 5

Hey, good morning. Linda, in terms of the M and A commentary you provided, can you bucket that between what you're seeing in Canada and what you're seeing over in the UK?

Speaker 2

I'd say it's a fifty-fifty split, Michael. I'd say, obviously, these are the priority geographies. We don't we're not more positive on one versus the other. There is good growth opportunities in both of which we're pursuing.

Speaker 5

But would you say that there Canada is a much more consolidated market, you still see plenty of opportunity in Canada for you to continue with M and A?

Speaker 2

I think there's likely larger opportunities in the UK, Michael, but there still remains good solid opportunities in Canada for sure. The opportunities, however, in terms of magnitude and scale are likely larger in the UK.

Speaker 5

Okay. And if we're thinking about margins and overall margins in 2024 versus 2023, can you just give some discussion surrounding the headwinds and tailwinds across the buckets like labor, energy, just how we should think about margins in 2024 versus 2023?

Speaker 2

I think that 2024 margins will be very consistent with historical margins and I define historical margins as 2019. Obviously, we saw improvement in the back half of twenty twenty three, but I think they'll be quite consistent with 2019 margins. Headwinds, I think, fortunately, we've seen stabilization of labor in a number of our markets. Some continue to be more challenging, but certainly it settled down in a number of our markets, including in the U. K.

Speaker 2

We're hedged on utilities until the end of 'twenty four in the U. K. So I think we don't face a significant headwind on utilities. So I think what we're pleased about is we're seeing some stabilization in the cost structure, which we certainly didn't experience in 2023.

Speaker 5

And on that utility hedge in the UK, are you able to give a comment as to if you were at market rate on that contract, what the variance would be on your overall EBIT margin EBITDA margin?

Speaker 2

It's not going to be a material amount. It's not going to be a couple of percentage points. And I would say for competitive reasons, we don't want to get into the details of rates and what that would mean in terms of potential aggregate dollar pickups.

Speaker 5

Okay, understood. Okay, thank you for taking the questions.

Speaker 2

Thanks, Michael.

Operator

Next question will be from Kyle Mecksee at Cormark Securities. Please go ahead.

Speaker 3

Hi, everyone. I just wanted to dig in a little bit more on the margin stuff we've already talked about. It seems like there's still some favorable moving parts left for 20 24 with more pricing gains. Correct me if that's not the case, but more pricing gains, the Granby volume consolidation into Billeray payoff from efficiency related CapEx programs, a full year without with lessened labor added labor costs. So what is that kind of negative offset within the moving parts that's maybe preventing you from delivering year over year margin gains again such that you're above at or above 2019 levels?

Speaker 2

So I mean associated with all of those things, there is minimum wage increases. So as much as there's stabilization, Kyle, there's minimum wage increases, which while we're not we don't pay minimum wage, there will be pressure on wages. In terms of the consolidation and opportunities there, it takes time to work through efficiencies. As it relates to equipment installations, there's efficiencies that take time to come through. It's not plug and play.

Speaker 2

You don't put in the new machine in it. All of a sudden, efficiencies arrive, you have to work through those transition processes. So we're very confident in saying that 2024 margins will remain consistent into further years. Is there room for upside possibly? But I would say that we're confident in saying that for 2024 they'll be very consistent with historical margins.

Speaker 3

Got it. Okay. And maybe just on Quebec, on the back of the tuck ins you did last year, much stronger competitive positioning in the market. Can you just speak to how much growth runway there is in that province for Cabral?

Speaker 2

Yes. I mean, I think in our market share numbers, we show a fairly small market share. It's the 2nd largest market in Canada. We have some healthcare volume, but there remains significant opportunities in healthcare. And we really didn't have the facility to actively pursue growth in hospitality.

Speaker 2

So I think that we'll see a meaningful increase in our market share given that we now have the infrastructure and a very solid management team to continue to pursue additional growth. Again, we have to continue to work through the consolidation of the Granby plant into the Villarey plant, which will happen over the next number of quarters. But we're very pleased that we'll at least have the infrastructure in a highly desirable location versus being in our ground B facility to pursue that growth.

Speaker 3

Okay. That's it for me. Thanks.

Operator

Thanks, Kyle. Next question will be from Justin Keyword at Stifel. Please go ahead.

Speaker 6

Hi, thanks for taking my call. Good morning.

Speaker 2

Morning. Do

Speaker 6

you have the organic growth rate in Q4?

Speaker 2

Roughly around 20%. A large part of it came from price increases, Justin, about half of it. Yes, so it would be about half of it would be price, half of it would be both from our acquisitions and 20% from organic growth.

Speaker 6

Sorry, just to clarify, Q4 organic growth was 20%? Correct. And if the majority was price, but it also seems like that's implying that there's pretty good volume where I believe Q4 isn't typically your seasonally strong quarter. Are there any changes as far as the travel dynamics that you're seeing?

Speaker 2

Not we can't identify anything in a meaningful way other than the travel has resumed in the markets that we service. Nothing comes to mind really, Justin.

Speaker 6

Okay. And then assuming that robust organic growth, what's your expectation for growth in 2024 on an organic basis?

Speaker 2

I'd say mid single digit.

Speaker 6

And is that largely price or is there a volume expectation in there as well?

Speaker 2

I think it's a combination of both. So half and half.

Speaker 6

Okay. And then just the adjusted EBITDA target consistent with 2023 is 18%. Is that a good target? Is that how you're looking at it?

Speaker 2

That's within the range for sure.

Speaker 6

Okay. And then just finally on the pipeline of M and A, are we going to see more tuck in acquisitions this year or are there potentially some larger transformational assets out there?

Speaker 2

We're pursuing growth in all of those areas, Justin, in both of those areas.

Speaker 6

Okay. And then just a quick question for Christy, if she has the leverage ratio on the quarter on a net debt to EBITDA basis? Thank you.

Speaker 1

Yes. It was about excluding the right of use assets, about 1.35, Justin.

Speaker 6

And what's the current capacity?

Speaker 1

3.5 times.

Speaker 6

Sorry, on the implied dollar value?

Speaker 1

There would be 50 just $53,000,000

Speaker 6

Thanks for taking my questions.

Speaker 2

Thank you, Justin.

Operator

Next will be a follow-up from Derek Lessard. Please go ahead.

Speaker 4

Yes. I just want to hit based on your on the latest AIF, it looks like the Regina facility contract is up for renewal this month. Just maybe give us your thoughts on the upcoming negotiation or the ongoing negotiations and any factor expectation around an increase in those labor costs?

Operator

Kristi, do you have a thought on that?

Speaker 1

Yes. I think that would all I mean, any changes to labor costs would be factored into our forecast, Derek. In terms of, I guess, potential resolution for negotiations, we're just starting and we don't

Speaker 4

one for me on the hospital backlog. Just could you characterize sort of the level of healthcare activities and if there's been any noticeable improvement that perhaps help clearing the that elective surgery backlog?

Speaker 2

I think we're seeing small improvements. It's not going to change overnight. It's so related to their ability to attract and retain clinical staff. But we are seeing improvements or increases in volume. We are seeing increases in our operating room volume.

Speaker 2

But it's not going to be flicking a switch and saying there's going to be a 10% increase in our volume as the result. It'll be slow moving change.

Speaker 4

Okay. And maybe I'll sneak one last one in for Christy. How should we be thinking about your working capital in 2024?

Speaker 1

I would suggest no significant changes or no significant investments in working capital, slight increase in Q4, just timing on some of the account receivable cash receipts, but really 2024 would be pretty steady state.

Speaker 4

Okay. Thanks for taking my questions.

Operator

Thank you. Next is Michael Glen at Raymond James. Please go ahead.

Speaker 5

Hey, I just want to follow-up on the Parinet. Linda, are you just able to give some additional commentary regarding what happened with not being able to meet the earn out target?

Speaker 2

How I would characterize that was, I think the seller was fairly confident in EBITDA growth and we put forward a acquisition price that reflected his optimism and it perhaps didn't quite materialize. We and that's ultimately what happened. We are delighted with the acquisition and believe there is significant growth that may not have happened as quickly as the seller had anticipated, however.

Speaker 5

Okay. And then just on the CapEx for 2024, the $15,000,000 to $17,000,000 Can you give some like how do the buckets break down for that CapEx spending? Some rough ideas there?

Speaker 2

Christy, do you want to handle that one?

Speaker 1

Yes, sure. I think we had guided it was the Ville Ray acquisition, some incremental CapEx required for that. So that represents about $5,000,000 of it. There's an additional $4,000,000 for a one time investment project in the UK, which will improve margin and has return on it. And then the balance would really just be ongoing maintenance CapEx and maintenance and strategic CapEx.

Speaker 5

Okay. And after this year, would you say so should we think about cap maintenance CapEx being what kind of level after we get past 2024?

Speaker 1

I would say probably consistent with 2024 carving out the 2 one time initiatives. So kind of in that $8,000,000 to potentially $10,000,000 bucket range.

Speaker 5

Okay. Thank you.

Operator

Thank you. And at this time, Ms. McCurdy, we have no further questions. Please proceed.

Speaker 2

Thank you, everyone, for joining today. If there's anything further, Christy and I will be available. And with that, have a great day.

Operator

Thank you. 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.

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