K-Bro Linen Q2 2024 Earnings Call Transcript

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August 7, 2024

There are 7 speakers on the call.

Operator

Good morning, ladies and gentlemen, and welcome to the Cabral Linen Systems Inc. 2nd Quarter 2024 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 August 7, 2024.

Operator

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

Speaker 1

Thank you, operator, and good morning, everyone. Thank you for joining us today, and welcome to our Q2 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 questions. Before we begin, I'd like to remind everyone that statements made during our prepared remarks or in the question and answer 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 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 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.

Speaker 1

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 2024 Second Quarter results. I will focus on the main highlights of our Q2 and Christy will provide more details of our financial performance and balance sheet. So I'm delighted with our record second quarter results and continued momentum in both the Healthcare and Hospitality segments. In terms of highlights, we reported Q2 twenty twenty four revenue of $93,000,000 and adjusted EBITDA of $18,800,000 for the quarter.

Speaker 2

Since the start of the year, we announced 2 acquisitions, Shortridge in the UK and Centimeters in Montreal. We're excited about our organic growth prospects and potential future M and A. As we actively pursue these growth opportunities, we will continue to incur certain non recurring or one time transaction transition and financing costs. In this context, we believe adjusted EBITDA before non recurring or one time costs will assist investors to assess our performance on a consistent basis as it's an indication of our capacity to generate income from operations. EBITDA before adjusting items was $16,600,000 for the quarter.

Speaker 2

Overall, consolidated revenue increased 15.8 percent compared to Q2 2023 with healthcare revenue having increased by 5.5% and hospitality revenue by 28.9%. Healthcare revenues represented approximately 51% of consolidated revenue, which is lower compared to approximately 56 percent in 2023 due to the acquisition of Shortridge and strong activity in the Hospitality segment. We're excited to welcome Shortridge and Centimeters to the Cabro family. On April 30, we acquired Shortridge, a high quality hospitality laundry provider based in the northwest of England. Shortridge further diversifies our U.

Speaker 2

K. Customer base while positioning our combined U. K. Business for more growth as we look to extend Cabro's geographic reach further south into the UK. On June 21st, we acquired Centimeters, a high quality operator serving top tier healthcare customers in Montreal.

Speaker 2

Centimeters expands KeyBros healthcare customer base, increases healthcare volumes, adds additional healthcare capacity and supports significant future growth opportunities. We're pleased with the early contributions of our acquisitions and see a positive outlook for Cabro. We're excited about our organic growth prospects and potential future M and A. We remain well positioned from a balance sheet and liquidity perspective and will continue to be disciplined as we evaluate acquisitions. 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.

Speaker 2

Kristie, over to you.

Speaker 1

Thank you, Linda. The information we are discussing today is also highlighted in our 2024 Q2 earnings press release issued yesterday and detailed supplemental financial information can be found on our Investor Relations website. As a result of the acquisition of Shortridge in April 2024, price increases implemented and the acquisitions of Parinet and Ville Ray, consolidated hospitality revenue for the 3 months ended June 30, 2024 increased by 28.9 percent over the comparable 2023 period. And the corporation saw a 5.5 percent increase in consolidated healthcare revenue for an overall increase in consolidated revenue of 15.8%. As Linda mentioned, when reporting adjusted EBITDA, we have revised our adjusting items to reflect certain nonrecurring or one time transaction, transition and financing costs related to our growth opportunities.

Speaker 1

We believe adjusted EBITDA before non recurring or one time costs will assist investors to assess our performance on a consistent basis. Details of the calculations and adjustments can be found in our MD and A under the section Terminology. Consolidated adjusted EBITDA increased in the 2nd quarter to $18,200,000 or by 25.2 percent compared to $14,600,000 in 2023. Adjusted EBITDA margin increased by 1.4 percent to 19.5% from 18.1%. Adjusting items include non reoccurring transaction, transition and syndication and structural financing costs.

Speaker 1

Consolidated EBITDA increased in the quarter to $16,600,000 or by 14.3% compared to $14,500,000 in 2023. Consolidated EBITDA margin decreased to 17.7% in 2024 from 18% in 2023. For the Canadian division, Q2 adjusted EBITDA margin increased to 18.9% in 2024 from 18.2% in 2023. Without adjusting items, the EBITDA margin in the 2nd quarter decreased to 17% in 2024 from 18.1% in 2023. The decrease in margin is primarily related to non reoccurring items, which include transaction transition and syndication and structural financing costs.

Speaker 1

For the UK division, Q2 adjusted EBITDA margin increased to 20.8% in 2024 from 17.6% in 2023. Without adjusting items, in the 2nd quarter, the EBITDA margin increased to 19.4% in 2024 from 17.6% in 2023. The improvement in EBITDA margin is primarily related to the acquisition of Shortridge in April 24, delivery and labor cost efficiencies and the impact of price earnings decreased by $200,000 or by 3.3 percent from $4,700,000 in 2023 to $4,500,000 in 20.24 and net earnings as a percentage of revenue decreased by 0.9% to 4.9% from 5.8% in 2023. The decrease in net earnings is due to increased depreciation and amortization related to Shortridge, Parana and Bill Ray assets acquired as well as due to non reoccurring transaction transition and syndication and structural financing costs. Adjusted net earnings increased by $1,400,000 or by 30 percent from $4,800,000 in 2023 to $6,200,000 in 2024.

Speaker 1

Wages and benefits in the Q2 of 2024 increased by $4,200,000 to $35,200,000 compared to $31,000,000 in the comparative period of 2023 and as a percentage of revenue decreased by 0.8 percentage points to 37.6%. The decrease as a percentage of revenue is primarily related to the corporation's acquisition targets and the integration of their cost profile. Linen in the Q2 of 2024 increased by $800,000 to $9,100,000 compared to $8,300,000 in the comparative period of 2023 and as a percentage of revenue decreased by 0.5 percentage points to 9.7%. The decrease as a percentage of revenue is primarily related to the changes in linen mix and a higher hospitality volume process compared to the prior year. Utilities in the Q2 of 2024 increased by $700,000 to $7,000,000 compared to $6,300,000 in the comparative period of 2023 and as a percentage of revenue decreased by 0.3 percentage points to 7.5%.

Speaker 1

The decrease as a percentage of revenue is primarily related to the impact of price increases secured across various markets. Delivery in the Q2 of 2024 increased by $1,500,000 to $10,900,000 compared to $9,400,000 in the comparative period of 2023 and as a percentage of revenue remained relatively consistent at 11.6%. Occupancy costs in the Q2 of 2024 increased by $300,000 to $1,700,000 compared to $1,400,000 in the comparative period of 2023 and as a percentage of revenue remained consistent. Materials and supplies in the Q2 of 2024 increased by $600,000 4

Speaker 2

increased by $600,000 to $3,800,000

Speaker 1

compared to $3,200,000 in the comparative period of 2023 and as a percentage of revenue remained consistent. Repairs and maintenance in the Q2 of 2024 increased by $1,000,000 to $4,100,000 compared to $3,100,000 in the comparative period of 2023 and as a percentage of revenue increased by 0.6 percentage points to 4.4%. The increase as a percentage of revenue is primarily related to bill rate transition costs and the timing of maintenance activities. Corporate costs in the Q2 of 2024 increased by $1,500,000 to $5,200,000 compared to 3 point $7,000,000 in the comparative period of 2023 and as a percentage of revenue increased by 1 percentage point to 5.6%. The increase as a percentage of revenue is primarily related to transaction costs, including legal, professional and consulting fee expenditures related to acquisition as well as the syndication costs for the corporation's credit facility.

Speaker 1

These costs are non reoccurring in nature and are further defined within our MD and A. Now looking at our capital resources, distributable cash flow for the Q2 of 2024 was $9,700,000 and our payout ratio was 32.7%. The company paid out 0.3 dollars per share in dividends during the quarter for total consideration of $3,200,000 The corporation had net working capital of $52,500,000 at the end of the Q2 of 2024 compared to its working capital position of $41,400,000 at December 31, 2023. The increase in working capital is primarily attributable to the acquisitions of Shortridge and Centimeters as well as the timing of cash receipts from customers. With regards to the credit and liquidity, we have a strong balance sheet and ample undrawn capacity on our syndicated revolving credit facility with an operating line of $175,000,000 and a further $75,000,000 accordion for growth purposes.

Speaker 1

At June 30, 2024, after the acquisitions of Shortridge and Centimeters, we had an undrawn balance of close to 36 $500,000 on our operating line without taking into account the accordion, reinforcing our strong liquidity. This represents a debt to EBITDA ratio excluding leases of just under 2.5 times. I'll now turn things back over to Linda for additional commentary. Linda?

Speaker 2

Thank you, Christy. So we're excited by our strong year to date performance and see a positive outlook for our business. Over the past year and a half, we've acquired 4 complementary high quality laundry operators. In Canada, we see attractive growth opportunities in Quebec, Nevada, Parinet, Villare and Centimeters to our platform. In the U.

Speaker 2

K, Shortridge expands and diversifies our customer base and positions our combined U. K. Business for more growth as we look to extend Cabro's geographic reach south into the U. K. Both of Cabro's Healthcare and Hospitality segments continue to experience steady growth in trends.

Speaker 2

Healthcare volumes remain steady as hospitals focus on reducing wait times and backlogs. We also see a continued trend from care providers towards reusable products. Hospitality volumes have recovered and business and international travel have returned. We continue to see strong levels of activity across Canada and the UK. We expect adjusted EBITDA margins to follow historical seasonal trends.

Speaker 2

Our vision for Cabro centers around delivering industry leading service, putting people first and supporting the communities in which we operate. We're proud of our reputation for looking after the interests of our valued customers and being dependable partners to all stakeholders. Paranaet, Villarey, Centimeters and Shortridge share our values and we're excited for the potential these acquisitions present for our future. We see a positive outlook and continued momentum in both healthcare and hospitality and attractive growth opportunities. Strategic acquisitions of complementary high quality operators continue to be an important contributor to Cabro's overall growth profile and we continue to have an active M and A pipeline.

Speaker 2

We remain well positioned from a balance sheet and liquidity perspective and will continue to be disciplined as we evaluate acquisitions. I'll now turn it over to answer any questions we have with regards to the Q2.

Operator

Thank Your first question comes from Derek Lessard at TD Cowen. Please go ahead.

Speaker 3

Yes. Good morning, Slinda and Christy, and congratulations on a really strong quarter.

Speaker 2

Thank you and good morning, Derek.

Speaker 4

Linda, maybe I just want

Speaker 3

to talk on your positive outlook and just maybe if you could talk about that in relation to hospitality and some of the clouds that are gathering on the macro front, particularly as it relates to the consumer and maybe the impact on future travel, particularly the U. S. Travel to Europe, which is up, I think, at record highs?

Speaker 2

Based on feedback that we have seen from our customers and just in discussions with them, they still seem pretty positive about the outlook for the balance of the year. I would also say that convention and large group travel, which has to be booked months, if not years in advance, has come back into play. So we haven't seen any significant warning signs to say that, we won't finish the year on the hospitality front in line with what we've seen in Q2 is really the best I can answer that, Derek.

Speaker 3

Okay. No, that's super helpful. And I guess maybe there is also some industry data that's pointing to the return of business travel. Curious on what you're hearing from the business side of the business travel side?

Speaker 2

It's really hard for us to discern a business traveler from a leisure travel. Some of our markets are more geared to leisure. For example, the U. K, we service Edinburgh, which there is business travel there, but a lot of the Scottish business is leisure travel. In markets like Toronto, we are definitely seeing a pickup in demand from business travel.

Speaker 2

But it is hard for us to break that down between various travel types.

Speaker 3

Okay, that's fair. And one last one for me before I re queue. Maybe if you could help us understand, I guess, the relative contribution to growth from pricing versus volume?

Speaker 2

Sure. Absolutely. Christy, do you want to handle that one?

Speaker 1

Yes. Yes, sure. So I think just overall on a consolidated basis, Derek, about half of the just over half would be related to acquisitions and volumes, so in the 60% range and about 40% would be price.

Speaker 3

Thanks for that. I'll reach you. Thanks everybody.

Operator

Thank you. Next question comes from Michael Glen at Raymond James. Please go ahead.

Speaker 5

Hey, good morning. Just following on the last question there. Linda, are you able to indicate what Q2 organic growth was if we peel out the M and A from the quarter?

Speaker 2

It's about 8% between price and volume, Michael.

Speaker 5

Okay. So this would look to be trending above what you had seen historically? Any like is this still a rebound in hospitality coming through? Or is there a lot of things happening on the healthcare side pushing that number higher as well?

Speaker 2

I'd say it's about half and half, Michael, between hospitality and healthcare. Okay.

Speaker 5

And just on the renewals that, you flagged to us earlier in the year, can you give an update on where we sit with the renewals and progress towards that?

Speaker 2

Christy, do you want to respond to that?

Speaker 1

Yes, sure Linda. Thank you.

Speaker 2

So what I would say

Speaker 1

to that is overall there's still there are still contracts that will come due throughout the balance of the year. In terms of those that have been renewed to date, roughly about half of them, Michael, have been renewed to date.

Speaker 5

So that would be 1 half of I think the number was $67,000,000 or Correct. Correct.

Speaker 1

In the $70,000,000 range. Correct.

Speaker 5

In the 7th so roughly half of the $70,000,000 renewed. Okay.

Speaker 2

And I would just the one thing I would add on that, I would say of the 50% remaining, I'd say half of that is trending and positive discussions, but the paperwork hasn't been signed, Michael. So we're in and the balance of it comes due throughout the balance of the year.

Speaker 5

Okay. And any can you just also provide a comment on your on the outlook for organic win opportunities or RFPs coming in the next year or 2?

Speaker 2

Yes. I'd say in the next throughout the balance of the year in 'twenty five, I would say there's large chunks of volume coming up to RFP, I'd say in the tens of 1,000,000 of dollars in various markets.

Speaker 5

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

Speaker 2

Thanks, Michael.

Operator

Thank you. Next question comes from Kyle McPhee at Cormark Securities. Please go ahead.

Speaker 4

First, just a follow-up on the pricing contribution. So all the information you've provided from prior questions indicates pricing was about 6%, 6.5%. Does that and I think it was similar last quarter as well. Does that type of pricing contribution start to fall now going forward? Have you largely lapped the big round of inflation catch up pricing gains that became effective throughout last year?

Speaker 2

But I would say that's a fair comment, Kyle.

Speaker 4

Okay. And then just on I wanted to talk about Quebec. So regarding your most recent acquisition in the province that you announced in June, should we expect revenue to land at typical K Bro margins or any notable differences or margin mix impacts we should be aware of for that deal?

Speaker 2

I think you'll see it fall in line with our historical margin. It would be consistent with our existing margin profile.

Speaker 4

Okay. And then higher level on your Quebec plan, you've done a series of acquisitions in the province. The deals landed you with 3 facilities in the province. Looks like you already made the decision to close one site and consolidate the volume. Will you keep the 2 remaining sites or should we expect further facility consolidation in the province?

Speaker 2

I would say that it's a bit premature to comment on that. Our expectation is to maintain the existing facilities. The one you noted was in Granby and we have transferred the volume. At this point, we expect to keep our remaining facilities and grow the business and add additional volume to our plants.

Speaker 4

So is it a significant amount of excess capacity you're leaving yourself within the province? Like is Quebec going to be an above average organic volume growth province leveraging your now much bigger position in the province?

Speaker 2

We one of our vision was to expand capacity in the market for that reason exactly. It's a large market where we were we didn't have the capacity. So I would expect there to be a significant area of growth.

Speaker 4

Got it. Okay. And then last one, nice to see you're now adjusting for the true one time items in your results with a detailed breakdown. I assume one time costs will continue as you integrate the series of acquisitions you've done in Quebec and the UK. Can you provide guidance on the level of one time costs for the rest of this year and next year?

Speaker 2

I would expect it to be just for the remainder of this year. And I mean, a large part of those transition costs were legal and consulting in terms of PPA, in terms of legal costs associated with negotiating the purchase and sale agreement, the transition costs, I think, will not be overly material as we move forward for the balance of the year.

Speaker 4

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

Speaker 2

Thanks, Kyle.

Operator

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

Speaker 6

Good morning. Thanks for taking my call.

Speaker 2

Good morning, Kai. Justin.

Speaker 6

Thanks. Just some follow ups on the upcoming contracts. So if I understand correctly, there's $70,000,000 from existing customers to be renewed and then there's tens of 1,000,000 in RFPs, I assume, from competing companies?

Speaker 2

The 70 are our contracts being renewed in this year, of which more than half have been re signed. The tens of $1,000,000 of business that is out there, I would say, is business that will go out to RFP in beyond 2024.

Speaker 6

Understood. And the remaining $35,000,000 to be renewed, is that with 1 or several customers? And what's your confidence in that being renewed without any issue?

Speaker 2

We remain highly confident. I would say it's split between Canada and the U. K. There's not a large single customer that makes up a meaningful part of the remaining 35, Justin. But we feel very confident in our ability to renew it successfully.

Speaker 6

Okay. Thank you. And then what about the outlook on wages? We've seen some sizable increases with for companies that have unions in place. Do you feel confident in the margin outlook going into next year?

Speaker 2

I would say that we are as we continue to move in the back half of the year, some of that pressure has come off. I think we'll see higher than the 2% range, but we do feel confident in our ability to renew contracts in the lower single digit, not as low as historically, but we're not anticipating anything in the range of 5% to 10% increases.

Speaker 6

Okay. And then just finally on the comments on potential M and A, if you have any additional color as far as size and transaction or geographic focus? Thank you.

Speaker 2

Remain very focused on Canada and the U. K. As we've guided, our desire to continue to grow further south in the U. K. Is a priority.

Speaker 2

We're agnostic as to whether it's healthcare or hospitality. We both are key in our growth strategy. I'd say ranges anywhere from the size that we've previously announced in the $10,000,000 to $25,000,000 There are some larger ones, but it's hard to predict timing on any of those.

Speaker 6

And target multiples, I know Shortridge, the multiple was implied at a bit of the higher end of Cabral's typical range, would you anticipate future M and A to be at or below those levels?

Speaker 2

Yes. I would say typical range is 6 to just over 8 times, slightly over 8 times is what our range has historically been.

Speaker 6

Thank you for taking my questions.

Speaker 2

You bet.

Operator

Thank Next question is a follow-up from Derek Lessard at TD Cowen. Please go ahead.

Speaker 3

Yes. Just one follow-up and a couple of housekeeping for me. Linda, maybe just on the Shortridge acquisition, could you just talk about how the integration is going? Any incremental learning since acquiring them and maybe some opportunities to leverage that capacity there?

Speaker 2

I'd say it's been a relatively smooth acquisition and transition. The existing management team, which we have a very high degree of confidence in, has stayed on. The back of the house integration, which is Christie's department has gone relatively smooth. So they use the same IT platforms as we do. So a lot of that has been simplified.

Speaker 2

I would say that we continue to they continue to work very closely with Fishers to identify opportunities where there could be synergies and opportunities to bid for and expand our geographic reach. So overall, I would say that it's gone very well. We're pleased with how it's unfolding up till this point.

Speaker 3

Awesome. And maybe just some housekeeping just on and for Christy, like on your working capital, any changes to working capital expectations for the year given the acquisitions?

Speaker 1

I think we would predominantly have seen that in this quarter, Derek. I don't expect to see any huge investments going forward into the balance of the year.

Speaker 3

Okay. And the same thing for depreciation. It was higher this quarter. I'm assuming that reflects the recent acquisitions. Should we basically consider the new run rate?

Speaker 1

Yes. It will be slightly higher than that considering the 2 new acquisitions weren't fully reflected for the entire quarter given the timing of when they were purchased, but not materially higher.

Speaker 3

Okay. And just one last one on the finance expense, which was also higher. One time related to M and A as well?

Speaker 1

Related to M and A, not one time, just given the higher level of borrowing, interest expense or finance expense will be higher going forward in correlation to higher debt levels.

Speaker 3

Got it. Thanks everyone.

Operator

Thank you. And the next question comes from Michael

Speaker 2

Glynn at Raymond James. Please go ahead.

Speaker 5

Hi. Just updated CapEx guidance for this year and perhaps if you could indicate for 2025 what CapEx might look like as well?

Speaker 1

Kristine? Sure. Yes, sure. So for 2024, in line with the guidance that we've included within the MD and A towards the upper end of the guidance, which in the guidance was up to $17,000,000 And then in terms of the 20 25 outlook, I would say consistent with what we've said in the past in that $10,000,000 or just under $10,000,000 range.

Speaker 5

Okay. So the this for this year then the CapEx will drop off quite a bit in the back half

Speaker 2

of the year versus Yes.

Speaker 1

So I mean a large portion of that CapEx, just kind of the change between historical guidance in this year were one time projects that we had announced previously related to our acquisitions in Montreal as well as an investment in the UK in one of our plants.

Speaker 5

Okay. Okay. Thank you.

Operator

Thank you. We have no further questions. I will turn the call back over to Linda McCurdy for closing comments.

Speaker 2

Well, thank you everyone for joining today. Enjoy the rest of the summer. And if there's any follow-up, please reach out to Christy or I.

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