K-Bro Linen Inc
TSX:KBL

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K-Bro Linen Inc
TSX:KBL
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Price: 38.14 CAD -0.94% Market Closed
Market Cap: 399.1m CAD
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Earnings Call Transcript

Earnings Call Transcript
2018-Q1

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Operator

Good morning, my name is Denise and I'll be your conference operator today. At this time, I'd like to welcome everyone to the K-Bro Linen Systems Inc. First Quarter Results Conference Call. [Operator Instructions] Kristie Plaquin, CFO, you may begin your conference.

K
Kristie L. Plaquin
Chief Financial Officer

Thank you. Good morning, ladies and gentlemen, and thank you for joining us. On this morning's call, we will discuss our financial results for the 3 months ended March 31, 2018. Joining me this morning is a Linda McCurdy, President and Chief Executive Officer. Before I turn the call over to Linda, I'd like to remind everyone that statements made during our prepared remarks or in the Q&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 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. The business prospects of K-Bro Linen Inc. are subject to a number of risks and uncertainties that may cause actual results to differ materially from a conclusion, forecast or projection in the forward-looking information. Actual results could differ materially from those anticipated. Risk factors that could affect the results are detailed in the corporation's public filings. Please note that K-Bro is under no obligation to update any forward-looking information discussed today. Investors are also cautioned not to place undue reliance on these statements. For more information about these risks, uncertainties and assumptions, please refer to our annual information form and our Management Discussion and Analysis, which are available on SEDAR and our corporate website. With that said, I'll now turn the call over to our CEO, Linda McCurdy. Linda, go ahead.

L
Linda Jane McCurdy
CEO, President & Director

Thank you, Kristie and good morning, ladies and gentlemen. Thank you for joining us today. I am very pleased to have the opportunity to report on our first quarter of 2018. I'll start with giving you a bit of a preview in terms of our top line. We have seen significant growth in the top line, and our healthcare division volumes have shown significant increases, with revenue for the 3-month period ended March 31, 2018, of $32.1 million, an increase of $4 million or 14.2% on a quarter-over-quarter basis. This increase was due largely because of the additional healthcare -- awarded healthcare volume from the Vancouver/Lower Mainland contract signed in 2016, Trillium Health Partners volume, William Osler Health System volume, organic growth at existing customers and new customers secured in existing markets. Our first quarter hospitality revenue in the quarter was $23.3 million, an increase of $12.4 million or a 113.8% on a quarter-over-quarter basis. This was primarily due to the acquisition of Fishers in Scotland. The relative proportion of healthcare and hospitality revenue as a percentage of total revenue decreased from the comparative quarter of 2017 from 72% to 57.9% of total revenue. Again this primarily related to the acquisition of Fishers with their business being predominantly in the hospitality sector. I'm going to turn it over to Kristie for a detailed review of the quarter and then we'll talk about our strategic initiatives and our progress. So over to you, Kristie.

K
Kristie L. Plaquin
Chief Financial Officer

Thanks, Linda. As Linda mentioned, I'll provide commentary on our consolidated results for the first quarter. My comments will focus on our key performance drivers, which are centered on growth, profitability and stability. The information discussed is also highlighted in our news release and detailed supplemental financial information, which can be found on our investors relations website under the heading Financial Documents. For the three months ended March 31, 2018, K-Bro's revenue increased by 42.2% to $55.4 million compared to $39 million in 2017. This increase was due to the acquisition of Fishers, which contributed $12.1 million in additional revenue, additional awarded healthcare volume from the Vancouver/Lower Mainland contract, which was signed in 2016 as well as Trillium Health Partners, William Osler Health System health Systems volume, organic growth at existing customers and new customers secured in existing markets. For the 3 months ended March 31, 2018, approximately 57.9% of K-Bro's revenue was generated from healthcare institutions, which compares to 72% in Q1 of 2017. And this change is primarily related to the Fishers volume, which is heavily concentrated in the hospitality sector. EBITDA increased to $6.2 million for the 3 months ended March 31, 2018, which compares to $4.8 million in the comparative period of 2017. On the consolidated basis, the EBITDA margin decreased from 12.2% in 2017 to 11.2% in 2018. For the Canadian division, the EBITDA margin increased to 12.7% from 12.2% for the comparative period of 2017. The change in the consolidated EBITDA margin is primarily associated with the seasonality of hospitality volume related to the acquisition of Fishers, whereby Q2 and Q3 are stronger quarters due to increased tourism. The change in the Canadian EBITDA margin relates to capacity constraints with the Vancouver transition as well as rising minimum wage rates in advance of future revenue price escalators, offset with efficiencies gained as a result of capital expenditures made to build our new Toronto plant. Management estimates that the onetime costs incurred in the quarter related to the Vancouver transition and capacity constraints were approximately $1 million. After adjusting for this, from a Canadian perspective, EBITDA would have been $6.5 million and the Canadian EBITDA margin would have been 15.1%. For the 3 months ended March 31, 2018, net earnings decreased by $0.7 million or 48% from $1.3 million in 2017 to $0.6 million in 2018. And net earnings as a percentage of revenue decreased by 2% to 1.2% in 2018 from 3.2% in 2017. This decrease in net earnings is primarily due to the flow-through of EBITDA items discussed earlier, higher finance costs related to increased borrowing under our credit facility, higher depreciation of property, plant and equipment, offset by lower income tax expense. Wages and benefits increased to $23.3 million in 2018 from $16.4 million in 2017 and increased as a percentage of revenue from 42% in 2017 to 42.2% in the same period of 2018. Wages and benefits include $4.6 million related to the U.K. division. This increase in the period is due to the incremental labor required to process higher volumes, significant overtime costs and onetime costs to support business, strong volumes and temporary capacity constraints in certain of our markets. Rising labor cost from the incremental increase in minimum wage also impacted labor. Linen expenses increased to $6.4 million in 2018 from $4.4 million in 2017 and increased as a percentage of revenue to 11.6% from 11.4% in 2017. Linen expenses include $1.3 million related to our U.K. division. The remaining increase is a result of increased healthcare volume from new customers. Utility costs increased to $3.5 million compared to $2.7 million in 2017, and decreased as a percentage of revenue to 6.4%. Utility costs included $0.9 million related to the U.K. division, and the remaining variance is primarily due to the incremental volume processed, higher carbon levy rates in Alberta, offset by improved efficiencies in the new Toronto facility. Delivery costs increased to $7.4 million and to 13.4% as a percentage of revenue compared to $4.2 million and 10.7% in 2017. Delivery costs include $2.5 million related to the U.K division. The remaining increase is the result of increased business activity, measures to address temporary capacity constraints at our Vancouver facility, higher carbon levy rates in Alberta and higher cost of diesel. Occupancy costs increased to $2.3 million and to 4.1% as a percentage of revenue compared to $1.5 million and 3.7% in 2017. Occupancy costs include $0.7 million related to the U.K. division. The remaining increase is a result of the new Toronto facility, additional warehousing costs to address temporary storage requirements related to the additional volumes from the Vancouver/Lower Mainland contract. Materials and supplies increased to $2 million and to 3.5% as a percentage of revenue compared to $1.5 million and 3.9% in 2017. Materials and supplies include $0.6 million related to the U.K. division. Materials and supplies as a percentage of revenue decreased, primarily related to the transition costs in 2017 associated with the move to the new Toronto facility. Repairs and maintenance increased to $1.8 million and to 3.3% as a percentage of revenue compared to $1.4 million and 3.5% in 2017. Repair and maintenance includes $0.3 million related to the U.K. division and the remaining changes are primarily due to timing of scheduled maintenance activities. Corporate costs increased to $2.4 million and to 4.4% as a percentage of revenue compared to $2.2 million and 5.5% in 2017. Corporate costs include $0.4 million related to the U.K. division. Changes in corporate costs are primarily related to the timing of costs and initiatives to support the corporation's growth and business strategies across the plant. We continue to manage distributable cash flow and monitor our payout ratio for purposes of assessing dividend solvency and managing our overall financial position. Our distributable cash for Q1 2018 was $5.2 million, which is 15.5% higher than Q1 2017. Our payout ratio for Q1 was 60.6% compared to 53.5% in 2017. This level is conservative. However, we continue to believe that our payout ratio provides us with the financial flexibility to execute on our strategy, capitalize on growth opportunities and ensure sufficient liquidity for expansion, development and dividends. Our debt to total capitalization has increased from 18.4% at December 31, 2017, to 22.5% at March 31, 2018. Due to the strategic plans K-Bro expects to execute on in the coming fiscal year, we do expect that debt to total capitalization to increase as a result of strategic capital expenditures made to build out the new Vancouver facility. We believe the unutilized balance of $42 million with respect to the revolving credit facility is sufficient for the corporation's operations in the foreseeable future. With respect to K-Bro's overall financial position as at March 31, 2018, K-Bro had net working capital of $34 million compared to its working capital position of $32 million at December 31, 2017. The increase in working capital is primarily attributable to timing differences related in the cash settlement of new plant equipment and deposits related to the acquisition of equipment across the plants. Total assets increased to $312.2 million compared to $295.2 million at December 31, 2017, while total liabilities increased to $108.3 million at March 31, 2018, from $93.6 million at December 31, 2017. Shareholders' equity increased to $203.9 million from $201.6 million at year-end or a book value of $19.49 per common share. Based on all of our key performance drivers, we are confident in our business model and are pleased with the significant progress we made in increasing our top line during the quarter. On that note, I'll now turn things over to Linda who will discuss K-Bro's outlook and strategy going forward.

L
Linda Jane McCurdy
CEO, President & Director

Thank you very much, Kristie, and again just to summarize, our EBITDA margin decreased in the quarter to 11.2% from 12.2% in the comparative period of 2017. And the change in the consolidated EBITDA margin is consistent with our expectations and primarily associated with the seasonality of the hospitality volume related to the acquisition of Fishers, whereby Q2 and Q3 are significantly stronger quarters due to increased tourism and hotel occupancies. The change in the Canadian EBITDA margin relates to capacity constraints related to the Vancouver transition, costs associated with the transition in the Vancouver plants as well as rising minimum wage rates in advance of future revenue price escalators, offset with the efficiencies gained as a result of the capital expenditures made in our new Toronto plant. Management estimates the onetime cost incurred related to the Vancouver transition and capacity constraints at the Vancouver plant for the quarter to be approximately $1 million. After adjusting for the onetime cost, consolidated EBITDA would have been $7.2 million and consolidated EBITDA margin would have been 13% and the Canadian margin would have been 15.1%. Our first quarter net earnings were -- per share were $0.06 on a basic and fully diluted basis compared to net earnings per share of $0.16 basic and diluted for the comparable period in 2017. Distributable cash flow per share on a fully diluted basis was $0.496 for the first quarter. This the first full quarter that we've had our Scottish acquisition under the K-Bro umbrella and we're very excited to add the Fishers platform as our first acquisition outside of Canada. Fishers is our largest acquisition to date and is aligned with our growth strategy. Fishers has -- provides us with a critical mass in an attractive new geographical region and is well positioned for future growth. The U.K. linen hospitality market is mature and highly fragmented and we expect to leverage Fishers' leading market position, experienced local management team, entrenched customer relationships and proven track record of stable and profitable operations to take advantage of the significant organic growth and consolidation opportunities available to us similar to what we have achieved in Canada. In terms of updates regarding our key strategic priorities, I'll start with an update in Toronto. In terms of the Toronto plant, we are very pleased with the progress we have made in optimizing the plant in the quarter. We continue to work on further productivity improvements in utility consumption reductions but we've had -- but we've made significant progress in the quarter. Management estimates that the cost to commission the facility is -- remains at the $37 million for new efficiency-enhancing equipment and leaseholds. As of March 31, K-Bro has incurred $37 million of the total expected capital cost. Our strategy in Toronto includes significant growth in healthcare and hospitality volumes and the additional capacity in the long-term lease of the facility enables us to grow into the additional capacity as opportunities emerge. Management believes that many new customer opportunities will present themselves to K-Bro going forward. In terms of BC, in 2016, K-Bro commenced the planning and development of a new state-of-the-art facility with a projected investment of up to $55 million. As of March 31, 2018, we've incurred $44.9 million of the total expected cost. The new Vancouver plant is located in Burnaby, and we began transitioning to the new plant at the end of the first quarter of 2018. The new facility will enable K-Bro to expand current capacity to accommodate the additional awarded volume in the lower mainland and to provide the opportunity to consolidate the health -- all of our healthcare volume from our two existing facilities into one plant. In addition to investing in the new healthcare facility, we are upgrading and replacing equipment at one of -- at our other existing Vancouver facility, which will be used to process the consolidated hospitality volume. We will not be renewing the lease for the remaining Vancouver area facility and the related assets will be transferred to other K-Bro facilities. We believe this will enable us to achieve significant operating efficiencies at our new plant. In terms of the actual transition, in the quarter -- at the end of the quarter, we commenced moving all of our healthcare volume and anticipate that this will -- the healthcare will be completed -- the move of the healthcare will be completed by the end of May. So we are well on the road there. We will then commence moving the hospitality volume into the upgraded facility in June with this piece of the transition completed by the end of July. It's anticipated that the transition costs associated with these new Vancouver plants -- the new Vancouver plant and upgrade will negatively impact EBITDA margin as they have in Q1. This will continue in Q2 and Q3, while the plants become operational. Similar to 2017, we view 2018 as a transition year that will impact our margins, but once complete, will enable us to realize additional efficiencies, increased capacity and increased market share. As we have experienced with all of our transitions, the margin pressure may vary quarter-to-quarter. However, we believe that the onetime transition costs incurred in 2018 will position the company to achieve more growth at a lower cost structure into the future, and that the company will return to normalized margins as it enters 2019. We have a development in Alberta. As we disclosed in our financial statements and our MD&A, we have signed an asset purchase agreement to acquire all of the assets of a private laundry and linen services company operating in Calgary, servicing the Calgary and the Banff market -- Banff and Canmore market. The acquisition is expected to close on October 1, 2018 for total consideration of $4.7 million, and we anticipate that this will translate into EBITDA of approximately $600,000. This is a strategic acquisition of a reputable operator in Calgary and, as always, we are focusing on delivering high-quality service to our customers. On closing in October, we will service the existing volumes from the acquired facility and we'll evaluate the opportunity to realize additional efficiencies by transferring the volumes to our state-of-the-art Calgary facility. However, the timing for any volume transition has yet to be determined. In terms of Fishers, we are currently integrating the acquisition into our portfolio and we're very pleased with how things are going. Key priorities for this acquisition include developing our capital investment plan, renewing all of our key contracts and securing new business. We anticipate run rate CapEx of approximately $3 million over the -- on an annual basis over the next several years. So overall, K-Bro continues to be focused on profitable growth in the years to come as we execute on our strategy of expanding geographically within Canada as well as adding new services to our customers. We remain committed to building value for our shareholders, our customers and our employees. We continue to aggressively go after new business, we have several proposals pending out there and have entered discussions with new customers. In addition, we continue to seek potential acquisition candidates as we have in the Calgary market and we remain committed to grow through acquisition as well. So in summary, we believe we have significant growth opportunities going forward inside Canada as well as outside of Canada. We are pleased with the progress we've made, in particular, the operational improvements we've seen in the Toronto plant and the significant development of our new Vancouver facility and the progress we've made in terms of transitioning volumes into the new healthcare plant. We are definitely excited to have the transition and the upgraded facility of the second Vancouver plant complete and are looking forward to having a highly efficient network of processing facilities, enabling us to further grow our business in Canada. I want to thank you all for joining us today and we'd like to open it up now to any questions you might have.

Operator

[Operator Instructions] Your first question comes from Lennox Gibbs with TD Securities.

L
Lennox Gibbs
Research Analyst

Couple of questions on Fishers. What retention rates are you modeling with respect to contract expiries that are likely to happen over the next 24 months?

L
Linda Jane McCurdy
CEO, President & Director

So in terms of retention rates, what I would say, Lennox, and thank you for the question, I would say we anticipate that we will be net gaining, in terms of new business and retaining -- retaining business. What I mean by that is there's definitely more churn in this business. We will lose some accounts, but overall we are anticipating that we will gain net revenue over the next 24 months.

L
Lennox Gibbs
Research Analyst

Okay. And what -- what's the argument for gaining new business? I understand routine. What's the argument for gaining new business?

L
Linda Jane McCurdy
CEO, President & Director

We have been out to customers. We have met with major customers, we've met with new customers and I think one of the things that really held Fishers back in the past was the uncertainty around the ownership structure. And will it be sold? When will it be sold? Who will it be sold to? And that was a significant concern for customers, potential and new. So the argument I would say is now that they see a stable ownership group, a strategic acquirer and one who continues to make investments in the plants, I think that will create opportunities for us, Lennox.

L
Lennox Gibbs
Research Analyst

Okay. And then secondly on Vancouver, when would you expect to get earliest indications regarding employee retention at the new facility?

L
Linda Jane McCurdy
CEO, President & Director

So, I mean having moved a significant amount of the healthcare volume already, I can say that we are feeling good about the labor pool that we are being able to attract. So as we were hoping and anticipated, we are attracting employees from Surrey. So that is all a good news, the fact that we are getting people through the door. I think that there still in the early days is a high degree of turnover, but what we remain very -- what we are pleased about is that we are getting people coming through the door, which is a great first start.

L
Lennox Gibbs
Research Analyst

So would you expect to have reasonable visibility in a couple of months? Is that a fair way to look at it?

L
Linda Jane McCurdy
CEO, President & Director

Absolutely, yes. For sure, within two months we will have a sense.

Operator

Your next question comes from the line of Elizabeth Johnston with Laurentian Bank Securities.

E
Elizabeth Johnston
Analyst

Just continuing on the discussion of Fishers. In terms of the seasonality, can you give us a sense of the magnitude of that seasonality in terms of the margin we should expect in Q2, Q3? Given what you reported so far, it implies that the mid -- middle of the year is much, much stronger on a margin perspective. Is that a fair statement?

L
Linda Jane McCurdy
CEO, President & Director

Absolutely, absolutely. And I don't think that's significantly disproportionate to Canada, but overall historic margins have been around 14%. I don't think our view has changed on that at all. So if you see the margins where they are at today, that would absolutely conclude that Q2 and Q3 are substantially stronger.

E
Elizabeth Johnston
Analyst

Okay. So -- and given that it looks like in Q2 and Q3 it's likely that over 75% of the Fishers' EBITDA contribution is going to come in those two periods?

L
Linda Jane McCurdy
CEO, President & Director

Correct.

E
Elizabeth Johnston
Analyst

Okay. And just turning back over to transition costs, the $1 million that you called out. Since the transitioning of volumes in Vancouver really started only at the end of the period, can you break out in terms of that $1 million and how much of that was related to moving volumes more directly as opposed to capacity constraints that you are experiencing?

L
Linda Jane McCurdy
CEO, President & Director

That becomes pretty challenging because it all blends together some as the preparation before the volume moves. So that becomes a very difficult exercise. What we know is -- we know the efficiencies that we need to run at, we know that what we were running in both of -- all three of the plants at that time when the costs incurred, but it comes very challenging to break that out, Elizabeth.

E
Elizabeth Johnston
Analyst

Okay. But overall, if we can look at -- looking at the expected transition costs at least at this point, cognizant that it's early days with respect to the employee turnover, but comparing it to your experience with Toronto. Is it still expected to come in, overall, as a lower amount of transition cost. Is that still true?

L
Linda Jane McCurdy
CEO, President & Director

I would say it's probably not going to be as low as we had hoped, but we do expect it to be lower than Vancouver -- sorry, than Toronto.

E
Elizabeth Johnston
Analyst

Okay. Great. And just a final question from me at your acquisition that you -- in the quarter in Calgary. Is that plant mostly hospitality volumes?

K
Kristie L. Plaquin
Chief Financial Officer

Yes. 100% hospitality

Operator

Your next question comes from the line of Endri Leno with National Bank.

E
Endri Leno
Associate

Just a couple from me really. First, I was wondering if you are able to quantify the impact of the minimum wage in the quarter and when will the price escalations on this contract start to apply and how much will they be able to offset the minimum wage impact?

L
Linda Jane McCurdy
CEO, President & Director

So because part of it is a negotiation process, it's going to be difficult to say what the outcome will be of those discussions. I would say that some of our price increases are contractual, so there's no negotiation process associated with that. The majority of the price increases come into place over Q2 and Q3. I would say excluding -- we talked about the onetime costs, I would say the minimum wage impact in Q1 would've been around 150 basis points.

E
Endri Leno
Associate

Okay, okay. Great. And the next question, it's more on the Alberta, the Calgary Health Services. You are on the one year, you renewed the contract for one year. I mean, have you started discussions with them to put them on a more permanent basis and for like let's say another 10-year length and if you haven't already, like when would you expect to begin those negotiations?

L
Linda Jane McCurdy
CEO, President & Director

So given the nature of the business and the fact that it is a government contract, it would be our expectation that they will go to a formal tender process. And that remains on their timing, not our timing. And that's really the only update we would have there.

Operator

Your next question comes from the line of Justin Keywood what the GMP Securities.

J
Justin Keywood
Analyst

For the margins on the Canadian division. If we assume there was $1 million of onetime items and if there was a 150 bps of the minimum wage impact, was there any other increased cost -- or maybe not onetime, but is not expected to continue going forward?

L
Linda Jane McCurdy
CEO, President & Director

Not so much, Justin. Again -- those would be the primary drivers behind it. Kristie, there was nothing else from there that comes to mind?

K
Kristie L. Plaquin
Chief Financial Officer

No, no, nothing else.

J
Justin Keywood
Analyst

Okay. And then on that 150 bps in minimum wage impact. How should we expect that to be recaptured over the next few quarters through the price increases? Like will this be gradual? Or how will that play out?

L
Linda Jane McCurdy
CEO, President & Director

So I think most -- our expectation is most of that will come into play in Q2 and Q3. Again, some of those are scheduled price increases. Most of our healthcare contracts have escalators that come into place in Q2 because of health authorities run their years ending at the end of March. So that's when we see price increases generally in the start of Q2.

J
Justin Keywood
Analyst

Okay. And then just if you can provide an update on the new sales initiative for the Toronto plant and how you're seeing the organic growth progressing there?

L
Linda Jane McCurdy
CEO, President & Director

Again, we remain very confident in our growth prospects there. We've seen -- we see a number of RFPs out there and we're somewhat restricted in being able to disclose which RFPs are out there. As much as they're public documents they're -- they still require us not to talk specifically about them. But there is a good inflow of RFP activity out there on the healthcare side. And on the hospitality side, we are out there speaking with accounts that we're not currently processing with and we're getting significant interest.

J
Justin Keywood
Analyst

Okay. That's good to hear. And then just for the acquisition in Alberta. Is the idea to close the plant that they are working out of and transfer the volume over to the main one?

L
Linda Jane McCurdy
CEO, President & Director

So we won't be doing that right at close, which is at October 1. We will continue to operate that facility and we'll be evaluating what additional efficiencies could be achieved by transferring the volumes to our Calgary plant. So the timing of those moves have not been determined yet, Justin.

Operator

Your next question comes from the line of Brian Pow with Acumen.

B
Brian D. Pow
VP of Research & Equity Analyst

My question is related to, again, the performance of Fishers. I know you don't or didn't provide comparative information to last year. But can you just indicate how the business performed this quarter versus last year?

L
Linda Jane McCurdy
CEO, President & Director

So I would say it would have been down from last year as the result of the loss of one of an account that was of reasonable significance to them. So year-over-year, they would be down from last year. But outside of that one customer that I just referred to, it would be very comparable.

B
Brian D. Pow
VP of Research & Equity Analyst

Okay. And then just sort of looking at it -- when you first announced the acquisition you're sort of on a revenue run rate of around $60 million. So this quarter what sort of puts -- if you are able to maintain that, right, you'd be about at 20% of revenue this quarter. Just sort of thinking -- again wondering if that annual run rate is still sort of one that we should be thinking of?

L
Linda Jane McCurdy
CEO, President & Director

Yes, I think it's still achievable. There is just a dramatic difference between Q1 and 4 and Q2 and 3.

B
Brian D. Pow
VP of Research & Equity Analyst

And again, Q4 is even weaker than Q1? Is that correct?

L
Linda Jane McCurdy
CEO, President & Director

Kristie, do you know that off the top of your head?

K
Kristie L. Plaquin
Chief Financial Officer

I don't. I think they'd be fairly similar.

B
Brian D. Pow
VP of Research & Equity Analyst

Okay. All right. So again, I think to Elizabeth's questions earlier, I mean I see -- probably see about 60% of your revenue coming in Q2 and Q3 and then I see a higher percentage of your EBITDA contribution.

L
Linda Jane McCurdy
CEO, President & Director

Correct. 100% -- that's absolutely correct.

Operator

Your next question comes from the line of Scott Carscallen with Mackenzie Investment.

S
Scott Carscallen

Yes. I just want to go back to the Canadian margins. I hate to harp on this, but I want to make sure I am understanding the hit to the margins in the quarter. I think I've done my math right. I tried to create a smooth Canadian EBIT margin number for this year and that's adding back the noise from Vancouver and last year it's adding back the noise from the Toronto move. I get 15.1% for this quarter versus last year of about 18.1%, so about a 300 basis point difference. You had explained that the minimum wage had an impact of about 150 basis points, but there's still a bit of a discrepancy in there. And I'm wondering if I should be making that proper comparison or if there's just unexpected variability from quarter-to-quarter that you've talked about in prior discussions as the reason for the additional drop in the Canadian base margin?

L
Linda Jane McCurdy
CEO, President & Director

So what I would say is when you're saying 18% for 2017 that's the adjusted EBITDA with a onetime...

S
Scott Carscallen

Yes, I added back the $2.3 million from the Toronto move. Yes.

L
Linda Jane McCurdy
CEO, President & Director

Right, okay. So the $15.1 million plus -- we are comparing -- there's about 150 basis points difference is your question?

S
Scott Carscallen

Yes.

L
Linda Jane McCurdy
CEO, President & Director

I can't point to one specific thing on that, Scott. We remain confident and comfortable that our margins will restore to 2015 levels. There's not one single thing that I can point to on the difference -- on the margin difference.

S
Scott Carscallen

Okay, I appreciate that.

Operator

[Operator Instructions] Your next question comes from [ Dave Brown ], private investor.

U
Unknown Attendee

With respect to the new Calgary acquisition, what's the ratio of healthcare versus hospitality work that you're going to be doing in that facility?

L
Linda Jane McCurdy
CEO, President & Director

The acquisition is 100% hospitality.

U
Unknown Attendee

Okay. And then I missed the first part of your call, but with respect to Toronto facility, what capacity did you start at when you opened it and where are you right now? If that's a possible to tell me that?

L
Linda Jane McCurdy
CEO, President & Director

In high-level numbers, we were probably at about 40% and currently we are running at about 60%.

Operator

Your next question comes from the line of Endri Leno with National Bank.

E
Endri Leno
Associate

Just a quick one on that lost customer at Fishers. When was that customer lost? What was the reason and did you know it when you acquired, I'm guessing? And is there any chance of perhaps winning it back?

L
Linda Jane McCurdy
CEO, President & Director

We absolutely knew it. They had lost it -- I don't know the exact date but it would've been end of Q1, beginning of Q2. Certainly, there is an opportunity to secure it back. They are in a 3-year contract. However, again I think the stability that K-Bro has brought to Fishers in the Scottish market and through the Northeast of England is providing major hotel groups comfort. We've met with a lot of them and they are very intrigued with our entrance into the market. So I think there is a great opportunity to secure them back at some point.

Operator

And there are no further questions at this time. I'll turn the call back over to Linda McCurdy.

L
Linda Jane McCurdy
CEO, President & Director

Great. Thank you, everyone, for joining today. If there are any follow-up questions, please don't hesitate to reach out to either Kristie or myself. And hopefully we will see some of you at the AGM in June. Thank you and have a great day.

Operator

This concludes today's conference call. You may now disconnect.