K-Bro Linen Inc

TSX:KBL

Earnings Call Transcript 2024-Q1

[Operator]

Good morning, ladies and gentlemen, and welcome to K-Bro Linen Inc. First Quarter 2024 Results Conference Call. [Operator Instructions] I would now like to turn the conference over to Kristie Plaquin.

[Kristie Plaquin, executive]

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 respect 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. 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 McCurdy, executive]

As Kristie mentioned, I'll focus on the main highlights of our first quarter, and then Kristie will provide some details with regards to our financial performance and balance sheet. I'm pleased with our strong first quarter results and our momentum to start the year. In terms of the highlights, we reported Q1 2024 revenue of $80 million and EBITDA of $11.6 million for the quarter. Overall, consolidated revenue increased 13% compared to Q1 2023 with health care revenue having increased by 8% and hospitality revenue by 21%. The Health care revenues represented approximately 59% of consolidated revenue, which is lower compared to approximately 62% in 2023 due to strong activity in the hospitality segment. During the quarter, we announced our new upsized $175 million syndicated credit facility, including a further $75 million accordion, providing further financial flexibility to pursue growth opportunities. Strategic acquisitions of complementary high-quality operators continue to be an important contributor to K-Bro's overall growth profile. On April 30, 2024, we announced the acquisition of Shortridge. I'm delighted to welcome the Shortridge team to the K-Bro family, and I'm excited by the potential this acquisition presents in the U.K. Since the 1990s, Shortridge has operated as a family run business specializing in providing high-quality laundry services to local independent hospitality businesses, including hotels, B&Bs, self-catering units and restaurants. Shortridge further diversifies our customer base in the U.K. and helps position our combined U.K. business for more growth as we look to extend K-Bro's footprint further south into the U.K. We see a positive outlook for K-Bro and are excited about our organic growth prospects and potential future M&A. I'll now turn the call over to Kristie to discuss our detailed financial results for the quarter, after which I'll return to talk about our outlook.

[Kristie Plaquin, executive]

The information we are discussing today is also highlighted in our 2024 first quarter earnings press release issued yesterday and detailed supplemental financial information can be found on our Investor Relations website under the heading of Financial Documents. As a result of increased activity in the hospitality segment, price increases and the acquisition of both Paranet and Villeray, consolidated hospitality revenue for the three months ended March 31, 2024, increased by 21.4% over the comparable 2023 period.The corporation saw an 8.4% increase in consolidated health care revenue for an overall increase in consolidated revenue of 13.3%. Consolidated EBITDA in the quarter increased to $11.6 million from $10.3 million in 2023, which is an increase of 12.3%. The consolidated EBITDA margin decreased to 14.5% in 2024 compared to 14.6% in 2023. The decrease in margin is primarily related to $1.5 million in onetime costs incurred to execute the syndicated credit facility agreement and transaction costs associated with the acquisition of Shortridge, which had a negative impact on the margin in the quarter of 1.8%. For the Canadian division, Q1 EBITDA decreased to 15.8% from 16.9% for the comparative quarter of 2023. For the U.K. division, Q1 EBITDA margin increased to 9.8% from 6.4% for the comparative quarter of 2023. For the Canadian division, the decrease in margin is again primarily related to the $1.5 million in costs incurred to execute the citicated credit facility agreement and certain transaction costs associated with the acquisition of Shortridge, which had a negative impact on the Canadian margin in the quarter of 2.4%. For the U.K. division, the increase in EBITDA margin is primarily related to delivery and late rate cost efficiencies and the impact of price increases that were put in place in 2023. Net earnings decreased by $0.2 million or 9.7% from $2 million in 2023 to $1.8 million in 2024 and net earnings as a percentage of revenue decreased by 0.5% to 2.3%. In 2024, the change in net earnings is primarily related to an increase in depreciation and amortization due to Paranet and Villeray assets acquired. Wages and benefits in the first quarter increased by $3.9 million–$31.6 million compared to $27.7 million in the comparative period of 2023 and as a percentage of revenue increased by 0.2 percentage points to 39.3%. The increase as a percentage of revenue is primarily related to temporary inefficiencies during the Villeray transition. Linen in the first quarter increased by $0.4 million–$7.8 million in the first quarter compared to $7.4 million in the comparative period of 2023 and as the percentage of revenue decreased by 0.8 percentage points to 9.7%. The decrease as a percentage of revenue is primarily related to the change in mix of women and higher hospitality volume process compared to the prior year. Utilities in the first quarter increased by $0.3 million–$6.3 million compared to $6 million in the comparative period of 2023 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 impact of price increases secured across various markets, coupled with lower gas costs in the Canadian market. Delivery in the first quarter increased by $0.9 million–$10 million compared to $9.1 million in the comparative period of 2023 and as a percentage of revenue decreased by 0.3 percentage points to 12.5%. 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 in the first quarter increased by $0.1 million–$1.4 million compared to $1.3 million in the comparative period of $23 million and as a percentage of revenue remained constant. Materials and supplies in the first quarter remained constant at $3.1 million compared to the comparative period of $23 million and as a percentage of revenue decreased by 0.4 percentage points to 3.9%. The decrease as a percentage of revenue is primarily related to timing. Repairs and maintenance in the first quarter increased by $0.6 million– $3.5 million compared to $2.9 million in the comparative period of 2023 and as a percentage of revenue, increased by 0.4 percentage points to 4.4%. The increase in cost as a percentage of revenue is primarily related to bill rate transition costs. Corporate costs in the first quarter increased by $1.8 million–$4.8 million compared to $3 million in the comparative period of 2023 and as a percentage of revenue, increased by 1.7 percentage points to 6%. Again, the increase of a percentage of revenue is primarily related to the $1.5 million in costs associated with executing the syndicated credit facility and certain transaction costs associated with the Shortridge acquisition. Now looking at our capital resources. Distributable cash flow for the first quarter of $24 was $6 million, and our payout ratio was 53.2%. The company paid out $0.3 per share in dividends during the quarter for total consideration of $3.2 million. The corporation had net working capital of $36.7 million at the end of Q1 compared to its working capital position of $41.4 million at the end of December '23. With regards to credit and liquidity, we have a strong balance sheet and ample undrawn capacity on our syndicated revolving credit facility, which is an operating line of $175 million and a further $75 million accordion for growth purposes. At the end of April, after the acquisition of Shortridge, we had an undrawn balance of close to $60 million on our operating line without taking into account the accordion, reinforcing our strong liquidity. This represents a debt-to-EBITDA ratio excluding leases of 2.2x. I'll now turn things back over to Linda for additional commentary.

[Linda McCurdy, executive]

We're excited by our strong start to 2024 and see a positive outlook for the business. Both of K-Bro's Health care and hospitality segments continued to experience steady growth, and we expect EBITDA margins to follow historical seasonal trends. Our vision for K-Bro 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 interest of our valued customers and being dependable partners to all stakeholders. K-Bro has a track record of successfully attracting new customers organically and acquiring complementary high-quality operators to extend our geographic reach and accelerate growth. We prioritized shared values in our acquisitions and our teams work diligently to exchange best practices and support operations. Paranet, Villeray and Shortridge are welcome additions to the K-Bro family, and we're excited for the potential these acquisitions present for our future. We're excited about our outlook. We see momentum in both health care and hospitality and are focusing on our other growth opportunities. We continue to have an active M&A pipeline and remain well positioned from a balance sheet and liquidity perspective, and we'll continue to be disciplined as we evaluate acquisitions. I'll now turn it over to answer any questions you have with regards to the first quarter results.

[Operator]

[Operator Instructions] Your first question comes from the line of Derek Lessard from TD Cowen.

[Derek Lessard, analyst]

The first question for me was I was just hoping to get a sense from you the organic growth trends in the quarter? Then maybe as a follow-up to that, how much of that was tied to pricing versus volume and maybe new customer additions?

[Linda McCurdy, executive]

Yes. I'd say both from a consolidated perspective, about 10% of it is volume and half of it is price driven with the remainder being increases as the result of volume and revenue from acquisitions.

[Derek Lessard, analyst]

I just wanted to hit a little bit on your CapEx. Just wondering if you can maybe give us an update on the Villeray transition. How much of the, I guess, the $5 million of CapEx has been incurred and on your onetime investment from your Perth in the U.K., just curious about the timing of that project.

[Kristie Plaquin, executive]

I guess in terms of the CapEx, the Villeray Project is just starting. There's been some of that CapEx spend probably about $1 million of it but predominantly, the rest of it will be spent over Q2 and Q3. Then in terms of Perth, a good portion of it has already been incurred. I'd say there's maybe $1 million left to be incurred in Q2.

[Derek Lessard, analyst]

Just given the new supply agreement on the U.K. gas hedges, how should we think about, I guess, your utility costs going forward?

[Linda McCurdy, executive]

That hedge takes place or comes into effect in 2025. Our existing hedge carries throughout '24. There is some favorable pricing that on a consolidated basis will have a positive impact in the range of 0.5–1 percentage point.

[Operator]

Your next question comes from the line of Kyle McPhee from Cormark Securities.

[Kyle McPhee, analyst]

Just first, a quick follow-up on the new gas hedge. Can you tell us what price was locked in through that January 25 to December 26 period, the pricing in terms of British per kilowatt hour or at the very least, just confirm with these multiyear hedge contracts are typically pricing at around current spot pricing?

[Linda McCurdy, executive]

They're slightly higher than spot pricing. Well, it changes week by week, but I'd say, within the neighborhood of spot pricing, Kyle.

[Kyle McPhee, analyst]

That helps us quantify the margin gain you should see in 2025. Then nice to see your Q1 margins tracking above 2019 levels when adjusting for the onetime costs you disclosed. I have a question about one moving part that may impact this type of margin performance through the rest of this year. Multiple provinces have scheduled increases to minimum wages. Historically, I think K-Bro offset this with pricing on a lag basis at contract anniversary dates. K-Bro, just went through a period of many out-of-contract pricing increases. Were you able to proactively offset these upcoming minimum wage increases? Or will it be a minor margin drag throughout this year that's eventually offset on a lag basis.

[Linda McCurdy, executive]

I think how we should look at that is we certainly are well aware of the changes in minimum wage by province, which in some provinces are material. As we've guided that our margin profile going forward will be close to or at pre-pandemic levels. We've taken into account the impact of minimum wage in that guidance.

[Operator]

[Operator Instructions] Your next question comes from the line of Michael Glen from Raymond James.

[Michael Glen, analyst]

Could you provide any update for the $16 million contract renewals this year? How are discussions progressing? Is this competitive? Then maybe you could break down a lot of the contract renewals across the regional segment.

[Linda McCurdy, executive]

Of the renewals up this year. I would say about $40 million of it is Canada and $30 million is the U.K. We've resigned about 30% of those total and feel confident as the year goes on, that we will continue to renew them. Some of them are not yet out of contracts. They come due as the year unfolds, but we do feel good that we will continue to renew those contracts.

[Michael Glen, analyst]

On short rates, could you provide some insights into the margins of that transaction and the multiple paid as well as what the pro forma leverage would look like, including Shortridge.

[Linda McCurdy, executive]

In terms of margins, what we have disclosed and we wouldn't go too much further than this is to say that the historic margin profile is higher than our consolidated historical margin profile for our consolidated K-Bro. For competitive reasons, we'll leave it at that. Leverage will be after taking into account the acquisition at the 2.2x debt to EBITDA.

[Operator]

There are no further questions at this time. I would like to turn it back to Linda McCurdy for closing remarks.

[Linda McCurdy, executive]

Well, thank you, everyone. Have a great day and if there's any follow-up questions, please don't hesitate to reach out to Kristie or myself.

[Operator]

Thank you, presenters and ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.