K-Bro Linen Inc

TSX:KBL

Earnings Call Transcript 2022-Q4

[Operator]

Good morning, ladies, and gentlemen, and welcome to the K-Bro Linen Systems Inc. Fourth Quarter 2022 Results Conference Call. [Operator Instructions] This call is being recorded on March 22, 2023.

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

[Kristie Plaquin, executive]

Thank you, operator, and good morning, everyone. Thank you for joining us today, and welcome to our fourth quarter 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.

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. 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 this forward-looking information. Investors are 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 our 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?

[Linda McCurdy, executive]

Thank you, Kristie. Good morning, everyone, and thank you for joining us today to review our 2022 fourth quarter and annual results.

I'll focus on the main highlights of our fourth quarter, and Kristie will provide more details on our financial performance and balance sheet. I'll come back to you and update you on our outlook for 2023.

In terms of the highlights, we reported 2022 revenues of $277 million and EBITDA of $36.5 million for the year. I'm pleased with our annual revenue -- that our annual revenue exceeded pre-COVID levels set in 2019. In 2022, hospitality revenues returned to 90% of pre-pandemic levels. Hospitality represented approximately 37% of consolidated revenue.

With the return on hospitality revenue, health care revenues represented approximately 63% of consolidated revenue, which is lower compared to approximately 74% of 2021. Consolidated health care revenue increased 4.1% and consolidated hospitality revenue increased significantly 79.7% as a result of a pickup in tourism and business travel.

In 2022, our results reflected a few key factors. While our revenue has returned to pre-COVID levels, our EBITDA margins were impacted by temporary labor inefficiencies and higher inflation related and energy costs, stemming from the COVID pandemic and certain geopolitical events. We're actively managing these factors and working with many of our Canadian/U.K. customers to implement price increases to offset higher inflation-related costs.

Going forward, we expect to continue to benefit from strong hospitality activity in both Canada and the U.K. and stable health care trends. We anticipate achieving the full benefit of the new AHS [Calgary] contract by the second half of 2023 as transition costs will be eliminated.

We continue to benefit from our U.K. natural gas hedge, which we put in place in April of this year throughout the end of 2024 -- April of 2022. We anticipate improvement in our labor recruitment and retention and are managing more challenging regional labor availability with complementary temporary foreign worker programs. We've been successful in working with many of our Canadian and U.K. customers to implement price increases to offset inflation-related costs.

We began to see some benefit of these price increases in the fourth quarter, but we'll see the full benefit of these increases in 2023. We remain well-positioned from a balance sheet and liquidity perspective with $53 million of additional borrowing capacity on our revolving line of credit and with an additional $25 million accordion for growth purposes. Total debt increased in the quarter from $39.1 million to $45.2 million, and our funded debt to EBITDA, excluding leases at the end of Q4, remained conservative at just over 1.6x.

I'll now turn the call over to Kristie to discuss our detailed financial results for the year, after which I'll return to talk about our outlook for 2023.

Kristie, over to you.

[Kristie Plaquin, executive]

Thanks, Linda. The information we're going to discuss today is also highlighted in our 2022 fourth quarter earnings press release issued yesterday and detailed supplemental financial information can be found on our Investor Relations website under the heading Financial Documents.

As a result of COVID-19 pandemic restrictions being eased, consolidated hospitality revenue for the 3 months ended December 31, 2022, increased by 29% over the comparable 2021 period. And the corporation saw a 5.8% increase in consolidated health care revenue, for an overall increase in consolidated revenue of 13.6%.

On a year-to-date basis, consolidated revenue increased by 23.5% to $276.6 million compared to $224 million in the comparative period of 2021. In 2022, approximately 63% of K-Bro's consolidated revenue was generated from healthcare institutions, which is lower than the 74% in 2021, primarily as a result of a return of hospitality activity, which came along with the easing of COVID-19 pandemic restrictions.

Consolidated EBITDA decreased in the year to $36.5 million from $42.8 million in 2021, which is a decrease of 14.7%. The consolidated EBITDA margin decreased to 13.2% in 2022 compared to 19.1% in 2021. The decrease in margins primarily reflects timing differences related to increases in inflation-related costs in the period, while the full impact of price -- of customer price increases will take place in 2023.

The corporation's higher costs include higher natural gas prices, particularly in the U.K.; the additional labor costs incurred due to temporary inefficiencies from unusually competitive labor markets in certain cities in which we operate; higher delivery costs related to higher diesel rates as well as the AHS transitions; repricing of the corporation's existing business in Edmonton and Calgary with AHS, which took effect on August 2021 in advance of the business being fully transitioned; and lower government assistance received in the Canadian division from $0.9 million received in 2021 to nothing in 2022.

Net earnings decreased by $4.8 million or 54.6% from $8.7 million in 2021 to $3.9 million in 2022. And net earnings as a percentage of revenue decreased by 2.5% to 1.4% in 2022 from 3.9% in 2021. The change in net earnings is primarily related to the flow-through items in EBITDA, higher finance costs related to increased interest rates for the revolving credit facility and lower income tax expense.

Wages and benefits increased by $26.2 million to $111 million compared to $84.8 million in the comparative period of '21 and as a percentage of revenue increased by 2.2 percentage points to 40.1%. The increase as a percentage of revenue is primarily related to a $0.8 million decrease in government assistance received in the Canadian division, escalating wage rates and temporary inefficiencies from unusually competitive labor markets in certain cities in which we operate as well as the transitioning of the new AHS business.

Linen increased by $3.4 million to $31.3 million compared to $27.9 million in the comparative period of '21 and as a percentage of revenue, decreased by 1.2 percentage points to 11.3%. The increase in spending is primarily related to the change in the mix of Linen and higher hospitality volumes processed compared to the prior year.

Utilities increased by $10.3 million to $23.8 million compared to $13.5 million in the comparative period of '21 and as a percentage of revenue increased by 2.6 percentage points to 8.6%. The increase as a percentage of revenue is primarily related to increased natural gas rates, particularly in the U.K. as well as in British Columbia for the fourth quarter of 2022.

Delivery increased by $12.6 million to $37.3 million compared to $24.7 million in the comparative period of '21, and as a percentage of revenue, increased by 2.5 percentage points to 13.5%. The increase as a percentage of revenue is primarily related to rising diesel prices and the costs associated with the new girl AHS business, along with delivery route inefficiencies associated with the incremental hospitality volumes processed in the year as well as a $0.1 million decrease in government assistance received in the Canadian division.

Occupancy cost increased by $0.6 million to $4.5 million compared to $3.9 million in the comparative period of 2021 and as a percentage of revenue, remained relatively constant at 1.6%. Materials and supplies increased by $1.8 million to $10.9 million compared to $9.1 million in the comparative period of 2021, and as a percentage of revenue remained constant at 4%.

R&M increased by $2.7 million to $10.4 million compared to $7 million in the comparative period of 2021, and as a percentage of revenue increased 0.4 percentage points to 3.8%. The increase as a percentage of revenue is primarily related to onetime cost and price increases. Corporate costs increased by $1.5 million to $11 million compared to $9.5 million in the comparative period of 2021 and as a percentage of revenue remained constant at 4%.

Now looking at our capital resources. Distributable cash flow for the fourth quarter of 2022 was $3 million, and our payout ratio was 106.9%. In addition, 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 $36.6 million at December 31, 2022, compared to its working capital position of $30.3 million at December 31, 2021.

With regards to credit and liquidity, we have a strong balance sheet and ample undrawn capacity on our credit facility, with an operating line of $100 million and a further $25 million accordion for growth purposes. At the end of Q4, we had an undrawn balance of close to $53 million on our operating line, reinforcing our strong liquidity. Debt and total capitalization for the period ended December 31, 2022, was 20.6%.

Total debt increased in the quarter from $38 million to $45.2 million and was primarily due to the change in working capital items. As Linda said earlier, our debt-to-EBITDA ratio, excluding leases, was just over 1.6x.

I'll now turn things back over to Linda for additional commentary. Linda?

[Linda McCurdy, executive]

Thank you, Kristie. So I can definitely say that we're very excited about our outlook for 2023. We've had strong top line performance over the past year, but our results were impacted by a few key factors. We're actively managing these factors and working with many of our Canadian and U.K. customers to implement price increases to offset higher inflation-related costs. We began to see some of the benefit of these price increases in the fourth quarter, but we'll see the full impact in 2023.

Going forward, we see continued momentum in both hospitality and health care. Our Healthcare segment remains steady, and we expect that to continue as the result of the new AHS volume that has been fully transitioned, permanent conversions to reusable products as well as efforts by hospitals to reduce the backlog of procedures that have been delayed during the pandemic.

Our hospitality segment continues to see good levels of activity compared to 2021, with an ongoing return to business and international travel. COVID restrictions in both Canada and the U.K. have been substantially reduced. Since the pandemic, labor availability remains temporarily constrained. We focused on retention of existing staff, in addition to implementing strategies to recruit and hire new staff. We've achieved some success in certain markets, but are still focusing efforts on our other markets. We anticipate improvements in our labor recruitment and retention and are managing more challenging regional labor availability with complementary temporary foreign worker programs.

In the second half of the year, we anticipate returning to historical 2019 margin levels consistent with historical seasonal trends. Our anticipated immediate recovery remains dependent on our ability to attract and retain staff in each of the markets in which we operate.

On March 2, we were delighted to announce the acquisition of Paranet for an enterprise value of $11.5 million and a potential earnout of $1.9 million. The acquisition was funded with K-Bro's revolving credit facility. Paranet is a high-quality operator with leading market positions in the Quebec healthcare and hospitality market.

Paranet enables K-Bro to grow market share in key regions and provides us with additional operating efficiencies, capital expenditure synergies and significant growth capabilities. Paranet is our first acquisition following the pandemic, and we have an active M&A pipeline. Strategic acquisitions have been an important contributor to our overall growth profile. And with continued momentum in our business, we're refocusing on M&A. We remain well positioned from a balance sheet and liquidity perspective, and we'll continue to be disciplined as we evaluate our position.

In summary, we see continued momentum in both health care and hospitality. We're actively managing factors that affected our results over the past year and is again to see the full benefit of price increases. We anticipate achieving the full benefit of our new AHS province-wide contract in 2023. In the second half of the year, we anticipate returning to historical 2019 margin levels consistent with historical seasonal trends.

I'll now open it up -- open up the line to any questions you have as it relates to the fourth quarter of '22.

[Operator]

[Operator Instructions] We'll take our first question with Derek Lessard from TD Securities.

[Derek Lessard, analyst]

This is Cheryl [indiscernible] in for Derek. So I was curious if you could talk about the challenges that you faced in terms of passing on prices. I think most of your contracts contain annual escalators tied to CPI, but this inflation is definitely unprecedented. So maybe talk about the timing? And could you give us a sense of the general magnitude where you are in the process?

[Linda McCurdy, executive]

Cheryl, and thank you for your question. So I touched on it a little bit in our -- in my comments, but it was certainly a key focus in the second half of 2022 was to work with our customers.

And while -- and you quite rightly commented that, well, most of our contracts have price increases and inflationary price increases. Much of the cost increases we saw and in particular in the U.K. on the energy side, we're well in excess of what we've ever seen historically or what was provided for contractually price increases we cover those costs.

So in the back half of 2022, and even into Q4, we worked very diligently to work with our customers to negotiate out of contract price increases. I'm not going to comment on the magnitude of them for competitive reasons, but we're very pleased with how receptive our customers were to understanding the economic environment in which we're operating. And we expect to see the benefit of that in 2023, with the full benefit of that in the second half of 2023.

We expect a good solid year in 2023, recognizing with margins returning to historical levels in the back half. And when I say historical levels, we're making reference to 2019, given all of the noise and certain factors as a result of the pandemic that impacted results in 2020 and 2021. But I can definitely say we are expecting that for the full year of '23 the price increases to be reflected and are confident in a good solid year.

[Derek Lessard, analyst]

Okay. That's great. And I was wondering how has the customer feedback been so far?

[Linda McCurdy, executive]

Sorry. How has--

[Derek Lessard, analyst]

The customer feedback then?

[Linda McCurdy, executive]

Customer feedback?

[Derek Lessard, analyst]

Yes.

[Linda McCurdy, executive]

Listen, I don't think anyone likes price increases, but their understanding of the environment that the unprecedented inflationary pressures that exist. I would say they have all been exceptionally cooperative.

[Derek Lessard, analyst]

Okay. That's good to hear. And I know that there's a challenge that you've talked about pricing in Q2 and Q3. I was just curious what your assumptions for inflation since then? And if you could talk about your confidence that you've taken enough price going forward?

[Linda McCurdy, executive]

So we have definitely seen tapering off of the increases. I think it's definitely stabilized, stabilized at much higher input cost levels. And where we're seeing that certainly is on the delivery line, cost line and on the utility cost line.

We have fixed our natural gas prices in the U.K., which creates stability. And we've seen increases in Canada, but nowhere near what we saw in the U.K. But again, we've seen a stabilizing of those increases. We still do struggle with labor shortages, although, again, we've seen some stabilization of that.

We have put in place or moved to put in place access to temporary foreign workers, and that process is underway with the caveat that implementing that program takes time. It's typically a 6- to 8-months' time frame from application to being able to access to hire foreign workers. So we expect that to happen later in the year.

All that to say, the back half of 2023, we're confident in margins restoring to historical levels. Just being mindful of the fact that there's seasonality in the business in Q1 because of seasonality is always our weakest quarter.

[Derek Lessard, analyst]

Okay. That's very helpful. And just one more before I requeue. So we're getting close to the end of Q1 already. And I was curious if you would be able to provide us a sense of where the inflationary trends are trending so far? Are they better or worse than Q4?

[Linda McCurdy, executive]

Just consistent with my previous comments, Q1 is always our seasonally weakest quarter as the result of hospitality revenues being the weakest. But again, we see stabilization in the input cost lines, in particular, labor, delivery and utilities.

[Operator]

[Operator Instructions] We'll take our next question from Michael Glen with Raymond James.

[Michael Glen, analyst]

So first question, just in terms of the AHS transition, that's something that you've been talking about for a while. So when we look back to the original expectations for this transition and the increased level of cost versus where we are now, like what has been the big factors that have pushed that time frame out?

[Linda McCurdy, executive]

The biggest factor is somewhat related to supply chain and receiving the distribution cart -- the carts that we use to distribute Linen on. And again, receiving those new carts to replace old carts that are at the end of their useful life, which we have been using and somewhat inherited from AHS, which are not as efficient and impact operations in both our plant as well as the distribution function delivery not being able to cube the truck so effectively.

So I would say that, that has been an impact and impacted both plant operations as well as distribution. It's taken longer to receive the carts and transition the volume into the most efficient way to deliver our service would be the biggest impact, Michael.

And again, I would say, labor has played a factor in that. We are feeling more confident in being able to access labor and to reduce turnover. It was particularly bad in volatile in 2022, but we are seeing, as the result of inflationary pressures and the verge of a recession, we are seeing some of our markets becoming more stable. Those would be the biggest impact, Michael.

[Michael Glen, analyst]

Okay. And then just to drill in maybe a bit more on the labor situation in Alberta. Can you just give an update as to what you see happening there right now in terms of availability? Is it moving meaningfully right now in Alberta? Is it getting more favorable?

[Linda McCurdy, executive]

It's certainly getting more favorable. I would say, in 2022 -- in certain months in 2022, we really were having a difficult time attracting people. We are getting people applying and people through our doors. The turnover still remains high, but at least we're able to get people through the door.

So we are seeing positive trend lines that are helping us to achieve efficiencies that we weren't seeing in 2022. It's not perfect by any stretch, but it is a definite improvement from what we saw in 2022.

[Michael Glen, analyst]

Okay. And then just on -- you're referencing a return to historical levels in the back half of '23. But I'm just hoping that you can -- and you've given us some degree of information regarding how to think about Q1. But I'm just hoping that when we're thinking about the lift in margin profile into the back half of the year from the front half of the year?

Like what's realistic to think about for the front half of the year? Should we think about something that's looks more like 2022 margins in the front half of the year? And then we lift higher to the back half of the year? I'm just trying to understand the magnitude of the delta there.

[Linda McCurdy, executive]

I think that's -- I think you're spot on. I think the front half of 2022 will be similar -- 2023 will be similar to the front half of 2022, with Q3 and Q4 seeing improvements -- seeing most of the improvements as the result of price increases that go into play as well as improvements in productivity -- improvements in labor.

[Operator]

We'll take our next question from Endri Leno with National Bank.

[Endri Leno, analyst]

I'm sorry if I repeat something, I was a little bit late jumping on the call, and good morning. So first question, I mean, Linda, you talked a bit about seeing momentum into 2023. I was wondering if you can -- if you are able to contextualize that a little bit?

In terms of what you're seeing in Q1, how does it compare to 2019 or even the quantum of improvement from '22? In '23 into '22, how does that compare with, for example, the improvement that you saw in Q4 of last year?

[Linda McCurdy, executive]

Thanks for your call, Andrew, your questions. Again, we're very confident that we will return to historical levels. Q1 is -- has always been our seasonally weakest quarter. I would say that margins will be similar to what we saw in 2022, in the first half of the year. with the improvement coming in the back half of the year.

[Endri Leno, analyst]

Okay. The other question I have is with regards for in labor, and you mentioned it could be 6 to 8 months. I just had a question on the time line. I mean you said based on the situations that you've had before, when you brought firing labor in? Or is it kind of on more recent input as I've seen some kind of big backlogs on the federal government processing Visa and work permits and things of that like?

[Linda McCurdy, executive]

There's certainly has -- the time lines have expanded in to bring temporary foreign workers into the country. We're well down the road in that process, but it takes anywhere from 6 to 8 months. So we would expect that -- to see the impact of that in Q2 -- back half of Q2 and into Q3?

[Endri Leno, analyst]

Okay. Great. My other question is -- it's a bit more kind of bigger picture, and I think there were recently some announcements from Ontario.

And I think a bit Alberta as well to move some of the surgery volumes into private clinics and to at least in Ontario that's happening in, I think, 2024. So can you talk a little bit about what your exposure is to private clinics or anything you can share on how they handle their Linen and whether you are able to participate in those incremental volumes?

[Linda McCurdy, executive]

Sure. The private clinics play a small role in the overall -- in our overall volumes. We do service a number of them, but it's a market and a segment that we will pursue as private clinics open up. But generally, it really tends to be a bit of a rounding error in terms of our expectations of what those volumes will be.

It's generally not high acuity. So it's routine procedures that wouldn't necessarily require a lot of linen, not a lot of overnight stays, not a lot of changes of linen. So we will certainly pursue it, but we wouldn't expect it to be monumental in terms of the volumes that will be -- that will be shifted to private clinics.

[Endri Leno, analyst]

Okay. Great. My next question is on the Paranet acquisitions, and congrats on that, by the way. When you're talking about it in the press release and the MD&A, I mean you mentioned significant growth capabilities.

So I was wondering if you can talk a little bit, where do you expect this to come from? Are you able to provide any metrics around them? And then still related to that acquisition, is there something specific to the QC market that you decided to go in there? Or is it just opportunistic?

[Linda McCurdy, executive]

So I mean, listen, we have a plant in Quebec City. So this was a nice additional increase in our market share between ourselves and Paranet. We're the two primary players in the hospitality segment. It's not a new market to us, but we're very happy to acquire Paranet and become the primary provider in that market.

We expect there to be synergies in terms of CapEx, in terms of management, in terms of operations. So we'll keep two plants operational at this point. And down the road, we'll determine whether we move all the volume into one of the plants, which would be the Paranet plant. Or if we continue to operate two separate facilities, that remains to be seen. Paranet processes half of the volume is health care volume. So we'll continue to pursue additional health care volume with the two separate operations.

[Endri Leno, analyst]

That's great to hear. And the last one for me, are there any significant contracts that are coming up for renewal in 2023? Or are there any significant RFPs that you see upcoming in the market?

[Linda McCurdy, executive]

Nothing significant in 2023. I mean every year; we have a number of contracts. I would say the first year in which a large amount of volume comes up for RFP would be in 2025 in the Vancouver market. And that would be the first major contract up for renewal.

[Endri Leno, analyst]

Okay. Great. And any significant RFP you see upcoming? Or is it steady business as usual?

[Linda McCurdy, executive]

Pretty standard fair. I don't see any large markets that were not in -- up in the next 6 months that I can think of.

[Operator]

We'll take our next question from Kyle McPhee with Cormark Securities.

[Kyle McPhee, analyst]

Just starting with Paranet. But beyond that, what's behind the strategic decision to allocate more capital to Quebec just from a market perspective? Is there anything particular about the Quebec market that gets you excited in terms of organic runway?

[Linda McCurdy, executive]

I mean, certainly, the ability to increase our market share in that market is attractive and to continue to pursue health care. The Paranet facility is more -- is [not to say] more modern, but is a better -- is a larger facility than our facility in Quebec City. So in order for us to grow materially in that market, we would either -- we would have likely had to move. So it enables us to expand capacity and pursue additional growth without having to relocate from our existing facility.

[Kyle McPhee, analyst]

Okay. And then can you speak to the acquired margin profile you got with Paranet? Or maybe at least give us color around if there will be a noticeable margin mix shift when that revenue starts flowing through your statements, all else equal?

[Linda McCurdy, executive]

So I would say that the margins in that business are consistent with K-Bro margins. There's nothing out of the ordinary. It's -- yes, I would say they're very consistent with K-Bro's margins. And again, the revenue is about -- top line revenue is about $10 million.

[Kyle McPhee, analyst]

Okay. And then last one for me. You gave a lot of color already on the margin path. Is part of that -- like should we expect any benefit from lower gas prices in Canada where you're not fully hedged? And if so, can you help quantify that, maybe at least relative to the 250 basis points of margin drag previously guided for energy prices? Because I suspect that's not reflecting any benefit of lower gas prices for your unhedged exposure or hedges in Canada falling out?

[Linda McCurdy, executive]

I will -- Kristie, I'll ask you for additional color, but most of the increase in the utilities line is reflective of the U.K., where we've locked in last year, in April of 2022. But Kristie, I'll kick it over to you as it relates to impact in Canada of the lower gas prices.

[Kristie Plaquin, executive]

Yes. I'd suggest -- to Linda's point, most of the increase is related to the U.K. In Canada, we're about 60% hedged. So there will be some pickup from lower gas prices. In terms of quantifying it, a little bit difficult to do that, but there certainly could be some pickup.

[Kyle McPhee, analyst]

Okay. So some pickup. So it sounds like the margin path forward your landing spot for the back half of this year is largely price and labor improvement? You're not really -- it's not energy? Okay.

[Linda McCurdy, executive]

Correct.

[Kristie Plaquin, executive]

Correct.

[Linda McCurdy, executive]

Yes. That's fair.

[Operator]

[Operator Instructions] We'll move to our next question from Justin Keywood with Stifel.

[Justin Keywood, analyst]

Just want to circle back on the margin improvement comments for the back half of this year. I also note that there's been an increase in the federal minimum wage to be implemented on April 1, going up by 6% or 7%. Is that factored in for the margin improvement comments in the back half of the year?

[Linda McCurdy, executive]

Yes. Definitely. I mean we don't pay minimum wage. And we pay above minimum wage, but we have factored in the implications of rising minimum wages in each of the provinces in our margin forecast.

[Justin Keywood, analyst]

Okay. Good to know. And then just going back to the 2019 EBITDA margins. There were some moving parts, but we had the margins basically around 19% if we blend it over Q3 and Q4. Is that a reasonable target for this year?

[Linda McCurdy, executive]

I think that's certainly in the ballpark. Yes.

[Justin Keywood, analyst]

Okay. Great. And then just on the comments of M&A, are you able just to describe your pipeline on what you're potentially looking at? If it's similar to Paranet or if there's some larger assets out there? And is the focus in Canada or in Europe?

[Linda McCurdy, executive]

There's certainly more acquisitions of the Paranet type, both in Canada and the U.K. I would say they range anywhere from the size that we've just executed on, anywhere from $10 million. There are larger assets potentially up to $50 million to $100 million. They're fewer, but they certainly exist out there. And key focuses both Canada and the U.K. Both are where we're very active. Those are our primary focuses.

[Justin Keywood, analyst]

Okay. And then maybe a question for Kristie. The balance sheet if you have a pro forma net debt-to-EBITDA ratio after Paranet? And then also the comfort level as far as net debt and EBITDA for potential M&A?

[Kristie Plaquin, executive]

Yes, certainly. I guess in terms of our comfort -- to start meeting with the latter, in terms of our comfort level with debt going forward, we don't really have a target that we've set. I would say probably in the 2 to 3x range would be where our comfort level is. And in terms of the impact of Paranet, it won't be -- it will go up to just under 2x. I would suggest somewhere in there.

[Justin Keywood, analyst]

Okay. And then maybe just one more question for yourself. Just on the working capital, I noticed there was a large usage in Q4. Is that expected to normalize in Q1? Or is it to take a bit longer in the year?

[Kristie Plaquin, executive]

It might take a bit longer. It's really timing, predominantly driven by prepaid and tax. And we'll smooth out over 2023.

[Justin Keywood, analyst]

And there's no concern on that working capital? I assume it's with high-quality customers?

[Kristie Plaquin, executive]

No concerns whatsoever.

[Operator]

Our next question will return to the line of Derek Lessard with TD Securities.

[Derek Lessard, analyst]

So just have a few on the market competition demand side. So clearly, it's a very change environment. But I was curious how you think about competitive activity here. Do you think you are picking up a share from smaller competition who can't meet the service level at this time? And how do you think that might benefit you going forward?

[Linda McCurdy, executive]

Yes. I mean, one is I think, Cheryl, your question really validates our growth strategy and growth both organically and through acquisition. Paranet is a good example of that, where owner-operator, getting the business for many years. and decided that it was the right time to contract with K-Bro or to work with K-Bro. The seller will continue on and work with us.

And I think that is something that we're seeing we're new about there, where it's a very difficult operating environment with a lot of different pressures -- inflationary pressures to hire labor. And so that provides an opportunity for us.

And as a result of that, we feel that we will continue to be successful in growth through acquisitions. Smaller players are finding it difficult. And we have purchasing power leverage with our suppliers that many smaller operators just don't have. So the pressures we're feeling, you're feeling even more acutely.

So again, as part of our growth strategy, we expect to be able to take advantage of that and either grow organically through taking customers from smaller operators or acquiring them.

[Derek Lessard, analyst]

Okay. Great. And I was wondering, are there any developments on the movement of the backlog on elective surgery?

[Linda McCurdy, executive]

The -- certainly, we are seeing improved volumes from the operating room linen. So I would say, yes. I think all of the hospitals are continuing to push through surgeries. As commented on earlier in the call, working with private clinics to reduce some of that backlog is certainly a strategy that both QC and Ontario are pursuing.

But what I will say, as much as there is a desire for health regions and provinces to continue to work to that end, staffing remains an issue for hospitals as well. And nurse and doctors, they have many of the same constraints as many businesses and providers are feeling in the market with retirement terms, health care burnout, which we've all read about, they are struggling with labor as well.

[Derek Lessard, analyst]

Okay. That makes sense. And then last one for me. I'm curious how demand for hospitality is trending in Q1 so far? Given the macro backdrop, are you seeing any potential pullback in either leisure or business travel?

[Linda McCurdy, executive]

We are -- we're continuing to see strength in that segment. We are very pleased with how it's rebounded. And we certainly expect significant improvements relative to 2022 and are expecting a solid '23. But yes, for what we're seeing to date, we're still seeing good, solid volumes and activity.

[Operator]

[Operator Instructions] For our next question, we'll return to Endri Leno with National Bank.

[Endri Leno, analyst]

I think, Linda, you just touched on this briefly on the prior questions. But you also mentioned in one of the answers that as a potential improvement in labor is that if we enter a recession. So I was just wondering if you are able to balance that comment with recession potentially also impacting hospitality volumes? And any kind of discussions that you might have had with your clients in that regard as you're looking at for the rest of 2023?

[Linda McCurdy, executive]

Yes. And of course, it would -- any recessionary pressures would impact hospitality the most. But as we speak with our customers on that segment, we're not -- we're still expecting quite a strong year in discussions with them. Business travel has definitely picked up.

I would say it's not at -- it's not fully at 2019 levels. I would say it's 90 -- in the 90 -- the pro do 90%, 95% of 2019 levels. We are still expecting a very strong year even with inflationary and recessionary pressures on the hospitality segment in discussions with our customers.

[Operator]

[Operator Instructions] It appears that there are no further questions at this time. Ms. McCurdy, I'd like to turn the conference back over to you for any additional or closing remarks.

[Linda McCurdy, executive]

Well, thank you, everyone, for joining today. And if there's any additional follow-up, Kristie and I will be available. And have a great day, everyone.

[Operator]

This concludes today's call. Thank you again for your participation. You may now disconnect, and have a great day.