Redishred Capital Corp (Pre-Merger)

XTSX:KUT

Earnings Call Transcript 2019-Q1

[Operator]

Thank you for standing by. This is the conference operator. Welcome to the RediShred Capital Corp. Q1 Investor Conference Call. [Operator Instructions] And the conference is being recorded. [Operator Instructions] I would now like to turn the conference over to Jeffrey Hasham, CEO. Please go ahead, sir.

[Jeffrey I. Hasham, CEO, President & Director]

Thank you very much. Good morning, everyone. Thank you for joining the RediShred Capital Corp. Q1 2019 Earnings Call. Thank you, many of you have joined, and we will give you an update on the company this -- and the first quarter results. I'll start with a high-level overview of the consolidated operating performance. The first thing is, obviously, over the last number of months, 9 to 12 months, we've conducted just under $20 million in acquisitions. And those acquisitions, the 2 largest ones being Northern New Jersey, Safe Shred in Northern New Jersey and then our PROSHRED Kansas location and the Secure e-Cycle business. And those as anticipated, have had a very positive impact on our business. We've seen total consolidated operating performance from a revenue perspective, increase 65% in 2018. We started with $3.1 million, just almost $3.2 million in revenue, and we were at $5.2 million in revenue for the first 3 months ended March 31. That translated on the EBITDA line. And just -- Kasia will talk a little bit about the impact of IFRS 16. We've adjusted for IFRS 16 on the operating income line, and I'll talk about that in a moment. But on the EBITDA line, 103% increase from 800 -- just under $800,000 to over $1.6 million. Our operating -- our EBITDA as a percentage of revenue was $0.31 versus the prior year at 25% on a consolidated basis. Operating income, and operating income is a very important number for us because it includes tangible depreciation on the truck assets, on our container assets. But also with IFRS 16 now coming into play. I think it's a more important number because the in-use assets being our rental leases where rent used to be included in the EBITDA is no longer included in the EBITDA. And I think it's important that we start to migrate our focus on to operating income. As a percentage, so first of all, operating income increased 87%, and we've adjusted for IFRS 16. I'm looking at Kasia, she's is nodding her head. So that's good, and she'll talk again a little bit more about that. That's an 87% increase from $550,000 to over $1 million. As a percentage of revenue, operating income was 20% versus 17%. So -- and certainly, we have seen a good uptake, like the acquisitions have impacted the company favorably. And our operating income per share was up 38% as a result. So we had 2 months of the Kansas operation under our belt, and we had 3 months or full quarter of the Safe Shred Northern New Jersey acquisition under our belt, and obviously, both have positively impacted the company's performance. I'm going to just talk a little bit about system sales. And obviously, system sales are all sales. Both our corporate locations and our franchisees. And system sales will give you an indication of where some of our focus is both at the corporate store level and at the franchise level. So first of all, I'm going to talk a little bit more about same location or same-store basis. Our total system sales increased 16% and -- on a same-store basis. On a total location basis, it was up 25%. And when you look at -- and we've got Canadian dollar stats. In our MD&A, we have both Canadian and U.S. dollar stats, and you'll be seeing that shortly. And we had $15 million in system sales in the first 3 months. And again, that was up on a Canadian dollar basis, 31%. We've got a little bit of tailwind from the foreign exchange there. Overall, our scheduled revenue, and that's the most important category. That's our recurring revenue. The mix from a total perspective was 47%. Same locations grew 12%, and on a total locations grew 19%. That total locations is the impact of Northern New Jersey being a new location and an additive footprint for us. So that was very positive. And then, of course, unscheduled or purged business, that grew also 11% overall and 21% for the quarter and total basis. And recycling sales where we were at close to all-time highs in the first quarter, and on a same-store basis, up 38%. A cautionary tale here is like many commodities, they go up and down. The pricing is reflected through market factors, of course, that we don't control or not sure who controls them some time. Those paper prices are coming down. There are 3 pressure points around paper prices. The first 2 are earlier in the year, there was a major fire in the Northern New Jersey paper mill. And that put pressure on paper prices. Secondly, there was another fire recently in Oklahoma, a very big mill there, and that's continued to put some paper pressures, particularly in the Midwest. And then, of course, the China-U.S. trade dispute continues to put some pressures there. So we will see into Q2, into Q3 some pressure on pricing. And we'll continue to monitor that, both mills. The Northern New Jersey mill, we're hoping that will be back up and running in short order. We don't have an estimated time frame here, but just wanted to give you a little bit of flavor on what's happening out there. But overall, on a consolidated basis and on a system sales basis, we had some very good results. I'm going to turn it over to Kasia. She's going to talk about the balance sheet and our capital management. She's also going to talk a little bit more detail about our corporate locations. And then once we do that, we'll open it up for some Q&A. So I'll turn that to Kasia, our Chief Financial Officer.

[Katherina M. Pawluk, CFO & Secretary]

Good morning, everyone. I'll start off with the capital management section. At March 31, 2019, we had a negative working capital balance. And that was due to the fact that we used our cash reserves and drew on our line of credit to fund the Kansas acquisition, and that was a total of USD 6.7 million, which was used for the purchase. However, right after the quarter end, we did secure an additional senior credit facility of USD 9.5 million, of which we advanced USD 4.5 million. And that was the equivalent amount of CAD 6.9 million, and that was for the North New Jersey and Kansas acquisitions.The advance on that term loan has a fixed rate of 3.5% over a 5-year period. Along with the new credit facility, we also revised the terms of our existing credit facilities with a reduction to our interest rates from prime plus 2.5% to prime plus 1%. And the financial covenants were also amended and increased. So with the new credit facility, we currently have USD 6.5 million available for future acquisitions as well as a USD 1 million available on a line of credit for the purchase of trucks. Our objective going forward is to finance future acquisitions with a 50-50 debt-to-equity financing structure. And in terms of our financial covenants, we were and are expected to be well within our limits, and we were quite pleased with the strength of our balance sheet this quarter. In terms of corporate operations, as Jeff mentioned, we had the acquisition of our Kansas franchisee on January 31. So we currently had 9 corporate locations in operation. The average exchange rate for Q1 of 2019 was 5% higher than Q1 of 2018 and therefore, provided some uplift to our growth year-over-year. So I'll discuss the results in terms of U.S. dollars. As Jeff also mentioned, the adoption of IFRS 16 on leases, which we applied using the modified retrospective approach. Therefore, we didn't restate the prior year financials. So with the new IFRS standard, we replaced the operating lease cost with the charge to tangible depreciation below the EBITDA line and then the charge to interest below the operating income line. In the MD&A, you'll see that we've included pro forma results, excluding the IFRS 16 adjustment, to compare to our prior year results. So I'll speak to the pro forma corporate location results here as well. We had the 2-month results of the Kansas locations, included under non-same corporate location results in the MD&A, along with the 3 acquisitions that we completed in 2018. Our EBITDA from these acquisitions was $450,000 with a 37% margin. And included in this EBITDA, we did also have $75,000 in vendor-related consulting fees and that accounted for 5% of the acquisition revenue. And operating income from the acquisitions was $314,000 with a 26% margin. And these 4 acquisitions have been performing as expected to date, so we were pleased with the results there. Our same locations grew shredding sales by 6%, and in particular, this was all scheduled sales growth, which was good to see. Recycling sales grew 30% as the paper prices were higher than Q1 of 2018, and we also had increased tonnage. Same location EBITDA declined by 7% year-over-year, which was due to a number of factors, one of which was a shift in the revenue mix towards higher recurring revenues, while our unscheduled revenue declined by 1% over the prior year. In Q1 of 2019, we did not have as many of the very large purges that we did in Q1 of 2018, and this accounted for approximately $100,000 in sales. And in addition, unscheduled revenue almost always has higher margins than scheduled revenue. And we've seen that the size of purges has been slightly declining. Along with that, in the strong U.S. economy, we did experience some driver shortages, which has increased our driver wages and overtime. We invested in additional salespeople, and that's to drive our increased scheduled revenue. We invested in stronger management in 2 of our major locations in Q2 of 2018. And we've had increased truck repair costs and downtime. We did invest in 2 new trucks during the first quarter, which has given us increased capacity. And is expected to result in some reduction in the repair costs and downtime going forward. So overall, we were not very pleased with the same location decline in EBITDA and operating income. However, our management team has and continues to work on improving our route efficiencies to minimize costs, including the overtime, and in particular, driving sales and that scheduled sales growth in the areas and buildings we already service. We also plan to continue to invest in new and additional trucks throughout the rest of the year. And in terms of overall total corporate location results, our EBITDA grew 40%, with an EBITDA margin of 36%. And we had total operating income growth of 43% with a margin of 26%. And I'll pass it back over to Jeff to wrap up.

[Jeffrey I. Hasham, CEO, President & Director]

Yes. So just a few follow-up comments. Thank you, Kasia, on that. The company, we're continuing to take a long-term view of driving the recurring revenue side of the business and for the very reason that both paper prices and unscheduled purge revenue are more volatile in nature and obviously, purge revenue is event-based. So by investing in the sales folks, we did see a good uplift in our corporate location -- same location scheduled revenue, and that was by design. And of course, as Kasia mentioned, that has slightly lower margin profile, however, is very sticky and has a long-term durability to it. So we've taken that approach to make sure that in the long run, we can bank on that revenue and continue to build on that revenue as it is cumulative. So those were mindful decisions that we've made as management. I think they're the right decisions and we look at the long -- I know they're the right decisions and we look at the long-term view of trying to get as much recurring revenue into this business as possible. And the view here is between that, between deploying better routing software we'll be able to get more efficiencies on our routes longer term and then bring our margin profile back a little bit more in line with what we've seen in the past. So we're taking this moment in time to make sure our revenue profile is the right one, recurring, make sure that we're deploying the right routing platform so we can squeeze in more stops, if you will, and be more efficient between those stops. And those are things we're doing right now, and we will see positive impact from that. We took some similar measures in 2016 when we centralize tasks here in Toronto, and they did have a positive benefit to the company, and we're taking a few of those steps today. So I just want to add a little more clarity there that management's actively on top of the business, in particular, driving efficiency and recurring revenues. So I'll pause there and open it up for Q&A.

[Operator]

[Operator Instructions] The first question comes from Bob Gibson with PI Financial.

[Robert Gibson, Special Situations Analyst]

Can you just give us an idea of how the integration of PROSHRED Kansas is doing? And then sort of your thoughts of the e-Cycle business and rolling that out across the network?

[Jeffrey I. Hasham, CEO, President & Director]

Great question. Thank you for that. So the PROSHRED Kansas integration has gone well. I think one of the advantages of buying a franchisee is, they're already using the same workflow system, the trucks are already labeled PROSHRED. The team follows our playbook and our manuals. Obviously, there's sometimes a little bit of change. One of the things that we are doing there is deploying our CRM package. They weren't using -- they hadn't implemented the CRM platform and integrated workflow. So that's, in fact, an opportunity for us to improve that business, which is already a good business. So on the PROSHRED Kansas side, knock on wood, integration has gone well. They had a bit of a rough go in the last few days. I don't know if you've heard, there's been a tremendous number of tornadoes in the area. And that has actually impacted a couple of our employees. So we're being very mindful there and just join us in wishing them well, and we'll be supporting them in their recovery. But from an integration perspective, gone very well. On the e-secure business, we're -- we -- the business is doing fine. It's gone more or less as expected. We're not experts in that business yet. We have good management there that are -- that is -- that are experts. And right now, we're in the documentation and workflow mapping base. So we understand how the business works. We understand who the key buyers are, who the key sources of equipment is. And my view is by the end of this year, we're going to have this fully documented workflow. We've already started video workflow as well. Then that's something that we can roll out to other franchise locations and the other corporate locations. So it is something that we want to do, and we're studying it and understanding the mechanics of the business. And so far, so good though, there's been no surprises per se in that business. It's a little more lumpy. And I think we knew that it was a little more lumpy. It's more -- there are customers that are recurring in nature and that they provide a constant stream of equipment, particularly leasing companies and hospitals. But there is a lumpiness to it in that. You'll sometimes get a big influx of stuff from people who have an ad hoc need to dispose of their e-waste. And so you have some of that. The good thing is the economy is doing very well there, and people are upgrading their computers and their equipment. So there's some tailwind there, I think, in the medium to long term at the moment.

[Robert Gibson, Special Situations Analyst]

Okay. And can you give me an idea of sort of your CapEx budget for this year and how that might break down as maybe trucks, et cetera?

[Jeffrey I. Hasham, CEO, President & Director]

Yes. So we've ordered up -- we've got 2 -- 3 trucks.

[Katherina M. Pawluk, CFO & Secretary]

3 trucks.

[Jeffrey I. Hasham, CEO, President & Director]

3 trucks so far this year, 3 more to go. So that's said another USD 750,000 plus containers, there's probably another $150,000 in containers to go. That's pretty much it on the CapEx side. There's always a little…

[Katherina M. Pawluk, CFO & Secretary]

Accounting software.

[Jeffrey I. Hasham, CEO, President & Director]

Oh, yes, one thing as actually Kasia reminded me, we do have a new accounting platform coming in, that's probably going to be another $100,000 to $150,000 in CapEx to go. So there's a little bit more there. So we're probably at about $1 million left to go for this year. And the majority of that is going to be truck assets and all those truck assets and none of them are to replace existing equipment, they're all for new growth.

[Operator]

The next question comes from [ Marcus Lattimore ], a private investor.

[Unknown Attendee]

Just 2 questions. The first, I've heard in the past couple of quarters that there's an ongoing investment in sales and management personnel to support existing growth. Is there any way that you can comment on how close we are to having the team that we need to support the near-term growth? Or do you expect further investment in the near term? And then second, related to the point just on maintenance CapEx and truck investment. Can you comment a little bit further on the average age of the existing fleet?

[Jeffrey I. Hasham, CEO, President & Director]

Yes, certainly. So just -- I mean the investment in earnest started late Q3, early Q4 last year, so that's sort of been where we started that investment. And we're continuing to -- the team is almost there. Now one thing with, obviously, the investment in a sales team it's not just that initial hire and onboarding. To build a scheduled revenue pipeline, obviously, takes time. They do stumble on purge as they go along, which is good. But it literally takes 3 to 6 months to build a solid pipeline, given that our business on average, our average schedule customers are $100 per customer. So you've got to get out there. We obviously provide them with the tools, CRM, the marketing automation platform. Obviously, we're driving leads as well. So we're still working through that. However, we have -- the majority of the sales team. We're down 1 salesperson and 1 sales leader at the moment. We're managing the sales leadership on our own without the sales leader, but we're actively pursuing that. So we're -- we've made some good steps. So to answer your question there, the team is almost in place. It's now ramping up. And that's sort of where we're looking for the next couple of quarters. And it's shaping up well, I mean scheduled revenue has already responded in the right way in our corporate locations. So we're very pleased about that. On the average age of our truck fleet, it's roughly 4 to 5 years old, and that's our target. We're staying under 5 is where we would like the average age. Now we have to stratify that. Trucks that are in Charlotte or in Florida, those Southern markets, they have a life of 10 years. And there are some trucks in those markets that are approaching 7, 8, 9 and even 10 years old that are still performing, which is great. The Northeast is a completely different animal and you get to 7 years on that, and it's a challenge. And it's not just the weather, it's the conditions of the roads as well that put a lot of wear and tear on the trucks and also the mileage because there's a lot more commuter-only, no-truck highway. So the Northeast and in the north, in general, you'll see shorter life spans on the trucks. But overall, we've been continuing to keep that weighted average age of our trucks in that 4 to 5-year range. And a good thing with some of our older trucks, they act -- serve as great backup trucks. So the death in this business, and death in any service type business that's using trucks that have a special purpose application like ours is when the trucks go down. And so now having some redundancy where we can take some older trucks and deploy them in our corporate markets, and our corporate markets are fairly close. We're reducing truck downtime. So we did get impacted in this first quarter by some truck repairs that we didn't plan on. Those tend to balance each other out over a year. And sometimes -- again, those are lumpy costs that that you can get hit in 1 quarter and not the next. And -- but every truck is on a dual preventive maintenance program. We have a preventive maintenance with a shredder -- with a shred mechanic dedicated to us. They rotate through the PROSHRED fleet, particularly on the East Coast. And then we've also have a -- for our corporate locations program with Penske, and the trucks go through the Penske program as well. So we have a very good preventive maintenance program to help us minimize downtime and to hopefully minimize some surprises, unfortunately, not all surprises can be mitigated. Does that answer your question?

[Unknown Attendee]

It does.

[Operator]

This concludes the question-and-answer session. I would like to turn the conference back over to Jeffrey Hasham for any closing remarks.

[Jeffrey I. Hasham, CEO, President & Director]

Thank you very much. I appreciate, first of all, everyone joining the call this morning. Thank you for that. A number of you we'll hopefully see tonight at our Toronto investor presentation night as well. Management team will be there to circulate once I finish my soliloquy. We're doing it at the perfect time, sort of starts before the Raptors game. So hopefully, we won't be in clogged up traffic as part of that. And of course, let's hope the Raptors take this one home. So -- but again, appreciate everyone's time and support of the company, it doesn't go unnoticed. Thank you.

[Operator]

This concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.