Redishred Capital Corp (Pre-Merger)
XTSX:KUT
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Redishred Capital Corp (Pre-Merger)
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Thank you for standing by. This is the conference operator. Welcome to the RediShred Capital Corp. First Quarter 2024 Financial Results and Business Update Conference Call. [Operator Instructions]
I would now like to turn the conference over to Jeffrey Hasham, Chief Executive Officer. Please go ahead.
Thank you very much. Appreciate it. So first of all, welcome, everyone, this morning to RediShred's Q1 2024 Investor Call. I want to thank everyone for joining us this morning. I'm joined by Harjit Brar, our Chief Financial Officer, and together we'll be reviewing the first quarter results of 2024. As usual, we'll have a Q&A session once Harjit and I make a few remarks.
I want to note, of course, that as usual, our Q1 financial statements, MD&A and press release were disseminated yesterday. They're available on SEDAR as usual. So if you're looking for those documents, they are there and have been filed.
I want to first note that 2024 started off well operationally. We've continued to grow our service lines of revenue. I want to congratulate the PROSHRED team, operations team, sales team, marketing team, technology team. PROSHRED, the shredding revenue was up 12% versus the same quarter of last year and kudos to everyone involved in bringing that together. And then, of course, the PROSCAN business, our digital imaging business, was up 47%. It's a big number. And so altogether, on the service side, again, we saw very good growth. Harjit will dive a little deeper into that growth profile, but to continue to see strong double-digit growth in our service end of the business, that's something we're appreciative. And again, I want to thank our teams out there that do this every single day. They work hard and don't often get the credit, they're deserved.
Paper pricing was closer to the 10-year average in the first quarter, I always get asked about paper prices. And you'll recall a year ago in Q1 2023, we were still fairly close to the highest levels that we've seen in a long time.
And so of course, our recycling revenue was about $2 million in the first quarter when you compare that back to the first quarter of 2023, that was $3.3 million. So that's a $1.3 million decline when we look at that, the quarter versus the quarter. So obviously, the key for us is to continue to be more dependent on the service revenue, less dependent on the paper revenue. And we've been doing that, and we've been doing that very well.
So organic growth has been strong, which we just spoke about. Acquisitive growth has been there and will continue to be there. Obviously, adding new customers is critical, especially our subscription service scheduled customers are very important. Price increases are important to the mix. Those all will drive our route density, our bottom line, and we're continuing to do -- take those actions and do those things. So when we look at EBITDA and you back out that recycling revenue, Q1 2024 was $2.3 million versus $1.8 million in Q1 2023.
So a $0.5 million improvement, which we're very happy about. So again, just coming back to paper for a moment. Again, the strategy here is paper prices are going to continue to be low, then we've got to increase our prices. We've started that process. That process will be completed by the end of June. So starting -- so we'll get a little bit of a bump in June of 2024. And of course, in Q3 of 2024 all the price increases will have taken effect and will positively impact our results.
The next piece of good news is, of course, one of the things we've endeavored to do is improve our technology platform, security is critical. It's critical to protecting what we own and have, but it's also critical to gaining new business. And our SOC 2 Type 1 certification, we're in the audit report moments. So we're just finished the last ends of our audit report, our audit with the firm and of course, that audit will be completed very, very shortly and that type -- we expect to get that Type 1 very, very shortly. That's going to positively impact the scanning business for sure, and we are excited about that.
So stay tuned there because that's been a year-long journey now coming to the first stage of conclusion. Obviously, a year from now, we'll get the Type 2 once we go through a full year in the new SOC environment.
And then, of course, MDK, we completed that in January. So here's the good news. We're in Michigan. After absorbing that business, like any other business, although a smaller acquisition, as of right now, we're in Detroit, and that's a great new market for us. And so to be able to service another new market is great. And of course, we all know what we like to do once we're in a market, let's see are there either 1, 2 or 3 truck operators in the market.
So overall, I'm happy with the operational performance of the business.
And let me turn it over to Harjit, who can get a little more granular with you.
Thank you, Jeff, and thank you again for everyone who is joining us on this call today. So I guess in terms of the financial results. Jeff, sort of gave a bit of a sort of a feel for them. If we look at sort of the overall top line results, so we did grow from $17 million in Q4 2022 to $17.2 million. So there's an uptick. That uptick was driven by shredding revenue. So the shredding revenue is up 12% or $1.5 million. That is sort of being partially offset, though, with the lower recycling revenue. But again, something that we did anticipate and we are comparing a quarter in Q1 2023, where paper prices were more elevated than what sort of the normal sort of long-term average is.
So if we look at sort of the top line, we're seeing growth there. Bottom line results, EBITDA, we landed at $4 million that looked up to about $0.22 per share on a fully diluted share basis. So again, good margins, especially when you take a look at EBITDA less net recycling, considerable improvement, that does show us that we're continuing to sort of improve the bottom line. And then when we combine that with the fact that, hey, we're also executing on things like price increases, focusing on sort of density scaling that's really helped contribute to a very good bottom line and margins.
From a cash flow perspective, free cash flow was $0.9 million, or about $0.05 per share. That's driven by $3.1 million in cash that we generated from operations, but that was offset, obviously, by CapEx. So we had $2.2 million in CapEx in Q1 2024. Obviously, we spend on trucks. We want to add service capacity, grow the business. But if you look at Q1 2024, part of the CapEx spend, it was driven by timing of purchases. So when we kind of look at the coming quarters in 2024 we definitely anticipate spending less on trucks compared to what we spent in Q1 2024. So you're definitely getting a bit of a front-loading on the CapEx side, which is impacting the free cash flow for Q1 2024.
All in all, when we look at the year, a good start to the year, but obviously, we're excited about the sort of this coming quarters and how we can sort of grow this business.
And now I'll turn it over to Jeff for any sort of last remarks or comments.
Yes. Thanks, Harjit. Yes. No, I appreciate -- I know our audience appreciate a little bit more color. And of course, we'll get this open up to Q&A in a moment. But again, I want to thank operations, marketing, sales, finance, technology, compliance, the entire team that does this every single day. It was good execution on the operations side. Everyone is looking to improve and how to get better. And of course, Q2 and Q3 are traditionally good strong sales and revenue quarters for us, and Q2 is not done yet. And so we're going to be pushing forward to make Q2 as successful as we possibly can.
And so I think on that note, I'm sure there are questions from the audience. So we'll open it up.
[Operator Instructions] Our first question comes from David Ocampo of Cormark Securities.
So you guys have talked about the price increases that you guys are implementing in June. But I'm curious, do you expect most of this to fall down to the bottom line? Or will it be offset by some inflationary pressures on the cost side, whether it's driver wages, et cetera?
Harjit, do you want to take that one? Or do you want me to take that one?
Sure. So when we take a look at the price increases, obviously, we're looking at a sort of -- at a clip that's a little bit higher than we typically done them. So we definitely think that, that is an opportunity. And so obviously, we've already started executing on them. So come May 1, we started sort of rolling out the price increases. The residual carryover into June. And so again, you're going to start getting that full benefit in Q3.
When we sort of look at it from a costing perspective. Obviously, I think some of the headwinds with inflation and sort of the inflationary increases that we were seeing sort of especially post-COVID those have dissipated quite a bit. And so we kind of look at that sort of run rate going forward from a sort of a cost increase perspective. It's not going to be as significant. So we do expect a good chunk of that to definitely fall to the bottom line.
Got you. And when I look at the volume of paper processed. It was down 2% year-over-year, but your scheduled and unscheduled sales were up pretty nicely in the quarter. Just curious what are the factors driving that? Or potentially some of the bins that you guys are collecting from customers containing fewer paper in them? Or are you guys potentially siting on process paper facilities?
I can answer that. Look, usually, usually, it's driven by just the type of purges, are they lots of small purges are they larger purges. So the purge will tend to drive your tonnage a little -- the schedule tonnage tends to be pretty steady. So you tend to get that. So it's just really driven by those types -- what types of purges are there. You also get sometimes quarters where your existing scheduled clients will call in for a purge and maybe they do, maybe they don't. But generally, we've seen this in the past where you'll see a little bit of a reduction in tonnage on a quarter-versus-quarter basis just because of the nature and the type of purges typically, again, scheduled was up, and we're not seeing much variance in the service methodology or what we're servicing or the like.
Okay. That makes a lot of sense. And then just one last one for modeling purposes. I mean you guys are forecasting free cash flow of $9 million, so it's a pretty big yield against the current stock price. And Harjit, I'm just curious what you guys are assuming for total CapEx for the year? I know you said sequentially down off the Q1, but full number would be helpful for us.
Yes. So when we kind of take a look at it, I think one thing to sort of look at is you kind of take a look at sort of our CapEx spend as a percentage of revenue sort of historically. So it will probably fall there or a little bit lower than that. It's probably going to a little bit lower than that, but that's kind of where we're going to land. So it is front loaded. Obviously, each truck is a significant investment for us. But again, a great revenue-generating asset. So when we kind of look at that, I would kind of use that as sort of a gauge of sort of the ongoing CapEx, again, just look at that historical percentage of revenue it's going to sort of continue to sort of come down from that.
Our next question comes from David Marsh of Singular Research.
So if I could just follow up on that prior question about CapEx. So last year, it looks like you did about $6.2 million on about $65 million in revenue. So if we were to extrapolate, I mean, if we are thinking something in the $70 million to $75 million in revenue range, would it be good to assume like a $7 million-ish number for CapEx. Is that in the ballpark?
I think with that one. So it is going to -- as a percentage of revenue, it is going to continue to drop, especially sort of when we continue to sort of scale and identify. So you're probably going to look at something in the 6s.
In the 6s. Okay. Perfect. And then my next question, just a housekeeping item, but I think it's probably important to address a pretty significant portion of the debt went current on the balance sheet at the end of the fiscal year estimate. Obviously, that indicates that the debt matures -- a big portion of debt matures here in the next 12 months. So can you just talk about refinancing activities around that to extend that out so, that that's not a concern for investment?
Sure. I can actually talk about that. So I think the way the presentation is done for accounting purposes, we do have to disclose if that's current, just based on some of the features of the debt. The reality is, is that [indiscernible] sort of schedule for that is actually a lot longer. So in the notes to our financials, we do have a note section, we talk about in sort of the long-term debt note, where you can see the actual true amort schedule. And you notice the actual amort schedule, it does extend out a number of years. There's no requirement to actually do any refinancing. It's more just of an accounting exercise under our sort of accounting rules where we have to classify it as current, but the actual sort of repayment schedule and amort schedule, it would more mirror the sort of the long-term debt schedule that you see in the notes to the financials, assuming obviously that there's no feature that's exercised, which would force us to draw or repay it early, which is not what we anticipate happening. So I would look at that amort schedule in the long-term debt note. I think it's note 10 or 11 of the financials.
Yes. Let me take a look at -- let me take a closer look at that and get the understanding and I'll hit you up with any follow-up questions. Yes. I mean it looks like most of that's pretty low rate. So I would hate to see you guys before [indiscernible]
We don't want to pay that.
Today's [indiscernible]. Okay. And then on the acquisition front, so obviously, a small one in the first quarter. Just could you talk about landscape and kind of what your desire -- your desires are for the balance of the fiscal growth regards to [indiscernible].
Yes, I can jump in on that. So our M&A pipeline is pretty good. We're always working on M&A pipeline. We've got deals in the pipeline. We've got deals with various sizes, large, medium and small. And I guess the good news when you have a good pipeline as we can cherry pick the deals. And that's exactly what we're doing. We're going to cherry pick -- so if you sort of look at the prioritization of deals. Number one, deals that are in market where we can get the maximum amount of cost extraction, the maximum amount of route density, those are our top priority deals. Whether they're small, medium or large, those are our top priority deals because those are the most accretive to cash flow.
There's the -- they have the best return on invested capital. So that's priority #1. Priority #1 [indiscernible], of course, is when franchisees are looking to exit, we'll buy them. Those are part of our plan. And so that's something that's always in the background, and there's always franchisees that are getting ready to exit. And so we always have those. So those are sort of when you look at the shredding business. Those are sort of our top 2 priorities.
If something is in a market where we -- is an approach or a franchisee or isn't a tuck-in into an existing market. It has to be attractive, like MDK was attractive. It had some scanning, it brought us into Detroit. We could manage it from Chicago. So there's some special features to that, which was good. And the valuation, frankly, was very good, right? So valuation is playing a role. So we want to cherry pick the best possible deals that are out there that provide the best return on invested capital that we possibly can. That's the goal of all of our deals that we're looking to do.
[Operator Instructions] Our next question comes from Devin Schilling of Ventum Financial.
Just on the -- just on the SOC 2 certification. Can you just remind me what customers that the certification opens up for RediShred is on the scanning side, is on the shredding side? And also, I guess, just that time line on that audit, like are we weeks away, months away? Any color would be great.
Yes, no problem. So number one, certainly, from a scanning perspective because look, when we're processing the information, we're housing client data, right? So like temporarily and in some cases longer than that. So you're housing their data, your clients want you to know that you have the right technology, processes, controls, procedures, all of those types of things. And in fact, we had some clients go to us like we -- or potential clients. We love -- we've done the testing, we love you guys, but our compliance wants a vendor that's a SOC 2 certified vendor. So that -- we're eagerly anticipating that certification. I'll talk about time line in a second, Devin.
The second part of this is I don't know if everyone is familiar, but in the United States, if you do work, any type of work with the government in the United States, you need to be NIST 800 certified or NIST 800 compliance, actually not a certification, compliant. It's an IT protocol again.
And so by having our SOC 2 certification, we knock -- we check the vast majority of the boxes on the NIST 800 compliance. And again, that puts us a leg up on a lot of the independents in particular when it comes to shredding services or ITAT services or whatever other services that we provide to the federal government. And so there's a multiple opportunity here.
So the time line to get Type 1 is imminent. I would be disappointed we don't have it by June 30. So that is imminent. Again, we're in the last [indiscernible] of the audit, and the auditor is [ AOK ], then we're going to get it, and if they're not, then we're not. But we put in a lot of time and effort and energy and so far passed all the tests that we're supposed to pass. So those are good news for us. So -- and then the SOC 2 Type 2, you need to go through 1 year before you can get that. So that will be about a year afterwards.
Okay. I know that's great color. So obviously, we'll open up a new customer set for you guys that might have been not reachable prior to that? .
That's right.
Secondly here, just on the expected free cash flow growth, obviously, it looks quite healthy here. Maybe you can just touch a bit on the key drivers. And I guess how much is from just projected lower CapEx this year?
Yes. Harjit and I might tank in this one. Look, I think operationally, which you've seen, the company continues to perform operationally. The operational margins are continuing to improve, which is great, and that will bring cash flow in. Other things, I mean, you sort of think about cash flow from operations, right? It's how do you also better your working capital cycles, right? And so we've got -- we're introducing this year our client portals and some automated client -- sorry, automated collection techniques and some of that can even be run through Salesforce, which we've already installed.
So there's a few opportunities there to just make that cycle flow faster, which is positive. So those things are there. And then CapEx, I mean, last year, and Harjit can elaborate, but in 2023, we replaced a lot of older trucks from the American and [ Shred-X deal ]. That was by design, we had to do it. We went 1 year with their crappy trucks, part of the word, but they weren't great, but we knew we need to get through it. And now we replace them.
That's the benefits, the operational benefits that we see in New York. Trucks are part of it. Like we've got strong people, good routes, a lot of good things happening there, but the trucks certainly were part of that equation. So when we do get a new truck, you get an uplift in uptime, you get a down shift in repairs and maintenance. You get a downshift in fuel use. So those are all positive on the cash generation front. But Harjit, did you want to just speak a little bit more to the CapEx there on the truck side?
Sure. So I think -- so in terms of -- if we kind of look at free cash flow, if you look at sort of the inputs. So I think from the [indiscernible] cooperations are really going to be driven, as Jeff pointed out by sort of our EBITDA growth. Obviously, Q1, we did $4 million in EBITDA. Q2 and Q3, as Jeff also pointed out, are historically stronger as well in terms of sort of financial results. So when we kind of look at that -- so it's really going to be EBITDA because at the end of the day, I think when we look at CapEx, CapEx is going to be sort of more in line with what we -- we're forecasting it to be more in line with what we had in 2023. So overall, the biggest driver is going to be EBITDA, the EBITDA growth.
And so that's going to require us to really focus and continue to focus in on the operations, continue to get good margins. So obviously, we're doing a number of things from a pricing perspective, focusing sort of on sort of acquiring customers, growing the business organically. Obviously, we have the M&A pipeline, we closed on MDK, which will help. And we're -- so there's a number of drivers to that, but I think the -- some of the levers, obviously, is dependent on us just going out and executing on them.
Yes, that's great. Just on the price increases, I don't know, did you guys mention were they like low double digit, high single digit. Is there any color around that?
Sure. So in terms of price increases, what we're looking at is sort of in the sort of the 6% range right now. So with price increases, we haven't really sort of -- historically, we haven't really sort of capitalized on the opportunity to sort of push through those price increases in response, obviously, cost increases and sort of what the market is sort of doing. So I think this year, we got sort of 6% and we consider that sort of a healthy rate, but definitely something at the same time that's going to help us from a bottom line perspective.
Okay. And just last one quickly here for me. You guys talked about on the acquisition front, some franchisees may be targeted as well this year. I just wanted to know if we are up for renewal this year? If you guys have that top of mind.
Yes. We've got a couple that are up for renewals. And of course, we're always chit chatting with them about what they want to do. Typically, if they don't renew, they sell to us. Typically, if they renew and they renew -- they all don't renew for a 10-year deal, they renew for a 5-year deal. And typically, when they renew for that 5-year deal, they usually don't make it to the end of 5. What they're looking to do is use that a little bit more time to improve certain things in their business that should help them improve their overall valuation. So that's typically what they would do in those instances.
So I guess the good news for us is we always have franchisees in the pipeline. We always have independence in the pipeline. And sometimes it shifts a little more franchisee oriented. Sometimes it shifts a little more independent oriented. And -- but the priorities do not change, right? The depth in a marketplace is the most accretive acquisition you can garner from an ROIC perspective. Franchisees are great because they're very low risk. They're generally very successful, and they create the foundation to further densify their business by doing other tuck-ins. So both are great M&A pipelines to have, and we have representatives from both.
This concludes the question-and-answer session. I would like to turn the conference back over to Jeffrey Hasham for any closing remarks.
That's great. So again, thank you, everyone, for joining this morning and for the questions. And obviously, again, all the documentation has been filed. Should any of you have further questions, of course, reach out to Harjit and I. Many of you on this call are our shareholders and longtime shareholders and supporters, we thank you for believing in the management team and supporting the management team. And again, the hardhack goes on now and we go work on the business and on the operations to make it better, and we will do that every single day. And so again, we don't do it. None of this is on our own, we're big team, and so we thank you for your support. So have a great day, everyone, and we look forward to talking with you soon.
This brings to a close today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.