Redishred Capital Corp (Pre-Merger)
XTSX:KUT
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Redishred Capital Corp (Pre-Merger)
Earnings Call Analysis
Summary
Q3-2023
Despite a strong operational quarter, the company saw a 16% decrease in EBITDA due to a significant decline in paper prices, which halved from the previous year. Nevertheless, the shredding revenue grew by 21%, and the EBITDA excluding paper increased by $1 million, marking a 121% rise from the previous quarter. Free cash flow per share was $0.15, with the company showing a robust conversion rate. The company is also making strides in technology investments, including a recent move to Azure and embarking on a journey toward SOC 2 certification to attract more clients. On the horizon, management is focusing on Q4 performance and creating business pipelines for the upcoming quarters.
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Thank you for standing by. This is the conference operator. Welcome to the RediShred Capital Corp Third Quarter 2023 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, Ariel. This is Jeff Hasham, good morning everyone. I want to welcome you to our third quarter investor call for Redishred Capital Corp. I want to thank everyone for attending on Friday morning, especially those that wake up early on the West Coast, which are a number of you. And of course, it's Black Friday in the U.S., so a number of you might still be recovering from Turkey Day. So thank you for joining us.
I'm also joined by Harjit Brar, who's our CFO. Together, we'll be reviewing the third quarter 2023 results. And of course, we'll have a Q&A session at the end of the presentation. I do want to let everyone know that, of course, our financial statements, MD&A and press release are all available on SEDAR for your consumption as you need it. I would say for the third quarter, an okay quarter.
I think when I look at the operations, operations were solid. Operations we made a very solid strides particularly versus last year, even versus the first quarter of this year, very strong strides. We grew our shredding revenue by 21% versus last year in the same quarter. EBITDA though, of course, came in lower by 16%. Now we strip out paper out of that, our EBITDA without paper grew by almost $1 million, that's a 121% increase over the third quarter of 2022.
Hence, my comment, it was an okay quarter. Strong operational profitability, offset by a strong decline in the paper prices. So how did that happen? How did the paper prices impact our results. So our SOP is the class of paper sort of office pack as our class of paper. And those paper prices reverted back to their long-term average. If you recall, a year ago, we were hovering close to $300 per tonne. And now we're half that or just a little shy of how that's a little better, though.
However, that has had a significant impact, of course, on the results and we've seen EBITDA decrease by $600,000 when we compare this quarter versus last year's quarter. So those are the historical highs from last year. Now we're close to the 10-year average. I will say, thankfully, we're at that 10-year average and now it's somewhere below that. And I think that's the good news in all of this is that the paper prices seem to be plateauing or flattening out as we sit at this point in time. So again, if we sort of look at what we can control, we can control our core business. We can hone in on doing the right thing with every day.
And if you look at our EBITDA margins without the paper, you'll see this. Our margins as a percentage of revenue improved 500 basis points and our corporate location operating income, again, less recycling margins also improved by 1,000 basis points, when we compare to last year at this time. How has that happened? That has happened by very good right densification. This is helped by, in particular, in a few regions, where we finished the implementation of some very large acquisitions. The team has done an amazing job of integrating these acquisitions in the first half of this year, the ones that we did in late '21 and into '22.
So seeing that happen has been quite satisfying for all of us and quite timely, if you ask me. When you also look out and look forward, we acquired PROSHRED Baltimore in September. And of course, we're looking at bringing that in and integrating that into with our North Virginia -- existing North Virginia corporate location. So Baltimore, is a very good operation. We're going to look to bring those 2 operations together over the first 6, 7 months of ownership, but Baltimore is performing as expected. So we look at that.
We also did a smaller acquisition Security Shred a day before we did the Baltimore acquisition. That one I can safely say has been integrated. The team in New York, New Jersey, the ops team, the finance team, the marketing sales team have done an amazing job integrating that acquisition. In fact, the trucks that we received for those acquisitions were distributed to other markets. So I'm very happy about that acquisition as well. So looking forward, building on a strong operational platform and operational results. We have a couple of acquisitions, which we only saw a little bit of it in the third quarter. We'll see more of their results in the fourth quarter and of course, into 2024.
I would be remiss, if I didn't take the opportunity here to speak about the investments we've been making. As we've been growing, we need to continue to create the right environment for us to scale without burdening ourselves from extra cost that's associated with growth. And the best way to do that is to use technology. And we've invested in technology. Number one, earlier this year, we went with a new customer relationship management tool, Salesforce, it's the best in the business. Integrated into that. We used Pardot, which is our marketing automation platform. All of this together is going to allow us not only to have better closing rates and better efficacy on the sales side, but allow us to nurture market our clients going forward. So we saw that investment. We also took in this quarter we migrated to Azure.
And why do we migrate to Azure? Azure as the leading cloud platform and having the right cloud platform is the foundation of our technology stack Azure as the language that allows us to link all our platforms. So Azure provides a number of things: speed, security and linkage between our platforms so we can have them talking to each other reducing double data entry, reducing administrative burden that comes with our type of business, where we have thousands of transactions on any given day, and they're all small.
So having these things talk to each other, this is going to help us for many, many years because we're using the best in the business, we're using the Salesforce, Azure. Our workflow software is the best in the business, our routing and tracking systems are the best in the business. So these will pay dividends for many, many, many years, which we've done this year.
The last thing we've invested in this year is the SOC 2 certification as an information protection company, having this certification allows us to do more business with governments, both on the shredding side as well as, in particular, the scanning side. Our scanning business is growing, which you can see in the financial statements. Harjit will talk to that. And having that certification will allow us to capitalize on the larger scanning clients, government, large institutions. So this year, the investments that we've made are going to really, really pay off. I think the team has done a great job at polishing our rocks.
They've done a great job finding those operational opportunities and savings and efficiencies and right densities, I can't thank everyone enough for what they've done there. And now the ability to invest in these technologies to allow us to be even better. That's pretty exciting for us. So we're looking forward to -- we've already started deploying Salesforce. Azure is just been deployed the integration of those tools will be next year in terms of our workflow and our Salesforce. There's a number of things that are on the go that are going to be very beneficial to us and allow us to scale with more leverage, and that's really what we want to do. Scale with more leverage.
So on that note, I want to turn it over to Harjit, who will give us the incremental color on our financial results.
Thank you, Jeff, and thank you again, everyone, who's able to join this call. So in terms of our financial results, our top line revenue grew by 5% and grew to $15.4 million compared to $14.7 million in the third quarter of 2022. If you look at the revenue growth from a service line perspective, our shredding revenue grew 21%, as Jeff noted, with scanning sales growing by 17% and our e-waste revenue being comparable to the third quarter of 2022.
Recycling revenue, of course, decreased, as Jeff noted, and that's, of course, driven by lower SOP pricing, which has now reverted to sort of its longer-term average. If you sort of translate the results on a per share basis, EBITDA came in at $0.17 per share for the quarter. That compared to $0.20 per share in the third quarter of 2022. Stripping of paper, EBITDA less net recycling revenue, that grew by $0.9 million -- so almost $1 million there to $1.7 million. So in terms of how the results translated from a cash flow perspective, so our free cash flow was $2.7 million for the quarter or $0.15 per share. So a strong FCF conversion rate.
If you look at Q2 2022, we were at $0.03 per share from a free cash flow perspective. So if we look at the free cash flow, what was that sort of being generated by -- so that's, again, driven by strong cash generated from operations. So our EBITDA was translating to strong cash flow from operations, and that's offset by some CapEx, which we had $0.8 million in CapEx. As you know, our CapEx is primarily sort of comprised of shredding truck purchases. That is our largest CapEx item.
So if you look at sort of our capital resources right now that we have on hand, we have $3.6 million. We still have some additional capacity into our existing banking facilities as well. So again, some strong capital that we can deploy to continue to grow the business and to execute on any sort of items in the M&A pipeline. And so that's an overview with the financials. I will turn it over now to Jeff for some closing remarks.
Thank you, Harjit. One of the -- let everyone know that we always put our head down, put our hard hats on work on the business. And I do want to take a moment to thank a number of our employees and leaders for doing that. And that's what we're going to go do right after this call. We're going to work on the business and see how we can improve what we've been doing, how we can continue to deploy the technology to be even better at what we've been doing. Like anything, things get thrown at you in the business.
In this case, paper prices coming down. That's certainly been a challenge. And see at just be smarter about how you run your business, and we are taking the moment to do that. So going forward, we're even better off when paper prices go back up. And then when paper prices eventually come back down. We want to be in a better position every time that happens. And I will say we're certainly in a better position this time around then, when it happened last time around in 2019. We're in a much, much better position, much better operationally. And with the technology rollouts that are happening, we're going to be much better off than next time this happens.
So I want to state that -- look, the year is still a good year. The year is still performing. The company is producing cash flow. The company management leadership for being mindful of everything and we will continue to do so, and we'll continue to work hard on behalf of our shareholders on behalf of all our stakeholders to finish the year very strongly. So I want to thank everyone for their support. And I will pass it to Ariel to open it up for Q&A.
We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Devin Schilling Financial.
Just if we could talk on paper tonnage here a little bit. I see tonnage was down a little bit this quarter versus both Q1 and Q2 of this year. Maybe if you could just comment on what was the driver here? And I guess, how should we be looking at tonnage going forward?
Yes. A little bit of our schedule is by venue. Growth has been quite good. our recurring revenue has been quite good. Our purge revenue has been a little -- it's still growing. It just didn't grow as much as we anticipated. Some larger purges that we typically get in the Q3, we're working on those for Q4. And so typically, those purges drive a lot of your tonnage because you get more packed paper in the boxes.
So our take on that is -- there's a little bit of timing that's happened there. Again, Q4 seems to be a little bit better start so far to Q4 than we typically have. Again, everyone is really gunning for it. And I think we'll see a few extra purges in the fourth quarter. That's what we missed out on a few of those larger purges in the Q3. And that's the problem. You don't -- we actually had more number of purges this Q3 than last Q3, just -- they happened to be smaller this year than they were the prior year. In some quarters, you get them, some big ones that better. So that chunkiness does appear, and that's why the tonnage was a little bit reduced.
Okay. That's more of a revenue mix item, here.Okay, just a second question on the scanning revenue. It was obviously a pretty nice increase this quarter. Your comment was this like some new customer wins or I guess just timing of some existing business?
Yes, you know what, no, it was -- I think the team there has done a very good job at a, #1 with our existing clients, mining those existing clients. We have a number of long-term repeat type clients that continue to -- continue to buy. We had some newer clients, some smaller newer clients, which we love. Those are [ pro-type ] clients and then some smaller clients that have joined up. So some net new client gains there, which is which is very good.
And as we bought this business, see our goal here is to really create pipeline. This is a business where you're trying to look out forward and you're trying to create a pipeline of boxes essentially to bring into your facility. So right now, we're not working on Q4 pipeline. We're working on Q1 and Q2 pipeline. That's what we're working on right now. So I'd say that the entire team has done a very good job at driving pipeline more in advance. Managing the box flow for production as obviously, we earn revenue, not on what we book, but on what gets produced. And the team is much more consistent there. And so good kudos to them. That's why we've had the growth, and we view this business as one that we can continue to grow in a very good way.
Yes, I know that makes sense here. I guess just last one for me here. Just on the SOC 2 certification. Did you say this was already completed or just underway right now?
It's under -- where we -- this year is a preparation year -- so doing all the preparation part of the move to Azure was preparation. We need to move to something that is faster, more secure, all those kinds of things in any event. But we figure we're going to do all this work. let's get a certification. So we're really putting -- so we're a good chunk of the way in. By Q1, we'll be ready for the Type 1 certification. And then -- so that's great.
Type 1 means something and means something to those clients that we're trying to attract in the number of clients that have already said that they would love to work with us, if they had -- if we had that certification. And then the type 2 happens about a year later because the type 2 is sort of an annual audit. So the type 1 that sort of get to into the [ dance floor ] and so type 2 keep sure the [ dance floor ] So we're well underway. We've made a lot of progress both on the technology side, the process side, the control side. So that's -- this is a very good thing and we're getting close to finishing the job there.
[Operator Instructions] Our next question comes from Nick Corcoran of Acumen Capital.
Just a question for me. The first is on the CapEx. I saw it came down quarter-over-quarter. Can you just comment on how many trucks were delivered in the quarter and your target for the year?
Harjit, do you want to take that one?
Sure, Nick. So in terms of the truck CapEx, so we did purchase 2 trucks in the quarter. So the way our CapEx works, obviously, is that there is some timing sometimes -- so the -- depending on sort of when the sort of the orders come in, when we're able to get the trucks, it just creates some timing issue. But saying that, I think we're very prudent on the CapEx front.
So we're really kind of making sure we're sort of getting trucks as we truly need them. Very mindful there. And I think as we continue to grow and scale the business, I think that CapEx percentage, especially if you compare it as a percentage of revenue, that will sort of continue to sort of slowly come down. If you sort of look at that from sort of a medium to longer-term lens.
And can you just remind us how many trucks are being delivered year-to-date?
So year-to-date, we've had about -- you think about approximately 12 to 15 trucks. So sort of in that range.
And do you have any more trucks expected to year-end?
We do. We're probably going to have another 3 to 4 trucks coming in.
Okay. That's great color. And then I used to think about the margins, I think they came down more sequentially than I had expected. Can you just comment what the impact of diesel prices might be in the quarter?
Sure. So when you're saying margins are coming down, are you looking at what margins are you referring to specifically?
Yes. Sorry, I'm looking at consolidated EBITDA margins between the second and third quarter?
So that consolidated EBITDA margin, that's actually all driven by paper, that decrease. If you actually look at the consolidated EBITDA without the recycling, our margins actually went up 500 basis points. So that EBITDA decrease is actually driven more by recycling prices. Fuel costs were actually pretty decent for the quarter. So there wasn't a lot of volatility over the summer. So they were pretty comparable to the first few quarters. So that decreases it's -- operationally, we did improve quite a bit. So that's just a function of SOP prices more so.
That's helpful. And then maybe thinking about the fourth quarter, I think there's been some seasonality. How should we think about the margins?
So in terms of Q4, historically, yes, it's been -- the margins have been sometimes sort of been a little bit more compressed relative to -- especially when you look at Q2 sort of the summer and sort of earlier in the year. Part of that has to do with sort of the timing of when things happen in the number of business days and such. What we're noticing this year some of the stuff that typically happens in Q3. I think Jeff just alluded to it as well. There is -- some of it's timing, some of that has gotten pushed out to Q4.
So we are seeing a bit of a stronger start to Q4 than we typically expect for Q4. So that's positive news for us. So all in all, it's sort of difficult to say where we're going to land. But yes, historically, Q4 is a little bit lighter. But this year, again, we started off a little bit stronger than we were expecting.
[Operator Instructions] This concludes the question-and-answer session. I would like to turn the conference back over to Jeffrey Hasham for any closing remarks.
Great. Thank you very much. Thank you, again, everyone, for joining the call. Right after this call, we'll go back to finding ways to finish the year in a strong way. We want to win Q4. Everyone has that mantra this year is to win Q4, and we're looking to win it and set us up well also for Q1 and Q2.
And so everyone on the sales team is working on driving more schedule revenue. We're going to win Q4 not only by winning scheduled revenue, but by winning more event-based revenue, closing more -- executing on our scanning side of the revenue and being mindful of our operating costs and all our costs. So we're all going to put our head down and go polish those rocks in a better way and try to come out of the year as strong as possible. Paper prices will be what they are. So we'll deal with what we can do, and what we can control, and the team has done a great job.
So I want to thank the team. I want to thank our Board of Directors, I want to thank our shareholders. I want to thank our partners, I want to thank everybody who's worked with us. And for our American friends, happy Thanksgiving, and we'll talk to each other soon, I'm sure. Bye-bye.
This concludes today's conference call. You may disconnect your lines. Thanks for participating, and have a pleasant day.