Redishred Capital Corp (Pre-Merger)
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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. Fourth Quarter 2022 Financial Results and Business Update Conference Call. [Operator Instructions] And the conference is being recorded. [Operator Instructions] I would now like to turn the call over to Jeffrey Hasham, Chief Executive Officer. Please go ahead.
Thank you very much. Good morning, everyone. Welcome to RediShred's Q4 and year-end 2022 conference call. I want to thank everyone for attending on this Monday morning. Today, I'm joined by Harjit Brar, our Chief Financial Officer. And together, we'll be reviewing the fourth quarter and year-end 2022 results and provide some color on those and company update. And of course, we'll finish the session off with some Q&A. Did want to let everyone know that the year-end audited financial statements, including Q4 and 2022 MD&A, press release were disseminated on Friday. And obviously, on SEDAR, and of course, please, at your convenience, take a look and read through them.
So for the Q4 2022 and full year, 2022, this is a good growth year for us. Sales were strong. EBITDA grew by double digits. In fact, Harjit will go through the exact numbers, but it was our strongest year-over-year dollar growth that we've seen in the history of RediShred on an EBITDA basis. So if we look at the fourth quarter, both revenue and EBITDA were significantly up. Revenue was up 48% and EBITDA was up 85%, respectively, when you compare that to the fourth quarter of 2021. For the year ended 2022, so this is fiscal year '22 versus '21, EBITDA -- sorry, revenue was up 58%, EBITDA up 67%.
So how did this growth continue for us. And many of you know us very well. We're following our game plan. Number one, organic growth, what we own, we build, and we're driving strong same-location service revenue growth, shredding, scanning and e-waste. So you take that into the mix. Of course, we had strong paper revenues that came from there. And then, of course, we had a good year for acquisitions. And towards the tail end of 2022, November 1, to be exact. We purchased the PROSHRED Philadelphia franchise, that completed really the Northeast for us in terms of acquisitions and a very good acquisition for us. So as much as we've been acquiring, we've been acquiring, we've been acquiring it smart. We've been pragmatic about the deals we do. And I think this is paying off for us in terms of translations to the results that you've seen.
So -- as noted, that Philadelphia franchise is a good one for us for many reasons, well operated in the Northeast. We look at our organic results in core shredding business. And if you look at our same corporate location revenue, shredding revenue, again, that grew by 21%. So when you strip out the paper, the service revenue growth was 21%. And our secure e-recycling business, Secure e-Cycle and Proscan both for the year were up and we're very pleased about that. And of course, I already mentioned recycling being a combination of really 3 things: number one, strong paper prices; number two, increased tonnage; number three, we're now baling in 5 locations.
Proscan business, I do want to note that in the fourth quarter, it was softer than I think any of us might have anticipated. The Proscan business is more what I would call chunky to use -- not such a nice word, but I don't know any other way to say it. We have a lot of the larger clients and government clients. So [ why ] end up playing with when the government releases their budget money. And there's a lot of repeat clients that they're large and their timing can be off, sometimes 3, 4, 5 months. And so if you get these peaks and get these values in that business, very different than the shredding business. We have a lot of small recurring clients. So 2023, our usual stable of clients are there and the business is performing so far so good in '23. So Q4 was a little bit of a timing challenge more than anything.
When we look back at '22, it was a tough year in terms of a number of factors. It was a tight labor market and that triggered -- not only was there inflation, macroeconomic inflation, but that driver, labor market, was quite profound. Many of you know about the supply chain issues that impacted new truck supply as well as parts for older trucks. So that caused increased downtime or reduced uptime, but increased downtime for our trucks. And the good news is we're able to sort of use our backup trucks and our spare trucks. But again, those required higher repair and maintenance fees, which Harjit will talk about.
Higher fuel prices were certainly well known and that drove the costs. So this whole inflationary environment certainly did us no favors on the cost side and they did impact our margins more than we would have liked. Given all of that, we finished 2022 quite well and we're really well positioned. When Harjit reviews the balance sheet, you'll see why we're very well positioned because we can continue to do deals. And as these macroeconomic factors sort of wear down the independents, I think that will give us opportunities to buy independents and our pipeline is quite good. And we've got a number of folks in the pipeline, independents, of course, are always in the pipeline.
Acquisitions, Philadelphia, as mentioned, and we -- that was a $7 million deal up front plus earnouts and the earnouts were tied to service revenue and the paper price. So we've got downside protection on both, which is good. And from -- since we bought it, it's performing to plan, so we're pleased about that. So when we sort of look at all of this, I also want to make note and I mentioned this earlier, we're baling paper now in 5 of our corporate locations. So we have 15 as of today, we have 5 that are baling. These are our 5 largest locations.
So when we look at December -- when we started, November 30 of 2021, we had 2 locations, Chicago and Kansas baling. And now with the acquisitions that we've done, we've got 5 and a lot of our volume is going through there. So probably about 50% of our tonnage corporately is being baled at a higher price. And those, of course, have a higher cost because the baling has a cost. Those costs include rent for the warehouse, labor, utilities, and those types of things. So just to give everyone some color on that, that the paper revenue for us, we are doing work and processing it to make sure that we're getting as high a dollar as we can for that paper. So as noted Philly brought the baling facilities up to 5.
With that, Harjit, why don't I turn that over to you and you get into a little bit more of the details there.
Sure. Thank you, Jeff, and thank you again, everyone, for joining on this call today. So in terms of financial results, our consolidated revenue for Q4 2022 was CAD 15.4 million. We compare that to CAD 10.4 million in the fourth quarter of 2021. So that's, again, a 48% increase. From a bottom-line perspective, EBITDA in Q4 was CAD 3.1 million compared to CAD 1.7 million in Q4 2021. And even with the growth, here, the margins were stronger than the comparative period in Q4 2021. So we were 400 basis points higher.
If we look at the full year results, again, strong growth, as Jeff alluded to, revenue was CAD 57 million. EBITDA was CAD 15.3 million for the year. And if you compare that to 2021, we had revenue of CAD 36 million and EBITDA of CAD 9.2 million. And then if you look at the margins, we definitely had our cost challenges, but saying that -- even comparing it to 2021, we were ahead of 200 basis points. Obviously, that's partially driven by sort of strong recycling prices, which helped. But again, it was the cost, which I'll sort of maybe dive into a little bit more deeper shortly that have had some impact on the margins.
And if you look at our growth overall, like Jeff again, mentioned it as well, but we've had strong organic growth, and we've been very pragmatic from an acquisition front, and that's translated to the bottom line. So in terms of the cost that we spoke about, we've had to incur incremental costs, for example, like we've had to rent trucks due to some of the parts supply issues. And we know that that's driven up in part costs. We've had wage inflation for our drivers, higher fuel prices. And if you sort of aggregate them all together, you're looking at about a [ CAD 1.3 million ] negative impact for the 2020 (sic) [ 2022 ] year on our corporate location operating costs and hence our bottom line. So definitely some headwinds from a cost perspective. So in terms of the truck supplies, truck supply has improved as have part supplies for older trucks. But there are still some remaining challenges as we start in 2023, but definitely a bit more positive than what it was in 2022.
The -- we're talking about the results, but even you translate them down on a per share basis. So EBITDA was CAD 0.17 in Q4 2022. That compares to CAD 0.10 in Q4 2021. And then for a full year, EBITDA was CAD 0.84 per share in 2022 compared to CAD 0.58 per share in 2021. From a net income perspective, full year 2022 net income per share was CAD 0.84, and compared to CAD 0.58 in 2021. And we've talked about sort of the income side. But from a cash flow perspective, we did have strong cash provided by operating activities, CAD 2.9 million in Q4 2022 and CAD 11.6 million if you look at 2022 as a whole. So cash flows have been strong. We still have a good liquidity on our balance sheet. We're sitting on cash of $7 million and we also have capacity under our existing banking facilities to help facilitate growth as we sort of look into 2023. And all in all, again, we're pleased with the results for 2022, and we look forward to executing our plan in 2023.
And so on that note, I will turn it over to Jeff for some closing comments.
Thank you, Harjit. So as Harjit noted, I think overall, we're pleased with where we finished in 2022, given those factors that we faced from a cost perspective, we're looking ahead. And yes, those factors came into play. So what are we doing about it to make sure we're more efficient and more effective. We have several work and technology initiatives on the go. We're rolling out our workflow software. We started that last year. most of the corporate stores are on it. We're rolling that out not only to the rest of the corporate stores, but also to our franchisees.
That software also has a collection automation platform. As you can imagine collecting all these $100 bills, clients, you can have many, many and -- tens of thousands of those in any given month. So having an automation process will help us obtain more efficiency and allow us to scale as we grow. So -- and help us reduce our days sales outstanding. So I think those are the things that I think will be very positive for us.
We just launched this month, the Salesforce CRM and that has sales automation and better pipeline tracking. We've grown so much on the sales side and with so many customers, you need to be able to track them and you'll be able to follow up with them and enable you to market with them in an individualized but yet automated manner, and that's what that's doing for us.
And then all of these things need to be integrated, and that's the next phase of this, and we actually have our integration folks working on that. So for us, that's going to allow us to grow and scale in a very standardized way and we feel those investments have a strong return on invested capital because we're going to continue to do acquisitions. We're going to continue to grow organically, but we can't do the same things over and over again, we need to be smarter about how we do it. And so the team is really focused on these initiatives, they're focused on our operating metrics, they're focused on what may come. So having plans for what may come. So essentially, we're going to go back after this call, put our hard hats on continue to work on the nitty gritty of the business and continue to improve our business.
And with that all being said, I want to thank all of you, our shareholders, our financial partners, our Board, our management team, our franchisees and our employees for working so hard to make 2022 successful. I'll open it up to Q&A.
[Operator Instructions] Our first question comes from Amr Ezzat of Echelon Partners.
Jeff, Harjit, can you speak to the macro environment and how it may impact your business? Are you guys seeing any signs of weakness or maybe increased price competition?
Yes. So Amr, I think if I talk competitive wise, with the consolidation we are finding, there's going to be fewer independents out there. I know you've got your big guys out there, the Shred-it, Iron Mountains and a few others that are more in the record storage business. I think what we typically -- what we see here is on the recurring revenue side. We're winning where our go-to-market pricing has been pretty good, which is great. On the event-based purge type business, we're very elastic in each market. We tend to be very mindful of the market and our capacity because that plays a role. So the good news is we -- when we have capacity, we can go fill it and we can fill it on routes, we can drop prices a little bit to fill it on routes, and we don't have capacity better order a new truck to create capacity, but then we can be more selective and go for those higher-margin accounts.
So we're always looking at that. We're always -- price increases happen every year, and we'll be doing one this year as well. And we're trying to read the tea leaves on the rate of inflation and things like that, but this is still a good time to pass through a price increase. So I think those things are there.
Overall, just what's our view in the U.S. is, U.S. is still hot, right? Like it's still a hot economy. And so those have good things and that there's full -- more or less full employment. I mean, if you look at the last 2 months -- a month ago, it was the lowest unemployment rate since they started -- since the 50s. So those are good, but that puts pressure. Of course, the opposite is that it puts pressure on wage inflation and things like that. So we got to be mindful. And hence, I come back to the technology deployments, we need to be -- continue to be improving and continuously improving our business and we are -- I hope that answered it. Do you have a follow-up on that, Amr, or did I get that for you?
No, that great. U.S. market is hot. It's what I picked from it. Can we go back to the operating costs, just looking at operating income ex recycling, the margins obviously got compressed from 13% to 8% in '22. Just wondering how we should be thinking about 2023 in light of the different moving parts, including your price increases. You guys like have a target number? I know you guys like have a bunch of targets you released for growth and EBITDA and so on. But you have like a target sort of operating income ex recycling target that we should be thinking about?
Yes. And that's a good question. And I think one of the things just to be careful, when you pull out all the recycling revenue is, we have costs now -- some costs associated with that because we're baling paper now, right? So the baled paper will attract $50 or $60 or more a ton and there's some costs associated with that, right? So yes, we've seen -- so when you take out the paper revenue, you're left with where we're at and -- yes, the exposure of the fuel cost, for example, and the repair and maintenance cost, that $1.3 million that Harjit showed up, doesn't get offset by anything, right? And you're absolutely right. We get -- we got -- that hurt us and people offset us and then having baled paper as well and that margin on the baled paper certainly helped us as well.
Where these margins are right now in terms of our cost, going into the new year. I see fuel obviously has been up and down but has subsided quite a bit. The truck-supply situation there's still a challenge getting new trucks, so we're still incurring higher repair and maintenance costs into the new year, but not like 2022. And I do see that easing off over the year. So every time I thought it was going to ease off last year, you get a call from the truck vendor going, yes, we're waiting for one part and then your truck can be released, right? I mean, literally, it's that minute, one part can knock out your truck supply. And then now you're spending money on the old truck and you're spending money on the overtime and then those trucks are not fuel efficient here. So those are really -- those really hurt us last year, to your point. And when you pull up the recycling, you can see that as well.
Having said that, I think we're already into the first part of this year in Q1. It's been better on the truck supply perspective. We haven't gotten all our trucks that we wanted, but it's better than last year. And we're getting parts to repair older trucks a little bit faster. So those things are certainly helping us going into '23. So -- and then we'll do another price increase and paper's remained relatively strong. It's not quite -- it's come off its highs, but it's remained relatively strong. So that offset some of those costs. And last but not least, we're continuing to work on the routing and deploying the workflow technology that is going to help us just be better at that. And so does that give you some color Amr?
Yes. So if I were to exclude paper out of the equation, and I understand that it's hard to do that, given the cost of baling, but that 8% margin ex recycling, you guys are expecting it to expand in 2023 in light of the price increases and the other measures that you spoke to? Is that correct?
That would be -- yes, that would be correct.
Okay. Maybe one last one, and I'll pass the line. In terms of like capital allocation and pace of spends in M&A in 2023? How should we be thinking about that then in light of like still like great performance for 2022 and where the stock price is? Are you guys like considering like buyback of stocks or anything like that?
Our stock is a great investment right now given the price and -- in my opinion anyhow. And look, we're fortunate we have to be -- and I'll let Harjit talk to the CapEx side of it, but on the M&A side, the smaller deals we can do out of cash flow and the smaller deals we do at lower valuations. Larger deals we're looking at the valuation in going and -- what should be buying, buying independents and/or franchisees closer to home, in markets where there's more efficiencies will help in that margin expansion as well because then you can lever existing locations.
So those tuck-ins in existing markets or buying franchisees along the East Coast. That helps with all of that margin expansion, which then allows us to do deals at reasonable valuations, but get the big bang for your dollar. We have bank facilities. We have cash flow to do small deals, we have the banking facilities. That's where we're going to -- that's where we're focusing right now. And will we buy back our stock? I don't see why we wouldn't, that's something that makes a lot of sense just given where the stock is at. So we're looking at all the alternatives right now, Amr, because we perform -- had a good year. Could it be better? Yes, because there's other things we're going to make it better? Absolutely. But, it was a good year, and we're not getting recognized for that. And so can't complain about that. You just got to go try to figure something else out.
Our next question comes from David Ocampo of Cormark Securities.
Jeff, just wanted to circle back on the M&A question there. You guys called out a target of $5 million to $6 million of revenue being acquired this year. How should we be thinking about that in terms of the split between existing franchise locations and independents, especially since you noted on the call that they may be struggling in this inflationary environment.
Yes. I think there's going to be some -- even like last year, we had more independents, I mean, Philly was a big deal, but it was one deal, right? So I think we're going to continue to see some of these smaller independents put up the white flag like they did last year. And I think the ones that sold last year are probably a little more proactive, but we'll have more independents this year. We'll -- there's always franchisees that are at a position to look to retire and of course, if they are, then we're there to buy them. But I think you're going to continue to see some good independent acquisitions. And then we're going to see some franchise acquisitions as well.
So I think this year will look a lot like last year. And if it does, then that's good because we will have accomplished our targets, and we'll continue to be executing our strategic plan. And I think the key for me is really trying to keep the acquisitions focused on where we are to try to get that leverage that we're looking for.
Great. And then for your franchise acquisitions, how many franchises for '23 are up for renewal because I know that's usually [indiscernible] for any acquisition.
Yes. No, there's a number. There's about 3 of them that are up for renewal this year. And we're always talking to them and walking them through their alternatives. And one alternative is to accept an LOI that I give to you, right? And so -- and I think those that took the LOI last year were -- I think the timing was good. I guess we know, of course, the markets deteriorated over the last part of the year and look, reality is evaluations are often. So there's a few folks that are getting a little bit of heartburn around that. But that's okay. They'll come around, people still need [ eggs ] in this business. And if they have a good business with the right things going on it, we'll still pay. We're just not going to pay maybe what we used to.
Got it. And then you guys have these '23 targets out there. Just curious what you guys are baking in, in terms of paper pricing, probably help us triangulate it to a better margin for -- your shredding business.
Yes. No, thank you for that. Harjit -- I mean, generally, I mean -- do you want to just jump in on that one?
Sure. So in terms of paper pricing, so we have had very high paper prices during the past year. Paper prices, the way we're sort of forecasting them is that they're going remain strong, but there is going to be a bit of a softening in the pricing. So we do anticipate the price is leveling off, but still sitting at sort of historically high levels. And so we're very mindful of that when we're also sort of looking at our business, our core shredding business as well, and so all in all, I would say is like, like any commodity, you don't know sort of which direction it's going, but that's sort of our forecast that we have right now as we sort of -- as we already -- as of right now, sort of in April 2023.
Do you have a hard number that we can throw in our model?
Yes, I can definitely share something after the call for sure in terms of some of the things, but I would definitely put in some softening maybe as of right now, I would say probably you can go with a number, 10% -- 10%, 15% softening or something along those lines is sort of our forecast at this point.
Our next question comes from Nick Corcoran of Acumen Capital.
Jeff, Harjit. Most of my questions have been answered. I guess just one follow-up is, I think you mentioned in the prepared remarks that incremental costs in 2022 were [ CAD 1.3 million ]. Can you give a number for the fourth quarter?
Sure. So I think in terms of the -- Harjit here. So in terms of the fourth quarter, the -- if we sort of take a look at it from the full year, you look at some of the sort of the cost increases and things like that. They started hitting over the summer and fall and sort of continued into the sort of the fourth quarter. So if I was to sort of put a number into it, I would probably say that it's probably somewhere between 1/4 to 1/3 of that number, probably closer to 1/3, that sort of sits at sort of a higher cost increase for Q4.
That's helpful. And can you maybe help us understand the buckets that the incremental costs were in between higher fuel prices, higher labor and the repair and maintenance.
Sure. So in terms of the sort of the structure it's -- about half of, is sort of in sort of that fuel bucket, in terms of the fuel cost increases. And then with the remaining 2 buckets, I would allocate the remaining 50% sort of -- it's about equal, roughly.
Our next question comes from [ Mike ] Walter of Singular Research.
A couple of questions. First, on the Proscan and the fourth quarter challenges as far as timing. Do you envision any kind of shortfall there coming back sometime in 2023?
I think '23 is going to be -- the business typically follows a cycle of first quarter, fourth quarter are typically softer and then -- and it builds in the second quarter to third quarter, really in the scanning business due to government budget and spending and all of that. Last year, we also had -- we had 1 large customer that was sort of a onetime help into the first quarter of 2022. So that helped a bit.
I think the good news is we're getting more repeat, we're getting more smaller recurring clients. We're also backlogging business. So just trying to anticipate the clients' needs, grab the boxes and then hit -- get the scanning done sometimes on their schedule. Sometimes they don't need it done right away, but the solution is, "I got boxes, I've got to get rid of them," right? So we grab the boxes, we got them. And then we get to bill for that, of course. And then we get to scan that and help build the revenue into the fourth quarter. So that's really what we're working on right now. The second and third quarter are looking pretty good in that business, which it typically does. And so we're still pretty high on that business and seeing some good growth out of it.
Okay. Great. It's -- that's quite helpful. Second thing you mentioned on the Philadelphia acquisition. It really helped you round out the Northeast. Are there any kind of target geographies as far as potential M&A activity that will round out any additional geographies for you?
Yes. We're always looking on the East Coast. We're pretty strong on the East Coast, top to bottom. There's a couple of franchisees in there, actually 3 along the East Coast that are left to buy. There are many, many independents on the East Coast. So we're always honing in on that market. And then, of course, we're pretty strong Midwest, you sort of go Milwaukee, Chicago, Kansas. Those areas are -- we're pretty strong.
And there are some adjacent markets that are not far like Ohio, Tennessee places like that, that have a number of large cities that we can also go after. And again, focusing on the East Coast at the moment, just from a time perspective, a time-zone perspective, a support perspective, is going to be less expensive. And then as our younger franchisees are more on the West Coast anyhow. So as they then come to renewal and then that's when we may look to acquire them. So -- yes, right now, it's certainly go after the markets that we're in.
Got it. Okay. And last question for me. You mentioned earlier about potential capital allocation back to shareholders. I guess the question is if, in fact, that's something to consider down the road. Any thoughts, repurchases versus dividends at this juncture?
Yes, that's what we have to consider, right? I mean, we are a growth company. So that's the -- like -- here's a good thing. We've got good cash flow coming out of the business. So that's positive. And we're always working on improving our efficiencies to drive more cash flow out of the shredding business. We have a couple of growth businesses that don't require a lot of capital, which is Proscan and Secure e-Cycle.
So then what does require our capital? It's acquisitions, right? So then it's a matter of where do we want to deploy that capital, where we want to allocate the capital. So acquisitions, yes. Share buybacks, a good idea. Dividends are also a good idea, and I think we just have to decide what is the best place or what is the best avenue to deploy capital? And as I already mentioned earlier, our stock is quite inexpensive at the moment. So that's viable. Dividends with shareholders that have been with us a long time. I'm sure they'd appreciate dividends. Obviously, that -- both take cash out of the ability to do M&A.
So we're looking at our pipeline and evaluating the additional free cash flow that we have to determine the right strategy there. And we just can't sit here and do nothing, right? So look, a bunch of acquisitions pop, right? If they don't, we have a couple of other places we can spend our money.
Our next question comes from Devin Schilling of PI Financial.
Jeff, can you just please remind me what percent of your corporate costs are related to diesel prices?
Yes, they are -- you know what -- traditionally as a percentage of service sales pre-fuel price increases, they were like about 5% and then they jacked up to like about 8%, Harjit, correct me if I'm wrong, but I mean, they went up like 3% last year. So quite the uptick as a percentage.
So 5% to 8% of your total corporate costs?
Yes.
Okay and then obviously...
So sorry, Devin, let me just clarify, 5% to 8% of our service revenue. So that's sort of the percentage of our service revenue. If you look at as a mix of the cost, if you look at our pie chart of cost, they're our second largest cost after driver labor. So I can get you that number later. I don't have it off the top of my head, but it is our second largest cost after driver labor.
Sure. Just to add in there. So I think, as Jeff was noting, like it has gone up about 200, 300 basis points. We're kind of looking at about 7% to 8% of our sort of our shred revenue is sort of right now being eaten up by fuel and oil costs.
Okay. Yes. No, that's helpful. And then also obviously, paper prices are still looking quite healthy here relative to the long-term average. Diesel prices are down year-to-date. Just wondered if you guys could provide some color on your Q1 EBITDA margins. Like are we looking in that low 30% range again? Or do you guys see additional room for upside?
I would say right now, I mean, Q1 is always a stronger quarter. And we've now baked in those price increases that are there. So they're kicking in, and all those schedule of clients we won at the end of the year are kicking in. So I think we're going to see a good Q1. I would say it's going to be better than last year. There's, of course, some cost pressure there. But I would say, if we look at Q3 and Q4, we really took it hard. I think Q1 is going to prove to be a much better quarter when you look at the -- versus those last 2 quarters.
This concludes the question-and-answer session. I would like to turn the conference back over to Jeffrey Hasham for any closing remarks.
Great. Yes. Thank you, everyone, for the questions. They're always helpful for us as we see things from a different perspective and certainly appreciate those questions. As you can see, 2022 is a good year. I wouldn't call it a great year, I would call it a good year, I would call it a year that we can build from. We are building from it, and we're deploying a lot of things that are going to improve the business. That's what you do in -- when you look at the cash flow that we're producing, let's improve the business, let's improve how we do things, and that's what we're going to be doing. So I want to thank everyone again for joining us this morning. And of course, I'm sure we'll be talking to a number of you over the next week or so. So have a great day, and we'll talk to you soon.
This concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.