Redishred Capital Corp (Pre-Merger)

XTSX:KUT

Earnings Call Transcript 2023-Q4

[Operator]

Thank you for standing by. This is the conference operator. Welcome to the RediShred Capital Corp. Fourth Quarter 2023 Financial Results and Business Update Conference Call. [Operator Instructions] And the conference is being recorded.

I would now like to turn the conference over to Jeffrey Hasham, Chief Executive Officer. Please go ahead.

[Jeffrey Hasham, executive]

Thank you very much. Good morning, everyone. Welcome to RediShred's fourth quarter and year-end 2023 call. I want to thank everyone for attending today this morning. And of course, as usual, I'm joined by Harjit Brar, our Chief Financial Officer. Together, we'll be reviewing the results for the fourth quarter and for the year. And of course, as always, we'll have some time at the end for Q&A.

One thing just to remember, our financial statements, MD&A and press release are all also located on SEDAR. So for further details, please visit SEDAR for those reports.

I want to first start, Q4 2023 was a good quarter for us. We all know that the fourth quarter seasonally is a top quarter with U.S. Thanksgiving, Christmas holidays and the like. However, both from a top line perspective and also from a bottom line perspective, it was a good quarter. The operations made very good strides, and everyone put their head down to do so.

If you look at our organic same-store shredding revenue, it grew 10% versus the prior year same quarter. And consolidated EBITDA, excluding the paper, grew $1.3 million where last year, our EBITDA was $200 million. So $1.5 million of EBITDA. Excluding paper in the prior year, it was $200,000. So a very significant uptick in the performance of the business when excluding paper.

And of course, we all know, unfortunately, in 2023, paper prices came down much more than anyone would have anticipated. We are fairly close to our long-term average. Long-term average is in around $140 to $150 per ton, and Harjit will go through a little bit of this in more detail, but we're sort of in that area.

So obviously, when we sort of look at the fourth quarter, that significant drop in recycling revenue driven by the price of paper was more than offset by the operational improvements that we saw. And so on a consolidated basis, we're still able to grow our consolidated EBITDA by 2% in the fourth quarter of '24 versus the fourth quarter of 2023, again, despite that paper dropping in a significant way.

So we were fairly pleased about that operational result and what the entire team accomplished together in the fourth quarter, in particular.

In 2023 and, of course, in the fourth quarter, we made serious investments in our business. And those investments are going to tee us up for the years ahead -- for the many years ahead. It did impact our EBITDA. And of course, most of those costs would have been seen in the G&A line.

These investments, to name a few, would include our transferring to Microsoft Azure, implementing the first and most important components of Salesforce and the marketing automation platform that's embedded within Salesforce.

We started in a very serious way working towards having a SOC 2 Type 1 report, which will then be followed up with the Type 2. So that certification is very important. Not only will it help us secure many of our governmental shredding accounts, but it will also allow us to be a very serious player in the scanning business, as a lot of larger companies are looking for that SOC 2 certification, and the most of our competitors in the digital imaging space have that certification. So that's going to put us in a positive way.

So we made some very good investments. These investments will have positive effects on sales, route economics, long-term G&A costs as we scale this business. And this is what we're trying to do is make sure that when we scale this business, we can continue to deliver operating leverage in the business.

And we needed to take these steps this year and into early '24 to ensure that we drive a business that can scale as we grow and reduce manual input and make it easy for our customers, both inside and outside of the organization. That's what we're looking to do with these investments, and they will drive positive economic results.

On the M&A side, if we look at our most recent 2 deals -- or 3 deals. First PROSHRED Baltimore, longstanding franchisee there, great franchisee. We were able to buy his business as he was looking to retire, him and his wife, and we thank them for that. That allowed us to finish the job in the D.C., Virginia, Baltimore corridor. So far, to date, it's going to plan. So we're pleased about that.

Simultaneously, we did an acquisition called Security Shredding in the New Jersey market. It was a tuck-in. And again, the team in New Jersey and the technology team and the DD team, due diligence team, did a great job integrating that, and that was a nice win for us.

If we look at the '24, we bought MDK in -- on January 1 in the Michigan market. They had shred and scan. We had no presence in Michigan. We're now at a point where we can start to be more aggressive on marketing and sales as we look to penetrate the -- that whole Detroit, Lansing, Flint market. Toledo as well, but we're well positioned to do that. So we're going to drive that business forward to the latter part of this year, so pleased about that.

So overall, a lot was accomplished. A lot of people worked hard and those hard work -- the hard work led to some positive results. And speaking of positive results, I'll let Harjit provide the good color on the quarter and on the year.

[Harjit Brar, executive]

Thank you, Jeff, and thank you again for everyone who is joining on this call today.

So if we sort of look at our financial results, start from the top line, revenue, we grew to $16.8 million compared to $15.4 million in the fourth quarter of 2022. So that's up 9%. If you look at the other lines of business, specifically, for example, scanning sales, those also did go up by $0.5 million. That is, again, a smaller line of business, but has done well. E-waste was comparable.

And if you look at the shredding revenue side, shredding revenue again, total growth rate, 20% or $2.2 million for the quarter if you compare back to the prior quarter. And as Jeff sort of mentioned earlier, this is even in the face of softer paper prices. So very good top line growth.

You look at the bottom line, that's also translated well. EBITDA, $3.1 million. That sort of translates to $0.17 per share fully diluted basis.

Cash flow side, free cash flow, $2 million for the quarter, $0.11 per share. Again, that's driven by a positive strong cash flows from operations, which was about $3 million in Q4, and that's offset by $1 million in CapEx. As many of you already know, our CapEx is primarily driven by our shredding trucks. And I think with our spend, we will add additional service capacity, and this will allow us to continue to support the growth of the business.

If you sort of look at the full year results now, those were also positive. Free cash flow of $7 million, that compares to $6.3 million in 2022. Revenue at $65.9 million, comparing that to $57.2 million in 2022. And then EBITDA, slightly up at $15.4 million compared to $15.3 million in 2022. And again, that was impacted by paper, but we were able to more than offset the operational improvements to the business with that sort of downward impact on the paper prices.

So again, overall pleased with the results for Q4 2023 and the full year 2023. And I think we're well positioned to sort of execute on our plan for 2024. We are definitely very excited about it.

And with that, I will turn it over to Jeff for some closing comments.

[Jeffrey Hasham, executive]

Thank you, Harjit. Appreciate the incremental color. Again, you know what? We -- this is one of those businesses. Like all businesses in factory, you just got to put your head down, work on executing every single day, the attention to detail on the operation, the attention to detail on how we allocate capital, those are the most important things in our business. So those are the two areas that we focus in on.

And the team has been doing a great job on the things they can control, and that -- those are reflected in the numbers. And more exciting is that we're investing to improve this business going forward. And so we're very excited about 2024, and we're excited to take on some questions now.

So I'll turn it back to you, Aisha, and we'll -- and get the questions from the group.

[Operator]

[Operator Instructions] The first question comes from David Ocampo with Cormark Securities.

[David Ocampo, analyst]

Jeff, I guess, my first line of question is around the targets that you normally said, alongside your Q4 results. I was wondering if you could provide some high-level targets for the company, whether that's EBITDA growth, margin performance or acquisitions. I think that would be helpful for us as we look to model 2024.

[Jeffrey Hasham, executive]

Yes, for sure. So look, we will be publishing in the Q1 report a more fuller set of targets. The targets are going to be -- and the -- one of the reasons why we want to take a few moments on that is, number one, our view here is to convert some of the -- have at least one target based around free cash flow. And now that we're larger, free cash flow really is a very critical number.

It speaks to efficacy and collection. It speaks to capital allocation in terms of truck purchases and other CapEx spend. So that's going to be one that we will be providing some targets. There will be also -- and that calculates paper, too, right?

And then there'll be other targets such as same location results with paper and without paper. Those will be very important targets that we'll be looking at for next year.

Acquisitions, no doubt, those will be targets that we'll be setting up also for the following year. And so those are the things -- those are the three areas, in particular, that we'll be honing in on and we'll be -- the good news of Q1 for us, it's not even a month away. And so we'll be reporting those with the proper details at that time.

[David Ocampo, analyst]

Does that sound good. And you touched a little bit on capital allocation and acquisitions. I take a look at your balance sheet today. You have $3 million of cash, but a $3 million contingent consideration still on the books for past acquisitions. Just curious about your ability to finance that growth as we move forward here.

[Jeffrey Hasham, executive]

Yes. Look, I guess, the good news is the company produces cash flow, so that's number one. And we've always wanted to get to the point, and I'm not sure we're quite yet there, but we're certainly getting closer. And we always wanted to get to the point where we really could fund on our own, meaning without as many equity raises.

The idea here is to have the right banking facilities and the right cash flow production. And we're getting with the bank. We've certainly expanded our facilities. The bank has been extremely supportive of our growth programs. And when you sort of look at the -- when you look at our ratios from a debt to assets, debt to EBITDA -- sorry, debt to EBITDA, we're in a very good position there.

So from a banking perspective, we've got capacity. You'll see we've expanded our debt financing facilities to include a much easier to access smaller deals of line. And then, of course, we've got the typical line that's also been expanded. And then the cash production will allow us to also fund acquisitions.

So look, we've got a good pipeline, more independents at the moment than franchisees. And the independents do tend to be smaller. We love these smaller ones. We tuck them in. They're very, very positive for the company, these little ones, as you've seen in the past.

So I think we're in a good position. That doesn't mean at some point we're not going to need to raise equity. Of course, there will be larger acquisitions and the like. But at the moment, we're holding pretty steady, which is great.

Harjit, did I miss anything there? I want to make sure we answer Dave's questions.

[Harjit Brar, executive]

Sure. So I think, David, just to sort of add to that. I think one thing to point out, as we kind of look at the business, free cash flow for the year 2023 was $7 million, right? So we definitely have the capacity to self-fund any contingent consideration that is owing for the coming 2024 year.

Definitely to grow the business, there's always conversations around, like, hey, what is the proper sort of capital structure, looking at funding deals, what's the right LTV. So we take into account those different factors. And as we continue to grow the business, definitely, there is the need for the capital to get it to that sort of additional growth level, but it's something we constantly evaluate.

And -- but to Jeff's point, we are sort of well positioned where we want to be. And then we definitely have our M&A pipeline, which is pretty robust. And so I would say, in summary, we're in pretty good -- we're pretty comfortable where we are in terms of our capital.

[David Ocampo, analyst]

Okay. That's helpful. And then just a bigger type question before I hand the line over, right? I mean, if we take a look at your performance ex paper, it did have a nice improvement, but recycling still represents close to half of your EBITDA. And just out of curiosity, is this the right level for your business? And if not, how do you guys reduce your reliance on recycling going forward?

[Jeffrey Hasham, executive]

A great question. It's a big question. So just looking at some stats. If we look at total EBITDA as the -- and look on the same corporate location basis, recycling revenue was about 35% of our EBITDA this quarter, fourth quarter, versus last year, which was 67%. So obviously, paper prices coming down, that naturally will do -- go there. And then when you improve your EBITDA operationally, we had a nice uplift there.

And so how do we ensure that we continue to manage that? Look, we've always been a business that's been about the service side. So even when paper prices were sky high, we were -- at best, we were in around 20%. Revenue represent about 20% of our total -- paper represent 20% of our total revenue. And now it's sort of dropping closer to 10%.

So we're always in that range. And obviously, the more we drive that service revenue, I think every time we've seen a high, it represents less of our revenue. And every time we've seen a low, it also -- it doesn't impact us as badly. If you go back to 2019, that was -- those were much tougher times for us with the paper.

So number one, making sure that our recurring scheduled revenue, we're growing it. Making sure the service revenue, we're growing. That's number one.

Number two, digital imaging, our scanning business, you can see some good growth there. We're continuing to invest in that business. That SOC 2 certification will be important in the short, medium and long run to securing new clients, especially larger clients. And those clients can afford often the bill to digitize. So we have that.

And then lastly, our ITAD business, we're sort of unraveling. We're really doing a deep dive on that business. We think that business is a good business. We've just put in some new software -- some new workflow software, so we can really understand the data in real time around what we're collecting, what the values are, who we're selling it to, who the clients are. We -- a lot of our clients are the PROSHRED clients, and then creating the playbook to replicate that business.

So we're going to reduce our reliance on recycled paper. We're going to reduce that over time by focusing on the things that we can control and selling into those types of things. And we've started that, and that's why we've invested in a lot of technology this year because knowing your clients, particularly using Salesforce and marketing automation and knowing where they are, are very critical to us driving the operational margins versus the reliance on paper.

Did I get everything you needed there, David? Or do you have a follow-up on that?

[David Ocampo, analyst]

That was perfect. I'll hop back in the queue.

[Operator]

[Operator Instructions] The next question comes from Nick Corcoran with Acumen Capital.

[Nick Corcoran, analyst]

Congrats on the strong end to 2023. Just a couple of questions from me. We're kind of 4 months into 2024. I'm just wondering if you can give any indication how the business performed year-to-date and maybe the monthly trend just in paper prices as well.

[Jeffrey Hasham, executive]

Harjit, do you want to take that one?

[Harjit Brar, executive]

Sure. So I think if you sort of look at the business, again, 2024, without getting into sort of too much detail here, sort of at a high level, so far, things are sort of progressing like we wanted to. We will definitely be releasing Q1 results in the upcoming month. But I think, overall, so far, again -- again, we have our plan for the year, and we're going to go out and execute it.

And from a paper perspective, prices for paper, they've been relatively flat compared to year-end 2023. So as we sort of -- again, I'm referring to 2024 here. So far, relatively flat. We did get a bit of an uptick in March, April. But if you kind of look at the quarter overall, they're pretty much in line with sort of where we finished 2023.

So I think that lack of volatility, I think, is helpful because it helps us plan a little bit better. So again, we sort of look at it, we will release results next month. But overall, again, we're on the right path.

[Nick Corcoran, analyst]

Good. And then you highlighted the investments you've made in the business, particularly on the technology side. Can you give an indication of how much you spent in 2023 and why the additional investments you're planning to do in 2024?

[Jeffrey Hasham, executive]

Yes, we spent a lot. Harjit, did you want to give a little bit of a range there?

[Harjit Brar, executive]

Sure. So yes -- sure, we can sort of provide a bit more context. So I think in terms of the businesses, investments, Jeff spoke about them earlier, we're looking at about $0.5 million plus in investments, at least in the G&A side.

And as we sort of look ahead to 2024, that amount of investment we're going to need to do to sort of get our business to that next level is going to be definitely significantly reduced.

We are going to spend a little bit on the SOC 2 Type 1 certification. So there's still a little bit of work left to be done there. But the major investments, especially on the cloud computing front, Salesforce side, the good thing is, again, we've made those investments last year. Obviously, they impacted our bottom line margins. But I think we will be much better for it in 2024 and in the coming years ahead.

[Nick Corcoran, analyst]

Yes. And what's the time line to get that, the SOC 2 Type 1 certification and the steps to get the Type 2 certification as well?

[Jeffrey Hasham, executive]

Yes. So Type 1 will be this year. And Type 2 will be 2025.

[Nick Corcoran, analyst]

Great. And then maybe just one last question for me. Just thinking forward to the number of trucks you're expecting to be delivered in 2024 and 2025.

[Jeffrey Hasham, executive]

Harjit, I'll give that one back to you.

[Harjit Brar, executive]

Sure. So as we sort of plan ahead for 2024, you've kind of see our CapEx spend in 2023. So look at our net CapEx for just south of $6 million. As we sort of plan ahead for 2024, we're going to be kind of in that range of spend.

Trucks are going to sort of be in that range of about 15 trucks kind of. Again, this is going to be something that sometimes will change, and we'll do update how much we think we're going to need to spend based on not only the performance of the business, but where we think the growth opportunities are.

But if you're sort of planning it and looking ahead for 2024, you can kind of use that $6 million -- just out the $6 million as sort of a gauge for what we're expecting to spend on CapEx for 2024.

[Operator]

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

[Jeffrey Hasham, executive]

Yes. Thank you. Appreciate everyone jumping on the call this morning. I want to thank everyone for their time this morning as well. So many investors are on this call and our Board members and our employees. I want to thank all of them for the support.

The team here is dedicated to being great at operations and being great allocating capital. And we're going to continue to put our head down and work on those things and invest in the things that will drive our business forward. And we've been doing it, and we've been executing it.

And I want to thank my team for all that they've done, and we are very excited for 2024. So everyone, have a great day. Appreciate your time. We'll talk soon.

[Operator]

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