Good morning, ladies and gentlemen, and welcome to the K-Bro Linen Systems, Inc, fourth quarter 2023 results conference call. Note that all phone lines are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session, and if at any time during this call you require immediate assistance, please press star zero for the operator. Also note that this call is being recorded on March 22, 2024. Now we'd like to turn the conference over to Kristie Plaquin. Please go ahead.
Thank you, operator, and good morning, everyone. Thank you for joining us today, and welcome to our fourth quarter results conference call. On the line with me today is Linda McCurdy, President and Chief Executive Officer. Following our remarks today, we will open it up for questions. Before we begin, I'd like to remind everyone that statements made during our prepared remarks or in the Q&A portion of the conference call with reference to management's expectations or our predictions of the future are forward-looking statements. All statements made today which are not statements of historical fact are considered to be forward-looking. Certain material factors or assumptions were implied in drawing a conclusion or making a forecast or projection as reflected in the forward-looking information. Investors are also cautioned not to place undue reliance on these statements. Actual results could differ materially from those anticipated.
Risk factors that could affect the results are detailed in the corporation's public filings. I'll now turn the call over to our CEO, Linda McCurdy, who will provide her insights and remarks on the quarter. Linda?
Thank you, Kristie. Good morning, everyone, and thank you for joining us today to review our 2023 fourth quarter and annual results. I'll focus on the main highlights of the fourth quarter, and Kristie will provide more details of our financial performance and balance sheet. I'll come back to you and update you on our outlook for 2024. We're pleased to have reported record results for 2023, with revenue of CAD 321 million and EBITDA of CAD 56.8 million for the year. Our 2023 results highlight the resilience of our business model and the responsiveness of our team. The improvement in EBITDA and margins was in line with our expectations and reflects our disciplined approach to managing operations combined with the stabilization of energy prices, labor market shortages, and inflationary pressures.
In 2023, we saw continued growth in healthcare revenue and significant growth in hospitality revenue due to the return of business and leisure travel volumes. Overall, consolidated revenue increased by 16% compared to 2022, with healthcare revenue having increased by 6.3% and hospitality revenue by 32.3%. Healthcare revenue represented approximately 58% of consolidated revenue for the year compared to 63% in 2022 due to increased hospitality activity. In 2023, we enhanced K-Bro's position in Quebec through completing the acquisitions of Villeray and Paranet. In November, we closed our Granby facility and consolidated existing volumes into Villeray's larger and more modern plant. Our transition plan also includes the sale of the existing Granby facility, which we anticipate bringing to market in Q2 2024.
On May 15, we announced a normal-course issuer bid to purchase up to 881,000 common shares during the 12-month period commencing May 18, 2023 and ending May 17, 2024. At the end of 2023, we've repurchased just under 200,000 shares for CAD 6.5 million. We remain well-positioned from a balance sheet and liquidity perspective, with CAD 52.9 million of additional borrowing capacity on our revolving line of credit and with an additional CAD 25 million accordion for growth purposes. We're proud of our seven-decade history of responsible, innovative growth. While delivering industry-leading service, we've embraced our responsibility to society. In December, we published our inaugural sustainability report as the latest step in our ESG program. Our report provides a framework to move forward on future objectives and initiatives.
I'll now turn the call over to Kristie to discuss our detailed financial results for the year, after which I'll return to talk about our outlook. Kristie?
Thank you, Linda. The information we are discussing today is also highlighted in our 2023 fourth quarter earnings press release that we issued yesterday, and detailed supplemental financial information can be found on our investor relations website under heading Financials. As a result of increased activity in the hospitality segment, price increases and the acquisitions of Paranet and Villeray, consolidated hospitality revenue for 2023 increased by 32.3% over the comparable 2022 period, and the corporation saw a 6.3% increase in consolidated healthcare revenue for an overall increase in consolidated revenue of 16%. Consolidated EBITDA increased in the year to CAD 56.8 million from CAD 36.5 million in 2022, which is an increase of 55.7%. The consolidated EBITDA margin increased to 17.7% in 2023 compared to 13.2% in 2022.
The increase in margin is primarily related to the impact of price increases implemented as well as increased productivity and delivery route optimization coupled with lower fuel costs. The increase in EBITDA margin was also due to the gain on settlements of contingent consideration related to the Paranet acquisition. While Paranet's performance was in line with expectations, the performance target was not achieved, and the contingent consideration was not paid out. This gain is a non-cash item outside of core operations. Consolidated adjusted EBITDA increased in the year to CAD 55.9 million from CAD 36.5 million in 2022, which is an increase of 53.1%. The consolidated EBITDA margin increased to 17.4% in 2023 compared to 13.2% in 2022, and adjusted EBITDA excludes the gain of CAD 0.9 million on the settlement of contingent consideration for Paranet.
For the Canadian division, the EBITDA margin in the fourth quarter increased to 18.6% in 2023 from 14.2% in 2022. The increase in margin is primarily related to the impact of stronger client activity, price increases across various markets serviced, labor efficiencies, and delivery route optimization combined with reduced fuel rates. The increase in EBITDA margin was also due to the gain on settlements of contingent consideration. Again, this relates to the derecognition of contingent consideration for the Paranet acquisition. For the U.K. division, in the fourth quarter, the EBITDA margin increased to 13.2% in 2023 from 6% in 2022. The improvement in EBITDA margin is primarily related to the impact of stronger client activity, price increases, increased productivity, and delivery cost efficiencies. Adjusted EBITDA for the U.K. division was consistent with EBITDA.
Net earnings increased by CAD 13.7 million, or 350.8%, from CAD 3.9 million in 2022 to CAD 17.6 million in 2023, and net earnings as a percentage of revenue increased by 4.1 percentage points to 5.5% in 2023 from 1.4% in 2022. The change in net earnings is primarily related to the flow-through items in EBITDA mentioned earlier, as well as the derecognition of contingent consideration for Paranet. Wages and benefits increased by CAD 12.4 million to CAD 123.4 million compared to CAD 111 million in the comparative period of 2022, and as a percentage of revenue decreased by 1.6 percentage points to 38.5%. The decrease as a percentage of revenue is primarily related to the impact of price increases secured across various markets and labor efficiencies achieved.
Linen increased by CAD 1.7 million to CAD 33 million compared to CAD 31.3 million in the comparative period of 2022, and as a percentage of revenue decreased by 1 percentage point to 10.3%. The decrease as a percentage of revenue is primarily related to the change of mix in linen and higher hospitality volumes processed compared to the prior year. Utilities increased by CAD 1.3 million to CAD 25.1 million compared to CAD 23.8 million in the comparative period of 2022, and as a percentage of revenue decreased by 0.8 percentage points to 7.8%. The decrease as a percentage of revenue is primarily related to the impact of price increases secured, the U.K. natural gas hedge, which was put in place during Q2 of 2022.
Delivery increased by CAD 1.4 million to CAD 38.7 million compared to CAD 37.3 million in the comparative period of 2022, and as a percentage of revenue decreased by 1.4 percentage points to 12.1%. The decrease as a percentage of revenue is primarily related to the optimization of high-frequency routes resulting in delivery cost efficiencies as well as lower fuel prices. Occupancy costs increased by CAD 0.9 million to CAD 5.4 million compared to CAD 4.5 million in 2022, and as a percentage of revenue remained relatively constant at 1.7%.
Materials and supplies increased by CAD 1.2 million to CAD 12.1 million compared to CAD 10.9 million in the comparative period of 2022, and as a percentage of revenue remained relatively constant at 3.8%. Repairs and maintenance increased by CAD 2.4 million to CAD 12.8 million compared to CAD 10.4 million in the comparative period of 2022, and as a percentage of revenue remained relatively constant at 4%.
Corporate costs increased by CAD 3.4 million to CAD 14.4 million compared to CAD 11 million in the comparative period of 2022, and as a percentage of revenue increased by half a percentage point to 4.5%. The increase as a percentage of revenue is primarily related to financing costs, compliance-related advisory and professional fees, along with acquisition-related costs. Included within the quarter are approximately CAD 1 million of transition and transaction-related costs as it pertains to 2020-2023 acquisition initiatives. The gain on settlements of contingent consideration relates to the derecognition of the contingent consideration for Paranet since it was not paid out. The derecognition of this liability resulted in a one-time gain, which is non-cash in nature. Now, looking at our capital resources, distributable cash flow for the fourth quarter of 2023 was CAD 7.2 million, and our payout ratio was 44.4%.
The company paid out 0.3% per share in dividends during the quarter for total consideration of CAD 3.2 million. The corporation had net working capital of CAD 41.4 million at December 31, 2023, compared to its working capital position of CAD 36.6 million at December 31, 2022. With regards to credit and liquidity, we have a strong balance sheet and ample undrawn capacity on our credit facility, with an operating line of CAD 125 million and a further CAD 25 million accordion for growth purposes. At the end of Q4, we had an undrawn balance of close to CAD 52.9 million on our operating line and an additional CAD 25 million accordion for growth purposes, which reinforces our strong liquidity. Debt to total capitalization for the period ended December 31, 2023, was 29.4%.
Total debt increased in the quarter from CAD 55.2 million to CAD 70.2 million and was primarily related to the acquisition of Villeray as well as the change in net working capital in the NCIB. Our debt to EBITDA ratio, excluding leases, was under 1.5x . I'll now turn things back over to Linda for additional commentary. Linda?
Thank you, Kristie. So as we start 2024, we see a positive outlook. Both of K-Bro's healthcare and hospitality segments continue to experience steady growth trends. In the healthcare segment, we expect activity levels to remain strong from continued focus on reducing wait times and enhancing patient care. In the hospitality segment, we expect solid activity levels from both business and leisure travel reflecting historical seasonal trends. Going forward, we expect EBITDA margins to follow historical seasonal trends. As we emerge from the pandemic, we're focused on organic growth and potential M&A opportunities. Strategic acquisitions of high-quality operators with leading market positions in key regions continue to be an important contributor to K-Bro's overall growth profile. We're pleased with our acquisitions of Villeray and Paranet and believe they will further enhance K-Bro's growth profile.
The events of the past three years have been a catalyst for certain strategic opportunities that were previously not actionable. We have an active M&A pipeline and remain well-positioned from a balance sheet and liquidity perspective, and we'll continue to be disciplined as we evaluate acquisitions. We're pleased to have published our inaugural sustainability report. We've always prioritized being responsible corporate citizens, and our report was an important milestone in extending our current best practices into our long-term program. We look forward to providing annual updates on our progress. In summary, we're pleased to put the headwinds of the past three years behind us. We're excited about our outlook as we continue to see momentum in both healthcare and hospitality and are focusing on our growth opportunities. I'll now open it up to any questions you might have with regards to the fourth quarter results.
Thank you. Ladies and gentlemen, if you would like to ask a question, please press star followed by one on your touch-tone phone. You will then hear a three-tone prompt acknowledging your request. If you would like to withdraw from the question queue, please press star followed by two. If you're using a speakerphone, you will need to please first lift the handset before pressing any keys. Please go ahead and press star one now if you do have any questions. Your first question will be from Derek Lessard at TD Cowen. Please go ahead.
Yeah, good morning, Linda and Kristie. Congratulations on a solid quarter and solid year.
Thank you, Derek, and good morning.
I wanted to maybe just one thing that stood out to me was the higher level of corporate costs in the quarter. Could you just maybe add some color to the jump that we saw there and whether or not this is sort of a one-time bump and then it settles back to normal levels?
Yeah, you bet, Derek. I think we had guided back last quarter that with the acquisition of Villeray, we intended to close down and transition our volumes from our Granby facility into the larger Villeray facility, which happened. We'd guided about CAD 500,000 of costs associated with that. So those would be part of it, as well as other transaction costs associated with the balance would be additional transaction costs associated with our growth initiatives for the year. So totaling about CAD 1 million. Yeah.
Yeah, okay. Absolutely. And I guess you don't expect that that's non-recurring?
It's non-recurring. The only thing I would add to it, Derek, is obviously, as we continue with an aggressive M&A pipeline and our outlook is for additional growth, there will be associated costs going forward. But steady state operations and business as usual, I would think our corporate costs would be in line with what they have been for the last number of quarters, excluding those transition and transaction costs.
Yeah, Linda, that's helpful. Thank you for that. Just maybe on the hospitality side, the hotel occupancy rate recovery, that's pretty much done in Canada and the U.K. Just curious about your thoughts on the outlook of hospitality, just given the macro backdrop and where you think maybe consumer spending and interest rates are?
To your point, we've seen a very large recovery in the last year, that being driven by price increases, which we telegraphed and worked on with our customers throughout all of last year. I still think there's room for additional growth in occupancies, and there is some level of additional price increase that will come through in 2024. By no means do I think it'll be the same growth that we've seen in 2023, however, but I still think it'll be a meaningful increase 2024 over 2023.
Okay. Maybe just switching gears, just looking at your November presentation, it looks like there's about CAD 60 million of contracts expiring in 2024. Just curious about how you feel around the potential of renewing the contracts and just in terms of opportunities and any sense of how much RFPs are coming up for renewal that could be an opportunity for you?
I'd say in 2024, there's no large single contracts coming due. It's a number of contracts spread over many geographies. I think we feel very good about renewing a number or all of them, really. In terms of new opportunities coming to the table, I think there's more to look at in 2025. I think there'll be contracts coming due for opportunities for K-Bro in 2024, but not as meaningful as 2025.
Okay. Thanks for answering my questions. I'll requeue.
Thanks, Derek.
Thank you. Next question will be from Michael Glen at Raymond James. Please go ahead.
Hey, good morning. Linda, in terms of the M&A.
Morning.
In terms of the M&A commentary you provided, can you bucket that between what you're seeing in Canada and what you're seeing over in the U.K.?
I'd say it's a 50/50 split, Michael. I'd say, obviously, these are the priority geographies. We're not more positive on one versus the other. There's good growth opportunities in both, of which we're pursuing.
Would you say that Canada's a much more consolidated market? You still see plenty of opportunity in Canada for you to continue with M&A?
I think there's likely larger opportunities in the U.K., Michael, but there still remains good, solid opportunities in Canada, for sure. The opportunities, however, in terms of magnitude and scale, are likely larger in the U.K.
Okay. And if we're thinking about margins and overall margins in 2024 versus 2023, can you just give some discussion surrounding the headwinds and tailwinds across the buckets, like labor, energy, just how we should think about margins in 2024 versus 2023?
I think that 2024 margins will be very consistent with historical margins. I define historical margins as 2019. Obviously, we saw improvement in the back half of 2023, but I think they'll be quite consistent with 2019 margins. Headwinds, I think fortunately, we've seen stabilization of labor in a number of our markets. Some continue to be more challenging, but certainly, it's settled down in a number of our markets, including in the U.K. We're hedged on utilities until the end of 2024 in the U.K. I think we don't face a significant headwind on utilities. I think what we're pleased about is we're seeing some stabilization in the cost structure, which we certainly didn't experience in 2023.
On that utility hedge in the U.K., are you able to give a comment as to if you were at market rate on that contract, what the variance would be on your overall EBIT margin, EBITDA margin?
It's not going to be a material amount. It's not going to be a couple of percentage points. I would say for competitive reasons, we don't want to get into the details of rates and what that would mean in terms of potential aggregate dollar pickups.
Okay. Understood. Okay. Thank you for taking the questions.
Thanks, Michael.
Next question will be from Kyle McPhee at Cormark Securities. Please go ahead.
Hi everyone. I just wanted to dig in a little bit more on the margin stuff we've already talked about. It seems like there's still some favorable moving parts left for 2024 with more pricing gains. Correct me if that's not the case, but more pricing gains, the Granby volume consolidation into Villeray, payoff from efficiency-related CapEx programs, a full year with lessened added labor costs. So what is that kind of negative offset within the moving parts that's maybe preventing you from delivering year-over-year margin gains, again, such that you're at or above 19 levels?
So I mean, associated with all of those things, there's minimum wage increases. So as much as there's stabilization, Kyle, there's minimum wage increases, which, while we're not we don't pay minimum wage, there will be pressure on wages. In terms of the consolidation and opportunities there, it takes time to work through efficiencies as it relates to equipment installations. There's efficiencies that take time to come through. It's not plug-and-play. You don't put in the new machine and all of a sudden, efficiencies arrive. You have to work through those transition processes. So we're very confident in saying that 2024 margins will remain consistent into further years as there's room for upside, possibly. But I would say that we're confident in saying that for 2024, they'll be very consistent with historical margins.
Got it. Okay. Maybe just on Quebec, on the back of the tuck-ins you did last year, much stronger competitive positioning in the market, can you just speak to how much growth runway there is in that province for K-Bro?
Yeah. I mean, I think in our market share numbers, we show a fairly small market share. It's the second largest market in Canada. We have some healthcare volume, but there remains significant opportunities in healthcare. We really didn't have the facility to actively pursue growth in hospitality. So I think that we'll see a meaningful increase in our market share given that we now have the infrastructure and a very solid management team to continue to pursue additional growth. Again, we have to continue to work through the consolidation of the Granby plant into the Villeray plant, which will happen over the next number of quarters. But we're very pleased that we'll at least have the infrastructure in a highly desirable location versus being in our Granby facility to pursue that growth.
Got it. Okay. That's it for me. Thanks.
Thanks, Kyle.
Next question will be from Justin Keywood at Stifel. Please go ahead.
Hi. Thanks for taking my call. Good morning.
Morning.
Do you have the organic growth rate in Q4?
Roughly around 20%. A large part of it came from price increases, Justin, about half of it. Yeah. So about half of it would be price, half of it would be growth from our acquisitions, and 20% from organic growth.
Sorry, just to clarify, Q4 organic growth was 20%?
Correct.
If the majority was price, but it also seems like that's implying that there's pretty good volume where I believe Q4 isn't typically your seasonally strong quarter. Are there any changes as far as the travel dynamics that you're seeing?
We can't identify anything in a meaningful way other than the fact that it was a strong Q4 and travel has resumed in the markets that we service. Nothing comes to mind, really, Justin.
Okay. And then assuming that robust organic growth, what's your expectation for growth in 2024 on an organic basis?
I'd say mid-single digit.
Is that largely price, or is there a volume expectation in there as well?
I think it's a combination of both, so half and half.
Okay. And then just the Adjusted EBITDA target consistent with 2023 is 18%. Is that a good target? Is that how you're looking at it?
I think that's within the range, for sure.
Okay. And then just finally, on the pipeline of M&A, are we going to see more tuck-in acquisitions this year, or are there potentially some larger transformational assets out there?
We're pursuing growth in all of those areas, Justin, in both of those areas.
Okay. And then just a quick question for Kristie if she has the leverage ratio on the quarter on a net debt to EBITDA basis? Thank you.
Yeah. It was about excluding the right-of-use assets, about CAD 1.35, Justin.
What's the current capacity?
3.5x.
Sorry, on the implied dollar value?
Oh, there would be just CAD 53 million.
Thanks for taking my questions.
Thank you, Justin.
Once again, a reminder to please press star one if you have any questions. Next will be a follow-up from Derek Lessard. Please go ahead.
Yeah. I just want to hit based on the latest AIF, it looks like the Regina facility contract is up for renewal this month. Just maybe give us your thoughts on the upcoming negotiation or the ongoing negotiations and any factor, expectation around an increase in those labor costs.
Kristie, do you have a thought on that?
Yeah. I think that would all, I mean, any changes to labor costs would be factored into our forecast, Derek, in terms of, I guess, potential resolution for negotiations. We're just starting, and we don't anticipate any significant changes as a result.
Okay. And maybe just one last one for me on the hospital backlog. Could you characterize sort of the level of healthcare activities and if there's been any noticeable improvement that perhaps helped clearing that elective surgery backlog?
I think we're seeing small improvements. It's not going to change overnight. It's so related to their ability to attract and retain clinical staff. But we are seeing improvements or increases in volume. We are seeing increases in our operating room volume. But it's not going to be flicking a switch and saying there's going to be a 10% increase in our volume as the result. It'll be slow-moving change.
Okay. Maybe I'll sneak one last one in for Kristie. How should we be thinking about your working capital in 2024?
I would suggest no significant changes to or no significant investments in working capital. Slight increase in Q4, just timing on some of the account receivable cash receipts. But really, 2024 would be pretty steady state.
Okay. Thanks for taking my questions.
Thank you. Next is Michael Glen at Raymond James. Please go ahead.
Hey. I just wanted to follow up on the Paranet. Linda, are you just able to give some additional commentary regarding what happened with not being able to meet the earnout target?
How I would characterize that was I think the seller was fairly confident in EBITDA growth, and we put forward an acquisition price that reflected his optimism, and it perhaps didn't quite materialize. That's ultimately what happened. We are delighted with the acquisition and believe there's significant growth. It may not have happened as quickly as the seller had anticipated, however.
Okay. And then just on the CapEx for 2024, the CAD 15 million-CAD 17 million, can you give some, how do the buckets break down for that CapEx spending? Some rough ideas there?
Kristie, do you want to handle that one?
Yeah. Sure. So I think we had guided it with the Villeray acquisition, some incremental CapEx required for that. So that represents about CAD 5 million of it. There's an additional CAD 4 million for a one-time investment project in the U.K., which will improve margin and has return on it. And then the balance would really just be ongoing maintenance CapEx and maintenance and strategic CapEx.
Okay. After this year, would you say so should we think about maintenance CapEx being what kind of level after we get past 2024?
I would say probably consistent with 2024, carving out the two one-time initiatives. So kind of in that CAD 8 million to potentially CAD 10 million bucket range.
Okay. Okay. Thank you.
Thank you. At this time, Ms. McCurdy, we have no further questions. Please proceed.
Thank you, everyone, for joining today. If there's anything further, Kristie and I will be available. And with that, have a great day.
Thank you. Ladies and gentlemen, this does indeed conclude your conference call for today. Once again, thank you for attending. At this time, we ask that you please disconnect your line.