Good morning, ladies and gentlemen, and welcome to the K-Bro Linen Systems Inc. Q3 2024 Results Conference Call. At this time, our lines are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. If at any time during this call you need assistance, please press star zero for the operator. This call is being recorded on November 14th, 2024. I will now let you 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 Q3 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 statements. Certain material factors or assumptions were applied in drawing a conclusion or making a forecast or projection as reflected in the forward-looking information. Investors are 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 to everyone. Thank you for joining us today to review our 2024 Q3 results. I'll focus on the main highlights of the Q3, and then I'll pass it over to Kristie, who'll provide more details on our financial performance and the balance sheet. We're very pleased with our record Q3 results, which reflect the benefits of our acquisitions in our seasonally strongest quarter. In terms of the highlights, we reported Q3 2024 revenue of CAD 104 million and Adjusted EBITDA of CAD 23 million for the quarter. Overall, consolidated revenue increased by 20% compared to Q3 2023, with healthcare revenue having increased by 6% and hospitality revenue increasing by 37%.
Healthcare revenues represented approximately 47% of consolidated revenue, which is lower compared to approximately 54% in 2023, and this is the result of our acquisition of Shortridge and strong activity in the hospitality segment. We're pleased with the early contribution of our acquisitions, and we highlighted last quarter that as we actively pursue these growth opportunities, we'll continue to incur certain non-recurring one-time transaction transition and financing costs. In this context, we believe Adjusted EBITDA before non-recurring or one-time costs will assist investors to assess our performance on a consistent basis, as it is an indication of our capacity to generate income from operations. EBITDA before adjusting for these items was CAD 22.8 million for the quarter. We see a positive outlook for the business, and we're excited about our organic growth prospects and potential future M&A.
We remain well-positioned from a balance sheet and liquidity perspective and will continue to be disciplined as we evaluate acquisitions. I'll now turn the call over to Kristie to discuss our detailed financial results for the quarter, after which I'll return to talk about our outlook, and of course, we'll follow that with a Q&A. Kristie, over to you.
Thank you, Linda. The information we're discussing today is also highlighted in our 2024 Q3 Earnings Press Release issued yesterday, and detailed supplemental financial information can be found on our Investor Relations website under the heading of Financial Documents. As a result of our acquisitions of Shortridge, Villeray, and Paranet, along with implemented price increases, consolidated hospitality revenue for the three months ended September 30th, 2024, increased by 36.8% over the comparable 2023 period, and the corporation saw a 6% increase in consolidated healthcare revenue for an overall increase in consolidated revenue of 20.2%. As we discussed last quarter, when reporting Adjusted EBITDA, we have revised our adjusting items to reflect certain non-recurring items, including one-time transaction transition and financing costs related to our growth opportunities. We believe Adjusted EBITDA before non-recurring or one-time costs will assist investors to assess our performance on a consistent basis.
Details of the calculations and adjustments can be found in our MD&A under the section heading terminology. Consolidated Adjusted EBITDA increased in the Q3 to CAD 23 million, or by 27.2% compared to CAD 18.1 million in 2023. Adjusted EBITDA margin increased by 1.2% to 22% from 20.8%. Adjusting items include non-recurring transaction and transition costs, as well as a gain on the settlement of contingent consideration during the quarter. Consolidated EBITDA increased in the quarter to CAD 22.8 million, or by 29.1% compared to CAD 17.7 million in 2023. Consolidated EBITDA margin increased to 21.9% in 2024 from 20.4% in 2023. For the Canadian division, Q3 Adjusted EBITDA margin remained consistent at 20.8% in 2024 compared to 21% in 2023. Without adjusting items, the EBITDA margin in the Q3 increased to 20.7% in 2024 from 20.4% in 2023.
The increase in EBITDA margin is primarily related to Q3 2023 non-recurring items included in transaction and transition costs. For the U.K. division, both Adjusted EBITDA and EBITDA margin in the Q3 increased to 24.3% in 2024 from 20.3% in 2023. The improvement in Adjusted EBITDA and EBITDA margin is primarily related to the acquisition of Shortridge in April 2024, along with delivery and labor cost efficiencies and the impact of price increases implemented in 2023. Net earnings increased by CAD 1.4 million, or by 21.9% from CAD 6.7 million in 2023 to CAD 8.1 million in 2024. Net earnings as a percentage of revenue increased by 0.1% to 7.8% from 7.7% in 2023. Adjusted net earnings increased by CAD 1.3 million, or by 17.5% from CAD 7 million in 2023 to CAD 8.3 million in 2024.
Wages and benefits in the Q3 of 2024 increased by CAD 6.3 million to CAD 39.2 million compared to CAD 32.9 million in the comparative period of 2023, and as a percentage of revenue decreased by 0.4 percentage points to 37.5%. On a year-to-date basis, wages and benefits increased by CAD 14.3 million to CAD 105.9 million compared to CAD 91.6 million in the comparative period of 2023, and as a percentage of revenue decreased by 0.3 percentage points to 38.1%. The decrease as a percentage of revenue is primarily related to the integration of acquisition targets. Linen in the Q3 of 2024 increased by CAD 1.2 million to CAD 10 million compared to CAD 8.8 million in the comparative period of 2023, and as a percentage of revenue decreased by 0.5 percentage points to 9.6%.
On a year-to-date basis, linen increased by CAD 2.3 million to CAD 26.8 million compared to CAD 24.5 million in the comparative period of 2023, and as a percentage of revenue decreased by 0.7 percentage points to 9.6%. The decrease as a percentage of revenue is primarily related to the changes in the mix of linen and higher hospitality volumes processed compared to the prior year. Utilities in the Q3 of 2024 increased by CAD 0.8 million to CAD 7.4 million compared to CAD 6.6 million in the comparative period of 2023, and as a percentage of revenue decreased by 0.6 percentage points to 7%. On a year-to-date basis, utilities increased by CAD 1.8 million to CAD 20.7 million compared to CAD 18.9 million in the comparative period of 2023, and as a percentage of revenue decreased by 0.5 percentage points to 7.4%.
The decrease as a percentage of revenue is primarily related to the impact of price increases secured across various markets. Delivery in the Q3 increased by CAD 2.2 million to CAD 12.2 million compared to CAD 10 million in the comparative period of 2023, and as a percentage of revenue increased by 0.1 percentage points to 11.6%. On a year-to-date basis, delivery increased by CAD 4.5 million to CAD 33 million compared to CAD 28.5 million in the comparative period of 2023, and as a percentage of revenue remained constant at 11.9%. Occupancy costs in the Q3 of 2024 increased by CAD 0.2 million to CAD 1.6 million compared to CAD 1.4 million in the comparative period of 2023, and as a percentage of revenue remained constant at 1.6%. On a year-to-date basis, occupancy costs increased by CAD 0.7 million to CAD 4.7 million, and as a percentage of revenue remained constant at 1.7%.
Materials and supplies in the Q3 of 2024 increased by CAD 0.6 million to CAD 3.6 million compared to CAD 3 million in the comparative period of 2023, and as a percentage of revenue remained constant at 3.5%. On a year-to-date basis, materials and supplies increased by CAD 1.2 million to CAD 10.5 million, and as a percentage of revenue remained relatively constant at 3.8%. Repairs and maintenance in the Q3 of 2024 increased by CAD 0.7 million to CAD 3.9 million compared to CAD 3.2 million in the comparative period of 2023, and as a percentage of revenue remained constant at 3.7%. On a year-to-date basis, R&M increased by CAD 2.4 million to CAD 11.5 million compared to CAD 9.1 million in the comparative period of 2023, and as a percentage of revenue increased by 0.3 percentage points to 4.1%.
The increase as a percentage of revenue is primarily related to Villeray transition costs and the timing of our maintenance activities. Corporate costs in the Q3 of 2024 increased by CAD 0.9 million to CAD 4.2 million compared to CAD 3.3 million in the comparative period of 2023, and as a percentage of revenue increased by 0.3 percentage points to 4%. The increase as a percentage of revenue for the quarter is primarily related to timing. On a year-to-date basis, corporate costs increased by CAD 4.2 million to CAD 14.2 million compared to CAD 10 million in the comparative period of 2023, and as a percentage of revenue increased by 0.9 percentage points to 5.1%. The increase as a percentage of revenue year-to-date is primarily related to transaction costs, which include legal, professional, and consulting fee expenditures related to the acquisitions, as well as syndication costs for the corporation's credit facility.
These costs are non-recurring in nature and are further defined within our MD&A. Now, looking at our capital resources, distributable cash flow for the Q3 of 2024 was CAD 14.2 million, and our payout ratio was 22.3%. The corporation 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 63.3 million at September 30th, 2024, compared to our working capital position of CAD 41.4 million at December 31st, 2023. The increase in working capital is primarily attributable to the timing of cash receipts and the mechanics of the syndicated credit facility, whereby the operating line is classified as cash until a repayment is made.
With regards to credit and liquidity, we have a strong balance sheet and ample undrawn capacity on our syndicated revolving credit facility, with an operating line of CAD 175 million and a further CAD 75 million accordion for growth purposes. At September 30th, we had an undrawn balance of just over CAD 33 million on our operating line without taking into account the accordion, which reinforces our strong liquidity. This represents a debt-to-EBITDA ratio excluding leases of just under two and a half times. I'll now turn things back over to Linda for any additional commentary. Linda?
Thank you, Kristie. So we're very pleased by our strong Q3 results, which reflect the benefits of our acquisitions in our seasonally strongest quarter and see a positive outlook for our business. Both of K-Bro's healthcare and hospitality segments continue to experience steady volume trends. Healthcare volumes remain steady as hospitals continue to focus on reducing wait times and backlogs. We also see a continued trend from healthcare providers towards reusable products. Hospitality volumes have recovered, and business and international travel have returned. We continue to see solid levels of activity across Canada and the U.K., while recognizing that our Q4 has seasonally lower hospitality volumes. Going forward, we expect annual Adjusted EBITDA margins will remain at similar levels following historical seasonal trends. We're proud of our reputation for looking after the interests of our valued customers and being dependable partners to all stakeholders.
Paranet, Villeray, C.M., and Shortridge share our values, and we're excited for the potential these acquisitions present for our future. We're pleased with the early contributions of these acquisitions and are excited about our organic growth prospects and potential future M&A. Strategic acquisitions of complementary high-quality operators continue to be an important contributor to K-Bro's overall growth profile, and we continue to have an active M&A pipeline. We remain well-positioned from a balance sheet and liquidity perspective and will continue to be disciplined as we evaluate acquisitions. I'll now turn it over to answer any questions you have with regards to the Q3 results of 2024.
Thank you. Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press the star followed by the one on your touchtone phone. You will hear a prompt that your hand has been raised. If you are using a speakerphone, please lift the handset before pressing any keys. The first question is from Derek Lessard at TD Cowen. Please go ahead.
Yeah, good morning, Linda and Kristie, and congrats on the strong quarter.
Good morning, Derek.
Maybe I'll just start with wondering if you could give us a quick update on the Shortridge's acquisition and how the integration is going there and any new opportunities as a result.
Absolutely. Sorry, did you say Shortridge?
Yes, sorry. Yeah.
Yeah. Okay. Yeah. Okay. Very pleased. It expands our geographic scope into the Lake District, obviously further into England. Just very, very pleased with the team. Very strong operators, a very unique customer base, and two facilities and a distribution center that we're very confident will be able to expand further into England and grow both the top and bottom line. In terms of integration, it falls under the managing director of Fishers, so Michael Jones. We've done a bit of a reorganization, but very pleased with how all of that is unfolding. We will continue to have two brands in the market, the Fishers' brand as well as the Shortridge brand. But overall, just very pleased with how this has progressed.
Awesome. That's very helpful. And maybe just one last one for me before I re-queue. I was curious on the Granby building and land sale, if you have, and maybe this one's for Kristie, if you have any expectation on the timing and potential proceeds.
Yeah, absolutely. I would say timing could potentially be sometime in the early half of 2025, and proceeds would be higher than the carrying value of the net book value, would be our anticipation.
Okay. Thank you, everyone.
Thank you. The next question comes from Kyle McPhee at Cormark Securities. Please go ahead.
Hi, everyone. First question on the top line outlook. Your commentary suggests you're looking for steady volume trends, but you also say in your filings you're excited about organic growth prospects. Can you add some color on what you mean by that? What are the exciting growth prospects you're referring to?
Yeah. I think we've characterized it as steady because I think we're going to see mid-single-digit organic growth. Hospitality volumes have come back in 2024. I don't think we'll see the significant growth. We're back to pretty steady volumes, not quite at pre-pandemic levels, but I don't think we'll see a significant growth beyond single digit, mid-single digit. In terms of organic, we continue, of course, to pursue additional acquisitions, but I think that's why we've characterized it in the way that we have. Kristie, do you have any other commentary on that?
No, not really, Linda. I think that's a fair characterization.
Got it. Okay. And when you say mid-single-digit organic growth, you're talking volume plus price, I assume?
Correct. Yeah.
Got it. Okay, and then on EBITDA margins, it looks like a lot of the moving parts aiding your EBITDA margin gains continue to show up in the year-over-year trend, the pricing, the Quebec acquisition synergies, the higher margin Shortridge now in the mix, and your commentary is calling for margins to stay at similar levels, so you're expecting to hold on to all these gains, but looking into next year, as your new U.K. gas pricing becomes effective, is there something we should be aware of that's going to offset the gas cost benefit, or is there potential here for margins to still be picking up year-over-year into next year?
So Kyle, I think that's a really interesting point, and there's a lot of moving parts. And you're absolutely right about the net wage positive impact. Just recently, however, on the flip side, which I think is why we've always been somewhat cautious, in the U.K., or certainly in England and Scotland, they've announced a fairly sizable increase in the employer tax, kind of EI and CPP equivalent, that will come into effect next year, which will offset some of the gains on the net wage. So I think there'll still be a pickup, but that is a new increase in the wage bucket that we will see in the U.K. Kristie, do you want to put some color around magnitude of that?
Yeah, absolutely. It definitely will have an impact on the U.K. margins. I wouldn't say an overly material impact, less than half a percentage point.
Okay. Thank you. That's helpful to understand all the moving parts here. And then just maybe a follow-up on Derek was asking about Shortridge. It looks like your U.K. EBITDA margin had a nice leap forward in Q3 on a year-over-year basis. Is that essentially the Shortridge revenue mix impact from the first full quarter of Shortridge, or is there anything else meaningful we should be aware of that led to such a strong U.K. margin performance?
Yeah. Certainly, Shortridge is a part of that. I would say the continued rollout and impact of price increases and the strong seasonal quarter for Fisher's played a role. But for sure, Kyle, to your point, Shortridge has been part of the lift in the EBITDA profile in the U.K..
Got it. Okay. I'll pass the line. Thank you very much.
Thank you.
Thank you. The next question comes from Michael Glen at Raymond James. Please go ahead.
Hey, good morning. Just to start, on the balance sheet, Linda, you're carrying just over CAD 20 million of cash, which is somewhat uncharacteristic for the company. Just wondering if there's a specific reason for carrying that level of cash.
We knew this question would come up. Kristie, I mean, the short answer is it's absolutely timing. But Kristie, you can dive into the details a little more.
Yeah, absolutely. So it really just has to do with the mechanics of the syndicated facility such that when we carry cash in our operating line, we use that to pay down the syndicated facility. And just due to the timing of cash receipts and the proximity to the quarter end, we couldn't pay down the syndicated loan in advance of the quarter. So it truly is just timing and a function of cash receipts coming in at the very end of the month.
So we should expect then a decent-sized paydown? Would most of that then go to debt repayment in Q4 then?
Yeah. Not all of it will. Some of that is just cash that we use for working capital needs in the U.K. But a reasonable expectation would be around half of that.
Okay. And I think the prior question was on organic growth and hospitality. But maybe can you talk about the outlook for Canadian healthcare organic growth? Mostly from, I guess, a volume perspective. I understand the price dynamic. Just wondering more from a volume perspective, what's reasonable to think about for Canadian healthcare organic?
I think CPI-type increase, Michael.
Okay. And volume, though, will volume continue to move higher?
Yeah. I mean, again, I would say that it's low single-digit in terms of volume. Just organic growth in terms of volumes in our existing hospitals, pardon me, additional beds, some increase in the operating room linen would contribute to volume growth in our existing hospitals.
Okay. And then if you could provide an update on the renewals that you've been working through for this quarter?
Yeah. So we are at about 75% of the stated CAD 70 million has been renewed, with the balance to be renewed over the remainder of the year.
Can you indicate what the success rate has been on the renewals?
Say north of 95%.
North of 95. Okay. And then I think I just had. Oh, the CapEx outlook for 2024 and any indication for 2025.
Absolutely. So for 2024, we had guided somewhere in the range of 15-17. We believe it'll be closer to the upper end of that guidance. And then for 2025, CapEx will fall more in line with guidance we've given for historical years in the range of 10-ish million.
10 million. And that's a combination that would be mostly maintenance then?
A combination of maintenance and strategic.
Okay. Okay. That's it for me. Thank you.
Thank you, Michael.
Thank you. The next question comes from Justin Keywood at Stifel. Please go ahead.
Good morning. Thanks for taking my call.
Morning, Justin.
Thanks. Just first, not sure if I missed it, the organic growth rate in the quarter?
Kristie, do you want to answer that?
Yeah, for sure. So of the 20% increase in consolidated revenue, about 70% would be acquisitions and 30% would be organic growth.
Okay. Thank you, and then on the contract renewals, how we understand it, there was potentially a large set of RFPs that are to come out for bid in 2025 with GTA hospitals. Is that still the case, and if you can give any other color on that potential opportunity?
We believe that to be still the case. Absolutely. Timing is somewhat to be determined, but we expect across Canada there to be tens of millions CAD of new business that'll go out to RFP.
So what's the mechanism or visibility behind it? Does this come out into some type of public site or public domain, or how can we track that opportunity?
There are a number of group purchasing GPOs that would be responsible for letting those tenders across, whether it is in BC or in the GTA. They would be led by public tender processes that would be accessible on their website.
Okay. And maybe just one more question around this. The timing, I know it's a little variable, but is it safe to say that there would be a couple RFPs that come in 2025?
That's our expectation, Justin. We don't have full insight to the timing on each of them. Sometimes they are proactive and ahead of it, and sometimes they look for short-term extensions while they put their process in place. But we would certainly expect throughout the year tenders to be available.
Okay. Great. Maybe just one more on M&A. If there's an opportunity for more tuck-in or if there's some more transformational acquisitions in the pipe and potential timing on the next transaction? Thank you.
We certainly remain active in terms of our pipeline. Some are smaller, like we've seen in the CAD 10 million range, and some are larger, like we've seen with Shortridge. Timing is a little bit unknown at this point, but we expect to be active throughout 2025 with our M&A pipeline.
Thank you very much.