Please stand by. We're about to begin. Good day, and welcome to the K-Bro Linen Inc third quarter 2022 results call. Today's conference is being recorded. At this time, I'd like to hand the call over to Kristie Plaquin. Please go ahead.
Thank you, operator, and good morning, everyone. Thank you for joining us today and welcome to our third 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. 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 applied 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, and good morning, everyone. And thank you for joining us today to review our 2022 third quarter results. I'll focus on our main highlights of the third quarter, and Kristie will provide more details on our financial performance and our balance sheet. I'll then come back to you and update you on our outlook for the remainder of the year. In terms of the highlights, I'm pleased with our 2022 third quarter results, with revenue and EBITDA of CAD 73.6 million and CAD 11 million for the quarter, with overall 19.7% increase in revenue over the same period last year. Going forward, we expect to continue to benefit from the strong recovery in hospitality volumes in both Canada and the U.K. and the full impact of our new AHS province-wide contract.
We've been successful in implementing price increases to offset the higher input costs, the full benefit of which will be seen in 2023. The ongoing COVID-19 pandemic and certain geopolitical events have resulted in rising and unstable commodity costs and inefficient labor markets. On the commodity front, we've put in place our U.K. natural gas hedge through 2024, and on the labor front, we've focused on retention of existing staff in addition to implementing strategies to recruit and hire new staff. We've achieved some success in labor in certain markets, but we're still focusing our efforts in other markets. In light of current labor markets, we anticipate returning to 2019 margins in the second half of 2023. In 2022, approximately 62.9% of K-Bro's consolidated revenue was generated from healthcare institutions, returning towards our pre-pandemic revenue mix.
Hospitality revenues were at 94% of pre-pandemic levels on a consolidated basis. For the three months ended September 30th, 2022, the corporation saw a 9% increase in consolidated healthcare revenue, while consolidated hospitality revenue significantly increased by 39% as the result of a pickup in tourism and business travel as COVID-19 restrictions were loosened. We remain well positioned from a balance sheet and liquidity perspective with CAD 59.1 million of additional borrowing capacity on our revolving line of credit and with an additional CAD 25 million-dollar accordion for growth purposes. Total debt decreased in the quarter from CAD 45.2 million to CAD 39.1 million, and our funded debt to EBITDA at the end of Q3 remained conservative at just under 1.5x .
I'll now turn the call over to Kristie to discuss our detailed financial results for the third quarter, after which I'll return to talk about our outlook for the remainder of 2022 and answer any questions you might have. Kristie, over to you.
Thank you, Linda. The information we are discussing today is also highlighted in our 2022 third quarter earnings press release issued yesterday, and detailed supplemental financial information can be found on our investor relations website under the heading Financial Documents. For the Canadian division, the EBITDA margin in the third quarter decreased to 16.4% in 2022 from 20.6% in 2021. The decrease in margin is primarily related to temporary labor inefficiencies resulting from unusually competitive labor markets in certain cities in which we operate and the AHS transition, along with higher natural gas, electricity, and delivery costs related to increased energy rates and the AHS transition. For the U.K. division, in the third quarter, the EBITDA margin decreased to 10.7% in 2022 from 13.6% in 2021.
The decrease in margin is primarily related to significant increases in natural gas costs. Net earnings increased by CAD 0.3 million from CAD 2.1 million in 2021 to CAD 2.5 million in 2022, and net earnings as a percentage of revenue decreased by 0.2 percentage points to 3.3% in 2022 from 3.5% in 2021.
Wages and benefits in the third quarter of 2022 increased by CAD 5.8 million to CAD 29.8 million compared to CAD 24 million in the comparative period of 2021, and as a percentage of revenue increased by 1.4 percentage points to 40.5%. On a year-to-date basis, wages and benefits increased by CAD 22.6 million to CAD 82.9 million compared to CAD 60.3 million in the comparative period of 2021, and as a percentage of revenue increased by 3 percentage points to 40.3%. The increase as a percentage of revenue is primarily related to escalating minimum wage rates, inefficiencies associated with the lack of labor workforce availability, the transitioning of the new AHS period, and for the year-to-date period, a CAD 0.9 million dollar decrease in government assistance received in the Canadian division.
Linen in the third quarter increased by CAD 0.7 million to CAD 8.1 million compared to CAD 7.4 million in the comparative period of 2021, and as a percentage of revenue decreased by 1.1 percentage points to 11%. On a year-to-date basis, linen increased by CAD 2.9 million to CAD 23.1 million compared to CAD 20.2 million in the comparative period of 2021, and as a percentage of revenue decreased by 1.3 percentage points to 11.2%. The decrease as a percentage of revenue is primarily related to changes to the mix of healthcare linen related to the pandemic and the higher hospitality volumes processed in the current year.
Utilities in the third quarter of 2022 increased by CAD 2.4 million to CAD 6.1 million compared to CAD 3.7 million in the comparative period of 2021, and as a percentage of revenue increased by 2.2 percentage points to 8.2%. On a year-to-date basis, utilities increased by CAD 8.3 million to CAD 17.7 million compared to CAD 9.4 million in the comparative period of 2021, and as a percentage of revenue increased by 2.7 percentage points to 8.6%. The increase as a percentage of revenue is primarily related to the higher cost of natural gas, particularly in the U.K.
Delivery in the third quarter increased by CAD 3 million to CAD 9.8 million compared to CAD 6.8 million in the comparative period of 2021, and as a percentage of revenue increased by 2.2 percentage points to 13.3%. On a year-to-date basis, delivery increased by CAD 10.9 million compared to CAD 27.6 million in 2022, and as a percentage of revenue increased by 3.1 percentage points to 13.4%. The increase as a percentage of revenue is primarily related to rising diesel prices and the costs associated with the new rural AHS business, along with delivery route inefficiencies associated with the incremental hospitality volume processed in the year and quarter.
Occupancy costs in the third quarter of 2022 increased by CAD 0.3 million to CAD 1.2 million compared to CAD 0.9 million in the comparative period of 2021, and as a percentage of revenue increased by 0.1 percentage points to 1.6%. On a year-to-date basis, occupancy costs increased by CAD 0.6 million to CAD 3.4 million compared to CAD 2.8 million in the comparative period of 2021, and as a percentage of revenue decreased by 0.1 percentage points to 1.6%. Materials and supplies in the third quarter decreased by CAD 0.1 million to CAD 2.4 million compared to CAD 2.5 million in the comparative period of 2021, and as a percentage of revenue decreased by 0.9 percentage points to 3.2%.
On a year-to-date basis, materials and supplies increased by CAD 1.8 million to CAD 8 million compared to CAD 6.2 million in the comparative period of 2021, and as a percentage of revenue remained constant. The decrease during the quarter is due to timing of purchases for packaging costs. Repairs and maintenance in the third quarter of 2022 increased by CAD 0.6 million to CAD 2.6 million compared to CAD 2 million in the comparative period of 2021, and as a percentage of revenue increased by 0.3 percentage points to 3.5%. On a year-to-date basis, repairs and maintenance increased by CAD 1.9 million to CAD 7.3 million compared to CAD 5.4 million in the comparative period of 2021, and as a percentage of revenue increased by 0.2 percentage points to 3.5%.
Corporate costs in the third quarter increased by CAD 0.2 million- CAD 2.7 million compared to CAD 2.5 million in the comparative period of 2021, and as a percentage of revenue decreased by 0.3 percentage points to 3.7%. On a year-to-date basis, corporate costs increased by CAD 1.4 million- CAD 8.2 million compared to CAD 6.8 million in the comparative period of 2021, and as a percentage of revenue decreased by 0.2 percentage points to 4%. Now, looking at our capital resources, distributable cash flow for the third quarter of 2022 was CAD 7.5 million, and our payout ratio was 42.9%. In addition, the company paid out CAD 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 30.8 million at September 30, 2022, compared to its working capital position of CAD 30.3 million at December 31st, 2021. At September 30th, 2022, total assets decreased to CAD 321.5 million compared to CAD 332.5 million at December 31st, and total liabilities remained fairly consistent. Shareholders' equity decreased at September 30th, 2022, from that of December 31st, 2021 to CAD 175 million. As far as our debt is concerned, we have sufficient room on our credit facility with an operating line of CAD 100 million and a further CAD 25 million- dollar accordion for growth purposes.
As at the end of Q3, we have an undrawn balance of close to CAD 59.1 million, which reinforces our strong liquidity. Debt to total capitalization for the period ended September 30th, 2022 was 18.4%. Total debt decreased in the quarter from CAD 45.2 million- CAD 39.1 million and was primarily due to changes in working capital. As Linda said earlier, our debt to EBITDA ratio was about 1.5x. I'll now turn things back over to Linda for any additional commentary. Linda?
Thank you, Kristie. With the continued rebound in the hospitality business, our overall revenue in the quarter was down only 6% from 2019. We have reopened our Perth facility in Scotland, which was temporarily closed in response to the pandemic, and are now operating all of our facilities. While there is startup costs associated with opening at Perth, given the strong volumes we've seen in Scotland, we're pleased to have the additional processing capacity. We've moved quickly to adjust to significantly increasing volumes by increasing operating hours, recalling and recruiting additional staff, and ensuring all aspects of our supply chain can support the increases. Our highly experienced team has been crucial in managing the situation, and we will continue to leverage our experience for the challenges ahead. These actions have resulted in performance that we're quite pleased with, given the tight labor markets and supply chain disruptions.
We're pleased to say that these challenges have not resulted in any disruptions to our customers. In terms of our 2022 outlook, we continue to see strong results in our healthcare segment and expect that to continue as a result of the new AHS volumes that have been fully transitioned as of April, permanent conversions to reusable products, as well as efforts by hospitals to reduce the backlog of procedures that have been delayed during the pandemic. From a hospitality perspective, we believe it's reasonable to expect continued improvements in client activity when compared to 2021 due to a gradual return to business and international travel as COVID restrictions implemented in both Canada and the U.K. have been substantially reduced. We're continuing to face temporary labor inefficiencies due to the lack of workforce availability.
We are focused on implementing strategies to recruit and hire new staff as well as existing labor force retention, and have achieved some success in certain markets, but we're still focusing efforts on other markets. We anticipate that labor markets will stabilize in the coming quarters. We're still confident in our ability to return to historical 2019 margin levels once we gain efficiencies from the AHS transition. However, this will be dependent on our ability to attract and retain staff in each of these markets in which we operate. We continue to pursue price increases to reflect the inflationary cost environment, and we anticipate returning to 2019 margins in the second half of 2023.
With continued momentum in the business, we will look to refocus our on evaluating acquisitions in both the U.K. and North American markets as we execute on our strategy to grow our market share. As Kristie discussed, we remain well positioned from a balance sheet and liquidity perspective. I'll summarize the main points of the quarter as continued growth and solid financial performance in an adverse environment where temporary labor inefficiencies and inflationary pressures persist. We're very pleased with our strong revenues and EBITDA. I'll now turn it over to answer any questions you have with regards to the third quarter of 2022.
Thank you. If you would like to ask a question, please signal by pressing star one on your telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, it is star one if you would like to ask a question. We'll go ahead and take our first question from Michael Glen with Raymond James. Please go ahead.
Hey, good morning, Linda, and Kristie. Can you just, for the Canadian market in terms of labor, I know that a lot of your healthcare contracts are tied to CPI adjusters, but are you having any success or do you have any ability to pass some of the incremental labor through in Canada over and above the CPI adjusters that you have?
I would say that we are working very closely with all of our customers, both on the healthcare and hospitality front. While it's taken some time, I would say that we have definitely been successful in working with our customers to pass price increases on beyond what we would normally be contractually entitled to. We have to work very hard on a customer-by-customer basis. Again, it's happening over time, but I think they're all understanding of the environment in which we're operating in the economic realities. Yes, we absolutely have been successful, Michael. All that to say that we will see the full impact of that in 2023. We have seen some amount of those increases in Q3.
We will see some of it in Q4, but much of it will be reflected in 2023.
Thanks. Then, I've asked you this question before, but at what level for the stock do you think it's appropriate to for the company to implement the share repurchase program?
I guess how I'd respond to that is that we routinely evaluate return of capital options among our alternatives. Certainly as the pandemic continues to stabilize, we'll continue to assess how dividend increases and share buybacks will contribute to overall total returns, Michael.
Okay. That's it for me. Thanks.
Thanks, Mike.
We'll go ahead and move on to our next question from André Léger with National Bank. Please go ahead.
Hey, good morning. Thanks for taking my question. The first one I want to ask is on the hospitality segment. It was down 6% versus 2019, whereas when we look at occupancies, 42.3% for hotel occupancies, they were generally in line in 2019. I mean, is it any particular reason why KBL was 6% below? And, like, how do we bridge that?
Sorry, I didn't. You kind of cut out, André. I'm sorry. When you looked at statistics for the hospitality industry, I didn't quite catch that. I'm sorry.
Yeah, I know. It's okay. It's hotel occupancies in Q3. They were generally in line with 2019. Very much so in Canada and closer in Scotland. But you know, revenues for the hospitality were down 6%. I mean, is there any particular reason? Is it just a question of what markets you're in? Or is there any reason why you were not, let's say, in line with 2019?
I see what you're saying. Yeah. Yeah. Okay. I understand the question. You know, I don't have a clear answer to that. When we look at our hotel by hotel numbers, I would say that it's pretty consistent across the board. In terms of what we've seen, it's not one particular market per se. Although having said that, I would say that Vancouver, the Vancouver market lags a little bit more relative to other markets. I don't have a clear answer on that. We're not seeing anything exceptional, André, to be honest.
Okay. No, fair enough. Just wanted to make sure. Okay. Thank you. You made a reference. My other question, for Q4, you made a reference that you expect it to be better than 2021. I mean, how is it shaping up against your expectation? Because you mentioned before that it is more corporate driven rather than leisure. It's just kind of any additional color you can give in there, where we are at this point in Q4.
Yeah, I'd say that we, you know, we continue to expect increases in both healthcare and hospitality. We feel positive in continued top-line growth, relative to 2021, likely similar to what we've seen in the quarter.
Okay. That's good to hear. Thank you. The last one for me. You mentioned having some success in certain labor markets. Are you able to share which labor markets you are having more success than where does it need, let's say, to be still stabilized from a labor perspective?
What I would say is Québec continues to be very challenging, both Montréal and Québec City, more Montréal than Québec City. Victoria continues to be challenging. Alberta and Saskatchewan continue to. We see some stabilization there. Also I would say in the U.K., André, we've seen more. Yeah.
Great. Okay, that's it for me. Thank you.
Thank you, André.
As another reminder, star one if you would like to ask a question. We'll take our next question from Derek Lessard with TD Securities. Please go ahead.
Yeah, good morning, everybody, and I think it's pretty strong results considering the environment. It looks like there was a bit of a hiccup in hospitality in September. It was down 13% versus 2019 after closing the gap quite meaningfully over the last several months. Just curious what was going on there.
You know, I think there was a lot of pent up demand over the summer, which fell off in September. September historically has always been a very strong month for business travel, which I don't believe has come back in full force yet.
Okay.
Would be my assessment of it.
Just maybe a follow-up on that. That was my second question, I guess. Do you have a view on whether the business travel comes back fully?
Yeah, I would still say we're still definitely seeing some weakness there. The leisure travel has come back in full force, but we're still seeing a lag in business travel. We are hearing from our hotels that conference demand for 2023 is increasing, but just the regular business travel still continues to lag to some extent, Derek.
Okay. That's helpful. One final one for me is there was a little change in the outlook. You're now giving the timing for your margin recovery being in the second half of 2023. Just curious if there's anything that's giving you the confidence that you can get back in the second half.
Yeah, for sure. Again, much of it's being driven by all of it's being driven by temporary labor inefficiencies and diesel costs in the delivery line. I would say that we have definitely seen some successes over the summer in stabilizing the labor markets, and we will continue to focus on strategies in 2023, including retention strategies as well as recruiting temporary foreign workers, which we feel good about for the back half of 2023, but it will continue to take time to, you know, recruit and work through the process to bring in temporary foreign workers.
Awesome. Thanks for taking my questions.
You bet.
We'll move on to our next question from Justin Keywood with Stifel GMP. Please go ahead.
Good morning. Thank you for taking my call. Just on the,
Morning, Justin.
Hi. Just on, I'm just wondering, 'cause there's substantial higher scale in the quarter, and obviously there's some headwinds to deal with labor and other challenges. But I'm just wondering, is there anything unique that would be preventing the operating leverage showing through for the business? Because I assume just with higher scale, obviously your corporate overhead is a lower percentage. So when would we, you know, start to see that operating leverage benefit?
I mean, really, it's going to come down to, again, stabilizing the labor markets. For many reasons, we feel good about that, i.e., talked about recruitment and retention strategies, temporary foreign workers, and, you know, continued price increases that we've negotiated, as well as increased volumes. We feel, again, very confident that in the back half of 2023 that we'll see those margins increase and be restored to 2019 levels.
Okay. Thank you. My other question is just if there's been any change as far as the competitive landscape. Obviously it must be much more of a challenging period for some of the smaller competitors out there. Is that resulting in, perhaps, new opportunities for K-Bro, either organically or through M&A?
Yeah. You know, as I've continued to say, acquisitions have always been a very meaningful part of our growth strategy, and we expect that to continue in both North America and in the U.K. We continue to have a number of opportunities in the pipeline, from tuck-ins to larger opportunities, but we don't always control the timing of these. Certainly as we've come out of the pandemic and our competitors have returned to business as usual, these opportunities continue to be more on the forefront, and we continue to engage with our competitors to look at those opportunities, I would say.
Understood. Thank you for taking my call.
Thanks, Justin.
We'll take our next question from, Michael Glen with Raymond James. Please go ahead.
Yeah. Just, a follow-up on hospitality in Q4. Typically there's some seasonality to take into consideration there, but there's also, a lot of, you know, there's this pent-up demand dynamic. Like, how much seasonality do you think there's gonna be in hospitality in Q4 this year?
I think it'll be consistent what we normally see in Q4, but we may see, you know, we've seen the recovery, but we will not see as great a recovery just because we continue to see a weakness in business travel, Mike. It has not come back to the levels that we've seen leisure travel come back.
Okay.
Yeah. Yeah.
Just want to dial in on those transition costs with AHS. You haven't been quantifying those, but did the level of transition costs for AHS diminish in Q3 or was it roughly the same as front half of the year? How do we think about those sorts of coming off over the next, call it two or three quarters?
Yeah. It has come down. It has not come down as quickly as we had hoped. Part of that is receiving additional parts to deliver the linen in which, because of supply chain challenges, will resolve itself in the first half of next year. Yes, it's come down, but not as quickly as we had hoped because of just challenges in supply chain, which is why we feel good about guiding that the second half of 2023, margins will be restored to historical 2019 levels.
Okay. Thank you.
It appears we have no further questions at this time. I'd like to hand the call back over to Linda for any additional or closing remarks.
Thank you everyone for joining. Kristie and I are available if there's any follow-up questions. Have a great day, everyone.
With that does conclude today's call. Thank you for your participation. You may now disconnect.