Redishred Capital Corp.

Thank you for standing by. This is the conference operator. Welcome to the Ready Shred Capital Court first quarter 2023 financial results and business update conference call. As a reminder, all participants are in listen only mode and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. To join the question queue, you may press star then one on your telephone keypad. Should you need assistance during the conference call, you may signal an operator by pressing star and zero. I would now like to turn the conference over to Jeffrey Hashim, Chief Executive Officer. Please go ahead.

Thank you, Arielle. Appreciate it. Good morning, everyone. On this Monday, late Monday in May, for those of you in Toronto probably enjoying some great weather finally, I wanted to welcome everyone to our Q1 2023 investor call. I'm joined by Harjeet Bharar, who's our CFO, and we'll be reviewing the results. And of course, as always, we'll have the Q&A sessions at the end. Also note, our financials and B&A press release were issued last week on Thursday, and if you haven't done so, we encourage everyone to take a good read through them. Always interesting stuff in there for sure. Q1 2023. So I would say we were pleased with the results for a number of reasons. First of all, both sales and EBITDA dollars grew double digits. When we look back to the first quarter of last year, consolidated revenue grew 36% and EBITDA 17%. We'll talk a little bit about margins in a moment. The growth was driven a lot from organic, so a lot from our same corporate locations performed well. And of course, we had two acquisitions on the books that were non-same, including our Pro Shred Philadelphia franchise in November of 2022. And then last year, we also, at this time, conducted the SDD acquisition as well. On pipeline, we didn't do any deals in the first quarter of 2023. I'm sure my team is all going, uh-oh, we're going to be at the last half of the year, we're going to have more deals, hopefully, and the pipeline is good and remains strong, and we've got a good mix of small, medium, and large-size acquisitions. So while we didn't conclude any deals in the first quarter, we were quite busy. And we'll continue to work on our three-pronged approach to growth. And, of course, two of those prongs are organic, same location, and, of course, through acquisition. So we'll get to work that through. And, you know, we have the balance sheet. I won't steal Harjeet's thunder. We have the balance sheet to continue to execute on our game plan there. If we look at organic and that sort of core shredding revenue results, You know, 25%. So, again, we were happy with seeing that growth on the Shred side. And, of course, the EUA side was with solid growth as well. On our ProScan business, we were down versus last year. And this is more dependent on large contracts. And these large contracts can initiate at varying times. And I will make a note that our pipeline is good, and we anticipate a rebound in that business, a little more of a chunky business. And so our view is that that's moving along well, and we're going to be seeing better things from that business line. On the recycling sales, again, we had a good quarter there. And, of course, that's two things. That's the price side, the P, and the tonnage, which is the Q. We're seeing a little bit of erosion on the paper prices coming down a little bit. Haven't seen the dramatic ups and downs that we saw for those of you that were with us in 17, 18, really 18, 19, 20 and 21 and even 22. That four year period was very volatile up and down. We're seeing a more gradual reduction in paper prices. And that's good. We planned it. We planned on that. And so far, knock on wood, we're good to our plans. On the EBITDA side, corporate location margins, 37%. So that's a strong number. Especially if you look at sequentially, when you look at the latter half of 2022. Uh, we know that ladder half 2022 is a challenge, uh, on a number of fronts, probably the biggest front was truck supply and the impact that had to repair and maintenance, uh, efficiency, uh, the impact of labor and driving those labor costs. Um, you know, those were, those were all, um, uh, you know, negative to that. And, um, Look, we still face some of those headwinds. I mean, fuel costs are still high when we look at historical levels. And again, I guess the good news right now is if we look sequentially, they have come down. That's good. Wage inflation is still there. Again, when we look sequentially, more moderate. When we look at truck supply and part supply, still some truck supply challenges. In the marketplace, obtaining trucks on schedule has become a little more difficult over the last year and a half, and we continue to see that. We don't see it as acute as we did, again, if we look sequentially in Q2-3 and even into Q4 a little bit last year. We don't see it as acute. as tough but it is certainly not like it was in 1920 and even into 21 where we could get trucks readily available and also the parts for those trucks that were looking to get repaired were easier to obtain. That's still playing a bit of a role here. Having said that, not as acute as the prior quarters, which we're pleased about. So you look at those types of things. And then, you know, we did two acquisitions last year. The SDD one, we're finalizing a number of route optimization activities right now, which is great. And then, of course, the Philadelphia location, is a location that bails. So yes, we're getting a higher paper revenue there. Obviously, there's costs associated with that, and that has a bit of impact on the margins as well. Overall, good, solid, strong quarter, also room to improve, always room to improve, and the team is working on that improvement. So how are we going to improve? Number one, price increases, we do them annually. We're going to be doing them again here in the next couple months. So we're looking at those price increases. Route optimization, we continue to look at routes. All of our corporate locations now have a, except for one, have the new workflow software. So that has more real-time routing data and we'll be able to optimize routes better. And, of course, when you optimize routes, that really means we're densifying those routes, getting depth in marketplaces. That's critical for us. We view that as job number one operationally is depth. And even when we look at geo-targeting from a marketing and sales perspective, That's job number one. How do we get more on our routes, get depth and depth leads to stronger margins. And so that's what we're working on. Uh, with that all being said, uh, I'm going to turn it over to our CFO who's watching our margins like a hawk and, uh, his team and others are doing the same. So RG, uh, I'll turn that over to you.

Thank you, Jeff. And, uh, thank you again to everyone who is joining, uh, us on this call. So in terms of the results, um, Revenue, again, Jeff kind of touched upon it very strong, finished at $17 million for Q1, compared to $12.5 million in Q1 2022. That's a 36% increase. From a bottom line EBITDA perspective, we were at $4.7 million for Q1 2023, and that compared to $4.1 million in Q1 2022. So if you kind of put that on a per share basis, EBITDA per share was 26 cents for the quarter compared to 22 cents in Q1 2022. So in terms of the results and how they translated from a cash flow perspective, our free cash flow for the quarter was 2.4 million. That compares to 1.6 million in Q1 2022. On a per share basis, free cash flow was 13 cents compared to 9 cents in the comparative quarter of Q1 2022. And, you know, again, the free cash flow was really driven by our EBITDA growth and some favorable changes in non-cash operating working capital. And, you know, so that's the cash flow. And then, you know, from a liquidity perspective, I know Jeff mentioned, you know, the pipeline is strong. And right now we are, you know, we do have cash that we're sitting on of approximately $6.3 million as of March 31st. We also have some capacity available under our existing banking facilities as well. And, you know, again, we're also generating positive cash flow from operations. So, you know, from that, from a balance sheet perspective, we're fairly well positioned. And, you know, one of the other things that, you know, Jeff kind of alluded to is, you know, we're continuously looking to sort of, you know, improve our margins, drive efficiencies. And one of the projects on the goal that we do have is sort of our routing system. you know, automating some of the workflows around that, you know, to create density in the routes, you know, that should help drive up margins. And this is one of, you know, several other projects that we're looking at to try to continuously, you know, see how can we improve operations, streamline things, and just make things simpler and less cumbersome. And, you know, so on that note, I'm just going to, you know, turn it over to Jeff for some closing comments.

Some people might like it better that way, so it's okay.

Look, thanks, Harjeet, appreciate that. and I'll elaborate a little bit more. First of all, 23, good start. And we know we have room to do better and that's always a good thing. And I know the team, many of them on this phone call will continue to put their head down and work on these things. You know, we've done a lot of acquisitions over the years. We've integrated a number of them. You know, one of the nice things about having that is, We have lots of clients and lots of prospects in our pipeline. One of the things we just did complete phase one of is Salesforce, added Salesforce CRM. And why did we do that? So we can even more proactively and aggressively market to our client database. And as we think about the value of our client lists on our balance sheet, they're big. And so for, you know, top priority for us is marketing to our clients that we bought and letting them know about all the services that we have, not just shredding, obviously shredding being a big component of that. But there's another opportunity that we have with such a strong database of clients. So the CRM and sales automation is one part. We've got the workflow on the other part. And then as we start to link these in and tie these in, That's where you get scale, that's where you get cost improvement and operating leverage improvement because then we want to be able to input things into our systems once and let the system do the rest from cradle, which is order origination, to RAVE, which is cash collection and everything in between. So by having Salesforce, by having our new workflow software, tying that out into our client portals and collections automation platform, All of that's going to tie together. So this technology piece is going to be important to us. And we've got a number of smart people on our team working on it. And I appreciate everything they're doing to move those things forward so we can hit on those priority items. So all these things together will allow us to have a standard playbook, allow us to scale, allow us to obtain operating leverage, and allow us to deliver the strong return on invested capital and a strong return on equity that we all are looking for. So we're laser focused on continuing to improve our metrics. We're going to put our head down as we always do after this phone call and work on the business and work on those top priorities. So I'm going to pause there. I'm sure that there might be a few questions out there. So Arielle, I'll turn it back to you for a moment.

Thank you. We will now begin the question and answer session. To join the question queue, please press star then one on your telephone keypad. You will hear a tone acknowledging your request. If you are using a speakerphone, please pick up your handset before pressing any keys. To withdraw your question, please press star then two. We will pause for a moment as callers join the queue. Our first question comes from David Ocampo of Cormark Securities. Please go ahead.

Thanks. Good morning, everyone. Good morning, David. Not too bad. Jeff, I guess a quick one for you before I go on to a bigger picture question. When do you guys typically put forward the price increases and do you expect at least for this year for that to flow directly down to the bottom line since it does seem like driver inflation has taken a backseat here?

Certainly hoping for that. Look, we're So we're just prepping the databases now. We typically do these price increases in the summer. We're going to try to do them sooner if we can. Again, with the new software, you know, there's some user functionality there. But for us, yeah, the thesis for us is certainly more of that's going to drop to the bottom line, giving a little bit more stability in our cost structure.

Got it. Got it. That makes a lot of sense. And then if I take a look at the profitability for your franchise stores, it's almost been in decline, I guess, more or less in tandem with the drop in your location count. Just curious if franchisees are still part of your go forward plan. And if not, when do you expect to roll all 15 of those stores into your platform?

Yeah, that is a big, big question and a good one. So I guess, you know, from a franchising perspective, and I guess, you know, you're sort of looking at our segmented note, you know, that certainly it's becoming a smaller component of our business, logically. You know, the franchisees, I just want to speak to this because I think it is important to make a note that the franchisees get the benefit of everything we do in our corporate locations right so salesforce that once that's all that phase one is done they'll have access to it they'll be trained on it they can buy into it which is great the workflow software you know we're rolling out franchisees even now as we speak um our safety soft everything we do the franchisees get to leverage uh and that's a great thing right and that's a great thing for them because that should enhance their profitability number one. And number two, it's a great thing for them at the exit because we're buying a platform that we already operate the same. So number one, I think that's an important comment that our franchisee support has been very good. We're very pleased with it. It's very bespoke. But, you know, I think the proof is that the franchisees continue to grow at very good rates. So we're very, so that's excellent. And they get to leverage what we do. Bigger picture, look, I guess it's capital allocators, right? We have to allocate two things. We have to allocate time and we have to allocate money. And best use of both our time and money is to acquire. And so let me just talk about that in a little bit more depth. So, number one, franchising, when you set up a new franchisee in a new market, you know, they're greenfielding, right? And that greenfielding takes time. And so, you know, we put in a lot of effort training them, getting them home systems and all of that, and we had zero revenue, right? Six and a half percent of nothing is still nothing, right? And, you know, yes, they get there after 10 years, but that's 10 years or five years or whatever the number is. It takes a long time. So, you know, when I look at the end of our acquisition strategy, you know, our acquisition strategy is really, number one, continue to buy our franchisees. Why? They're hubs. So we buy something that can sustain, you know, we can make money at it right out of the gate, number one. Number two, as you know, do the tuck-in acquisitions. Why? Because that helps with the rent density. We can knock out more costs. The return on investment capital is very strong. It's a good use of our capital. Number three, buying a larger franchisee-like acquisition in markets that we're not in. That's absolutely part of the footprint growth that we can get. If I'm going to prioritize the three, franchisees and tuck-ins in markets that we're in, those are really the top priorities because that's the ultimate in return on investment capital. You look at a risk profile, you look at You look at all that, that's a great use of our people's time too, right? Because, you know, we're not having to bring on something and reconvert it in totality. That doesn't mean though, and I want to come back to that, that there aren't great opportunities in Ohio or Kentucky or Alabama or Texas or wherever we're not. That doesn't mean there aren't large acquisition targets that we can go after. And similar to, you know, I go back to Safe Shred in New Jersey, similar to that, we bought it, we weren't there, we bought it. And off we went with it, and it was a great acquisition. So there are targets like that. But I want to give you a full answer on that just because, you know, it is important that everyone understands how we're allocating time, capital, and money capital.

Yeah, that was a very thorough discussion there, Jeff. And then just the last one, just out of curiosity, I took a look at paper pricing, at least for Maine. It did check back a little bit. Just curious what's driving that and if you expect prices to continue to fall towards that longer-term average.

Yeah, look, there is more paper supply out there. You're probably not alone, but more and more people are back in the offices now. generating more of this type of paper. So you've got a bit more supply. So obviously more supply does put some pressure on prices the wrong way. We knew this was coming. We had a feeling this was coming. That's why we planned and budgeted for all of that. And again, to my other comment earlier, we're not seeing the volatility, though. We're seeing a much more slow migration trend. probably that 10-year average. That 10-year average for us might be a bit higher going forward. And the reason why is because we're bailing in five of our locations. And so, you know, when you sort of look at that, you know, that means we're going to have a higher paper price. We also have a higher cost related to that incremental revenue because there's, you know, warehouse and people associated with that. So we probably will see a slightly higher 10-year average for us. But I suspect that's going to happen just because there is more volume going through. People are back at work. China still isn't buying a lot, so you don't have that valve back in 18 when paper races took off like a rocket. China was buying a lot of it. That's gone. And we've adjusted, right? So that's also good that we've adjusted to the missing demand piece.

Okay, that's perfect. I'll hop back in the queue.

Thanks, everyone. Thank you. Take care, David. The next question comes from Gavin Shillen from PI Financial.

Please go ahead.

There we go. Good morning, guys.

Good morning, Danny.

Obviously, very strong quarter here. Just looking at your same location shredding revenue growth during the quarter, was there any large one-time per shredding events, or is this really just a mix of new client wins and the recently implemented price increases?

Archit, did you want to answer that one?

Uh, sure. There was, um, so I think in terms of, uh, I guess the question comes down to run rate. Yeah. So this is, uh, you know, this is, there's, there's no special sort of one-time jobs or anything like that. It's sort of more reflective of sort of the price increases and sort of new customer wins. So more, more organic that's expected to be sort of more reoccurring in nature.

Okay. And just maybe to remind us what, what was the size of the, uh, the recently implemented price increases?

Sure. So there was no price increases that we've implemented in 2023. So some of the effects you're seeing are actually some of the price increases that came into effect in 2022. So it really varies by, you know, there is some sort of geographical and sort of, you know, considerations that we do, you know, but all in all, we're kind of looking at about a, you know, four or five percent increase on average. You'd be looking at between the two quarters. Yeah.

Yeah, no, that's helpful. Thanks. You guys mentioned further route optimization initiatives coming down the pipe here. How much more upside on margins do you think exists from these initiatives?

Sure. Go ahead, Parjeet.

Sure. So in terms of the route densification, so there are opportunities in a few of our markets, a few of our larger markets. And then there's particular opportunity, especially in the newer acquisitions that we do, uh, in the newer acquisitions, uh, just, you know, uh, integrating those rights of routes and sort of assimilating them onto some of our sort of our existing routes. So that sometimes that does take time. So you're probably, we're probably going to see more opportunity on the, um, sort of the new acquisitions. And then, um, there are a few markets right now that we're looking at very closely, uh, which, you know, would help drive margins. And so, um, You know, it really depends, but, you know, it would be meaningful. So definitely, you know, I could see it maybe being a percent or two impact on margins potentially. And so maybe even more depending on how things go. And then, yeah, Jeff, I'm not sure you want to add anything to that, but that's sort of my view.

Yeah, no, it's exactly it. I mean, you know, we go back to end of 21 with American and then SD, reasonable sized tuck-ins and, you know, probably the learning moment for us is the data side of it. Getting the data side of that integrated sooner and faster is way more important. We've invested heavily in our technology team and they're heavily involved in these integrations now. Philadelphia went much smoother. Yes, it was a franchisee, so it should. But even their data, when migrated, migrated much, much smoother. And then we actually did tuck in some routes into their uh, not too long ago. So, um, you know, that's, that's critical for us. So, so that's the good news is, you know, we, we, we've learned from a few bloody noses on, on how to do this better. Uh, and then I think the Harjeet's point, that sort of continuous improvement, looking at all these different locations and looking at the routes and, and, and really, um, uh, honing in on, on, um, you know, where can we be a little better, um, uh, and using the technology that we've deployed to drive that, that's going to be critical. That's really the next stage for us is we've got the technology, we've got the data, now let's use it and be, you know, scalpel out any fat or costs that you don't need, of course, and then use the sales and marketing weapon and the databases that we bought and drive more accounts into the same routes. That's where you get the magic. So, So I think there's more to come on both the integration side and on just the, you know, sort of thinking through our business in a better way. So I hope that helps. Devin, do you have a follow-up question?

Yeah, no, that's great. I guess, yeah, last one for me is just a bit of a housekeeping item. I see your electronic waste segment. It's now listed as electronic waste and product shredding services. Maybe you guys can just touch base on what's changed there.

Probably not, Mark. Go ahead, Archie. Yeah.

Yeah, not much. I think it was, you know, there's obviously a bit of a nomenclature change there. But I think that was more cosmetic. If you take a look at sort of our SEC business, it's essentially unchanged. And so when you're kind of looking at the results, I would kind of look at them from sort of that lens.

Okay. No, that's everything for me. Thanks. Thanks so much.

Once again, if you have a question, please press star then one. This concludes the question and answer session. I would like to turn the conference back over to Jeffrey Hashim for any closing remarks.

Great. Thank you, Arielle. I want to thank everyone again for joining the call. I know everyone's busy on a Monday morning. Thank you for doing that, number one. So many of you on this phone call have been longtime supporters of ReadyShred. And, of course, our shareholders, we appreciate all the support over the many, many years for many of you. And as always, the team will go put their head down and keep working on the business. I also see a lot of members of the ReadyShred team on this call. I want to thank them for everything they do. Without them, Harjeet and I don't get to come on this phone call and give you the message of, what we've been doing well, where we need to improve, of course. But overall, a good news message that didn't happen by accident. That happened because a lot of people did a lot of good work. So I want to thank them. So long and short, thank you again. We have a bit of an investor relations night tonight. So for those of you that are going to be there, I'll see you there tonight. For those of you who are not or would like to come, not too late. Just email Pamela Gray. Pamela.Gray at ProShare.com. We can get you on that list tonight. Nice way to thank you all again. So everyone be well. Have a great Monday.

Thanks, everyone. Bye.

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