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Thank you for standing by. This is the conference operator. Welcome to the RediShred Capital Corp Second Quarter 2023 Financial Results and Business Update Conference Call. [Operator Instructions] The conference is being recorded. [Operator Instructions] I would now like to turn the conference over to Jeffrey Hasham, Chief Executive Officer. Please go ahead.
Thank you very much. Good morning, everyone. Welcome to our second quarter 2023 investor call. First, I want to thank everyone for attending on this Friday morning. For those of you in Toronto, another gray gloomy day. Hopefully, that will change before the weekend hits.
I'm joined by Harjit Brar, who is our CFO and together, we'll be reviewing the Q2 2023 results. And as always, we'll conclude with our Q&A session. I do want to remind everyone that all of our information, financials, MD&A and press release were disseminated yesterday and of course, they're available on SEDAR. So that we can get that information as needed when needed. I want to start off with saying, overall, the second quarter results, we were pleased with them. I think when we sort of look at the fundamentals of the business, let's start with the top line. We were able to grow our top line revenue by 15% compared to the second quarter of last year. I think everyone and anyone who's spoken with us over the last little while and has been following us knows that the paper prices have started to come down. We'll talk about that in a moment. Our core shredding revenue. So if we look at the service side of the business, that was up 28%. So obviously, that 15% is being tempered by the paper markets, which have started to soften. And -- so when we look at that softening, our consolidated EBITDA remained flat with last year at around $4.5 million. So we compare the 2 quarters. If we exclude EBITDA less net recycling revenue, and that's a KPI, we've always had a KPI called operating income less net recycling revenue. We've added EBITDA just to make it a little bit easier for everyone, and we take out that net recycling revenue. The net recycling revenues to take out the paper revenue and, of course, the related bailing costs. We actually grew EBITDA by 28%. So that EBITDA growth was very much in line with our shredding revenue growth, and we're -- that's what we're pleased about. The core operations were very solid. Look, paper markets, we know can go up and go down in my 18.5 years. I've seen everything from $50 a ton to things close to $300 a ton. And of course, we have a long run average in the mid and for us now, mid- to high 100s because we bail so much paper. So what have we been doing to this volatility, and we've been doing this not just for this year but for many years and we're going to really be -- continue to be laser focused on. This is drive shredding and service revenue growth. That's really what this comes down to. And again, if you look at our corporate locations, same corporate location shredding revenue was up 14% compared to last year. And that obviously offset the lower cycling revenue. At the same time, we're able to grow our margins. when you strip out that revenue from paper on the corporate income less net recycling margin grew 100 basis points. So again, we're improving the margins and how we're doing that. We're in the routing business. And so we've continued to improve our routing efficiencies that has absolutely help margin. And of course, the pricing of input costs have come down. Driver wages have not necessarily come down, but it's stabilized and fuel prices have come down and I guess, the correlation between fuel and paper has continued, which is a very good thing for us. So between good performance on the routing and getting better efficiencies between stabilization of driver wages and of course, fuel prices coming down. We've been able to mitigate quite a bit of the paper fall. One other thing that I think is very important is starting towards the end of May and now more or less finished as we've been rolling out our annual price increases. So we look to see that impact Q3 and Q4 in a positive way. On the acquisition front, we did not complete any deals in the first half of the year. Having said that, the pipeline is strong. We -- look, we've got a three-pronged approach to growth. And of course, organic driving leverage and of course, grow through our acquisition program. So all of those three things are there. And the acquisition program is certainly there. The pipeline is strong, and I'm sure we'll have some questions on that a little later. What I'd like to be able to do is have you get a little more of the detail. So let me turn this over to Harjit, and he can walk you through those.
Thank you, Jeff, and thank you again to everyone who is joining us on this call. In terms of our financial results, our consolidated revenue for Q2 grew to $16.8 million compared to $14.6 million for the second quarter of 2022, representing an increase of 15%. EBITDA was at -- EBITDA finished at $4.5 million for the quarter. And on a per share basis, that's $0.25 per share, which was unchanged from the second quarter of 2022. If we strip out the effects of paper, EBITDA less net recycling revenue grew to $2.2 million compared to $1.7 million in the second quarter of 2022. From a cash flow perspective, our free cash flow was negative $0.1 million for the quarter, that was driven by $2.7 million in cash generated from operations, which was offset by $2.8 million in CapEx. The CapEx was primarily for shredding truck purchases, and part of it was, again, due to timing, there is some fluctuation quarter-to-quarter. But the truck purchases, they will help us add service capacity in support to growth of our business. If you look at the free cash flow on a year-to-date basis, that was $2.3 million. Year-to-date revenue, we finished at $33.8 million compared to $27.1 million for the comparative period in 2022, with EBITDA year-to-date of $9.2 million compared to $8.6 million for the same period in 2022. Cash on hand right now, we have $5.4 million as of June 30, 2023. And as Jeff alluded to the strong M&A pipeline, we do have that ability to utilize this cash and are available credit facility -- or the available space in our credit facility to help support some of those M&A. And all in all, we were again pleased with our results. We look forward to executing on our plan for the remainder of the year. And on that note, I will turn it to Jeff for some closing comments before we open it up to Q&A.
Sure. Thanks, Harjit. I appreciate that. Look, I wanted to just make a comment before we open that up to Q&A. We're continuing to focus on growing scaling. Look, we all know, we all hear the headlines such as the economic uncertainty. Of course, paper prices impact us. Having said that, we're focused -- laser-focused, we're are going to keep our head down on operating metrics, driving more leads every day, converting those leads into shredding in service revenue and servicing those clients that in a very, very efficient manner. And so look, we've got a great team, and that team is putting their head down every single day working on really those three things to drive better core operating results. And I think when we look at the second quarter, we see indication of that, and we'll continue to drive that operating result going into the third and the fourth -- now in the third quarter and into the fourth quarter. So look, let me open it up to questions. That's always the best part. So I'm available and as is Harjit, turn that back over to the operator for a moment.
[Operator Instructions] The first question comes from David Ocampo with Cormark Securities.
Jeff, I just want to touch first here on margins. I think if you look at your MD&A and your previous commentary, you guys have been targeting EBITDA margins in the 35% range, and you're above that today. But if I look on a go-forward basis, paper prices have fallen down all the way back down to the long-term average. But you do have some offsets here. So falling fuel and price increases on your shredding business. Do you think that's enough to keep margins in that 35% range? Or how should we be thinking about targeted margins on a go-forward basis?
Yes. Look, if prices sort of remain in and around where they are, of course, look, even when we look at July, right, the paper prices were down quite a bit from the second quarter. Having said that, of course, fuel continued to drop a little bit thereafter. And then you had price increases and operational improvements, that 35% is not a bad number. I think if paper goes back to 2019 levels where it dropped dramatically, then that's going to put pressure on the margins, of course. That's just -- there's still this component of paper. Even though the paper, the percentage of EBITDA that paper makes up, the paper profit make up is much less than it was even a quarter ago or a year ago, it's still going to put some pressure there. So look, I'm not a prognostic here on paper. I wouldn't dare. There's some signals out there that's saying we should hang in this range. But I've been wrong before, David, so I wouldn't necessarily quote me on that. The long -- that's the answer. Short answer is, right now, we're hanging really, really well given where paper has dropped to 35% at the moment. It seems like a pretty good goal and target, and we're hanging in there. Really, it's going to come down to does paper stay where it is? Or does it continue to drop? The drops a little bit more. We can -- we're pretty resilient. We can deal with it. Paper continue -- paper, again, goes to '19. That's a bit of a different story. But even when it went down to '19, you can see we are consolidated EBITDA. Yes, they were impacted, but they were still not bad. And so far, so good at this moment in time.
Has always been a bit of a black box. But maybe something that you do have a little bit more visibility on the premium that you guys get on bale paper? Is that 20% higher than kind of what we see on the spot SOP 37? Or just trying to get a better sense on the premiums that you guys are getting today?
Yes. So typically, when you -- if you're dropping paper off loose, so if you sort of look at that $180 million that were in July, that's a bit of a blended rate for us because that $180 million includes a significant amount of bale paper because, again, we've got 5 locations that are baling paper. The typical premium between loose and baled is anywhere between $40 and $60 a ton. That's the typical premium. Sometimes when paper prices come down, that premium can be eroded where when paper prices are really high, you can be closer to $60. And in 2019, we saw erosion there. So far, we haven't seen a lot of erosion, which is good. People are valuing the baled paper. So we're happy about that. So $40 to $60 that is the typical bonus for baling.
Got it. That makes sense. And then just last one for me on acquisitions. You called out that you're still on target to hit that $5 million to $6 million of acquired revenue. But when you're thinking about the mix of that $5 million to $6 million, is it tilted towards franchise locations? Or are you guys thinking more third-party shredding companies?
Good question. We always have a good mix of everything in our pipeline and we do. I can say that this year, there's been a little more migration to the independents. I think our franchisees, as you know, are very, very well healed individually. They've got great businesses. They can they can withstand things better than a 2 or 3 truck independent. So when we get into environments like this where paper prices are coming down, we have high interest rate environment, trucks cost more. They go to the back of the line for trucks that puts a lot of pressure on them. And so there's no better time to buy an independent than now, and so -- and we're seeing some of that in our pipeline. We have seen a bit of a migration to independent in our pipeline. Having said that, our franchisees are certainly getting much closer to retirement age. There's a number that, as we always have, that are looking to retire. So there's always franchisees that were we're talking to and trying to move through the pipeline. I think you make a good point there that there is a bit of a shift. The shift started earlier this year. I think there's been some expectation of old multiples that people are expecting. And of course, we've been working people to understand that you can't get 7 multiple of EBITDA, like you might have been able to 10 years ago or even 6 years ago. I think those expectations are starting to fall in line. And that's why I think the pipeline has gotten pretty decent. And look, we're, obviously, in our strategic targets, we indicated that we still feel pretty good about executing on the pipeline.
The next question comes from Nick Corcoran with Acumen Capital.
Just a couple of questions for me. So the first is paper price in the period have rolled over a bit in July. Two-part question. What have you seen August to date? And not expecting too much detail, but are there any macro factors that you think are driving paper prices there?
Harjit, did you want to speak to August? I don't know because August, sometimes you get stuck middle -- beginning of the month, middle of the month end of the month. It really does depend. But Harjit, is there any commentary we can give at this time?
Yes, sure. So in terms of paper prices, I think the precipitous drops that we sort of saw over the course of December or the earlier part of the summer, those seem sort of not to be at play right now. So the prices seem to have stabilized a little bit, but we are seeing still a little bit of a drop. Difficult to predict where we're going to kind of finish August. But I think the overall sort of, at least from, again, what I've seen so far is that we're not going to see that at least see in the short term, some of the precipitous drops that we saw earlier.
And to the macro question, I think there's a couple of things to think about. Number 1, more and more people are returning to the office that creates more supply, and especially on the scheduled revenue side, you're getting more supply. And also, the other thing is where is virgin pulp because our SOP is a raw material course for trading tissue paper and all that type, all those other secondary paper products. Virgin pulp can be used in that process. And typically, a virgin price -- virgin pulp paper prices come down, or virgin pulp comes down, then that competes, right? So you get a little -- that's the other macro piece that can be out there. And so I think those 2 things are sort of playing off on the paper margins. The good news right now is the adjustments that were made in 2019 when China shut the door on paper, China doesn't take paper anymore. They certainly don't take paper directly. They might take it through Vietnam or other markets. But they're not impacting the U.S. market which is good for us. The adjustments have been made some time ago. So it's a little bit -- I do believe that takes out some volatility and hopefully, that remains the case.
That's good color. And just thinking of the EBITDA less net recycling revenue. Can you speak to what the sequential change was between the first quarter and second quarter?
Good question. It was -- we had a stronger -- I can get to the exact number. It's a good question. We can get that for everyone. It was a noticeable improvement between the 2 quarters, and you can just see that even when you look at the quarterly -- if you look at the on a year-to-date basis. It was -- we were at $0.22 on a per share basis and for the year-to-date $0.12 on the quarter. So obviously, it was a $0.02 per share improvement. And so we can get you that spot that sort of exact number for you. But certainly, there was good improvement and we actually bought back a few shares during the period of time. So that helps, too. But not like we didn't buy a lot of shares back, by the way. So, we had a good operating quarter, let's put it that way, compared to the first quarter and certainly compared to the many, many quarters that went before where we had a lot of volatility with fuel, a lot of volatility with truck supply, the team has worked hard to get great offer get -- let me not say great yet. We're going to get to great, but much better operating results. certainly, we're there. And the core shredding revenue was certainly there, which we were very happy about. And most importantly, it was scheduled, right? That's what drove it.
That's helpful. And then maybe thinking about the price increases you put through in May. Can you speak to the percentage increase that you were able to path through? And has there been a pushback from customers on that?
I'm going to pass that to Harjit because it's his billing and collection team that has to do with a pushback. And so Harjit, do you want to talk to the averages in terms of where we landed with the increases on the scheduled side, of course. And then maybe you can speak to push back.
Sure. So in terms of the quantum of the price increases, so we did start pushing through the price increases in May, have essentially wrapped them up in August. And again, they're for sort of our scheduled customers. And on average, we're looking at about 4%. So there is some variation between markets and between certain clients. So for example, like we did get granular to the point where we looked at sort of profitability for particular clients that may be a little bit more out of the way, increase those prices a little bit more. But on average, it was about 4%. And in terms of the -- whether there's been any pushback so far, again, it's August, haven't heard too much noise about people not being happy or customers taking issue with it. So from a churn perspective, don't really expect it to impact churn on any sort of significant basis.
Great. And then just a last question for me on the CapEx. It was a bit elevated sequentially. Can you speak to the number of shops delivered in the quarter and year-to-date and what we should expect going forward?
Yes. There was some -- there was quite a bit of catch up in the first quarter and Harjit, I think in the first quarter, we took 2 and correct me if I'm wrong, in the second quarter, we took 7, and that was sort of a catch-up quarter. I think that's -- those are the correct numbers, Harjit?
That's correct. Exactly. So there definitely was -- if you look at sequentially, there was an uptick in Q2. So, and I think going forward, when you're kind of looking at it, that's more of an outlier. So I think typically, we'd try to do 4 to 5 per quarter sort of -- you'd be sort of looking at it from a near-term sort of perspective -- on a prospective basis.
The next question comes from Mike Walter with Singular Research.
Mike with Singular. A couple of quick ones for me. As you mentioned, U.S. locations at 30 for having this call a year from now, do you have a goal number you'd like to see that at? Or how do you view that a year out?
Mike, it's early for you, I know. Look, our growth strategy and our growth program obviously has changed a little bit over the years. Where our footprint growth will come through acquisitions predominantly. Now we have in our pipeline some independence in new markets which is positive. So when I look at the priority of acquisitions, obviously, franchisees when they want out their priority. Tuck-ins in existing markets are critical from a depth perspective, and they're critical from a margin expansion perspective. So it's always -- those are 1 and 2 for us. Having said that, there are some markets where we can go into a new market and buy a larger independent and independent that looks a little bit like a franchisee, and we have some of those in our pipeline. So look, can we take that number up by a couple of new locations a year from now? That's possible. And -- but I will say from a capital allocation perspective and also in both our team's time and our financial resources it's always best to grab depth in the marketplace for those obvious route density and the ability to drive more bottom line out of that. But I think the pipeline may break where we get a couple of new locations. So that's certainly plausible.
Okay. Great. And just two quick ones to understand your metrics a bit better, and that will be it for me. As far as the paper pricing, I guess question one, is there any type of hedging that you can partake in as far as minimizing the volatility? That's question one. And question two. Just in general, with this trend, it seems like more people are going back to the office more days of the week. How that affects your different business lines? And yes, those are two questions for me.
Yes. The hedging is a great question. Not only we have a bit of a natural hedge with fuel and the correlation with fuel and paper. We haven't really found sort of a pure hedge. I would imagine someone out there figures it out and certainly a good idea. We certainly haven't found it and would love to find it. And so that's -- it's a good idea. The idea of people -- so this is a -- the great thing about us, and here's -- in the U.S. and we go back to COVID, the nice thing about our client mix is dominated lots of essential services and also dominated by small and medium-sized enterprise. So they came back quite quickly. And now the larger companies, I mean, it's interesting that Zoom of all companies are now mandating a hybrid solution. I find that quite interesting. The more people get into the office the better it is because the more they're going to consume our service. And remember, we've got the many services, right? We've got, obviously, our shredding and our recurring scheduled shredding benefits from that. But of course, as people get back in the office, they're looking at their space needs and they're going, "Hey, I've got all this paper,do I digitize it? " Great. We have a solution? Do we -- from a PROSCAN perspective, we have that solution. Do we shred? Do we have other stuff we need to shred? So the more people get back to the office, of course, that is a positive thing for us. And of course, we're seeing more and more and more of that. And we're very big proponents of the benefit of working in the office. So yes, it's been good. Obviously, it does create more supply of the paper. But look, here's the thing. Our business has always been a service business. We drive -- we want to be operationally excellent and to be operationally excellent, you can't rely on the -- purely on the paper profits. We like them, don't get me wrong. But you've got a plan for paper not to be that high. And that's what we've done and these results in this second quarter are an indication of that. And again -- so I know it's a long answer. I just want to be as full as possible for you.
[Operator Instructions] The next question comes from Devin Schilling with PI Financial.
Maybe you guys can just comment a little bit more on the strong shredding revenue growth during the quarter. Like what was that split for the new client wins? Like is this largely winning business from competitors or new organic opportunities popping up in your existing markets?
Yes. It's been both. I would say that the investments we made in the salespeople and professionals over the -- since the -- let's call it, the tail end of COVID, and we continue to invest in both outside and inside sales has allowed us to do both. Yes, we steal from our competitors. Our competitors, especially our larger competitors are not great at dealing with smaller enterprises. I think the Shred-it migration, the plant-based shredding and to -- let's call it, inflexible client service and inflexible billing and all of those kinds of things doesn't really fit well with the smaller type of clients, right? A large client, they're under contract. It's a different deal, but they are smaller clients. So our sales group has done a great job of converting those opportunities from our competitors. Simultaneously, we're getting leads every single day from people who never used shredding. I can't believe it, probably you can't believe it. But certainly, that has been the case. It certainly weighed more to stealing. It's probably 60-40 or 65-35 split towards on the scheduled side to sealing business. On the purge side, you know what, purge clients are generally newer clients. And here's the reason why. You have a service provider, you just phone the number on the bin and our purge clients tend to be -- our unscheduled clients tend to be newer clients. So it's, we're still finding those smaller businesses, which were so well equipped to go after wanting this service for the first time. And when we get a purge and here's the great news, Devin, we launched Salesforce in April. The team is well entrenched in using Salesforce. And we don't just use Salesforce as a CRM, which is the best and the team has done a great job taking that on. We use this now as a marketing automation platform. We use this to really create those individual conversations with our clients. So the marketing team has done a great job of using that weapon, and we just started using that weapon really. And so we're going to -- and the nice thing with that type of weapon is you can try different things on the fly and see what messages work and don't. So again, I know it's a long answer, but that sales growth is really -- it is a two-pronged strategy taking away from our competitors as well as getting new clients.
This concludes the question-and-answer session. I would like to turn the conference back over to Jeffrey Hasham for any closing remarks.
I appreciate that. Look, everyone, it's a Friday. I want to thank everyone for attending a very nicely attended conference call. As always, many of you on this call our shareholders. And you've stood by us, and we appreciate that. And look, we're -- as you know, we'll put our head down, and we'll keep working on the fundamentals of this business. And to that end, I want to thank the team, many of our team members who are on this call, they've been working extra hard, extra time, extra creatively to ensure that we're one step ahead of Google and one step ahead of the market and deploying these types of tools to drive the revenue. And then, of course, the service team has got to create the right environment have the right team on the trucks and have the right trucks and equipment, and they've done it. And we're going to continue to do it. So I want to thank them, of course, thank our Board of Directors for their support as well all these many years. So -- and our franchisees who go out there every day as well. So I want to thank everyone. After this call, we go back to work, we will put our hard hats on and work on having a strong third quarter. So thank you very much, everyone. Have a great weekend.
This concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.