K-Bro Linen Inc. (KBL) Earnings Call Transcript & Summary

Ladies and gentlemen, my name is Mike Percy, and I am the Director of K-Bro Linen, Inc. It gives me great pleasure to welcome you today to our 2021 Annual Meeting of Shareholders. Joining me and presenting today are Linda McCurdy, President and CEO; and Kristie Plaquin, CFO. As you can see, we are holding today's meeting fully virtually as a consequence of COVID-19 pandemic and for health and safety reasons, as it would be inappropriate to put the health and safety of shareholders, employees and community at risk. On behalf of the Board, I wish to express thanks to those shareholders who have submitted their proxies in advance of today's meeting. If you have logged into this meeting with a control number or user name provided to you by AST Trust Company, please be sure to vote on the resolutions put forth before the meeting today. As this meeting is being held virtually via live audio webcast, we think it is necessary to set out a few rules for the orderly conduct of the meeting. First, questions in respect to the motion can be submitted by a registered shareholder or duly appointed proxy holder using the questions module of the virtual platform. Second, when asking a question, please indicate your name and which entity you represent, if any. Third, questions will be read aloud by the Secretary and addressed during the question period at the end of the meeting provided that questions regarding procedural matters or directly related to the motions before the meeting, during the meeting. Fourth, for the purposes of the meeting today, voting on all matters will be conducted by a single electronic ballot. Registered shareholders and duly appointed proxy holders will be asked to vote on each business item after the presentation of all such business items. Only registered shareholders and duly appointed proxy holders of the corporation are permitted to participate in the voting. Fifth, when you are asked to vote, you will receive a message on the virtual interface requesting you to register your votes. You will have only a certain amount of time to do so when the polls open. We will now proceed with the formal portion of today's meeting. To expedite the formal part of the meeting, I will move and second all motions. Following the formal meeting, Linda McCurdy, President and CEO of the Corporation; and Kristie Plaquin, CFO of the corporation, will give a short presentation. I now call to order the Annual General Meeting of the corporation's shareholders. With the consent of the meeting, I appoint Kristie Plaquin, the corporation's CFO as Secretary of the meeting. With the consent of the meeting, I appoint Christopher Carbone and Nazim Nathoo from AST Trust Company as scrutineers to report on the number of common shares at this meeting and to tabulate the votes on any ballot taken at the meeting and to report thereon to the chair person of the meeting. Ms. Plaquin, can you please confirm the presence of a quorum?

Mr. Chair, I have been advised by the scrutineers that there are present by proxy, a sufficient number of persons holding a sufficient number of shares entitled to vote at the meeting to constitute a quorum. As there is a quorum present, this meeting is regularly called and properly constituted for the transaction of business.

Thank you, Ms. Plaquin. I hereby declare that this meeting has been duly convened and properly constituted to transact the business for which it has been called. Accordingly, unless there is an objection, I will dispense with the reading of the notice of meeting. I direct that a copy of the notice with proof of mailing be kept by the Secretary with the minutes of the meeting. Hearing no objection, I now declare that this meeting is regularly called and properly constituted for the transaction of business. We will now move to the formal part of today's agenda. As I mentioned earlier, the polls are open for voting on all the matters of business. The first item of business is the tabling of the annual consolidated financial statements of K-Bro Linen Inc. as at December 31, 2020, and for the year then ended, together with this report therein of management and the auditors of corporation. A copy of these documents was made available to all shareholders of the corporation along with the corporation notice of meeting and information circular dated April 19, 2021. Additional copies are available for anyone wishing one. Unless there is an objection, I will dispense with the reading of the auditor's report. The annual reports will be tabled at this time, but I would ask that any questions you may have arising from the annual report or financial statements be raised later when shareholder questions are entertained. Hearing no objection, I will entertain questions with respect to the financial statements of the corporation in the general question period. We now move to the next point on today's agenda. The next matter to be acted upon is the election of 5 individuals to the Board of Directors. As per the management information circular: Mr. Matthew Hills; Mr. Steve Matyas; Mr. Michael Percy; Ms. Linda McCurdy; and Ms. Elise Rees have been nominated as directors for the ensuing year or until their successors are elected or appointed. Each of the persons nominated has confirmed that he or she is prepared to serve as a director. Each of them qualifies as a director under the provisions of the Business Corporations Act, Alberta. The motion to elect the 5 nominees is now on the floor. The act requires that the Board of Directors be elected. Proxies have been solicited for each of the 5 proposed qualified persons listed in the management information circular. The form of proxy for voting on the election of directors sets out each proposed nominee separately and allows shareholders to vote for each director individually. Is there any discussion on the motion or additional nominations? Hearing none. Thank you. Thank you. As mentioned, at the beginning of this meeting, voting today will be conducted by a single electronic ballot. We will, therefore, continue with the next item of business, which is the appointment of the corporation's auditors. And you would be prompted to vote on the election of each proposed director after the presentation of all business items for this meeting. Unless there are any questions or discussions, I will now move to the next item of business. The next item of business is the reappointment of PricewaterhouseCoopers LLP Chartered Accountants as the auditors of the corporation for the ensuing year and to authorize the directors of the corporation to fix the remuneration of the auditors. I move and second that PricewaterhouseCoopers LLP be appointed auditors of the corporation until the next annual meeting of shareholders and that the Board of Directors be authorized to fix their remuneration. The motion is now on the floor. You will be prompted to vote on the reappointment of the auditors after the presentation of all business items for this meeting. Unless there are questions or discussions, I will move to the next item of business. As previously mentioned, voting today will be conducted by a single electronic ballot. You will now be prompted to register your vote in respect of each of today's business items for this meeting. Please register your votes by accessing the voting page when prompted and pressing on the for or withhold buttons next to the name of each proposed director and next to the resolution with respect to the appointment of PricewaterhouseCoopers LLP as the corporation's auditors. Once the electronic balloting closes, the voting page will disappear and your votes will be automatically submitted. We will now take a short pause to answer any questions that have been submitted and to permit any registered shareholder or proxy holder who has not already done so to record their votes on the motions before the meeting. Having received no questions, I will close the polls in 30 seconds. [Voting]

The polls are now closed. I have now received the preliminary scrutineer's report. With respect to the election of directors, I am advised by the scrutineers that each of the proposed nominees has been duly elected. With respect to the resolution to appoint the auditors, I am advised by the scrutineers that this resolution has been duly carried. The scrutineer will prepare the scrutineer's report following the completion of the meeting, and we will announce the results of the meeting in a press release in accordance with the policies of the TSX and file the press release on SEDAR. Is there any other formal business to be properly brought before this meeting? If there is no further business to be brought before this meeting, I move and second that the formal portion of today's meeting be concluded. I will now call upon Linda McCurdy, President and CEO of the Corporation; and Kristie Plaquin, CFO of the corporation, to lead a discussion on the corporation and a review of our 2020 annual and first quarter 2021 results.

Thank you, Mr. Chairman. Good morning, everyone, and welcome. So before we begin the formal presentation, I'd just like to remind everyone that statements made during our prepared remarks or in the Q&A portion of today's meeting, with reference to management's expectations and 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 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. So with that, I will start by giving you an overview of the business, Kristie will provide an overview of our financial performance. I will come back with some closing comments and then open it up for Q&A. In terms of K-Bro's business, we are the largest health care and hospitality laundry and linen processor in Canada. And with the acquisition of Fishers, we're now one of the largest in the U.K. K-Bro started over 65 years ago in Edmonton as a family business and was subsequently sold to 2 different PE firms in the '80s and '90s and owned by them until the company was taken public in 2005. In terms of the senior management team, we've been with the company for several decades. I've been with the company for 22 years and CEO for 20 years. Kristie, who's joined us today, is CFO and has been with the company for 20 years. Sean Curtis, our COO, has been with the company for over 35 years. And most of our GMs have been with the company for between 20 and 30 years. As you can see on Slide 5, we operate 15 facilities and 2 distribution centers, 9 facilities -- we have 9 facilities and 2 distribution centers in Canada. And with the acquisition of Fishers at the end of 2017, we operate 6 facilities in the U.K., primarily in Scotland and the Northeast of England. And it is really this network of strategically positioned modern facilities that enables us to provide the critical services required by our health care and hospitality customers. Our ongoing reinvestment in the latest equipment and technologies has enabled us to provide the highest levels of service and quality to our health care and hospitality customers. On Slide 5, I'll point out a few of the key points as it relates to our continued strength of our business model. So we've continued to grow our market share in the laundry and linen processing sector for several decades. When we went public in 2005, we had 4 plants in 3 provinces in Canada. Today, we have 15 plants in Canada and the U.K. Revenue has more than doubled since 2009, growing from $87 million to $252 million in 2019. And really, this growth has come from all areas. Organic growth from existing customers, greenfield new builds and acquisitions. Our vertically integrated business model provides complete supply chain solutions to our customers at reduced operating costs and capital costs versus providing these services internally. We're also able to take advantage of scale by purchasing large quantities of linen at highly competitive prices given the quantities and can spread fixed operating costs over substantially larger volumes of processed laundry. We also have deep industry experience and a reputation that spans over 65 years and create value through our operating expertise. We've conservatively managed our balance sheet with significant credit available for initiatives, including capital expansions and acquisitions and to weather unusual circumstances such as those that we are currently facing. We've proven strategies for growth and has successfully integrated 7 acquisitions, built 5 new state-of-the-art plants and executed on many plant expansions in the last decade. On Slide 6, here, you can see a consolidated financial overview of K-Bro. In terms of our top line, our revenue comes from 2 key areas: the health care and hospitality sectors. Our revenue for 2019 was $252 million, with approximately 45% of our revenues coming from hospitality and 55% from health care. As you can see, for 2020, however, we were substantially impacted by COVID and revenue decreased to $197 million as a result of COVID on the hospitality industry. Our mix of revenue between health care and hospitality shift is 77% health care and 23% hospitality. Previous to this, we have seen annual growth year-over-year. Our adjusted EBITDA before the adoption of IFRS 16 for 2019 was $39 million with net earnings of $10.9 million and earnings per share of $1.30. Again, due to COVID, we saw a decrease in adjusted EBITDA before the adoption of IFRS 16 in 2020 of approximately $35 million. Moving to Slide 7. What you can see is that our revenue is secured by long-term contracts. Our health care business is a noncyclical essential service industry backed by 5- to 10-year contracts, and our hospitality contracts generally 2 to 5 years in length. And as you can see on the chart on the right, roughly 40% of our revenue is from contracts that extend into 2024 and beyond. Slide 8 speaks to the competitive landscape and trends that we've experienced over the past decades. In K-Bro, the competitive landscape includes independently privately owned facilities, those would generally be owner operators with 1 or 2 facilities, public and private sector central laundries that are off-site and process for a number of member hospitals or their own hotels and public and private sector on-premise laundries that are located on-site at the hospital or the hotel. What we've seen over the past decade is an ongoing shift to outsourcing laundry and linen services. This has been driven by several factors, including that linen is considered noncore to a hospital's mission of patient care and a hotel's desire to provide an excellent guest experience. Significant capital and operating savings can be achieved through outsourcing as large laundry operators such as K-Bro, are able to achieve economies of scale. A desire to repurpose valuable square footage at both hospitals and hotels that can then be used for revenue generating opportunities. And specialization by experienced operators that use technology to manage inventory and report on linen usage, leading to better management of the entire laundry and linen supply chain. These are a few of the factors as to why we see an outsourcing trend of laundry and linen services. On Slide 9, you can see that both the Canadian and the U.K. markets are large with significant organic and acquisition growth opportunities in both the health care and hospitality space. In Canada, we see the Canadian market to be approximately $600 million. K-Bro has approximately 30% of the market and other private sector competitors have around 40% of the market and the rest remains quite fragmented. And 30% remains in-source, which represents opportunities for further growth. The U.K. market is rough GBP 750 million with K-Bro, Fishers having 5% market share. The remaining private sector competitors have about 64% and approximately 31% is in-sourced, and there are opportunities in both health care and hospitality to gain in-source share. Slide 10 speaks to our market share in Canada. Here, you can see that in each of our markets throughout Canada and our market share relative to all outsourced volume. We maintain a strong position relative to our private sector competitors. However, there still remains growth opportunities in all of our markets. In addition, there are many provinces across Canada that continue to process their linen in-house, which we would expect as equipment ages will lead to further outsourcing opportunities. In terms of the U.K. Fishers market, Slide 11 speaks to the market share for Fishers in Scotland and the Northeast of England, the markets in the U.K. that we service. In this market, where Fishers was founded and is the strongest, we have about a 37% market share, while other private sector participants make up about 30%. Approximately 30% of the market remains in-sourced and virtually all of the health care remains in-house. We see this as a real growth opportunity and similar to Canada, where 15 years ago, much of the Canadian health care laundry was in-sourced. In terms of our customers, on Slide 12, we'll note that our client base consists of large provincial health authorities, such as Alberta Health Services as well as individually managed major hospitals, such as the hospital for sick kids here in Toronto as well as St. Michaels in Toronto. Our health care customers also include larger centralized buying groups. For example, in British Columbia, Provincial Health acts as an agent for themselves as well as Fraser Health, Vancouver Coastal and Providence. We're also privileged to include national hoteliers such as the Fairmont Hotels, Four Seasons, The Hyatt, Hilton, Delta, Marriott and The Starwood Group are all among our clients. In the U.K., where approximately 90% of our business is hospitality, we service as well the large hotel chains, such as The Core, Travelodge, Jurys Inn, Hilton and Marriott. In terms of our retention rates, we continue to excel at renewing our existing contracts with our valued customers. We have very high retention rates up in the high 90th percentile range and have been serving -- servicing some of our major customers for literally decades. The long-term nature of our contracts helps us establish strong relationships and offer additional services to our customers, which further strengthens our position. We'll now take a look at our state-of-the-art facilities. We've remained focused on growth in regions where we have an existing competitive advantage or can develop a new one. Over the past decade, we've invested more than $250 million in our business in new plants and equipment with a significant amount of this reinvestment happening in the last number of years. In 2017, we opened our new state-of-the-art 90,000 square foot facility in Toronto for a total investment of $37 million, including the purchase of new efficiency enhancing equipment and leasehold costs. Our new plant replaced an old and efficient operation that was running over capacity. Really, this investment gives us the platform for further growth in the largest market in Canada and has enabled us to reduce our labor cost by 25%. In B.C., as the result of several major health care contract wins and renewals, we moved forward to build a new state-of-the-art facility in Vancouver, which opened in 2018. This new facility expands our current capacity as well as enabled us to consolidate our health care business. We also upgraded and replaced equipment at our existing hospitality plant, resulting in significant operating efficiencies. The investment in our Vancouver facilities was $55 million. Overall, we viewed 2017 and 2018 as investment years as we constructed and upgraded 3 large facilities that allows us to bid on a significant amount of additional business and reduced our operating costs. The transition associated with these investments created margin pressure in 2017-18 and throughout the first half of 2019 as the company incurred onetime and transition costs. However, as we entered the back half of 2019, we saw the gradual return of Canadian EBITDA margins to more historical rates. Further looking at our facilities, on Slide 15, our decade of reinvestment in state-of-the-art facilities has provided us with a network of highly efficient operations that has helped us to become the low-cost producer in each of our markets. As you can see, in each of our Canadian markets, we have excess capacity for growth to aggressively pursue new profitable business, maximizing the operating leverage and improving EBITDA margins by utilizing excess capacity. Flipping to Slide 16, you'll see we also have excess capacity in each of our plants in Scotland and in New Castle. Acquisitions have played a meaningful part of our growth. As you can see on Slide 17, we've outlined a few of our more recent acquisitions. But overall, we entered the Victoria, Montreal and Québec City market through acquisition and completed -- and have completed 2 acquisitions in the last year. At the end of 2017, we acquired our Fishers -- acquired Fishers in the U.K. for a net purchase price of CAD 60 million. And as I mentioned before, Fishers is the largest player in Scotland and the Northern England and gives K-Bro a strong foothold in the U.K. market. In Q4 2018, we acquired Calgary-based Linitek for just under $5 million and have consolidated that volume into our existing Calgary plant. In 2019, we acquired Deeside, an Aberdeen-based hospitality plant for $1.4 million and consolidated this volume into Fishers' existing infrastructure. On Slide 18, our strategy remains focused on extending core services to new regions as well as introducing new related services to our existing and new customers. We've been successful in this strategy and have entered several new Canadian markets over the past decade. We are also introducing sterilization services to new markets, such as Vancouver from our new facility, whereby we will -- we are now sterilizing our operating -- the operating room linen, a function that would historically be done at the hospital. We believe that additional opportunities will be made as well as the result of COVID-19. We've seen a number of health systems convert to reusable products from disposable, and we expect there to be continued opportunities of this nature. As we've discussed, we've reached the end of our aggressive strategic capital spending program to build new facilities and upgrade facilities that allows us to be the most cost-efficient processor in our industry and to add millions of dollars of new business through our network of highly efficient plants. We'll continue to focus on growth through acquisitions and will either consolidate the volume into our existing facilities or operate them independently depending on the assets acquired. In terms of our goals for 2021, one of our key focuses for -- in 2020 was preparing and responding to the province-wide RFP that was issued by Alberta Health Services in Alberta in late 2020. This encompasses our existing Edmonton and Calgary volumes as well as the volumes for various rural locations throughout the province. In late April, we were -- it was announced that we were selected as the preferred vendor for this business. So we're now focused on negotiating a definitive agreement with AHS and planning for the transition of this volume. In terms of other priorities, COVID will continue to present us with many uncertainties. So our focus for the remainder of the year will be on managing the impact of the pandemic to our operations. As a backdrop, in response to the unprecedented situation, we quickly reacted over a year ago to scale down our operations by reducing headcount, consolidating volumes into a reduced number of plants as well as streamlining distribution routes. Currently, we still have reduced days of operations in all of our Canadian hospitality plants. If we fast forward a few months into June and into the summer, we are seeing volumes pick up and we are very focused on preparing for the reopening of the economy and working diligently to bring these plants back online in the most cost-efficient manner. And of course, growing both our Canadian and U.K. business organically and through acquisition will remain a key priority. I talked a little bit earlier about the management team. But here, you can see an overview of the senior team. Again, I've been with the company for more than 23 years now. Kristie has been with the company for over 20 years. And Sean, our COO, has been with the company for over 35 years and has been key to all aspects of business development, plant operations and development of future operating talent. In addition to this team, our 9 general managers in Canada have extensive experience in the business as well as our 4 general managers in the U.K. Many of our GMs have been with K-Bro for more than 25 years, and the combined years of experience in this group is roughly 230 years. Each member of this team is responsible for all elements of their respective business units from revenue growth to the bottom line. We have the best operators in the business, and I'm very proud of this team. I'll just spend a few minutes now walking you through some slides of our plants and detailing our business model and the process. These pictures here are from our Edmonton plant, which have become the blueprint for all our new builds. In any of our new facilities, for example, Regina, Toronto and Vancouver, we're achieving operating efficiencies from using the latest laundry technologies, including a 30% reduction in water, a 20% reduction in the consumption of natural gas and a 30% gain in productivity. Just to step back and provide you with a bit of an overview of the business, it really is a simple and easy business to understand from an investor's point of view, yet it is highly specialized, automated and has significant barriers to entry, which puts K-Bro in a strong market position. The process starts by us purchasing and managing linen on behalf of our health care customers. We collect the soiled linen from our customers and return it to our plant for processing 365 days a year. All of our plants follow Health Canada rules and regulations and achieve the highest standards of clean -- cleanliness, all while adhering to HLAC standards and TRSA's hygienically clean standards. These strict processing requirements create a barrier to entry for small processors in the health care market. The first step in the process is to sort the linen by classification to wash it most efficiently and effectively. We wash the linen in tunnel washers, which you can see on the top right-hand side of the screen, which are roughly 75-feet in length and are highly automated and controlled. Flipping to the next side after the washing and drying process, we will iron and fold the linen and package it up for distribution based on set quotas by nursing unit or by ward or as the hotel demands, send it back to our customers, 365 days a week -- a year. Flipping to Slide 23. Here, you can see our operating room services that we provide to our major health care clients. Our core services is linen processing of reusable operating room linens, including surgical gowns, drapes and towels, and in some cases, sterilization of these products prior to delivery to the hospital. We provide sterilization in our Vancouver and Toronto plants. Our services include the assembly of operating room packs specifically designed by the customer, for example, an open heart surgery pack may contain gowns, drapes, towels, each in predetermined quantities, and each pack may differ depending on specific hospital configurations. And moving on to Slide 24, what I would say is what really differentiates K-Bro from our competitors is our focus on providing value-added services to our customers, and not just washing and drying the linen and dropping it off at the loading dock. Because we manage the entire linen supply chain and distribution function, we're able -- we're capable of delivering extensive reporting by unit or ward and reporting on cost by unit or by ward to each of our clients. We work very closely with our customers to reduce linen consumption through best practice use of our end products. And it's this type of activity that builds tremendous loyalty from our customers as they see us working with them closely to help them achieve their objectives. On the hospitality side of the business, we're also focused on being a complete laundry and linen solution. For certain customers, we deliver the linen directly to the floors. And with the acquisition of Fishers, we use RFID technology to better understand linen usage and linen life. I'll now turn it over to Kristie, who will provide a financial overview. Over to you, Kristie.

Thank you, Linda. And good morning, everyone. I'll just take a minute here to talk about our revenue and EBITDA profile history over the last number of years. So on the left-hand side of this slide, with the exception of 2020, which was impacted significantly by COVID, I'd just like to highlight our steady increase in annual revenue. In 2019, we reported consolidated revenue of approximately $252 million, which compared to $136 million in 2014. This was an 85% increase on a consolidated basis since 2014. And this growth has come from new contract wins, acquisitions and organic growth in existing markets as well as the acquisition of Fishers in 2017. In 2020, revenue decreased just over 20%, and this was due to the significant impact of COVID-19 on the hospitality industry. Overall, for the year, hospitality revenue was down approximately 60% as a result of various government restrictions put in place throughout the year. This was somewhat offset by stronger health care revenues, which increased about 10% due to the pandemic. On the right-hand side of the slide, for fiscal 2020, adjusted EBITDA, before the adoption of IFRS 16, was $35 million. This represented a decrease of approximately 10% on a year-over-year basis from fiscal 2019 adjusted EBITDA. The decrease in EBITDA, again, relates to the COVID-19 pandemic and the significant effect of the various government restrictions on our hospitality segment. Previous to this, other than in 2017, when we saw significant transition costs associated with new plant builds, we had also seen steady growth in EBITDA. Moving to Slide 26. This slide provides a snapshot of revenue and EBITDA segmentation between our Canadian and U.K. operations as well as our health care and hospitality sectors. And I'll just note that the figures on this slide are actually based on our 2019 revenue and adjusted EBITDA results as they are a better representation of our existing segmentation before the impact of COVID-19. From a revenue perspective, Canada represents about 75% of our revenue and Fishers about 25%. And from an EBITDA perspective, the same type of mix. So a very similar split revenue and in EBITDA. On Slide 27, I'll discuss both our 2020 and our Q1 2021 results. For 2020, revenue decreased to $196.6 million or by 22% compared to 2019. Again, the decrease primarily related to the reduction in hospitality revenue resulting from the COVID-19 pandemic. Initially, in 2020, we saw strong revenues, increasing 5.2% for the first 2 months of 2020. However, as of March 2020, when the COVID was declared the pandemic, it began to have an immediate effect on the company with many of our hospitality customers experiencing significantly reduced occupancies or closures. On a consolidated basis, adjusted EBITDA without the adoption of IFRS 16 and the impairment of assets in 2020 was $35 million compared to $38.7 million in 2019. Consolidated adjusted EBITDA margin was 17.8% for 2020 compared to 15.3% in 2019, and dividends declared remained consistent on a year-over-year basis. Overall, debt levels decreased to $40.7 million from $62.5 million at the end of 2019. For Q1 2021, consolidated revenue decreased by about 17% to $47.6 million from $57.3 million in the comparative period. Again, this decrease was primarily related to the significant reduction in hospitality revenue related to COVID. In 2021, approximately 90.4% of K-Bro's consolidated revenue was generated from health care institutions, which is higher compared to 61.2% in 2020. Consolidated adjusted EBITDA increased in the quarter to $7.8 million from $7.1 million in 2020, which is an increase of about 10%. This includes about $400,000 received in the form of government subsidy related to the CEWS program. The consolidated adjusted EBITDA margin increased to 16.4% in 2021 compared to 12.4% in 2020. And at March 31, we continued to have moderately low levels of leverage with a funded debt-to-EBITDA ratio of approximately 1x. So turning to Slide 28. As I noted previously, COVID has had a very significant impact to our business. The table on this slide summarizes the impact month-by-month and quarterly on each segment of our business. So as I noted earlier, we began 2020 in a position of strength. As COVID hit, it had a very significant impact on our operations. And by mid-March, we saw an immediate and rapid decline in volume with revenues dropping 11%. In order to address the adverse effects of the pandemic, we had to react quickly to implement plans to mitigate the effects, including consolidating operations, reducing headcount and accessing available government assistance programs. We had a highly experienced team that has been crucial in managing the situation. And in combination with our proven operating model, we continued to leverage, and we will continue to leverage it for the experiences and the challenges ahead. As we entered Q2, you'll note on the table -- Q2 of 2020, you'll note on the table, hospitality revenue was down about 90% on a year-over-year basis. This improved in Q3 of 2020 when government restrictions were temporarily lifted to some extent. But as we progress through Q4 2020, we saw volumes continue to drop. So overall, for 2020, hospitality revenues saw approximately 60% reduction. As we enter 2021, we continue to see these reductions on the hospitality side, which were consistent with the later part of Q4 for Q1 of 2021. On the health care side, in April, when the most significant lockdown occurred, we saw a decrease in health care revenues of 8%. As the year progressed due to product conversions and usage change practices, we saw increases ranging from 10% to 25% month over month with a yearly revenue increasing 9% from that of 2019. As we entered 2021, health care volumes continued to be strong with Q1 2021 finishing 26% higher than Q1 of 2019. We do anticipate that as the year progresses, the hospitality volumes will increase with the health care volumes slowing down as the various government restrictions are lessened. Despite the impact on hospitality revenues, we continue to generate free cash flow and have sufficient liquidity to weather the storm with approximately $60 million of unused debt capacity. Turning to Slide 29. Our trailing 12-month payout ratio is hovering around 40%. Our ability to maintain and grow our dividends is made possible through increasing market share through new customer contracts, extending core services to new markets through greenfield activity and targeted acquisitions, introducing new related services, undertaking accretive strategic capital expenditures and controlling costs by entering into fixed supply contracts. We continue to evaluate our payout ratio and dividend policy in the context of COVID-19. On Slide 30, just a reflection of our financial position. We continue to have moderately low levels of leverage with a funded debt-to-EBITDA ratio of about 1x for both March 31, 2021, and December 31, 2020. As I mentioned before, we also have room under our existing credit facility to fund moderate levels of growth. At March 31, 2021, we have approximately $60 million in availability under our existing credit facility, which is a $100 million revolver plus a $25 million accordion. On Slide 31, you'll note that K-Bro has performed well over the past 10 years relative to the TSX Composite Index, as you can see on the graph. I'll now turn things back to Linda for a quick closing address.

That's great, Kristie. Thank you. So in terms of a high-level investment summary, we are very confident in the strength of our business model. I'll just point out a few key highlights. We have a long-term relationship with all of our clients in some regards -- in some cases, providing service to them for over 30 years. We have a deep industry experience and reputation that spans 50-plus years. We have multiyear contracts for large portions of our health care and hospitality volumes. As Kristie mentioned, we have a conservative financial position and credit profile with significant credit availability to manage the current uncertain times and for various initiatives, including acquisitions. And we have a state-of-the-art set of processing facilities in our major health care markets that will enable us to be the low-cost producer and add millions of dollars of additional revenue to profitably grow and increase margins. So at this point, I'd like to thank all of you for attending today. And Kristie, I think, you're queuing up any questions?

Yes. I can confirm there are no questions.

Well, that's great. Thank you. Over to you, Mike.

So hearing no questions. Yes, hearing no questions. And again, last opportunity for questions. I would, on behalf of management, our Board of Directors, our employees, I would like to take the opportunity to thank everyone for attending the meeting today. I would like to thank all of our shareholders for their commitment and continued support. We look forward to your attendance again next year. Again, thank you very much, and that concludes today's AGM.