KBL K Bro Linen Inc

(TSX: KBL)

EDMONTON, AB, Aug. 6, 2024 /CNW/ - K-Bro Linen Inc. ("K-Bro" or the "Corporation") today announces its Q2 2024 financial and operating results.

Q2 2024 Financial and Operating Highlights

• Consolidated revenue increased 15.8% compared to Q2 2023, with healthcare revenue having increased by 5.5% and hospitality revenue by 28.9%.
• Adjusted EBITDA, Adjusted EBITDA Margin & Adjusted Net Earnings
  • Adjusted EBITDA increased in the second quarter of 2024 by $3.6 million to $18.2 million compared to $14.6 million over the comparable 2023 period, a 25.2% increase.
  • Adjusting items include costs of $1.7 million in the quarter related to non-recurring transaction, transition and syndication/structural financing costs.
  • Adjusted EBITDA margin increased to 19.5% from 18.1% in the comparable period.
  • Adjusted net earnings in the second quarter increased by $1.4 million to $6.2 million compared to $4.8 million in the comparative period of 2023.
• EBITDA, EBITDA Margin & Net Earnings
  • EBITDA increased in the second quarter of 2024 by $2.1 million to $16.6 million compared to $14.5 million over the comparable 2023 period, a 14.3% increase.
  • EBITDA margin decreased to 17.7% from 18.0% in the comparable period as the result of the adjusting items discussed above.
  • Net earnings in the second quarter of 2024 decreased by $0.2 million to $4.5 million compared to $4.7 million in the comparative period of 2023.
• For the second quarter of 2024, K-Bro declared dividends of $0.300 per common share.
• Long-term debt at the end of Q2 2024 was $134.8 million compared to $70.2 million at the end of fiscal 2023 due to the acquisitions of Shortridge and C.M.
• K-Bro entered into a three-year, $175 million committed, syndicated revolving credit facility on March 26, 2024.
• K-Bro repurchased and cancelled 49,060 shares in Q2 2024 under the normal course issuer bid. To date, a total of 312,676 shares have been repurchased and cancelled.

Linda McCurdy, President & CEO of K-Bro, commented that "I'm delighted with our record second quarter results and continued momentum in both healthcare and hospitality segments.  Both of K-Bro's segments continue to experience steady growth trends and we remain focused on delivering industry-leading service to our existing and new customers.  We're pleased with the early contributions of our acquisitions and see a positive outlook for K-Bro.

We're excited about our organic growth prospects and potential future M&A.  We remain well positioned from a balance sheet and liquidity perspective and will continue to be disciplined as we evaluate acquisitions.  As K-Bro actively pursues its growth opportunities, we will continue to incur certain non-recurring or one-time transaction, transition and financing costs.  In this context, we believe Adjusted EBITDA, before non-recurring or one-time costs, will assist investors to assess our performance on a consistent basis as it is an indication of our capacity to generate income from operations.  Going forward, we expect Adjusted EBITDA margins to follow historical seasonal trends."

On April 30, 2024 the Corporation completed the acquisition of 100% of the share capital of Shortridge Ltd. ("Shortridge Acquisition"), a private hospitality laundry provider based in the North West of England, expanding K-Bro's geographic footprint in the UK.  The Shortridge Acquisition was completed through a share purchase agreement consisting of existing working capital, fixed assets, contracts and an employee base. The contracts acquired are in the hospitality sector in England and Scotland, which complements the existing business of the Corporation. Based on the Corporation's evaluation of the Shortridge Acquisition and the criteria in the identification of a business combination established in IFRS 3, the Shortridge Acquisition has been accounted for using the acquisition method, whereby the purchase consideration is allocated to the fair values of the net assets acquired.

At the time the financial statements were authorized for issue, and due to the timing of the Acquisition, the Corporation has not yet completed the accounting for the Shortridge Acquisition. This includes the accounting for the amounts attributable to property, plant and equipment, intangible assets and the associated goodwill.

The Corporation financed the Shortridge Acquisition and transaction costs from the syndicated revolving credit facility.

The preliminary purchase price allocated to the net assets acquired, based on their estimated fair values, is as follows:

The assets and liabilities recognized as a result of the Shortridge Acquisition are as follows:

The provisional intangible assets acquired are made up of $13,149 related to customer relationships and $2,032 related to the brand. The goodwill is attributable to the workforce, and the efficiencies and synergies created between the existing business of the Corporation and the acquired business. Goodwill will not be deductible for tax purposes.

Contingent consideration

The contingent consideration consists of amounts related to achieving certain profitability and operational targets.

An amount of $7,684 was funded in cash on April 30, 2024 and is held in trust with a third party escrow agent. The remaining $1,591 will be payable in cash.

The estimated fair value of the payments has been classified as contingent consideration by exercising significant judgment as to whether it should be classified as such, or as remuneration to the former owners, who will be employed subsequent to the close of the transaction. The Corporation has determined by considering all relevant factors included in the agreements as it pertains to employment terms, valuation of the business, and other relevant terms that the additional consideration is most appropriately reflected as contingent consideration.

For the contingent consideration, in the event that certain profitability and operational targets are achieved by Shortridge, additional undiscounted consideration will be released from escrow or paid in cash before December 31, 2025.

The fair value of the contingent consideration of $9,275 was estimated by considering the probability-adjusted future expected cash flows in regards to Shortridge achieving the targets that would result in consideration being paid.

Acquisition related costs

For the six months ended June 30, 2024, $508 in professional fees associated with the Shortridge Acquisition has been included in Corporate expenses.

Revenue and profit information

The acquired business contributed revenues of $4,402 to the Corporation for the period from April 30, 2024 to June 30, 2024. If the Acquisition had occurred on January 1, 2024, consolidated pro-forma revenue for the period ended June 30, 2024 would have been $179,676.

The acquired business contributed net earnings of $761 to the Corporation for the period from April 30, 2024 to June 30, 2024. If the Acquisition had occurred on January 1, 2024, consolidated pro-forma net earnings for the period ended June 30, 2024 would have been $6,778.

On June 21, 2024 the Corporation completed the acquisition of 100% of the share capital of Buanderie C.M. Inc. ("C.M. Acquisition"), a private laundry and linen operator located in Montréal serving the healthcare market. The acquisition will enable K-Bro to operate with two facilities in Montreal to service its growing healthcare and hospitality business. Based on the Corporation's evaluation of the C.M. Acquisition and the criteria in the identification of a business combination established in IFRS 3, the C.M. Acquisition has been accounted for using the acquisition method, whereby the purchase consideration is allocated to the fair values of the net assets acquired.

At the time the financial statements were authorized for issue, and due to the timing of the Acquisition, the Corporation has not yet completed the accounting for the C.M. Acquisition. This includes the accounting for the amounts attributable to property, plant and equipment, intangible assets and the associated goodwill.

The Corporation financed the C.M. Acquisition and transaction costs from the syndicated revolving credit facility.

The preliminary purchase price allocated to the net assets acquired, based on their estimated fair values, is as follows:

The assets and liabilities recognized as a result of the C.M. Acquisition are as follows:

The provisional intangible assets acquired are made up of $1,800 related to customer relationships. The goodwill is attributable to the workforce, and the efficiencies and synergies created between the existing business of the Corporation and the acquired business. Goodwill will not be deductible for tax purposes.

Acquisition related costs

For the six months ended June 30, 2024, $538 in professional fees associated with the C.M. Acquisition has been included in Corporate expenses.

Revenue and profit information

The acquired business contributed revenues of $176 to the Corporation for the period from June 21, 2024 to June 30, 2024. If the Acquisition had occurred on January 1, 2024, consolidated pro-forma revenue for the period ended June 30, 2024 would have been $177,308.

The acquired business contributed net earnings of $17 to the Corporation for the period from June 21, 2024 to June 30, 2024. If the Acquisition had occurred on January 1, 2024, consolidated pro-forma net earnings for the period ended June 30, 2024 would have been $6,180.

On August 31, 2023, the Corporation completed an amendment to its existing revolving credit facility to extend the agreement from July 31, 2026 to July 31, 2027, as previously amended on July 18, 2022. In addition, the agreement expanded the revolving credit facility from $100,000 to $125,000 plus a $25,000 accordion.

On March 26, 2024, the Corporation entered into a three-year committed Syndicated Credit Facility Agreement from March 26, 2024 to March 25, 2027. The new agreement consists of a $175,000 revolving credit facility plus a $75,000 accordion.

The Corporation's incremental borrowing rate under its existing credit facility is determined by the Canadian prime rate plus an applicable margin based on the ratio of Funded Debt to EBITDA as defined in the credit agreement.

For fiscal 2024, the Corporation's planned capital spending is expected to be between $15.0 and $17.0 million on a consolidated basis, including the expenditures associated with the Villeray acquisition. This guidance includes both strategic and maintenance capital requirements to support existing base business in both Canada and the UK. We will continue to assess capital needs within our facilities and prioritize projects that have shorter term paybacks as well as those that are required to maintain efficient and reliable operations.

Since 2020, due to changing government restrictions to mitigate the ongoing COVID-19 pandemic, supply chain disruption, geopolitical events impacting key inputs such as natural gas, electricity and diesel and inflationary impacts to labour and materials the Corporation has faced varying degrees of financial impact within Canada and the UK. The COVID-19 pandemic has also contributed to unusually competitive labour markets, causing inefficiencies in attracting, training and retaining employees.While labour markets have been stabilizing, certain regional markets continue to experience constrained labour availability.

The Corporation's Credit Facility is subject to floating interest rates and, therefore, is subject to fluctuations in interest rates which are beyond the Corporation's control. Increases in interest rates, both domestically and internationally, could negatively affect the Corporation's cost of financing its operations and investments.

Uncertainty about judgments, estimates and assumptions made by management during the preparation of the Corporation's consolidated financial statements related to potential impacts of the COVID-19 pandemic, geopolitical events and rising interest rates on revenue, expenses, assets, liabilities, and note disclosures could result in a material adjustment to the carrying value of the asset or liability affected.

Financial Results

OUTLOOK

The Corporation's healthcare and hospitality segments continues to experience steady growth trends. For the healthcare segment, management expects activity levels to remain strong from continued focus on reducing wait times and enhancing patient care.For the hospitality segment, management expects solid activity levels from both business and leisure travel reflecting historical seasonal trends. 

The volatility we encountered from energy prices, local labour market shortages and cost inflation throughout the pandemic has stabilized. In early 2022, particularly in the UK, the Corporation faced significant volatility in energy costs due to geopolitical issues. In April 2022, to mitigate this instability, the Corporation locked in natural gas supply rates in the UK until December 2024. In April 2024, the Corporation's UK division extended their natural gas supply commitment until December 2026.

The Corporation also faced temporary labour inefficiencies from unusually competitive labour markets. While labour markets have been stabilizing, certain regional markets continue to experience constrained labour availability. The Corporation is managing more challenging regional labour availability with complementary temporary foreign worker programs and has seen positive staffing support in this regard. 

Throughout 2023, EBITDA margins benefited from stronger client activity, price increases that we have secured to offset inflation-related costs, the completion of the AHS transition, operating efficiencies, and lower delivery costs.  As K-Bro actively pursues its growth opportunities, the Corporation will continue to incur certain non-recurring or one-time transaction, transition and syndication/structural financing costs.  In this context, management believes Adjusted EBITDA, before non-recurring or one-time costs, assists investors to assess our performance on a consistent basis as it is an indication of our capacity to generate income from operations.  Adjusting items include non-recurring transaction, transition and syndication/structural financing costs, as detailed in the tables within "Terminology".    Going forward, management expects Adjusted EBITDA margins to follow historical seasonal trends. 

With continued momentum in existing operations, management has refocused attention on strategic acquisitions, such as the acquisitions of C.M., Shortridge, Villeray and Paranet, to accelerate growth in both North America and Europe, geographies which remain highly fragmented. K-Bro's upsized $175 million syndicated credit facility, with a further $75 million accordion, provides further financial flexibility to pursue growth opportunities. K-Bro will look to leverage its strong liquidity position, balance sheet and access to the capital markets to execute on these opportunities, should they arise. For further information about the impact of other economic factors on our business, see the "Summary of Interim Results and Key Events". 

CORPORATE PROFILE

K-Bro is the largest owner and operator of laundry and linen processing facilities in Canada and a market leader for laundry and textile rental services in Scotland and the North of England. K­­­‑Bro and its wholly-owned subsidiaries operate across Canada and the UK, providing a range of linen services to healthcare institutions, hotels and other commercial accounts that include the processing, management and distribution of general linen and operating room linen.

The Corporation's operations in Canada include ten processing facilities and two distribution centres under two distinctive brands: K‑Bro Linen Systems Inc. and Buanderie HMR. The Corporation operates in ten Canadian cities: Québec City, Montréal, Toronto, Regina, Saskatoon, Prince Albert, Edmonton, Calgary, Vancouver and Victoria.

The Corporation's operations in the UK include Fishers, which was acquired by K‑Bro on November 27, 2017. Fishers was established in 1900 and is a leading operator of laundry and linen processing facilities in Scotland, providing linen rental, workwear hire and cleanroom garment services to the hospitality, healthcare, manufacturing and pharmaceutical sectors. The Corporation operates five UK sites located in Cupar, Perth, Newcastle, Livingston and Coatbridge.

Additional information regarding the Corporation including required securities filings are available on our website at www.k-brolinen.com and on the Canadian Securities Administrators' website at www.sedarplus.ca; the System for Electronic Document Analysis and Retrieval ("SEDAR").

TERMINOLOGY

Throughout this news release and other documents referred to herein, and in order to provide a better understanding of the financial results, K-Bro uses the terms "EBITDA", "adjusted EBITDA", "adjusted net earnings", "adjusted net earnings per share", "debt to total capital", "distributable cash" and "payout ratio". These terms do not have any standardized meaning under International Financial Reporting Standards ("IFRS") as set out in the CICA Handbook. Therefore, EBITDA, adjusted EBITDA, adjusted net earnings, adjusted net earnings per share, distributable cash and payout ratio may not be comparable to similar measures presented by other issuers. Specifically, the terms "EBITDA", "adjusted EBITDA", "adjusted net earnings", "adjusted net earnings per share", "distributable cash", and "payout ratio" have been defined as follows:

EBITDA

EBITDA (Earnings before interest, taxes, depreciation and amortization) comprises revenues less operating costs before financing costs, capital asset and intangible asset amortization, and income taxes.

EBITDA is a sub‑total presented within the statement of earnings in accordance with the amendments made to IAS 1 which became effective January 1, 2016. EBITDA is not considered an alternative to net earnings in measuring K‑Bro's performance. EBITDA should not be used as an exclusive measure of cash flow since it does not account for the impact of working capital changes, capital expenditures, debt changes and other sources and uses of cash, which are disclosed in the consolidated statements of cash flows.

K‑Bro reports Adjusted EBITDA (Earnings before interest, taxes, depreciation and amortization) as a key measure used by management to evaluate performance. Adjusted EBITDA is utilized to make decisions related to dividends to Shareholders. We believe Adjusted EBITDA assists investors to assess our performance on a consistent basis as it is an indication of our capacity to generate income from operations before taking into account management's financing decisions and costs of acquiring tangible and intangible capital assets.  The Corporation has modified its definition for Adjusted EBITDA and has updated its comparative quarters to reflect the modified definition. "Adjusted EBITDA" is defined as EBITDA (defined above) with the exclusion of certain non-recurring or one-time costs, expenses, gains, losses, charges or any changes in fair value that are non-operating in nature that the Corporation believes are not reflective of ongoing business performance and operational profitability. The Corporation believes these non-GAAP definitions provide more meaningful reflections of normalized financial performance from operations and will enhance period-over-period comparability.   

Adjusted Net Earnings and Adjusted Earnings per Share are non-GAAP measures. These non-GAAP measures are defined to exclude certain non-recurring or one-time costs, expenses, gains, losses, charges or any changes in fair value that are non-operating in nature that the Corporation believes are not reflective of ongoing business performance and operational profitability. The Corporation believes these non-GAAP definitions provide more meaningful reflections of normalized financial performance from operations and will enhance period-over-period comparability. 

Distributable Cash Flow

Distributable cash flow is a measure used by management to evaluate the Corporation's performance. While the closest IFRS measure is cash provided by operating activities, distributable cash flow is considered relevant because it provides an indication of how much cash generated by operations is available after capital expenditures. It should be noted that although we consider this measure to be distributable cash flow, financial and non‑financial covenants in our credit facilities and dealer agreements may restrict cash from being available for dividends, re‑investment in the Corporation, potential acquisitions, or other purposes. Investors should be cautioned that distributable cash flow may not actually be available for growth or distribution from the Corporation. Management refers to "Distributable cash flow" as to cash provided by (used in) operating activities with the addition of net changes in non‑cash working capital items, less share‑based compensation, maintenance capital expenditures and principal elements of lease payments.

Payout Ratio

"Payout ratio" is defined by management as the actual cash dividend divided by distributable cash. This is a key measure used by investors to value K-Bro, assess its performance and provide an indication of the sustainability of dividends. The payout ratio depends on the distributable cash and the Corporation's dividend policy.

Debt to Total Capital

"Debt to total capital" is defined by management as the total long‑term debt (excludes lease liabilities) divided by the Corporation's total capital. This is a measure used by investors to assess the Corporation's financial structure.

Distributable cash flow, payout ratio, debt to total capital adjusted EBITDA, adjusted net earnings, and adjusted net earnings per share are not calculations based on IFRS and are not considered an alternative to IFRS measures in measuring K‑Bro's performance. Distributable cash Flow, payout ratio, adjusted EBITDA, adjusted net earnings, and adjusted net earnings per share do not have standardized meanings in IFRS and are therefore not likely to be comparable with similar measures used by other issuers.

FORWARD LOOKING STATEMENTS

This news release contains forward‑looking information that represents internal expectations, estimates or beliefs concerning, among other things, future activities or future operating results and various components thereof. The use of any of the words "anticipate", "continue", "expect", "may", "will", "project", "should", "believe", and similar expressions suggesting future outcomes or events are intended to identify forward‑looking information. Statements regarding such forward‑looking information reflect management's current beliefs and are based on information currently available to management.

These statements are not guarantees of future performance and are based on management's estimates and assumptions that are subject to risks and uncertainties, which could cause K-Bro's actual performance and financial results in future periods to differ materially from the forward-looking information contained in this news release. These risks and uncertainties include, among other things: (i) risks associated with acquisitions, including (a) the possibility of undisclosed material liabilities, disputes or contingencies, (b) challenges or delays in achieving synergy and integration targets, (c) the diversion of management's time and focus from other business concerns and (d) the use of resources that may be needed in other parts of our business; (ii) K-Bro's competitive environment; (iii) utility costs, minimum wage legislation and labour costs; (iv) K-Bro's dependence on long-term contracts with the associated renewal risk and the risks associated with maintaining short term contracts; (v) increased capital expenditure requirements; (vi) reliance on key personnel; (vii) changing trends in government outsourcing; (viii) changes or proposed changes to minimum wage laws in Ontario, British Columbia, Alberta, Quebec, Saskatchewan and the United Kingdom (the "UK"); (ix) the availability and terms of future financing; * textile demand; (xi) the adverse impact of the COVID-19 pandemic on the Corporation, which has been significant to date and which we believe will continue to be significant for the short to medium term; (xii) availability and access to labour; (xiii) rising wage rates in all jurisdictions the Corporation operates and (ix) foreign currency risk. Material factors or assumptions that were applied in drawing a conclusion or making an estimate set out in the forward-looking information include: (i) volumes and pricing assumptions; (ii) expected impact of labour cost initiatives; (iii) frequency of one-time costs impacting quarterly and annual financial results; (iv) foreign exchange rates; (v) the level of capital expenditures and (vi) the expected impact of the COVID-19 pandemic on the Corporation. Although the forward-looking information contained in this news release is based upon what management believes are reasonable assumptions, there can be no assurance that actual results will be consistent with these forward-looking statements. Certain statements regarding forward-looking information included in this news release may be considered "financial outlook" for purposes of applicable securities laws, and such financial outlook may not be appropriate for purposes other than this news release. Forward looking information included in this news release includes the expected annual healthcare revenues to be generated from the Corporation's contracts with new customers, calculation of costs, including one-time costs impacting the quarterly financial results, anticipated future capital spending and statements with respect to future expectations on margins and volume growth, as well as statements related to the impact of the COVID-19 pandemic on the Corporation.

All forward‑looking information in this news release is qualified by these cautionary statements. Forward‑looking information in this news release is presented only as of the date made. Except as required by law, K‑Bro does not undertake any obligation to publicly revise these forward‑looking statements to reflect subsequent events or circumstances.

This news release also makes reference to certain measures in this document that do not have any standardized meaning as prescribed by IFRS and, therefore, are considered non‑GAAP measures. These measures may not be comparable to similar measures presented by other issuers. Please see "Terminology" for further discussion.

Web: www.k-brolinen.com

SOURCE K-Bro Linen Inc.