KBL K Bro Linen Inc

(TSX: KBL)

EDMONTON, AB, Nov. 9, 2023 /CNW/ - K-Bro Linen Inc. ("K-Bro" or the "Corporation") today announces its Q3 2023 financial and operating results.

Q3 2023 Financial and Operating Highlights

• Consolidated revenue increased 18.0% compared to Q3 2022, with healthcare revenue having increased by 9.2% and hospitality revenue by 30.1%.
• EBITDA increased in the third quarter of 2023 by $6.7 million to $17.7 million compared to $11.0 million over the comparable 2022 period, a 60.5% increase. 
• EBITDA margin increased to 20.4% from 15.0% in the comparable period.
• Net earnings in the third quarter of 2023 increased by $4.2 million to $6.7 million compared to $2.5 million in the comparative period of 2022, and as a percentage of revenue increased by 4.3% to 7.7%.
• For the third quarter of 2023, K-Bro declared dividends of $0.300 per common share.
• Long-term debt at the end of Q3 2023 was $55.2 million compared to $45.2 million at the end of fiscal 2022, with the acquisition of Paranet having been completed in early March.
• K-Bro has repurchased and cancelled 102,828 shares year-to-date under the normal course issuer bid announced May 15, 2023.

Linda McCurdy, President & CEO of K-Bro, commented that "I'm pleased with our strong third quarter results, with record revenue and EBITDA.  Throughout the pandemic, we have worked hard to meet the changing needs of our customers while managing the impact of inflation, volatile energy prices and local labour market shortages. Our third quarter results highlight the resilience of our business model and responsiveness of our team.

Consistent with the first half of the year, we saw continued growth in healthcare revenue and significant growth in hospitality revenue as business and leisure travel volumes have returned.  In the third quarter, the improvement in EBITDA margins was in-line with our expectations and reflects our disciplined approach to managing operations, combined with price increases that we have secured to offset inflation-related costs.  Going forward, we expect EBITDA margins to follow historical seasonal trends. 

On November 1, we announced the acquisition of Villeray, enhancing K-Bro's position within the attractive Montréal market.  As part of the transaction, K-Bro will close its Granby facility and consolidate existing volumes into Villeray.  Villeray's modern plant is strategically located in close proximity to customers, and we are investing to expand capacity, consolidate volumes, enhance operating efficiency, reduce fixed costs and support significant growth opportunities."

As we emerge from the pandemic, we are excited about our outlook.  On May 15, we announced a normal course issuer bid and have repurchased 102,828 shares to date. We have been refocusing on strategic acquisitions, such as Paranet and Villeray, and have an active M&A pipeline and remain well positioned from a balance sheet and liquidity perspective and will continue to be disciplined as we evaluate acquisitions."

Highlights and Significant Events for Fiscal 2023

Acquisition of Villeray

On November 1, 2023, the Corporation announced the closing of a share purchase agreement to acquire all the assets of Buanderie Villeray and its affiliate Buanderie La Relance (together "Villeray"), a private laundry and linen services company incorporated in Canada and operating in Montréal, Quebec in the healthcare and hospitality markets. The total consideration is $11.5 million plus a potential earnout of $1 million, subject to fair value considerations, working capital adjustments, and completion of the related purchase price accounting. K-Bro will invest a further $5 million in capital expenditures to expand capacity and enhance operational efficiencies. As part of the transaction, K-Bro will close its Granby facility and consolidate its volumes into Villeray. The acquisition will be accounted for using the acquisition method, whereby the purchase consideration will be allocated to the net assets acquired. The purchase price will be satisfied by drawing down on the Corporation's revolving credit facility.

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 acquisition of Villeray.

Acquisition of Buanderie Paranet

On March 1, 2023 the Corporation completed the acquisition of 100% of the share capital of Buanderie Para-Net ("Paranet") operating as Paranet (the "Acquisition"), a private laundry and linen services company operating in Québec City, Quebec. The 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 Quebec healthcare and hospitality sector, which complements the existing business of the Corporation. Based on the Corporation's evaluation of the Acquisition and the criteria in the identification of a business combination established in IFRS 3, the Acquisition will be accounted for using the acquisition method, whereby the purchase consideration will be 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 Acquisition of Paranet.  This includes the accounting for the amounts attributable to property, plant & equipment, intangible assets and the associated goodwill.  No measurement adjustments were made in the current period.

The Corporation financed the Acquisition and transaction costs from existing loan facilities.

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 Acquisition are as follows:

The provisional intangible assets acquired are made up of $2,450 for the customer contracts along with related relationships and customer lists. 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.

a)          Contingent consideration

The estimated fair value of payment has been classified as contingent consideration by exercising significant judgment as to whether it should be classified as such, or as renumeration to the former owner, 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.

In the event that a certain EBITDA target is achieved by Paranet for the twelve month period ended August 31, 2023, additional undiscounted consideration of up to $1,890 will be payable in cash during the fourth quarter of 2023.  The potential undiscounted amount payable within the agreement will only be paid should the EBITDA target be achieved.  Should the EBITDA target not be achieved no payment will be made.

The fair value of the contingent consideration of $945 was estimated by considering the probability-adjusted future expected cash flows in regards to Paranet achieving the target that would result in consideration being paid. The impact of discounting those future cash flows was not considered because the impact would be nominal.

Since the estimated future cash flows and probability of achieving the EBITDA target are an unobservable input, the fair value of the contingent consideration is classified as a level 3 fair value measurement. 

b)         Acquisition related costs

For the nine months ended September 30, 2023, $280 in professional fees associated with the Acquisition has been included in Corporate expenses.

c)          Revenue and profit information

The acquired business contributed revenues of $5,561 to the Corporation for the period from March 1, 2023 to September 30, 2023. If the Acquisition had occurred on January 1, 2023, consolidated pro-forma revenue for the period ended September 30, 2023 would have been $239,745.

The acquired business contributed a net deficit of ($214) to the Corporation for the period from March 1, 2023 to September 30, 2023. If the Acquisition had occurred on January 1, 2023, consolidated pro-forma net income for the period ended September 30, 2023 would have been $13,315.

These amounts have been calculated using Paranet's results and adjusting them for differences in the accounting policies between the Corporation and Paranet as it pertains to property, plant and equipment.  The Corporation follows the requirements of IFRS 16 whereas Paranet previously reported under Accounting Standards for Private Enterprises (ASPE), the additional depreciation and amortization that would have been charged assuming the fair value adjustments to property, plant and equipment and intangible assets had applied from January 1, 2023, together with the consequential tax effects.

3sHealth Contract Extension

In Q2 2022, the Corporation extended its existing contract with 3sHealth for an additional six years to May 31, 2031 on terms that are consistent with the existing contract.

Revolving Credit Facility

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. 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. During fiscal 2022 and 2023, the Canadian prime rate increased from 3.70% in January 2022 to 6.95% in June 2023, and July 2023 it increased to 7.20%. Had the prime rate in effect at July 12, 2023 been in effect for the nine months ended September 30, 2023, total interest rate expense for the period ended September 30, 2023 would have been $142 higher than reported assuming equivalent debt levels as at September 30, 2023.

Capital Investment Plan

For fiscal 2023, the Corporation's planned capital spending is expected to be approximately $8.0 million on a consolidated basis, excluding 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 and does not take into account amounts accrued in 2022 that are to be paid in 2023. 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.

Economic Conditions

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 the Corporation anticipates labour markets will stabilize, the timing remains uncertain and until such time as labour markets stabilize the Corporation will continue to be impacted financially by these conditions.

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

Dividends

The Board of Directors has declared a monthly dividend of $0.10 per common share for the period from November 1 to November 30, 2023, to be paid on December 15, 2023 to shareholders of record on November 30, 2023. The Corporation's policy is for shareholders of record on the last business day of a calendar month to receive dividends during the fifteen days following the end of such month. K-Bro designates this dividend as an eligible dividend pursuant to subsection 89(14) of the Income Tax Act (Canada) and similar provincial and territorial legislation.

OUTLOOK

The Corporation's healthcare segment continues to experience a steady growth trend. For the hospitality segment, management expects a solid recovery in activity with the elimination of government-imposed restrictions on international border crossings, increasing business/leisure travel, and price increases which will all continue to support the strong momentum in hospitality revenues experienced through 2022 as well as throughout 2023.

Throughout the pandemic we encountered volatile energy prices, local labour market shortages and cost inflation. Since early March 2022, particularly in the UK, the Corporation has faced significant volatility in energy costs due to current geopolitical issues. In April 2022, to mitigate this instability, the Corporation locked in natural gas supply rates in the UK until December 2024.

The Corporation has also faced temporary labour inefficiencies from unusually competitive labour markets.  Management remains focused on the retention of existing staff, in addition to implementing strategies to recruit and hire new staff.  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.

Throughout 2023, EBITDA margins have benefited from price increases that we have secured to offset inflation-related costs. Going forward, management expects 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 Villeray and Paranet, to accelerate growth in both North America and Europe, geographies which remain highly fragmented. 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 the COVID-19 pandemic and 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 East 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 three distinctive brands: K‑Bro Linen Systems Inc., Buanderie HMR and Les Buanderies Dextraze. 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 four UK sites located in 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

K‑Bro reports EBITDA (Earnings before interest, taxes, depreciation and amortization) as a key measure used by management to evaluate performance. EBITDA is utilized to measure compliance with debt covenants and to make decisions related to dividends to Shareholders. We believe 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 consuming tangible and intangible capital assets, which vary according to their vintage, technological currency and management's estimate of their useful life. Accordingly, EBITDA 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. 

Non-GAAP Measures

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.

SOURCE K-Bro Linen Inc.