K-Bro Reports Record Revenue for Q3 2018 and EBITDA in Line with Management Expectations as a Result of the Vancouver Transition

Company Release - 11/8/2018 6:49 PM ET

(TSX: KBL)

EDMONTON, Nov. 8, 2018 /CNW/ - K-Bro Linen Inc. ("K-Bro" or the "Corporation") today announces its 2018 Q3 financial and operating results.

K-Bro Linen Inc. (CNW Group/K-Bro Linen Inc.)

2018 Q3 Financial and Operating Highlights

  • Revenue for the three months ended September 30, 2018 was $64.0 million, an increase of 46.7% compared to the comparable period last year
  • EBITDA increased in the third quarter to $8.3 million, compared to $8.1 million for the third quarter last year, this includes estimated one-time costs of $2.7 million in the quarter. After adjusting for these one-time costs, EBITDA would have been $11.0 million.
  • EBITDA margin decreased to 13.0% from 18.6% for the comparable period in 2017. After adjusting for one-time costs, the EBITDA margin would have been 17.2%.
  • Net earnings for the third quarter was $1.9 million compared to net earnings of $3.4 million in the third quarter last year
  • K-Bro declared dividends of $0.300 per common share and distributable cash was $0.689 per common share on a fully diluted basis
  • K-Bro's acquisition of Linitek, a private laundry and linen services company operating in Calgary, AB, closed on October 3, 2018.

"The third quarter has historically been K-Bro's strongest in terms of revenue, and this year was no exception," said Linda McCurdy, President and Chief Executive Officer at K-Bro. "The height of tourist season in Scotland and northern England drove revenues in the UK division to $17.1 million and in Canada to $46.9 million, resulting in record total quarterly revenue of $64.0 million. While revenue has steadily grown, downward pressure on EBITDA persisted throughout the quarter as the result of the one-time costs associated with transitioning into our new and upgraded Vancouver facilities along with continued labour market tightness in British Columbia and Quebec. While we continue to work towards ramp-up at the Vancouver facility, the process has taken longer than anticipated due to the localized labour shortage. As we work through staffing and get closer to the end of our major capital program, we expect to return to normalized EBITDA margins in the latter half of 2019."

"Our capital investments for the past two years have focused on upgrades to existing facilities and building new facilities in key markets, and we view them as necessary to continue to leverage our competitive position, particularly in Canada where we anticipate steady growth through new and existing customers," continued Ms. McCurdy.  "At our new Vancouver facility, we completed the transition of volumes during the quarter and also consolidated healthcare volumes from our other lower mainland facilities. We have strengthened our competitive position in that market through scale and efficiencies gained through state-of-the art operations. The result is highly competitive operating costs that are passed on to new and existing customers through competitive pricing."

Highlights and Significant Events for Fiscal 2018

Vancouver Facility Development

As announced on March 2, 2016, K-Bro commenced the development of a new state-of-the-art facility with projected investment of up to $55 million.  As at September 30, 2018, K-Bro has incurred $51.3 million of the total expected capital costs. K-Bro began transitioning to the new facility during the second quarter and completed the transition during the third quarter of 2018.  The new facility will enable K-Bro to expand current capacity, to accommodate the additional awarded volume, and to provide the opportunity to consolidate the healthcare volume from its existing two Vancouver-area facilities.

In addition to investing in the new facility, K-Bro has upgraded and replaced equipment at one of its existing Vancouver-area facilities, which is being used to process the consolidated hospitality volume. During the third quarter of 2018, K-Bro completed the decommissioning of the third Vancouver-area facility, with related assets and volume transitioned to the existing upgraded Vancouver K-Bro facility.

K-Bro believes it will achieve significant operating efficiencies at both the new Vancouver plant and the upgraded Vancouver plant.  It is anticipated that transition costs associated with both plants will continue to negatively impact EBITDA margins over the fourth quarter of 2018 and begin to improve during 2019.

Business Acquisition

On October 3, 2018, the Corporation announced that it has successfully completed the previously announced $4.7 million acquisition (the "Acquisition") of Linitek, a private laundry and linen services company operating in Calgary, Alberta. The acquisition will be accounted for using the acquisition method, whereby the purchase consideration will be allocated to the net assets acquired. The acquisition is expected to add incremental revenue and EBITDA of $3.5 million and $0.6 million respectively on an annual basis.


(thousands, except per share amounts

Canadian
Division
2018

UK Division (2)

For the three months ended September 30,

and percentages)

2018

2018

2017 (2)

$ Change

% Change








Revenue

$

46,872

$

17,100

$

63,972

$

43,598

20,374

46.7%

Operating expenses

41,758

13,904

55,662

35,487

20,175

56.9%

EBITDA

5,114

3,196

8,310

8,111

199

2.5%

EBITDA as a % of revenue

10.9%

18.7%

13.0%

18.6%


-5.6%

Net earnings

200

1,686

1,886

3,418

(1,532)

-44.8%

Basic earnings per Share

$

0.02

$

0.16

$

0.18

$

0.36

$

(0.18)

-50.0%

Diluted earnings per Share

$

0.02

$

0.16

$

0.18

$

0.36

$

(0.18)

-50.0%

Dividends declared per diluted share



$

0.30

$

0.30

-

0.0%








Total assets



316,968

199,452

117,516

58.9%

Long-term debt, end of period



67,045

-

67,045

100.0%








Cash provided by  operating activities



9,759

3,788

5,971

157.6%

Net change in non-cash working capital items



1,176

(3,917)

5,093

-130.0%

Share-based compensation expense



403

276

127

46.0%

Maintenance capital expenditures



908

192

716

372.9%

Distributable cash flow



7,272

7,237

35

0.5%

Dividends declared



3,168

2,875

293

10.2%

Payout ratio



43.6%

39.7%


3.9%



















(thousands, except per share amounts

Canadian
Division
2018

UK Division (2)

For the nine months ended September 30,

and percentages)

2018

2018

2017 (2)

$ Change

% Change








Revenue

$

134,822

$

45,272

$

180,094

$

123,050

57,044

46.4%

Operating expenses

118,290

38,842

157,132

103,518

53,614

51.8%

EBITDA

16,532

6,430

22,962

19,532

3,430

17.6%

EBITDA as a % of revenue

12.3%

14.2%

12.8%

15.9%

-

-3.1%

Net earnings

2,669

2,448

5,117

7,005

(1,888)

-27.0%

Basic earnings per Share

$

0.26

$

0.23

$

0.49

$

0.79

(0.30)

-38.0%

Diluted earnings per Share

$

0.25

$

0.23

$

0.49

$

0.79

(0.30)

-38.0%

Dividends declared per diluted share



$

0.90

$

0.90

-

0.0%








Total assets



316,968

199,452

117,516

58.9%

Long-term debt, end of period



67,045

-

67,045

100.0%








Cash provided by  operating activities



9,755

12,385

(2,630)

-21.2%

Net change in non-cash working capital items



(12,462)

(6,864)

(5,598)

81.6%

Share-based compensation expense



1,437

1,175

262

22.3%

Maintenance capital expenditures



1,826

798

1,028

128.8%

Distributable cash flow



18,954

17,276

1,678

9.7%

Dividends declared



9,483

8,153

1,330

16.3%

Payout ratio



50.0%

47.2%

-

2.8%

(1)      Refer to the Terminology section for further details

(2)      Prior to the acquisition of Fishers on November 27, 2017, K-Bro was reporting and operating as a single Canadian division.

 

Dividend

The Board of Directors has declared a monthly dividend of $0.10 per common share for the period from November 1 to November 30, 2018, to be paid on December 14, 2018 to shareholders of record on October 31, 2018. 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

K-Bro's focus is on profitable growth in the years to come as we execute our strategy of expanding geographically and adding new services for our customers.  K-Bro is committed to building value for our shareholders, our customers and our employees. 

K-Bro also has several proposals pending and has entered into discussions with potential new customers.  In addition, K-Bro continues to seek potential acquisition candidates.  Neither the timing nor the degree of likelihood of success of any of these proposals or acquisitions can be stated with any degree of accuracy.

CORPORATE PROFILE

K-Bro is the largest owner and operator of laundry and linen processing facilities in Canada. K-Bro provides a comprehensive range of general linen and operating room linen processing, management and distribution services to healthcare institutions, hotels and other commercial accounts.  K-Bro currently operates nine processing facilities under three distinctive brands, including K-Bro Linen Systems Inc., Buanderie HMR and Les Buanderies Dextraze, in eight Canadian cities: Québec City, Montréal, Toronto, Regina, Edmonton, Calgary, Vancouver and Victoria.

Fishers was established in 1900 and is an 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. Fishers' client base includes major hotel chains and prestigious venues across Scotland and the North East of England. The company operates seven sites, including one depot, in Scotland and the North East of England with facilities in Cupar, Perth, Newcastle, Livingston, Inverness 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.sedar.com; the System for Electronic Document Analysis and Retrieval ("SEDAR").

TERMINOLOGY

Throughout this news release, and other documents referred to, 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 capitalization", "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:

EBITDA is defined as earnings before finance expense, income taxes, depreciation, and amortization. EBITDA is not a recognized measure for financial statement presentation under IFRS.  EBITDA is not intended to represent cash flow from operations, as defined by IFRS, and it should not be considered as an alternative to net earnings, cash flow from operations, or any other measure of performance prescribed by IFRS.  The Corporation's EBITDA may also not be comparable to EBITDA used by other corporations, which may be calculated differently.  The Corporation considers EBITDA to be a meaningful measure to assess its operating performance in addition to standardized IFRS measures.  It is included because the Corporation believes it can be useful in measuring its ability to service debt, fund capital expenditures, and expand its business.



Three Months Ended
September 30,


Nine Months Ended
September 30,

(thousands)

2018


2017


2018


2017



















Net earnings

$

1,886


$

3,418


$

5,117


$

7,005

Add:









Income tax expense

498


1,379


1,773


2,912


Finance expense

857


101


2,449


347


Depreciation of property, plant and equipment

4,371


2,840


11,387


8,063


Amortization of intangible assets

698


373


2,236


1,205

EBITDA

$

8,310


$

8,111


$

22,962


$

19,532

Adjusted EBITDA is a measure which has been reported in order to assist in the comparison of historical EBITDA to current results.  Adjusted EBITDA is defined as EBITDA (defined above) with the exclusion of certain material items that are unusual in nature, infrequently occurring or not considered part of our core operations.

Adjusted net earnings and adjusted net earnings per share are measures which have been reported in order to assist in the comparison of historical net earnings to current results.  Adjusted net earnings is defined as net earnings with the exclusion of certain material items that are unusual in nature, infrequently occurring or not considered part of our core operations. The calculation of adjusted net earnings normalizes the impact of the transaction costs related to the acquisition of Fishers, and the related impact on net earnings and net earnings per share. The normalization of this net expense in the calculation of adjusted net earnings and adjusted net earnings per share is considered by management to be a more accurate representation of the net earnings from core operations.

Distributable cash flow is a measure used by management to evaluate its 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 shall 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, and maintenance capital expenditures.




Three Months Ended
September 30,


Nine Months Ended
September 30,

(thousands)


2018

2017


2018

2017









Cash provided by  operating activities


$

9,759

$

3,788


$

9,755

$

12,385

Deduct (add):








Net changes in non-cash working capital items


1,176

(3,917)


(12,462)

(6,864)


Share-based compensation expense


403

276


1,437

1,175


Maintenance capital expenditures


908

192


1,826

798

Distributable cash flow


$

7,272

$

7,237


$

18,954

$

17,276

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.




Three Months Ended
September 30,


Nine Months Ended
September 30,

(thousands)


2018

2017


2018

2017










Cash dividends


3,168

2,875


9,483

8,153


Distributable cash flow


7,272

7,237


18,954

17,276









Payout ratio


43.6%

39.7%


50.0%

47.2%

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 MD&A.  These risks and uncertainties include, among other things: (i) risks associated with acquisitions, including the possibility of undisclosed material liabilities; (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; (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 and the United Kingdom (the "UK"), which could have an adverse effect on expenses in respect of employees situated in those jurisdictions and while a portion of such expenses may be passed on to or  be recoverable from customers, there can be no assurances that that will occur; (ix) the availability of future financing and * foreign exchange rates. 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; and (iv) the level of capital expenditures. Although the forward-looking information contained in this MD&A 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 MD&A may be considered "financial outlook" for purposes of applicable securities laws, and such financial outlook may not be appropriate for purposes other than this MD&A.   Forward looking information included in this MD&A includes the expected annual healthcare revenues to be generated from the Corporation's contracts with new customers, the anticipated capital costs for the Toronto and Vancouver facilities, calculation of costs, including one-time costs impacting the quarterly financial results, and statements with respect to future expectations on margins and volume growth. 

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, the Corporation disclaims any intention or obligation to update or revise any forward-looking statements to reflect subsequent events or circumstances.

SOURCE K-Bro Linen Inc.

Linda McCurdy, Chief Executive Officer, K-Bro Linen Inc. (TSX: KBL), Phone: 80.453.5218, Email: nquiries@k-brolinen.com, Web: www.k-brolinen.com