K-Bro Reports Record Annual Revenue for 2018 and Return to Normalized Capital Program for 2019

Company Release - 3/13/2019 9:21 PM ET

(TSX: KBL)

EDMONTON, March 13, 2019 /CNW/ - K-Bro Linen Inc. ("K-Bro" or the "Corporation") today announces its 2018 Q4 and annual financial and operating results.

2018 Financial and Operating Highlights

  • Revenue for the three and twelve months ended December 31, 2018, was $59.4 million and $239.5 million, respectively, increases of 25.1% and 40.4% over the comparable 2017 periods
  • EBITDA increased in the fourth quarter to $6.6 million, compared to $4.5 million for the fourth quarter last year. On an annual basis, 2018 EBITDA increased to $29.6 million compared to $24.0 million for 2017
  • EBITDA margin for the fourth quarter increased to 11.1% from 9.4% for the same period in 2017. Annual EBITDA margin for 2018 decreased to 12.3% from 14.1% for the same period in 2017
  • Net earnings for the fourth quarter was $1.1 million compared to a net loss of $1.3 million in the fourth quarter last year. Net earnings for 2018 increased to $6.2 million from $5.7 million in 2017
  • K-Bro declared dividends of $1.200 per common share and distributable cash was $2.359 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 1, 2018

"K-Bro's annual revenue increased 40.4% year over year, benefiting from a full year of contributions from Fishers, the acquisition of Linitek later in the year, organic growth and new customers in the Canadian market," said Linda McCurdy, President and Chief Executive Officer at K-Bro. "Pressure on EBITDA margin continued throughout the year with capital projects in Vancouver and Toronto. While the transition of volumes to our new and refurbished facilities in Vancouver took longer than initially expected and with higher costs, it marks the end of our major investment cycle. As a result, for Canada, we expect a gradual but significant improvement in EBITDA margin and target a return to historical 2015 levels by the end of 2019."

"In addition to our newest facilities in Vancouver, recent upgrades in other key markets have created a network of highly efficient facilities with capacity to spare," said Ms. McCurdy. "With a significant decrease in capital requirements going forward, our attention now shifts from capital projects to optimizing operations and filling capacity. We are also focusing on a renewed labour strategy to mitigate ongoing tightness in certain labour markets and increases in minimum wage."

Highlights and Significant Events for Fiscal 2018

Vancouver Facility Development

K Bro has now completed the development of a new state of the art facility located in Burnaby.  As at December 31, 2018, K Bro has completed the transition to the new facility and has incurred all the capital cost related to this facility.  The new facility has enabled 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 first two quarters of 2019.

Business Acquisition

On October 3, 2018, the Corporation announced that it 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 is accounted for using the acquisition method, whereby the purchase consideration is allocated to the net assets acquired.

Alberta Contract Award

On March 1, 2019, K-Bro was awarded a one year extension to provide laundry and linen services to Calgary Alberta Health Services. The contract extends the existing relationship between K-Bro and Alberta Health Services Calgary.

National Contract Award

Effective January 1, 2019, K-Bro replaced its existing agreement with Avendra Canada, Inc. ("Avendra") and replaced it with a new five-year agreement pursuant to which K-Bro became an Avendra-approved provider of  laundry and linen services across Canada, with exclusivity in K-Bro's markets commencing at various stages throughout the term. Avendra is North America's leading hospitality procurement and supply chain service provider.  While K-Bro has existing contracts with and services the customers initially covered by the agreement, the new arrangement with Avendra will strengthen its relationships with these customers and secure K-Bro's position with them as well as open up new opportunities in the hospitality segment.  These existing customers currently represent approximately 24% of K-Bro's Canadian hospitality revenue for the year ended December 31, 2018.


For the three months ended December 31,

(thousands, except per share amounts
and percentages)

Canadian
Division
2018

UK
Division
2018

2018

Canadian
Division
2017

UK
Division
2017

2017 (2)

$ Change

% Change

Revenue

$

45,067

$

14,373

$

59,440

$

42,781

$

4,728

$

47,509

11,931

25.1%

Operating expenses

40,229

12,592

52,821

35,820

7,236

43,056

9,765

22.7%

EBITDA

4,838

1,781

6,619

6,961

(2,508)

4,453

2,166

48.6%

EBITDA as a % of revenue

10.7%

12.4%

11.1%

16.3%

-53.0%

9.4%


1.7%










Adjusted EBITDA(1)

4,838

1,781

6,619

6,961

323

7,284

(665)

-9.1%

Adjusted EBITDA(1)as a % of revenue

10.7%

12.4%

11.1%

16.3%

6.8%

15.3%

-

-4.2%

Net earnings

32

1,020

1,052

1,594

(2,881)

(1,287)

2,339

-181.7%










Basic earnings per Share

$

0.003

$

0.097

$

0.100

$

0.164

$

(0.296)

$

(0.132)

$

0.230

-176.9%

Diluted earnings per Share

$

0.003

$

0.097

$

0.100

$

0.163

$

(0.295)

$

(0.132)

$

0.230

-176.9%

Dividends declared per diluted share



$

0.30



$

0.30

$

-

0.0%







$

-



Adjusted net earnings(1)

32

1,020

1,052

1,594

(50)

1,544

(492)

-31.9%

Basic adjusted net earnings per share(1)

$

0.003

$

0.097

$

0.100

$

0.164

$

(0.005)

$

0.159

$

(0.060)

-37.8%

Diluted adjusted net earnings per share(1)

$

0.003

$

0.097

$

0.100

$

0.163

$

(0.005)

$

0.158

$

(0.060)

-37.8%

Total assets



322,229



295,213

27,016

9.2%

Long-term debt, end of period



70,203



42,780

27,423

64.1%

Cash provided by  operating activities



7,799



6,395

1,404

22.0%

Net change in non-cash working capital items



1,082



2,942

(1,860)

-63.2%

Share-based compensation expense



380



333

47

14.1%

Maintenance capital expenditures



526



349

177

50.7%

Distributable cash flow



5,811



2,771

3,040

109.7%

Dividends declared



3,168



2,968

200

6.7%

Payout ratio



54.5%



107.1%


-52.6%


(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

 


Years Ended December 31,

(thousands, except per share amounts
and percentages)

Canadian
Division
2018

UK
Division
2018(3)

2018

Canadian
Division
2017

UK
Division
2017

2017 (2)

$ Change

% Change










Revenue

$

179,889

$

59,645

$

239,534

$

165,831

$

4,728

$

170,559

68,975

40.4%

Operating expenses

158,519

51,434

209,953

139,338

7,236

146,574

63,379

43.2%

EBITDA

21,370

8,211

29,581

26,493

(2,508)

23,985

5,596

23.3%

EBITDA as a % of revenue

11.9%

13.8%

12.3%

16.0%

-53.0%

14.1%

-

-1.8%










Adjusted EBITDA(1)

21,370

8,211

29,581

26,493

323

26,816

2,765

10.3%

Adjusted EBITDA(1)as a % of revenue

11.9%

13.8%

12.3%

16.0%

6.8%

15.7%

-

-3.4%

Net earnings

2,701

3,468

6,169

8,599

(2,881)

5,718

451

7.9%










Basic earnings per Share

$

0.258

$

0.331

$

0.589

$

0.947

$

(0.317)

$

0.630

$

(0.040)

-6.3%

Diluted earnings per Share

$

0.257

$

0.330

$

0.588

$

0.943

$

(0.316)

$

0.627

$

(0.040)

-6.3%

Dividends declared per diluted share



$

1.20



$

1.20

$

-

0.0%







$

-



Adjusted net earnings(1)

2,701

3,468

6,169

8,599

(50)

8,549

(2,380)

-27.8%

Basic adjusted net earnings per share(1)

$

0.258

$

0.331

$

0.589

$

0.947

$

(0.006)

$

0.941

$

(0.352)

-37.4%

Diluted adjusted net earnings per share(1)

$

0.257

$

0.330

$

0.588

$

0.943

$

(0.005)

$

0.938

$

(0.350)

-37.4%

Total assets



322,229



295,213

27,016

9.2%

Long-term debt, end of period



70,203



42,780

27,423

64.1%

Cash provided by  operating activities



17,554



18,780

(1,226)

-6.5%

Net change in non-cash working capital items



(11,380)



(3,922)

(7,458)

190.2%

Share-based compensation expense



1,817



1,508

309

20.5%

Maintenance capital expenditures



2,352



1,147

1,205

105.1%

Distributable cash flow



24,765



20,047

4,718

23.5%

Dividends declared



12,651



11,121

1,530

13.8%

Payout ratio



51.1%



55.5%


-4.4%


(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

(3)

For the UK Division, Q1 2018 includes $170k (98k GBP) in transaction costs related to the acquisition of Fishers

 

Dividend

The Board of Directors has declared a monthly dividend of $0.10 per common share for the period from March 1 to March 31, 2019, to be paid on April 15, 2019 to shareholders of record on March 31, 2019. 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 CPA Canada 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 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
December 31,


Years Ended
December 31,









(thousands)

2018


2017 (1)


2018


2017 (1)

Net earnings (loss)

$

1,052


$

(1,287)


$

6,169


$

5,718

Add:









Income tax expense (recovery)

(551)


849


1,222


3,761


Finance expense

866


786


3,315


1,133


Depreciation of property, plant and equipment

4,484


3,543


15,871


11,606


Amortization of intangible assets

768


562


3,004


1,767

EBITDA

$

6,619


$

4,453


$

29,581


$

23,985

 

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.

The calculation of Adjusted EBITDA normalizes the impact of the transaction costs related to the acquisition of Fishers in 2017, and the related impact on EBITDA (as defined above).  During the fourth quarter of 2017, K‑Bro incurred $2.8 million in transaction costs directly related to the acquisition of Fishers, which is not expected to occur in the normal course of operations.  The normalization of this expense from the calculation of EBITDA is considered by Management to be a more accurate representation of continuing operations.  One‑time costs related to the Vancouver plant transition have not been adjusted for in the table below.


Three Months Ended December 31,


Canadian
Division

UK
Division


Canadian
Division

UK
Division


(thousands)

2018

2018

2018

2017

2017

2017 (1)

EBITDA

$

4,838

$

1,781

$

6,619

$

6,691

$

(2,508)

$

4,453

Add:








Transaction costs incurred in the acquisition of Fishers

-

-

-

-

2,831

2,831

Adjusted EBITDA

$

4,838

$

1,781

$

6,619

$

6,691

$

323

$

7,284

 

 


Years Ended December 31,


Canadian
Division

UK
Division


Canadian
Division

UK
Division


(thousands)

2018

2018

2018

2017

2017

2017 (1)

EBITDA

$

21,370

$

8,211

$

29,581

$

26,493

$

(2,508)

$

23,985

Add:








Transaction costs incurred in the acquisition of Fishers

-

-

-

-

2,831

2,831

Adjusted EBITDA

$

21,370

$

8,211

$

29,581

$

26,493

$

323

$

26,816



(1)

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

 

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.



Three Months Ended December 31,


Canadian
Division

UK
Division


Canadian
Division

UK
Division


(thousands)

2018

2018

2018

2017

2017

2017 (1)

Net earnings (loss)

$

32

$

1,020

$

1,052

$

1,594

$

(2,881)

$

(1,287)

Add (net of corporate income taxes):








Transaction costs incurred in the acquisition of Fishers

-

-

-

-

2,831

2,831

Adjusted net earnings (loss)

$

32

$

1,020

$

1,052

$

1,594

$

(50)

$

1,544








Weighted average number of shares outstanding:







Basic

10,479,415

10,479,415

10,479,415

9,717,890

9,717,890

9,717,890

Diluted

10,525,450

10,525,450

10,525,450

9,755,183

9,755,183

9,755,183








Adjusted net earnings (loss) per share:







Basic

$0.003

$0.097

$0.100

$0.164

($0.005)

$0.159

Diluted

$0.003

$0.097

$0.100

$0.163

($0.005)

$0.158

 

 


Years Ended December 31,


Canadian
Division

UK
Division


Canadian
Division

UK
Division


(thousands)

2018

2018

2018

2017

2017

2017 (1)

Net earnings (loss)

$

2,701

$

3,468

$

6,169

$

8,599

$

(2,881)

$

5,718

Add (net of corporate income taxes):








Transaction costs incurred in the acquisition of Fishers

-

-

-

-

2,831

2,831

Adjusted net earnings (loss)

$

2,701

$

3,468

$

6,169

$

8,599

$

(50)

$

8,549









Weighted average number of shares outstanding:







Basic

10,466,458

10,466,458

10,466,458

9,083,693

9,083,693

9,083,693

Diluted

10,500,014

10,500,014

10,500,014

9,114,874

9,114,874

9,114,874








Adjusted net earnings (loss) per share:







Basic

$0.258

$0.331

$0.589

$0.947

($0.006)

$0.941

Diluted

$0.257

$0.330

$0.588

$0.943

($0.005)

$0.938



(1)

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

 

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
December 31,


Years Ended
December 31,

(thousands)

2018

2017


2018

2017

Cash provided by  operating activities

$

7,799

$

6,395


$

17,554

$

18,780

Deduct (add):







Net changes in non-cash working capital items

1,082

2,942


(11,380)

(3,922)


Share-based compensation expense

380

333


1,817

1,508


Maintenance capital expenditures

526

349


2,352

1,147

Distributable cash flow

$

5,811

$

2,771


$

24,765

$

20,047

 

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
December 31,


Years Ended
December 31,

(thousands)

2018

2017


2018

2017


Cash dividends

3,168

2,968


12,651

11,121


Distributable cash flow

5,811

2,771


24,765

20,047

Payout ratio

54.5%

107.1%


51.1%

55.5%

 

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 press release.   Forward looking information 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: 780.453.5218, Email: inquiries@k-brolinen.com, Web: www.k-brolinen.com