K-Bro Reports 2019 Q1 Results with Growth in Revenue and EBITDA

Company Release - 5/9/2019 5:15 PM ET

(TSX: KBL)

EDMONTON, May 9, 2019 /CNW/ - K-Bro Linen Inc. ("K-Bro" or the "Corporation") today announces its 2019 Q1 financial and operating results.

2019 Q1 Financial and Operating Highlights

  • Revenue for the three months ended March 31, 2019 was $57.8 million, an increase of 4.3% over the comparable period in 2018
  • EBITDA increased in the first quarter to $9.1 million, compared to $6.2 million for the first quarter last year, an increase of 47%
  • EBITDA without the adoption of IFRS 16 increased in the first quarter to $6.8 million from $6.2 million in the first quarter of last year
  • EBITDA margin for the first quarter increased to 15.8% from 11.2% for the same period in 2018
  • EBITDA margin without the adoption of IFRS 16 increased in the first quarter to 11.8% from 11.2% in the first quarter of last year
  • Net earnings for the first quarter was $0.5 million compared to $0.6 million in the first quarter last year
  • K-Bro declared dividends of $0.300 per common share and distributable cash was $0.53 per common share on a fully diluted basis

"We began fiscal 2019 with a strong quarter, demonstrating growth in both revenue and EBITDA," said Linda McCurdy, President and Chief Executive Officer at K-Bro. "The quarter benefited from the Linitek acquisition which closed in October 2018, along with organic growth in all markets. In what is generally the slowest time of year for hospitality-based volumes, we were able to increase hospitality revenue by 8.7% over the first quarter last year with gains in both our UK and Canadian operations."

Ms. McCurdy continued, "We have continued focus on increasing capacity and achieving greater efficiencies through our modernized and highly efficient network of facilities, and with our major capital projects behind us, continue to make progress towards improving our margins."

Highlights and Significant Events for Fiscal 2019

Vancouver Facility Development

K-Bro has now completed the development of a new state-of-the-art facility located in Burnaby 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 second quarter 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") 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.

Revolving Credit Facility

K-Bro completed an amendment to its existing revolving credit facility, which extended the agreement to July 31, 2022 and made changes to the definitions within the agreement to clarify that all financial covenants would be tested on a pre-IFRS 16 basis effective March 31, 2019. 

Financial Impact of the adoption of new accounting standards

As discussed in Note 3 – Adoption of new accounting standards, of the unaudited interim condensed Consolidated Financial Statements of K-Bro Linen Inc., the Corporation has adopted IFRS 16 retrospectively from January 1, 2019, but has not restated comparatives for the 2018 reporting period, as permitted under the specific transitional provisions in the standard.

The tables below provide a reconciliation of actual Q1 2019 financial results compared with what would have occurred had we not adopted the new accounting policy.

EBITDA without adoption of IFRS 16

For the three months ended March 31,

Segment
EBITDA

2019

Adjustments on
adoption
of IFRS 16

2019

EBITDA
without
adoption of
IFRS 16

2019

2018

Canadian Division

$

7.4

$

(1.4)

$

6.0

$

5.5

UK Division

1.7

(0.9)

0.8

0.7


$

9.1

$

(2.3)

$

6.8

$

6.2











Net earnings without adoption of IFRS 16






Segment
Net
earnings
(loss)

Adjustments
on adoption
of IFRS 16

Net
earnings
(loss)
without
adoption of
IFRS 16


For the three months ended March 31,

2019

2019

2019

2018

Canadian Division

$

0.7

$

0.1

$

0.8

$

1.0

UK Division

(0.2)

0.0

(0.2)

(0.4)


$

0.5

$

0.1

$

0.6

$

0.6









For the three months ended March 31,

(thousands, except per share amounts
and percentages)

Canadian
Division
2019

UK
Division
2019

2019 (3)

Canadian
Division

2018

UK
Division
2018

2018

$ Change

% Change

Revenue

$

44,533

$

13,250

$

57,783

$

43,292

$

12,092

$

55,384

2,399

4.3%

Operating expenses

37,149

11,519

48,668

37,774

11,410

49,184

(516)

-1.0%

EBITDA

7,384

1,731

9,115

5,518

682

6,200

2,915

47.0%

EBITDA as a % of revenue

16.6%

13.1%

15.8%

12.7%

5.6%

11.2%


4.6%










EBITDA without adoption of IFRS 16

5,960

843

6,803

5,518

682

6,200

603

9.7%

EBITDA without adoption of IFRS 16 as % of revenue

13.4%

6.4%

11.8%

12.7%

5.6%

11.2%

-

0.6%

Net earnings (loss)

731

(236)

495

1,048

(401)

647

(152)

-23.5%










Basic earnings (loss) per share

$

0.070

$

(0.022)

$

0.047

$

0.100

$

(0.038)

$

0.062

$

(0.010)

-16.7%

Diluted earnings (loss) per share

$

0.069

$

(0.022)

$

0.047

$

0.100

$

(0.038)

$

0.062

$

(0.010)

-16.7%

Dividends declared per diluted share



$

0.30



$

0.30

$

-

0.0%










Net earnings (loss) without adoption of IFRS 16

807

(227)

580

1,048

(401)

647

(67)

-10.4%

Basic earnings (loss) per share without adoption of IFRS 16

$

0.077

$

(0.022)

$

0.055

$

0.100

$

(0.038)

$

0.062

$

-

0.0%

Diluted earnings (loss) per share without adoption of IFRS 16

$

0.077

$

(0.022)

$

0.055

$

0.100

$

(0.038)

$

0.062

$

(0.010)

0.0%










Total assets



360,563



312,193

48,370

15.5%

Long-term debt, end of period



67,444



56,356

11,088

19.7%

Cash provided by  operating activities



9,670



4,625

5,045

109.1%










Net change in non-cash working capital items



1,484



(1,471)

2,955

-200.9%

Share-based compensation expense



540



409

131

32.0%

Maintenance capital expenditures



374



488

(114)

-23.4%

Principal elements of lease payments (4)



1,648



-

1,648

100.0%










Distributable cash flow (4)



5,624



5,199

425

8.2%

Dividends declared



3,168



3,153

15

0.5%

Payout ratio



56.3%



60.6%


-4.3%

 

(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)

Effective January 1, 2019, the Corporation has adopted IFRS 16 Leases ("IFRS 16") using the modified retrospective method but has not restated comparatives for the prior periods, as permitted under the specific transitional provisions of the standards. To enable the comparability of previous periods, the Corporation has provided the 2019 figures for both EBITDA and net earnings without adoption of IFRS 16 as separate line items. Refer to the Accounting Changes section of this MD&A for more information.

(4)

Effective January 1, 2019, distributable cash flow includes the addition of principal elements of lease payments. This accounts for the change in accounting policies and the adoption of IFRS 16, where now the principal elements of lease payments flow through financing outflows opposed to operating cash flows.

 

Dividend

The Board of Directors has declared a monthly dividend of $0.10 per common share for the period from May 1 to May 31, 2019, to be paid on June 14, 2019 to shareholders of record on May 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 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
March 31,

(thousands)

2019


2018






Net earnings

$

495


$

647

Add:





Income tax expense

191


394


Finance expense

1,513


876


Depreciation of property, plant and equipment

6,135


3,451


Amortization of intangible assets

781


832






EBITDA

$

9,115


$

6,200

 

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, maintenance capital expenditures and principal elements of lease payments.



Three Months Ended
March 31,

(thousands)

2019 (1)

2018

Cash provided by  operating activities

$

9,670

$

4,625

Deduct (add):




Net changes in non-cash working capital items

1,484

(1,471)


Share-based compensation expense

540

409


Maintenance capital expenditures

374

488


Principal elements of lease payments (2)

1,648

-

Distributable cash flow (2)

$

5,624

$

5,199

(1)

Effective January 1, 2019, the Corporation has adopted IFRS 16 Leases ("IFRS 16") using the modified retrospective method but has not restated comparatives for the prior periods, as permitted under the specific transitional provisions of the standards. Refer to the Accounting Changes section of this MD&A for more information.

(2)

Effective January 1, 2019, distributable cash flow includes the addition of principal elements of lease payments. This accounts for the change in accounting policies and the adoption of IFRS 16, where now the principal elements of lease payments flow through financing outflows opposed to operating cash flows.

 

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
March 31,

(thousands)


2019

2018


Cash dividends


3,168

3,153


Distributable cash flow


5,624

5,199

Payout ratio


56.3%

60.6%

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: 780.453.5218, Email: [email protected], Web: www.k-brolinen.com