K-Bro Announces 2018 Q2 Results Consistent with Management Expectations

(TSX: KBL)

EDMONTON, Aug. 13, 2018 /CNW/ - K-Bro Linen Inc. ("K-Bro" or the "Corporation") today announces its 2018 Q2 financial and operating results.

2018 Q2 Financial and Operating Highlights

• Revenue for the three months ended June 30, 2018 was $60.7 million, an increase of 50% compared to the comparable period last year with Canadian revenues up 10.3%
• EBITDA increased in the second quarter to $8.5 million, compared to $6.7 million for the second quarter last year
• EBITDA margin decreased to 13.9% from 16.4% for the comparable period in 2017 largely a result of $2.0 million in one-time costs related to the Vancouver transition
• Net earnings for the second quarter was $2.6 million compared to net earnings of $2.3 million in the second quarter last year
• K-Bro declared dividends of $0.300 per common share and distributable cash was $0.617 per common share on a fully diluted basis
• On May 9, 2018, K-Bro signed an asset purchase agreement to acquire all the assets of a private laundry and linen services company operating in Calgary, AB. The acquisition is expected to close on October 1, 2018 for total consideration of $4.7 million

"Contributions from Fishers led to a significant increase in revenue for the second quarter," said Linda McCurdy, President and Chief Executive Officer of K-Bro. "For the UK Division, the second quarter reflected stronger hospitality volumes, compared to the first quarter, as the tourist season in Scotland and northern England got underway. While Fishers was the main driver, incremental volumes in Canada also contributed to gains in revenue. EBITDA for the quarter increased by 27.0% compared to the second quarter last year, and year-to-date increased by 28.3% as we again benefited from the increase in hospitality volumes, and also from efficiencies gained as a result of improvements made at our Toronto facility."

"Also during the quarter, we began the consolidation of healthcare volumes from our two existing facilities in Vancouver into our new state-of-the-art facility in Burnaby, BC," continued Ms. McCurdy. "At all of our new facilities we have focused on reducing natural gas and water usage, along with increasing automation through new equipment and systems design, and as a result, expect reduced operating costs through gained efficiencies. Through new and upgraded equipment and facilities, and through recent acquisitions, we have invested significant capital over the past two years and are well positioned for the long-term to deliver value to our customers and shareholders. While we expect to finish the fiscal year with compressed EBITDA margins as a result of these investments and other one-time costs, we anticipate a return to a more normal capital spending profile and EBITDA margins more in line with 2015 levels in 2019."

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 June 30, 2018, K-Bro has incurred $49.1 million of the total expected capital costs. The new Vancouver plant is located in Burnaby, and K-Bro began transitioning to the new facility during the second 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 is upgrading and replacing equipment at one of its existing Vancouver-area facilities, which will be used to process our hospitality volume. K-Bro will not be renewing the lease for the remaining Vancouver-area facility and related assets will be transferred to the other K-Bro facilities. K-Bro believes it will achieve significant operating efficiencies at its new plant.  It is anticipated that transition costs associated with the new Vancouver plant will continue to negatively impact EBITDA margins over the third and fourth quarters of 2018 while the plants becomes operational.

Toronto Facility Development

Management estimates that the cost to commission the new leased facility in Mississauga, ON, is $37 million for new efficiency enhancing equipment, and leaseholds. As at June 30, 2018, K-Bro has incurred $37 million of the total expected capital cost. K-Bro's strategy includes significant growth in its healthcare and hospitality volumes, and the additional capacity and the long-term lease enable K-Bro to grow into the additional capacity as opportunities emerge.

Alberta Contract Awards

On March 1, 2018, 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.

Business Acquisition

On May 9, 2018, the Corporation signed an asset purchase agreement to acquire all the assets of a private laundry and linen services company incorporated in Canada and operating in Calgary, Alberta. The acquisition is expected to close on October 1, 2018 for total consideration of $4.7 million. 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 and percentages)	Canadian Division 2018		UK Division ^(2) 2018		For the three months ended June 30,
					2018		2017 ^(2)		$ Change		% Change
Revenue	$	44,658	$	16,080	$	60,738	$	40,494	20,244		50.0%
Operating expenses	38,758		13,528		52,286		33,837		18,449		54.5%
EBITDA	5,900		2,552		8,452		6,657		1,795		27.0%
EBITDA as a % of revenue	13.2%		15.9%		13.9%		16.4%				-2.5%
Earnings before income taxes	2,147		1,318		3,465		3,350		115		3.4%
Income tax expense	726		155		881		1,013		(132)		-13.0%
Net earnings	1,421		1,163		2,584		2,337		247		10.6%
Basic earnings per Share	$	0.14	$	0.11	$	0.25	$	0.26	$	(0.01)	-3.8%
Diluted earnings per Share	$	0.14	$	0.11	$	0.25	$	0.26	$	(0.01)	-3.8%
Dividends declared per diluted share					$	0.30	$	0.30	-		0.0%
Total assets					317,051		195,957		121,094		61.8%
Long-term debt, end of period					70,505		-		70,505		100.0%
Cash provided by (used in) operating activities					(4,629)		2,297		(6,926)		-301.5%
Net change in non-cash working capital items					(12,167)		(4,161)		(8,006)		192.4%
Share-based compensation expense					625		494		131		26.5%
Maintenance capital expenditures					430		427		3		0.7%
Distributable cash flow					6,483		5,537		946		17.1%
Dividends declared					3,163		2,871		292		10.2%
Payout ratio					48.8%		51.8%				-3.0%
(thousands, except per share amounts and percentages)	Canadian Division 2018		UK Division ^(2) 2018		For the six months ended June 30,
					2018		2017 ^(2)		$ Change		% Change
Revenue	$	87,950	$	28,172	$	116,122	$	79,452	36,670		46.2%
Operating expenses	76,532		24,938		101,470		68,031		33,439		49.2%
EBITDA	11,418		3,234		14,652		11,421		3,231		28.3%
EBITDA as a % of revenue	13.0%		11.5%		12.6%		14.4%		-		-1.8%
Earnings before income taxes	3,736		770		4,506		5,120		(614)		-12.0%
Income tax expense	1,267		8		1,275		1,533		(258)		-16.8%
Net earnings	2,469		762		3,231		3,587		(356)		-9.9%
Basic earnings per Share	$	0.24	$	0.07	$	0.31	$	0.42	(0.11)		-26.2%
Diluted earnings per Share	$	0.24	$	0.07	$	0.31	$	0.42	(0.11)		-26.2%
Dividends declared per diluted share					$	0.60	$	0.60	-		0.0%
Total assets					317,051		195,957		121,094		61.8%
Long-term debt, end of period					70,505		-		70,505		100.0%
Cash provided by (used in) operating activities					(4)		8,597		(8,601)		-100.0%
Net change in non-cash working capital items					(13,638)		(2,947)		(10,691)		362.8%
Share-based compensation expense					1,034		899		135		15.0%
Maintenance capital expenditures					918		606		312		51.5%
Distributable cash flow					11,682		10,039		1,643		16.4%
Dividends declared					6,315		5,278		1,037		19.6%
Payout ratio					54.1%		52.6%		-		1.5%

(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 August 1 to August 31, 2018, to be paid on September 14, 2018 to shareholders of record on August 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 June 30,						Six Months Ended June 30,
(thousands)		2018			2017			2018			2017
Net earnings		$	2,584		$	2,337		$	3,231		$	3,587
Add:
	Income tax expense	881			1,013			1,275			1,533
	Finance Expense	716			61			1,592			246
	Depreciation of property, plant and equipment	3,565			2,842			7,016			5,223
	Amortization of intangible assets	706			404			1,538			832
EBITDA		$	8,452		$	6,657		$	14,652		$	11,421

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 June 30,					Six Months Ended June 30,
(thousands)		2018		2017			2018		2017
Cash provided by (used in) operating activities		$	(4,629)	$	2,297		$	(4)	$	8,597
Deduct (add):
	Net changes in non-cash working capital items	(12,167)		(4,161)			(13,638)		(2,947)
	Share-based compensation expense	625		494			1,034		899
	Maintenance capital expenditures	430		427			918		606
Distributable cash flow		$	6,483	$	5,537		$	11,682	$	10,039

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 June 30,			Six Months Ended June 30,
(thousands)		2018	2017		2018	2017
	Cash dividends	3,163	2,871		6,315	5,278
	Distributable cash flow	6,483	5,537		11,682	10,039
Payout ratio		48.8%	51.8%		54.1%	52.6%

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