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K-Bro Reports 2019 Q3 Results with Record Revenue and EBITDA

(KBL.TO)

EDMONTON , Nov. 7, 2019 /CNW/ - K-Bro Linen Inc. ("K-Bro" or the "Corporation") today announces its 2019 Q3 financial and operating results.

2019 Q3 Financial and Operating Highlights

  • Revenue in the third quarter of 2019 increased by $3.8 million to $67.8 million compared to $64.0 million in the same comparative period of 2018.
  • EBITDA in the third quarter of 2019 increased by $6.3 million to $14.6 million compared to $8.3 million in the same comparative period of 2018, and margin increased by 8.5% to 21.5%.
  • EBITDA without the adoption of IFRS 16 increased in the third quarter to record levels whereby the Corporation saw an increase to $12.3 million from $8.3 million in the third quarter of last year.
  • EBITDA margin for the third quarter increased to 21.5% from 13.0% for the same period in 2018.
  • EBITDA margin without the adoption of IFRS 16 increased in the third quarter to 18.1% from 13.0% in the third quarter of last year.
  • Net earnings in the third quarter of 2019 increased by $2.8 million to $4.7 million compared to $1.9 million in the same comparative period of 2018, and as a percentage of revenue increased by 4.0% to 6.9%.
  • K-Bro declared dividends of $0.300 per common share and distributable cash was $0.828 per common share on a fully diluted basis.


"The third quarter of 2019 continued with strong operating results," said Linda McCurdy , President and Chief Executive Officer at K-Bro. "whereby in both Canada and the UK we saw growth in revenue and EBITDA.  We have made significant progress in our Canadian operations during the quarter seeing net growth in EBITDA before the adoption of IFRS 16 of 74.5% compared to Q3 2018."

Ms. McCurdy continued, "We continue to be highly focused on achieving greater efficiencies in our Canadian 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 of the capital costs related to this facility.  The new facility has enabled K‑Bro to expand current capacity, to accommodate 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.

Alberta Contract Award

On March 1, 2019 , K-Bro was awarded a one year extension of its existing contract with Alberta Health Services to provide laundry and linen services to Calgary .

Revolving Credit Facility

During the first quarter of 2019, 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 Leases basis.

Acquisition

On July 19, 2019 , the Corporation signed a share purchase agreement to acquire all the assets of a private laundry and linen services company incorporated in Scotland and operating in Aberdeen . The acquisition closed in September 2019 for a total consideration of £775k Sterling plus a working capital adjustment.

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 Q3 2019 financial results compared with what would have occurred had we not adopted the new accounting policy.

EBITDA without adoption of IFRS 16 Leases






Segment
EBITDA

Adjustments
on adoption
of IFRS 16

EBITDA
without
adoption of
IFRS 16


For the three months ended September 30,

2019

2019

2019

2018

Canadian Division

$

10,423

$

(1,498)

$

8,925

$

5,114

UK Division

4,194

(833)

3,361

3,196


$

14,617

$

(2,331)

$

12,286

$

8,310







Segment
EBITDA

Adjustments
on adoption
of IFRS 16

EBITDA
without
adoption of
IFRS 16


For the nine months ended September 30,

2019

2019

2019

2018

Canadian Division

$

27,106

$

(4,337)

$

22,769

$

16,532

UK Division

9,365

(2,557)

6,808

6,430


$

36,471

$

(6,894)

$

29,577

$

22,962

 

Net earnings without adoption of IFRS 16 Leases






Segment
Net
earnings
(loss)

Adjustments
on adoption
of IFRS 16

Net
earnings
(loss)
without
adoption of
IFRS 16


For the three months ended September 30,

2019

2019

2019

2018

Canadian Division

$

2,893

$

26

$

2,919

$

200

UK Division

1,776

41

1,817

1,686


$

4,669

$

67

$

4,736

$

1,886







Segment
Net
earnings
(loss)

Adjustments
on adoption
of IFRS 16

Net
earnings
(loss)
without
adoption of
IFRS 16


For the nine months ended September 30,

2019

2019

2019

2018

Canadian Division

$

6,027

$

135

$

6,162

$

2,669

UK Division

2,684

85

2,769

2,448


$

8,711

$

220

$

8,931

$

5,117

 


For the three months ended September 30,

(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

$

49,491

$

18,351

$

67,842

$

46,872

$

17,100

$

63,972

3,870

6.0%

Expenses included in EBITDA

39,068

14,157

53,225

41,758

13,904

55,662

(2,437)

-4.4%

EBITDA

10,423

4,194

14,617

5,114

3,196

8,310

6,307

75.9%

EBITDA as a % of revenue

21.1%

22.9%

21.5%

10.9%

18.6%

13.0%

8.5%

65.4%



















EBITDA without adoption of IFRS 16

8,925

3,361

12,286

5,114

3,196

8,310

3,976

47.8%

EBITDA without adoption of IFRS 16 as % of revenue

18.0%

18.3%

18.1%

10.9%

18.6%

13.0%

5.1%

39.2%

Net earnings

2,893

1,776

4,669

200

1,686

1,886

2,783

147.6%










Basic earnings per share

$

0.275

$

0.169

$

0.444

$

0.019

$

0.161

$

0.180

$

0.264

146.7%

Diluted earnings per share

$

0.273

$

0.168

$

0.441

$

0.019

$

0.160

$

0.179

$

0.262

146.4%

Dividends declared per diluted share



$

0.30



$

0.30

$

-

0.0%










Net earnings without adoption of IFRS 16

2,919

1,817

4,736

200

1,686

1,886

2,850

151.1%

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

$

0.278

$

0.173

$

0.451

$

0.019

$

0.161

$

0.180

$

0.271

150.6%

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

$

0.276

$

0.172

$

0.447

$

0.019

$

0.160

$

0.179

$

0.268

149.7%










Total assets



353,021



316,968

36,053

11.4%

Long-term debt, end of period



66,070



67,045

(975)

-1.5%










Cash provided by  operating activities



19,816



9,759

10,057

103.1%

Net change in non-cash working capital items



7,463



1,176

6,287

534.6%

Share-based compensation expense(4)



427



403

24

6.0%

Maintenance capital expenditures



1,352



908

444

48.9%

Principal elements of lease payments(4)



1,806



-

1,806

100.0%

Distributable cash flow



8,768



7,272

1,496

20.6%

Dividends declared



3,181



3,168

13

0.4%

Payout ratio



36.3%



43.6%

-7.3%

-16.7%




















For the nine months ended September 30,

(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

$

140,623

$

48,895

$

189,518

$

134,822

$

45,272

$

180,094

9,424

5.2%

Expenses included in EBITDA

113,517

39,530

153,047

118,290

38,842

157,132

(4,085)

-2.6%

EBITDA

27,106

9,365

36,471

16,532

6,430

22,962

13,509

58.8%

EBITDA as a % of revenue

19.3%

19.2%

19.2%

12.3%

14.2%

12.8%

6.4%

50.0%



















EBITDA without adoption of IFRS 16

22,769

6,808

29,577

16,532

6,430

22,962

6,615

28.8%

EBITDA without adoption of IFRS 16 as % of revenue

16.2%

13.9%

15.6%

12.3%

14.2%

12.8%

2.8%

21.9%

Net earnings

6,027

2,684

8,711

2,669

2,448

5,117

3,594

70.2%










Basic earnings per share

$

0.574

$

0.256

$

0.829

$

0.255

$

0.234

$

0.489

$

0.340

69.5%

Diluted earnings per share

$

0.571

$

0.254

$

0.825

$

0.254

$

0.233

$

0.487

$

0.338

69.4%

Dividends declared per diluted share



$

0.90



$

0.90

$

-

0.0%










Net earnings without adoption of IFRS 16

6,162

2,769

8,931

2,669

2,448

5,117

3,814

74.5%

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

$

0.587

$

0.264

$

0.850

$

0.255

$

0.234

$

0.489

$

0.361

73.8%

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

$

0.583

$

0.262

$

0.845

$

0.254

$

0.233

$

0.487

$

0.358

73.5%










Total assets



353,021



316,968

36,053

11.4%

Long-term debt, end of period



66,070



67,045

(975)

-1.5%










Cash provided by  operating activities



32,361



9,755

22,606

231.7%

Net change in non-cash working capital items



332



(12,462)

12,794

102.7%

Share-based compensation expense(4)



1,406



1,437

(31)

-2.2%

Maintenance capital expenditures



2,869



1,826

1,043

57.1%

Principal elements of lease payments(4)



5,190



-

5,190

100.0%

Distributable cash flow



22,564



18,954

3,610

19.0%

Dividends declared



9,526



9,483

43

0.5%

Payout ratio



42.2%



50.0%

-7.8%

-15.6%

 

(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.

(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 November 1 to November 30 , to be paid on December 13, 2019 to shareholders of record on November 30, 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 six sites, in Scotland and the North East of England with facilities in Cupar , 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.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 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:

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)

2019


2018


2019


2018

Net earnings

$

4,669


$

1,886


$

8,711


$

5,117

Add:









Income tax expense

1,379


498


2,217


1,773


Finance expense

1,510


857


4,589


2,449


Depreciation of property, plant and equipment

6,314


4,371


18,652


11,387


Amortization of intangible assets

745


698


2,302


2,236

EBITDA

$

14,617


$

8,310


$

36,471


$

22,962

 

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
September 30,


Nine Months Ended
September 30,

(thousands)

2019

2018


2019

2018

Cash provided by operating activities

$

19,816

$

9,759


$

32,361

$

9,755

Deduct (add):







Net changes in non-cash working capital items

7,463

1,176


332

(12,462)


Share-based compensation expense

427

403


1,406

1,437


Maintenance capital expenditures

1,352

908


2,869

1,826


Principal elements of lease payments(2)

1,806

-


5,190

-

Distributable cash flow(2)

$

8,768

$

7,272


$

22,564

$

18,954

 

(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
September 30,


Nine Months Ended
September 30,

(thousands)


2019

2018


2019

2018


Cash dividends


3,181

3,168


9,526

9,483


Distributable cash flow


8,768

7,272


22,564

18,954

Payout ratio


36.3%

43.6%


42.2%

50.0%

 

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, anticipated future capital spending, 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.


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