K-Bro Linen Q1 2024 Earnings Report

K-Bro Linen EPS Results

• Actual EPS: C$0.17
• Consensus EPS: C$0.29
• Beat/Miss: Missed by -C$0.12
• One Year Ago EPS: N/A

K-Bro Linen Revenue Results

• Actual Revenue: $80.23 million
• Expected Revenue: $77.77 million
• Beat/Miss: Beat by +$2.46 million
• YoY Revenue Growth: N/A

K-Bro Linen Announcement Details

• Quarter: Q1 2024
• Date: 5/6/2024
• Time: N/A
• Conference Call Date: Tuesday, May 7, 2024
• Conference Call Time: 8:00AM ET

K-Bro Linen (TSE:KBL) Inc is a healthcare and hospitality laundry and linen processor in Canada. It operates in major cities across Canada, and has two distribution centers, providing management services and laundry processing of hospitality, healthcare, and specialty linens. The company provides vital products and services that help people heal, travel, live, and play. It helps hospitals and extended care centers care for the young, old, and vulnerable in environmentally responsible ways. It operates through two divisions, which are the Canadian division and the United Kingdom division.

K-Bro Linen Q1 2024 Earnings Call Transcript

Key Takeaways

• Reported Q1 2024 revenue of $80 million (up 13% YoY) and EBITDA of $11.6 million (up 12.3% YoY), driven by organic growth and recent acquisitions.
• Segment performance saw hospitality revenue jump 21% while healthcare revenue grew 8%, with hospitality now ~41% of consolidated sales.
• Secured a new $175 million syndicated credit facility (plus a $75 million accordion), enhancing liquidity and firepower for future M&A and expansion.
• Closed the acquisition of UK laundry operator Shortridge, broadening Cabral’s UK footprint and diversifying its hospitality customer base.
• Net earnings declined 9.7% to $1.8 million, and margins were pressured by $1.5 million in one-time financing and transaction costs in Canada.

Presentation

[Operator]

Good morning, ladies and gentlemen, and welcome to K-Bro Linen, Inc. First Quarter 2024 Results Conference Call. At this time, all participants are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. If at any time during this call you require immediate assistance, please press star 0 for the operator. I would now like to turn the conference over to Kristie Plaquin. Please go ahead.

[Kristie Plaquin, CFO at K-Bro Linen Inc]

Thank you, Operator, and good morning, everyone. Thank you for joining us today, and welcome to our first quarter results conference call. On the line with me today is Linda McCurdy, President and Chief Executive Officer. Following our remarks today, we will open it up for questions. Before we begin, I'd like to remind everyone that statements made during our prepared remarks or in the question-and-answer portion of the conference call with respect to management's expectations or our predictions of the future are forward-looking statements. All statements made today which are not statements of historical fact are considered to be forward-looking statements. Certain material factors or assumptions were applied in drawing a conclusion or making a forecast or projection as reflected in the forward-looking information. Investors are also cautioned not to place undue reliance on these statements. Actual results could differ materially from those anticipated.

[Kristie Plaquin, CFO at K-Bro Linen Inc]

Risk factors that could affect the results are detailed in the corporation's public filings. I'll now turn the call over to our CEO, Linda McCurdy, who will provide her insights and remarks on the quarter. Linda?

[Linda McCurdy, President and CEO at K-Bro Linen Inc]

Thank you, Kristie. Good morning, everyone, and thank you for joining us today to review our 2024 1st Quarter Results. As Kristie mentioned, I'll focus on the main highlights of our 1st Quarter, and then Kristie will provide some details with regards to our financial performance and balance sheet. I'm pleased with our strong 1st Quarter Results and our momentum to start the year. In terms of the highlights, we reported Q1 2024 revenue of CAD 80 million and EBITDA of CAD 11.6 million for the quarter. Overall, consolidated revenue increased 13% compared to Q1 2023, with healthcare revenue having increased by 8% and hospitality revenue by 21%. Healthcare revenues represented approximately 59% of consolidated revenue, which is lower compared to approximately 62% in 2023 due to strong activity in the hospitality segment.

[Linda McCurdy, President and CEO at K-Bro Linen Inc]

During the quarter, we announced our new upsized CAD 175 million syndicated credit facility, including a further CAD 75 million accordion, providing further financial flexibility to pursue growth opportunities. Strategic acquisitions of complementary high-quality operators continue to be an important contributor to K-Bro's overall growth profile. On April 30th, 2024, we announced the acquisition of Shortridge. I'm delighted to welcome the Shortridge team to the K-Bro family, and I'm excited by the potential this acquisition presents in the U.K. Since the 1990s, Shortridge has operated as a family-run business specializing in providing high-quality laundry services to local independent hospitality businesses, including hotels, B&Bs, self-catering units, and restaurants. Shortridge further diversifies our customer base in the U.K. and helps position our combined U.K. business for more growth as we look to extend K-Bro's footprint further south into the U.K.

[Linda McCurdy, President and CEO at K-Bro Linen Inc]

We see a positive outlook for K-Bro and are excited about our organic growth prospects and potential future M&A. I'll now turn the call over to Kristie to discuss our detailed financial results for the quarter, after which I'll return to talk about our outlook. Kristie, over to you.

[Kristie Plaquin, CFO at K-Bro Linen Inc]

Thank you, Linda. The information we are discussing today is also highlighted in our 2024 first quarter earnings press release issued yesterday, and detailed supplemental financial information can be found on our Investor Relations website under the heading of Financial Documents. As a result of increased activity in the hospitality segment, price increases, and the acquisition of both Paranet and Buanderie Villeray, consolidated hospitality revenue for the three months ended March 31st, 2024, increased by 21.4% over the comparable 2023 period. The corporation saw an 8.4% increase in consolidated healthcare revenue for an overall increase in consolidated revenue of 13.3%. Consolidated EBITDA in the quarter increased to CAD 11.6 million from CAD 10.3 million in 2023, which is an increase of 12.3%. The consolidated EBITDA margin decreased to 14.5% in 2024 compared to 14.6% in 2023.

[Kristie Plaquin, CFO at K-Bro Linen Inc]

The decrease in margin is primarily related to CAD 1.5 million in one-time costs incurred to execute the syndicated credit facility agreement and transaction costs associated with the acquisition of Shortridge, which had a negative impact on the margin in the quarter of 1.8%. For the Canadian division, Q1 EBITDA decreased to 15.8% from 16.9% for the comparative quarter of 2023. For the UK division, Q1 EBITDA margin increased to 9.8% from 6.4% for the comparative quarter of 2023. For the Canadian division, the decrease in margin is again primarily related to the CAD 1.5 million in costs incurred to execute the syndicated credit facility agreement and certain transaction costs associated with the acquisition of Shortridge, which had a negative impact on the Canadian margin in the quarter of 2.4%.

[Kristie Plaquin, CFO at K-Bro Linen Inc]

For the UK division, the increase in EBITDA margin is primarily related to delivery and labor cost efficiencies and the impact of price increases that were put in place in 2023. Net earnings decreased by CAD 0.2 million, or 9.7%, from CAD 2 million in 2023 to CAD 1.8 million in 2024, and net earnings as a percentage of revenue decreased by 0.5%-2.3%. In 2024, the change in net earnings is primarily related to an increase in depreciation and amortization due to Paranet and Buanderie Villeray assets acquired. Wages and benefits in the 1st Quarter increased by CAD 3.9 million-CAD 31.6 million compared to CAD 27.7 million in the comparative period of 2023, and as a percentage of revenue increased by 0.2 percentage points to 39.3%. The increase as a percentage of revenue is primarily related to temporary inefficiencies during the Buanderie Villeray transition.

[Kristie Plaquin, CFO at K-Bro Linen Inc]

Linen in the 1st Quarter increased by CAD 0.4 million-CAD 7.8 million in the 1st Quarter compared to CAD 7.4 million in the comparative period of 2023, and as the percentage of revenue decreased by 0.8 percentage points to 9.7%. The decrease as a percentage of revenue is primarily related to the change in the mix of linen and higher hospitality volume process compared to the prior year. Utilities in the 1st Quarter increased by CAD 0.3 million-CAD 6.3 million compared to CAD 6 million in the comparative period of 2023, and as a percentage of revenue decreased by 0.7 percentage points to 7.8%. The decrease as a percentage of revenue is primarily related to the impact of price increases secured across various markets coupled with lower gas costs in the Canadian market.

[Kristie Plaquin, CFO at K-Bro Linen Inc]

Delivery in the 1st Quarter increased by CAD 0.9 million-CAD 10 million compared to CAD 9.1 million in the comparative period of 2023, and as a percentage of revenue decreased by 0.3 percentage points to 12.5%. The decrease as a percentage of revenue is primarily related to the optimization of high-frequency routes resulting in delivery cost efficiencies as well as lower fuel prices. Occupancy costs in the 1st Quarter increased by CAD 0.1 million- CAD 1.4 million compared to CAD 1.3 million in the comparative period of 2023, and as the percentage of revenue remained constant. Materials and supplies in the 1st Quarter remained constant at CAD 3.1 million compared to the comparative period of 2023, and as the percentage of revenue decreased by 0.4 percentage points to 3.9%. The decrease as a percentage of revenue is primarily related to timing.

[Kristie Plaquin, CFO at K-Bro Linen Inc]

Repairs and maintenance in the 1st Quarter increased by CAD 0.6 million-CAD 3.5 million compared to CAD 2.9 million in the comparative period of 2023, and as a percentage of revenue increased by 0.4 percentage points to 4.4%. The increase in costs as a percentage of revenue is primarily related to Buanderie Villeray transition costs. Corporate costs in the 1st Quarter increased by CAD 1.8 million-CAD 4.8 million compared to CAD 3 million in the comparative period of 2023, and as a percentage of revenue increased by 1.7 percentage points to 6%. Again, the increase of the percentage of revenue is primarily related to the CAD 1.5 million in costs associated with executing the syndicated credit facility and certain transaction costs associated with the Shortridge acquisition. Now, looking at our capital resources, distributable cash flow for the 1st Quarter of 2024 was CAD 6 million, and our payout ratio was 53.2%.

[Kristie Plaquin, CFO at K-Bro Linen Inc]

The company paid out CAD 0.3 per share in dividends during the quarter for total consideration of CAD 3.2 million. The corporation had net working capital of CAD 36.7 million at the end of Q1 compared to its working capital position of CAD 41.4 million at the end of December 2023. With regards to credit and liquidity, we have a strong balance sheet and ample undrawn capacity on our syndicated revolving credit facility, which has an operating line of CAD 175 million and a further CAD 75 million accordion for growth purposes. At the end of April, after the acquisition of Shortridge, we had an undrawn balance of close to CAD 60 million on our operating line without taking into account the accordion, reinforcing our strong liquidity. This represents a debt-to-EBITDA ratio excluding leases of 2.2x. I'll now turn things back over to Linda for additional commentary. Linda?

[Linda McCurdy, President and CEO at K-Bro Linen Inc]

Thank you, Kristie. So we're excited by our strong start to 2024 and see a positive outlook for the business. Both of K-Bro's healthcare and hospitality segments continue to experience steady growth, and we expect EBITDA margins to follow historical seasonal trends. Our vision for K-Bro centers around delivering industry-leading service, putting people first, and supporting the communities in which we operate. We're proud of our reputation for looking after the interests of our valued customers and being dependable partners to all stakeholders. K-Bro has a track record of successfully attracting new customers organically and acquiring complementary high-quality operators to extend our geographic reach and accelerate growth. We prioritize shared values in our acquisitions, and our teams work diligently to exchange best practices and support operations. Paranet, Buanderie Villeray, and Shortridge are welcome additions to the K-Bro family, and we're excited for the potential these acquisitions present for our future.

[Linda McCurdy, President and CEO at K-Bro Linen Inc]

We're excited about our outlook. We see momentum in both healthcare and hospitality, and are focusing on our other growth opportunities. We continue to have an active M&A pipeline and remain well-positioned from a balance sheet and liquidity perspective, and we'll continue to be disciplined as we evaluate acquisitions. I'll now turn it over to answer any questions you have with regards to the first quarter results.

[Operator]

Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. Should you have a question, please press the star followed by the number 1 on your telephone keypad. You will hear a three-tone prompt acknowledging your request, and your questions will be polled in the order they are received. Should you wish to decline from the polling process, please press the star followed by the number two. One moment, please, for your first question. Your first question comes from the line of Derek Lessard from TD Cowen. Your line is open.

[Derek Lessard, Equity Research Analyst at TD Cowen]

Yeah, good morning, Linda and Kristie. How are you?

[Linda McCurdy, President and CEO at K-Bro Linen Inc]

Good, Derek. Good morning.

[Derek Lessard, Equity Research Analyst at TD Cowen]

Yeah, solid quarter. Congratulations on Shortridge. The first question for me was I was just hoping to get a sense from you of the organic growth trends in the quarter. And then maybe as a follow-up to that, how much of that was tied to pricing versus volume and maybe new customer additions?

[Linda McCurdy, President and CEO at K-Bro Linen Inc]

Sure. Yeah. I'd say both from a consolidated perspective, about 10% of it is volume, and half of it is price-driven, with the remainder being increases as the result of volume and revenue from acquisitions.

[Derek Lessard, Equity Research Analyst at TD Cowen]

Okay. Thanks. That's helpful. And just wanted to hit a little bit on your CapEx. Just wondering if you could maybe give us an update on the Buanderie Villeray transition, how much of the, I guess, the CAD 5 million of CapEx has been incurred, and on your one-time investment from your Perth in the U.K. Just curious about the timing of that project.

[Linda McCurdy, President and CEO at K-Bro Linen Inc]

Kristie, why don't you, yeah, go ahead.

[Kristie Plaquin, CFO at K-Bro Linen Inc]

Yeah, for sure. So I guess in terms of the CapEx, the Buanderie Villeray project is just starting. There's been some of that CapEx spent, probably about CAD 1 million of it, but predominantly, the rest of it will be spent over Q2 and Q3. And then in terms of Perth, a good portion of it has already been incurred. I'd say there's maybe CAD 1 million left to be incurred in Q2.

[Derek Lessard, Equity Research Analyst at TD Cowen]

Okay. And maybe just one final one for me. Just given the new supply agreement on the UK gas hedges, how should we think about, I guess, your utility costs going forward?

[Linda McCurdy, President and CEO at K-Bro Linen Inc]

What I'd say to that? Oh, go ahead, Kristie.

[Kristie Plaquin, CFO at K-Bro Linen Inc]

No, no. Go ahead, Linda. It's fine.

[Linda McCurdy, President and CEO at K-Bro Linen Inc]

So that hedge takes place or comes into effect in 2025, so our existing hedge carries throughout 2024. There is some favorable pricing that, on a consolidated basis, will have a positive impact in the range of 0.5-1 percentage point.

[Derek Lessard, Equity Research Analyst at TD Cowen]

Okay. Thanks. Thanks, everyone.

[Linda McCurdy, President and CEO at K-Bro Linen Inc]

Thanks, Derek.

[Operator]

Thank you. Thank you. Your next question comes from the line of Kyle McPhee from Cormark Securities. Your line is open.

[Kyle McPhee, Analyst at Cormark Securities]

Hi, everyone. Just first, a quick follow-up on the new gas hedge. Can you tell us what price was locked in through that January 2025 to December 2026 period, the pricing in terms of Great British pence per KWh, or at the very least, just confirm if these kind of multi-year hedge contracts are typically pricing in around current spot pricing?

[Linda McCurdy, President and CEO at K-Bro Linen Inc]

They're slightly higher than spot pricing. Well, it changes week by week, but I'd say within the neighborhood of spot pricing, Kyle.

[Kyle McPhee, Analyst at Cormark Securities]

Okay. Thanks. That helps us quantify the margin gain you should see in 2025. Then nice to see your Q1 margins tracking above 2019 levels when adjusting for the one-time cost you disclosed. I have a question about one moving part that may impact this type of margin performance through the rest of this year. Multiple provinces have scheduled increases to minimum wages. Historically, I think K-Bro's offset this with pricing on a lag basis at contract anniversary dates. But K-Bro also just went through a period of many out-of-contract pricing increases. Were you able to proactively offset these upcoming minimum wage increases, or will it be a source of minor margin drag throughout this year that's eventually offset on a lag basis?

[Kyle McPhee, Analyst at Cormark Securities]

I think how we should look at that is we certainly are well aware of the changes in minimum wage by province, which in some provinces are material. As we've guided that our margin profile going forward will be close to or at pre-pandemic levels, we've taken into account the impact of minimum wage in that guidance.

[Kyle McPhee, Analyst at Cormark Securities]

Got it. Okay. Thank you. That's it from me.

[Linda McCurdy, President and CEO at K-Bro Linen Inc]

Awesome. Thank you.

[Operator]

Thank you. Once again, if you would like to ask a question, simply press the star followed by the number 1 on your telephone keypad. Your next question comes from the line of Michael Glen from Raymond James. Your line is open.

[Fred Gatali, Equity Research Associate at Raymond James]

Hi. Good morning. Just Fred Gatali on for Michael Glen. Could you provide any update for the CAD 60 million contract renewals this year? How are discussions progressing? Is this competitive? And then maybe you could break down as well the contract renewals across the regional segment. Thanks.

[Linda McCurdy, President and CEO at K-Bro Linen Inc]

Sure. Good morning. Of the renewals up this year, I would say about CAD 40 million of it is Canada and CAD 30 million's the U.K. We've re-signed about 30% of those totals and feel confident as the year goes on that we will continue to renew them. Some of them are not yet out of contract. They come due as the year unfolds. But we do feel good that we will continue to renew those contracts.

[Fred Gatali, Equity Research Associate at Raymond James]

Okay. On Shortridge, could you provide some insights into the margins of that transaction and the multiple paid as well as what the pro forma leverage would look like, including Shortridge?

[Linda McCurdy, President and CEO at K-Bro Linen Inc]

In terms of margins, what we have disclosed - and we wouldn't go too much further than this - is to say that the historic margin profile is higher than our consolidated historical margin profile for our consolidated K-Bro. For competitive reasons, we'll leave it at that. Leverage will be after taking into account the acquisition at the 2.2x debt-to-EBITDA.

[Fred Gatali, Equity Research Associate at Raymond James]

Okay. Thank you.

[Linda McCurdy, President and CEO at K-Bro Linen Inc]

Thank you.

[Operator]

Thank you. There are no further questions at this time. I would like to turn it back to Linda McCurdy for closing remarks.

[Linda McCurdy, President and CEO at K-Bro Linen Inc]

Well, thank you, everyone. Have a great day. If there's any follow-up questions, please don't hesitate to reach out to Kristie or myself.

[Operator]

Thank you, presenters. Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.

Participants

Executives

• Kristie Plaquin, CFO
• Linda McCurdy, President and CEO

Analysts

• Derek Lessard, Equity Research Analyst at TD Cowen
• Fred Gatali, Equity Research Associate at Raymond James
• Kyle McPhee, Analyst at Cormark Securities