K-Bro announces 2017 annual results and positions the company for long term growth

(TSX: KBL)

2017 Annual Financial Highlights

• Revenue for the three and twelve months ended December 31, 2017 was $47.5 million and $170.6 million, respectively, increases of 21.0% and 7.2% over the comparable 2016 periods.
  
  
• EBITDA decreased to $4.5 million for Q4, 2017 compared to $6.3 million in Q4, 2016.  On an annual basis, 2016 EBITDA decreased by $4.1 million to $24.0 million compared to the 2016 fiscal year largely as the result of $2.8 million in transaction costs associated with the acquisition of Fishers Topco Ltd and transition costs related to the relocation of our Toronto facility and capacity constraints at certain plants in the amount of $4.7 million.
  
  
• EBITDA margin decreased in the fourth quarter to 9.4% from 16.1% in the comparative period of 2016.  For the year, the EBITDA margin decreased from 17.7% in 2016 to 14.1% in 2017.  EBITDA margin excluding transaction costs associated with the acquisition of Fishers Topco Ltd and transition costs related to the relocation of our Toronto facility and capacity constraints at certain plants would have been 18.5%.
  
  
• K-Bro declared dividends of $1.200 per common share and distributable cash was $2.20 per common share on a fully diluted basis.
  
  
• Net loss after taxes for the fourth quarter was $-1.3 million compared to net earnings of $2.2 million in Q4, 2016. For the year, net earnings after taxes decreased by $5.8 million to $5.7 million from fiscal 2016.

Highlights and Significant Items for Fiscal 2017

Acquisition of Fishers

Fishers Topco Ltd. ("Fishers") was acquired by K-Bro on November 27, 2017 for cash consideration of  $57.6 million (in Sterling  £33.9 million). Fisher's is a leading commercial laundry business in Scotland and the North East of England providing linen and garments primarily to the hospitality sector. 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 distribution center, in Scotland and the North East of England with facilities in Cupar, Perth, Newcastle, Livingston, Inverness and Coatbridge.

K-Bro financed the cash portion of the acquisition, the repayment of Fishers' outstanding debt facilities and the payment of management fees and transaction costs from existing cash resources and existing loan facilities, including an amendment to its existing revolving credit facility.

The acquired business contributed revenues of $4.7 million (in Sterling £2.8 million) and a net loss of $2.9 million (in Sterling £1.7 million) to the Corporation for the period from November 27, 2017 to December 31, 2017.

If the acquisition had occurred on January 1, 2017, consolidated pro-forma revenue and profit for the year ended December 31, 2017 would have been $223.5 million and $8.8 million respectively. These amounts have been calculated using the Fishers results and adjusting them for:

• differences in the accounting policies between the group and the subsidiary; and
• the additional depreciation and amortization that would have been charged assuming the fair value adjustments to property, plant and equipment and intangible assets had applied from January 1, 2017, together with the consequential tax effects.

Pro-forma net profit includes expenses which are not expected to be recurring as part of normal operations, which include transaction costs incurred in the sale of Fishers' for $1.0 million (in Sterling £0.6 million), and loss on disposal of assets of $1.1 million (in Sterling £0.6 million).

Equity Offering

On April 25, 2017 the Corporation closed a bought deal offering of 1,518,000 common shares at $38.00/share. The net proceeds of the offering after deducting expenses of the offering and the underwriter's fee were $55.0 million. The net proceeds of the offering were used to reduce the revolving debt to nil, and to fund the build out of the Corporation's state-of-the-art facilities in Toronto and Vancouver, and for general corporate purposes.

On December 12, 2017 the Corporation closed a bought deal offering of 924,600 common shares at $37.35/share. The net proceeds of the offering after deducting expenses of the offering and the underwriter's fee were $32.7 million. The net proceeds of the offering were used to partially pay down indebtedness that was incurred under K-Bro's amended $100 million senior secured revolving credit facility to fund the acquisition of Fishers.

Revolving Credit Facility

On November 27, 2017, K-Bro completed an amendment to its existing revolving credit facility, which extended the agreement to July 31, 2021, and increased the available limit from $85 million to $100 million plus a $25 million accordion, of which $44.4 million is utilized (including letters of credit totaling $1.7 million as at December 31, 2017). Management intends to continually assess its opportunities to maintain a conservative amount of leverage and balance sheet flexibility in the short and long-term basis in order to ensure that sufficient capital is available for future growth needs.

EDMONTON, March 14, 2018 /CNW/ - K-Bro Linen Inc. ("K-Bro" or the "Corporation") today announced revenue of $170.6 million and EBITDA of $24.0 million for the year ended December 31, 2017.  Net earnings after tax were $5.75 million, diluted earnings per common share were $0.63 and distributable cash was $2.20 per diluted common share for the year.

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, 2018, to be paid on April 13, 2018 to shareholders of record on March 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

"We are very excited to add the Fishers platform as K-Bro's first acquisition outside of Canada. Fishers' is our largest acquisition to date and is aligned with our growth strategy. Fishers provides us with critical mass in an attractive new geography and is well positioned for future growth ." said Linda McCurdy, President & Chief Executive Officer of K-Bro. "The UK linen hospitality market is mature and highly fragmented and we expect to leverage Fishers' leading market position, experienced local management team, entrenched customer relationships and proven track record of stable and profitable operations to take advantage of the significant organic growth and consolidation opportunities available to us, similar to what we have achieved in Canada. We look forward to leveraging Fishers' market leading position, experienced local management team, entrenched customer relationships and proven track record of stable and profitable operations."

"We continue to make progress in the construction of our new Vancouver facility with a targeted completion date of early 2018.  We view 2017 and 2018 as transition years that will impact our margins but once complete will enable us to realize additional efficiencies, increase capacity and increase market share.  While the margin pressure may vary by quarter through 2018, we believe that the one-time and transition costs incurred in 2018 will position the company to achieve more growth and a lower cost structure into the future and that the company will return to normalized margins closer to those achieved in 2015 as it enters 2019.  We remain excited about our growth plans and are confident in our ability to continue to provide value to our customers and our shareholders."

CORPORATE PROFILE

K-Bro is the largest owner and operator of laundry and linen processing facilities in Canada and a market leader for laundry and textile rental services in Scotland and the North East of England. K-Bro and its wholly owned subsidiaries, operate across Canada and the United Kingdom ("UK"), providing a range of linen services to healthcare institutions, hotels and other commercial accounts that include the processing, management and distribution of general linen and operating room linen. 

K-Bro's operations in Canada include nine processing facilities and two distribution centres under three distinctive brands, including K-Bro Linen Systems Inc., Buanderie HMR and Les Buanderies Dextraze, in ten Canadian cities: Québec City, Montréal, Toronto, Regina, Saskatoon, Prince Albert, Edmonton, Calgary, Vancouver and Victoria.

K-Bro's operations in the UK include Fishers Topco Ltd. ("Fishers") which was acquired by K-Bro on November 27, 2017. Fisher's is a leading commercial laundry business in Scotland and the North East of England providing linen and garments primarily to the hospitality sector. 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 in seven cities, including one distribution center, 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").

K-Bro est le plus important propriétaire et exploitant de buanderies au Canada. K-Bro fournit une gamme étendue de services de buanderie aux établissements de soins de santé, hôtels et autres clients commerciaux. K-Bro exploite actuellement neuf usines et deux centres de distribution sous trois entités distinctes, incluant K-Bro Linen Systems Inc., Buanderie HMR et Les Buanderies Dextraze, dans dix villes canadiennes: Québec, Montréal, Toronto, Regina, Saskatoon, Prince Albert, Edmonton, Calgary, Vancouver et Victoria.

Les activités de K-Bro Linen Systems s'étendent maintenant au Royaume-Uni avec l'entreprise Fishers Topco Ltd. («Fishers») qui a été acquise par K-Bro le 27 novembre 2017.  Fisher's est une importante entreprise de buanderie commerciale en Écosse et au nord-est de l'Angleterre qui traite en premier lieu la literie et les vêtements du secteur de l'hôtellerie. Fishers fut fondée en 1900, et elle exploite des installations de buanderie et de traitement du linge en Écosse, fournissant des services de location de linge, de location de vêtements de travail, de vêtements pour salle blanche du secteur hospitalier, et de vêtements pour les secteurs de l'hôtellerie, de la santé, de la fabrication et du pharmaceutique. La clientèle de Fishers comprend de grandes chaînes hôtelières et des sites prestigieux à travers l'Écosse et le nord-est de l'Angleterre. La société opère dans sept villes, dont une, en Écosse et dans le nord-est de l'Angleterre, avec des installations à Cupar, Perth, Newcastle, Livingston, Inverness et Coatbridge.

Vous pouvez obtenir des renseignements supplémentaires sur la Société, y compris les documents déposés auprès des autorités de réglementation, sur notre site Web, au www.k-brolinen.com et sur le site Web des autorités canadiennes en valeurs mobilières au www.sedar.com, via le Système électronique de données, d'analyse et de recherche (« 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.

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, and the related impact on EBITDA (as defined above).  During the fourth quarter in 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.

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 defined by management as cash provided by operating activities, plus or minus the net change in non-cash working capital items, less maintenance capital expenditures and less cash taxes. Management believes this measure reflects the cash generated from the ongoing operation of the business. Distributable cash is an additional GAAP measure generally used by dividend paying corporations as an indicator of financial performance and it should not be seen as a measurement of liquidity or a substitute for comparable metrics prepared in accordance with IFRS.

Payout ratio is defined by management as the actual cash 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.

Figures expressed in percentages are calculated from amounts rounded in thousands of dollars.

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 news release.  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)  foreign exchange; and (ix) the availability of future financing. 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; and (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 news release 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 news release may be considered "financial outlook" for purposes of applicable securities laws, and such financial outlook may not be appropriate for purposes other than this news release. Forward looking information included in this news release includes the expected annual healthcare revenues to be generated from the Corporation's contracts with the William Osler Health System and Trillium Health Partners and other new customers, the anticipated capital costs for the Toronto and Vancouver facilities, calculation of 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.