Subject: ERN
K-BRO REPORTS RECORD Q4 AND FULL-YEAR RESULTS AND POSITIVE OUTLOOK
(TSX: KBL)
EDMONTON, AB, March 21, 2024 /CNW/ - K-Bro Linen Inc. ("K-Bro" or the "Corporation") today announces its Q4 2023 financial and operating results.
Q4 2023 Financial and Operating Highlights
- Consolidated healthcare revenue for 2023 increased by 6.3% compared to 2022.
- Consolidated healthcare revenue for Q4 2023 increased by 10.2% compared to Q4 2022.
- Consolidated hospitality revenue for 2023 increased by 32.3% compared to 2022.
- Consolidated hospitality revenue for Q4 2023 increased by 27.4% compared to Q4 2022.
- EBITDA increased for fiscal 2023 to $56.8 million compared to $36.5 million for fiscal 2022.
- EBITDA increased in the fourth quarter to $14.3 million compared to $8.7 million over the comparable 2022 period.
- Adjusted EBITDA increased for fiscal 2023 to $55.9 million compared to $36.5 million for fiscal 2022.
- Adjusted EBITDA increased in the fourth quarter to $13.3 million compared to $8.7 million over the comparable 2022 period.
- Net earnings increased for fiscal 2023 to $17.6 million compared to $3.9 million for fiscal 2022.
- Net earnings in the fourth quarter of 2023 increased by $3.9 million to $4.2 million compared to $0.3 million in the comparative period of 2022, and as a percentage of revenue increased by 4.8% to 5.2%
- For fiscal 2023 and during the fourth quarter, K-Bro declared dividends of $1.20 and $0.300 per common share respectively.
- Long-term debt at the end of fiscal 2023 was $70.2 million compared to $45.2 million at the end of fiscal 2022, with the normal course issuer bid put in place and the acquisitions of Paranet and Villeray completed during the year.
- K-Bro has repurchased and cancelled 199,062 shares year-to-date under the normal course issuer bid announced May 15, 2023.
- December 20, 2023, K-Bro published its inaugural sustainability report.
Linda McCurdy, President & CEO of K-Bro, commented that "I'm delighted with our record fourth quarter and full year results. K-Bro has always focused on delivering industry leading service and 2023 highlight the resilience of our business model and responsiveness of our team. The volatility we encountered from energy prices, local labour market shortages and cost inflation throughout the last number of years has stabilized. Going forward, we expect EBITDA margins to follow historical seasonal trends.
As we start 2024, we see a positive outlook. Both of K-Bro's healthcare and hospitality segments continue to experience steady growth trends. In the healthcare segment, we expect activity levels to remain strong from continued focus on reducing wait times and enhancing patient care. In the hospitality segment, we expect solid activity levels from both business and leisure travel reflecting historical seasonal trends.
On December 20, 2023, we published our inaugural sustainability report as the latest step in our ESG program. The report highlights our continuous efforts to grow our business sustainably and can be found on our new website <www.k-brolinen.com>. We are proud of our seven-decade history of responsible, innovative growth. While delivering industry-leading service, we have embraced our responsibility to society. We prioritize customer and employee relationships, environmental stewardship, and creating positive impacts where we do business.
As we emerge from a challenging number of years, we are excited about our outlook. On May 15, 2023, we announced a normal course issuer bid and have repurchased 199,062 shares to date. We have been refocusing on strategic acquisitions, such as Paranet and Villeray, and have an active M&A pipeline and remain well positioned from a balance sheet and liquidity perspective and will continue to be disciplined as we evaluate acquisitions."
Highlights and Significant Events for Fiscal 2023
Acquisition of Buanderie Paranet
On March 1, 2023 the Corporation completed the acquisition of 100% of the share capital of Buanderie Para-Net ("Paranet") operating as Paranet (the "Paranet Acquisition"), a private laundry and linen services company operating in Québec City, Quebec. The Paranet Acquisition was completed through a share purchase agreement consisting of existing working capital, fixed assets, contracts and an employee base. The contracts acquired are in the Quebec healthcare and hospitality sector, which complements the existing business of the Corporation. Based on the Corporation's evaluation of the Paranet Acquisition and the criteria in the identification of a business combination established in IFRS 3, the Paranet Acquisition has been accounted for using the acquisition method, whereby the purchase consideration is allocated to the fair values of the net assets acquired.
The Corporation financed the Paranet Acquisition and transaction costs from existing loan facilities.
The purchase price allocated to the net assets acquired, based on their estimated fair values, is as follows:
2023 | |
Cash consideration | $ 11,074 |
Contingent consideration | $ 945 |
Total purchase price | $ 12,019 |
The assets and liabilities recognized as a result of the Paranet Acquisition are as follows:
Net Assets Acquired: | |
Accounts receivable | 1,317 |
Prepaid expenses and deposits | 137 |
Linen in service | 970 |
Accounts payable and accrued liabilities (2) | (1,552) |
Lease liabilities | (1,176) |
Deferred income taxes | (1,474) |
Property, plant and equipment(1,2) | 6,142 |
Intangible assets | 2,450 |
Net identifiable assets acquired | 6,814 |
Goodwill | 5,205 |
Net assets acquired | $ 12,019 |
1) Includes ROUA from the Canadian Division of $1,176 comprised of buildings of $964 and vehicles of $212 |
2) Includes provision of $219 for asset retirement obligation |
The provisional intangible assets acquired are made up of $2,450 for the customer contracts along with related relationships and customer lists. The goodwill is attributable to the workforce, and the efficiencies and synergies created between the existing business of the Corporation and the acquired business. Goodwill will not be deductible for tax purposes.
Contingent consideration
In the event that a certain EBITDA target was achieved by Paranet for the twelve month period ended August 31, 2023, additional undiscounted consideration of up to $1,890 would have been payable in cash during the fourth quarter of 2023. While performance was in-line with expectations, the target was not achieved; therefore, no payment was made.
During the first three quarters of 2023, the estimated fair value of the possible payment was classified as contingent consideration. The fair value of the contingent consideration was estimated by considering the probability-adjusted future expected cash flows in regards to Paranet achieving the target that would result in consideration being paid. The impact of discounting these future cash flows was not considered because the impact would be nominal. Given that the EBITDA target was not achieved for the twelve month period ended August 31, 2023, the contingent consideration amount of $945 has been derecognized and a gain on settlement of contingent consideration has been recorded in Consolidated Statement of Earnings and Comprehensive Income for the twelve months ended December 31, 2023.
Acquisition related costs
For the twelve months ended December 31, 2023, $274 in professional fees associated with the Paranet Acquisition has been included in Corporate expenses.
Revenue and profit information
The acquired business contributed revenues of $7,819 to the Corporation for the period from March 1, 2023 to December 31, 2023. If the Paranet Acquisition had occurred on January 1, 2023, consolidated pro-forma revenue for the period ended December 31, 2023 would have been $322,209.
The acquired business contributed a net deficit of ($316) to the Corporation for the period from March 1, 2023 to December 31, 2023. If the Paranet Acquisition had occurred on January 1, 2023, consolidated pro-forma net income for the period ended December 31, 2023 would have been $17,591.
These amounts have been calculated using Paranet's results and adjusting them for differences in the accounting policies between the Corporation and Paranet as it pertains to property, plant and equipment. The Corporation follows the requirements of IFRS Accounting Standards whereas Paranet previously reported under Canadian Accounting Standards for Private Enterprises (ASPE), 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, 2023, together with the consequential tax effects.
Acquisition of Villeray
On November 1, 2023, the Corporation completed the acquisition of 100% of the share capital of Buanderie Villeray and its affiliate Buanderie La Relance (the "Villeray Acquisition"), a private laundry and linen services company incorporated in Canada and operating in Montréal, Quebec. The Villeray Acquisition was completed through a share purchase agreement consisting of existing working capital, fixed assets, customer relationships and an employee base. Villeray operates in the hospitality and healthcare sector, which complements the existing business of the Corporation. As part of the transaction, the Corporation closed its Granby facility and consolidated existing volumes into Villeray. Based on the Corporation's evaluation of the Villeray Acquisition and the criteria in the identification of a business combination established in IFRS 3, the Villeray Acquisition has been accounted for using the acquisition method, whereby the purchase consideration is allocated to the fair values of the net assets acquired.
The Corporation financed the Villeray Acquisition and transaction costs from existing loan facilities.
The purchase price allocated to the net assets acquired, based on their estimated fair values, is as follows:
2023 | |
Cash consideration | $ 11,204 |
Contingent consideration | $ 500 |
Total purchase price | $ 11,704 |
The assets and liabilities recognized as a result of the Villeray Acquisition are as follows:
Net Assets Acquired: | |
Accounts receivable | 907 |
Prepaid expenses and deposits | 187 |
Income tax receivable | 69 |
Accounts payable and accrued liabilities (2) | (807) |
Lease liabilities | (2,706) |
Deferred income taxes | (1,416) |
Property, plant and equipment(1,2) | 7,161 |
Intangible assets | 2,530 |
Net identifiable assets acquired | 5,925 |
Goodwill | 5,779 |
Net assets acquired | $ 11,704 |
1) Includes ROUA from the Canadian Division of $2,706 related to buildings |
2) Includes provision of $97 for asset retirement obligation |
The provisional intangible assets acquired are made up of $2,530 related to customer relationships. The goodwill is attributable to the workforce, and the efficiencies and synergies created between the existing business of the Corporation and the acquired business. Goodwill will not be deductible for tax purposes.
Contingent consideration
The estimated fair value of payment has been classified as contingent consideration by exercising significant judgment as to whether it should be classified as such, or as renumeration to the former owner, who will be employed subsequent to the close of the transaction. The Corporation has determined by considering all relevant factors included in the agreements as it pertains to employment terms, valuation of the business, and other relevant terms that the additional consideration is most appropriately reflected as contingent consideration.
In the event that a certain EBITDA target is achieved by Villeray for the twelve month period ended October 31, 2024, additional undiscounted consideration ranging from $500 to $1,000 will be payable in cash during the first quarter of 2025. The potential undiscounted amount payable within the agreement will only be paid should the EBITDA target be achieved. Should the EBITDA target not be achieved, no payment will be made.
The fair value of the contingent consideration of $500 was estimated by considering the probability-adjusted future expected cash flows in regards to Villeray achieving the target that would result in consideration being paid. The impact of discounting those future cash flows was not considered because the impact would be nominal.
Since the estimated future cash flows and probability of achieving the EBITDA target are an unobservable input, the fair value of the contingent consideration is classified as a level 3 fair value measurement.
Acquisition related costs
For the year ended December 31, 2023, $414 in professional fees associated with the Villeray Acquisition has been included in Corporate expenses.
Revenue and profit information
The acquired business contributed revenues of $1,602 to the Corporation for the period from November 1, 2023 to December 31, 2023. If the Villeray Acquisition had occurred on January 1, 2023, consolidated pro-forma revenue for the year ended December 31, 2023 would have been $329,021. If both the Paranet Acquisition and Villeray Acquisition had occurred on January 1, 2023, consolidated pro-forma revenue for the year ended December 31, 2023 would have been $330,346.
The acquired business contributed a net deficit of ($201) to the Corporation for the period from November 1, 2023 to December 31, 2023, inclusive of Granby transition related costs. If the Villeray Acquisition had occurred on January 1, 2023, consolidated pro-forma net income for the period ended December 31, 2023 would have been $17,721.
These amounts have been calculated using Villeray's results and adjusting them for differences in the accounting policies between the Corporation and Villeray as it pertains to property, plant and equipment. The Corporation follows the requirements of IFRS Accounting Standards whereas Villeray previously reported under Canadian Accounting Standards for Private Enterprises (ASPE), 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, 2023, together with the consequential tax effects.
3sHealth Contract Extension
In Q2 2022, the Corporation extended its existing contract with 3sHealth for an additional six years to May 31, 2031 on terms that are consistent with the existing contract.
Revolving Credit Facility
On August 31, 2023, the Corporation completed an amendment to its existing revolving credit facility to extend the agreement from July 31, 2026 to July 31, 2027, as previously amended on July 18, 2022. In addition, the agreement expanded the revolving credit facility from $100,000 to $125,000 plus a $25,000 accordion. The Corporation's incremental borrowing rate under its existing credit facility is determined by the Canadian prime rate plus an applicable margin based on the ratio of Funded Debt to EBITDA as defined in the credit agreement. During fiscal 2022 and 2023, the Canadian prime rate increased from 3.70% in January 2022 to 6.95% in June 2023, and in July 2023 it increased to 7.20%.
Capital Investment Plan
For fiscal 2024, the Corporation's planned capital spending is expected to be between $15.0 and $17.0 million on a consolidated basis, including the expenditures associated with the Villeray acquisition. This guidance includes both strategic and maintenance capital requirements to support existing base business in both Canada and the UK. We will continue to assess capital needs within our facilities and prioritize projects that have shorter term paybacks as well as those that are required to maintain efficient and reliable operations.
Economic Conditions
Since 2020, due to changing government restrictions to mitigate the ongoing COVID-19 pandemic, supply chain disruption, geopolitical events impacting key inputs such as natural gas, electricity and diesel and inflationary impacts to labour and materials the Corporation has faced varying degrees of financial impact within Canada and the UK. The COVID-19 pandemic has also contributed to unusually competitive labour markets, causing inefficiencies in attracting, training and retaining employees. While labour markets have been stabilizing, certain regional markets continue to experience constrained labour availability.
The Corporation's Credit Facility is subject to floating interest rates and, therefore, is subject to fluctuations in interest rates which are beyond the Corporation's control. Increases in interest rates, both domestically and internationally, could negatively affect the Corporation's cost of financing its operations and investments.
Uncertainty about judgments, estimates and assumptions made by management during the preparation of the Corporation's consolidated financial statements related to potential impacts of the COVID-19 pandemic, geopolitical events and rising interest rates on revenue, expenses, assets, liabilities, and note disclosures could result in a material adjustment to the carrying value of the asset or liability affected.
Impairment of Assets
The Corporation performed its annual impairment assessment for goodwill for the Canadian division and for the UK division as at December 31, 2023 and December 31, 2022 in accordance with its policy described in Note 2(k) and Note 2(h). The Corporation also performed impairment indicator assessments where there was no goodwill allocated to the CGU.
For both periods, the recoverable amount for the CGUs was assessed using an earnings multiple approach. If the results of the earnings multiple approach indicated a possible impairment, a further assessment using a discounted cash flow to determine the value-in use was performed.
Earnings multiple approach (Fair value less costs to dispose, "FVLCD")
For the years ended December 31, 2023 and 2022, the key assumption utilized was the implied multiple. The implied multiple is calculated by utilizing the average multiples of comparable public companies. The Corporation used an implied average forward multiple of 9.70 (2022 - 10.60) to calculate the recoverable amounts. The implied multiple was applied to the trailing twelve month EBITDA to determine the recoverable amount of the CGU and compare it to the carrying value of the CGU.
Based on the assessments performed for the year ended December 31, 2023, no CGU had a recoverable amount that was less than the carrying value of the CGU. A further assessment using a discounted cash flow to determine the value-in-use was not performed due to the headroom from FVLCD determined using an earnings multiple approach.
Discounted cash flow (Value-in-use, "VIU")
Where the results of the FVLCD approach indicated there was a possible impairment, a further assessment using a discounted cash flow was performed to determine the VIU of each VGU identified.
For the year ended December 31, 2022, the Corporation used probability weighted discounted cash flows and the assumptions for those cash flows were the Corporation's board approved budgets, cash flow forecasts, trailing twelve-month EBITDA, the pre-tax discount rate and terminal value growth rate.
The probability weighted approach used for the year ended December 31, 2022 was evaluated based on an equally weighted probability of a continued one-year downturn in sales to the worst case scenario of a two year downturn in sales. The scenarios estimated a decline of 8% to 12 % for 2023, 7% for 2024 with sales returning to normalized levels thereafter with sales growth estimates used 2%. These represent the Corporation's best estimate of cash flows over the forecast period.
The terminal value growth rate is based on management's best estimate of the long-term growth rate for its CGUs after the forecast period, considering historic performance and future economic forecasts.
The calculation of the recoverable amount was based on the following key assumptions:
Testing | Pre-tax | Terminal | |||
December 31 | December 31 | December 31 | |||
Calgary | FVLCD | n/a | n/a | ||
Edmonton | FVLCD | n/a | n/a | ||
Vancouver 2 | FVLCD | n/a | n/a | ||
Vancouver 1 | FVLCD | n/a | n/a | ||
Victoria | FVLCD | n/a | n/a | ||
Paranet | n/a | n/a | n/a | ||
Villeray | n/a | n/a | n/a | ||
UK | VIU | 15.4 % | 2.0 % |
Based on testing performed at December 31, 2023 and December 31, 2022, no impairment was determined to exist.
Recoverable amount
The recoverable amount of each CGU is sensitive to changes in market conditions which could result in material changes. For the year ended December 31, 2022, where further assessment using the probability weighted discounted cash flows was required the sensitivity of key assumptions to a reasonable change was assessed. The Corporation does not believe there is a reasonable change in the key assumptions that would cause the carrying value of the CGU to exceed its recoverable amount. The table below summarizes the results of the impact on key assumptions to a reasonable change.
Recoverable | Change in Pre-tax | Change in Terminal | ||||
December 31 | December 31 | December 31 | ||||
Calgary | n/a | n/a | n/a | |||
Edmonton | n/a | n/a | n/a | |||
Vancouver 2 | n/a | n/a | n/a | |||
Vancouver 1 | n/a | n/a | n/a | |||
Victoria | n/a | n/a | n/a | |||
Paranet | n/a | n/a | n/a | |||
Villeray | n/a | n/a | n/a | |||
UK | -£50,261 | -£4,201 | -£4,458 |
Financial Results
For The Three Months Ended December 31, | ||||||||
(thousands, except per share amounts | Canadian | UK | 2023 | Canadian | UK | 2022 | $ Change | % Change |
Revenue | $ 63,090 | $ 19,374 | $ 82,464 | $ 54,451 | $ 16,220 | $ 70,671 | 11,793 | 16.7 % |
Expenses included in EBITDA | 51,378 | 16,807 | 68,185 | 46,707 | 15,239 | 61,945 | 6,240 | 10.1 % |
EBITDA(1) | 11,712 | 2,567 | 14,279 | 7,745 | 981 | 8,726 | 5,553 | 63.6 % |
EBITDA as a % of revenue | 18.6 % | 13.2 % | 17.3 % | 14.2 % | 6.0 % | 12.3 % | 5.0 % | 40.7 % |
Adjusted EBITDA(1) | 10,767 | 2,567 | 13,334 | 7,745 | 981 | 8,726 | 4,608 | 52.8 % |
Adjusted EBITDA as a % of revenue | 17.1 % | 13.2 % | 16.2 % | 14.2 % | 6.0 % | 12.3 % | 3.9 % | 31.7 % |
Net earnings (loss) | 3,341 | 908 | 4,249 | 822 | (542) | 280 | 3,969 | 1417.5 % |
Basic earnings (loss) per share | $ 0.314 | $ 0.085 | $ 0.399 | $ 0.077 | $ (0.051) | $ 0.026 | $ 0.373 | 1434.6 % |
Diluted earnings (loss) per share | $ 0.311 | $ 0.085 | $ 0.396 | $ 0.076 | $ (0.050) | $ 0.026 | $ 0.370 | 1423.1 % |
Dividends declared per diluted share | $ 0.30 | $ 0.300 | $ - | 0.0 % | ||||
Total assets | 364,716 | 325,760 | 38,956 | 12.0 % | ||||
Long-term debt (excludes lease liabilities) | 70,247 | 45,166 | 25,081 | 55.5 % | ||||
Cash provided by operating activities | 7,817 | 1,049 | 6,768 | 645.2 % | ||||
Net change in non-cash working capital items | (3,448) | (4,994) | 1,546 | 31.0 % | ||||
Share-based compensation expense | 410 | 410 | - | 0.0 % | ||||
Maintenance capital expenditures | 1,103 | 706 | 397 | 56.2 % | ||||
Principal elements of lease payments | 2,547 | 1,908 | 639 | 33.5 % | ||||
Distributable cash flow | 7,205 | 3,019 | 4,186 | 138.7 % | ||||
Dividends declared | 3,200 | 3,227 | (27) | -0.8 % | ||||
Payout ratio | 44.4 % | 106.9 % | -62.5 % | -58.5 % | ||||
Years Ended December 31, | ||||||||
(thousands, except per share amounts | Canadian | UK | 2023 | Canadian | UK | 2022 | $ Change | % Change |
Revenue | $ 241,129 | $ 79,755 | $ 320,884 | $ 212,035 | $ 64,588 | $ 276,623 | 44,261 | 16.0 % |
Expenses included in EBITDA | 196,430 | 67,648 | 264,078 | 179,671 | 60,461 | 240,131 | 23,947 | 10.0 % |
EBITDA(1) | 44,699 | 12,107 | 56,806 | 32,365 | 4,127 | 36,492 | 20,314 | 55.7 % |
EBITDA as a % of revenue | 18.5 % | 15.2 % | 17.7 % | 15.3 % | 6.4 % | 13.2 % | 4.5 % | 34.1 % |
Adjusted EBITDA(1) | 43,754 | 12,107 | 55,861 | 32,365 | 4,127 | 36,492 | 19,369 | 53.1 % |
Adjusted EBITDA as a % of revenue | 18.1 % | 15.2 % | 17.4 % | 15.3 % | 6.4 % | 13.2 % | 4.2 % | 31.8 % |
Net earnings (loss) | 12,584 | 5,023 | 17,607 | 6,042 | (2,136) | 3,906 | 13,701 | 350.8 % |
Basic earnings (loss) per share | $ 1.180 | $ 0.471 | $ 1.651 | $ 0.567 | $ (0.200) | $ 0.366 | $ 1.285 | 351.1 % |
Diluted earnings (loss) per share | $ 1.172 | $ 0.468 | $ 1.640 | $ 0.563 | $ (0.199) | $ 0.364 | $ 1.276 | 350.5 % |
Dividends declared per diluted share | $ 1.20 | $ 1.200 | $ - | 0.0 % | ||||
Total assets | 364,716 | 325,760 | 38,956 | 12.0 % | ||||
Long-term debt (excludes lease liabilities) | 70,247 | 45,166 | 25,081 | 55.5 % | ||||
Cash provided by operating activities | 41,005 | 26,130 | 14,875 | 56.9 % | ||||
Net change in non-cash working capital items | (6,113) | (5,621) | (492) | -8.8 % | ||||
Share-based compensation expense | 1,796 | 1,788 | 8 | 0.4 % | ||||
Maintenance capital expenditures | 3,561 | 2,994 | 567 | 18.9 % | ||||
Principal elements of lease payments | 9,391 | 7,397 | 1,994 | 27.0 % | ||||
Distributable cash flow | 32,370 | 19,572 | 12,798 | 65.4 % | ||||
Dividends declared | 12,896 | 12,905 | (9) | -0.1 % | ||||
Payout ratio | 39.8 % | 65.9 % | -26.1 % | -39.6 % | ||||
(1) See "Terminology" for further details |
OUTLOOK
The Corporation's healthcare and hospitality segments continues to experience steady growth trends. For the healthcare segment, management expects activity levels to remain strong from continued focus on reducing wait times and enhancing patient care. For the hospitality segment, management expects solid activity levels from both business and leisure travel reflecting historical seasonal trends.
The volatility we encountered from energy prices, local labour market shortages and cost inflation throughout the pandemic has stabilized. In early 2022, particularly in the UK, the Corporation faced significant volatility in energy costs due to geopolitical issues. In April 2022, to mitigate this instability, the Corporation locked in natural gas supply rates in the UK until December 2024.
The Corporation also faced temporary labour inefficiencies from unusually competitive labour markets. While labour markets have been stabilizing, certain regional markets continue to experience constrained labour availability. The Corporation is managing more challenging regional labour availability with complementary temporary foreign worker programs and has seen positive staffing support in this regard.
Throughout 2023, EBITDA margins have benefited from price increases that we have secured to offset inflation-related costs. Going forward, management expects EBITDA margins to follow historical seasonal trends.
With continued momentum in existing operations, management has refocused attention on strategic acquisitions, such as the acquisitions of Villeray and Paranet, to accelerate growth in both North America and Europe, geographies which remain highly fragmented. K-Bro will look to leverage its strong liquidity position, balance sheet and access to the capital markets to execute on these opportunities, should they arise. For further information about the impact of other economic factors on our business, see the "Summary of 2023 Results and Key Events".
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 of England. K?Bro and its wholly-owned subsidiaries operate across Canada and the 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.
The Corporation's operations in Canada include ten processing facilities and two distribution centres under two distinctive brands: K?Bro Linen Systems Inc. and Buanderie HMR. The Corporation operates in ten Canadian cities: Québec City, Montréal, Toronto, Regina, Saskatoon, Prince Albert, Edmonton, Calgary, Vancouver and Victoria.
The Corporation's operations in the UK include Fishers, which was acquired by K?Bro on November 27, 2017. Fishers was established in 1900 and is a leading 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. The Corporation operates five UK sites located 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.sedarplus.ca; the System for Electronic Document Analysis and Retrieval ("SEDAR").
TERMINOLOGY
Throughout this news release and other documents referred to herein, 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 follows:
EBITDA
K?Bro reports EBITDA (Earnings before interest, taxes, depreciation and amortization) as a key measure used by management to evaluate performance. EBITDA is utilized to measure compliance with debt covenants and to make decisions related to dividends to Shareholders. We believe EBITDA assists investors to assess our performance on a consistent basis as it is an indication of our capacity to generate income from operations before taking into account management's financing decisions and costs of consuming tangible and intangible capital assets, which vary according to their vintage, technological currency and management's estimate of their useful life. Accordingly, EBITDA comprises revenues less operating costs before financing costs, capital asset and intangible asset amortization, and income taxes.
EBITDA is a sub?total presented within the statement of earnings in accordance with the amendments made to IAS 1 which became effective January 1, 2016. EBITDA is not considered an alternative to net earnings in measuring K?Bro's performance. EBITDA should not be used as an exclusive measure of cash flow since it does not account for the impact of working capital changes, capital expenditures, debt changes and other sources and uses of cash, which are disclosed in the consolidated statements of cash flows.
EBITDA | ||||||||
Three Months Ended | Years Ended | |||||||
(thousands) | 2023 | 2022 | 2023 | 2022 | ||||
Net earnings | $ 4,249 | $ 280 | $ 17,607 | $ 3,906 | ||||
Add: | ||||||||
Income tax expense | 1,000 | 302 | 5,256 | 1,538 | ||||
Finance expense | 1,732 | 1,639 | 6,649 | 4,980 | ||||
Depreciation of property, plant and equipment | 7,043 | 6,120 | 26,669 | 23,766 | ||||
Amortization of intangible assets | 255 | 385 | 625 | 2,302 | ||||
EBITDA | $ 14,279 | $ 8,726 | $ 56,806 | $ 36,492 | ||||
Non-GAAP Measures
Adjusted EBITDA
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.
Three Months Ended December 31, | |||||||
Canadian | UK | Canadian | UK | ||||
(thousands) | 2023 | 2023 | 2023 | 2022 | 2022 | 2022 | |
EBITDA | $ 11,712 | $ 2,567 | $ 14,279 | $ 7,745 | $ 981 | $ 8,726 | |
Deduct non-recurring items: | |||||||
Gain on settlement of contingent consideration | (945) | - | (945) | - | - | - | |
Adjusted EBITDA | $ 10,767 | $ 2,567 | $ 13,334 | $ 7,745 | $ 981 | $ 8,726 | |
Years Ended December 31, | |||||||
Canadian | UK | Canadian | UK | ||||
(thousands) | 2023 | 2023 | 2023 | 2022 | 2022 | 2022 | |
EBITDA | $ 44,699 | $ 12,107 | $ 56,806 | $ 32,365 | $ 4,127 | $ 36,492 | |
Deduct non-recurring items: | |||||||
Gain on settlement of contingent consideration | (945) | - | (945) | - | - | - | |
Adjusted EBITDA | $ 43,754 | $ 12,107 | $ 55,861 | $ 32,365 | $ 4,127 | $ 36,492 | |
Distributable Cash Flow
Distributable cash flow is a measure used by management to evaluate the Corporation's 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 should 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 | Years Ended | ||||||
(thousands) | 2023 | 2022 | 2023 | 2022 | |||
Cash provided by operating activities | $ 7,817 | $ 1,049 | $ 41,005 | $ 26,130 | |||
Deduct (add): | |||||||
Net changes in non-cash working capital items | (3,448) | (4,994) | (6,113) | (5,621) | |||
Share-based compensation expense | 410 | 410 | 1,796 | 1,788 | |||
Maintenance capital expenditures | 1,103 | 706 | 3,561 | 2,994 | |||
Principal elements of lease payments | 2,547 | 1,908 | 9,391 | 7,397 | |||
Distributable cash flow | $ 7,205 | $ 3,019 | $ 32,370 | $ 19,572 | |||
Payout Ratio
"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 | Years Ended | ||||||
(thousands) | 2023 | 2022 | 2023 | 2022 | |||
Cash dividends | 3,200 | 3,227 | 12,896 | 12,905 | |||
Distributable cash flow | 7,205 | 3,019 | 32,370 | 19,572 | |||
Payout ratio | 44.4 % | 106.9 % | 39.8 % | 65.9 % | |||
Debt to Total Capital
"Debt to total capital" is defined by management as the total long?term debt (excludes lease liabilities) divided by the Corporation's total capital. This is a measure used by investors to assess the Corporation's financial structure.
Distributable cash flow, payout ratio, debt to total capital adjusted EBITDA, adjusted net earnings, and adjusted net earnings per share are not calculations based on IFRS and are not considered an alternative to IFRS measures in measuring K?Bro's performance. Distributable cash Flow, payout ratio, adjusted EBITDA, adjusted net earnings, and adjusted net earnings per share do not have standardized meanings in IFRS and are therefore not likely to be comparable with similar measures used by other issuers.
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 (a) the possibility of undisclosed material liabilities, disputes or contingencies, (b) challenges or delays in achieving synergy and integration targets, (c) the diversion of management's time and focus from other business concerns and (d) the use of resources that may be needed in other parts of our business; (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 and the risks associated with maintaining short term contracts; (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, Quebec, Saskatchewan and the United Kingdom (the "UK"); (ix) the availability and terms of future financing; * textile demand; (xi) the adverse impact of the COVID-19 pandemic on the Corporation, which has been significant to date and which we believe will continue to be significant for the short to medium term; (xii) availability and access to labour; (xiii) rising wage rates in all jurisdictions the Corporation operates and (ix) foreign currency risk. 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; (iv) foreign exchange rates; (v) the level of capital expenditures and (vi) the expected impact of the COVID-19 pandemic on the Corporation. 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 new customers, 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, as well as statements related to the impact of the COVID-19 pandemic on the Corporation.
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, K?Bro does not undertake any obligation to publicly revise these forward?looking statements to reflect subsequent events or circumstances.
This news release also makes reference to certain measures in this document that do not have any standardized meaning as prescribed by IFRS and, therefore, are considered non?GAAP measures. These measures may not be comparable to similar measures presented by other issuers. Please see "Terminology" for further discussion.
SOURCE K-Bro Linen Inc.
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