(TSX: KBL)
Q2 2023 Financial and Operating Highlights
- Consolidated revenue increased 13.9% compared to Q2 2022, with healthcare revenue having increased by 4.4% and hospitality revenue by 29.0%.
- EBITDA increased in the second quarter of 2023 by
$4.8 million to$14.5 million compared to$9.7 million over the comparable 2022 period, a 49.8% increase. - EBITDA margin increased to 18.0% from 13.7% in the comparable period.
- Net earnings in the second quarter of 2023 increased by
$3.1 million to$4.7 million compared to$1.6 million in the comparative period of 2022, and as a percentage of revenue increased by 3.5 percentage points to 5.8%. - For the second quarter of 2023, K-Bro declared dividends of
$0.300 per common share. - Long-term debt at the end of Q2 2023 was
$63.6 million compared to$45.2 million at the end of fiscal 2022, with the acquisition of Paranet having been completed in early March. - K-Bro has repurchased and cancelled 52,756 shares under the normal course issuer bid announced
May 15, 2023 .
As with our first quarter results, we saw continued growth in healthcare revenue and significant growth in hospitality revenue as business and leisure travel volumes have returned. We continue to actively manage the impact of energy price increases and local market labour shortages.
We are excited about our outlook. We see continued stability in our healthcare segment and a return to pre-pandemic levels in our hospitality segment. On
Highlights and Significant Events for Fiscal 2023
Acquisition of Buanderie Paranet
On
At the time the financial statements were authorized for issue, and due to the timing of the Acquisition, the Corporation has not yet completed the accounting for the Acquisition of Paranet. This includes the accounting for the amounts attributable to property, plant & equipment, intangible assets and the associated goodwill. No measurement adjustments were made in the current period.
The Corporation financed the Acquisition and transaction costs from existing loan facilities.
The preliminary purchase price allocated to the net assets acquired, based on their estimated fair values, is as follows:
Cash consideration | $ 11,248 |
Contingent consideration | $ 945 |
Total purchase price | $ 12,193 |
The assets and liabilities recognized as a result of the Acquisition are as follows: | |
Net Assets Acquired: | |
Accounts receivable | 1,132 |
Prepaid expenses and deposits | 137 |
Linen in service | 970 |
Accounts payable and accrued liabilities | (1,119) |
Lease liabilities | (1,176) |
Deferred income taxes | 204 |
Property, plant and equipment(1) | 5,923 |
Intangible assets | 2,450 |
Net identifiable assets acquired | 8,521 |
3,672 | |
Net assets acquired | $ 12,193 |
1) Includes ROUA from the Canadian Division of |
The provisional intangible assets acquired are made up of
a) 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 Paranet for the twelve month period ended
The fair value of the contingent consideration of
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.
b) Acquisition related costs
For the period ended
c) Revenue and profit information
The acquired business contributed revenues of
The acquired business contributed net income of
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 16 whereas Paranet previously reported under 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
3sHealth Contract Extension
In Q2 2022, the Corporation extended its existing contract with 3sHealth for an additional six years to
Revolving Credit Facility
In Q2 2022, the Corporation completed an amendment to its existing revolving credit facility, which extended the agreement from
Capital Investment Plan
For fiscal 2023, the Corporation's planned capital spending is expected to be approximately
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
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.
Financial Results
For The Three Months Ended | ||||||||||
(thousands, except per share amounts | Canadian |
| 2023 | Canadian |
| 2022 | $ Change | % Change | ||
Revenue | $ 59,161 | $ 21,584 | $ 80,745 | $ 53,283 | $ 17,607 | $ 70,890 | 9,855 | 13.9 % | ||
Expenses included in EBITDA | 48,456 | 17,788 | 66,244 | 45,212 | 15,995 | 61,207 | 5,037 | 8.2 % | ||
EBITDA | 10,705 | 3,796 | 14,501 | 8,071 | 1,612 | 9,683 | 4,818 | 49.8 % | ||
EBITDA as a % of revenue | 18.1 % | 17.6 % | 18.0 % | 15.1 % | 9.2 % | 13.7 % | 4.3 % | 31.4 % | ||
Net earnings (loss) | 2,829 | 1,862 | 4,691 | 1,669 | (53) | 1,616 | 3,075 | 190.3 % | ||
Basic earnings (loss) per share | $ 0.264 | $ 0.174 | $ 0.438 | $ 0.157 | $ (0.005) | $ 0.152 | $ 0.286 | 188.2 % | ||
Diluted earnings (loss) per share | $ 0.263 | $ 0.173 | $ 0.436 | $ 0.156 | $ (0.005) | $ 0.151 | $ 0.285 | 188.7 % | ||
Dividends declared per diluted share | $ 0.30 | $ 0.300 | $ - | 0.0 % | ||||||
Total assets | 346,532 | 329,677 | 16,855 | 5.1 % | ||||||
Long-term debt (excludes lease liabilities) | 63,598 | 45,224 | 18,374 | 40.6 % | ||||||
Cash provided by operating activities | 1,122 | 3,838 | (2,716) | -70.8 % | ||||||
Net change in non-cash working capital items | (11,615) | (4,929) | (6,686) | -135.6 % | ||||||
Share-based compensation expense | 443 | 428 | 15 | 3.5 % | ||||||
Maintenance capital expenditures | 1,143 | 1,078 | 65 | 6.0 % | ||||||
Principal elements of lease payments | 2,340 | 1,821 | 519 | 28.5 % | ||||||
Distributable cash flow | 8,811 | 5,440 | 3,371 | 62.0 % | ||||||
Dividends declared | 3,237 | 3,227 | 10 | 0.3 % | ||||||
Payout ratio | 36.7 % | 59.3 % | -22.6 % | -38.1 % | ||||||
For The Six Months Ended | ||||||||||
(thousands, except per share amounts | Canadian |
| 2023 | Canadian |
| 2022 | $ Change | % Change | ||
Revenue | $ 114,660 | $ 36,868 | $ 151,528 | $ 102,517 | $ 29,807 | $ 132,324 | 19,204 | 14.5 % | ||
Expenses included in EBITDA | 94,597 | 32,097 | 126,694 | 86,927 | 28,652 | 115,579 | 11,115 | 9.6 % | ||
EBITDA | 20,063 | 4,771 | 24,834 | 15,590 | 1,155 | 16,745 | 8,089 | 48.3 % | ||
EBITDA as a % of revenue | 17.5 % | 12.9 % | 16.4 % | 15.2 % | 3.9 % | 12.7 % | 3.7 % | 29.1 % | ||
Net earnings (loss) | 5,074 | 1,617 | 6,691 | 3,098 | (1,928) | 1,170 | 5,521 | 471.9 % | ||
Basic earnings (loss) per share | $ 0.474 | $ 0.151 | $ 0.625 | $ 0.291 | $ (0.181) | $ 0.110 | $ 0.515 | 468.2 % | ||
Diluted earnings (loss) per share | $ 0.472 | $ 0.150 | $ 0.622 | $ 0.289 | $ (0.180) | $ 0.109 | $ 0.513 | 470.6 % | ||
Dividends declared per diluted share | $ 0.60 | $ 0.600 | $ - | 0.0 % | ||||||
Total assets | 346,532 | 329,677 | 16,855 | 5.1 % | ||||||
Long-term debt (excludes lease liabilities) | 63,598 | 45,224 | 18,374 | 40.6 % | ||||||
- | ||||||||||
Cash provided by operating activities | 10,430 | 13,551 | (3,121) | -23.0 % | ||||||
Net change in non-cash working capital items | (11,009) | (1,831) | (9,178) | -501.3 % | ||||||
Share-based compensation expense | 948 | 940 | 8 | 0.9 % | ||||||
Maintenance capital expenditures | 2,079 | 1,768 | 311 | 17.6 % | ||||||
Principal elements of lease payments | 4,484 | 3,655 | 829 | 22.7 % | ||||||
Distributable cash flow | 13,928 | 9,019 | 4,909 | 54.4 % | ||||||
Dividends declared | 6,468 | 6,443 | 25 | 0.4 % | ||||||
Payout ratio | 46.4 % | 71.4 % | -25.0 % | -35.0 % |
(1) See "Terminology" for further details |
Dividends
The Board of Directors has declared a monthly dividend of
OUTLOOK
The Corporation's healthcare segment continues to experience a steady growth trend. For the hospitality segment, management expects a good level of activity with the easing of government-imposed restrictions on international border crossings, increasing business/leisure travel, and price increases which will all continue to support the strong recovery momentum in hospitality revenues experienced through 2022 as well as in Q1 and Q2 of 2023.
In 2022, management was focused on operational efficiencies and the transition of new AHS business, which was completed in early
From an input cost perspective, since early
The Corporation is also facing temporary labour inefficiencies from unusually competitive labour markets. Management is focused on the retention of existing staff, in addition to implementing strategies to recruit and hire new staff. The Corporation has achieved some success in certain markets but is still focusing efforts on other markets. The Corporation is managing more challenging regional labour availability with complementary temporary foreign worker programs.
Management remains confident in their ability to return to 2019 margin levels, consistent with historical seasonal trends and it is anticipated this will occur in the later half of 2023. Margins will benefit from negotiated price increases, which have now been secured, as well as anticipated labour efficiency gains which depend on our continued ability to attract and retain staff. Management anticipates labour markets will stabilize, but the timing remains uncertain.
With continued momentum in existing operations, management has refocused attention on strategic acquisitions, such as the recently announced acquisition of Paranet, to accelerate growth in both
CORPORATE PROFILE
K-Bro is the largest owner and operator of laundry and linen processing facilities in
The Corporation's operations in
The Corporation's operations in the
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 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
Three Months Ended | Six Months Ended | |||||||
(thousands) | 2023 | 2022 | 2023 | 2022 | ||||
Net earnings | $ 4,691 | $ 1,616 | $ 6,691 | $ 1,170 | ||||
Add: | ||||||||
Income tax expense | 1,423 | 496 | 1,962 | 477 | ||||
Finance expense | 1,584 | 1,001 | 3,057 | 2,001 | ||||
Depreciation of property, plant and equipment | 6,656 | 5,936 | 12,907 | 11,792 | ||||
Amortization of intangible assets | 147 | 634 | 217 | 1,305 | ||||
EBITDA | $ 14,501 | $ 9,683 | $ 24,834 | $ 16,745 |
Non-GAAP Measures
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 | Six Months Ended | ||||||
(thousands) | 2023 | 2022 | 2023 | 2022 | |||
Cash provided by operating activities | $ 1,122 | $ 3,838 | $ 10,430 | $ 13,551 | |||
Deduct (add): | |||||||
Net changes in non-cash working capital items | (11,615) | (4,929) | (11,009) | (1,831) | |||
Share-based compensation expense | 443 | 428 | 948 | 940 | |||
Maintenance capital expenditures | 1,143 | 1,078 | 2,079 | 1,768 | |||
Principal elements of lease payments | 2,340 | 1,821 | 4,484 | 3,655 | |||
Distributable cash flow | $ 8,811 | $ 5,440 | $ 13,928 | $ 9,019 |
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 | Six Months Ended | ||||||
(thousands) | 2023 | 2022 | 2023 | 2022 | |||
Cash dividends | 3,237 | 3,227 | 6,468 | 6,443 | |||
Distributable cash flow | 8,811 | 5,440 | 13,928 | 9,019 | |||
Payout ratio | 36.7 % | 59.3 % | 46.4 % | 71.4 % |
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 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 including, without limitation, in connection with the settlement of definitive documentation in respect there of; (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
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
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