(TSX: KBL)
2020Q2 Financial and Operating Highlights
- As a result of the COVID-19 pandemic, consolidated hospitality revenue for the three months ended
June 30, 2020 decreased 91.7% over the comparable 2019 period. This is partially offset by an increase of 1.1% in consolidated healthcare revenue for an overall decrease in consolidated revenue of 41.3%. - EBITDA decreased in the secondquarter to $10.1 million compared to $12.7 million over the comparable 2019 period.
- On a consolidated basis excluding IFRS 16 Leases ("IFRS 16") for the three months ended
June 30, 2020 the Corporation recorded adjusted EBITDA of $7.6 million and adjusted net earnings of $1.3 million in the secondquarter of 2020. This is a decrease over the comparable 2019period where adjusted EBITDA was $10.5 million and adjusted net earnings was $3.6 million. - Net earnings in the second quarter of 2020 decreased by
$1.9 million to$1.6 million compared to$3.5 million in the comparative period of 2019, and as a percentage of revenue decreased to 4.3%. - Adjusted EBITDA margin increased to 20.1% from 16.4% over the comparable 2019 period.
- During the secondquarter, K-Bro declared dividends of $0.300 per common share and distributable cash was $0.683 per common share on a fully diluted basis.
While the second quarter was difficult, we have seen recent improvements in client activity with April's revenue being the low point and May and June gradually improving. As we progressed through the second quarter, healthcare volumes began to return to more typical levels and while hospitality remained below historical levels, we have experienced improvement. For July when compared to the prior year, consolidated healthcare and hospitality revenues are 10% higher and 75% lower respectively. While client activity is improving, we continue to maintain downsized operations and reduced employee headcount. From a safety standpoint, we continue to operate with enhanced safety protocols and practices to ensure the health and wellbeing of our employees and their families."
"We remain well-positioned from a balance sheet and liquidity perspective with
Highlights and Significant Events for Fiscal 2020
Revolving Credit Facility
During the second quarter of 2020, the Corporation completed an amendment to its existing revolving credit facility which made changes to certain terms and conditions within the agreement in consideration of the ongoing COVID-19 pandemic and the impact to the Corporation's operations. Key changes included:
- An increased Funded Debt to EBITDA covenant for the period of
September 30, 2020 toJune 30, 2021 which gradually allows for a maximum Funded Debt to EBITDA ratio of 4.5x for Q4 2020 and Q1 2021 which is also subject to certain one-time add backs to EBITDA. - A reduction to the Fixed Charge Covenant for the period of
September 30,2020 toJune 30, 2021 which reduces to a maximum of 1.1x. - A restriction on any dividend increases during the covenant relief period of
July 1, 2020 toJune 30, 2021 .
On
Capital Investment Plan
For fiscal 2020, K-Bro had previously anticipated capital spending to be approximately
Alberta Contract Award
On
Loss of Whitbread Group Contract
Subsequent to the 2019 fiscal year, the Corporation was unsuccessful in renewing its
COVID-19 Pandemic
The ongoing COVID-19 pandemic has caused world governments to institute travel restrictions, impacting travel both in and out of
Although the Corporation has developed and implemented measures to mitigate the effects of the COVID-19 pandemic which include, consolidating operations, reducing headcount, reducing certain capital expenditures and accessing available government assistance programs, earnings will continue to be effected if we continue to experience reductions in travel and reduced hospitality and healthcare occupancy rates. The extent of such negative effects on our business and our financial and operational performance will depend on future developments, including the duration, spread and severity of the outbreak, the duration and geographic scope of related travel advisories and restrictions and the extent of the impact of the COVID-19 pandemic on overall demand for personal and business travel, all of which are highly uncertain and cannot be predicted with any degree of accuracy. As hotels are continuing to experience significantly reduced occupancy rates for an extended period, our 2020 consolidated results of operations will be continue to be significantly impacted. Additionally, our suppliers or other third parties we rely upon may experience delays or shortages, which could have an adverse effect on our business prospects and results of operations.
As an ongoing risk, the duration and full financial effect of the COVID-19 pandemic is unknown at this time, and continues to be offset through the Corporation's business continuity plan and other mitigating measures. Any estimate of the length and severity of these developments is therefore subject to significant uncertainty, and, accordingly, estimates of the extent to which the COVID-19 pandemic may materially and adversely affect the Corporation's operations, financial results and condition in future periods are also subject to significant uncertainty.
Therefore, uncertainty about judgments, estimates and assumptions made by management during the preparation of the Corporation's interim condensed consolidated financial statements related to potential impacts of the COVID-19 pandemic on revenue, expenses, assets, liabilities, and note disclosures could result in a material adjustment to the carrying value of the assets or liabilities affected.
Impairment of Assets
Based on management's review, the original assessment at
Management's probability weighted approach was evaluated based off an equally weighted probability of a one year downturn in sales to the worst case of a two year downturn in sales. The scenarios estimated a decline of 70% for year 1 and 50% for year 2, with sales returning to normalized levels thereafter with sales growth estimates used between 2% to 3%. At
During the six month period ended
CGU Allocated to Allocated to Total Recoverable $ 823 $ - $ 823 $ 2,485 654 2,339 2,993 1,917 1,700 - 1,700 5,433 $ 3,177 $ 2,339 $ 5,516 $ 9,835
PP&E
impairment
recorded
Amount
The key assumptions in calculating the recoverable amount of the five CGU's where impairment calculations were as follows:
Long-term growth rate % | 2.0% to 3.0% |
Pre-tax discount rate % | 10.5% to 12.5% |
For
There were no other CGUs as at
With the ongoing development of the COVID-19 pandemic, the length and severity of these developments is therefore subject to significant uncertainty, and accordingly may materially and adversely affect assumptions used in the consideration of the impairment of assets, impact whether a CGU has been impaired, and may change prior recorded impairment amounts.
Financial Results
For The Three Months Ended (thousands, except per share amounts and percentages) Canadian 2020(2) Canadian 2019 $ Change % Change Revenue $ 35,353 $ 2,167 $ 37,520 $ 46,599 $ 17,294 $ 63,893 (26,373) -41.3% Expenses included in EBITDA 23,779 3,686 27,465 37,300 13,854 51,154 (23,689) -46.3% EBITDA(1) 11,574 (1,519) 10,055 9,299 3,440 12,739 (2,684) -21.1% EBITDA as a % of revenue 32.7% -70.1% 26.8% 20.0% 19.9% 19.9% 6.9% 34.7% Adjusted EBITDA without adoption of IFRS 16(1) 10,140 (2,582) 7,558 7,884 2,604 10,488 (2,930) -27.9% Adjusted EBITDA without adoption of IFRS 16as a % of revenue 28.7% -119.2% 20.1% 16.9% 15.1% 16.4% - 100.0% Net earnings (loss) 4,460 (2,847) 1,613 2,403 1,144 3,547 (1,934) -54.5% Basic earnings (loss) per share $ 0.423 $ (0.270) $ 0.153 $ 0.229 $ 0.109 $ 0.338 $ (0.185) -54.7% Diluted earnings (loss) per share $ 0.420 $ (0.268) $ 0.152 $ 0.228 $ 0.108 $ 0.336 $ (0.184) -54.8% Dividends declared per diluted share $ 0.30 $ 0.300 $ - 0.0% Adjusted net earnings (loss) without adoption of IFRS 16(1) 4,482 (3,190) 1,292 2,456 1,181 3,637 (2,345) -64.5% Basic adjusted net earnings (loss) without adoption of IFRS 16 per share $ 0.425 $ (0.302) $ 0.122 $ 0.234 $ 0.112 $ 0.346 $ (0.230) 100.0% Diluted adjusted net earnings (loss) without adoption of IFRS 16 per share $ 0.422 $ (0.300) $ 0.122 $ 0.233 $ 0.112 $ 0.344 $ (0.220) 100.0% Total assets 330,372 361,018 (30,646) -8.5% Long-term debt, end of period 56,416 75,952 (19,536) -25.7% Cash provided by operating activities 6,289 2,875 3,414 118.7% Net change in non-cash working capital items (2,926) (8,615) 5,689 66.0% Share-based compensation expense 189 439 (250) -56.9% Maintenance capital expenditures 280 1,143 (863) -75.5% Principal elements of lease payments 1,487 1,736 (249) -14.3% Distributable cash flow(3) 7,259 8,172 (913) -11.2% Dividends declared 3,196 3,177 19 0.6% Payout ratio 44.0% 38.9% 5.1% 13.1% For The Six Months Ended (thousands, except per share amounts and percentages) Canadian 2020(2)(4) Canadian 2019 $ Change % Change Revenue $ 79,064 $ 15,731 $ 94,795 $ 91,132 $ 30,544 $ 121,676 (26,881) -22.1% Expenses included in EBITDA 64,696 16,301 80,997 74,449 25,373 99,822 (18,825) -18.9% EBITDA(1) 14,368 (570) 13,798 16,683 5,171 21,854 (8,056) -36.9% EBITDA as a % of revenue 18.2% -3.6% 14.6% 18.3% 16.9% 18.0% -3.4% -18.9% Adjusted EBITDA without adoption of IFRS 16(1) 16,988 (2,321) 14,667 13,844 3,447 17,291 (2,624) -15.2% Adjusted EBITDA without adoption of IFRS 16 as a % of revenue 21.5% -14.8% 15.5% 15.2% 11.3% 14.2% - 100.0% Net earnings (loss) 1,988 (3,783) (1,795) 3,134 908 4,042 (5,837) -144.4% Basic earnings (loss) per share $ 0.189 $ (0.359) $ (0.170) $ 0.298 $ 0.086 $ 0.385 $ (0.555) -144.2% Diluted earnings (loss) per share $ 0.187 $ (0.357) $ (0.169) $ 0.297 $ 0.086 $ 0.383 $ (0.552) -144.1% Dividends declared per diluted share $ 0.60 $ 0.600 $ - 0.0% Adjusted net earnings (loss) without adoption of IFRS 16(1) 6,345 (4,068) 2,277 3,243 952 4,195 (1,918) -45.7% Basic adjusted net earnings (loss) without adoption of IFRS 16 per share $ 0.602 $ (0.386) $ 0.215 $ 0.309 $ 0.091 $ 0.400 $ (0.180) 100.0% Diluted adjusted net earnings (loss) without adoption of IFRS 16 per share $ 0.598 $ (0.383) $ 0.215 $ 0.307 $ 0.090 $ 0.397 $ (0.190) 100.0% Total assets 330,372 361,018 (30,646) -8.5% Long-term debt, end of period 56,416 75,952 (19,536) -25.7% Cash provided by operating activities 17,877 12,545 5,332 42.5% Net change in non-cash working capital items 85 (7,131) 7,216 101.2% Share-based compensation expense 696 979 (283) -28.9% Maintenance capital expenditures 608 1,517 (909) -59.9% Principal elements of lease payments 3,153 3,384 (231) -6.8% Distributable cash flow(3) 13,335 13,796 (461) -3.3% Dividends declared 6,377 6,345 32 0.5% Payout ratio 47.8% 46.0% 1.8% 3.9% (1) See "Terminology" for further details (2) Effective (3) Effective (4) Q1 2020 includes an adjustment of
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Dividends
The Board of Directors has declared a monthly dividend of
Outlook
While the COVID-19 pandemic will have a significant negative impact on our hospitality revenue, management believes the prospects for the Corporation's healthcare business remains strong in the medium-to-long-term. By providing integral laundry and linen processing services to the hospitality and healthcare sectors, the Corporation has been designated an "essential" service in the jurisdictions in which it operates, which has allowed the Corporation's facilities to remain open and continue "normal" operations. This has mitigated some of the more dramatic financial and operational impacts experienced by many other businesses in other industries. In addition, management believes that the financial flexibility provided by our strong balance sheet will enable us to operate without disruption to our business model while maintaining our ability to service the healthcare and hospitality sectors in our Canadian and
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) | 2020 | 2019 | 2020 | 2019 | ||||||||
Net earnings (loss) | $ | 1,613 | $ | 3,547 | $ | (1,795) | $ | 4,042 | ||||
Add: | ||||||||||||
Income tax (recovery) expense | 798 | 647 | (325) | 838 | ||||||||
Finance expense | 791 | 1,566 | 1,984 | 3,079 | ||||||||
Depreciation of property, plant and equipment | 5,891 | 6,203 | 12,006 | 12,338 | ||||||||
Amortization of intangible assets | 962 | 776 | 1,928 | 1,557 | ||||||||
EBITDA | $ | 10,055 | $ | 12,739 | $ | 13,798 | $ | 21,854 |
(1) | Q1 2020 includes an adjustment of |
Non-GAAP Measures
Adjusted EBITDA without adoption of IFRS 16
Adjusted EBITDA without adoption of IFRS 16 is a measure which has been reported in order to assist in the comparison of historical EBITDA to current results. "Adjusted EBITDA" without adoption of IFRS 16 is defined as EBITDA (defined above) with the exclusion of IFRS 16, and certain material items that are unusual in nature, infrequently occurring or not considered part of our core operations.
Three Months Ended | |||||||||||||
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| Canadian |
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(thousands) | 2020 | 2020 | 2020 | 2019 | 2019 | 2019 | |||||||
EBITDA | $ | 11,574 | $ | (1,519) | $ | 10,055 | $ | 9,299 | $ | 3,440 | $ | 12,739 | |
Add back IFRS 16 Adjustments: | |||||||||||||
Delivery | (329) | (423) | (752) | (321) | (554) | (875) | |||||||
Occupancy costs | (1,105) | (640) | (1,745) | (1,094) | (282) | (1,376) | |||||||
EBITDA without adoption of IFRS 16 | $ | 10,140 | $ | (2,582) | $ | 7,558 | $ | 7,884 | $ | 2,604 | $ | 10,488 | |
Add back non-reoccuring items: | |||||||||||||
Impairment of assets | - | - | - | - | - | - | |||||||
- | - | - | |||||||||||
- | - | - | |||||||||||
Adjusted EBITDA without adoption of IFRS 16 | $ | 10,140 | $ | (2,582) | $ | 7,558 | $ | 7,884 | $ | 2,604 | $ | 10,488 |
Six Months Ended | |||||||||||||
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(thousands) | 2020 | 2020 | 2020 | 2019 | 2019 | 2019 | |||||||
EBITDA | $ | 14,368 | $ | (570) | $ | 13,798 | $ | 16,683 | $ | 5,171 | $ | 21,854 | |
Add back IFRS 16 Adjustments: | |||||||||||||
Delivery | (687) | (820) | (1,507) | (647) | (1,116) | (1,763) | |||||||
Occupancy costs | (2,209) | (931) | (3,140) | (2,192) | (608) | (2,800) | |||||||
EBITDA without adoption of IFRS 16 | $ | 11,472 | $ | (2,321) | $ | 9,151 | $ | 13,844 | $ | 3,447 | $ | 17,291 | |
Add back non-reoccuring items: | |||||||||||||
Impairment of assets | 5,516 | - | 5,516 | - | - | - | |||||||
- | - | - | |||||||||||
- | - | - | |||||||||||
Adjusted EBITDA without adoption of IFRS 16 | $ | 16,988 | $ | (2,321) | $ | 14,667 | $ | 13,844 | $ | 3,447 | $ | 17,291 |
Adjusted net earnings without adoption of IFRS 16 and adjusted net earnings without adoption of IFRS 16 per Share
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 IFRS 16, and certain material items that are unusual in nature, infrequently occurring or not considered part of our core operations.
Three Months Ended Canadian Canadian (thousands) 2020 2020 2020 2019 2019 2019 Net earnings (loss) $ 4,460 $ (2,847) $ 1,613 $ 2,403 $ 1,144 $ 3,547 Add back IFRS 16 Adjustments: Delivery (329) (423) (752) (321) (554) (875) Occupancy costs (1,105) (640) (1,745) (1,094) (282) (1,376) Depreciation of property, plant and equipment 1,091 544 1,635 1,085 764 1,849 Finance expense 373 105 478 401 116 517 Income tax (8) 71 63 (18) (7) (25) Net earnings (loss) without adoption of IFRS 16 $ 4,482 $ (3,190) $ 1,292 $ 2,456 $ 1,181 $ 3,637 Add back non-reoccuring items (net of income taxes): Impairment of assets - - - - - - - - - Adjusted net earnings (loss) without adoption of IFRS 16 $ 4,482 $ (3,190) $ 1,292 $ 2,456 $ 1,181 $ 3,637 Weighted average number of shares outstanding: Basic 10,551,443 10,551,443 10,551,443 10,503,674 10,503,674 10,503,674 Diluted 10,626,893 10,626,893 10,626,893 10,557,643 10,557,643 10,557,643 Adjusted net earnings (loss) without adoption of IFRS 16 per share: Basic $ 0.425 ( $ 0.122 $ 0.229 $ 0.109 $ 0.346 Diluted $ 0.422 ( $ 0.122 $ 0.228 $ 0.108 $ 0.344
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Six Months Ended Canadian Canadian (thousands) 2020 2020 2020 2019 2019 2019 Net earnings (loss) $ 1,988 $ (3,783) $ (1,795) $ 3,134 $ 908 4,042 Add back IFRS 16 Adjustments: Delivery (687) (820) (1,507) (647) (1,116) (1,763) Occupancy costs $ (2,209) $ (931) (3,140) (2,192) (608) (2,800) Depreciation of property, plant and equipment $ 2,204 $ 1,201 3,405 2,172 1,537 3,709 Finance expense $ 757 $ 206 963 814 240 1,054 Income tax $ (17) $ 59 42 (38) (9) (47) Net earnings (loss) without adoption of IFRS 16 $ 2,036 $ (4,068) $ (2,032) $ 3,243 $ 952 $ 4,195 Add back non-reoccuring items (net of income taxes): Impairment of assets 4,309 - 4,309 - - - - - - Adjusted net earnings (loss) without adoption of IFRS 16 $ 6,345 $ (4,068) $ 2,277 $ 3,243 $ 952 $ 4,195 Weighted average number of shares outstanding: Basic 10,545,450 10,545,450 10,545,450 10,500,151 10,500,151 10,500,151 Diluted 10,609,815 10,609,815 10,609,815 10,545,951 10,545,951 10,545,951 Adjusted net earnings (loss) without adoption of IFRS 16 per share: Basic $ 0.602 ( $ 0.216 $ 0.298 $ 0.086 $ 0.400 Diluted $ 0.598 ( $ 0.215 $ 0.297 $ 0.086 $ 0.398
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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.
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.
Debt to Total Capital
"Debt to total capital" is defined by management as the total long–term debt 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; (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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