K-Bro Linen Inc

TSX:KBL

Earnings Call Analysis

Earnings Call Transcript 2024-Q2

[Operator]

Good morning, ladies and gentlemen, and welcome to the K-Bro Linen Systems Inc. Second Quarter 2024 Results Conference Call. [Operator Instructions] This call is being recorded on August 7, 2024. I would now like to turn the conference over to Kristie Plaquin. Please go ahead.

[Kristie Plaquin, executive]

Thank you, operator, and good morning, everyone. Thank you for joining us today, and welcome to our second quarter results conference call. On the line with me today is Linda McCurdy, President and Chief Executive Officer. Following our remarks today, we will open it up for questions. Before we begin, I'd like to remind everyone that statements made during our prepared remarks or in the question-and-answer portion of the conference call with reference to management's expectations or our predictions of the future are forward-looking statements. All statements made today, which are not statements of historical fact are considered to be forward-looking statements.

Certain material factors or assumptions were applied in drawing a conclusion or making a forecast or projection as reflected in the forward-looking information. Investors are also cautioned not to place undue reliance on these statements. Actual results could differ materially from those anticipated. Risk factors that could affect the results are detailed in the corporation's public filings.

I'll now turn the call over to our CEO, Linda McCurdy, who will provide her insights and remarks on the quarter. Linda?

[Linda McCurdy, executive]

Thank you, Kristie. Good morning, everyone, and thank you for joining us today to review our 2024 second quarter results. I will focus on the main highlights of our second quarter, and Kristie will provide more details of our financial performance and balance sheet. .

So I'm delighted with our record second quarter results and continued momentum in both the health care and hospitality segments. In terms of highlights, we reported Q2 2024 revenue of $93 million and adjusted EBITDA of $18.2 million for the quarter. Since the start of the year, we announced two acquisitions, Shortridge in the U.K. and C.M. in Montreal. We're excited about our organic growth prospects and potential future M&A.

As we actively pursue these growth opportunities, we will continue to incur certain nonrecurring or onetime transaction, transition and financing costs. In this context, we believe adjusted EBITDA before nonrecurring or onetime costs will assist investors to assess our performance on a consistent basis as it's an indication of our capacity to generate income from operations. EBITDA before adjusting items was $16.6 million for the quarter.

Overall, consolidated revenue increased 15.8% compared to Q2 2023, with health care revenue having increased by 5.5% and hospitality revenue by 28.9%. The health care revenues represented approximately 51% of consolidated revenue, which is lower compared to approximately 56% in 2023 due to the acquisition of Shortridge and strong activity in the hospitality segment.

We're excited to welcome Shortridge and C.M. to the K-Bro family. On April 30, we acquired Shortridge, a high-quality hospitality laundry provider based in the northwest of England, Shortridge further diversifies our U.K. customer base while positioning our combined U.K. business for more growth as we look to extend K-Bro's geographic reach further south into the U.K.

On June 21, we acquired C.M., a high-quality operator serving top-tier health care customers in Montreal. C.M. expands K-Bro's health care customer base, increases health care volumes, adds additional health care capacity and support significant future growth opportunities. We're pleased with the early contributions of our acquisitions and see a positive outlook for K-Bro. We're excited about our organic growth prospects and potential future M&A. We remain well positioned from a balance sheet and liquidity perspective and will continue to be disciplined as we evaluate acquisitions.

I'll now turn the call over to Kristie to discuss our detailed financial results for the quarter after which I'll return to talk about our outlook. Kristie, over to you.

[Kristie Plaquin, executive]

Thank you, Linda. The information we are discussing today is also highlighted in our 2024 second quarter earnings press release issued yesterday, and detailed supplemental financial information can be found on our Investors Relations website. As a result of the acquisition of Shortridge in April 2024, price increases implemented and the acquisitions of Paranet and Villeray, consolidated hospitality revenue for the 3 months ended June 30, 2024, increased by 28.9% over the comparable 2023 period. And the corporation saw a 5.5% increase in consolidated health care revenue for an overall increase in consolidated revenue of 15.8%.

As Linda mentioned, when reporting adjusted EBITDA, we revised our adjusting items to reflect certain nonrecurring or onetime transaction, transition and financing costs related to our growth opportunities. We believe adjusted EBITDA before nonrecurring or onetime costs will assist investors to assess our performance on a consistent basis. Details of the calculations and adjustments can be found in our MD&A under the section Terminology.

Consolidated adjusted EBITDA increased in the second quarter to $18.2 million or by 25.2% compared to $14.6 million in 2023. Adjusted EBITDA margin increased by 1.4% to 19.5% from 18.1%. Adjusting items include nonrecurring transaction, transition and syndication and structural financing costs. Consolidated EBITDA increased in the quarter to $16.6 million or by 14.3% compared to $14.5 million in 2023. Consolidated EBITDA margin decreased to 17.7% in 2024 from 18% in 2023. For the Canadian division, Q2 adjusted EBITDA margin increased to 18.9% in 2024 from 18.2% in 2023. Without adjusting items, the EBITDA margin in the second quarter decreased to 17% in '24 from 18.1% in 2023. The decrease in margin is primarily related to nonrecurring items, which include transaction, transition and syndication and structural financing costs.

For the U.K. division, Q2 adjusted EBITDA margin increased to 20.8% in 2024 from 17.6% in 2023. Without adjusting items, in the second quarter, the EBITDA margin increased to 19.4% in 2024 from 17.6% in 2023. The improvements in EBITDA margin is primarily related to the acquisition of Shortridge in April '24, delivery and labor cost efficiencies and the impact of price increases implemented in 2023, offset by certain nonrecurring adjusting items. Net earnings decreased by $0.2 million or by 3.3% from $4.7 million in 2023 to $4.5 million in 2024. And net earnings as a percentage of revenue decreased by 0.9% to 4.9% from 5.8% in 2023. The decrease in net earnings is due to increased depreciation and amortization related to Shortridge, Paranet and Villeray assets acquired as well as due to nonrecurring transaction, transition and syndication and structural financing costs. Adjusted net earnings increased by $1.4 million or by 30% from $4.8 million in 2023 to $6.2 million in 2024.

Wages and benefits in the second quarter of '24 increased by $4.2 million to $35.2 million compared to $31 million in the comparative period of 2023, and as a percentage of revenue, decreased by 0.8 percentage points to 37.6%. The decrease as a percentage of revenue is primarily related to the corporation's acquisition targets and the integration of their cost profile.

Linen in the second quarter of 2024, increased by $0.8 million to $9.1 million compared to $8.3 million in the comparative period of 2023, and as a percentage of revenue, decreased by 0.5 percentage points to 9.7%. The decrease as a percentage of revenue is primarily related to the changes in linen mix and a higher hospitality volume process compared to the prior year. Utilities in the second quarter of 2024 increased by $0.7 million to $7 million compared to $6.3 million in the comparative period of 2023. And as a percentage of revenue, decreased by 0.3 percentage points to 7.5%. The decrease as a percentage of revenue is primarily related to the impact of price increases secured across various markets.

Delivery in the second quarter of '24 increased by $1.5 million to $10.9 million compared to $9.4 million in the comparative period of 2023, and as a percentage of revenue, remained relatively consistent at 11.6%. Occupancy costs in the second quarter of '24 increased by $0.3 million to $1.7 million compared to $1.4 million in the comparative period of 2023, and as a percentage of revenue, remained consistent.

Materials and supplies in the second quarter of '24 increased by $0.6 million to $3.8 million compared to $3.2 million in the comparative period of '23, and as a percentage of revenue remained consistent. Repairs and maintenance in the second quarter of '24 increased by $1 million to $4.1 million compared to $3.1 million in the comparative period of 2023, and as a percentage of revenue, increased by 0.6 percentage points to 4.4%. The increase as a percentage of revenue is primarily related to Villeray transition costs and the timing of maintenance activities.

Corporate costs in the second quarter of 2024 increased by $1.5 million to $5.2 million compared to $3.7 million in the comparative period of 2023, and as a percentage of revenue, increased by 1 percentage point to 5.6%. The increase as a percentage of revenue is primarily related to transaction costs, including legal, professional and consulting fee expenditures related to acquisitions as well as the syndication costs for the corporation's credit facility. These costs are nonrecurring in nature and are further defined within our MD&A.

Now looking at our capital resources. Distributable cash flow for the second quarter of 2024 was $9.7 million, and our payout ratio was 32.7%. The company paid out $0.3 per share in dividends during the quarter for total consideration of $3.2 million. The corporation had net working capital of $52.5 million at the end of the second quarter of '24 compared to its working capital position of $41.4 million at December 31, '23. The increase in working capital is primarily attributable to the acquisitions of Shortage and C.M. as well as the timing of cash receipts from customers.

With regards to the credit and liquidity. We have a strong balance sheet and ample undrawn capacity on our syndicated revolving credit facility with an operating line of $175 million and a further $75 million accordion for growth purposes. At June 30, 2024, after the acquisitions of Shortage and C.M., we had an undrawn balance of close to $36.5 million on our operating line without taking into account the accordion, reinforcing our strong liquidity. This represents a debt-to-EBITDA ratio, excluding leases of just under 2.5x.

I'll now turn things back over to Linda for additional commentary. Linda?

[Linda McCurdy, executive]

Thank you, Kristie. So we're excited by our strong year-to-date performance and see a positive outlook for our business. Over the past 1.5 years, we've acquired 4 complementary high-quality laundry operators. In Canada, we see attractive growth opportunities in Quebec, and have added Paranet, Villeray and C.M. to our platform. In the U.K., Shortridge expands and diversifies our customer base and positions our combined U.K. business for more growth as we look to extend K-Bro's geographic reach south into the U.K.

Both of K-Bro's health care and hospitality segments continue to experience steady growth in trends. Health care volumes remain steady as the hospital focus on reducing wait times and backlogs. We also see a continued trend from care providers towards reusable products. Hospitality volumes have recovered and business and international travel have returned. We continue to see strong levels of activity across Canada and the U.K. We expect adjusted EBITDA margins to follow historical seasonal trends.

Our vision for K-Bro centers around delivering industry-leading service, putting people first and supporting the communities in which we operate. We're proud of our reputation for looking after the interest of our valued customers and being dependable partners to all stakeholders. Paranet, Villeray, C.M. and Shortridge share our values, and we're excited for the potential these acquisitions present for our future. We see a positive outlook and continued momentum in both health care and hospitality and attractive growth opportunities. Strategic acquisitions of complementary high-quality operators continue to be an important contributor to K-Bro's overall growth profile, and we continue to have an active M&A pipeline. We remain well positioned from a balance sheet and liquidity perspective, and we'll continue to be disciplined as we evaluate acquisitions.

I'll now turn it over to answer any questions you have with regards to the second quarter.

[Operator]

[Operator Instructions] Your first question comes from Derek Lessard from TD Cowen.

[Derek Lessard, analyst]

Congratulations on a really strong quarter. Linda, maybe I just want to talk on your positive outlook, and just maybe if you could talk about that in relation to hospitality. And some of the clouds that are gathering on the macro front, particularly as it relates to the consumer, and maybe the impact on future travel, particularly the U.S. travel to Europe, which is up, I think, at record highs?

[Linda McCurdy, executive]

Based on feedback that we have seen from our customers and just in discussions with them, they still seem pretty positive about the outlook for the balance of the year. I would also say that convention and large group travel, which has to be booked months, if not years in advance has come back into play. So we haven't seen any significant warning signs to say that we won't finish the year on the hospitality front in line with what we've seen in Q2, is really the best I can answer that, Derek?

[Derek Lessard, analyst]

Okay. No, that's super helpful. And I guess, maybe there is also some industry data that's pointing to the return of business to travel. Curious on what you're hearing from the business side of the -- business travel side?

[Linda McCurdy, executive]

It's really hard for us to discern a business traveler from a leisure travel. Some of our markets are more geared to leisure. For example, the U.K. we service Edinburgh, which there is business travel there, but a lot of the Scottish business is leisure travel. In markets like Toronto, we are definitely seeing a pickup in demand from business travel. But it is hard for us to break that down between various travel types.

[Derek Lessard, analyst]

Okay. That's fair. And one last one for me before I re-queue. Maybe if you could help us understand, I guess, the relative contribution to growth from pricing versus volume?

[Linda McCurdy, executive]

Sure, absolutely. Kristie, do you want to handle that one?

[Kristie Plaquin, executive]

Yes. Yes, sure. So I think just overall, on a consolidated basis, Derek, about half of the -- just over half would be related to acquisitions and volumes. So in the 60% range and about 40% would be for price.

[Operator]

Next question comes from Michael Glen at Raymond James.

[Michael Glen, analyst]

Just following on the last question there. Linda, are you able to indicate what Q2 organic growth was if we peel out the M&A from the quarter?

[Linda McCurdy, executive]

It's about 8% -- yes, about 8% between price and volume, Michael.

[Michael Glen, analyst]

Okay. So this would look to be trending above what you had seen historically. Any -- like is this still a rebound in hospitality coming through? Or is there a lot of things happening on the health care side, pushing that number higher as well?

[Linda McCurdy, executive]

I'd say it's about half and half, Michael, between hospitality and health care.

[Michael Glen, analyst]

Okay. And just on the renewals that you flagged to us earlier in the year. Can you give an update on where we sit with the renewals and progress towards that?

[Linda McCurdy, executive]

Kristie, do you want to respond to that?

[Kristie Plaquin, executive]

Yes. Sure, Linda. Thank you. So -- what I would say to that is, overall, there are still contracts that will come due throughout the balance of the year. In terms of those that have been renewed to date, roughly about half of them Michael, have been renewed to date.

[Michael Glen, analyst]

So that would be 1/2 of -- I think the number was $67 million or...

[Kristie Plaquin, executive]

Correct. Correct. In the $70 million range. Correct.

[Michael Glen, analyst]

In the -- so roughly half of the $70 million renewed. Okay.

[Linda McCurdy, executive]

And I would just -- the one thing I would add on that, I would say, of the 50% remaining, I'd say half of that is trending and positive discussions, but the paperwork hasn't been signed, Michael. So we're in -- and the balance of it comes due throughout the balance of the year.

[Michael Glen, analyst]

Okay. And any -- can you just also provide a comment on your -- on the outlook for organic win opportunities or RFPs coming in the next year or two?

[Linda McCurdy, executive]

Yes. I'd say in the next -- throughout the balance of the year in '25, I would say there's large chunks of volume coming up. To RFP, I'd say, in the tens of millions of dollars in various markets.

[Operator]

Next question comes from Kyle McPhee at Cormark Securities.

[Kyle McPhee, analyst]

First, just a follow-up on the pricing contribution. So all the information you've provided from prior question indicates pricing was about 6%, 6.5%. Does that -- and I think it was similar last quarter as well. Does that type of pricing contribution start to fall now going forward? Have you largely lapped the big round of inflation catch-up pricing gains that became effective throughout last year?

[Linda McCurdy, executive]

I would say that's a fair comment, Kyle.

[Kyle McPhee, analyst]

Okay. And then just on -- I wanted to talk about Quebec. So regarding your most recent acquisition in the province that you announced in June, should we expect revenue to land a typical K-Bro margins? Or any notable differences or margin mix impacts we should be aware of for that deal?

[Linda McCurdy, executive]

I think you'll see it fall in line with our historical margins. It would be consistent with our existing margin profile.

[Kyle McPhee, analyst]

Okay. And then higher level on your Quebec plan, you've done a series of acquisitions in the province. The deals landed you at three facilities in the province. Looks like you already made the decision to close one site and consolidate the volume. Will you keep the two remaining sites? Or should we expect further facility consolidation in the province?

[Linda McCurdy, executive]

I would say that it's a bit premature to comment on that. Our expectation is to maintain the existing facilities. The one you noted was in Granby and we have transferred the volume. At this point, we expect to keep our remaining facilities and grow the business and add additional volume to our plants.

[Kyle McPhee, analyst]

So is it a significant amount of excess capacity you're leaving yourself within the province? Like Quebec going to be an above average organic volume growth province, leveraging you're now much bigger position in the province?

[Linda McCurdy, executive]

We -- one of our vision was to expand capacity in the market for that reason exactly. It's a large market where we were -- we didn't have the capacity. So I would expect there to be a significant area of growth. .

[Kyle McPhee, analyst]

Got it. Okay. And then last one. Nice to see you're now adjusting for the two onetime items in your results with a detailed breakdown. I assume onetime costs will continue as you integrate the series of acquisitions you've done in Quebec and the U.K. Can you provide guidance on the level of onetime costs for the rest of this year and next year?

[Linda McCurdy, executive]

I would expect it to be just for the remainder of this year. And -- I mean a large part of those transition costs were legal and consulting in terms of [ PPA ], in terms of legal costs associated with negotiating the purchase and sale agreement. The transition costs, I think, will not be overly material as we move forward through the balance of the year.

[Operator]

The next question comes from Justin Keywood at Stifel.

[Justin Keywood, analyst]

Just some follow-ups on the upcoming contracts. So if I understand correctly, there's $70 million from existing customers to be renewed. And then there's tens of millions in RFPs, I assume, from competing companies?

[Linda McCurdy, executive]

The $70 million contracts being renewed in this year, of which more than half have been refined. The tens of million dollars of business that is out there, I would say, is business that will go out to RFP in -- beyond 2024.

[Justin Keywood, analyst]

Understood. And the remaining $35 million to be renewed, is that with one or several customers? And what's your confidence in that being renewed without any issue?

[Linda McCurdy, executive]

We remain highly confident. I would say it's split between Canada and the U.K. There's not a large single customer that makes up a meaningful part of the remaining $35 million, Justin. But we feel very confident in our ability to renew it successfully.

[Justin Keywood, analyst]

Okay. And then what about the outlook on wages, we've seen some sizable increases with -- for companies that have unions in place. Do you feel confident in the margin outlook going into next year?

[Linda McCurdy, executive]

I would say that we are -- as we continue to move in the back half of the year, some of that pressure has come off. I think we'll see higher than the 2% range, but we do feel confident in our ability to renew contracts, and the lower single digit, not as low as historically, but we're not anticipating anything in the range of 5% to 10% increases.

[Justin Keywood, analyst]

Okay. And then just finally, on the comments on potential M&A. If you have any additional color as far as size and transaction or geographic focus.

[Linda McCurdy, executive]

We remain very focused on Canada and the U.K. As we've guided, our desire to continue to grow further south in the U.K. is a priority. We're agnostic as to whether it's health care or hospitality, both are key in our growth strategy. I'd say, ranges anywhere from the size that we've previously announced in the $10 million to $25 million, there are some larger ones, but it's hard to predict timing on any of those.

[Justin Keywood, analyst]

And target multiples? I know Shortridge, the multiple was implied at a bit of the higher end of K-Bro's typical range? Would you anticipate future M&A to be at or below those levels?

[Linda McCurdy, executive]

Yes. I would say, typical range is 6 to just over 8x, slightly over 8x is what our range has historically been.

[Operator]

[Operator Instructions] Next question is a follow-up from Derek Lessard at TD Cowen.

[Derek Lessard, analyst]

Just one follow-up and a couple of housekeeping for me. Linda, maybe just on the Shortridge acquisition. Could you just talk about how the integration is going, any incremental learnings since acquiring them and maybe some opportunities to leverage that capacity there?

[Linda McCurdy, executive]

I'd say it's been a relatively smooth acquisition and transition. The existing management team, which we have a very high degree of confidence has stayed on. The back-of-the-house integration, which is Kristie's department has gone relatively smooth. So they use the same IT platforms as we do. So a lot of that has been simplified. I would say that we continue to -- they continue to work very closely with Fishers to identify opportunities where there could be synergies and opportunities to bid for and expand our geographic reach. So overall, I would say that it's gone very well. We're pleased with how it's unfolding up till this point.

[Derek Lessard, analyst]

Awesome. And maybe just some housekeeping just on -- and for Kristie, like on your working capital, any changes to working capital expectations for the year given the acquisitions?

[Kristie Plaquin, executive]

I think we would predominantly have seen that in this quarter. Derek, I don't expect to see any huge investments going forward into the balance of the year.

[Derek Lessard, analyst]

Okay. And the same thing for depreciation, it was higher this quarter. I'm assuming that reflects the recent acquisitions. Should we basically consider the new run rate?

[Kristie Plaquin, executive]

Yes, it will be slightly higher than that, considering the two new acquisitions weren't fully reflected for the entire quarter, given the timing of when they were purchased, but not materially higher.

[Derek Lessard, analyst]

Okay. And just one last one on the finance expense, which was also higher. Is this onetime related to M&A as well?

[Kristie Plaquin, executive]

Related to M&A, not onetime, just given the higher level of borrowing, interest expense or finance expense will be higher going forward in correlation to higher debt levels.

[Operator]

And the next question comes from Michael Glen at Raymond James.

[Michael Glen, analyst]

Just updated CapEx guidance for this year, and perhaps if you could indicate for 2025, what CapEx might look like as well?

[Linda McCurdy, executive]

Kristie?

[Kristie Plaquin, executive]

Yes, sure. So for 2024, in line with the guidance that we've included within the MD&A towards the upper end of the guidance, which -- and the guidance was up to $17 million. And then in terms of the 2025 outlook, I would say, consistent with what we've said in the past in that $10 million or just under $10 million range.

[Michael Glen, analyst]

Okay. So the -- for this year, then the CapEx will drop off quite a bit in the back half of the year?

[Kristie Plaquin, executive]

Yes. Yes. I mean, a large portion of that CapEx just kind of the change between historical guidance in this year or onetime projects that we had announced previously related to our acquisitions in Montreal as well as an investment in the U.K. in one of our plants.

[Operator]

We have no further questions. I will turn the call back over to Linda McCurdy for closing comments.

[Linda McCurdy, executive]

Well, thank you, everyone, for joining today. Enjoy the rest of the summer. And if there's any follow-up, please reach out to Kristie or I.

[Operator]

Ladies and gentlemen, this concludes your conference for today. We thank you for participating, and we ask that you please disconnect your lines.