K-Bro Linen Inc

TSX:KBL

Earnings Call Analysis

K-Bro Linen Reports Strong Q3 2024 with 20% Revenue Growth

K-Bro Linen experienced a remarkable Q3 2024, reporting revenue of $104 million—a 20% increase from last year—driven by a 37% rise in hospitality revenue and a 6% increase in healthcare. Adjusted EBITDA soared to $23 million, reflecting a 27.2% year-over-year jump, bolstered by strategic acquisitions and operational efficiencies. The company anticipates continued mid-single digit organic growth moving forward, supported by a robust acquisition pipeline. Additionally, adjusted EBITDA margins are expected to remain stable amidst evolving market conditions. The balance sheet remains strong with a debt-to-EBITDA ratio of nearly 2.5x, ensuring liquidity for future opportunities.

Strong Revenue Growth Driven by Acquisitions

K-Bro Linen Systems reported record third-quarter results for 2024, showcasing a remarkable revenue of $104 million, an increase of 20% compared to the same quarter in the previous year. This growth was significantly augmented by recent acquisitions including Shortridge, Villeray, and Paranet, especially in the hospitality sector, where revenue surged by 37%. Notably, healthcare revenue also grew by 6%, although its proportion of total revenue has decreased from 54% in 2023 to 47% in 2024. This reflects a strategic shift towards the rapidly growing hospitality division.

Impressive EBITDA Growth and Margins

The adjusted EBITDA for the quarter reached $23 million, marking a 27.2% rise from $18.1 million in Q3 2023. Furthermore, the adjusted EBITDA margin improved to 22%, up from 20.8% year-over-year. This is an excellent indication of the company's operational efficiency and the value generation from its acquisitions. Importantly, the adjusted EBITDA, before accounting for nonrecurring costs, stood at $22.8 million, reflecting the company’s robust income generation capabilities.

Future Growth Outlook

Looking ahead, K-Bro maintains a positive outlook for organic growth, estimating mid-single-digit growth driven by steady volumes in both healthcare and hospitality sectors. The management expects overall annual adjusted EBITDA margins to remain stable, following the historical seasonal trends. The company is also keen on pursuing further strategic acquisitions, which remain a cornerstone of its growth strategy. They have an active acquisition pipeline emphasizing high-quality operators that complement their existing operations.

Challenges and Strategic Adjustments

While the company enjoys strong growth and expanding margins, it also faces challenges, particularly in the U.K. market, where an increase in employer taxes may slightly offset the benefits gained from lower gas costs—estimated to impact margins by less than 0.5 percentage points. Despite these challenges, K-Bro is confident in its operational resilience and ability to sustain profitability in changing market conditions.

Capital Expenditure and Financial Health

K-Bro's capital expenditure (CapEx) outlook for 2024 is set between $15 million and $17 million, trending toward the upper end of this guidance, with historical levels expected for 2025 at around $10 million. The company's balance sheet reflects a solid financial position, with a current debt-to-EBITDA ratio of less than 2.5x, ample liquidity with $33 million undrawn on its credit facility, and net working capital rising to $63.3 million. This robust financial position supports K-Bro's continued growth and acquisition strategy.

Renewal and RFP Outlook in Healthcare Sector

The management highlighted their success rate in contract renewals, noting that over 75% of the $70 million in contracts have already been renewed, maintaining a high success rate above 95%. Looking forward, K-Bro anticipates potential bid opportunities throughout 2025, particularly related to new business tenders across Canada, which could yield significant revenue coupled with their ongoing reputation for dependable service.

Earnings Call Transcript 2024-Q3

[Operator]

Good morning, ladies and gentlemen, and welcome to the K-Bro Linen Systems Inc. Third Quarter 2024 Results Conference Call. [Operator Instructions] This call is being recorded on November 14, 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 third 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 Q&A 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 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, and good morning, everyone, and thank you for joining us today to review our 2024 third quarter results. I will focus on the main highlights of our third quarter, and then I'll pass it over to Kristie, who will provide more details on our financial performance and the balance sheet. So we're very pleased with our record third quarter results, which reflect the benefits of our acquisitions in our seasonally strongest quarter.

In terms of the highlights, we reported Q3 2024 revenue of $104 million and adjusted EBITDA of $23 million for the quarter. Overall, consolidated revenue increased by 20% compared to Q3 2023, with healthcare revenue having increased by 6% and hospitality revenue increasing by 37%. Healthcare revenues represented approximately 47% of consolidated revenue, which is lower compared to approximately 54% in 2023, and this is the result of our acquisition of Shortridge and strong activity in the hospitality segment.

We're pleased with the early contribution of our acquisitions, and we highlighted last quarter that as we actively pursue these growth opportunities, we'll continue to incur certain nonrecurring 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 is an indication of our capacity to generate income from operations. EBITDA before adjusting for these items was $22.8 million for the quarter. We see a positive outlook for the business, and 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 we'll 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. And of course, we'll follow that with a Q&A. Kristie, over to you.

[Kristie Plaquin, executive]

Thank you, Linda. The information we are discussing today is also highlighted in our 2024 third quarter earnings press release issued yesterday and detailed supplemental financial information can be found on our Investor Relations website under the heading of Financial Documents. As a result of our acquisitions of Shortridge, Villeray and Paranet, along with implemented price increases, consolidated hospitality revenue for the 3 months ended September 30, 2024, increased by 36.8% over the comparable 2023 period, and the corporation saw a 6% increase in consolidated healthcare revenue for an overall increase in consolidated revenue of 20.2%.

As we discussed last quarter, when reporting adjusted EBITDA, we have revised our adjusting items to reflect certain nonrecurring items, including 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 heading Terminology.

Consolidated adjusted EBITDA increased in the third quarter to $23 million or by 27.2% compared to $18.1 million in 2023. Adjusted EBITDA margin increased by 1.2% to 22% from 20.8%. Adjusting items include nonrecurring transaction and transition costs as well as a gain on the settlement of contingent consideration during the quarter. Consolidated EBITDA increased in the quarter to $22.8 million or by 29.1% compared to $17.7 million in 2023. Consolidated EBITDA margin increased to 21.9% in 2024 from 20.4% in 2023.

For the Canadian division, Q3 adjusted EBITDA margin remained consistent at 20.8% in 2024 compared to 21% in 2023. Without adjusting items, the EBITDA margin in the third quarter increased to 20.7% in 2024 from 20.4% in 2023. The increase in EBITDA margin is primarily related to third quarter 2023 nonrecurring items included in transaction and transition costs.

For the U.K. division, both adjusted EBITDA and EBITDA margin in the third quarter increased to 24.3% in 2024 from 20.3% in 2023. The improvement in adjusted EBITDA and EBITDA margin is primarily related to the acquisition of Shortridge in April 2024, along with delivery and labor cost efficiencies and the impact of price increases implemented in 2023.

Net earnings increased by $1.4 million or by 21.9% from $6.7 million in 2023 to $8.1 million in 2024. And net earnings as a percentage of revenue increased by 0.1% to 7.8% from 7.7% in 2023. Adjusted net earnings increased by $1.3 million or by 17.5% from $7 million in '23 to $8.3 million in '24.

Wages and benefits in the third quarter of '24 increased by $6.3 million to $39.2 million compared to $32.9 million in the comparative period of '23 and as a percentage of revenue decreased by 0.4 percentage points to 37.5%. On a year-to-date basis, wages and benefits increased by $14.3 million to $105.9 million compared to $91.6 million in the comparative period of 2023 and as a percentage of revenue decreased by 0.3 percentage points to 38.1%. The decrease as a percentage of revenue is primarily related to the integration of acquisition targets.

Linen in the third quarter of '24 increased by $1.2 million to $10 million compared to $8.8 million in the comparative period of '23 and as a percentage of revenue decreased by 0.5 percentage points to 9.6%. On a year-to-date basis, linen increased by $2.3 million to $26.8 million compared to $24.5 million in the comparative period of '23 and as a percentage of revenue decreased by 0.7 percentage points to 9.6%. The decrease as a percentage of revenue is primarily related to the changes in the mix of Linen and higher hospitality volumes processed compared to the prior year.

Utilities in the third quarter of '24 increased by $0.8 million to $7.4 million compared to $6.6 million in the comparative period of 2023 and as a percentage of revenue decreased by 0.6 percentage points to 7%. On a year-to-date basis, utilities increased by $1.8 million to $20.7 million compared to $18.9 million in the comparative period of '23 and as a percentage of revenue decreased by 0.5 percentage points to 7.4%. The decrease as a percentage of revenue is primarily related to the impact of price increases secured across various markets.

Delivery in the third quarter increased by $2.2 million to $12.2 million compared to $10 million in the comparative period of '23 and as a percentage of revenue increased by 0.1 percentage points to 11.6%. On a year-to-date basis, delivery increased by $4.5 million to $33 million compared to $28.5 million in the comparative period of 2023 and as a percentage of revenue remained constant at 11.9%.

Occupancy costs in the third quarter of '24 increased by $0.2 million to $1.6 million compared to $1.4 million in the comparative period of '23 and as a percentage of revenue remained constant at 1.6%. On a year-to-date basis, occupancy costs increased by $0.7 million to $4.7 million and as a percentage of revenue remained constant at 1.7%.

Materials and supplies in the third quarter of '24 increased by $0.6 million to $3.6 million compared to $3 million in the comparative period of '23 and as a percentage of revenue remained constant at 3.5%. On a year-to-date basis, materials and supplies increased by $1.2 million to $10.5 million and as a percentage of revenue remained relatively constant at 3.8%.

Repairs and maintenance in the third quarter of '24 increased by $0.7 million to $3.9 million compared to $3.2 million in the comparative period of 2023 and as a percentage of revenue remained constant at 3.7%. On a year-to-date basis, R&M increased by $2.4 million to $11.5 million compared to $9.1 million in the comparative period of '23 and as a percentage of revenue increased by 0.3 percentage points to 4.1%. The increase as a percentage of revenue is primarily related to the Villeray transition costs and the timing of our maintenance activities.

Corporate costs in the third quarter of '24 increased by $0.9 million to $4.2 million compared to $3.3 million in the comparative period of '23 and as a percentage of revenue increased by 0.3 percentage points to 4%. The increase as a percentage of revenue for the quarter is primarily related to timing. On a year-to-date basis, corporate costs increased by $4.2 million to $14.2 million compared to $10 million in the comparative period of '23 and as a percentage of revenue increased by 0.9 percentage points to 5.1%. The increase as a percentage of revenue year-to-date is primarily related to transaction costs, which include legal, professional and consulting fee expenditures related to the acquisitions as well as 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 third quarter of '24 was $14.2 million, and our payout ratio was 22.3%. The corporation 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 $63.3 million at September 30, 2024, compared to our working capital position of $41.4 million at December 31, 2023. The increase in working capital is primarily attributable to the timing of cash receipts and the mechanics of the syndicated credit facility, whereby the operating line is classified as cash until the repayment is made.

With regards to 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 September 30, we had an undrawn balance of just over $33 million on our operating line without taking into account the accordion, which reinforces 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 any additional commentary. Linda?

[Linda McCurdy, executive]

Thank you, Kristie. So we're very pleased by our strong third quarter results, which reflect the benefits of our acquisitions in our seasonally strongest quarter and see a positive outlook for our business. Both of K-Bro's Healthcare and Hospitality segments continue to experience steady volume trends. Healthcare volumes remain steady as hospitals continue to focus on reducing wait times and backlogs. We also see a continued trend from healthcare providers towards reusable products. Hospitality volumes have recovered and business and international travel have returned.

We continue to see solid levels of activity across Canada and the U.K. while recognizing that our fourth quarter has seasonally lower hospitality volumes. Going forward, we expect annual adjusted EBITDA margins will remain at similar levels following historical seasonal trends. We're proud of our reputation for looking after the interest of our valued customers and being dependable partners to all stakeholders. Paranet, Villeray, CM and Shortridge share our values, and we're excited for the potential these acquisitions present for our future.

We're pleased with the early contributions of these acquisitions and are excited about our organic growth prospects and potential future M&A. 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 third quarter results of 2024.

[Operator]

[Operator Instructions] The first question is from Derek Lessard at TD Cowen.

[Derek Lessard, analyst]

Linda and Kristie, congrats on the strong quarter. Maybe I'll just start with wondering if you could give us a quick update on the SandRidge's (sic) [ Shortridge ] acquisition and how the integration is going there and any new opportunities as a result?

[Linda McCurdy, executive]

Absolutely. Sorry, did you say Shortridge?

[Derek Lessard, analyst]

Yes, sorry. Yes.

[Linda McCurdy, executive]

Yes. Okay. Yes. Okay. Very pleased. It expands our geographic scope into the Lake District, obviously, further into England. Just very, very pleased with the team, very strong operators, a very unique customer base and -- 2 facilities and a distribution center that we're very confident we'll be able to expand further into England and grow both the top and bottom line.

In terms of integration, it falls under the Managing Director of Fisher, [ so ] Michael Jones. We've done a bit of a reorganization, but very pleased with how all of that is unfolding. We will continue to have 2 brands in the market, the Fishers brand as well as the Shortridge brand. But overall, just very pleased with how this has progressed.

[Derek Lessard, analyst]

Awesome. That's very helpful. And maybe just one last one for me before I requeue. I was curious on the Granby building and land sale, if you have -- and maybe this one is for Kristie, if you have any expectation on the timing and potential proceeds?

[Kristie Plaquin, executive]

Yes, absolutely. I would say timing could potentially be sometime in the early half of 2025 and proceeds would be higher than the carrying value of the net book value would be our anticipation.

[Operator]

The next question comes from Kyle McPhee at Cormark Securities.

[Kyle McPhee, analyst]

First question on the top line outlook. Your commentary suggests you're looking for steady volume trends, but you also say in your filings, you're excited about organic growth prospects. Can you add some color on what you mean by that? What are the exciting growth prospects you're referring to?

[Linda McCurdy, executive]

Yes. I think why -- we've characterized it as steady because I think we're going to see mid-single digit organic growth. Hospitality volumes have come back in 2024. I don't think we'll see the significant growth. We're back to pretty steady volumes, not quite at pre-pandemic levels, but I don't think we'll see a significant growth beyond single digit, mid-single digit. In terms of organic, we continue, of course, to pursue additional acquisitions, but I think that's why we've characterized it in the way that we have.

Kristie, do you have any other commentary on that?

[Kristie Plaquin, executive]

No, not really, Linda. I think you've -- I think that's a fair characterization.

[Kyle McPhee, analyst]

Got it. Okay. And when you say mid-single digit organic growth, you're talking volume plus price, I assume?

[Linda McCurdy, executive]

Correct. Yes.

[Kyle McPhee, analyst]

Got it. Okay. And then on EBITDA margins, it looks like a lot of the moving parts aiding your EBITDA margin gains continue to show up in the year-over-year trend, the pricing, the Quebec acquisition synergies, the higher margin Shortridge now in the mix. And your commentary is calling for margins to stay at similar levels. So you're expecting to hold on to all these gains. But looking into next year, as your new U.K. gas pricing becomes effective, is something we should be aware of that's going to offset the gas cost benefit? Or is there a potential here for margins to still be ticking up year-over-year into next year?

[Linda McCurdy, executive]

So Kyle, I think that's a really interesting point, and there's a lot of moving parts. And you're absolutely right about the nat gas positive impact. Just recently, however, on the flip side, which I think is why we've always been somewhat cautious. In the U.K. or certainly in England and Scotland, they've announced a fairly sizable increase in the employer tax; kind of EI and CPP equivalent that will come into effect next year, which will offset some of the gains on the nat gas. So I think there will still be a pickup, but that is a new increase in the wage bucket that we will see in the U.K.

Kristie, do you want to put some color around the magnitude of that?

[Kristie Plaquin, executive]

Yes, absolutely. It won't -- it definitely will have an impact on the U.K. margins. I wouldn't say an overly material impact, less than 0.5 percentage point.

[Kyle McPhee, analyst]

Okay. That's helpful to understand all the moving parts here. And then just maybe a follow-up on -- Derek was asking about Shortridge. It looks like your U.K. EBITDA margin had a nice leap forward in Q3 on a year-over-year basis. Is that essentially the Shortridge revenue mix impact from the first full quarter of Shortridge? Or is there anything else meaningful we should be aware of that led to such a strong U.K. margin performance?

[Linda McCurdy, executive]

Yes. Certainly, Shortridge is a part of that. I would say the continued rollout and impact of price increases and the strong seasonal quarter for Fishers played a role. But for sure, Kyle, to your point, Shortridge has been part of the lift in the EBITDA profile in the U.K.

[Operator]

The next question comes from Michael Glen at Raymond James.

[Michael Glen, analyst]

Just to start, on the balance sheet, Linda, you're carrying just over $20 million of cash, which is somewhat uncharacteristic for the company. Just wondering if there's a specific reason for carrying that level of cash?

[Linda McCurdy, executive]

Well, we knew this question would come up. Kristie, I mean, the short answer is, it's absolutely timing. But Kristie, you can dive into the details a little bit more.

[Kristie Plaquin, executive]

Yes, absolutely. So it really just has to do with the mechanics of the syndicated facility such that when we carry cash in our operating line, we use that to pay down the syndicated facility. And just due to the timing of cash receipts and the proximity to the quarter end, we couldn't pay down the syndicated loan in advance of the quarter. So it truly is -- it's just timing and a function of cash receipts coming in at the very end of the month.

[Michael Glen, analyst]

So we should expect then a decent sized paydown? Like would most of that then go to debt repayment in Q4 then?

[Kristie Plaquin, executive]

Yes. Not all of it. Well, some of that is just cash that we use for working capital needs in the U.K., but a reasonable expectation would be around half of that.

[Michael Glen, analyst]

Okay. And I think the prior question was on organic growth in Hospitality. But maybe can you talk about the outlook for Canadian Healthcare organic growth, what -- like mostly from, I guess, a volume perspective. I understand the price dynamic. Just wondering more from a volume perspective, what's reasonable to think about for Canadian Healthcare organic?

[Linda McCurdy, executive]

I think CPI type increase, Michael.

[Michael Glen, analyst]

Okay. And like volume, though, should volume -- will volume continue to move higher?

[Linda McCurdy, executive]

Yes. I mean, again, I would say that it's low single digit in terms of volume, just organic growth in terms of volumes in our existing hospitals, additional beds, some increase in the operating room linen would contribute to volume growth in our existing hospitals.

[Michael Glen, analyst]

Okay. And then if you could provide an update on the renewals that you've been working through for this quarter?

[Linda McCurdy, executive]

Yes. So we are at about 75% of the stated $70 million has been renewed with the balance to be renewed over the remainder of the year.

[Michael Glen, analyst]

And can you indicate what the success rate has been on the renewals?

[Linda McCurdy, executive]

Say, north of 95%.

[Michael Glen, analyst]

North of 95%. Okay. And then I think I just had -- the CapEx outlook for 2024 and any indication for 2025?

[Kristie Plaquin, executive]

Absolutely. So for 2024, we had guided somewhere in the range of $15 million to $17 million. We'll be -- we believe it will be closer to the upper end of that guidance. And then for 2025, CapEx will fall more in line with guidance we've given for historical years in the range of $10-ish million.

[Michael Glen, analyst]

$10 million. And that's a combination that would be mostly maintenance then?

[Kristie Plaquin, executive]

A combination of maintenance and strategic.

[Operator]

The next question comes from Justin Keywood at Stifel.

[Justin Keywood, analyst]

Just first, I'm not sure if I missed it, the organic growth rate in the quarter.

[Linda McCurdy, executive]

Kristie, do you want to answer that?

[Kristie Plaquin, executive]

Yes, for sure. So of the 20% increase in consolidated revenue, about 70% would be acquisitions and 30% would be organic growth.

[Justin Keywood, analyst]

Okay. And then on the contract renewals, how we understand it was there -- was -- potentially a large set of RFPs that are -- to come out for bid in 2025 with GTA hospitals. Is that still the case? And if you can give any other color on that potential opportunity?

[Linda McCurdy, executive]

We believe that to be still the case, absolutely. Timing is somewhat to be determined, but we expect across Canada, there to be tens of millions of dollars of new business that will go out to RFP.

[Justin Keywood, analyst]

So what's the mechanism or visibility behind it? Like does this come out into some type of public site or public domain? Or how can we track that opportunity?

[Linda McCurdy, executive]

There are a number of group purchasing, GPOs, that would be responsible for letting those tenders across whether it is in BC or in the GTA, they would be led by public tender processes that would be accessible on their website.

[Justin Keywood, analyst]

Okay. And maybe just one more question around this. The timing, I know it's a little variable, but is it safe to say that there would be a couple of RFPs that come in 2025?

[Linda McCurdy, executive]

That's our expectation, Justin. We don't have full insight to the timing on each of them. Sometimes they are proactive and ahead of it and sometimes they look for short-term extensions while they put their process in place, but we would certainly expect throughout the year tenders to be available.

[Justin Keywood, analyst]

Okay. Great. Maybe just one more on M&A. If there's an opportunity for more tuck-in or if there's some more transformational acquisitions in the pipe and potential timing on the next transaction?

[Linda McCurdy, executive]

We certainly remain active in terms of our pipeline. Some are smaller like we've seen in the $10 million range and some are larger like we've seen with Shortridge. Timing is a little bit unknown at this point, but we expect to be active throughout 2025 with our M&A pipeline.

[Justin Keywood, analyst]

Thank you very much.

[Linda McCurdy, executive]

Thanks, Justin.

[Justin Keywood, analyst]

Hello?

[Linda McCurdy, executive]

Any further questions?

[Kristie Plaquin, executive]

I think there's none, Linda, so we can.

[Linda McCurdy, executive]

Awesome. Well, thank you, everyone, for joining today. If there are any further questions, Kristie and I are available. So please feel free to reach out, and have a good day, everyone. Bye for now.