Ms. Linda McCurdy reports

K-BRO DELIVERS SIGNIFICANT INCREASE IN REVENUE, EBITDA AND MARGINS IN Q1 2023

K-Bro Linen Inc. has released its first quarter 2023 financial and operating results.

Q1 2023 financial and operating highlights:

• Consolidated revenue increased 15.2 per cent compared with Q1 2022, with health care revenue having increased by 1.4 per cent and hospitality revenue by 48.2 per cent.
• EBITDA (earnings before interest, taxes, depreciation and amortization) increased in the first quarter of 2023 by $3.2-million to $10.3-million compared with $7.1-million over the comparable 2022 period, a 46.3-per-cent increase.
• EBITDA margins increased to 14.6 per cent from 11.5 per cent in the comparable periods.
• Net earnings in the first quarter of 2023 increased by $2.4-million to earnings of $2.0-million compared with a loss of $400,000 in the comparative period of 2022 and, as a percentage of revenue, increased by 3.5 per cent to 2.8 per cent.
• For the first quarter of 2023, K-Bro declared dividends of 30.0 cents per common share.
• Long-term debt at the end of Q1 2023 was $53.7-million compared with $45.2-million at the end of fiscal 2022, with the previously announced acquisition of Paranet having been completed in early March.
• K-Bro also announces today that the Toronto Stock Exchange has accepted its notice of intention to proceed with a normal course issuer bid.

Linda McCurdy, president and chief executive officer of K-Bro, commented: "I'm pleased with our first quarter results, which show strong growth in EBITDA and margins. In addition, we saw continuing growth in health care revenue and significant increases in hospitality growth. We are especially pleased with the improvements in profitability and margins, and I continue to expect to return to our prepandemic margin profile in the second half of the year.

"We have been successful in working with many of our Canadian and [United Kingdom] customers to implement price increases to offset inflation-related costs. In the first quarter, we started to see the benefit from these price increases, the full impact of which we will see in the second half of 2023. We continue to actively manage the impact of energy price increases and local market labour shortages. We are also pleased with our acquisition of Paranet in Quebec in March, and early indications confirm our expectations of a well-performing addition to K-Bro.

"We are excited about our outlook. We see continued stability in our health care segment supported by the addition of the rural AHS volumes and a growing level of activity in hospitality as business and leisure travel have returned following the pandemic. With continued momentum in our core business, we are refocusing on acquisitions and have an active [merger-and-acquisition] pipeline. We remain well positioned from a balance sheet and liquidity perspective, and will continue to be disciplined as we evaluate acquisitions."

Highlights and significant events for fiscal 2023

Acquisition of Buanderie Paranet

On March 1, 2023, the corporation completed the acquisition of 100 per cent of the share capital of Buanderie Para-Net operating as Paranet, a private laundry and linen service company operating in Quebec City, Que. The acquisition was completed through a share purchase agreement consisting of existing working capital, fixed assets, contracts and an employee base. The contracts acquired are in the Quebec health care and hospitality sector, which complements the existing business of the corporation. Based on the corporation's evaluation of the acquisition and the criteria in the identification of a business combination established in international financial reporting standard 3, the acquisition will be accounted for using the acquisition method, whereby the purchase consideration will be allocated to the fair values of the net assets acquired.

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 and 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:  $11,366

Contingent consideration:  $945

Total purchase price:  $12,311

3sHealth contract extension

In second quarter 2022, the corporation extended its existing contract with 3sHealth for an additional six years to May 31, 2031, on terms that are consistent with the existing contract.

Revolving credit facility

In Q2 2022, the corporation completed an amendment to its existing revolving credit facility, which extended the agreement from July 31, 2024, to July 31, 2026. The corporation's incremental borrowing rate under its existing credit facility is determined by the Canadian prime rate plus an applicable margin based on the ratio of financed debt to EBITDA as defined in the credit agreement. Throughout fiscal 2022, the Canadian prime rate has risen from 3.7 per cent in January, 2022, to 6.7 per cent in March, 2023. As a result of this 3-per-cent increase, total interest rate expense for the period ended March 31, 2023, is $403,000 higher than it would have been had the equivalent rates been in place as for first quarter 2022.

Capital investment plan

For fiscal 2023, the corporation's planned capital spending is expected to be approximately $6.0-million to $8.0-million on a consolidated basis, excluding the acquisition of Paranet. This guidance includes both strategic and maintenance capital requirements to support existing base business in both Canada and the U.K., and does not take into account amounts accrued in 2022 that are to be paid in 2023. The company will continue to assess capital needs within its facilities and prioritize projects that have shorter-term paybacks, as well as those that are required to maintain efficient and reliable operations.

Economic conditions

Since 2020, due to changing government restrictions to mitigate the continuing COVID-19 pandemic, supply chain disruption, geopolitical events impacting key inputs such as natural gas, electricity and diesel, and inflationary impacts to labour and materials, the corporation has faced varying degrees of financial impact within Canada and the U.K. The COVID-19 pandemic has also contributed to unusually competitive labour markets, causing inefficiencies in attracting, training and retaining employees. While the corporation anticipates labour markets will stabilize, the timing remains uncertain, and until such time as labour markets stabilize, the corporation will continue to be impacted financially by these conditions.

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.

Dividends

The board of directors has declared a monthly dividend of 10 cents per common share for the period from May 1 to May 31, 2023, to be paid on June 15, 2023, to shareholders of record on May 31, 2023. The corporation's policy is for shareholders of record on the last business day of a calendar month to receive dividends during the 15 days following the end of such month. K-Bro designates this dividend as an eligible dividend pursuant to Subsection 89(14) of the Income Tax Act (Canada) and similar provincial and territorial legislation.

Outlook

The corporation's health care segment continues to outperform relative to historical levels with a steady 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 will continue to support the strong recovery momentum in hospitality revenues experienced through 2022, as well as Q1 2023. The corporation continues to pursue price increases to offset inflation-related costs and anticipates that 2023 results will reflect the impact of price increases secured in the later part of fourth quarter 2022, as well as in first quarter 2023 and into second quarter 2023.

In 2022, management was focused on operational efficiencies and the transition of new AHS business, which was completed in early April, 2022. Into 2023, management will continue to focus on optimizing plant efficiencies by streamlining processes impacted by the transition of new AHS business and stabilizing its labour force.

From an input cost perspective, since early March, 2022, particularly in the U.K., the corporation has faced significant volatility in energy costs due to current geopolitical issues. In April, 2022, to mitigate this instability, the corporation locked in natural gas supply rates in the U.K. until December, 2024. Based on these locked-in rates, natural gas as a percentage of revenue increased approximately 2.5 percentage points from historical levels for 2022. As the corporation moves through 2023, it expects to mitigate these cost increases with price increases to its customers.

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 is confident in its ability to return to 2019 margin levels, consistent with historical seasonal trends, once negotiated price increases and efficiencies gains have been achieved, which are anticipated to occur in the later half of 2023. However, this will also be dependent on its ability to attract and retain staff in each of the markets in which it operates. 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 North America and Europe, geographies which remain highly fragmented. K-Bro will look to leverage its strong liquidity position, balance sheet and access to the capital markets to execute on these opportunities, should they arise.

Normal course issuer bid

K-Bro announced today that the Toronto Stock Exchange has accepted its notice of intention to proceed with a normal course issuer bid.

K-Bro's board of directors believes that a normal course issuer bid represents an appropriate and desirable use of its available liquidity to increase shareholder value and is in the best interest of K-Bro and its shareholders.

Pursuant to the notice, K-Bro may purchase up to 881,481 of its common shares through the TSX and/or alternative Canadian trading systems, representing approximately 10 per cent of the public float of 8,814,816 shares as at May 9, 2023, during the 12-month period commencing May 18, 2023, and ending May 17, 2024. As at May 9, 2023, there were 10,773,190 shares issued and outstanding. Under the normal course issuer bid, other than purchases made under block purchase exemptions, K-Bro may purchase up to 2,198 shares on the TSX during any trading day, which represent approximately 25 per cent of 8,792 shares, which represent the average daily trading volume on the TSX for the most recently completed six calendar months prior to the TSX's acceptance of the notice of the normal course issuer bid. Any shares purchased under the normal course issuer bid will be cancelled.

Although K-Bro intends to purchase shares under its normal course issuer bid, there can be no assurances that any such purchases will be completed. Any purchases made under the normal course issuer bid will be made by K-Bro subject to favourable market conditions at the prevailing market price at the time of acquisition and through the facilities of the TSX. K-Bro intends to enter into an automatic purchase plan to be effective May 18, 2023, during the term of the normal course issuer bid. The automatic purchase plan will allow for purchases by K-Bro of shares during certain predetermined blackout periods.

About K-Bro Linen Inc.

K-Bro is the largest owner and operator of laundry and linen processing facilities in Canada and a market leader for laundry and textile rental services in Scotland and the northeast of England. K-Bro and its wholly owned subsidiaries operate across Canada and the U.K., providing a range of linen services to health care institutions, hotels and other commercial accounts that include the processing, management and distribution of general linen and operating room linen.

The corporation's operations in Canada include 10 processing facilities and two distribution centres under three distinctive brands: K-Bro Linen Systems Inc., Buanderie HMR and Les Buanderies Dextraze. The corporation operates in 10 Canadian cities: Quebec City, Montreal, Toronto, Regina, Saskatoon, Prince Albert, Edmonton, Calgary, Vancouver and Victoria.

The corporation's operations in the U.K. include Fishers, which was acquired by K-Bro on Nov. 27, 2017. Fishers was established in 1900 and is a leading operator of laundry and linen processing facilities in Scotland, providing linen rental, workwear hire and clean room garment services to the hospitality, health care, manufacturing and pharmaceutical sectors. The corporation operates five U.K. sites located in Cupar, Perth, Newcastle, Livingston and Coatbridge.

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