Ms. Linda McCurdy reports

K-BRO REPORTS Q3 RESULTS WITH RECORD REVENUE AND EBITDA

K-Bro Linen Inc. today released its Q3 2023 financial and operating results.

Q3 2023 financial and operating highlights

• Consolidated revenue increased 18.0 per cent compared with Q3 2022, with health care revenue having increased by 9.2 per cent and hospitality revenue by 30.1 per cent.
• EBITDA (earnings before interest, taxes, depreciation and amortization) increased in the third quarter of 2023 by $6.7-million to $17.7-million compared with $11.0-million over the comparable 2022 period, a 60.5-per-cent increase.
• EBITDA margin increased to 20.4 per cent from 15.0 per cent in the comparable period.
• Net earnings in the third quarter of 2023 increased by $4.2-million to $6.7-million compared with $2.5-million in the comparative period of 2022, and as a percentage of revenue increased by 4.3 per cent to 7.7 per cent.
• For the third quarter of 2023, K-Bro declared dividends of 30 cents per common share.
• Long-term debt at the end of Q3 2023 was $55.2-million compared with $45.2-million at the end of fiscal 2022, with the acquisition of Paranet having been completed in early March.
• K-Bro has repurchased and cancelled 102,828 shares year-to-date under the normal course issuer bid announced May 15, 2023.

Linda McCurdy, president and chief executive officer of K-Bro, commented that: "I'm pleased with our strong third quarter results, with record revenue and EBITDA. Throughout the pandemic, we have worked hard to meet the changing needs of our customers while managing the impact of inflation, volatile energy prices and local labour market shortages. Our third quarter results highlight the resilience of our business model and responsiveness of our team.

"Consistent with the first half of the year, we saw continued growth in health care revenue and significant growth in hospitality revenue as business and leisure travel volumes have returned. In the third quarter, the improvement in EBITDA margins was in line with our expectations and reflects our disciplined approach to managing operations, combined with price increases that we have secured to offset inflation-related costs. Going forward, we expect EBITDA margins to follow historical seasonal trends.

"On Nov. 1, we announced the acquisition of Villeray, enhancing K-Bro's position within the attractive Montreal market. As part of the transaction, K-Bro will close its Granby facility and consolidate existing volumes into Villeray. Villeray's modern plant is strategically located in close proximity to customers, and we are investing to expand capacity, consolidate volumes, enhance operating efficiency, reduce fixed costs and support significant growth opportunities.

"As we emerge from the pandemic, we are excited about our outlook. On May 15, we announced a normal course issuer bid and have repurchased 102,828 shares to date. We have been refocusing on strategic acquisitions, such as Paranet and Villeray, and have an active M&A pipeline and 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 Villeray

On Nov. 1, 2023, the corporation announced the closing of a share purchase agreement to acquire all the assets of Buanderie Villeray and its affiliate Buanderie La Relance (together Villeray), a private laundry and linen services company incorporated in Canada and operating in Montreal, Que., in the health care and hospitality markets. The total consideration is $11.5-million plus a potential earnout of $1-million, subject to fair value considerations, working capital adjustments and completion of the related purchase price accounting. K-Bro will invest a further $5-million in capital expenditures to expand capacity and enhance operational efficiencies. As part of the transaction, K-Bro will close its Granby facility and consolidate its volumes into Villeray. The acquisition will be accounted for using the acquisition method, whereby the purchase consideration will be allocated to the net assets acquired. The purchase price will be satisfied by drawing down on the corporation's revolving credit facility.

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 Villeray.

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 (Paranet) operating as Paranet, a private laundry and linen services 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 IFRS 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 shown in the attached table.

The provisional intangible assets acquired are made up of $2,450 for the customer contracts along with related relationships and customer lists. The goodwill is attributable to the work force, and the efficiencies and synergies created between the existing business of the corporation and the acquired business. Goodwill will not be deductible for tax purposes.

a) Contingent consideration

The estimated fair value of payment has been classified as contingent consideration by exercising significant judgment as to whether it should be classified as such, or as renumeration to the former owner, who will be employed subsequent to the close of the transaction. The corporation has determined by considering all relevant factors included in the agreements as it pertains to employment terms, valuation of the business and other relevant terms that the additional consideration is most appropriately reflected as contingent consideration.

In the event that a certain EBITDA target is achieved by Paranet for the 12-month period ended Aug. 31, 2023, additional undiscounted consideration of up to $1,890 will be payable in cash during the fourth quarter of 2023. The potential undiscounted amount payable within the agreement will only be paid should the EBITDA target be achieved. Should the EBITDA target not be achieved no payment will be made.

The fair value of the contingent consideration of $945 was estimated by considering the probability-adjusted future expected cash flows in regards to Paranet achieving the target that would result in consideration being paid. The impact of discounting those future cash flows was not considered because the impact would be nominal.

Since the estimated future cash flows and probability of achieving the EBITDA target are an unobservable input, the fair value of the contingent consideration is classified as a level 3 fair value measurement.

b) Acquisition-related costs

For the nine months ended Sept. 30, 2023, $280 in professional fees associated with the acquisition has been included in corporate expenses.

c) Revenue and profit information

The acquired business contributed revenues of $5,561 to the corporation for the period from March 1, 2023, to Sept. 30, 2023. If the acquisition had occurred on Jan. 1, 2023, consolidated pro forma revenue for the period ended Sept. 30, 2023, would have been $239,745.

The acquired business contributed a net deficit of ($214) to the corporation for the period from March 1, 2023, to Sept. 30, 2023. If the acquisition had occurred on Jan. 1, 2023, consolidated pro forma net income for the period ended Sept. 30, 2023, would have been $13,315.

These amounts have been calculated using Paranet's results and adjusting them for differences in the accounting policies between the corporation and Paranet as it pertains to property, plant and equipment. The corporation follows the requirements of IFRS 16 whereas Paranet previously reported under Accounting Standards for Private Enterprises (ASPE), the additional depreciation and amortization that would have been charged assuming the fair value adjustments to property, plant and equipment, and intangible assets had applied from Jan. 1, 2023, together with the consequential tax effects.

3sHealth contract extension

In Q2 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

On Aug. 31, 2023, the corporation completed an amendment to its existing revolving credit facility to extend the agreement from July 31, 2026, to July 31, 2027, as previously amended on July 18, 2022. In addition, the agreement expanded the revolving credit facility from $100,000 to $125,000 plus a $25,000 accordion. 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. During fiscal 2022 and 2023, the Canadian prime rate increased from 3.70 per cent in January, 2022, to 6.95 per cent in June, 2023, and July, 2023, it increased to 7.20 per cent. Had the prime rate in effect at July 12, 2023, been in effect for the nine months ended Sept. 30, 2023, total interest rate expense for the period ended Sept. 30, 2023, would have been $142 higher than reported assuming equivalent debt levels as at Sept. 30, 2023.

Capital investment plan

For fiscal 2023, the corporation's planned capital spending is expected to be approximately $8.0-million on a consolidated basis, excluding the expenditures associated with the Villeray acquisition. This guidance includes both strategic and maintenance capital requirements to support existing base business in both Canada and the United Kingdom, 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 Nov. 1 to Nov. 30, 2023, to be paid on Dec. 15, 2023, to shareholders of record on Nov. 30, 2023. The corporation's policy is for shareholders of record on the last business day of a calendar month to receive dividends during the fifteen 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 experience a steady growth trend. For the hospitality segment, management expects a solid recovery in activity with the elimination of government-imposed restrictions on international border crossings, increasing business/leisure travel and price increases which will all continue to support the strong momentum in hospitality revenues experienced through 2022 as well as throughout 2023.

Throughout the pandemic the company encountered volatile energy prices, local labour market shortages and cost inflation. 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.

The corporation has also faced temporary labour inefficiencies from unusually competitive labour markets. Management remains focused on the retention of existing staff, in addition to implementing strategies to recruit and hire new staff. While labour markets have been stabilizing, certain regional markets continue to experience constrained labour availability. The corporation is managing more challenging regional labour availability with complementary temporary foreign worker programs.

Throughout 2023, EBITDA margins have benefited from price increases that we have secured to offset inflation-related costs. Going forward, management expects EBITDA margins to follow historical seasonal trends.

With continued momentum in existing operations, management has refocused attention on strategic acquisitions, such as the acquisitions of Villeray and 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.

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 United Kingdom, 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 ten 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 cleanroom garment services to the hospitality, health care, manufacturing, and pharmaceutical sectors. The corporation operates four U.K. sites located in Perth, Newcastle, Livingston and Coatbridge.

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