Ms. Linda McCurdy reports

K-BRO REPORTS RECORD Q4 AND FULL-YEAR RESULTS AND POSITIVE OUTLOOK

K-Bro Linen Inc. has released its Q4 2023 financial and operating results.

Q4 2023 financial and operating highlights:

• Consolidated health care revenue for 2023 increased by 6.3 per cent compared with 2022.
• Consolidated health care revenue for Q4 2023 increased by 10.2 per cent compared with Q4 2022.
• Consolidated hospitality revenue for 2023 increased by 32.3 per cent compared with 2022.
• Consolidated hospitality revenue for Q4 2023 increased by 27.4 per cent compared with Q4 2022.
• EBITDA (earnings before interest, taxes, depreciation and amortization) increased for fiscal 2023 to $56.8-million, compared with $36.5-million for fiscal 2022.
• EBITDA increased in the fourth quarter to $14.3-million, compared with $8.7-million over the comparable 2022 period.
• Adjusted EBITDA increased for fiscal 2023 to $55.9-million, compared with $36.5-million for fiscal 2022.
• Adjusted EBITDA increased in the fourth quarter to $13.3-million, compared with $8.7-million over the comparable 2022 period.
• Net earnings increased for fiscal 2023 to $17.6-million, compared with $3.9-million for fiscal 2022.
• Net earnings in the fourth quarter of 2023 increased by $3.9-million to $4.2-million, compared with $0.3-million in the comparative period of 2022, and as a percentage of revenue increased by 4.8 per cent to 5.2 per cent.
• For fiscal 2023 and during the fourth quarter, K-Bro declared dividends of $1.20 and 30.0 cents per common share, respectively.
• Long-term debt at the end of fiscal 2023 was $70.2-million, compared with $45.2-million at the end of fiscal 2022, with the normal course issuer bid put in place and the acquisitions of Paranet and Villeray completed during the year.
• K-Bro has repurchased and cancelled 199,062 shares year to date under the normal course issuer bid announced May 15, 2023.
• Dec. 20, 2023, K-Bro published its inaugural sustainability report.

Linda McCurdy, president and chief executive officer of K-Bro, commented: "I'm delighted with our record fourth quarter and full-year results. K-Bro has always focused on delivering industry-leading service and 2023 highlight the resilience of our business model and responsiveness of our team. The volatility we encountered from energy prices, local labour market shortages and cost inflation throughout the last number of years has stabilized. Going forward, we expect EBITDA margins to follow historical seasonal trends.

"As we start 2024, we see a positive outlook. Both of K-Bro's health care and hospitality segments continue to experience steady growth trends. In the health care segment, we expect activity levels to remain strong from continued focus on reducing wait times and enhancing patient care. In the hospitality segment, we expect solid activity levels from both business and leisure travel reflecting historical seasonal trends.

"On Dec. 20, 2023, we published our inaugural sustainability report as the latest step in our ESG program. The report highlights our continuous efforts to grow our business sustainably and can be found on our new website. We are proud of our seven-decade history of responsible, innovative growth. While delivering industry-leading service, we have embraced our responsibility to society. We prioritize customer and employee relationships, environmental stewardship and creating positive impacts where we do business.

"As we emerge from a challenging number of years, we are excited about our outlook. On May 15, 2023, we announced a normal course issuer bid and have repurchased 199,062 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 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 services company operating in Quebec City, Que. The Paranet 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 Paranet acquisition and the criteria in the identification of a business combination established in IFRS 3 (international financial reporting standards), the Paranet acquisition has been accounted for using the acquisition method, whereby the purchase consideration is allocated to the fair values of the net assets acquired.

The corporation financed the Paranet acquisition and transaction costs from existing loan facilities.

The purchase price allocated to the net assets acquired, based on their estimated fair values, is detailed in an attached table.

The assets and liabilities recognized as a result of the Paranet acquisition are detailed in an 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.

Contingent consideration

In the event that a certain EBITDA target was achieved by Paranet for the 12-month period ended Aug. 31, 2023, additional undiscounted consideration of up to $1,890 would have been payable in cash during the fourth quarter of 2023. While performance was in line with expectations, the target was not achieved; therefore, no payment was made.

During the first three quarters of 2023, the estimated fair value of the possible payment was classified as contingent consideration. The fair value of the contingent consideration was estimated by considering the probability-adjusted future expected cash flows in regard to Paranet achieving the target that would result in consideration being paid. The impact of discounting these future cash flows was not considered because the impact would be nominal. Given that the EBITDA target was not achieved for the 112-month period ended Aug. 31, 2023, the contingent consideration amount of $945 has been derecognized and a gain on settlement of contingent consideration has been recorded in consolidated statement of earnings and comprehensive income for the 12 months ended Dec. 31, 2023.

Acquisition related costs

For the 12 months ended Dec. 31, 2023, $274 in professional fees associated with the Paranet acquisition has been included in corporate expenses.

Revenue and profit information

The acquired business contributed revenues of $7,819 to the corporation for the period from March 1, 2023, to Dec. 31, 2023. If the Paranet acquisition had occurred on Jan. 1, 2023, consolidated pro forma revenue for the period ended Dec. 31, 2023, would have been $322,209.

The acquired business contributed a net deficit of $316 to the corporation for the period from March 1, 2023, to Dec. 31, 2023. If the Paranet acquisition had occurred on Jan. 1, 2023, consolidated pro forma net income for the period ended Dec. 31, 2023, would have been $17,591.

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 accounting standards, whereas Paranet previously reported under Canadian 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.

Acquisition of Villeray

On Nov. 1, 2023, the corporation completed the acquisition of 100 per cent of the share capital of Buanderie Villeray and its affiliate, Buanderie La Relance, a private laundry and linen services company incorporated in Canada and operating in Montreal, Que. The Villeray acquisition was completed through a share purchase agreement consisting of existing working capital, fixed assets, customer relationships and an employee base. Villeray operates in the hospitality and health care sector, which complements the existing business of the corporation. As part of the transaction, the corporation closed its Granby facility and consolidated existing volumes into Villeray. Based on the corporation's evaluation of the Villeray acquisition and the criteria in the identification of a business combination established in IFRS 3, the Villeray acquisition has been accounted for using the acquisition method, whereby the purchase consideration is allocated to the fair values of the net assets acquired.

The corporation financed the Villeray acquisition and transaction costs from existing loan facilities.

The purchase price allocated to the net assets acquired, based on their estimated fair values, is detailed in an attached table.

The assets and liabilities recognized as a result of the Villeray acquisition are detailed in an attached table.

The provisional intangible assets acquired are made up of $2,530 related to customer relationships. 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.

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 Villeray for the 12-month period ended Oct. 31, 2024, additional undiscounted consideration ranging from $500 to $1,000 will be payable in cash during the first quarter of 2025. 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 $500 was estimated by considering the probability-adjusted future expected cash flows in regards to Villeray 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.

Acquisition related costs

For the year ended Dec. 31, 2023, $414 in professional fees associated with the Villeray acquisition has been included in corporate expenses.

Revenue and profit information

The acquired business contributed revenues of $1,602 to the corporation for the period from Nov. 1, 2023, to Dec. 31, 2023. If the Villeray acquisition had occurred on Jan. 1, 2023, consolidated pro forma revenue for the year ended Dec. 31, 2023, would have been $329,021. If both the Paranet acquisition and Villeray acquisition had occurred on Jan. 1, 2023, consolidated pro forma revenue for the year ended Dec. 31, 2023, would have been $330,346.

The acquired business contributed a net deficit of $201 to the corporation for the period from Nov. 1, 2023, to Dec. 31, 2023, inclusive of Granby transition related costs. If the Villeray acquisition had occurred on Jan. 1, 2023, consolidated pro forma net income for the period ended Dec. 31, 2023, would have been $17,721.

These amounts have been calculated using Villeray's results and adjusting them for differences in the accounting policies between the corporation and Villeray as it pertains to property, plant and equipment. The corporation follows the requirements of IFRS accounting standards whereas Villeray previously reported under Canadian 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 funded 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 in July, 2023, it increased to 7.20 per cent.

Capital investment plan

For fiscal 2024, the corporation's planned capital spending is expected to be between $15.0-million and $17.0-million on a consolidated basis, including 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. The corporation 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 United Kingdom. The COVID-19 pandemic has also contributed to unusually competitive labour markets, causing inefficiencies in attracting, training and retaining employees. While labour markets have been stabilizing, certain regional markets continue to experience constrained labour availability.

The corporation's credit facility is subject to floating interest rates and, therefore, is subject to fluctuations in interest rates that 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.

Impairment of assets

The corporation performed its annual impairment assessment for goodwill for the Canadian division and for the U.K. division as at Dec. 31, 2023, and Dec. 31, 2022, in accordance with its policy described in note 2(k) and note 2(h). The corporation also performed impairment indicator assessments where there was no goodwill allocated to the CGU (cost generating unit).

For both periods, the recoverable amount for the CGUs was assessed using an earnings multiple approach. If the results of the earnings multiple approach indicated a possible impairment, a further assessment using a discounted cash flow to determine the value-in use was performed.

Earnings multiple approach (fair value less costs to dispose (FVLCD))

For the years ended Dec. 31, 2023, and Dec. 31, 2022, the key assumption utilized was the implied multiple. The implied multiple is calculated by utilizing the average multiples of comparable public companies. The corporation used an implied average forward multiple of 9.70 (2022 -- 10.60) to calculate the recoverable amounts. The implied multiple was applied to the trailing-12-month EBITDA to determine the recoverable amount of the CGU and compare it with the carrying value of the CGU.

Based on the assessments performed for the year ended Dec. 31, 2023, no CGU had a recoverable amount that was less than the carrying value of the CGU. A further assessment using a discounted cash flow to determine the value-in-use was not performed due to the headroom from FVLCD determined using an earnings multiple approach.

Discounted cash flow (value in use (VIU))

Where the results of the FVLCD approach indicated there was a possible impairment, a further assessment using a discounted cash flow was performed to determine the VIU of each VGU (value generating unit) identified.

For the year ended Dec. 31, 2022, the corporation used probability weighted discounted cash flows and the assumptions for those cash flows were the corporation's board approved budgets, cash flow forecasts, trailing-12-month EBITDA, the pretax discount rate and terminal value growth rate.

The probability weighted approach used for the year ended Dec. 31, 2022, was evaluated based on an equally weighted probability of a continued one-year downturn in sales to the worst case scenario of a two-year downturn in sales. The scenarios estimated a decline of 8 per cent to 12 per cent for 2023, 7 per cent for 2024, with sales returning to normalized levels thereafter, with sales growth estimates used 2 per cent. These represent the corporation's best estimate of cash flows over the forecast period.

The terminal value growth rate is based on management's best estimate of the long-term growth rate for its CGUs after the forecast period, considering historic performance and future economic forecasts.

The calculation of the recoverable amount was based on key assumptions noted in an attached table.

Based on testing performed at Dec. 31, 2023, and Dec. 31, 2022, no impairment was determined to exist.

Recoverable amount

The recoverable amount of each CGU is sensitive to changes in market conditions, which could result in material changes. For the year ended Dec. 31, 2022, where further assessment using the probability weighted discounted cash flows was required, the sensitivity of key assumptions to a reasonable change was assessed. The corporation does not believe there is a reasonable change in the key assumptions that would cause the carrying value of the CGU to exceed its recoverable amount. An attached table summarizes the results of the impact on key assumptions to a reasonable change.

Outlook

The corporation's health care and hospitality segments continues to experience steady growth trends. For the health care segment, management expects activity levels to remain strong from continued focus on reducing wait times and enhancing patient care. For the hospitality segment, management expects solid activity levels from both business and leisure travel reflecting historical seasonal trends.

The volatility we encountered from energy prices, local labour market shortages and cost inflation throughout the pandemic has stabilized. In early 2022, particularly in the U.K., the corporation faced significant volatility in energy costs due to 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 also faced temporary labour inefficiencies from unusually competitive labour markets. 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 and has seen positive staffing support in this regard.

Throughout 2023, EBITDA margins have benefited from price increases that the corporation has 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 that 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. For further information about the impact of other economic factors on K-Bro's business, see the summary of 2023 results and key events.

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 north 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 two distinctive brands: K-Bro Linen Systems Inc. and Buanderie HMR. 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 five U.K. sites located in Cupar, Perth, Newcastle, Livingston and Coatbridge.

Additional information regarding the corporation including required securities filings are available on its website and on 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 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 with similar measures presented by other issuers.

We seek Safe Harbor.