K-BRO DELIVERS Q2 2022 RESULTS WITH CONTINUED STRONG RECOVERY IN HOSPITALITY REVENUE

(TSX: KBL)

EDMONTON, AB, Aug. 8, 2022 /CNW/ - K-Bro Linen Inc. ("K-Bro" or the "Corporation") today announces its Q2 2022 financial and operating results.

Q2 2022 Financial and Operating Highlights

• Consolidated hospitality revenue for Q2 2022 increased by 174.7% compared to Q2 2021.
• Consolidated healthcare revenue for Q2 2022 increased by 1.9% compared to Q2 2021.
• EBITDA decreased in the second quarter to $9.7 million compared to $12.2 million over the comparable 2021.
• Net earnings in the second quarter of 2022 decreased by $1.8 million to $1.6 million compared to $3.4 million in the comparative period of 2021, and as a percentage of revenue decreased by 4.2% to 2.3%.
• For the second quarter of 2022, K-Bro declared dividends of $0.300 per common share.
• Long-term debt at the end of Q2 2022 was $45.2 million compared to $38.0 million at the end of fiscal 2021 reflecting our strong balance sheet.

Linda McCurdy, President & CEO of K-Bro commented, "I am pleased with our second quarter results, especially given that we expect the Q1 and Q2 trends will benefit us through the end of this year and into 2023. Going forward we expect to continue to benefit from the strong recovery in hospitality volumes in both Canada and the UK, the full impact of our new AHS province-wide contract as transition costs will end, our UK natural gas hedge put in place in April of this year through the end of 2024, improvement in our labour recruitment and retention, and certain supplementary price increase in both Canada and the UK. While we continue to face certain cost pressures, we believe that these positive trends will provide a larger impact on our results going forward."   

"In addition, we are excited that we have extended our contract with 3sHealth in Saskatchewan to provide service to the entire province for an additional six years to May 31, 2031. We have had a very collaborative relationship with 3sHealth since we began servicing the province in 2015, and we service more than 200 site in both urban and rural parts of Saskatchewan. We are so pleased to have earned the confidence of 3sHealth as they extended our agreement, and it comes months after we were awarded an 11-year contract to service the entire province of Alberta and our continued position as the primary provider to the Lower Mainland in B.C."

"Hospitality revenues for 2022 saw increases of 174.7% on a year-over-year basis primarily a result of COVID-19 pandemic restrictions being eased. Healthcare revenues for the second quarter of 2022 continued to be strong with a 1.9% increase in customer demand. During the month of April we completed the transition of all new rural AHS volumes which fall under the 11-year contract with AHS which commenced on August 1, 2021.  As a result of this, during the last several quarters we have incurred certain one-time transition costs as we integrated this new business. 

We will continue to look to leverage our strong liquidity position, balance sheet and access to the capital markets to execute on M&A opportunities in North America and Europe as they arise," concluded McCurdy.

Highlights and Significant Events for Fiscal 2022

Capital Investment Plan

For fiscal 2022, the Corporation's planned capital spending is expected to be approximately $5.0 million on a consolidated basis. This guidance includes both strategic and maintenance capital requirements to support existing base business in both Canada and the UK and does not take into account amounts accrued in 2021 that are to be paid in 2022, nor does this account for the projected $10.0 million in additional capital expenditures to support new AHS business that was announced earlier in 2021 and is discussed above under the Alberta Contract Award. We will continue to assess capital needs within our facilities and prioritize projects that have shorter term paybacks as well as those that are required to maintain efficient and reliable operations.

COVID-19 Pandemic 

The COVID-19 pandemic caused world governments to institute travel restrictions, impacting travel both in and out of Canada and the UK. Beginning in mid-March 2020, we saw significantly reduced hotel occupancy rates compared to historical levels. Demand for both business and leisure airline travel declined significantly on a global basis, and airlines responded by cancelling international and domestic flights.  Accordingly, hospitality volumes in all of our Canadian and UK markets slowed to historically low levels.  However in mid-2021 as government restrictions began to ease the hospitality segment began to show strong recovery which is expected to continue.

In late Q1 2020 and into Q2 2020 we initially saw decreases in our healthcare business as a result of hospitals and health authorities taking measures to prepare for anticipated surges in COVID-19 related occupancy (i.e., cancellation of elective surgeries).  Since then however, we have continued to see healthcare revenues trend consistently above historical levels due to increased demand.  We cannot predict with certainty how the progression of COVID-19 will impact overall volumes going forward.

The following table depicts the impact of the COVID-19 pandemic on the Corporation's revenue for 2021 and 2022.

Month	Healthcare Revenue Change (2021 compared to 2019)	Hospitality Revenue Change  (2021 compared to 2019)	Consolidated Revenue Change (2021 compared to 2019)	Month	Healthcare Revenue Change (2022 compared to 2019)	Hospitality Revenue Change  (2022 compared to 2019)	Consolidated Revenue Change (2022 compared to 2019)
January	25 %	-80 %	-14 %	January	24 %	-37 %	1 %
February	26 %	-82 %	-19 %	February	28 %	-26 %	5 %
March	28 %	-80 %	-20 %	March	30 %	-10 %	12 %
Q1 2021 compared to Q1 2019 (Jan to March)	26 %	-81 %	-18 %	Q1 2022 compared to Q1 2019 (Jan to March)	27 %	-23 %	6 %
April	24 %	-81 %	-22 %	April	24 %	-7 %	11 %
May	21 %	-69 %	-19 %	May	26 %	-3 %	13 %
June	22 %	-49 %	-13 %	June	26 %	-8 %	9 %
Q2 2021 compared to Q2 2019 (April to June)	23 %	-66 %	-18 %	Q2 2022 compared to Q2 2019 (April to June)	25 %	-6 %	11 %
July	16 %	-40 %	-11 %	July
August	11 %	-30 %	-9 %	August
September	12 %	-28 %	-8 %	September
Q3 2021 compared to Q3 2019  (July to September)	13 %	-33 %	-9 %	Q3 2022 compared to Q3 2019  (July to September)
October	12 %	-28 %	-5 %	October
November	19 %	-23 %	1 %	November
December	20 %	-23 %	1 %	December
Q4 2021  compared to Q4 2019 (October to December)	17 %	-25 %	-1 %	Q4 2022  compared to Q4 2019 (October to December)
YTD	20 %	-49 %	-11 %	YTD	26 %	-14 %	9 %

As an ongoing risk, the duration and full financial effect of the COVID-19 pandemic is unknown at this time, and continues to be offset through the Corporation's business continuity plan and other mitigating measures. Any estimate of the length and severity of these developments is therefore subject to significant uncertainty, and, accordingly, estimates of the extent to which the COVID-19 pandemic may materially and adversely affect the Corporation's operations, financial results and condition in future periods are also subject to significant uncertainty.

Therefore, uncertainty about judgments, estimates and assumptions made by management during the preparation of the Corporation's interim condensed consolidated financial statements related to potential impacts of the COVID-19 pandemic on revenue, expenses, assets, liabilities, and note disclosures could result in a material adjustment to the carrying value of the assets or liabilities affected.

Based on management's review, there were no CGUs as at June 30, 2022 showing signs of impairment that were not already considered at December 31, 2021. The Corporation will continue to carefully monitor the situation as it pertains to COVID-19 and further consider if there are new, or additional indicators, that exist during the year.

Financial Results

	For the Three Months Ended June 30,
(thousands, except per share amounts and percentages)	Canadian Division 2022		UK Division 2022		2022		Canadian Division 2021		UK Division 2021		2021		$ Change		% Change
Revenue	$	53,283	$	17,607	$	70,890	$	44,156	$	8,519	$	52,675	18,215		34.6 %
Expenses included in EBITDA	45,212		15,995		61,207		32,734		7,736		40,470		20,737		51.2 %
EBITDA	8,071		1,612		9,683		11,422		783		12,205		(2,522)		-20.7 %
EBITDA as a % of revenue	15.1 %		9.2 %		13.7 %		25.9 %		9.2 %		23.2 %		-9.5 %		-40.9 %
Net earnings (loss)	1,669		(53)		1,616		4,460		(1,049)		3,411		(1,795)		-52.6 %
Basic earnings (loss) per share	$	0.157	$	(0.005)	$	0.152	$	0.421	$	(0.099)	$	0.322	$	(0.170)	-52.8 %
Diluted earnings (loss) per share	$	0.156	$	(0.005)	$	0.151	$	0.418	$	(0.098)	$	0.320	$	(0.169)	-52.8 %
Dividends declared per diluted share					$	0.30					$	0.300	$	-	0.0 %
Total assets					329,677						326,157		3,520		1.1 %
Long-term debt (excludes lease liabilities)					45,224						40,696		4,528		11.1 %
Cash provided by  operating activities					3,838						3,047		791		26.0 %
Net change in non-cash working capital items					(4,929)						(7,022)		2,093		29.8 %
Share-based compensation expense					428						439		(11)		-2.5 %
Maintenance capital expenditures					1,078						275		803		292.0 %
Principal elements of lease payments					1,821						1,742		79		4.5 %
Distributable cash flow					5,440						7,613		(2,173)		-28.5 %
Dividends declared					3,227						3,211		16		0.5 %
Payout ratio					59.3 %						42.2 %		17.1 %		40.5 %
	Six Months Ended June 30,
(thousands, except per share amounts and percentages)	Canadian Division 2022		UK Division 2022		2022		Canadian Division 2021		UK Division 2021		2021		$ Change		% Change
Revenue	$	102,517	$	29,807	$	132,324	$	88,858	$	11,431	$	100,289	32,035		31.9 %
Expenses included in EBITDA	86,927		28,652		115,579		66,478		11,545		78,023		37,556		48.1 %
EBITDA	15,590		1,155		16,745		22,380		(114)		22,266		(5,521)		-24.8 %
EBITDA as a % of revenue	15.2 %		3.9 %		12.7 %		25.2 %		-1.0 %		22.2 %		-9.5 %		-42.8 %
Net earnings (loss)	3,098		(1,928)		1,170		8,617		(3,572)		5,045		(3,875)		-76.8 %
Basic earnings (loss) per share	$	0.291	$	(0.181)	$	0.110	$	0.813	$	(0.337)	$	0.476	$	(0.366)	-76.9 %
Diluted earnings (loss) per share	$	0.289	$	(0.180)	$	0.109	$	0.808	$	(0.335)	$	0.473	$	(0.364)	-77.0 %
Dividends declared per diluted share					$	0.60					$	0.600	$	-	0.0 %
Total assets					329,677						326,157		3,520		1.1 %
Long-term debt (excludes lease liabilities)					45,224						40,696		4,528		11.1 %
Cash provided by  operating activities					13,551						11,589		1,962		16.9 %
Net change in non-cash working capital items					(1,831)						(6,330)		4,499		71.1 %
Share-based compensation expense					940						945		(5)		-0.5 %
Maintenance capital expenditures					1,768						387		1,381		356.8 %
Principal elements of lease payments					3,655						3,594		61		1.7 %
Distributable cash flow					9,019						12,993		(3,974)		-30.6 %
Dividends declared					6,443						6,415		28		0.4 %
Payout ratio					71.4 %						49.4 %		22.0 %		44.5 %

Dividends

The Board of Directors has declared a monthly dividend of $0.10 per common share for the period from August 1 to August 31, 2022, to be paid on September 15, 2022 to shareholders of record on August 31, 2022. 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 healthcare segment continues to outperform relative to historical levels. For the hospitality segment, management expects that the current trend towards loosening restrictions on international border crossings and increasing business/leisure travel will continue to support the strong recovery momentum in hospitality revenues experienced since mid-2021.

For the last few quarters, management has been focused on operational efficiencies and the transition of new AHS business, which was completed in early April 2022. Over the balance of 2022, management will continue to focus on optimizing plant efficiencies associated with the transition of new AHS business.

From an input cost perspective, since early March 2022, particularly in the UK, the Corporation has faced significant volatility in the cost of natural gas due to current geopolitical issues. In April 2022, to mitigate this instability, the Corporation locked in natural gas supply rates in the UK until December 2024. Based on these locked in rates we anticipate natural gas as a percent of revenue to increase 2 percentage points from historical levels for 2022. We expect to mitigate these cost increases with price increases to our customers although there could be some delay.

The Corporation is also facing pressure from a labour input cost perspective due to the lack of workforce availability. Management is focused on implementing strategies to recruit and hire new staff as well as existing labour force retention and has achieved some success in certain markets but is still focusing efforts on other markets. 

Management is confident in their ability to return to historical 2019 margin levels once we gain efficiencies from the AHS transition however this will also be dependent on our ability to attract and retain staff in each of the markets in which we operate.

Management continues to evaluate opportunities to accelerate growth through M&A opportunities in both North America and Europe, 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. For further information about the impact of the COVID-19 pandemic on our business, see the "Summary of Interim Results, and Key Events". 

CORPORATE PROFILE

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 East of England. K­­­‑Bro and its wholly-owned subsidiaries operate across Canada and the UK, providing a range of linen services to healthcare 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 nine 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 ten Canadian cities: Québec City, Montréal, Toronto, Regina, Saskatoon, Prince Albert, Edmonton, Calgary, Vancouver and Victoria.

The Corporation's operations in the UK include Fishers, which was acquired by K‑Bro on November 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, healthcare, manufacturing and pharmaceutical sectors. The Corporation operates six UK sites located in Cupar, Perth, Newcastle, Livingston and Coatbridge.

Additional information regarding the Corporation including required securities filings are available on our website at www.k-brolinen.com and on the Canadian Securities Administrators' website at www.sedar.com; the System for Electronic Document Analysis and Retrieval ("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 International Financial Reporting Standards ("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 to similar measures presented by other issuers. Specifically, the terms "EBITDA", "adjusted EBITDA", "adjusted net earnings", "adjusted net earnings per share", "distributable cash", and "payout ratio" have been defined as follows:

EBITDA

K‑Bro reports EBITDA (Earnings before interest, taxes, depreciation and amortization) as a key measure used by management to evaluate performance. EBITDA is utilized to measure compliance with debt covenants and to make decisions related to dividends to Shareholders. We believe EBITDA assists investors to assess our performance on a consistent basis as it is an indication of our capacity to generate income from operations before taking into account management's financing decisions and costs of consuming tangible and intangible capital assets, which vary according to their vintage, technological currency and management's estimate of their useful life. Accordingly, EBITDA comprises revenues less operating costs before financing costs, capital asset and intangible asset amortization, and income taxes.

EBITDA is a sub‑total presented within the statement of earnings in accordance with the amendments made to IAS 1 which became effective January 1, 2016. EBITDA is not considered an alternative to net earnings in measuring K‑Bro's performance. EBITDA should not be used as an exclusive measure of cash flow since it does not account for the impact of working capital changes, capital expenditures, debt changes and other sources and uses of cash, which are disclosed in the consolidated statements of cash flows. 

		Three Months Ended June 30,						Six Months Ended June 30,
(thousands)		2022			2021			2022			2021
Net earnings		$	1,616		$	3,411		$	1,170		$	5,045
Add:
	Income tax expense	496			1,183			477			2,005
	Finance expense	1,001			901			2,001			1,766
	Depreciation of property, plant and equipment	5,936			5,862			11,792			11,740
	Amortization of intangible assets	634			848			1,305			1,710
EBITDA		$	9,683		$	12,205		$	16,745		$	22,266

Non-GAAP Measures
Distributable Cash Flow

Distributable cash flow is a measure used by management to evaluate the Corporation's performance. While the closest IFRS measure is cash provided by operating activities, distributable cash flow is considered relevant because it provides an indication of how much cash generated by operations is available after capital expenditures. It should be noted that although we consider this measure to be distributable cash flow, financial and non‑financial covenants in our credit facilities and dealer agreements may restrict cash from being available for dividends, re‑investment in the Corporation, potential acquisitions, or other purposes. Investors should be cautioned that distributable cash flow may not actually be available for growth or distribution from the Corporation. Management refers to "Distributable cash flow" as to cash provided by (used in) operating activities with the addition of net changes in non‑cash working capital items, less share‑based compensation, maintenance capital expenditures and principal elements of lease payments.

			Three Months Ended June 30,					Six Months Ended June 30,
(thousands)			2022		2021			2022		2021
Cash provided by  operating activities			$	3,838	$	3,047		$	13,551	$	11,589
Deduct (add):
	Net changes in non-cash working capital items		(4,929)		(7,022)			(1,831)		(6,330)
	Share-based compensation expense		428		439			940		945
	Maintenance capital expenditures		1,078		275			1,768		387
	Principal elements of lease payments		1,821		1,742			3,655		3,594
Distributable cash flow			$	5,440	$	7,613		$	9,019	$	12,993

Payout Ratio

"Payout ratio" is defined by management as the actual cash dividend divided by distributable cash. This is a key measure used by investors to value K-Bro, assess its performance and provide an indication of the sustainability of dividends. The payout ratio depends on the distributable cash and the Corporation's dividend policy.

			Three Months Ended June 30,			Six Months Ended June 30,
(thousands)			2022	2021		2022	2021
	Cash dividends		3,227	3,211		6,443	6,415
	Distributable cash flow		5,440	7,613		9,019	12,993
Payout ratio			59.3 %	42.2 %		71.4 %	49.4 %

Debt to Total Capital

"Debt to total capital" is defined by management as the total long‑term debt (excludes lease liabilities) divided by the Corporation's total capital. This is a measure used by investors to assess the Corporation's financial structure.

Distributable cash flow, payout ratio, debt to total capital adjusted EBITDA, adjusted net earnings, and adjusted net earnings per share are not calculations based on IFRS and are not considered an alternative to IFRS measures in measuring K‑Bro's performance. Distributable cash Flow, payout ratio, adjusted EBITDA, adjusted net earnings, and adjusted net earnings per share do not have standardized meanings in IFRS and are therefore not likely to be comparable with similar measures used by other issuers.

FORWARD LOOKING STATEMENTS

This news release contains forward‑looking information that represents internal expectations, estimates or beliefs concerning, among other things, future activities or future operating results and various components thereof. The use of any of the words "anticipate", "continue", "expect", "may", "will", "project", "should", "believe", and similar expressions suggesting future outcomes or events are intended to identify forward‑looking information. Statements regarding such forward‑looking information reflect management's current beliefs and are based on information currently available to management.

These statements are not guarantees of future performance and are based on management's estimates and assumptions that are subject to risks and uncertainties, which could cause K-Bro's actual performance and financial results in future periods to differ materially from the forward-looking information contained in this news release. These risks and uncertainties include, among other things: (i) risks associated with acquisitions, including the possibility of undisclosed material liabilities; (ii) K-Bro's competitive environment; (iii) utility costs, minimum wage legislation and labour costs; (iv) K-Bro's dependence on long-term contracts with the associated renewal risk including, without limitation, in connection with the settlement of definitive documentation in respect there of; (v) increased capital expenditure requirements; (vi) reliance on key personnel; (vii) changing trends in government outsourcing; (viii) changes or proposed changes to minimum wage laws in Ontario, British Columbia, Alberta, Quebec, Saskatchewan and the United Kingdom (the "UK"); (ix) the availability of future financing; * textile demand; (xi) the adverse impact of the COVID-19 pandemic on the Corporation, which has been significant to date and which we believe will continue to be significant for the short to medium term; (xii) availability and access to labour; (xiii) rising wage rates in all jurisdictions the Corporation operates and (ix) foreign currency risk. Material factors or assumptions that were applied in drawing a conclusion or making an estimate set out in the forward-looking information include: (i) volumes and pricing assumptions; (ii) expected impact of labour cost initiatives; (iii) frequency of one-time costs impacting quarterly and annual financial results; (iv) foreign exchange rates; (v) the level of capital expenditures and (vi) the expected impact of the COVID-19 pandemic on the Corporation. Although the forward-looking information contained in this news release is based upon what management believes are reasonable assumptions, there can be no assurance that actual results will be consistent with these forward-looking statements. Certain statements regarding forward-looking information included in this news release may be considered "financial outlook" for purposes of applicable securities laws, and such financial outlook may not be appropriate for purposes other than this news release. Forward looking information included in this news release includes the expected annual healthcare revenues to be generated from the Corporation's contracts with new customers, calculation of costs, including one-time costs impacting the quarterly financial results, anticipated future capital spending and statements with respect to future expectations on margins and volume growth, as well as statements related to the impact of the COVID-19 pandemic on the Corporation.

All forward‑looking information in this news release is qualified by these cautionary statements. Forward‑looking information in this news release is presented only as of the date made. Except as required by law, K‑Bro does not undertake any obligation to publicly revise these forward‑looking statements to reflect subsequent events or circumstances.

This news release also makes reference to certain measures in this document that do not have any standardized meaning as prescribed by IFRS and, therefore, are considered non‑GAAP measures. These measures may not be comparable to similar measures presented by other issuers. Please see "Terminology" for further discussion.

SOURCE K-Bro Linen Inc.

Linda McCurdy, Chief Executive Officer, Phone: [phone], Email: [email protected], Web: www.k-brolinen.com