K-Bro Linen Inc. (74R.F) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen, and welcome to the K-Bro Linen Systems, Inc. Second Quarter 2025 Results Conference Call. [Operator Instructions] This call is being recorded on August 14, 2025. I would now like to turn the conference over to Kristie Plaquin. Please go ahead.

Thank you, operator, and good morning, everyone. Thank you for joining us today, and welcome to our second quarter results conference call. On the line with me today is Linda McCurdy, President and Chief Executive Officer. Before we begin, I'd like to remind everyone that statements made during our prepared remarks 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. Certain material factors or assumptions were applied in drawing a conclusion or making a forecast or projection as reflected in the forward-looking statements. Investors are also 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?

Thank you, Kristie, and good morning to everyone, and thank you for joining us today to review our 2025 second quarter results. I will focus on the main highlights of the second quarter, and Kristie will provide more details on our financial performance as well as our balance sheet. We're delighted to have reported record results for Q2 with revenue of $113 million and adjusted EBITDA of $23.7 million for the quarter. Our record second quarter results reflect early contributions of our recent acquisitions, and we're continuing our early integration of Stellar Mayan. Both of K-Bro's healthcare and hospitality segments continue to experience steady volume trends. Overall, consolidated revenue in our second quarter increased by 21% compared to Q2 2024, with healthcare and hospitality revenue each increasing by 21%, respectively. Healthcare represented approximately 51% of consolidated revenue, which was consistent with Q2 2024. On June 11, we were delighted to complete the acquisition of Stellar Mayan, the largest in our history, and we welcome the Stellar team to the K-Bro family. We initially entered the U.K. market through the acquisition of Fishers in 2017. Our complementary acquisitions of Shortridge in 2024 and Stellar Mayan in 2025 have helped achieve our vision of building a national platform in the U.K., enhancing our scale, reach and diversification. Together, we're excited to support our existing and new healthcare and hospitality customers. Strategic acquisitions of high-quality operators with leading market positions in key regions continue to be an important contributor to K-Bro's overall growth profile. And as we actively pursue these growth opportunities, we'll continue to incur certain transaction, transition and financing costs. In this context, we believe adjusted EBITDA before adjusting items will assist investors to assess our performance on a consistent basis as it's an indication of our capacity to generate income from operations. As always, we're focused on delivering industry-leading service, and we're proud of our growing diverse workforce that operates with our customers in mind. I'll now turn the call over to Kristie to discuss our detailed financial results for the quarter and which I'll return to talk about -- after which I'll return to talk about our outlook as well, of course, the Q&A. Kristie, over to you.

Thanks, Linda. The information we are discussing is also highlighted in our 2025 second quarter earnings press release issued yesterday and detailed supplemental financial information can be found on our Investor Relations website under the heading Financials. As a result of the Stellar Mayan acquisition in June of 2025 and the acquisitions of Shortridge and C.M. during Q2 of 2024. Consolidated hospitality revenue for Q2 '25 increased by 21.2% over the comparable period of 2024, and the corporation saw a 20.7% increase in consolidated healthcare revenue for an overall increase in consolidated revenue of 21%. As we discussed in previous quarters, when reporting adjusted EBITDA, we've revised our adjusting items to reflect certain amounts which are not indicative of ongoing operating performance. This includes transaction costs, structural finance costs, transition and integration costs, restructuring costs gains and losses on settlements of contingent consideration and any other nonrecurring transactions as defined within our MD&A. We believe adjusted EBITDA 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 terminology. Consolidated adjusted EBITDA increased in Q2 of '25 to $23.7 million or by 30% compared to $18.2 million in 2024. Adjusted EBITDA margin increased to 21% in 2025 compared to 19.5% in 2024. Adjusting items in the quarter included transaction costs, structural financing costs and nonrecurring gains. Consolidated EBITDA increased in Q2 '25 to $21.4 million or by 29% compared to $16.6 million in 2024. On a consolidated basis, EBITDA margin increased to 18.9% in '25 compared to 17.7% in 2024. For the Canadian division, the adjusted EBITDA margin in the second quarter increased to 21.1% for 2025 compared to 18.9% in 2024. The increase in adjusted EBITDA margin was largely due to labor efficiencies and the elimination of the Canadian carbon tax in Q2 2025. EBITDA margin increased to 20.6% in the second quarter of '25 from 17% in 2024. For the U.K. division, the adjusted EBITDA margin in the second quarter remained constant at 20.8% in both 2025 and 2024. The EBITDA margin for the U.K. division decreased to 16.3% in the second quarter of '25 compared to 19.4% in '24. The decrease in EBITDA margin was due to adjusting items in the quarter related to the Stellar Mayan transaction costs. Net earnings increased by $0.9 million in the second quarter of '25 or 19.5% from $4.5 million in '24 to $5.4 million in '25. And net earnings as a percentage of revenue remained relatively consistent at 4.8% in 2025 compared to 4.9% in 2024. Wages and benefits in the second quarter of '25 increased by $7.1 million to $42.3 million compared to $35.2 million in the comparative period of '24 and as a percentage of revenue decreased by 0.2 percentage points to 37.4%. The decrease as a percentage of revenue is primarily related to labor efficiencies. Linen in the second quarter of '25 increased by $2.1 million to $11.2 million compared to $9.1 million in the comparative period of 2024. And as a percentage of revenue increased by 0.2 percentage points to 9.9%. Utilities in the second quarter of '25 decreased by $0.5 million to $6.5 million compared to $7 million in the comparative period of 2024 and as a percentage of revenue decreased by 1.7 percentage points to 5.8%. The decrease as a percentage of revenue is primarily related to lower gas costs in the U.K. market and the elimination of the carbon tax in Canada in Q2 2025. Delivery in the second quarter of 2025 increased by $2.4 million to $13.3 million compared to $10.9 million in the comparative period of 2024 and as a percentage of revenue increased by 0.1 percentage points to 11.7%. Occupancy costs in the second quarter of '25 increased by $0.7 million to $2.4 million compared to $1.7 million in the comparative period of 2024 and as a percentage of revenue increased by 0.4 percentage points to 2.2%. The increase as a percentage of revenue is primarily related to higher facility operating costs. Materials and supplies in the second quarter of '25 increased by $0.2 million to $4 million compared to $3.8 million in the comparative period of 2024 and as a percentage of revenue decreased by 0.4 percentage points to 3.6%. Repairs and maintenance in the second quarter of 2025 increased by $0.4 million to $4.5 million compared to $4.1 million in the comparative period of 2024 and as a percentage of revenue decreased by 0.4 percentage points to 4%. Corporate costs in the second quarter of '25 increased by $3.8 million to $9 million compared to $5.2 million in the comparative period of 2024 and as a percentage of revenue increased by 2.3 percentage points to 7.9%. The increase as a percentage of revenue is related to higher transaction costs, including legal, professional and consulting fee expenditures related to the acquisition of Stellar Mayan as well as structural financing costs, partially offset by nonrecurring gains. These items are further defined within our MD&A. We had a recovery in the second quarter of 2025 of $1.5 million compared to nothing in the comparative period of 2024, resulting in a $1.5 million gain in the quarter. This increase is related to the sale of the Granby facility during Q2 of 2025. And the gain is an adjusting item for the purposes of calculating adjusted EBITDA, adjusted net income and adjusted earnings as is further detailed in our MD&A. Now looking at our capital resources. Distributable cash flow for the second quarter of '25 was $8.5 million, and our payout ratio was 40.1%. The company paid out $0.3 per share in dividends during the quarter for total consideration of $3.4 million. The corporation had net working capital of $90.5 million at June 30, 2025, compared to its working capital position of $54.1 million at December 31, 2024. The increase in working capital is primarily attributable to the acquisition of Stellar Mayan in June of 2025. With regards to credit and liquidity, we have a strong balance sheet and ample undrawn capacity on our syndicated revolving credit facility, which has an operating line of $175 million and an amortizing term loan of $134.3 million as well as a further $50 million accordion for growth purposes. At June 30, we had an undrawn balance of close to $46 million on our operating line without taking into account the accordion, reinforcing our strong liquidity. This represents a debt-to-EBITDA ratio on a pro forma basis, excluding leases of about 2.9x. On June 11, K-Bro amended its existing 3-year committed syndicated credit facility agreement to include the $134.3 million 4-year amortizing term loan and extended the term of the facility to June 10, 2029. In addition, K-Bro issued 2.3 million common shares to finance the Stellar Mayan acquisition. Debt to total capitalization for the period ended June 30, 2025, was 50.6%. Total debt net of cash increased in the quarter from $105 million in December of 2024 to $228.3 million due to the amortizing term loan to finance the Stellar Mayan acquisition. I'll now turn things back over to Linda for additional commentary. Linda?

Thank you, Kristie. Our acquisition of Stellar Mayan represents the start of a new and exciting chapter for K-Bro's next leg of growth. Stellar Mayan is highly complementary to Fishers and Shortridge and creates a top 3 commercial laundry in the U.K. with a strategic national presence. Our combined platform serves existing and new healthcare and hospitality customers from coast to coast. Stellar Mayan and K-Bro have shared values in putting people first, being dependable partners and environmental stewardship. Our U.K. Managing Director, who is an experienced K-Bro veteran is overseeing the combined U.K. operations, including the Stellar Mayan business integration plan. We anticipate the integration will take 12 to 18 months, and our transition team is executing on our plan. On a consolidated basis, we're excited about the future potential of our combined business and see a positive outlook going forward. We've been market leaders in the Canadian healthcare for over half a century. We're excited to expand the scale of our U.K. healthcare business, and we believe the U.K. market shares similarities to the Canadian market. Both of K-Bro's Healthcare and Hospitality segments continue to experience steady growth trends. In the healthcare 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. Going forward, we expect combined adjusted EBITDA margins will remain at similar levels to seasonally adjusted combined historical margins. We continue to monitor evolving global and Canadian foreign policies, geopolitical events and economic conditions, which could have a direct or indirect impact on K-Bro. We're not currently expecting meaningful impacts on the business as key customers and suppliers are not U.S.-based. We're committed to a sustainable future, and we're proud of our 7 decades of responsible, innovative growth. We collaborate with our stakeholders to appreciate their priorities, solicit and receive feedback and align around common goals. Our services are essential to the continuity of our customers' operations, and we're embodying sustainable practices to support them for the long-term. Now I'll turn it over to the Q&A with regards to any questions you may have on the second quarter results of 2025.

[Operator Instructions] Your first question comes from Derek Lessard with TD Cowen.

Belated congrats on the Stellar Mayan deal and great quarter.

Thank you, Derek. Good morning.

Maybe I just want to focus a little bit on the margin side to begin. And in your prepared remarks and in the MD&A, you did say that you expected the adjusted EBITDA margins to remain at similar levels to the combined adjusted historical margins. I was just wondering if maybe you could add some context around that, particularly as, I guess, it relates to capturing the Stellar Mayan synergies?

Sure, Derek. So what we've said is that they will be consistent with historical margins. And I think there are things that go both ways. So obviously, as we've seen, there is the pickup from reduced carbon tax and reduced energy prices. Those are offset by a lower margin profile out of the gate for Stellar. We expect over the next 18 to 24 months that synergies will -- we've certainly guided that there are synergies that we expect to harvest, but those will take some time. Kristie, do you have anything to add? Yes. Sorry, Derek. Kristie, did you have anything further to add?

No, sorry. I didn't. I think you captured it all. Thanks, Linda.

Yes, all good. That makes sense on the cadence there. And just maybe one last one for me before I requeue. Just talk about some of the -- you talked about the labor efficiencies in your prepared remarks. Just curious what's -- what are you seeing on that side of the efficiency?

We have certainly seen a stabilization of our workforce, both in Canada and the U.K. The benefit of some of our capital investments, the optimization of the integration of our Québec acquisitions. So I would say it's a combination of all of those factors where we've been able to reduce and optimize efficiencies in most of our plants.

Your next question comes from Michael Glen with Raymond James.

Maybe just to start, in terms of the business and revenue being acquired, are you happy with what you see for the margin profile or pricing on this work? Is there some -- is there something where you potentially see some opportunity?

Thank you, Michael and good morning. We're certainly happy with the acquisition and the fact that it is predominantly healthcare in the U.K. We have acquired very solid plants, good operations. I think as we go forward, there are efficiencies that we will harvest through different operating practices. And I think as we continue to work with the customers, there are opportunities to expand the product line, which will mean ultimately margin expansion. They -- in the U.K., our observations, and we knew this going in. From a product line perspective, they use more disposables and not just in the operating room, but in just general rooms, Linen, where we think we can introduce like we have in Canada, new products that will increase volumes to existing customers, increase sales and improve operating leverage over time. That's not going to happen overnight. As we know, selling clinical products takes time, but we have met with, I'd say, 12 of the NHS trusts, and they're all very excited about the innovation and the fact that a strategic from out of market has acquired Stellar.

And in Canada, I guess we're familiar with how the regional healthcare authorities or hospitals go about their process with RFPs being issued when pieces of business come up or opportunity. Is it a similar process in the U.K.? Can you describe how that works and maybe describe how that bidding pipeline looks like over in the U.K.?

Sure. You bet. It's quite similar when we compare our -- an RFP in Canada to an RFP in the U.K. I would say the questions are similar. The weightings tend to be similar for cost, corporate profile -- or sorry, price, corporate profile, innovation, corporate strength. That tends to be quite similar. I think the most significant difference is their contracts tend to be 3 to 5 years in length, where our healthcare contracts tend to be longer term in nature. That, to me, would be the largest differentiator. In terms of pipeline in the U.K., we're quite excited about growth opportunities. And I'd say over the next 18 months, we are aware of about GBP 10 million of business that will come up outside of our existing business. Our existing business, we don't have anything material coming up until next summer. And even then, it's not overly material.

When you say existing business, you're talking about the Canadian and the U.K. business combined? Or is that specific to the U.K.?

No. That was U.K., Michael. Sorry, I thought we were referring to the U.K.

Yes, we were. All right. And maybe just on Canada, healthcare, can you update us on 2 parts. Number one, your contract renewals overall for the next, say, 12 months or 18 months? And then number two, what the bidding pipeline in Canada looks like for health care business?

Sure. I'd say we have locked down over 40% of the contracts that come up this year. And while we are into August and 40% may seem low, we just have to remember that a lot of it comes due in Q3 and Q4 or a December expiry. We're feeling confident in our ability to renew those contracts. In terms of Canadian healthcare, I would say that we expect in '26, probably tens of millions of dollars of business to come to the market in a variety of different geographies. Our major contract -- our first major contract that comes due would be in 2027.

Okay. And that's -- is that Western -- I guess that's Western Canada more than likely?

Yes.

[Operator Instructions] Your next question comes from Justin Keywood with Stifel.

Nice to see the results. So as we enter in Q3, historically, it's been the seasonally strongest quarter for K-Bro, the most EBITDA contribution. Q3 of last year, the adjusted EBITDA margin was 22%. I realize there's several moving parts with this Q3. But should we expect a margin to be in a similar range? Or how should we be looking at that?

I think that's within the ballpark. Consistent with my earlier comment, the Stellar profile does have a lower margin profile. But overall, I think it should be in the ballpark, Justin.

Okay. Great. And then I just wanted to clarify a few points on the contracts. So for the remaining 60% that is coming up for renewal for the balance of the year, are you able to quantify that as far as the dollar impact?

Kristie, can you weigh in here?

Yes. That would be roughly $40 million, $45 million, Justin.