K-Bro Linen Inc. ($KBL)

Good morning, ladies and gentlemen, and welcome to the K-Bro Linen Systems Inc. Fourth Quarter 2025 Results Conference Call [Operator Instructions]. This call is being recorded on Friday, March 20, 2026. 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 fourth quarter and annual 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 with reference to management's expectations or 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 the forecast or projection as reflected in the forward-looking information. 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. Good morning to everyone, and thank you for joining us today to review our 2025 fourth quarter and annual results. I will focus on the main highlights of the quarter, and Kristie will provide more details of our financial performance and the balance sheet. So overall, we are delighted to have reported record results for 2025 with revenue of $507 million and adjusted EBITDA of $99 million for the year. We are an essential service provider to our health care and hospitality customers and our results are the product of our disciplined, proven, growth strategy. Q4 marks our seventh consecutive quarter of record results and includes the early contributions from Stellar Mayan. Stellar is highly complementary to our existing U.K. businesses, Fishers and Shortridge and creates a top 3 national U.K. health care and hospitality platform. We're pleased with the progress of our ongoing integration efforts, and we work -- as we work towards optimizing our local and national footprints and positioning K-Bro for long-term growth. From a revenue perspective for the year, it increased by 36% compared to [ 2024 ], with health care revenue having increased by 41% and hospitality revenue increasing by 30%. Health care revenues represented approximately 58% of consolidated revenues, which is higher compared to 53% in [ 2024 ], and this is due mainly to the acquisition of Stellar and the annualization of C.M. 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. 2025 was a record year for K-Bro and we're excited about our future. We have national health care and hospitality platforms now in both Canada and the U.K., and we're proud of our diverse and talented team of over 4,500 employees and our culture that puts people first, supports our partners, and embraces environmental stewardship. I'll now turn the call over to Kristie to discuss our detailed financial results for the quarter and then I'll return to talk about the outlook and answer any Q&A. Kristie, over to you.

Thanks, Linda. The information we are discussing today is also highlighted in our 2025 fourth quarter earnings press release issued yesterday, and detailed supplemental financial information can be found on our Investor Relations website under the heading Financials. For the year ended December 31, '25, K-Bro's consolidated revenue increased approximately 36% to $506.8 million compared to $373.6 million in the comparative quarter of year of 2024. This increase is primarily due to the acquisition of Stellar Mayan in June '25 and the acquisition of Shortridge and C.M. during Q2 '24 as well as the impact of price increases implemented. 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 financing costs, transition and integration costs as well as gains and losses on the settlement 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, and details of the calculations and adjustments can be found in our MD&A under the section terminology. Consolidated adjusted EBITDA increased in 2025 to $98.7 million or by 36.9% compared to $72.1 million in 2024. Adjusted EBITDA margin increased from 19.3% in 2024 to 19.5% in 2025. The increase in adjusted EBITDA margin is largely due to labor efficiencies, the elimination of the Canadian carbon tax in 2025 and lower gas costs in the U.K. market, offset by the combination of the lower Stellar Mayan margin profile. Consolidated EBITDA increased in 2025 to $90.9 million or by 31.7% compared to $69 million in 2024. On a consolidated basis, EBITDA margin decreased from 18.5% in 2024 to 17.9% in 2025. The decrease in EBITDA margin is due to the combination of the lower Stellar Mayan margin profile as well as adjusting items in the year related to the Stellar transaction and transition costs. For the Canadian segment, the adjusted EBITDA margin increased to 20.6% in '25 compared to 19.1% in '24. The increase in adjusted EBITDA margin was largely due to labor efficiencies as well as the elimination of the carbon tax, which I mentioned earlier. EBITDA margin increased to 19.5% in '25 from 18.1% in '24. For the U.K. segment, the adjusted EBITDA margin decreased to 18.1% in '25 from 19.8% in '24. The decrease is due to the combination of the lower Stellar Mayan profile. The EBITDA margin for the U.K. segment decreased to 15.9% in '24 -- sorry, in '25 from 19.3%. The decrease in EBITDA margin is due to the combination of the lower Stellar Mayan margin profile as well as adjusting items in the quarter related to transition and transaction costs. Adjusted net earnings increased in the year to $30.4 million from $21.7 million in 2024. Adjusting items in the year included transaction costs, transition costs, structural financing costs, nonrecurring gains and contingent income tax provisions as well as intangible asset amortization related to the acquisition of Stellar. Without adjusting items, net earnings decreased by $0.7 million in '25 from $18.7 million in 2024 to $18 million in 2025. The decrease in net earnings is primarily related to higher interest costs due to increased borrowing related to acquisitions, increased amortization and depreciation due to the Stellar Mayan, Shortridge and C.M. assets acquired as well as the adjusting items. Wages and benefits for the year increased by $54 million to $196.2 million compared to $142.2 million in the comparative period of 2024. And as a percentage of revenue, increased by 0.6 percentage points to 38.7%. The increase as a percentage of revenue is primarily related to the combination of the Stellar Mayan cost structure. Linen for the year increased by $13.7 million compared to $36.2 million in the comparative period of '24 and as a percentage of revenue remained relatively constant at 9.8%. Utilities for the year increased by $4.3 million to $32.2 million compared to $27.9 million in the comparative period of '24 and as a percentage of revenue, decreased by 1.1 percentage points to 6.4%. The decrease as a percentage of revenue is primarily related to lower gas costs in the U.K. market and the elimination of the Canadian carbon tax in Canada in Q2 of '25. Delivery for the year increased by $13.6 million to $58.3 million compared to $44.7 million in the comparative period of '24 and as a percentage of revenue, decreased by 0.5 percentage points to 11.5%. The decrease as a percentage of revenue is primarily related to the combination of the Stellar Mayan cost structure, delivery route optimization and lower fuel prices in Canada. Occupancy costs for the year increased by $4.1 million to $10.5 million compared to $6.4 million in the comparative period of '24, and as a percentage of revenue, increased by 0.4 percentage points to 2.1%. The increase as a percentage of revenue is primarily related to higher facility operating costs and the combination of the Stellar Mayan cost structure. Materials and supplies for the year increased by $8.9 million to $22.7 million compared to $13.8 million in the comparative period of '24 and as a percentage of revenue, increased by 0.8 percentage points to 4.5%. The increase as a percentage of revenue is primarily related to the combination of the Stellar Mayan cost structure. Repairs and maintenance for the year increased by $4.4 million to $20.2 million compared to $15.8 million in the comparative period of '24 and as a percentage of revenue remained consistent. Corporate costs for the year increased by $8.2 million to $27.4 million compared to $19.2 million in the comparative period of '24. And as a percentage of revenue, increased by 0.3 percentage points to 5.4%. The increase as a percentage of revenue is primarily related to adjusting items, which include transaction costs, legal, professional and consulting fee expenditures related to the acquisition of Stellar as well as structural financing costs, higher management share-based compensation and is partially offset by a nonrecurring gain. These items are considered to be adjusting items for the purposes of calculating adjusted EBITDA, adjusted net income and adjusted EPS and are further detailed within the terminology section of the MD&A. Other recovery for the year decreased by $0.4 million to $1.5 million compared to $1.1 million in the comparative period of '24 and as a percentage of revenue remained constant. Other recovery is primarily related to the sale of the Granby facility during Q2 '25. This gain is also an adjusting item for the purpose of calculating adjusted EBITDA, adjusted net income and adjusted EPS. Now looking at our capital resources. Distributable cash flow for the fourth quarter of '25 was $13.5 million, and our payout ratio was around 20%. The company paid out $0.3 per share in dividends during the quarter for total consideration of $3.9 million. The corporation had net working capital of $90.3 million at the end of December '25 compared to its working capital position of $54.1 million at the end of December '24. The increase in working capital is primarily attributable to the acquisition of Stellar on June 11, '25 and the change in working capital items driven from timing of business activities. With regards to credit and liquidity, we have a strong balance sheet and ample undrawn capacity on our syndicated revolving credit facility with an operating line of $175 million and an amortizing term loan of $134 million. And we have a further $50 million accordion for growth purposes. At year-end, we had an undrawn balance of close to $66 million on our operating line without taking into account the accordion, which reinforces our strong liquidity. This represents a pro forma funded debt-to-EBITDA ratio, excluding leases of about 2.6x on a pro forma basis. Debt to total capitalization for the period ended December 31, '25, was 48.7% and total debt net of cash increased in the year from $114.4 million to $214.2 million, primarily again related to the amortizing term loan to finance the Stellar Mayan acquisition, which has been offset by repayments to our revolving credit facility. I'll now turn things back over to Linda for any additional commentary. Linda?

Thank you -- thank you so much, Kristie. 2025 was a transformational year for K-Bro as we built out our strategic national presence across the U.K. With the acquisition of Stellar, we're delighted to have 2 national health care and hospitality platforms in both Canada and the U.K. We are a leader in Canadian health care with half a century of experience and we're excited to extend that leadership into other markets. We see a positive outlook for our business in both Canada and the U.K. and are excited about our growth opportunities ahead. We are pleased with our progress on our ongoing Stellar integration efforts. Our U.K. Managing Director, who is an experienced K-Bro veteran oversees the combined U.K. operations, including the Stellar business integration plan. Our transition team is reviewing cost synergies, operational efficiencies and platform optimizations, and we anticipate run rate cost synergies will be realized over the contemplated 24-month time horizon. To the end of '25, we're on track and estimate we've achieved 25% of the anticipated synergies. On a consolidated basis, we're excited about the future potential of our combined business. Both of K-Bro's Health care and hospitality segments continue to experience steady growth rates. In the Health care segment, we expect activity levels to remain strong from continued focus on reduced 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. In line with management's expectations. The consolidated U.K. divisional adjusted EBITDA margins will be lower than a seasonally adjusted historical margins due to the lower EBITDA margin profile of Stellar. K-Bro is committed to a sustainable future, and we're proud of our talented, diverse and motivated workforce that share our values and represent our local communities. We're working to integrate our recently acquired businesses. And as always, 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 answer any questions you have as it relates to the fourth quarter and annual results of '25.

[Operator Instructions] The first question comes from Michael Glen with Raymond James.

Linda, maybe just to start, you speak about similar levels for adjusted EBITDA margins, but at the same time, we are seeing some escalating -- natural gas expenses and then diesel cost as well. I guess you could lump into that. Can you maybe speak to how your outlook on those line items might have changed as we trended early into 2026?

Yes, absolutely, Michael. I would say, certainly, we will see a marginal impact as it relates to certain items in that area. We are hedged in both Canada and the U.K., Kristie, I'll get you to outline time lines and percentages. The largest area where we would see some exposure would be diesel. Having said that, diesel is by far the smallest input cost as it relates to -- or relative to natural gas or electricity. But Kristie, maybe you can map out hedging and what's under contract and tell win by geography?

Yes, absolutely. So from a natural gas perspective, in Canada, we're hedged about 60% and those hedges roll off anywhere between the next 12 to 36 months. So a little bit of exposure on the Canadian side. Having said that, we don't think it would have any -- from a Canadian perspective, any material impact to the margins at this point in time. In the U.K., we are hedged 100% to the end of this fiscal year, so to the end of 2026, there has been a significant increase in cost in natural gas compared to what we're hedged at today, if we had to renew our hedges at today's rates, we would anticipate that there would be a margin impact of about 1% to consolidated margins going forward.

Okay. And then, just...

I think just to add to that, Michael -- sorry, the one thing I would say is that our diesel hedge in the U.K. comes off as of March, but again, similar to my earlier comment, smaller part of the input cost.

Okay. And just given the nature of the events, is there any chance that the counterparty to that could come back with any sort of -- this risk wasn't foreseen or anything like that? Could they push back on the hedging at all?

We've been fairly careful about who the third-party counterparty is ensuring that they are financially stable and a large player. So we don't expect exposure there. And it's the same counterparty that we've dealt with during similar periods. But it's a fair enough question. We don't expect anything at this point.

Okay. And then just on labor, can you update us on how you see the labor market evolving in both markets? And then perhaps in Canada, just touch on, are you seeing any movement in Alberta? These might be early days, but seeing any movement in Alberta with labor as we go into this higher oil and gas market?

Yes. Yes. Good questions. I would say labor overall in both geographies has been very constructive. We have been fortunate to be able to secure and are obviously gearing up in our hospitality plants for Easter where the seasonality picks up, and it leads into our busier season. We are feeling pretty good about the situation and our ability to access labor in virtually all of our markets. On the Alberta front, I would say, we definitely can be impacted by the increase in the price of oil, but it is early days, and we have not seen anything yet.

The next question comes from Derek Lessard with TD Cowen.

Congrats on a really nice quarter and an exceptional year.

Thank you, Derek.

I just maybe wanted to -- it's more of a macro question at this point. Obviously, hearing a lot about the health of the consumer, some sectors, it's had an impact. Others reported no change. And I guess, on the back of what's going on globally, impact on airline fuel and what have you. Maybe just a quick view on hospitality trends that you're seeing both in Canada and the U.K. would be helpful.

Yes. Part of this would have -- we would have expected to see some level of impact in 2025 as Liberation Day started, tariffs started to come and the cost to the consumer had risen. And yet it tended to be quite a solid year in '25 on the hospitality front, partially because of staycations, still strong European travel and strong U.S. travel to Canada. We are not seeing any warning signs at this point in Canada as it relates to commentary from our hospitality partners, our hotels. I'm not worried about the U.K., but to the extent there would be an impact, I would be thinking it would be more related to the U.K. But yet, we haven't experienced that and have not seen any warning signs. A real telltale will be Easter because -- and school holidays as it relates to the U.K. to see how those trend but we're not seeing anything that we're worried about at this point.

Okay. That's helpful color. And then just maybe still sticking with the U.K. Can you just talk about the organic growth or the organic volume growth that you're seeing in the business?

Yes. Mid-single digit broken down equally between -- well, health care and hospitality, both mid-single digit, broken down equally between organic and price increases is what we've guided. Doesn't include volume growth as it relates to converting customers from disposable to reusable, but I would say that, that is a process, and that process will take a longer period of time. At this point, our key focus has been integrating and optimizing operations. I've spoke previously about changing shift patterns within a number of our plants, and that's been the key focus. So that is what we're guiding for growth in the U.K.

The next question comes from Justin Keywood with Stifel.

Nice to see the results. On the CapEx expectations for 2026 around $20 million, is that maintenance CapEx? Is there any new automation to incorporate within your plans? And maybe just a more broad question with AI advancing. Is there any other areas across the K-Bro platform where you see efficiencies either in the back-end office functions or perhaps at the facilities?

Well, from a CapEx perspective, I'd say about half of that is maintenance and half of that is growth/strategic. I would say on the strategic piece of it, not a significant focus on new automation, much of it would be newer versions of equipment that needs replacement. Robotics is just premature. I can't foresee a situation where that would be a key focus in our spend over the next several years, possibly 5 to 10 years. It's not that it doesn't exist. Our experience and our investigation of it is that it's -- the returns just aren't there yet, and it takes an incredible amount of square footage in your facility. So space is a serious consideration. In terms of back office and AI -- using AI and back office, very early stages of investigating that, Justin. I think there will be a place for it, but we're not there at this point.

Okay. Helpful. And then within Ontario, our understanding is there's several hospital RFPs that could come to market in the relatively near term. Are you able to update us on the organic growth opportunity within Ontario?

Yes. It's obviously a key market, one where we have capacity to add additional volumes. As you've identified, there are a number of opportunities that would come out later in the year. That remains our expectation, and we will be aggressively pursuing those as those opportunities come to market. But I would say no material update, still on track with our expectation.

Just for context, are we considering -- is it 2 or 3 RFPs, 5 to 10? Or any indication there?

It's hard to know how it will be structured to be fair, whether there will be consolidation among hospitals working together with a GPO or whether it will be singular entities. So I think it's a bit premature to determine that or comment on it.

The next question is the follow-up from Michael Glen with Raymond James.

Maybe just taking into everything as we work down the cash flow statement next year. What are you -- can you give some idea of what we should be thinking about from a free cash generation perspective in '26?

You bet, Kristie?

Yes, absolutely, Michael. We would anticipate somewhere in the range of $40 million before dividends for 2026.

Okay. And does that -- with that type of free cash generation then as you exit next year, I guess your balance sheet should be firmly into the low 2s, from a leverage standpoint?

Yes, exactly. That would be based on that level of free cash flow, just somewhere in the low 2 range would be a reasonable estimate.

And what happens with the free cash generation once you're back into the low 2s, should we expect at that point to see more activity with the share repurchase program?

Yes. I think we'll remain focused on growth opportunities, acquisitions that make sense in our existing markets as they, if and when they become available and to your point, exactly revisiting the NCIB and looking at reactivating that if that makes sense.

Okay. And then just on organic growth. Are you able to indicate what the level of organic growth -- and we have the Stellar Mayan deal, but do you have an estimate of what actual underlying organic was in the U.K. in Q4?

Kristie, do you want to comment on that?

Yes, absolutely. And I would say most of the growth obviously came from the Stellar acquisition. And I would say that organic growth was in the low single-digit levels.

Okay. Okay. And are there any -- I think you touched on this, but any timing in the U.K. regarding volume opportunities? Like should we -- can we think about maybe some volume opportunities, some volume growth building into the U.K. over the coming year?

I would say the back half of the year, Michael, we're still very focused on some heavy lifting of changing shift patterns and plants, improving service levels, very operational-focused activities. But I think it's fair enough to say the back half of the year will be focused on growth opportunities.

[Operator Instructions] Next question all from Derek Lessard with TD Cowen.

Yes. Maybe just a housekeeping one for me, Kristie. Just on the wages and benefits line. I know as a percentage of revenue, it's up on the Stellar acquisition. But sequentially, it did step up, I think, 90 bps or thereabouts. Just curious of how we should be modeling that line item going forward?

Yes. I would say Q4 is probably fairly representative of the go-forward position. We do expect to have some increase on that line as we gain efficiencies. But I would say a very good starting point would be the Q4 number.

Okay. And when you say, you expect it to gain, you mean, improve? As you get efficiencies? Yes. Yes. Got it.

Correct. Correct.

There are no further questions. I will turn the call back over to Linda McCurdy for closing remarks.

Thank you, everyone, for joining today, and I hope everyone enjoys the first day of spring. If there's any additional follow-up for Kristie and I, please feel free to reach out. We're always available. Thank you.

Ladies and gentlemen, this concludes your conference call for today. We thank you for participating, and we ask that you please disconnect your lines.