K-Bro Linen Inc. ($KBL)

Good morning, ladies and gentlemen, and welcome to the K-Bro Linen Inc. First Quarter 2026 Results Conference Call. [Operator Instructions] This call is being recorded on Wednesday, May 6, 2026. And 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 first 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 facts are considered to be forward-looking statements. Certain material factors or assumptions were applied in drawing a conclusion or making a 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 can 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 very much, Kristie, and good morning to everyone. Thank you for joining us today to review our 2026 first quarter results. I'll touch on some of the highlights of the first quarter. I'll then hand it over to Kristie, who will provide more details on our financial performance and the balance sheet. So we are delighted to have reported our eighth consecutive quarter of record results with revenue of $139 million and adjusted EBITDA of $22.6 million. We have steady trends in both our Healthcare and Hospitality segments and volumes for the quarter were generally in line with our expectations. Our Q1 results highlight the benefits of our strategic national platforms in both Canada and the U.K. Stellar Mayan, which we acquired in June 2025, is highly complementary to our existing U.K. businesses, Fishers and Shortridge and create a top three national U.K. health care and hospitality platform. As our Stellar Mayan first anniversary approaches, we're pleased with the progress of our ongoing integration efforts. We continue to anticipate run rate cost synergies will be realized over the contemplated 24-month time frame. and we've seen great results so far. We estimate that we've achieved 30% of the anticipated synergies. Consolidated total revenue for the first quarter increased by 53% compared to 2025, with health care revenue having increased by 67% and hospitality revenue by 35%. Healthcare revenues represented approximately 61% of consolidated revenue, which is higher compared to approximately 56% in 2025 due to the acquisition of Stellar. Amid a more volatile global backdrop, we're pleased with our Q1 results, underscoring our resilient growth model and business performance. I'll now turn the call over to Kristie to discuss our detailed financial results for the quarter, after which I'll return to talk about our outlook. And of course, we'll open it up to any questions. Kristie, over to you.

Thank you, Linda. The information we are discussing today is also highlighted in our 2026 first quarter earnings press release issued yesterday and detailed supplemental financial information can be found on our Investor Relations website under the heading Financials. K-Bro's consolidated revenue for Q1 of 2026 increased by 52.9% year-over-year to $139.1 million. In Canadian dollars, quarterly revenue for both the Canadian and U.K. divisions were roughly equal. 90% of the increase in consolidated revenue was due to the acquisition of Stellar Mayan in June 2025, and the remaining portion was made up of price increases and volume increases. Strategic acquisitions of high-quality operators with leading market positions in key regions continues to be an important contributor to K-Bro's overall growth file. And as we actively pursue these growth opportunities, we will continue to incur certain transaction, transition and financing costs. In this context, we believe adjusted EBITDA before these adjusting items will assist investors to assess our performance on a consistent basis as it is an indication of our capacity to generate income from operations. Consolidated adjusted EBITDA for Q1 of 2026 increased by 50.4% year-over-year to $22.6 million. Consolidated adjusted EBITDA margin decreased 0.3% year-over-year to 16.2%, largely due to the combination of Stellar Mayan margin profile, offset by labor efficiencies and the elimination of the Canadian carbon tax in Q2 of 2025. For the Canadian division, the adjusted EBITDA margin for Q1 of '26 increased by 2.2% year-over-year to 20.1%. The increase in adjusted EBITDA margin is largely due to labor efficiencies and the elimination of the Canadian carbon tax in Q2 of '25. As a reminder to all, Q1 of 2026 will be the last quarter where we see the year-over-year benefit due to the elimination of the carbon tax, which again was eliminated in Q2 of '25. For the U.K. division, the adjusted EBITDA margin for Q1 of '26 was relatively flat, decreasing by 0.1% year-over-year to 12.4%. Adjusted net earnings increased in the first quarter of '26 to $4.3 million from $3.4 million in '25 and included adjusting items of $2.3 million. The adjusting items in the quarter include transaction costs, transition costs and intangible asset amortization related to the acquisition of Stellar Mayan. K-Bro has a strong cash flow generation profile and a disciplined approach to capital allocation, which allows us to both invest in growing the business and return capital to shareholders. Distributable cash flow for Q1 of '26 was $9.4 million, and our payout ratio was 41.5%. Our trailing 12-month payout ratio was 29.7%. The company paid out $0.3 per share in dividends during the quarter for total consideration of $3.9 million. Post-acquisition debt and leverage levels have been consistent with our expectations. We have a strong balance sheet with ample undrawn capacity on our syndicated revolving credit facility with an operating line of $175 million and an amortizing term loan of $134.3 million and a further $50 million accordion for growth purposes. At the end of the first quarter of 2026, we had an undrawn balance of close to $68.2 million on our operating line without taking into account the accordion, reinforcing our strong liquidity. This represents a pro forma debt-to-EBITDA ratio, excluding leases, of approximately 2.5x on a pro forma basis. Debt to total capitalization for the period ended March 31, '26 was 49.5%. Total debt net of cash decreased from $214.2 million to $204.5 million, primarily attributable to the timing of business activities and the acquisition of Stellar. I'll now turn things back over to Linda for additional commentary. Linda?

Thank you very much, Kristie. So we're very pleased with our start to 2026, and we see a positive outlook in the context of an evolving macro landscape. We've built national platforms with coast-to-coast coverage in Canada and the U.K. We're able to deliver industry-leading service to health care and hospitality customers from a network of strategically located facilities. Our services are essential to the continuity of our customers' operations, and we're embodying sustainable practices to support them for the long term. We have a highly experienced team, and we're focused on disciplined operational performance. We're making good progress on our U.K. integration efforts following our acquisition of Stellar in June 2025. Our Canadian and U.K. platforms are roughly the same size in terms of employees and Canadian dollar revenues. Over the past year, we've implemented various improvements at Stellar, including adopting 7-day operations at certain facilities, in-sourcing maintenance that was previously outsourced, workflow optimization, realigned compensation structures, changing certain managers and leveraging K-Bro's deep bench strength of talent. Our National U.K. platform is a top three player, and we're well positioned for long-term growth in health care and hospitality. On a consolidated basis, we continue to monitor the evolving global economic and political forces. From where we stand today, both health care and hospitality segments continue to experience stable volume 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 due to the lower EBITDA margin profile of Stellar, the consolidated U.K. divisional adjusted EBITDA margins will be lower than seasonally adjusted historical margins. We continue to monitor the volatile energy pricing environment and the impact on diesel prices and our margins. In the U.K., 50% of our diesel usage is hedged and 50% is floating. In Canada, our diesel usage is floating. If current diesel prices were to continue, management anticipates the anticipated impact to adjusted EBITDA margin would be a decrease of 0.5% to consolidated margins. Putting people first, being dependable partners and embracing environmental stewardship have always been part of our culture. We're committed to a sustainable future, and we're proud of our talented, diverse and motivated team of over 4,500 employees 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. We'll now open it up to any questions you might have regarding our first quarter results.

[Operator Instructions] Our first question comes from Ahmed Abdullah with National Bank of Canada.

On the U.K. margins, it seems that the dilution is less than we had anticipated. Can you give us a bit more color on how the integration is going for Stellar Mayan? Last time you mentioned the 25% realization of synergies. Where are we today? And was that the main contributor of kind of the stable margin profile versus last year?

So I would make the comment that while on the surface, it looks like there is not a lot of dilution on the margin as a result of Stellar. It is also the seasonally weakest quarter for Fishers and Shortridge. So that will be a more dramatic impact as we enter into the higher-margin Stellar, Shortridge period for the hospitality part of the business for Q2 and Q3, which are the strongest. So we didn't see it in Q1, but it will be greater impact we'll see in Q2 and Q3. In terms of integration, it has been a lot of heavy lifting, all the heavy lifting that we knew created opportunities for us. As I mentioned, we've made changes in management. We've moved to 7-day working in certain of our operations. We haven't done it yet in all of them. That is in the works and requires notice periods and working with staff schedules, but all are unfolding as planned. We have brought maintenance back in-house, which we are -- has gone very, very well. So we're very pleased with the progress. It has been a lot of heavy lifting. However, there's more to come. We feel we're achieving and experiencing about and seeing the impact of about 30% of the savings in our results.

Okay. That's great color. Just on the comment around the diesel price impact, how have discussions been progressing with your customers? We're seeing it across a lot of industries where fuel surcharges are becoming more of an acceptable discussion point with customers. Is that 0.5% impact net of adding fuel surcharges? Or could you offset that 0.5% with fuel surcharges?

Sure, Ahmed, we are sort of priming the customer base to know that this could be coming down the pipe. We, in some of our contracts have the ability to pass it on. In many of them, we don't. It is factored in, in our annual price increase through depending on what the mechanism is. But in the U.K., that cost increases reflected in the textile rental [ index ], which is generally used as the base for our price increases. However, there is some lag in that being reflected in an actual price increase because they're generally annual. Having said that, we have historically worked very closely with our customers to pass some of these dramatic increases on, whether it's natural gas or diesel. So I would say it's something that is on our radar. It's something that we work towards. But in a lot of cases, there is no automatic increase that happens as a result of it.

Your next question comes from Cheryl Zhang with TD Cowen.

Congrats on a great quarter. So first on Stellar Mayan, just some back of the envelope math, it appears that Stellar Mayan revenue growth was in the high single-digit range year-over-year. If my math makes sense. I'm curious what's driving the strong growth there? Was there any market share gains or penetration growth that you can point out?

I think the -- from a revenue perspective, and I'll ask Kristie to weigh in, it was somewhat as advertised. It was in line with our expectations. We have certainly resigned a number of our contracts with anticipated CPI type increases. So I would say it's as expected with no significant major wins. Kristie, do you have any additional color to add?

No, Linda, I think you've characterized it well as being really in line with where we thought it would be.

Okay. That's helpful. And then just curious on the hospitality side, just given where fuel costs are trending and also the geopolitical uncertainties, curious if you have seen or heard any impact on businesses -- sorry, business and leisure travel demand or anything you -- any early reads from your hospitality customers?

Yes. I'd say Canada is a little more insulated, certainly. We do have a part of our business, of course, in the U.K. that is airline business. We have -- having said that, it is a small percent of our business. We have definitely seen some impact on flights that are going from Heathrow to the Middle East. So no surprise there, but it is not material in terms of overall revenue impact. I would say that we have not -- we're not anticipating a dramatic impact on rooms sold from our hospitality customers, but there is definitely a general awareness and concern about jet fuel and the impact potentially on summer travel. So all that to say there's no alarm bells yet, but it is on people's radar and there's a general awareness of it, of the impact.

Your next question comes from Kyle McPhee with ATB Cormark.

To start, just to follow up on the diesel cost exposure discussion we already had. That 50 basis points margin hit, when would that start to show in your results? Is that when the hedges roll off? Or is that kind of right away into Q2 here if prices don't alleviate?

Pretty quickly, Kyle, because of the 50% that are unhedged in the U.K. So we're certainly seeing the impact. And there is a little bit of an impact in Canada, but all wrapped into the 50 basis points. but we're experiencing that now.

Got it. And can you provide any color on the length of these hedges that are in place?

Yes. So we're not hedged in Canada on diesel. We are hedged until the end of '26 in the U.K.

Got it. Okay. And then just a follow-up on the U.K. organic growth. We talked about it already. By my math, it was 6.1%, so very strong, again, keeps tracking ahead of what I thought. You indicated it was mostly pricing gains. Was there any organic volume gains in the U.K. that's feeding into that 6%?

Yes. I'd say, certainly, there was -- it's half and half, to be fair. It's half price, half volume, more so existing customers, a few new wins, but nothing material, but it is half and half.

Got it. Okay. And then last one for me. I'd like to discuss the natural gas price exposure. Your U.K. business, I think, is fully hedged through this year, but exposed into 2027 to whatever prices may be at that time. Canada has some exposure as well, I think. Can you help us just understand the margin at risk in 2027, if, for instance, natural gas prices stay at these levels, kind of similar to the math you're doing on the diesel exposure, if it's not too early to do that here with natural gas?

Yes. So what I would say is if we look out at what pricing is into 2027, ralph, I'm going to say it differently. The impact is likely a 1% to just over a 1% increase overall. If we had to hedge at today's rate. But of course, if we were looking at rehedging into '27, those rates come down. But if we actually had to pay today's prices for natural gas and diesel, it would be about a 1.2% increase. Kristie, do you agree with that number?

Yes, I do.

That doesn't take into account, however, any price increases that would offset that, obviously.

Got it. That was my next question. Can you -- you have so much lead time here in this energy category. So can you proactively kind of deal with it? And is any of that automatic in this category kind of contrasting the diesel?

Well, most of our price increases come either at the beginning of the year or in April if. So certainly, if the increased cost will be reflected in the percent increase we get. So it will reduce the 1.2% impact if we had to rehedge at today's prices. And actually will signal to all of -- yes. And just a final point on your question, yes, we absolutely are telegraphing to our customers that energy is having an impact on the business, and they know that.

Your next question comes from Michael Glen with Raymond James.

Linda, are you able to update us at all? I know that you've spoken about this disposable conversion opportunity in the U.K. Is there anything that you can share with those conversations at this point in time?

We really are just getting started on that. We've been very focused on the synergy -- achieving the synergy target. We're moving some volume from a relocation from a small plant. So yes, it is in the works, but I would say it is in terms of priorities, kind of secondary on the list, but we still see it as a significant opportunity, Michael.

Okay. And then are you able to provide us -- is there any update that you are able to share with respect to the lower mainland renewal process?

I would say that their process is unfolding and there wouldn't be any real meaningful news until I think at the very earliest Q4 and possibly Q1.

Okay. And maybe just on your capital allocation thoughts or updates. You're deleveraging, I think, faster than -- I think you're characterizing it as in line, but it feels like it's faster than I was certainly expecting down at 2.5x now pro forma. So are you able to speak to how we should think about capital allocation in the second half of the year?

Absolutely. So we continue to look at the various alternatives with the highest priorities being growth through acquisition in our existing markets. And of course, we don't depend -- we don't control timing on that front. But very -- a very close second priority would be reactivating the NCIBs that we had put in place several years ago, but stopped to preserve balance sheet flexibility for the Stellar acquisition. So I would say that we're pleased with how it's deleveraged and those two priorities remain the top priorities, which we'll continue to focus on.

Your next question comes from Justin Keywood with Stifel.

Nice to see the big step-up in growth. Are we able to parse out the organic contribution, both in Canada and the U.K?

Kristie, do you want to address that?

Yes, absolutely. So Justin, most -- again, most of the revenue growth, about 90% of it would have came from the Stellar acquisition. The remaining 10% would be split approximately evenly between price and volume growth.

And the split Canada versus the U.K., would that be roughly half?

Yes. Yes, that would be a fair assumption.

Would it be fair to assume mid-single-digit organic growth for the rest of 2026?

Yes, that would be -- sorry, mid-single -- yes, we would say kind of in the 5% to 5-ish percent range would be like mid would be reasonable.

Okay. Great. And then we understand that there are several competitive RFPs that have been ongoing for quite a while in Ontario. Are we able to get an update on the stages of those opportunities?

Justin, I wouldn't expect anything meaningful to be out to the market at the earliest until end of Q3 and/or by Q4. We know that there are various health organizations considering alternatives, but there wouldn't be anything until that point in time.

And are these like -- are they a couple of RFPs, like 5 to 10 or more?

It's hard to determine -- well, each hospital or health system somewhat act on their own behalf and would use a group purchasing organization, but each of them would determine their own path forward. So it is a little hard to just tell what each of them has in there. We know there will be some, but they don't act together as a consolidated group. And there's at least 10 health organizations that would be impacted by that minimum, probably 15 actually.

So that's quite...

Moving from very large. Moving from very large to very small.

Quite substantial. Like if this gets pushed a little further, is it fair to assume that most of these RFPs will come to market in 2027?

I would say that some will, some may opt not to go to RFP and look for short-term extensions. It really, I would say, will become much more in focus in the back half of the year.

Okay. Interesting. And just finally, for Kristie, what do you anticipate the exit leverage ratio to be for 2026?

Justin, I would say somewhere in the mid-2s would be a reasonable leverage exit ratio based on where we're at today.

So would that -- if I understand, we're at 2.5 right now? Or is that already?

We're around 2.5 now, yes. So kind of in the mid mid-2s would be reasonable.

So relatively flat then would be the way to look at it?

Slightly lower than. Slightly lower than we are right now. We would anticipate free cash flow before dividends of about $45 million. So there will still be some repayments of debt. So mid- to like in the -- it will come down a little bit throughout the quarters.

There are no further questions at this time. I would like to turn the call back over to Linda McCurdy.

Thank you, everyone. Look forward to any follow-up if you have it, feel free to reach out to Kristie and I, and have a great day.