K-Bro Linen Inc. (KBL) Earnings Call Transcript & Summary

Thank you. Good morning, ladies and gentlemen, and welcome to the KBRO Linen Systems Incorporated Second Quarter 2026 Results Conference Call. At this time, all lines are in a listen-only mode. Following the presentation, we will conduct a question and answer session. If at any time during this call you have any questions, please contact the KBRO Linen Systems Incorporated require immediate assistance, please press star zero for the operator. This call is being recorded on Wednesday, August 5th, 2026. I would now like to turn the conference over to Christy 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. 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 marks 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 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 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, Linda.

Thank you very much, Christy, and good morning to everyone, and thanks for joining us today to review our 2026 second quarter results. I'll touch on some of the highlights of our second quarter, and then Christy will provide some details on our financial performance and our balance sheet. We are pleased with our strong second quarter results, which are consistent with our expectations. Revenue for the quarter was 150 million and adjusted EBITDA was 29.8 million. We've seen steady trends in both our healthcare and hospitality segments. Our Q2 results highlight the benefit of our strategic national platforms in both Canada and the UK. We have just passed our first anniversary of owning Stellar Mayan, which was on July 11th, and we are 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 horizon. Through the end of Q2, we estimate we've achieved roughly 40% of the anticipated synergies. Consolidated total revenue for the quarter increased by 33% compared to 2025, with healthcare revenue having increased by 50% and hospitality revenue by 15%. healthcare revenues represented approximately 58% of our consolidated revenue, which is higher compared to approximately 51% in 25 due to the acquisition of Stellar. Amid a more volatile global backdrop, we're pleased with our Q2 results underscoring our resilient growth growth model and business performance. As always, our experienced team is focused on disciplined operations. I'll now turn the call over to Christy to discuss our detailed financial results for the quarter, after which I'll return and talk to you about the outlook.

so much, Christy. Over to you. Thanks, Linda. The information we are discussing today is also highlighted in our 2026 second quarter earnings press release issued yesterday, and detailed supplemental financial information can be found on our investor relations website under the heading financials. April's consolidated revenue for Q2 2026 increased year-over-year by 33% to $150.4 million. In Canadian dollars, quarterly revenue from both the Canadian and UK divisions were roughly equal, with Canada at 47.7%. and the UK at 52.2%. The increase in consolidated revenue is primarily due to the acquisition of Stellar Mayan in June 2025, as well as the impact of price increases implemented. Consolidated adjusted EBITDA for Q2 2026 increased year over year by 25.6% to 29.8 million. Consolidated adjusted EBITDA margin decreased 1.2% year over year to 19.8%. to the combination of the stellar Mayan margin profile and higher fuel costs. The Canadian division adjusted EBITDA margin in the second quarter remained relatively constant at 21.1%. For the year, UK division, the adjusted EBITDA margin in the second quarter decreased by 2.1% to 18.6% in 2026. decreases primarily related to the combination of the stellar mine margin profile and higher fuel costs. Adjusted net earnings increased in the second quarter of 2026 to 10.1 million from 7.8 million in 2025, including adjusting items of 2.5 million. The adjusted items in the quarter include lower transaction costs and structural financing costs related to the acquisition of of Stellar Mayan, transition costs, fair value adjustment on interest rate derivatives, which I will discuss in more detail shortly, non-recurring gains, and intangible asset amortization. ABLE 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 Q2 26 was 14.7 million. THE PAYOUT RATIO WAS 26.6%. THE PAYOUT RATIO WAS 26.6%. OUR TRAILING 12-MONTH PAYOUT OUR TRAILING 12-MONTH PAYOUT RATIO WAS 27.3%. The company paid out 0.3 per share in dividends during the quarter for total consideration of 3.9 million. In the second quarter, Cabro repurchased and canceled 58,000 common shares for 2.5 million under the normal course issuer bid. 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, an amortizing term loan of $134.3 million and a further $15 million $50 million accordion for growth purposes. At the end of the second quarter of 26, we had an undrawn balance of close to $69.6 million on our operating line without taking into account the accordion, which reinforces our strong liquidity. This represents a pro-format funded debt to EBITDA ratio excluding leases of just under 2.5 times on a pro forma basis. Debt to total capitalization for the period ended June 30th, 26th was 47.5% and total debt net of cash was 213.5 million. AGO is exposed to floating interest rates and changes in interest rates may impact future cash flows. To manage the exposure to fluctuations in interest rates, in In June, Cabro entered into an interest rate swap in connection with the term loan portion of its syndicated credit facility. under the terms of the swap, Cabral economically converts the floating interest rate exposure on the term loan to a fixed rate. The interest rate swap is measured at fair value and recorded as interest rate derivatives on the consolidated statement of financial position with changes in fair value recognized in fair value adjustment on interest rate derivatives derivatives within operating costs in the consolidated statement of income. and losses on the interest rate swap are recognized in finance expense. consistent with the presentation of interest on the underlying term loan. Fair value adjustment on the interest rate derivatives is included as an adjusted item, as detailed in the tables within the terminology section of our MD&A. I'll now turn things back over to Linda for additional commentary. Linda?.

Thank you, Christy. We're pleased with our start to 2026, and we see a positive outlook in the context of an evolving macro landscape. Following our acquisition of Stellar in 2025, Cabro is the largest healthcare and hospitality laundry and linen processor in Canada, and one of the largest in the UK with coast-to-coast national geographic footprints in each country. We're able to deliver industry leading service to healthcare and hospitality customers from a network of strategically located facilities. Our services are essential to the continuity of our customers operations. We have a highly experienced team and we're focused on disciplined operational performance. Last week, we announced the addition of John Lynch to the board. John spent 10 years as a managing director at J.P. Morgan Asset Management, growing and managing the infrastructure investments and team in Europe. John brings a range of capital markets experience to the board, including more than three decades of experience in international finance and investing, all of which will further strengthen and Cabrow's Board of Directors. We're very excited about the addition of John. We've made good progress on our UK integration efforts. As we have highlighted before over the past year, we've implemented various improvements at Stellar, including insourcing the maintenance function, workflow optimizations, realigning compensation structures, changing certain managers. and leveraging Cabro's deep strength of talent. Our national UK platform is a top three player and we're well positioned for long-term growth in healthcare and hospitality. On a consolidated basis, we continue to monitor the evolving global economic and political forces. we stand today, both Gabriel's healthcare and hospitality segments continue to experience steady growth. Going forward, we expect combined adjusted EBITDA margins will remain at similar levels to seasonally adjusted combined historical margins. In line with our expectations due to the lower EBITDA margin profile of Stellar, the consolidated UK divisional adjusted EBITDA margins will be lower than seasonally adjusted historical margins. continue to monitor the volatile energy pricing environment and the impact on diesel prices and our margins. In the U.K., 50 percent of our diesel usage is heads and 50 percent is floating. In Canada, our diesel usage is floating. Management estimates that due to 2026 adjusted EBITDA margins were impacted negatively by half a percentage point due to diesel rates. Should diesel rates stay consistent, management anticipates that the adjusted EBITDA margin for the remaining quarters in 2026 will continue to be impacted by this same magnitude. As we celebrate Stellar's first anniversary, we're focused on completing the integration, pursuing organic growth opportunities and potential M&A opportunities. Strategic acquisitions of high quality operators continue to be an important contributor to our overall growth profile and strategy. pleased with the early contribution of our recent acquisitions and believe they'll further enhance our growth profile. We elevate potential strategic acquisitions that may complement our platform and will look to leverage our strong liquidity position and access to the capital markets to execute on these opportunities that they arise. Putting people first, being dependable partners, and embracing environmental stewardship of always been part of our culture and we're committed to a sustainable future. I'll now open it up to any questions which you may have as it relates to the quarter.

Operator? Thank you. Ladies and gentlemen, we will now begin our question and answer session. Should you have a question, please press the star followed by the 1 on your touchtone phone. You will hear a prompt that your hand has been raised. Should you wish to decline from the polling process, please press the star followed by the 2. And if you're using a speakerphone, please lift the handset first before pressing any keys. And we have our first question from Cheryl Zhang with TD Collins.

Hey, good morning, Linda and Christy. Thanks for taking our question. Good morning. I guess I first wanted to ask about the synergy capture. I'm curious if you can comment on the incremental thermion synergy that's captured in Q2 and what remains to be achieved.

Thanks, Cheryl. So we're quite pleased with the progress we've made. I identified a number of the areas that has been our focus to date. We estimate that about 40% of the targeted synergies have been achieved with the remaining to be achieved over the next 12 months. The largest piece yet to conquer is to convert to seven day working in the in our healthcare plants. We have converted one plant, which went well, but the more complicated transition will be in our healthcare plants. Planning is well underway and we're working We expect that to happen over the next six months, but it is a significant change in people's work routines and obviously their schedules. Most had, well, all had weekends off. So we have to be very careful and mindful in how this is rolled out. But to date, As I mentioned, some of the key accomplishments is bringing the entire engineering function and maintenance function back in-house, which has gone exceedingly well. We've made management changes. We've worked with our customers to pursue additional volumes. So we're very pleased with our progress, but certainly more to come, Carol.

Understood. That's very helpful, Keller. Thank you, Linda. And my next question is around hospitality. I think Canadian hospitality growth slowed to 0.9% this quarter. I'm curious if you could provide some color around that. Are you seeing any slowdown in travel activities? ask the same question for UK hospitality as well. Just curious how the organic growth involving has trended.

Yes, great question. So I will say that from a hospitality growth perspective, Q2 relative to prior years was definitely behind what we have seen year over year. And one key note would have been FIFA, which would have impacted both Toronto and Vancouver where we have quite frankly, where occupancies didn't meet what was expected. I think that a large number of rooms were blocked off by FIFA. They were not secured or not occupied, open to the public, but rates were exceedingly high, hotel room rates, were exceedingly high, so people made choices not to come. So that impacted both the Toronto and Vancouver market. In the UK, I would say, you know, they experienced extreme heat, you know, and volumes and occupancies also were a little weaker than historical norms. A little unclear as to what that means for Q3, but you know we're still seeing growth, perhaps just not as high as we've seen historically. In 10, Canada was very clearly aligned to the impact of under-soldering for FIFA. It is a little unclear, however, what that means going forward.

Okay, that's helpful, Color. Thank you. I'll get back in this queue.

Thanks, Cheryl. Thank you. And thank you. We have our next question from Hanzo Saars with ATB Coremark.

Hey, I'm on for Kyle McPhee. We're hoping to get an update on the hedge book specifically for diesel and natural gas. So my main question is, have you entered any new hedges since the last quarterly update that would alter your margin exposure risk in 2027? I know that regardless of how things play out, you can claw back potential margin drag over time. with your kind of pricing power, but we just want to understand that transient risk in 2027 if diesel and gas prices don't alleviate. Thank you.

Yes, thank you for your question, Christy. I'm going to let you respond to that. Yes, absolutely. We haven't entered any additional hedges since our Q1 call. Really, our guidance would still remain relatively consistent. As Linda mentioned, about 50% of our natural gas usage in the UK is hedged, and 50% is floating, all floating in Canada. should the diesel rates prevail, we see exposure of about half a percent to the margin. And from a natural gas perspective, for the most part, our hedges in the Canadian market a lot of material hedges that roll off over several years. We are not seeing huge volatility in natural gas pricing on the Canadian side as of now. Especially given we don't have material hedges that roll off in 2027. costs presently are slightly higher than where our current hedge would fit to the extent we had to lock in pricing today. there would be a negative margin impact of about a half a percent as well.

Okay, got it. And then just regarding margins in Q2, your margin landed better than we thought. And was that pricing action that allowed you to offset the diesel inflation exposure, or should we attribute the margin performance to something else that was really working in your favor?.

I think there were a number of contributing factors. We have optimized some distribution routes. We have seen some price increases in certain areas. Labor has been contained nicely. partially as the result of installation of new equipment. Christy, is there anything I'm missing in the list of... No, you've hit the highlights. Yes, you've hit the highlights.

That's great, Kola. Thank you. And thank you. We have our next question from Ahmed Abdullah with National Bank of Canada.

Thank you. Good morning all. Touching a little bit more on the margins, your Canadian margin was steady versus last year, despite obviously the wage and diesel pressure. I'll ask the question a little bit differently. How much of that resilience came from pricing and route optimization and other initiatives, perhaps volume as well? and how much of those benefits should we expect to persist into the second half?.

I'd say it's a combination of both, about 50-50 on this. And I think we're feeling that it's reasonable to expect that. that to continue into the bounce of the year. Yes, we were pleased with our results on containing costs and being able to cover the increased easel costs through efficiencies in other areas.

Okay. So, despite the lack of a hedge on the diesel costs, you're still able to manage around it. to try to soften the impact as much as possible. Is that kind of the read I'm supposed to get here? Yes.

Yes, cost containment in other areas. Root consolidation was a contributor for labor. And then, as I mentioned, price increase in other areas. So, we feel that in PQ3 that that will continue to be achievable.

Okay. And just a question on something we've noticed since your reporting of Q4. You've had a linen purchase obligation on your books. that's quite sizable. Is this supporting a new contract twin or are you replacing some aged inventory that you have?.

Any color around that that we should be thinking about? Christy, I'll pass back to you. I was going to say, I can take that, Linda. No, not supporting a new contract win. I think it's really just a timing issue in terms of... when we've issued purchase orders for standard linen orders, we've likely just done that sooner this year we've done in previous years, but really more standard fare linen purchases.

Okay, that's helpful, Culler. And just one last one for me. Any updates, Linda, on the RFP processes?.

on the eastern side of Canada? Nothing formally to report. I would say that we're still optimistic and know that it's a conversation point as well as they are expiring. So we feel good about it.

Okay, that's helpful. I'll pass the line. Thank you very much.

Thank you. Our next question comes from Michael Glenn with Raymond James. Michael, perhaps you're muted. Your line is open. I'm not receiving a response. I will go to the next question. Our next question is from Justin Keywood with Stifel.