K-Bro Reports Second Quarter for 2020




  • In Business
  • 2020-08-14 01:03:00Z
  • By CNW Group
K-Bro Reports Second Quarter for 2020
K-Bro Reports Second Quarter for 2020  

(TSX: KBL)

EDMONTON, AB, Aug. 13, 2020 /CNW/ - K-Bro Linen Inc. ("K-Bro" or the "Corporation") today announces its 2020 Q2 financial and operating results.

2020 Q2 Financial and Operating Highlights

  • As a result of the COVID-19 pandemic, consolidated hospitality revenue for the three months ended June 30, 2020 decreased 91.7% over the comparable 2019 period. This is partially offset by an increase of 1.1% in consolidated healthcare revenue for an overall decrease in consolidated revenue of 41.3%.

  • EBITDA decreased in the second quarter to $10.1 million compared to $12.7 million over the comparable 2019 period.

  • On a consolidated basis excluding IFRS 16 Leases ("IFRS 16") for the three months ended June 30, 2020 the Corporation recorded adjusted EBITDA of $7.6 million and adjusted net earnings of $1.3 million in the second quarter of 2020. This is a decrease over the comparable 2019 period where adjusted EBITDA was $10.5 million and adjusted net earnings was $3.6 million.

  • Net earnings in the second quarter of 2020 decreased by $1.9 million to $1.6 million compared to $3.5 million in the comparative period of 2019, and as a percentage of revenue decreased to 4.3%.

  • Adjusted EBITDA margin increased to 20.1% from 16.4% over the comparable 2019 period.

  • During the second quarter, K-Bro declared dividends of $0.300 per common share and distributable cash was $0.683 per common share on a fully diluted basis.

Linda McCurdy, President & CEO of K-Bro commented, "I am pleased with our second quarter results with Adjusted EBITDA of $7.6 million and improvements in the Adjusted EBITDA margin despite operating in an environment of unprecedented uncertainty as a result the COVID-19 pandemic. Our teams moved very quickly to safely meet the changing needs of our customers all while eliminating costs and adjusting to reduced customer activity. This performance reflects the resiliency of our business model and responsiveness of our team.

While the second quarter was difficult, we have seen recent improvements in client activity with April's revenue being the low point and May and June gradually improving. As we progressed through the second quarter, healthcare volumes began to return to more typical levels and while hospitality remained below historical levels, we have experienced improvement. For July when compared to the prior year, consolidated healthcare and hospitality revenues are 10% higher and 75% lower respectively. While client activity is improving, we continue to maintain downsized operations and reduced employee headcount. From a safety standpoint, we continue to operate with enhanced safety protocols and practices to ensure the health and wellbeing of our employees and their families."

"We remain well-positioned from a balance sheet and liquidity perspective with $42.4 million of borrowing capacity on our revolving line of credit, in addition to having approximately 70% of our Canadian revenue from the healthcare sector. As a precautionary measure, we have completed an amendment to our credit facility that provides greater financial flexibility during this challenging period. We are continuing to monitor our situation carefully and will consider any and all actions, including any opportunities that will allow us to come out of this downturn with a stronger market position. While it is difficult to provide revenue guidance for the second half of the year, we do expect our consolidated adjusted EBITDA margin before the adoption of IFRS 16 for the full year to be between 12% and 16%," concluded McCurdy.

Highlights and Significant Events for Fiscal 2020

Revolving Credit Facility

During the second quarter of 2020, the Corporation completed an amendment to its existing revolving credit facility which made changes to certain terms and conditions within the agreement in consideration of the ongoing COVID-19 pandemic and the impact to the Corporation's operations. Key changes included:

  • An increased Funded Debt to EBITDA covenant for the period of September 30, 2020 to June 30, 2021 which gradually allows for a maximum Funded Debt to EBITDA ratio of 4.5x for Q4 2020 and Q1 2021 which is also subject to certain one-time add backs to EBITDA.

  • A reduction to the Fixed Charge Covenant for the period of September 30,2020 to June 30, 2021 which reduces to a maximum of 1.1x.

  • A restriction on any dividend increases during the covenant relief period of July 1, 2020 to June 30, 2021.

UK Acquisition

On July 19, 2019, the Corporation signed a share purchase agreement to acquire all the assets of a Scotland-incorporated private laundry and linen services company operating in Aberdeen. This acquisition closed in September 2019 for a total consideration of £775k plus a working capital adjustment. For accounting purposes, the transaction has been treated as an asset acquisition, whereby the net working capital was recorded at closing, and the customer contracts acquired have been recorded as an intangible asset for £883k representing the total purchase price of £775k and associated transaction costs of £88k.

Capital Investment Plan

For fiscal 2020, K-Bro had previously anticipated capital spending to be approximately $5.0 million on a consolidated basis. However, in light of the current public health crisis, the Corporation's planned capital spending for fiscal 2020 is expected to be approximately $3.0 million, as a result of the deferral of the Corporation's plan to implement an enterprise-wide operating system because implementing the new system would be logistically challenging during the pandemic. 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 2019 that were paid in 2020.

Alberta Contract Award

On March 1, 2020, the Corporation was awarded a one-year extension to provide laundry and linen services to Alberta Health Services Calgary. The contract extends the existing relationship between the Corporation and Alberta Health Services Calgary.

Loss of Whitbread Group Contract

Subsequent to the 2019 fiscal year, the Corporation was unsuccessful in renewing its UK contract with the Whitbread Group. The associated volume will be phased out of the relevant plant over the first two quarters of 2020. For the year ended December 31, 2019, this contract accounted for approximately 14% of Fishers' overall revenue.

COVID-19 Pandemic

The ongoing COVID-19 pandemic has caused world governments to institute travel restrictions, impacting travel both in and out of Canada and the UK. This has had and is expected to continue to have a significant adverse impact on the Corporation's hospitality business, the duration of which we are unable to predict with any degree of accuracy. Since mid-March, we have seen significantly reduced hotel occupancy rates compared to historical levels. Demand for both business and leisure airline travel has declined significantly on a global basis, and airlines are responding by cancelling international and domestic flights. Accordingly, hospitality volumes in all of our Canadian and UK markets have slowed to historically low levels. In addition to this, in late Q1 and into Q2 we 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). As Q2 progressed, we have seen a gradual return to more normal healthcare levels; however, we cannot predict with certainty how additional surges of COVID-19 would impact overall volumes. For example, consolidated revenue for April 2020 decreased by approximately 45% with a decrease in consolidated healthcare revenue of approximately 10% and a decrease in consolidated hospitality revenue of approximately 90% compared to the same period last year. In terms of trends for July and the first few weeks of August, we saw consolidated revenue decrease approximately 30% with an increase in consolidated healthcare revenue of approximately 10% and a decrease in consolidated hospitality revenue of approximately 75% in July relative to the prior year. While our hospitality revenue has improved significantly in resort and country areas, revenue remains very low from almost all of our customers located in cities. In August, we have seen consolidated revenue decrease approximately 25% from prior year with most of the increase over July coming from the UK.

Although the Corporation has developed and implemented measures to mitigate the effects of the COVID-19 pandemic which include, consolidating operations, reducing headcount, reducing certain capital expenditures and accessing available government assistance programs, earnings will continue to be effected if we continue to experience reductions in travel and reduced hospitality and healthcare occupancy rates. The extent of such negative effects on our business and our financial and operational performance will depend on future developments, including the duration, spread and severity of the outbreak, the duration and geographic scope of related travel advisories and restrictions and the extent of the impact of the COVID-19 pandemic on overall demand for personal and business travel, all of which are highly uncertain and cannot be predicted with any degree of accuracy. As hotels are continuing to experience significantly reduced occupancy rates for an extended period, our 2020 consolidated results of operations will be continue to be significantly impacted. Additionally, our suppliers or other third parties we rely upon may experience delays or shortages, which could have an adverse effect on our business prospects and results of operations.

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.

Impairment of Assets

Based on management's review, the original assessment at March 31, 2020 remains appropriate in that no additional impairment amounts are determined to be required, with the exception of CGU's already deemed to be impaired. Management had previously assessed the impairment indicators that existed at March 31, 2020, specifically, five CGUs that rely primarily on hospitality revenues due to the significant impact that COVID-19 had on the hospitality industry. The recoverable amounts of these specific CGUs were recalculated using the value in use method by applying probability weightings to capture the increased risk and uncertainty arising from COVID-19.

Management's probability weighted approach was evaluated based off an equally weighted probability of a one year downturn in sales to the worst case of a two year downturn in sales. The scenarios estimated a decline of 70% for year 1 and 50% for year 2, with sales returning to normalized levels thereafter with sales growth estimates used between 2% to 3%. At March 31, 2020, an impairment loss of $5,516k was recognized for three CGUs in the Canadian division, of which $3,177k was allocated to goodwill and $2,339k was allocated to PP&E.

During the six month period ended June 30, 2020, EBITDA before impairment of PP&E was $19,314k (2019 - $21,854k).

CGU

Allocated to
Goodwill

Allocated to
PP&E

Total
impairment
recorded

Recoverable
Amount

Montreal

$

823

$

-

$

823

$

2,485

Quebec

654

2,339

2,993

1,917

Victoria

1,700

-

1,700

5,433







$

3,177

$

2,339

$

5,516

$

9,835


The recoverable amount of the UK Division and Vancouver 2 CGUs was estimated to be £67,234k and $24,008k as at March 31, 2020 which exceeded the carrying amount of both of the CGUs. No impairment was therefore required for either of these CGUs.

The key assumptions in calculating the recoverable amount of the five CGU's where impairment calculations were as follows:


March 31 2020

Long-term growth rate %

2.0% to 3.0%

Pre-tax discount rate %

10.5% to 12.5%

For Vancouver 2 and the UK Division, in addition to the key assumptions noted above, management has also evaluated other reasonable changes in estimates and assumptions, and did not identify any other instances at March 31, 2020, that could cause the carrying amount of these CGUs to exceed the recoverable amount.

There were no other CGUs as at June 30, 2020 showing further signs of impairment, that were not already considered at March 31, 2020, and as such we have not updated any of the other impairment calculations. 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.

With the ongoing development of the COVID-19 pandemic, the length and severity of these developments is therefore subject to significant uncertainty, and accordingly may materially and adversely affect assumptions used in the consideration of the impairment of assets, impact whether a CGU has been impaired, and may change prior recorded impairment amounts.

Financial Results


For The Three Months Ended June 30,

(thousands, except per share amounts and percentages)

Canadian
Division
2020

UK
Division
2020

2020(2)

Canadian
Division
2019

UK
Division
2019

2019

$ Change

% Change

Revenue

$

35,353

$

2,167

$

37,520

$

46,599

$

17,294

$

63,893

(26,373)

-41.3%

Expenses included in EBITDA

23,779

3,686

27,465

37,300

13,854

51,154

(23,689)

-46.3%

EBITDA(1)

11,574

(1,519)

10,055

9,299

3,440

12,739

(2,684)

-21.1%

EBITDA as a % of revenue

32.7%

-70.1%

26.8%

20.0%

19.9%

19.9%

6.9%

34.7%

Adjusted EBITDA without adoption of IFRS 16(1)

10,140

(2,582)

7,558

7,884

2,604

10,488

(2,930)

-27.9%

Adjusted EBITDA without adoption of IFRS 16as a % of revenue

28.7%

-119.2%

20.1%

16.9%

15.1%

16.4%

-

100.0%

Net earnings (loss)

4,460

(2,847)

1,613

2,403

1,144

3,547

(1,934)

-54.5%

Basic earnings (loss) per share

$

0.423

$

(0.270)

$

0.153

$

0.229

$

0.109

$

0.338

$

(0.185)

-54.7%

Diluted earnings (loss) per share

$

0.420

$

(0.268)

$

0.152

$

0.228

$

0.108

$

0.336

$

(0.184)

-54.8%

Dividends declared per diluted share



$

0.30



$

0.300

$

-

0.0%

Adjusted net earnings (loss) without adoption of IFRS 16(1)

4,482

(3,190)

1,292

2,456

1,181

3,637

(2,345)

-64.5%

Basic adjusted net earnings (loss) without adoption of IFRS 16 per share

$

0.425

$

(0.302)

$

0.122

$

0.234

$

0.112

$

0.346

$

(0.230)

100.0%

Diluted adjusted net earnings (loss) without adoption of IFRS 16 per share

$

0.422

$

(0.300)

$

0.122

$

0.233

$

0.112

$

0.344

$

(0.220)

100.0%

Total assets



330,372



361,018

(30,646)

-8.5%

Long-term debt, end of period



56,416



75,952

(19,536)

-25.7%

Cash provided by operating activities



6,289



2,875

3,414

118.7%

Net change in non-cash working capital items



(2,926)



(8,615)

5,689

66.0%

Share-based compensation expense



189



439

(250)

-56.9%

Maintenance capital expenditures



280



1,143

(863)

-75.5%

Principal elements of lease payments



1,487



1,736

(249)

-14.3%

Distributable cash flow(3)



7,259



8,172

(913)

-11.2%

Dividends declared



3,196



3,177

19

0.6%

Payout ratio



44.0%



38.9%

5.1%

13.1%




















For The Six Months Ended June 30,

(thousands, except per share amounts and percentages)

Canadian
Division
2020

UK
Division
2020

2020(2)(4)

Canadian
Division
2019

UK
Division
2019

2019

$ Change

% Change

Revenue

$

79,064

$

15,731

$

94,795

$

91,132

$

30,544

$

121,676

(26,881)

-22.1%

Expenses included in EBITDA

64,696

16,301

80,997

74,449

25,373

99,822

(18,825)

-18.9%

EBITDA(1)

14,368

(570)

13,798

16,683

5,171

21,854

(8,056)

-36.9%

EBITDA as a % of revenue

18.2%

-3.6%

14.6%

18.3%

16.9%

18.0%

-3.4%

-18.9%

Adjusted EBITDA without adoption of IFRS 16(1)

16,988

(2,321)

14,667

13,844

3,447

17,291

(2,624)

-15.2%

Adjusted EBITDA without adoption of IFRS 16 as a % of revenue

21.5%

-14.8%

15.5%

15.2%

11.3%

14.2%

-

100.0%

Net earnings (loss)

1,988

(3,783)

(1,795)

3,134

908

4,042

(5,837)

-144.4%

Basic earnings (loss) per share

$

0.189

$

(0.359)

$

(0.170)

$

0.298

$

0.086

$

0.385

$

(0.555)

-144.2%

Diluted earnings (loss) per share

$

0.187

$

(0.357)

$

(0.169)

$

0.297

$

0.086

$

0.383

$

(0.552)

-144.1%

Dividends declared per diluted share



$

0.60



$

0.600

$

-

0.0%

Adjusted net earnings (loss) without adoption of IFRS 16(1)

6,345

(4,068)

2,277

3,243

952

4,195

(1,918)

-45.7%

Basic adjusted net earnings (loss) without adoption of IFRS 16 per share

$

0.602

$

(0.386)

$

0.215

$

0.309

$

0.091

$

0.400

$

(0.180)

100.0%

Diluted adjusted net earnings (loss) without adoption of IFRS 16 per share

$

0.598

$

(0.383)

$

0.215

$

0.307

$

0.090

$

0.397

$

(0.190)

100.0%

Total assets



330,372



361,018

(30,646)

-8.5%

Long-term debt, end of period



56,416



75,952

(19,536)

-25.7%

Cash provided by operating activities



17,877



12,545

5,332

42.5%

Net change in non-cash working capital items



85



(7,131)

7,216

101.2%

Share-based compensation expense



696



979

(283)

-28.9%

Maintenance capital expenditures



608



1,517

(909)

-59.9%

Principal elements of lease payments



3,153



3,384

(231)

-6.8%

Distributable cash flow(3)



13,335



13,796

(461)

-3.3%

Dividends declared



6,377



6,345

32

0.5%

Payout ratio



47.8%



46.0%

1.8%

3.9%

(1)

See "Terminology" for further details

(2)

Effective January 1, 2019, the Corporation has adopted IFRS 16 using the modified retrospective method but has not restated comparatives for the prior periods, as permitted under the specific transitional provisions of IFRS 16. To enable the comparability of previous periods, the Corporation has provided the 2019 figures for both EBITDA and net earnings without adoption of IFRS 16 as separate line items. See "Accounting Changes" in the Corporation's MD&A for the three month period ending March 31, 2020 for more information.

(3)

Effective January 1, 2019, distributable cash flow includes the addition of principal elements of lease payments. This accounts for the change in accounting policies and the adoption of IFRS 16, where now the principal elements of lease payments flow through financing outflows as opposed to operating cash flows.

(4)

Q1 2020 includes an adjustment of $5.5 million for an impairment related charge to the Canadian Division, and is excluded in adjusted EBITDA and adjusted net earnings (loss).

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, 2020, to be paid on September 15, 2020 to shareholders of record on August 31, 2020. 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

While the COVID-19 pandemic will have a significant negative impact on our hospitality revenue, management believes the prospects for the Corporation's healthcare business remains strong in the medium-to-long-term. By providing integral laundry and linen processing services to the hospitality and healthcare sectors, the Corporation has been designated an "essential" service in the jurisdictions in which it operates, which has allowed the Corporation's facilities to remain open and continue "normal" operations. This has mitigated some of the more dramatic financial and operational impacts experienced by many other businesses in other industries. In addition, management believes that the financial flexibility provided by our strong balance sheet will enable us

COMMENTS

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