On Wednesday, K-Bro Linen (TSX:KBL) discussed second-quarter financial results during its earnings call. The full transcript is provided below.
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Summary
K-Bro Linen Systems Incorporated reported a 33% year-over-year increase in Q2 2026 revenue to 150.4 million CAD, attributed primarily to the acquisition of Stellar and price increases.
Adjusted EBITDA rose by 25.6% to 29.8 million CAD, with a margin decrease of 1.2% year-over-year due to Stellar's margin profile and higher fuel costs.
Healthcare revenue grew by 50%, now representing 58% of total revenue, while hospitality revenue increased by 15%.
The company is progressing with the integration of Stellar, achieving 40% of the anticipated synergies, with plans to realize full synergies over the next 12 months.
K-Bro Linen maintains a strong financial position with significant undrawn capacity on its credit facility and a pro forma funded debt to EBITDA ratio of under 2.5 times.
Management anticipates stable combined adjusted EBITDA margins going forward, despite ongoing challenges like fluctuating energy prices.
K-Bro Linen's strategic focus includes completing Stellar's integration, pursuing organic growth, and exploring M&A opportunities.
The company continues to monitor opportunities for strategic RFPs and acquisitions in both Canada and the UK, with no specific target ratio between healthcare and hospitality sectors.
Management remains optimistic about future growth potential, particularly in the UK market due to its fragmentation and acquisition opportunities.
Full Transcript
OPERATOR
Good morning, ladies and gentlemen, and welcome to the K-Bro 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 require immediate assistance, please press star-zero for the operator. This call is being recorded on Wednesday, August 5, 2026. I would now like to turn the conference over to Kristi Plaquin.
Please go ahead.
Kristi Plaquin, Investor Relations
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 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 McCurdy, President and CEO
Thank you very much, Kristi, 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 Kristi 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 platform in both Canada and the UK. We have just passed our first anniversary of owning Stellar, 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 2025 due to the acquisition of Stellar. Amid a more volatile global backdrop, we're pleased with our Q2 results, underscoring our resilient growth model and business performance.
As always, our experienced team is focused on disciplined operations. I'll now turn the call over to Kristi to discuss our detailed financial results for the quarter, after which I'll return and talk to you about the outlook. Thanks so much. Kristi, over to you.
Kristi Plaquin, Investor Relations
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. K-Bro Linen'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 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%, largely due to the combination of the Stellar margin profile and higher fuel costs. For the Canadian division, adjusted EBITDA margin in the second quarter remained relatively constant at 21.1%.
For the UK division, the adjusted EBITDA margin in the second quarter decreased by 2.1% to 18.6% in 2026. The decrease is primarily related to the combination of the Stellar margin profile and higher fuel cost. 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 Stellar, transition costs, fair value adjustment on interest rate derivatives, non-recurring gains, and intangible asset amortization.
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 Q2 2026 was 14.7 million, and our payout ratio was 26.6%. Our trailing twelve-month payout ratio was 27.3%. The company paid out 0.30 per share in dividends during the quarter, for total consideration of 3.9 million. In the second quarter, K-Bro 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 50 million accordion for growth purposes. At the end of Q2 2026, 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 forma 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 30, 2026 was 47.5%, and total debt net of cash was 213.5 million. K-Bro 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 June K-Bro entered into an interest rate swap in connection with the term loan portion of its syndicated credit facility.
Under the terms of the swap, K-Bro 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 within operating cost in the Consolidated Statement of Income. Realized gains 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 McCurdy, President and CEO
Thank you, Kristi. 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, K-Bro 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 K-Bro'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 K-Bro'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. From where we stand today, both K-Bro'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.
We continue to monitor the volatile energy pricing environment and the impact on diesel prices and our margins. In the UK, 50% of our diesel usage is hedged and 50% is floating. In Canada, our diesel usage is floating. Management estimates that Q2 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. We're pleased with the early contribution of our recent acquisitions and believe they'll further enhance our growth profile. We evaluate potential strategic acquisitions that may complement our platform and will look to leverage our strong liquidity position, balance sheet, and access to the capital markets to execute on these opportunities as they arise.
Putting people first, being dependable partners, and embracing environmental stewardship have always been part of our culture, and we're committed to a sustainable future. I'll now open it up to any questions you may have as it relates to the quarter. Operator.
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 one 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 two. 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.
Cheryl Zhang, Analyst at TD
Hey, good morning, Linda and Kristi. Thanks for taking a question. Good morning. I guess I first wanted to ask about the synergy capture. I'm curious if you could comment on the incremental Stellar synergies that were captured in Q2 and what remains to be achieved.
Linda McCurdy, President and CEO
Thanks, Carol. 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 our healthcare plants. We have converted one plant which went well, but the more complicated transition will be in our healthcare planning is well underway and 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. You know, most had weekend—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
Cheryl Zhang, Analyst at TD
Understood. That's very helpful color. Thank you, Linda. And my next question is around hospitality. So I think Canadian hospitality growth slowed to 0.9% this quarter. I'm curious if you could provide some color around that and are you seeing any slowdown in travel activities? And maybe I can ask the same question for UK hospitality as well. Just curious how the organic growth involving has trended.
Linda McCurdy, President and CEO
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 which would have impacted both Toronto and Vancouver where we, 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 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 Canada. It was very clearly aligned to the impact of under soldiering for FIFA.
It is a little unclear, however, what that means going forward.
Cheryl Zhang, Analyst at TD
Okay, that's helpful color. Thank you. I'll get back in this queue.
Linda McCurdy, President and CEO
Thanks, Cheryl.
OPERATOR
Thank you. And thank you. We have our next question from Hanzo Sars with ATB Cormark.
Hanzo Sars, Analyst at ATB Cormark
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.
Linda McCurdy, President and CEO
Yes, thank you for your question, Christy. I'm going to let you respond to that.
Christopher Burrows, Chief Financial Officer & Corporate Secretary
Yeah, absolutely. So we haven't entered any additional hedges since our Q1 call. So 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. You know, 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 roll off over several years.
We're 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. On the UK front, natural gas 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.
Hanzo Sars, Analyst at ATB Cormark
Okay, got it. And then just regarding margins in Q2, your margin line is better than we thought. And was that pricing action that you 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?
Linda McCurdy, President and CEO
I think there were. No, go ahead. It's okay. Yeah, I think there were a number of contributing factors. We did. 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 terms of forgetting?
Hanzo Sars, Analyst at ATB Cormark
Yeah, that's great, color. Thank you.
OPERATOR
And thank you. We have our next question from Ahmed Abdullah with National Bank of Canada.
Ahmed Abdullah, Analyst at National Bank of Canada
Yeah, 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?
Linda McCurdy, President and CEO
I'd say it's a combination of both. About 50-50, Ahmed. And I think we're feeling that it's reasonable to expect that to continue into the balance of the year. Yeah, we were pleased with our results on containing costs and being able to cover the increased diesel costs through efficiencies in other areas.
Ahmed Abdullah, Analyst at National Bank of Canada
Okay. So despite the lack of, you know, a hedge on the diesel costs, you're still able to kind of manage around it to try to, you know, soften the impact as much as possible? Is that kind of the read I'm supposed to get here?
Linda McCurdy, President and CEO
Yeah, yeah. Cost containment in other areas, route consolidation was a contributor for sure, labor. And then, as I mentioned, price increase in other areas. So we feel that into Q3 that that will continue to be achievable.
Ahmed Abdullah, Analyst at National Bank of Canada
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 win or are you replacing some aged inventory that you have? Any color around that that we should be thinking about?
Linda McCurdy, President and CEO
Christy, I'll pass that to you.
Christopher Burrows, Chief Financial Officer & Corporate Secretary
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 when we've issued purchase orders for standard linen orders. We've likely just done that sooner this year than we've done in previous years, but really more standard-fare linen purchases.
Ahmed Abdullah, Analyst at National Bank of Canada
Okay, that's helpful color and just one last one for me. Any updates, Linda, on the RFP processes on the eastern side of Canada?
Linda McCurdy, President and CEO
Nothing formally to report. I would say that, you know, we're still optimistic and know that it's a conversation point as well as they are expiring. So we feel good about it.
Ahmed Abdullah, Analyst at National Bank of Canada
Okay, that's helpful. I'll pass the line. Thank you very much.
OPERATOR
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.
Justin Keywood, Analyst at Stifel
Good morning. Thanks for taking my call.
Linda McCurdy, President and CEO
Good morning, Justin.
Justin Keywood, Analyst at Stifel
Hey, so on the RFP opportunity, are we able to have an update on the situation in Ontario and the GTA hospitals? Are there expected RFPs to come to the market this year and what could that opportunity be going into next year as well?
Linda McCurdy, President and CEO
I think that'll be on a hospital-by-hospital basis and I do expect that there will be further activity into Q3 and into Q4 as well as into 2027. I think it's hard to know exactly the potential dollar value, but, you know, anywhere from 10 million plus is kind of what we think is out there in the short to medium term.
Justin Keywood, Analyst at Stifel
Thank you. That's the aggregate value of RFPs. I assume that includes several hospitals.
Linda McCurdy, President and CEO
Yes, absolutely. Yeah. And again, in the short term, I think there will be certain hospitals that may have extended short term. When I say short term, whether it's a year or two years. But over the next two to three years, I think it'll be well in excess of 10 million. But I would say over the next six to 12 months would be the timelines in which the 10 million would relate to.
Justin Keywood, Analyst at Stifel
Understood, that's very helpful. And then the Vancouver contract that's set to renew next year, I believe. Are we able to have an update on how that process is going, or if it's a bit too early?
Linda McCurdy, President and CEO
You know, it's a competitive process, so I won't comment too extensively on that other than, you know, we have a very large, efficient, state-of-the-art plant, have serviced that market since 2000. So we feel very good about our position, recognizing that it is a competitive process.
Justin Keywood, Analyst at Stifel
Great. And on acquisitions, very interesting board addition. And is that a signal that there's additional opportunities in Europe? And I realize this may be difficult, but if we can contextualize what that opportunity could be. And then also is there a target percentage of sales as far as hospitality versus health care? With Starman, the healthcare proportion has edged up a bit. It was 57% in the quarter. Just wondering if there's like a medium or long term target overall.
Linda McCurdy, President and CEO
Thank you, Justin. Not really a target. I mean really it comes down to where are the interesting opportunities—good acquisition targets, including contracts, good management—and geographically where are they located, what is the quality of the assets? So we're a bit agnostic between health care and hospitality. Both are profitable and meaningful parts of our growth strategy. In terms of board addition, the reality is over 50% of our top line is now coming from the UK.
We thought it was very, very important to add someone who has a UK lens, familiar with the English market and the business environment there. So I would say it was in the works for a while. We're very pleased with the addition. In terms of future acquisition size/number, we remain optimistic that there are interesting and attractive opportunities out there. I think I have commented that the quantum in size and number of them is likely higher in the UK.
There's still more fragmentation in the UK market in terms of size probably. I mean we obviously did the largest acquisition of Stellar. The size of those is reduced substantially with that asset being acquired by us. But there are a number that are more of the Shortridge size in the UK market, and there are acquisitions in Canada, but it has been more consolidated than in the UK.
Justin Keywood, Analyst at Stifel
Thank you, that's very helpful. Look forward to the developments ahead.
Linda McCurdy, President and CEO
Thank you very much, Justin.
OPERATOR
We have our next question from Michael Glenn with Raymond James.
Michael Glenn, Analyst at Raymond James
Sorry about before. Linda, could you just—or Christy, the AR build in the quarter, the accounts receivable build, is that something that you would expect to reverse in Q3?
Christopher Burrows, Chief Financial Officer & Corporate Secretary
Yes, it's really seasonality given Q2 is a much stronger quarter than Q4. The comparative, it's really timing of payments from our customers between the two quarters due to the increased volumes.
Michael Glenn, Analyst at Raymond James
Okay. And just on the share repurchase program, Linda, would you expect the share repurchase program to continue at similar levels? Just trying to gauge the philosophy on the NCIB from here.
Linda McCurdy, President and CEO
Yeah, I would say this is something that we monitor on a very regular basis. As we explained, there was over $2 million of repurchases and we'll continue to monitor it, keeping in mind leverage and growth opportunities going forward. But we have been active in it and we continue to be active balancing leverage and opportunities.
Michael Glenn, Analyst at Raymond James
And then just on the UK, so you talked about realizing 40% of anticipated synergies. There was also another comment that you made about actions you've taken to change the comp structure and some of the management change over there. On those items, like those comp structure changes and the management items, how far along do you think you are in that bucket?
Linda McCurdy, President and CEO
Relatively new on that. I would say with the one-year anniversary, changing the comp structure to be focused on performance and results would be a relatively new introduction, I'd say within the last quarter. So impact, really impact going forward from here.
Michael Glenn, Analyst at Raymond James
Okay. And then just on the NHS, anything notable in the quarter in terms of some of the progress you may have had with regard to dialogue or with regard to conversations surrounding conversion of disposable to reusable?
Linda McCurdy, President and CEO
Again, I see that as an opportunity that is a very good opportunity going forward. I would say there's been good discussion. I can't say there's been, you know, 90% of our healthcare have converted. What I will say is we are extremely pleased with the discussions that we've had with a number of the NHS press and our customers, including renewing a number of contracts, including their satisfaction with service quality and service. So all the right things are happening.
The next phase of that is for sure continuing to work with them to increase product lines and conversions to reusable.
Michael Glenn, Analyst at Raymond James
Okay, thank you for taking the questions.
Linda McCurdy, President and CEO
Thanks, Mike.
OPERATOR
We have our next question. It's a follow-up question from Cheryl Zhang with TD.
Cheryl Zhang, Analyst at TD
Thanks, Linda. Christie, just a few housekeeping items. So first one, you noted that you had an interest rate swap that basically converts your floating rate to a fixed rate. I'm curious, how should we be thinking about your interest rate going forward?
Christopher Burrows, Chief Financial Officer & Corporate Secretary
I would say, Cheryl, there shouldn't be any significant changes to what you're seeing in the quarter, realistically.
Cheryl Zhang, Analyst at TD
Okay, understood. And then lastly on capex, how much of Stellar Mayan project capex is remaining, and what would be your expected cadence for the capex plan for the rest of the year?
Christopher Burrows, Chief Financial Officer & Corporate Secretary
So big picture, I think the remaining spend will probably be spent more or less evenly between Q3 and Q4. Big picture, there's roughly $10 to $11 million left from our guided capex in totality, and a couple million of that is probably the Stellar Mayan remaining cash payments.
Cheryl Zhang, Analyst at TD
Okay, that's very helpful, thank you.
OPERATOR
And thank you. There are no further questions at this time. I will now turn the call over to Linda McCurdy for closing remarks.
Linda McCurdy, President and CEO
Thanks, everyone, for joining today. If there are any follow-up questions, please feel free to reach out to Kristi and myself. And just wishing everyone a good rest of summer. Thanks so much.
OPERATOR
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.
Disclaimer: This transcript is provided for informational purposes only. While we strive for accuracy, there may be errors or omissions in this automated transcription. For official company statements and financial information, please refer to the company's SEC filings and official press releases. Corporate participants' and analysts' statements reflect their views as of the date of this call and are subject to change without notice.
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