K-Bro Linen (TSE:KBL) reported higher second-quarter revenue and adjusted EBITDA, supported by the June 2025 acquisition of Stellar Mayan, price increases, and steady demand in its healthcare and hospitality businesses.
Revenue for the quarter ended June 30 rose 33% year over year to C$150.4 million, while adjusted EBITDA increased 25.6% to C$29.8 million. Adjusted EBITDA margin declined 1.2 percentage points to 19.8%, reflecting Stellar Mayan’s lower margin profile and higher fuel costs.
Stellar Integration Progress
K-Bro marked the first anniversary of its Stellar Mayan acquisition on July 11 and said it has achieved about 40% of the anticipated run-rate cost synergies. Management continues to expect the full synergy program to be realized over the originally contemplated 24-month period.
McCurdy said the remaining synergies are expected to be achieved over the next 12 months, with a major initiative involving the conversion of healthcare plants to seven-day operations. The company has converted one plant so far and expects the more complex healthcare-site transitions to occur over the next six months.
Other integration actions have included bringing engineering and maintenance functions in-house, optimizing workflows, modifying compensation structures, replacing certain managers, and seeking additional customer volumes. McCurdy said the changes to compensation structures, which are intended to focus on performance and results, were introduced relatively recently and are expected to have a greater impact going forward.
K-Bro said its U.K. platform is now a top-three participant in the market and that more than half of its consolidated revenue comes from the country. The company also added John Lynch to its board of directors. McCurdy said Lynch’s experience in European infrastructure investing and international finance provides a U.K. perspective as the business expands there.
Margins, Fuel Costs and Pricing
Canadian adjusted EBITDA margin was essentially unchanged from the prior year at 21.1%, while the U.K. division’s margin fell 2.1 percentage points to 18.6%. The U.K. decline was attributed to Stellar Mayan’s margin profile and higher fuel costs.
Management estimated that diesel prices reduced second-quarter adjusted EBITDA margin by approximately 0.5 percentage points. If diesel prices remain at current levels, K-Bro expects a similar effect on margins for the rest of 2026.
In the U.K., approximately half of diesel usage is hedged and half is exposed to floating prices. Canadian diesel usage is floating. Chief Financial Officer Kristie Plaquin said the company had not entered additional fuel hedges since its first-quarter call.
Management said margin resilience during the quarter came from a combination of pricing actions, route optimization, labor containment, and new equipment. Plaquin characterized the benefit as roughly evenly split between pricing and other operational initiatives, and said the company expects these efforts to remain achievable through the second half of the year.
For natural gas, Plaquin said K-Bro’s Canadian hedges roll off over several years and there are no material hedge maturities in 2027. In the U.K., current natural gas costs are somewhat above the company’s existing hedge levels; locking in prices at current levels would result in an estimated negative margin impact of about 0.5 percentage points, she said.
Hospitality Trends and Contract Opportunities
McCurdy said hospitality growth in the second quarter was below the pace seen in prior years. In Canada, she attributed weaker hotel occupancy in Toronto and Vancouver partly to FIFA-related room blocks and high room rates, which she said limited public availability and discouraged travel. In the U.K., extreme heat also contributed to weaker volumes and occupancies relative to historical norms.
The company said it is still seeing hospitality growth, though at a slower rate than in prior periods, and management said it remains unclear what the second-quarter trends will mean for the third quarter.
On healthcare contracts, McCurdy said K-Bro expects request-for-proposal activity in Ontario and the Greater Toronto Area to continue through the third and fourth quarters and into 2027. She estimated that opportunities over the next six to 12 months could total about C$10 million, with potential value exceeding that amount over the next two to three years.
McCurdy also said K-Bro is participating in a competitive renewal process for a Vancouver contract, where it has served the market since 2000. She said the company believes it is well positioned because of its large, efficient, state-of-the-art facility.
Cash Flow, Capital Allocation and Outlook
Adjusted net earnings increased to C$10.1 million from C$7.8 million a year earlier. Distributable cash flow totaled C$14.7 million, and the quarterly payout ratio was 26.6%. K-Bro paid C$0.30 per share in dividends, totaling C$3.9 million, and repurchased and canceled 58,000 common shares for C$2.5 million under its normal course issuer bid.
At quarter-end, the company had nearly C$69.6 million undrawn on its C$175 million operating line, excluding a further C$50 million accordion facility. Total debt net of cash was C$213.5 million, while pro forma funded debt to EBITDA, excluding leases, was just under 2.5 times.
K-Bro entered into an interest-rate swap in June to convert floating-rate exposure on its term loan to a fixed rate. Plaquin said the company does not expect significant changes in interest expense relative to the second quarter.
Management expects combined adjusted EBITDA margins to remain near seasonally adjusted historical levels, though U.K. margins are expected to remain below historical levels because of Stellar Mayan’s lower margin profile. The company also said it plans to pursue organic growth and potential acquisitions, with McCurdy noting that the U.K. market remains more fragmented than Canada’s.
About K-Bro Linen (TSE:KBL)
K-Bro Linen Inc is a healthcare and hospitality laundry and linen processor in Canada. It operates in major cities across Canada, and has two distribution centers, providing management services and laundry processing of hospitality, healthcare, and specialty linens. The company provides vital products and services that help people heal, travel, live, and play. It helps hospitals and extended care centers care for the young, old, and vulnerable in environmentally responsible ways. It operates through two divisions, which are the Canadian division and the United Kingdom division.
