K-Bro Linen Inc

TSX:KBL

Earnings Call Transcript 2020-Q3

[Operator]

Ladies and gentlemen, thank you for standing by, and welcome to the K-Bro Linen Inc. Third Quarter 2020 Results Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions]I would now like to hand the conference over to your speaker today, Kristie Plaquin. Thank you. Please go ahead.

[Kristie L. Plaquin, Chief Financial Officer]

Thank you, operator, and good morning, everyone. Thank you for joining us today, and welcome to our 2020 third quarter results conference call. On the line with me today is Linda McCurdy, President and Chief Executive Officer. Following our remarks today, we will open it up for questions.Before we begin, I would like to remind everyone that statements made during our prepared remarks or in the Q&A portion 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 a 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?

[Linda Jane McCurdy, President, CEO & Director]

Thank you, Kristie, and good morning to everyone, and thank you for joining us today for a review of the quarter. On today's call, I'll provide an update on how we're navigating through these challenging times. Kristie will then detail our financial performance for the third quarter. And I'll come back to you and provide you with an outlook for the balance of the year.As anticipated, the third quarter continued with unprecedented uncertainty as the result of COVID-19. I'll start with saying that I'm very proud of how our team has navigated through this very uncertain operating environment and our strong Q3 results are a reflection of this.In terms of the highlights, I'm pleased with our third quarter results with adjusted EBITDA of $10.8 million and improvements in the adjusted EBITDA margin despite continuing to operate in an extremely challenging environment. 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 the responsiveness of our team.After a decline of 41% in consolidated Q2 2020 revenue compared to Q2 2019, we see consolidated decrease of 24.2% in Q3 2020 compared to Q3 2019, demonstrating a significant improvement from Q2 to Q3. On the hospitality front, revenue decreased by 62.7% for the quarter compared to Q3 2019 versus a decline of 92% in Q2 2020 compared to Q2 2019, largely the result of domestic tourism.On the health care front, for the quarter, we've seen a significant increase in client activity on a year-over-year basis. For Q2, health care revenues were up about 1% for Q2 2020 compared to Q2 2019, and in Q3, we saw an increase quarter-over-quarter of 12%. This increase is coming from new customers, product conversions, increased usage and price increases.We remain well positioned from a balance sheet and liquidity perspective with $39.5 million of additional borrowing capacity on our revolving line of credit, with an additional $25 million accordion for growth purposes. As a precautionary measure, we've completed an amendment to our credit facility that provides greater financial flexibility during this challenging period, although we do not expect to need this change. Our funded debt-to-EBITDA at the end of Q3 remained conservative at 1.56x.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 the remainder of the year. Kristie, over to you.

[Kristie L. Plaquin, Chief Financial Officer]

Thank you, Linda. The information we are discussing today is also highlighted in our third quarter and 2020 earnings press release, which we issued yesterday, and detailed supplemental financial information can be found on our Investor Relations website under the heading financial documents.In Q3 2020, approximately 76% of K-Bro's consolidated revenue was generated from healthcare institutions, which is significantly higher compared to 51.1% in 2019 primarily related to the significant falloff in hospitality volume due to COVID in both Canada and the U.K. For the quarter, EBITDA on an adjusted basis without the adoption of IFRS 16 decreased by 12.2% to $10.8 million with an adjusted EBITDA margin of 21%, which was 24.6% in Canada and 2.1% in the U.K.For the Canadian division, the corporation for the months of April, May and July through September was eligible for the Canadian Emergency Wage Subsidy, or CEWS, that was announced by the federal government in response to the COVID-19 pandemic on March 27, 2020. The CEWS program, which subsidizes a percentage of employee wages subject to certain caps, is designed for eligible Canadian employers whose businesses have been impacted by the COVID-19 pandemic and is intended to help employers rehire previously laid off workers, retain existing employees and assist Canadian businesses through the pandemic. The CEWS program allowed the corporation to preserve a significant number of jobs.As a result, during the third quarter of 2020, the company recognized $2.1 million of wage subsidy, which has been netted against the respective source of expense. This includes an allocation to wages and benefits of $1.8 million, delivery of $0.2 million and corporate costs of $0.1 million. Without the benefit of this wage subsidy, the Canadian operations would have taken available alternative actions. Year-to-date, the corporation has recognized $7.7 million wage subsidy, which has been netted against the respective source of the expense.For the U.K. division, the corporation was eligible for the Coronavirus Job Retention Scheme, which was introduced by the U.K. government on March 20, 2020, to pay approximately 80% of salaries for employees subject to certain caps who are furloughed.As a result, during the third quarter of 2020, the company recognized GBP 0.7 million or $1.1 million of wage subsidy, which has been netted against the respective source of the expense. This includes an allocation to wages and benefits of GBP 0.4 million or $0.6 million, delivery of GBP 0.2 million or $0.3 million and corporate costs of GBP 0.1 million or $0.2 million. Year-to-date, the corporation has recognized GBP 2.7 million or $4.6 million, which has also been netted against the respective source of the expense.During the quarter, the terms of the program changed to require that companies share in the cost of the program and resulted in an impact to EBITDA during the quarter and year-to-date with a cost of GBP 26,000 or $45,000, which represents the U.K. division's contribution for hours and certain benefits.For greater clarity, until July, the U.K. division received an equivalent amount from the government that was then paid to furloughed employees netting to no impact on EBITDA. However, starting in August, the U.K. division was required to make certain contributions for hours and benefits.Wages and benefits in the third quarter of 2020 decreased by $9.6 million to $17 million compared to $26.6 million in the comparative period of 2019, and as a percentage of revenue, decreased by 6.2% to 33%. On a year-to-date basis, wages and benefits decreased by $24.2 million to $50.7 million compared to $74.9 million in the comparative period of 2019, and as a percentage of revenue, decreased by 4.8% to 34.7%. The decrease as a percentage of revenue is primarily related to the government assistance received in the Canadian division along with improved labor efficiencies, offset by escalating minimum wage rates and restructuring costs of $1.4 million related to COVID.Linen in the third quarter of 2020 decreased by $0.7 million to $6.4 million compared to $7.1 million in the comparative period of 2019, and as a percentage of revenue, increased by 1.9% to 12.4%. On a year-to-date basis, linen decreased by $2.2 million to $18.3 million compared to $20.5 million in the comparative period of 2019, and as a percentage of revenue, increased by 1.7% to 12.5%. The increase as a percentage of revenue is primarily related to the higher proportion of health care revenue and flow-through of customer setup costs from the prior period.Utilities in the third quarter of 2020 decreased by $1.3 million to $2.8 million compared to $4.1 million in the comparative period of 2019, and as a percentage of revenue, decreased by 0.6% to 5.5%. On a year-to-date basis, utilities decreased by $4 million to $8.5 million compared to $12.5 million in the comparative period of 2019, and as a percentage of revenue, decreased by 0.8% to 5.8%. The decrease as a percentage of revenue is primarily related to lower utility costs in British Columbia as a result of a temporary natural gas shortage during the first quarter of 2019, lower commodity costs and operational measures to offset the impact of COVID-19.Delivery in the third quarter of 2020 decreased by $2 million to $5.1 million compared to $7.1 million in the comparative period of 2019, and as a percentage of revenue, decreased by 0.5% to 10%. On a year-to-date basis, delivery decreased by $5.6 million to $15.7 million compared to $21.3 million in the comparative period of 2019, and as a percentage of revenue, decreased again.The decrease as a percentage of revenue is primarily related to government assistance received, in addition to management's efforts to offset the impact of COVID-19 in the delivery operations of each plant through temporary reductions in the delivery labor force, logistics and delivery route optimization, offset by fixed costs, which remained constant regardless of the reduction in volume resulting from the COVID-19 pandemic, and price increases from renewals of outsourced freight contracts.Occupancy costs in the third quarter decreased by $0.2 million to $0.9 million compared to $1.1 million in the comparative period of 2019, and as a percentage of revenue, increased by 0.2% to 1.8%. On a year-to-date basis, occupancy costs decreased by $0.7 million to $2.6 million compared to $3.3 million in the comparative period of 2019, and as a percentage of revenue, remained relatively constant at 1.8%.This includes fixed costs that remain constant regardless of the reduction in volume resulting from the COVID-19 pandemic, offset by rent concessions received in certain plants in the U.K. in the amount of $0.5 million recorded in the second quarter of 2020.Materials and supplies in the third quarter decreased by $0.4 million to $1.9 million compared to $2.3 million in the comparative period of 2019, and as a percentage of revenue, increased by 0.3% to 3.7%. On a year-to-date basis, materials and supplies decreased by $0.8 million to $5.2 million compared to $6 million in the comparative period of 2019, and as a percentage of revenue, increased by 0.4% to 3.6%. The increase as a percentage of revenue is primarily related to additional personal protective equipment required as a result of the pandemic and onetime cost recoveries in 2019.Repairs and maintenance in the third quarter of 2020 decreased by $0.4 million to $1.8 million compared to $2.2 million in the comparative period of 2019, and as a percentage of revenue, increased by 0.2% to 3.5%. On a year-to-date basis, repairs and maintenance decreased by $1.1 million to $5.4 million compared to $5.6 million in the comparative period of 2019, and as a percentage of revenue, increased by 0.3% to 3.7%. The increases as a percentage of revenue is primarily related to fixed costs that remain constant regardless of the reduction in volume resulting from the pandemic and timing.Corporate costs in the third quarter of 2020 increased by $0.1 million to $2.8 million compared to $2.7 million in the comparative period of 2019, and as a percentage of revenue, increased by 1.5% to 5.4%. On a year-to-date basis, corporate costs decreased by $0.3 million to $7.8 million compared to $8.1 million in the comparative period of 2019, and as a percentage of revenue, increased by 1% to 5.3%. The increase as a percentage of revenue is primarily related to a provision for bad debt expense of $0.5 million, restructuring costs of $0.5 million, timing of initiatives to support the corporation's growth and business strategies across the plant, and offset by government assistance received.Depreciation of property, plant and equipment and amortization of intangible assets represents the expense related to the appropriate matching of the corporation's long-term assets to the estimated useful life and period of economic benefit of those assets. Income tax includes current and future income taxes based on taxable income and temporary timing differences between the tax and accounting basis of assets and liabilities.Now looking at our capital resources. Distributable cash flow for the third quarter of 2020 was $11.1 million, and our payout ratio was 29%. In addition, the company paid out $0.3 per share in dividends during the quarter for total consideration of $3.2 million.The corporation had net working capital of $43.1 million at September 30, 2020, compared to its net working capital position of $31 million at December 31, 2019. The change in cash from operations is primarily due to the change in working capital items driven mainly from the timing of business activity and the impact of COVID-19, particularly timing of collection of health care receivables which were delayed due to the pandemic. Of the increase attributable to the accounts receivable, approximately $10 million of this was received during October.At September 30, 2020, total assets decreased to $338.6 million compared to $352.1 million at December 31, 2019, and total liabilities decreased to $149 million from $156 million. Shareholders' equity decreased at September 30, 2020, from December 31, 2019, to $189.6 million from $196.1 million.As far as our debt is concerned, we have sufficient room on our credit facility with an operating line of $100 million, with a further $25 million accordion for growth purposes. As of the end of Q3, we have an undrawn balance of close to $40 million, reinforcing our strong liquidity.During the second quarter of 2020, we completed an amendment to our existing revolving credit facility, which made changes to certain terms and conditions within the agreement in consideration of the ongoing pandemic and the impact to our operations. These 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, including certain onetime add backs to EBITDA.As Linda stated, our current debt-to-EBITDA ratio was 1.56 for the quarter. It also included 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. Our current ratio is 9.3x. A restriction on any further dividend increases during the covenant relief period of July 1, 2020, to June 30, 2021, also exists. As we mentioned previously, we did this for cautionary reasons and we don't expect to need this change.Debt to total capitalization for the quarter ended September 30, 2020, was 23.9% and the corporation's unused revolving credit facility was $39.5 million. Total debt increased in the quarter from $56.4 million to $59.3 million and was mainly due to the timing in collections of the accounts receivable as noted earlier. We continue to monitor and aggressively pursue accounts receivable collections. At this point, we do not anticipate that there will be material receivables which are uncollectible which have not already been provided for.I'll now turn things back over to Linda for additional commentary. Linda?

[Linda Jane McCurdy, President, CEO & Director]

Thank you, Kristie. So we began 2020 in a position of strength with the first 2 months of 2020 consolidated adjusted EBITDA without the adoption of IFRS 16 at $1.8 million higher compared to the same period of 2019, and revenues were up 5.6% for the same period. However, when COVID-19 hit in mid-March, we saw a rapid decline. In order to address the adverse effects of COVID-19, we had to quickly react to implement plans to mitigate the effects, including consolidating operations, reducing head count and accessing available government assistance programs.We are proud of our team -- of our highly experienced team and they've been crucial in managing the situation, and in combination with our proven operating model, we'll continue to leverage our experience for the challenges ahead. These actions have resulted in results that we're quite pleased with given the circumstances.While Q3 revenue was down 24.2%, it marked a notable improvement over the 41.3% recorded in Q2. Beginning in Q3, we saw consolidated health care revenues exceed previously recorded amounts compared to prior year with a year-over-year increase of 12.6% for the quarter. Consolidated hospitality revenue remains subdued compared to previous years, but also showed improvement over Q2, largely due to domestic tourism. So all in all, we're quite pleased with the recovery we experienced in the quarter and the positive trajectory of our health care business.While client activity on the hospitality front is still well below historical norms, the increases we experienced resulted in the reopening of all of our operations with the exception of our Perth plant in Scotland as well as increasing the days and hours of operations in all of our plants. We have successfully recalled employees to meet these increased demands and will continue to adjust production schedules as demand warrant.In terms of our 2020 outlook, while we saw a marked improvement in both health care and hospitality segments relative to the prior quarter, it's very difficult to predict what revenue will look like for the balance of the year given the uncertainty in the hospitality segment. For example, we do anticipate that as we move into Q4 to see declining client activity when compared to September's activity levels and year-over-year due to reduced business in international travel that is common in this quarter and because of the recent restrictions that are being implemented in both Canada and the U.K. with COVID cases on the rise.As a guideline, for October, we estimate a decline of approximately 60% when comparing October '20 to October 2019. Having said that, I'm still comfortable saying that consolidated adjusted EBITDA margin before the adoption of IFRS 16 for the year will be in the range of 12% to 16%.On the customer front, we're pleased to announce during the quarter that we were awarded a 5-year extension to provide health care laundry and linen services to part of the lower mainland in British Columbia until November 2025. The contract extends the existing relationship between K-Bro and Business Initiatives & Support Services for Vancouver Coastal Health, Fraser Health, Providence Health Care and Provincial Health Services.We remain well positioned from a balance sheet and liquidity perspective, as Kristie discussed. In addition, a strong concentration of our Canadian revenue is from the health care sector at approximately 70%. We're 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 in a stronger market position.We continue to evaluate other acquisitions in both the U.K. and Canada as we execute on our strategy to grow our market share, and this will continue as we move forward in 2020 and 2021 when current market conditions may lead to opportunistic situations for us.With respect to our dividend, we continue to determine that the best policy is to maintain our dividend at $0.10 per share. As we stated in the last quarter, we don't have a single metric that determines our dividend policy, but given our expectations for Q4, we do not believe it necessary or prudent to change.Obviously, the situation is fluid with both health care and especially hospitality volumes much more uncertain than usual, as such, we'll regularly reexamine our dividend policy. And if our performance or outlook changes, then we'll consider whether any changes in dividend policy is warranted.And finally, we remain committed to the safety of our employees, customers and communities and we have put in place strict policies to do our part to minimize the potential spread of the virus. This is of utmost importance and we will continue to ensure that all measures are in place to protect their safety, and we continue to exceed all public health recommendations.I'll now turn it over to answer any questions you have with regards to the quarter.

[Operator]

[Operator Instructions] And your first question in queue here comes from the line of Michael Glen from Raymond James.

[Michael W. Glen, Equity Research Analyst]

Linda, can you just dig into this 12.6% growth you're seeing in the Canadian health care business? You're highlighting this reusable versus disposable tailwind that you're seeing. Can you maybe just give a little bit more context to that and how you see that playing out over the next few quarters?

[Linda Jane McCurdy, President, CEO & Director]

Yes. So -- I mean, I think we've -- what we've said is in the bucket of the 12%, there's obviously price increases, there's new and temporary customers that fall into that, and then a bucket of increased usage and conversions. And it's a little bit hard to parse between increased usage and conversion because we know we've converted some hospitals to a reusable product, but what we don't know is how much of that usage will be a permanent conversion and how much is simply because there's more usage because there's COVID cases and there's additional precautions.I would say that the increased usage and conversions amount to about 60% of the 12% increase. And what's unclear -- I mean, if I had to guess, I would say at least half of that would be permanent.

[Michael W. Glen, Equity Research Analyst]

Okay. And then just on the hospitality side of the business, can you describe your -- you're seeing some fluctuations potentially in terms of how volumes trend in that business. In those plants that are focused on hospitality, what's your ability -- how quickly can you flex the labor force to respond to these volume changes?

[Linda Jane McCurdy, President, CEO & Director]

Michael, I think this is where we do a very good job of managing the cost structure. Two things. I don't think we will see anything as dramatic as what we saw in Q2, where there was a decline of 90%, where we had to react very, very quickly and very severely to reduce the cost structure. And conversely, in Q3, we very quickly had to ramp up and most dramatically in the U.K., where hotels really only opened up in mid-July.So I'm not really concerned about our ability to flex as volumes decline for Q4, and again, evidenced by what we were able to accomplish in Q2 and subsequently in Q3. We have made some structural changes, permanent structural changes. I think we're kind of at the end of the road of the permanent changes. And now it really becomes a process of -- as we see volumes declining in reducing the hours of work and employee schedules accordingly.

[Operator]

Your next question comes from the line of Paul Bilenki with TD Securities.

[Paul Bilenki, Associate]

You disclosed that your October health care revenue was still up 12% year-over-year. And I recognize that it's highly uncertain and there's a lot of moving pieces. But I'm curious what you've heard more recently from your health care clients? How we should be thinking about the remainder of Q4 given rising COVID hospitalizations, and again, the postponement of elective surgeries in some regions? Would you expect some softening relative to October as we kind of go through November, December here?

[Linda Jane McCurdy, President, CEO & Director]

So I think we may see some softening from the 12%. I think it may come down a couple of percentage points. But it's not all going to disappear, a, because there are still a significant number of COVID test sites, temporary test sites that will exist.Again, back to my earlier commentary, because there has been a true conversion from a disposable product to a reusable product, there will be a permanent increase to some extent going forward. So I'm pretty confident that the increase for the remainder of the year will be high single digits. And of those high single digits, at least half of that is permanent.

[Paul Bilenki, Associate]

Okay. That's very helpful. And I saw in your disclosures that the timing of the collection of your health care receivables has been delayed due to the pandemic. What exactly is going on there and do you see any risk there?

[Kristie L. Plaquin, Chief Financial Officer]

No.

[Linda Jane McCurdy, President, CEO & Director]

No. Go ahead, Kristie.

[Kristie L. Plaquin, Chief Financial Officer]

No, it was just an administrative backlog at a particular health authority. And for the most part, it's all fully collected now. It truly just was a timing issue.

[Paul Bilenki, Associate]

Okay. That's great. And maybe one more. The Canadian wage subsidy, what would be your expectations for Q4? Would you expect a similar amount relative to Q3?

[Linda Jane McCurdy, President, CEO & Director]

I think that it's an extremely complicated formula. It's -- there's obviously ceilings as to how much per employee you're eligible for. It's also determined by your change in revenue. I don't think that we will be -- based on our view of volumes on the hospitality and health care front, I don't -- and the way the program has changed, I don't think we'll be eligible for the same amount as Q3. I think it will be substantially less. But there still will be some eligibility.

[Paul Bilenki, Associate]

Okay. And just following on that. You state that without this wage subsidy, you would have taken additional action. To what -- do you think you would have been able to find an additional $2.1 million in cost savings this quarter without this program?

[Linda Jane McCurdy, President, CEO & Director]

It's hard to...

[Paul Bilenki, Associate]

Would you be able to...

[Linda Jane McCurdy, President, CEO & Director]

Yes.

[Paul Bilenki, Associate]

Yes. Sorry.

[Linda Jane McCurdy, President, CEO & Director]

I understand the question.

[Paul Bilenki, Associate]

Please go on.

[Linda Jane McCurdy, President, CEO & Director]

Yes. We definitely would have taken some amount of additional action. I think it's too aggressive to say that we would have reduced $2 million of additional cost.

[Operator]

Your next question comes from the line of Endri Leno with National Bank.

[Endri Leno, Associate]

A couple for me. I mean, most have been asked and answered. But in terms of the increases in the health care for the quarter, I mean, you mentioned there was also a bit of a price increase. I was wondering if you're able to quantify what percentage of that growth came from price.

[Linda Jane McCurdy, President, CEO & Director]

About I'd say somewhere between 15% and 20%.

[Endri Leno, Associate]

Okay. Great. And the next question -- and congrats on renewing the contract in B.C. I was wondering, are there any other contracts? I mean, I see there are several up for renewal in B.C. in 2020, but are there any outstanding for the remainder of the year? And have you had any discussions with the Ontario ones, anyway, for 2020 and even a little bit into 2021?

[Linda Jane McCurdy, President, CEO & Director]

So there have been a number that come up in 2020. A lot of them have been extended on a short-term basis to not distract from all attention that is being focused on COVID. So that's what I would say with regards to anything that has come up for 2020 that has not been renewed. And then there's a series of contracts, obviously, that come up in '21. The largest of which is obviously the Calgary Health Region -- AHS, Calgary region.

[Endri Leno, Associate]

Okay. Great. And are you able -- or can you quantify what sort of a percentage revenue came from the B.C. renewals? Like how much would that contribute to revenues?

[Linda Jane McCurdy, President, CEO & Director]

We haven't disclosed the revenue as it relates to that actually, Endri.

[Endri Leno, Associate]

Okay. No, no, that's fine. And the last question for me. On the Alberta rural volumes RFP, what are your time line expectations? I mean, I know the RFP, I think, closes on December 1. But how quickly do you think the province response to that? And where can we get some resolution or news further?

[Linda Jane McCurdy, President, CEO & Director]

So here's -- I'll make this general comment about AHS's RFP. While it is a public document, there is an implied confidentiality obligation as a bidder and I obviously want to be very respectful of that. It is a public document. It was released on October 23, and it is a provincial wide RFP, which includes all of the rurals, Edmonton and Calgary. They have outlined in the RFP a time line as to when they think the process will conclude, which is in the spring of 2021.I think part of the answer to your question, Endri, is what does the award look like and what are the transition time scales that are negotiated between supplier and AHS.

[Operator]

Your next question comes from the line of Justin Keywood with Stifel GMP.

[Justin Keywood, Director of Equity Research]

Just had a clarification question on the lower mainland B.C. contract. How much did that represent of total sales?

[Linda Jane McCurdy, President, CEO & Director]

We have not disclosed. We have several contracts in B.C. And I would say as a -- health care contracts in B.C., we haven't disclosed the exact percent. I would say it's the smaller part of our B.C. business as it relates to contract value. But we haven't actually disclosed the percentage revenue.

[Justin Keywood, Director of Equity Research]

Okay. Understood. And was that contract renewed at similar terms as prior?

[Linda Jane McCurdy, President, CEO & Director]

Yes. Yes, absolutely.

[Justin Keywood, Director of Equity Research]

Okay. And then on the M&A -- I think there was some mention of this in the opening remarks -- I was just wondering if you could provide some additional color on what you're seeing there as far as the appetite for potential sellers in the market and if the valuation expectations have changed at all just given the current environment?

[Linda Jane McCurdy, President, CEO & Director]

Yes. Here's what I would say. It is a very difficult time for straight hospitality players. There is no question. And so we know that there is a permanent or a significant impact to their business. And from the discussions that we have, I would say that many of them at this point are being propped up obviously by government subsidy programs. And part B to that is many of them are looking at their business and saying, "I think we just have to put a pause on this until there's brighter days so that we can experience a fuller valuation for our business." Because at the current levels, I don't think they're being very attractive to -- or put in a different way, they want the valuation of their business based on normal activity and based on better numbers.So I don't think the opportunity -- I do believe the opportunity remains and continues. I think some of the operators are looking for more stability in the business at this point. So for me, it's more a question of timing versus whether there is an opportunity.

[Justin Keywood, Director of Equity Research]

And would it be primarily on the hospitality side? Or are there any opportunities on the health care side either in U.K. or other regions?

[Linda Jane McCurdy, President, CEO & Director]

In some cases, there's still an element of hospitality, so they're mixed operators. So I would say there is still the pause button that's being hit temporarily. And in terms of straight health care players, we haven't seen any real activity at this point.

[Operator]

Your next question comes from the line of Furaz Ahmad from Laurentian.

[Furaz Ahmad, VP of Research and Special Situations Analyst]

Just had a question on -- have you seen any progress in the long-term care industry? I mean has anything changed since we spoke about it last quarter?

[Linda Jane McCurdy, President, CEO & Director]

We continued in Q3 to do some temporary service. I would say, again, the opportunity definitely exists and it's an area of focus for us. I would say that -- especially as we're entering in Q3, again, the focus becomes on increased cases and managing the pandemic. But many of the potential facilities that we're in discussions with I believe will ultimately make it change. But again, as we've seen cases rise all across Canada, the focus very much continues to be keeping that under control.

[Furaz Ahmad, VP of Research and Special Situations Analyst]

Okay. That's helpful. And then I just wanted to circle back on the price increases you mentioned in the health care business. Is that directly as a result of cost increases that you're experiencing?

[Linda Jane McCurdy, President, CEO & Director]

Those would be just annual escalators that come into place during contract anniversary dates. So there would be no additional price increases as the result of COVID, for example.

[Furaz Ahmad, VP of Research and Special Situations Analyst]

Okay. And I guess on the cost side, have you seen an increase due to additional precautions that you might have to take on the health care side?

[Linda Jane McCurdy, President, CEO & Director]

There really wouldn't be anything material. All of our operations will have been managed assuming that all of the linens that we touch is contaminated whether it's COVID, whether it's any other type of infectious disease. So our process is very much -- we're in place to handle an outbreak like this.I would say there has been minor incremental costs in terms of temperature checks at the beginning of the day, a little more social distancing in the plants, but it's not really material.

[Furaz Ahmad, VP of Research and Special Situations Analyst]

Okay. Great. And then just also on the M&A environment -- thanks for the additional color on that. Just wanted to clarify, within the different businesses within the U.K. and Canada, are you seeing a little bit of a difference in terms of, I guess, the support that a lot of these businesses, particularly in hospitality, are receiving from the government? And then whether that kind of extends out -- how long they can go in this environment?

[Linda Jane McCurdy, President, CEO & Director]

There is definitely a difference in the retention schemes as we see in -- between Canada and the U.K. I would say -- which the U.K. programs are quite similar to other European programs. I would say that in Canada, they are more flexible and cover a larger percentage of the cost. So I think we will see, as the pandemic continues, in the U.K. it will continue to be much more difficult for hospitality players than it would be in Canada, for sure.

[Furaz Ahmad, VP of Research and Special Situations Analyst]

Okay. And that should, I guess, lead to perhaps more timely opportunities in the U.K.?

[Linda Jane McCurdy, President, CEO & Director]

I think that's a fair assumption.

[Operator]

[Operator Instructions] Your next question comes from Michael Glen from Raymond James.

[Michael W. Glen, Equity Research Analyst]

Linda, the new and short-term customers that you're talking about, is this predominantly long-term care? Or is there something else in the mix there?

[Linda Jane McCurdy, President, CEO & Director]

It's a bit of a mix, Michael. So yes, I would say it's a combination of both.

[Michael W. Glen, Equity Research Analyst]

Okay. And any regions in particular where that might be a more elevated activity?

[Linda Jane McCurdy, President, CEO & Director]

You know what, I would say Ontario we have seen some additional requirements for our service and Alberta as well. So those 2 would be the primary markets.

[Operator]

And I'm not showing any further questions in the queue at this time, so I'll turn the call back over to Linda McCurdy for any closing comments.

[Linda Jane McCurdy, President, CEO & Director]

That's great. So I just want to thank everyone for your participation today. And if there's any additional questions, Kristie and I are available. So have a great day, everyone.

[Operator]

And ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.