K-Bro Linen Inc

TSX:KBL

Earnings Call Transcript 2018-Q4

[Operator]

Good morning. My name is Mariama, and I'll be your conference operator today. At this time, I'd like to welcome everyone to the K-Bro Linen Systems Inc. Fourth Quarter Results Conference Call. [Operator Instructions] Please note that today's call is being webcast live and will be archived for replay, both online and by telephone, beginning approximately 2 hours following the completion of the call.I would now like to turn the call over to Kristie Plaquin, Chief Financial Officer of K-Bro Linen. You may begin your conference.

[Kristie L. Plaquin, Chief Financial Officer]

Thank you, operator, and good morning, everyone. Thank you for joining us today, and welcome to our 2018 fourth quarter and annual results conference call. On the line with me today is Linda McCurdy, President and Chief Executive Officer. 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 the historical fact are considered to be forward-looking statements. Certain material assumptions were applied in drawing a conclusion or making a forecast or projection as reflected in the forward-looking information. The business prospects of K-Bro Linen Inc. are subject to a number of risks and uncertainties that may cause actual results to differ materially from a conclusion, forecast or projection in the forward-looking information. Actual results could differ materially from those anticipated. Risk factors that could affect the results are detailed in the corporation's public filings.Please note that K-Bro is under no obligation to update any forward-looking information discussed today. Investors are cautioned not to place undue reliance on these statements. For more information about these risks, uncertainties and assumptions, please refer to our annual information form and our MD&A, which are available on SEDAR or our corporate website.With that, I'll turn the call over to our CEO, Linda McCurdy.

[Linda Jane McCurdy, President, CEO & Director]

Thank you, Kristie. Good morning to everyone, and thank you for joining us today. I'd like to start by saying, we've made tremendous progress throughout 2018, as we come to the end of a major investment cycle. Over the past 5 years, we've committed more than $200 million to build a new state-of-the-art facility, the acquisition of Fishers and refurbishing select existing locations. Doing both in our 2 largest markets, Toronto and Vancouver. The result of this is a highly efficient, environmentally conscious and cost-effective network across Canada, with capacity to spare and an entrance into a new large market in the U.K. We achieved record revenue for both the quarter and the year, with the benefit of having a full year of operations from Fishers in the U.K., which we acquired in late 2017. Our other recent acquisition was Calgary based Linitek, with the deal closing October 2018. We also added significant volume from new and existing customers throughout the year.As I mentioned, we completed the last of our major capital projects in Vancouver, with the transition into our new and refurbished facilities. While this project took longer to complete than we had initially expected along with greater costs associated, we're absolutely thrilled with the results. We've significantly expanded capacity, allowing for additional awarded volumes in this very important market. Also in Vancouver, we've made great strides in managing the lower mainland's tight labor market by taking a more active and innovative approach to recruitment and retention. For example, in recruitment, we're using nontraditional advertising and then use to access a broader group. Towards retention, we're aiming to provide our employees with greater stability and flexibility in scheduling their hours and shifts, also working to convert part-time staff to full-time, in order to further stabilize our workforce.We also believe that improved efficiency achieved at our new and refurbished facilities will partially offset some labor costs and risks. Looking at the relative proportion of healthcare to hospitality revenue as a percent of total revenue for the year, on a consolidated basis, it was 57% healthcare to 43% hospitality. This compares to 2017, when it was 69% healthcare to 31% hospitality. While we still lean towards healthcare for the majority of our revenue, our U.K. division has certainly closed the gap.Speaking to our hospitality business, subsequent to the quarter, K-Bro extended our existing relationship with Avendra through a new 5-year agreement. Avendra is North America's leading hospitality procurement and supply chain service provider with customer locations across Canada that include some of the country's largest and most recognized hotel chains. We expect the partnership will further strengthen our competitive position in the hospitality segment and help to broaden our own network of customers and suppliers. While EBITDA improved over 2017, there remained downward pressure on margin as the Vancouver project continued throughout the year. Given the completion of all major capital projects with no immediate plans for new plants or refurbishments, our capital requirements going forward are expected to be much less than what we've seen during the past few years. As a result, we do expect to gradually return to margins similar to what we achieved in 2015 in the latter half of the year.I'll now turn the call over to Kristie to discuss our financial results for the quarter and the fiscal year, after which I'll return to talk about plans for 2019. Kristie, over to you.

[Kristie L. Plaquin, Chief Financial Officer]

Thank you, Linda. The information we're discussing today is also highlighted in our 2018 fourth quarter and annual earnings press release issued yesterday and detailed supplemental financial information, which can be found on our Investors Relation website, under the heading financial documents.Revenue for the fourth quarter increased by roughly 25% compared to the fourth quarter last year. The hospitality segment contributed $25 million and healthcare contributed $34.5 million. Fishers contributed $14.5 million towards consolidated quarterly revenue of $59.4 million. While we saw typical fourth quarter decreases in volume in our hospitality segment, this was partially offset by the acquisition of Linitek, which closed during the quarter, volumes from the Fishers acquisition, additional healthcare volumes from Vancouver lower mainland contracts and organic growth through existing customers along with new customers in existing markets. The distribution of revenue generated from healthcare compared to hospitality for the quarter was 58% to 42%, respectively. This compares to 67.2% healthcare to 32.8% hospitality during the fourth quarter last year. The shift in distribution reflects the Fishers acquisition.For the year, revenue increased to $239 million compared to $171 million for 2017. Growth in annual revenue reflects the acquisition of Fishers and Linitek along with additional volumes already mentioned. While EBITDA increased to $6.6 million for the quarter compared to $4.5 million for the same period last year, downward pressure on EBITDA margin continued largely as a result of cost associated with continued transition to the new facilities in Vancouver, rising minimum wages in advance of future revenue price escalators, tight labor markets in both B.C. and Québec. As Linda mentioned, we've now completed the Vancouver transition and all associated costs have been incurred. Our Canadian EBITDA margin for the quarter was 10.7% and Fishers EBITDA margin was 12.4%. Management estimates that costs incurred related to the Vancouver transition and onetime costs for the quarter were approximately $1.1 million. After adjusting for these onetime costs, the Canadian EBITDA margin would have been 13.2%, as compared to Q4's 2015 margin of 16.4%. The remaining 3% in margin shortfall from 2015 is comprised of the following items: about 0.5% relates to increased costs related to renewal of our outsourced freight contracts, whereby we saw significant increases; about 0.5% relates to higher carbon taxes in Alberta and natural gas rate increases in B.C. due to the natural gas pipe explosion that happened in the fourth quarter; 0.5% relates to tight labor markets in Québec and about 2% relates to minimum wage increases, particularly in Alberta, which saw an increase of 10% on October 1, from $13.60 per hour to $15 per hour.Consolidated EBITDA margin increased for the fourth quarter when compared to the same period last year, from 9.4% to 11.1%. K-Bro's consolidated EBITDA margin for the year decreased to 12.3% in 2018 compared to 14.1% in 2017, again reflecting factors already discussed. With the Vancouver transition now complete and strategies in place to mitigate the impact of rising minimum wages, we expect margins to improve in the latter half of 2019.Overall, we're very pleased with our Fishers acquisition. For 2018, Fishers recorded EBITDA of GBP 4.7 million and an EBITDA margin of 13.8%. This includes approximately GBP 100,000 of acquisition costs, that were recorded in 2018, which when adjusted for would have resulted in EBITDA of GBP 4.8 million and a margin of 14%, which was consistent with our expectations. Net earnings for the quarter increased to $1.1 million compared to a net loss of $1.3 million for the fourth quarter last year, which included amongst other nonrecurring items, certain expenses related to the acquisition of Fishers. Net earnings for the year increased to $6.2 million compared to $5.7 million in 2017. There was an overall increase to operating expenses for the year compared to 2017. Wages and benefits increased to $100 million or 41.7%, as a percentage of revenue compared to $70.4 million or 41.2% as a percentage of revenue in 2017. The increase was largely due to expenses related to our U.K. division, incremental labor needed to process higher volumes, overtime and onetime costs related to the Vancouver transition, incremental increases in the wage rate and escalating minimum wage rates, tight labor markets in British Columbia and Québec. Linen expenses for the year increased to $26.7 million in 2018 compared to $19 million in 2017. Both years were constant as a percentage of revenue at 11.1%. Again, the increase reflects expenses related to our U.K. division along with increases in healthcare volume from new Canadian customers.Utility costs increased to $15 million or 6.3% as a percentage of revenue in 2018 compared to $10.4 million or 6.1% in 2017. The increase was, again, largely a result of costs related to our U.K. division, but also impacted by incremental volume, the Vancouver transition and higher commodity costs in B.C. as a result of temporary natural gas supply shortage. Higher carbon levies in Alberta and costs were partially offset by improved efficiencies of the new Toronto facility. Delivery costs increased to $30.7 million or 12.8% as a percentage of revenue in 2018 compared to $18.3 million and 10.7% in 2017. Again, the increase was the result of costs associated with Fishers along with an increase in business activity, price increases from renewals of outsourced freight contracts, the Vancouver transition and higher carbon tax levies in Alberta, a higher diesel cost and freight charges which are tied to diesel price.Occupancy cost increased to $9.9 million or 4.1% as a percentage of revenue for the year compared to $6.5 million or 3.8% for 2017. Again, this is largely as a result of costs associated with Fishers. It also reflects increased costs related to the new Toronto facility and additional occupancy costs in Vancouver related to our build-out strategy.Materials and supplies for the year increased to $8.5 million or 3.5% as a percentage of revenue compared to $5.5 million or 3.2% in 2017. Again, the bulk of the increase was tied to Fishers, but also a result of onetime setup cost as part of the Vancouver transition.Repair and maintenance increased to $8.2 million or 3.4% for the year compared to $5.6 million and 3.3% in 2017. Along with costs associated with Fishers, the increases were a result of timing and scheduled maintenance activities and onetime costs associated with the Vancouver facility transition.For 2018, corporate costs increased to $11.1 million or 4.6% as a percentage of revenue compared to $10.9 million and 6.4% in 2017, which included $2.8 million related to transition costs associated with the acquisition of Fishers. Changes in corporate costs are largely a result of initiatives to support the company's growth and business strategy.Looking to capital resources, distributable cash flow for Q4 was $5.8 million and our payout ratio for the quarter was 54.5%. For the year, the company paid out $1.20 per share in dividends for total consideration of $12.7 million. Debt to total capitalization for 2018 was 26.4%, an increase from 18.4% in 2017. Net working capital at December 31, 2018, was $34.8 million compared to $32 million at December 31, 2017.Overall, on a consolidated basis, cash invested in working capital was $11.4 million as compared to $4 million from the previous year. The increase in cash invested in working capital is related to the timing of cash received, new business, which increased to -- which contributed to increased receivables and linen purchases as well as the settlement of accruals made for the acquisition costs for Fishers in 2017 and income tax installments. Again, at December 31, 2018, total assets increased to $32.2 million compared to $29.5 million at December 31, 2017, and total liabilities increased to $123.6 million from $93.6 million. Shareholders' equity decreased slightly at December 31, 2018 to $198.7 million from $201.6 million at December 31, 2017.I'll now turn things back over to Linda for her concluding remarks.

[Linda Jane McCurdy, President, CEO & Director]

Thank you very much, Kristie. Now that we're at the end of our major investment cycle, we shift our focus from project execution to operations and growth. Operationally, we have the ability to optimize and take advantage of the efficiencies we've worked so hard to put in place. We have capacity to spare and can easily accommodate new volumes in all of our markets. We have increased automation with new and upgraded systems and equipment that allow us to reduce and manage operating costs and through economies of scale, any additional volume improves our operating cost per pound. I've referred to our new facility in Toronto quite often to demonstrate the benefits of our upgraded facilities. We've achieved significant improvements in productivity as a result of the greater degree of automation along with reduced energy and water usage. Both are incredibly important when servicing our largest market, in that we're able to process greater volumes with greater efficiencies and cost savings for both K-Bro and our customers. We expect similar results at the new and upgraded facilities in Vancouver. Looking forward to our capital program for 2019, our requirements are much less now than the -- now that the Vancouver transition is complete. Capital expenditures for the year are expected to be less than $5 million in total, with $3 million of that directed towards optimizing and increasing market share in the U.K. and $2 million towards our Canadian operations, mainly as maintenance CapEx. We remain active in evaluating potential acquisitions and see opportunities similar to Linitek, which we completed late last year. Linitek was in an existing market for us and it made a lot of sense to consolidate that part of the market in that geography. We also see opportunity to look beyond existing markets, particularly in the U.K., where we have a relatively small footprint. The Fishers acquisition continues to be a point of strength for the business, and during its first full year of operations, as part of K-Bro, we've been able to make improvements operationally, increase market share and are confident we can strengthen our position further. Fishers also serves as a good jumping off point for other opportunities in the U.K. We remain committed to managing our balance sheet, and our strong cash flow position continues to allow us to move quickly on acquisitions as they arrive. We believe that by continuing to focus on organic growth from our new and existing customers and through efficiencies achieved at our facilities, we will be able to return to historical EBITDA margins during the latter half of the year.At this time, I'd like to open it up to all of you to answer any questions you have with regards to the quarter.

[Operator]

[Operator Instructions] Your first question comes from Maggie MacDougall.

[Maggie Anne MacDougall, Director of of Institutional Equity Research]

Just a question on the transition that you're undergoing in Vancouver. So it sounds as though you've got things going there now, but that you're going to see some continued, I guess, additional costs related to getting those facilities optimized over the next 2 quarters, so I'm wondering if that is going to be more labor related or if it's operational. And then if it's more related to one facility or another? And then the follow-up to that would be, if the impact is expected to be similar to what you saw in the past couple of quarters in 2018 on the margin side, or if you think you'll get a little bit of improvement month-over-month where you still have depressed margin, but it's not quite as bad as it was?

[Linda Jane McCurdy, President, CEO & Director]

Thank you for those questions. I would say, we -- as we saw in 2018, the onetime costs will continue to narrow and come down. We will certainly see some in Q1 and Q2, they will be substantially less than we saw at the $1.1 million level for Q4. But we will see them in Q1 and Q2. As it generally is the result of labor and gaining efficiencies, so that would be the largest area that contribute to the onetime costs. But we continue to make progress and we're very happy with the progress, but as expected it -- we will not see historical margins until the latter half of 2019.

[Maggie Anne MacDougall, Director of of Institutional Equity Research]

Okay. And then the follow-up to that would be to 2020, I know it's pretty far away right now, but would you expect to see further margin improvement over that sort of Q4 '19 or Q3 '19 level as the facilities continue to add volume?

[Linda Jane McCurdy, President, CEO & Director]

Yes. So I would say that 2020 and beyond, we will be fully optimized and as we take on more volume, there is certainly the opportunity for margin improvement.

[Operator]

Your next question comes from Elizabeth Johnston.

[Elizabeth Johnston, Analyst]

Just talk about Fishers a little bit. I'm looking at the full year EBITDA margin. And given what we understood at the time of acquisition in December, it seems it's come in lower than what margins were at that time, so maybe you can walk us through what contributed to that lower margin on an annual basis and if there is opportunity to continue to improve that?

[Kristie L. Plaquin, Chief Financial Officer]

So included in 2018's annual margin would be a portion of acquisition-related costs that were incurred in Q1 to the tune of about $200,000 or GBP 100,000, which is impacting the margin, when adjusting for that, it comes back in line with our expectations.

[Elizabeth Johnston, Analyst]

Okay. And when it comes to margin expansion in that market specifically, what can you say in terms of any expectation for 2019 or is that really more of a 2020 type of expectation?

[Linda Jane McCurdy, President, CEO & Director]

I think that there certainly is an opportunity for margin expansion. I would say, it would be back half of 2019 and 2020. I think we can make improvements to the operations and I think there is an opportunity for top line growth that will enable us to lever -- leverage the existing operations. I don't believe that there is the opportunity to get to Canadian levels. I think there is room for some, but I think it would be difficult to get to Canadian levels given the investment we've made in highly automated operations that everyone is aware of.

[Elizabeth Johnston, Analyst]

Okay. No, understood. And when it comes to the reduction in margin year-over-year, I know, Kristie, you went over a couple of items that contributed to the, basically the 3% shortfall. Just to confirm, sorry, if I missed it, there were 4 items, roughly 0.5% from increased freight, 0.5% carbon tax utilities and minimum wage impact was 2%. Was there a fourth thing in that list?

[Kristie L. Plaquin, Chief Financial Officer]

Yes, about 0.5% also related to tight labor markets in Québec.

[Elizabeth Johnston, Analyst]

Okay. So when it comes to tight labor markets, you're separating those additional costs out from minimum wage. Should we read into that you're effectively having to pay overtime or pay above-market rates because the labor's just simply not available?

[Linda Jane McCurdy, President, CEO & Director]

I think it is a combination, Elizabeth. I think it's a combination of overtime. I think it's a combination of lost efficiency, because we know what the plant can produce, but there may not be the labor force or the efficient labor force to do so. And in addition, the use of agency labor in certain markets. And as we relate to tight labor markets, it's outside of the Vancouver market, in particular.

[Elizabeth Johnston, Analyst]

Okay. Great. And just one final for me, in terms of transition costs for 2019. Are you able to give us a sense of how that should compare versus the tail end of transition cost experience in Toronto or Edmonton or one of the other plants, just to get a sense of where that would rank?

[Linda Jane McCurdy, President, CEO & Director]

In terms of quantum, is that what you're asking in terms of Q1...

[Elizabeth Johnston, Analyst]

Yes.

[Linda Jane McCurdy, President, CEO & Director]

I mean, I'd say we -- I don't remember the Edmonton or Toronto cost off the top of my head, what I can say is that relative to Q4 at $1.1 million, I think it's -- that will -- we believe it will be cut in half for Q1 and go down further for Q2 and be gone by Q3.

[Operator]

Your next question comes from Endri Leno.

[Endri Leno, Associate]

Couple for me to start, but first of all, you referenced in the press release that there is a renewed labor strategy to mitigate tightness and increasing minimum wage. I was wondering if you can talk a little bit to what that strategy is and how is it developing so far?

[Linda Jane McCurdy, President, CEO & Director]

Sure. Thank you for your questions. I would say that there's just been a real renewed focus ahead of the busy season to put in place things like increased employee referral programs and incenting our existing employees for assisting in helping -- assisting in bringing on new staff, family, friends, retention bonuses for employees, new employees who will stay over 3 months, 6 months and a year -- or a year. We continue to operate an employee bus in the Vancouver market and just having to continually think of how we will continue to attract and retain employees, changing shift patterns and shifts to be more favorable for people's schedules and for accommodating their family needs and all of these are having an impact. I would say that we have made great progress in the Vancouver market and in some of our other markets i.e., Victoria and Québec, we've had to really ramp up some of these strategies as the results of the tightness we saw last summer and still continue to see, to be frank, in those markets

[Endri Leno, Associate]

And on the minimum wage side, thank you for that by the way, do you still expect negotiations at the beginning of the year, so we should start to see some mitigation of the minimum wage increases in Q1?

[Linda Jane McCurdy, President, CEO & Director]

I would say that there has been some impact of price increases. I would say, the larger part of that will be in the latter half of 2019, which is why we feel confident that we will narrow that gap in the back end and -- the back end of the year. A number of the price increases will come into effect in Q3 and Q4.

[Endri Leno, Associate]

Okay. Great. And the last question for me, perhaps for Kristie, it's on the IFRS 16. You have about $9 million of operating leases, and is that the right way to think that as a lift in EBITDA for next year or...

[Kristie L. Plaquin, Chief Financial Officer]

Yes. I think that would definitely be a reasonable assumption.

[Endri Leno, Associate]

Okay. Great. And just to clarify on that, that number is not included in the margin improvement that we're expecting?

[Linda Jane McCurdy, President, CEO & Director]

No, that's correct.

[Kristie L. Plaquin, Chief Financial Officer]

That's correct. Yes. Correct.

[Operator]

[Operator Instructions] Your next question comes from Justin Keywood.

[Justin Keywood, Director of Equity Research]

On the Avendra contract renewal, is the terms comparable to the prior contract in place as far as pricing and the exclusivity in certain regions?

[Linda Jane McCurdy, President, CEO & Director]

Because of confidentiality, I can't get into tremendous detail on the terms. I would say, we certainly took into consideration the fact that we have seen certain cost increases and we've made improvements in that, so I can comment on that. I would say that in terms of the exclusivity, it is now a national contract, national being described as exclusivity in the markets that we have plants and that we service. Prior to this agreement, it only covered the geography of Vancouver, and as it relates to exclusivity, that -- they have some existing agreements, so it won't be entirely exclusive until some of those other agreements expire.

[Justin Keywood, Director of Equity Research]

Okay. So how should we look at that as far as an opportunity?

[Linda Jane McCurdy, President, CEO & Director]

That's a great question. So it is the extension of an existing relationship in Vancouver, but from across the country, I would say, there is not going to be millions and millions of dollars of increased revenue in a day. What it does do is, they have relationships with hotels across the country, and for those that we don't do business with, in certain markets, they will be very helpful in assisting us as their exclusive provider to secure those accounts and have a very good shot at securing those accounts. As you know, we have a large market share in -- already in many of our markets, which is why I'd say it won't be millions of dollars of incremental revenue, but to the extent there are vendor customers in markets where we don't do the work, it will certainly give us an advantage, Justin.

[Justin Keywood, Director of Equity Research]

Okay. That's helpful. And then with the approved vendor status, I'm wondering if there is any other approved linen vendors in Canada?

[Linda Jane McCurdy, President, CEO & Director]

I can't speak to Avendra's relationship with other vendors, but I can say that we are aware that there are others that are approved at this point.

[Justin Keywood, Director of Equity Research]

Okay. And then given that Avendra is a North American supplier, this could raise the question, does this open up any U.S. opportunities for K-Bro?

[Linda Jane McCurdy, President, CEO & Director]

So not only they -- are they an approved North American vendor, they recently made an acquisition in Ireland. So I think that's a real opportunity for us both in terms of the U.S. and in other markets by having a strong relationship with Avendra. So I think there is certainly opportunity there.

[Justin Keywood, Director of Equity Research]

Okay. Great. And then on the capital budget for 2019, just wondering the expected maintenance CapEx, and any remaining plant upgrade CapEx either in Vancouver or at Fishers?

[Kristie L. Plaquin, Chief Financial Officer]

So for -- overall, we expect consolidated CapEx to be approximately $5 million, so $2.5 million would be Fishers and the balance would be Canada. In terms of there are still some remaining cash payments required for the Vancouver project, but all the physical capital costs have been incurred in 2018. So there's still some, I guess, PP&E and accounts payable to the tune of about $6 million. But no new capital strategic spending for Vancouver.

[Justin Keywood, Director of Equity Research]

And that $6 million, is that anticipated to be incurred in the near term or is that over several quarters?

[Kristie L. Plaquin, Chief Financial Officer]

It will probably fall more into Q2, maybe trail a little bit into Q3.

[Operator]

Your next question comes from Elizabeth Johnston.

[Elizabeth Johnston, Analyst]

Just a quick follow-up for me in terms of minimum wage and the price increases you're expecting to come through. So when it comes to the drag, which you highlighted Kristie, about 2% for minimum wage, if we think about the increases that you're expecting in pricing in the second half of this year, are you able to quantify how much of that 2% you think you might be able to recoup, would you say it's roughly half of it, just trying to get a sense of that time line?

[Linda Jane McCurdy, President, CEO & Director]

What I will say is that the gap will narrow as the result of a number of things and from price increases to eliminating inefficiencies from the Linitek transition to eliminating certain fixed costs, we haven't provided guidance or haven't broke down how that gap narrows, it will come from a number of items in the bucket.

[Elizabeth Johnston, Analyst]

Okay. And are you able to just give us a sense of -- so there's price increases in the second half, are most of your contracts -- I don't know if you can even quantify, trying to get a sense of when your contracts come up for renewal, is it mostly in the second half or is it -- does it vary year to year, just trying to see if there is opportunity for further increases in, say, the first half of 2020 that could also contribute?

[Linda Jane McCurdy, President, CEO & Director]

I mean, it really varies, healthcare is different than hospitality and hospitality are spread throughout the year and there are certain markets and certain customers that are going to see larger increases. So I don't know how much more we can provide on that front.

[Elizabeth Johnston, Analyst]

Okay, no understood. And just one more for me. In terms of the U.K., with respect to Brexit, obviously, it's difficult to predict at this point, but is there anything that you've had to do to prepare yourself for any potential outcome, any uncertainty as a result of that, that means you've taken steps to either improve the situation with labor or anything else, anything you can comment on with respect to that will be helpful?

[Linda Jane McCurdy, President, CEO & Director]

Sure. The one risk I think that has been identified is what is the potential impact on supply chain if there is a no deal and a hard exit. So for us that means what do we depend on in the supply chain that we would be concerned about, I would say, potentially linen and chemicals. I would say we have made an investment in linen whereby we're not dependent on the supply chain for 6 months. And to the extent there is an impact on the linen supply chain, where on supply chain in general, the view is that it would be through increased tariffs, of which we do not believe linen would be impacted. The other impact that is discussed and potentially anticipated is just the impact on the overall economy and what that could potentially do to the hospitality industry, I would say question mark and to be determined. The flip side to that is, it may have an impact on unemployment and assist us in being able to attract and retain frontline employees. So I would say that's what we anticipate as potential impacts. But we feel pretty well prepared for anything that could impact supply chain.

[Operator]

Your next question comes from Brian Pow.

[Brian D. Pow, VP of Research & Equity Analyst]

I just wanted to -- had a follow-up question on the conversation about the Avendra contract. What is the margin profile of the Avendra-driven business or related business versus your other hospitality business?

[Linda Jane McCurdy, President, CEO & Director]

It's a great question. I would say, in dealing with Avendra and providing assistance in securing additional business and volumes, as a buying group, I think it would be normal to expect that they have preferential pricing. But I would not say that it is monumental, in the sense that they're not getting advantages that are -- they are meaningful, but they are not -- hotels dealing with Avendra are not going to get a 10% benefit by dealing with Avendra and coming -- versus coming directly to K-Bro.

[Brian D. Pow, VP of Research & Equity Analyst]

Okay. But as you look at this, are they a little bit of a gatekeeper for some of the market that you historically haven't been able to reach?

[Linda Jane McCurdy, President, CEO & Director]

It's an interesting question, and I would say that if a hotel's desire to deal with Avendra is a more -- it's a more complicated decision than just a laundry decision, and what I mean by that is, they offer a whole suite of services from food service to elevators to -- so laundry is just one item in their service offering. So it wouldn't preclude us from gaining customers -- or getting customers in any potential market if they were or weren't Avendra.

[Brian D. Pow, VP of Research & Equity Analyst]

Okay. But as you stand back and look at this, whatever margin you're giving up, you expect to make it up in volume would probably be the best way to think about this?

[Linda Jane McCurdy, President, CEO & Director]

Correct. Absolutely.

[Operator]

There are no further questions at this time. I will now turn the call back over to the presenters.

[Linda Jane McCurdy, President, CEO & Director]

So thank you very much, everyone, and Kristie and I will remain available should there be any follow-up questions. And we look forward to being back in -- for the Q1 results. Thank you so much.

[Operator]

This concludes today's conference call. You may now disconnect.