K-Bro Linen Inc

TSX:KBL

Earnings Call Transcript 2019-Q4

[Operator]

Ladies and gentlemen, thank you for standing by, and welcome to the K-Bro Linen Systems Inc. Fourth Quarter Results 2019 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 Kristie Plaquin, CFO. 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 fourth quarter and 2019 year-end 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 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 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 also 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. 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 to review our full year results for 2019. As we all know, much has changed in the last 30 days, and I'm sure that everyone wants to understand how COVID-19 will impact K-Bro and how the company will proceed as a result of the pandemic. What we'll do today is we'll begin the call with a review of 2019, and then I'll provide you a full update on the impact on K-Bro and how we plan on moving forward. Well, obviously, COVID-19 will impact us. And 2019 showed that our underlying operations and financial performance had returned to historical levels, especially with respect to margins. That's important for us to know as we plan to get through the impact of COVID-19 while also remaining prepared for when the impact of the virus eventually begins to recede. The annual results of 2019 have set new records in revenue and EBITDA, both before and after the adoption of IFRS 16. Overall, annual revenue increased in 2019 to $252.4 million or by 5.4% and EBITDA increased in 2019 to $47.6 million from $29.6 million or by 60.8% compared to 2018. This increase was due to volume from the acquisition of Linitek, acquisition of [ D Side ], a tuck-in acquisition in Scotland, organic growth at existing customers, new customers secured in existing markets and the adoption of IFRS 16. Before the adoption of IFRS 16, which Kristie will provide further details on shortly, annual EBITDA increased to $38.7 million from $29.6 million, and respectively, EBITDA margin increased to 15.3% from 12.3% compared to 2018. Again, before IFRS 16, as a result of the capital expenditures made in our new facilities and the associated operating efficiencies despite rising minimum wage rates in advance of future revenue price escalators and tight labor markets for all of our plants, particularly in B.C. and Québec. With the completion of the Vancouver transition in 2018, we exited our major investment cycle with 2019 marking a year of significant improvement in overall operational efficiencies. On an annual basis before the adoption of IFRS 16, we saw EBITDA growth in Canada of $8.7 million or 40.6% and margin improvement of 4.2%. On an annual basis, our consolidated hospitality segment revenue represented 44.9% of overall revenue compared to 43.5% in 2018. Our U.K. operations are almost entirely hospitality, while hospitality represents approximately 30% of our Canadian revenue. On an annual basis, hospitality revenue grew by 6% in Canada and 11.5% in the U.K., with consolidated growth of 8.8%. Our healthcare segment has also experienced growth of 2.8% over the same period last year, which has primarily been from organic growth and contractual rate increases. I'll now turn the call over to Kristie to discuss our financial results for the quarter, after which I'll return to talk to you about the impact of COVID. Kristie?

[Kristie L. Plaquin, Chief Financial Officer]

Thanks, Linda. The information we are discussing today is also highlighted in our fourth quarter and 2019 earnings press release issued yesterday. And detailed supplemental financial information can be found on our Investor Relations website under the heading financial documents. Consolidated revenue for the fourth quarter increased by 5.8% compared to the same period last year and 5.4% on a year-to-date basis. The hospitality segment contributed $27.4 million; and healthcare, $35.5 million; and respectively, on a year-to-date basis, $113.4 million and $139 million. For the fourth quarter, Fishers contributed $16.9 million towards the consolidated revenue of $62.9 million; and on a year-to-date basis, $65.8 million of the consolidated revenue of $252.4 million. The distribution of revenue generated from hospitality compared to healthcare for the fourth quarter was 43.5% to 56.5%, respectively, which is an increase in hospitality revenue compared to the same quarter last year of approximately 9.8%. Our U.K. operations are almost entirely hospitality, while hospitality represented approximately 30% of our Canadian revenue. The adoption of IFRS 16 continues to have an impact on EBITDA. And while we have adopted the new accounting standard retroactive to January 1 of this year, we have not restated the comparative periods for 2018. However, we continue to provide a reconciliation of actual results and year-to-date financial results compared to what we would have incurred had we not adopted the new policy in the MD&A for this quarter and for the year. EBITDA for the fourth quarter before the adoption of IFRS 16 was $9.1 million compared to $6.6 million for the same period last year, an increase of 37.7% and, respectively, on a year-to-date basis, was $38.7 million compared to $29.6 million in 2018, an increase of 30.8%. EBITDA benefited significantly from operating efficiencies gained in our Canadian division as a result of capital investments made in 2018. The adoption of IFRS 16 leases, on an annual basis, increased EBITDA by $8.9 million and accounts for 3.5% of the increase in EBITDA margin. The remainder of the increase in EBITDA is due to revenue growth, partially offset by higher commodity costs in the U.K., higher costs in British Columbia for natural gas as a result of a temporary supply shortage during the first quarter, rising minimum wage rates in advance of future revenue price escalators and tight labor markets, particularly in B.C. and Québec. Consolidated EBITDA margin. Once again, before the adoption of IFRS 16 increased for the fourth quarter compared to the same period last year from 11.1% to 14.5%, and on a year-to-date basis from 12.3% to 15.3%. Our Canadian EBITDA margin for the fourth quarter before the adoption of IFRS 16 was 15.8% compared to 10.7% for the same period last year. And Fishers was 10.9% compared to 12.4% in the prior year. The same figures, respectively, on a year-to-date basis for our Canadian division was 16.1% compared to 11.9% in 2018, and Fishers was 13.1% compared to 13.8% in 2018. Net earnings in the fourth quarter of 2019 increased by $1.1 million to $2.2 million compared to $1.1 million in the same comparative period of 2018, and as a percentage of revenue, increased by 1.7% to 3.5%. On an annual basis, net earnings increased by $4.7 million to $10.9 million compared to $6.2 million in the same comparative period of 2018. And as a percentage of revenue increased by 1.7% to 4.3%. The change in net earnings is primarily related to the changes in EBITDA discussed earlier, offset by higher depreciation and finance costs as a result of the adoption of IFRS 16 leases and higher depreciation associated with the new plant builds and acquisitions, along with higher finance costs related to the revolving credit facility, offset by a higher income tax expense. Wages and benefits decreased by $0.4 million to $99.6 million compared to $100 million in the same comparative period of 2018, and as a percentage of revenue, decreased by 2.3% to 39.4%. The decrease as a percentage of revenue is primarily related to the elimination of onetime costs related to the Vancouver transition when compared to 2018. Improved labor efficiencies offset by wages and benefits is related to incremental labor required to process higher volumes and escalating minimum wage rates. Linen increased by $0.8 million to $27.5 million compared to $26.7 million in the same comparative period of 2018, and as a percentage of revenue, decreased by 0.2% to 10.9%. The decrease as a percentage of revenue is primarily related to the higher proportion of hospitality revenues in the quarter that doesn't require linen replacement. Utilities increased by $1.4 million to $16.4 million compared to $15 million in the same comparative period of 2018, and as a percentage of revenue increased by 0.2% to 6.5%. The increase as a percentage of revenue is primarily related to higher commodity costs in the U.K. related to the timing of contracts and market conditions, higher utility costs in British Columbia as a result of the temporary natural gas supply shortage during the end of 2018 and first quarter of 2019 and offset by improved efficiencies in the new Vancouver facilities. Delivery decreased by $1.9 million to $28.8 million compared to $30.7 million in the same comparative period of 2018. And in the percentage of revenue, decreased by 1.4% to 11.4%. The decrease as a percentage of revenue is primarily related to the adoption of IFRS 16 leases which accounts for 1.3% and a decrease to delivery costs of $3.4 million. The remaining decrease is a result of diminishing onetime costs related to the Vancouver transition when compared to 2018, offset by increased business activity, price increases from renewals of outsourced freight contracts and higher cost of diesel and external freight charges tied to the diesel price. Occupancy costs decreased by $5.4 million to $4.5 million compared to $9.9 million in the same comparative period of 2018, and as a percentage of revenue decreased by 2.3% to 1.8%. The decrease as a percentage of revenue is primarily related to the adoption of IFRS 16 leases, which accounts for 2.2% and a decrease to occupancy cost of $5.5 million and onetime Vancouver transition costs, partially offset by costs associated with the acquisition of Linitek. Materials and supplies decreased by $0.2 million to $8.3 million compared to $8.5 million in the same comparative period of 2018, and as a percentage of revenue decreased by 0.2% to 3.3%. The decrease as a percentage of revenue is primarily related to the costs related to the Vancouver transition and certain onetime recoverable costs. Repairs and maintenance increased by $0.6 million to $8.8 million compared to $8.2 million in the same comparative period of 2018, and as a percentage of revenue increased by 0.1% to 3.5%. The increase as a percentage of revenue is primarily related to 2019 maintenance activities and nonrecurring costs related to laundry accreditation and health and safety initiatives, offset by onetime Vancouver transition costs in 2018. Corporate costs increased by $0.1 million to $11.1 million compared to $11 million in the same comparative period of 2018, and as a percentage of revenue, decreased by 0.2% to 4.4%. The decrease as a percentage of revenue is primarily related to the timing of initiatives to support the corporation's growth and business strategy across the plan. Depreciation of property, plant and equipment and amortization of intangible assets represents the expense related to the appropriate matching of our long-term assets. The depreciation increased by $8.8 to $24.7 million compared to $15.9 million in the same comparative period of 2018. The increase is primarily related to the adoption of IFRS 16 leases of $7.4 million and the completion of the new Toronto and Vancouver facilities. Now looking at our capital resources. Distributable cash flow for the fourth quarter of 2019 was $7 million, and our payout ratio was 45.2%, and on a year-to-date basis, was $29.6 million and 42.9%. In addition, the company paid out $0. 3 per share in dividends during the quarter, for total consideration of $3.2 million, and year-to-date, the company has paid out $1.20 per share in dividends for total consideration of $12.7 million. Debt to total capitalization for the year ended December 31, 2019, was 24.7% and decreased from 26.4% in December 2018, reflecting debt paydown for improved operational efficiencies and impact of the decrease in capital expenditures related to the new Vancouver facility. The corporation had net working capital of $31 million at December 31, 2019, compared to its working capital position of $34.8 million at December 31, 2018. The decrease in working capital is primarily attributable to the adoption of IFRS 16 leases, which is offset by an increase in cash, timing differences related to cash settlement of new plant equipment, income tax payments, deposits related to the acquisition of equipment across the plants and cash received from our customers. At December 31, 2019, total assets increased to $352.1 million compared to $322.2 million at December 31, 2018, and total liabilities increased to $156 million from $123.6 million. Shareholders' equity decreased slightly at December 31, 2019, from not at 2018 to $196.1 million from $198.7 million. I'll now turn things back over to Linda for additional commentary.

[Linda Jane McCurdy, President, CEO & Director]

Thank you, Kristie. While capital costs over the past few years have been significant. What we have, as a result, is a highly efficient network with the capacity to profitably grow our business for the long term. We're pleased with the progress we made in the quarter with a year-over-year improvement in EBITDA margin before the adoption of IFRS 16 of 3%. This progress has been made despite the fact that we faced headwinds with regard to cost increases in areas such as minimum wage, distribution costs and the impact of tight labor markets. For fiscal 2020, K-Bro had previously anticipated capital spending to be approximately $5 million on a consolidated basis. However, in light of the current public health crisis, management is considering whether to significantly lower the corporation's planned capital spending for fiscal 2020 in order to mitigate the expected significant negative impacts of the COVID-19 pandemic on the corporation's results of operations. This guidance includes both strategic and maintenance CapEx to support existing base business in both Canada and the U.K. As we look back on the year, I do want to take this opportunity to thank everyone who attended the tours of our Vancouver and Toronto facility. We're proud of the plants we've built in the last 5 years, and these tours enable us to show you how we've invested in state of the art laundry technology and use the many years of experience of our operators to creatively make design and process improvements that will enable us to provide the highest quality in linen processing with our operating costs that set us apart from others in the industry. At this point, I'll address the COVID-19 situation for K-Bro. We are entering unprecedented times as COVID-19 rapidly evolves. Our healthcare business, which is approximately 70% of our Canadian revenue remains solid, and we believe it will continue to do so during the pandemic. However, we are seeing significant impacts to the hospitality industry as a result of individuals eliminating all but essential travel and restrictions imposed by the government. We've seen rapid declines in occupancies in Canada in all markets, well below historical levels. We expect to see the same trend in the U.K. very quickly. This will have a material impact to the hospitality segment of our business in both countries. However, we are currently at this stage, we were not able to quantify the impact, primarily because the situation is changing so rapidly that we do not have enough visibility. In terms of the impact on the healthcare side, again, we're in the early stages. And while elective surgeries have been canceled by many health authorities, we believe that as COVID-19 worsens, that should be offset by increased acute care volumes. Although we're not yet able to quantify the impact of the significant hospitality decline, I do expect it to be significant. So I'll try and provide some context as to what that means for K-Bro and the steps that we are taking. First, I do not believe there is any concern for K-Bro with respect to liquidity. I believe that we're able to conduct all our operations as needed, even in markets where we are focused primarily on hospitality let alone in plants where healthcare is most of our volume. We still have significant internal cash flow generation capabilities, and we will defer any capital expenditures that are not urgent. Second, we have $36.5 million of undrawn capacity on our bank line. To be clear, we will continue to monitor our situation carefully and consider any and all actions. We've already reduced labor at all of our plants that are that process primarily hospitality volume, and we've begun to process fewer days a week in a number of our plants as the number of deliveries to our clients has decreased. We will consolidate volumes in plants where appropriate to enable temporary shutdown of plants. We will also consider all fixed cost reductions at the plant as necessary. What I've described for you is that our company will be able to move through, at least 2020, even if hospitality remains at historically low levels for the year without concerns regarding operations or liquidity. Our healthcare business remains solid, and as I mentioned earlier, we will also consider any opportunities that will allow us to come out of this downturn in a stronger market position. And finally, we're 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 this virus. To date, we are in the fortunate position that we have not had any employees who have contracted COVID-19. This is of utmost importance to us, and we will continue to ensure that all measures are in place to protect their safety. So at this time, I will open up the lines to answer any questions you may have regarding the quarter and going forward.

[Operator]

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

[Michael W. Glen, Equity Research Analyst]

One question. So maybe I'll just go with the dividend. I mean can you talk about -- was that a board-level discussion? And is there any thoughts on your side, what would need to happen for you to take a hard look at that dividend and decide to cancel it? And then maybe just if you -- what would be the bare, bare minimum CapEx for the business?

[Linda Jane McCurdy, President, CEO & Director]

I'll start with your last question first. In terms of bare minimum, I would think it would be in the neighborhood of $2.5 million, Michael. I think in terms of the dividend, we definitely speak about it -- spoke about it at our board meeting. And given our expectations now, I don't anticipate changing that. I mean let's be clear. I can certainly imagine a scenario if hospitality doesn't recover at some point. And we don't take every other measure to save costs. Of course, everything would remain on the table in circumstances like that, including the dividend, but that's just not where we're at the moment.

[Operator]

Your next question comes from Endri Leno with National Bank.

[Endri Leno, Associate]

And just to -- on COVID-19, I mean, I understand the situation is evolving rapidly. What are you seeing in Q2 so far even if you can give some kind of rough estimate of what you're seeing there? And like how much do you think this might be applicable for Q3 or even the remainder of the year?

[Linda Jane McCurdy, President, CEO & Director]

Yes, sure. I mean it has been dramatic, and hotel associations have been pretty clear about what their expectation is for the quarter. We have seen drop-off to occupancy levels of about 10%. I think it's really hard to predict what will happen in Q3 and Q4. Our expectation is not much of a change for Q2. Beyond Q2, it's -- I mean, I think everyone's guess is as good as mine. It's really difficult to know.

[Endri Leno, Associate]

Okay. And just a follow-up on that. I mean do you have any outstanding receivables in hospitality at the moment? And how do you see them evolving, particularly, let's say, for Q1 or even Q4, something on those lines?

[Linda Jane McCurdy, President, CEO & Director]

We certainly have outstanding receivables, given our hospitality base of business, it's certainly something we are monitoring very closely. There is no question, absolutely. I mean we're -- our expectation is that the largest majority of them will be fine, but I'm sure there will be some unfortunate events for certain restaurants or smaller hotels.

[Endri Leno, Associate]

Okay. Yes, great. I'll ask one more before I jump in on the queue, but I mean, we've talked about margins under a normal circumstance being similar about the hospitality and healthcare. I mean the question I have is what would you think or some sort of sensitivity of what the cost impact would be if we continue to experience a challenged hospitality, right? Like I would assume it's a bit more outsized than that similar to healthcare, but I was just wondering any sensitivity would be great.

[Linda Jane McCurdy, President, CEO & Director]

Yes, I think it's really hard to tell. At this point, it's going to come down to how long -- what is our expectation with regards to depressed volumes and what level of fixed costs do we make to compensate for that. And I think that it's just too early to tell. Obviously, if occupancy stay at 10% for extended periods of time, that's very different than if there is a recovery we see happening in Q3. Some amount of a recovery, not full recovery. I don't think anyone would anticipate full recovery in Q3 and 4.

[Operator]

Your next question comes from Ammar Shah with Eight Capital.

[Ammar Shah, Research Analyst]

And I just want to appreciate the color on COVID-19. Just on that topic, I know you said that there's going to be a significant impact to hospitality. So I guess, I'm just curious, if I can understand maybe the cadence towards how much you can really reduce expenses on that front should such scenario present itself for an extent period. Just curious on any commentary on cadence there. Great. That would be great.

[Linda Jane McCurdy, President, CEO & Director]

Well, the variable expenses are quite easy to eliminate. If volume doesn't come in, the variable labor dollars associated with those are eliminated almost immediately. And remember, there are 4 plants in Canada that are predominantly healthcare. So those activities have happened. The same would have -- be true of distribution costs, we would eliminate virtually immediately. In circumstances where -- again, we are still delivering. We are still delivering. We're delivering 1 in 2 days a week, so it's not complete plant shutdown. You then start -- we then look at considerations of fixed costs, management, senior maintenance people. Those are things that we will look at in the shorter -- or the more medium term. In Scotland, I think it's a little bit different, where we have 4 plants in a very close geographic area, again, who are still processing linen and operating, albeit, on a much reduced level. I think that becomes a different opportunity to consolidate volumes and temporarily close processing facilities.

[Ammar Shah, Research Analyst]

Sorry, just one follow-up was -- within your contracts, are there any minimums at all? Or is it entirely volume-based?

[Linda Jane McCurdy, President, CEO & Director]

Volume-based, yes.

[Operator]

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

[Justin Keywood, Director of Equity Research]

Just wondering for the hospital segment, how do you see the growth playing out this year? Like the government seems to be adding beds and setting up some mid-shift hospitals. But as you mentioned, elective procedures have also been deferred. And then related to that, do you have enough staff to accommodate a potential surge in healthcare volume, while also considering the declines on the hospitality side?

[Linda Jane McCurdy, President, CEO & Director]

Yes. So at this point, we are just starting to see some amount of uptick in healthcare. In the earlier days in the last several weeks, the cancellation of the electric -- elective surgeries muted any real increase in -- increases in other products, isolation gowns, mops, rags, scrubs. I think that will change. I don't think that it will be double-digit growth in healthcare, but I do believe it will be a positive impact. In terms of staffing, I would say for good or for bad, with the significant decline in our hospitality volumes, we have been in the position where we have been laying workers off. So we don't have a concern about access to labor to process increased volumes.

[Justin Keywood, Director of Equity Research]

Okay. And then on the Whitbread contract, could you just give some color on that, on what led to the non-renewal there? Was that COVID related? Or was it pricing or some other factor?

[Linda Jane McCurdy, President, CEO & Director]

So of course, we're disappointed. About Whitbread, I would say there are a few factors there. One would have been partially priced. The second would be their desire to consolidate to 2 national players in the U.K. at the end of the day, we are confident that we have a plan that would enable us to achieve operating efficiencies and new volumes to offset this at that particular juncture. But yes, those would be the 2 factors in that decision.

[Justin Keywood, Director of Equity Research]

Now are there any other large contracts upcoming for Fishers?

[Linda Jane McCurdy, President, CEO & Director]

Yes. While there are always contracts coming up. We don't have any contracts anywhere near of this magnitude. We also don't have any contracts that we feel are in danger before COVID.

[Justin Keywood, Director of Equity Research]

Okay. And then one more, if I may. I assume some of the less capitalized hospitality competitors. We'll see a much larger impact on their operations. Is this a time to be opportunistic for M&A or securing some other contracts?

[Linda Jane McCurdy, President, CEO & Director]

What I can say is we are the best positioned of anyone in the industry. And we know the impact that it is having on us and will continue to have on us. So I would expect it will have a much more significant and dramatic impact on some other players. I would say that we will continue to stay very close to that situation, but I would expect opportunities to present themselves for sure.

[Operator]

Your next question comes from Nicholas Boychuk with Cormark Securities.

[Nicholas Boychuk, Associate of Institutional Equity Research]

So in terms of the Whitbread group contract loss, I was wondering if you could kind of give a little bit more color on potential CapEx needs. So the deal was lost because of price. Do you expect in the coming year or 2, maybe once COVID, kind of, alleviates that you have to invest a little bit more in the Fishers facilities to kind of make them more efficient like the Vancouver ones in order to compete on price moving forward?

[Linda Jane McCurdy, President, CEO & Director]

Our U.K. operations are well equipped. They're not as automated as our healthcare plants. I don't see that as playing a role in the outcome of Whitbread. We made a decision to stick with where -- what our price was, and I don't view our operations impacting our ability to be competitive in that arena. We were very successful in the latter half of last year of securing substantial new business. And that was certainly our expectation going into 2020 outside of the Whitbread contract. So I don't see that as being an issue.

[Operator]

Your next question comes from Endri Leno with National Bank.

[Endri Leno, Associate]

Just -- so just moving on a little bit more on the leverage side. I was wondering if you can talk a little bit, what are your covenants. And I mean, how do you expect leverage ratios to revolve, I mean, given the situation for 2020?

[Linda Jane McCurdy, President, CEO & Director]

Kristie, do you want to address the covenant?

[Kristie L. Plaquin, Chief Financial Officer]

Yes, sure. So we've got a funded debt-to-EBITDA coverage of 3.2 to 5x and a fixed charge ratio of 1x. And other than that, those are the only financial covenant metrics within the credit facility.

[Endri Leno, Associate]

Okay, great. And have you had any conversation with your lenders? Or you feel comfortable enough not to at this point?

[Linda Jane McCurdy, President, CEO & Director]

At this point, we feel okay.

[Endri Leno, Associate]

Okay. And then just one more for me. Is there -- in the facilities where it's primarily hospitality. Is there any opportunity to convert some of that into healthcare? Should you see a bump in volumes or you're probably better off just kind of reducing operations there?

[Linda Jane McCurdy, President, CEO & Director]

I mean we are doing everything in every -- all of our hospitality plants to be nimble. So remembering all of our healthcare plants are operating on a single shift. So we have ample capacity in all of our healthcare plants to double processing. On our hospitality plants, we are really scaling back operations to be nimble. Is there an opportunity to take on healthcare in some of those markets? For example, whether it be as a backup supplier to the health agency, the health authority, we're absolutely doing that.

[Operator]

Your next question comes from Michael Glen with Raymond James.

[Michael W. Glen, Equity Research Analyst]

Linda, just on the healthcare business that you do have in the U.K., what is that exactly? And is there -- do you think that there is a bit of opportunity there to see an uptick on volume?

[Linda Jane McCurdy, President, CEO & Director]

It's too early to tell on whether that will transpire into healthcare volumes in Scotland. Our existing business is more clean room business targeted to the pharmaceutical industry. And there may be some uptick there. The real opportunity would be supporting the in-house NHS laundries, should they require additional processing capacity.

[Michael W. Glen, Equity Research Analyst]

Okay. And do you have any insights there as to where their capacity might be?

[Linda Jane McCurdy, President, CEO & Director]

I think from their perspective, it will be more about access to labor and should their employees -- should there be shortages as the result of employees being sick. So we have done work for them before. We have open lines of communication, whether it will or will not happen is tough to know, to be honest.

[Michael W. Glen, Equity Research Analyst]

And just one more. On the Canadian business, on the health care. Is there a requirement now for the employees to be working in masks of some sort?

[Linda Jane McCurdy, President, CEO & Director]

So we have always had very strict PP&E requirements. All of our employees on the soiled side of the plant wear full protective gear with masks, gowns, gloves, protective shoe covering. So that has always been in place. COVID is no different to any other kind of virus in the sense that we treat every piece of soil blending that comes into our plant is contaminated.

[Michael W. Glen, Equity Research Analyst]

And more on the clean side, though, going out, is there changes on the way those people need to work?

[Linda Jane McCurdy, President, CEO & Director]

We've implemented additional policies with regards to if someone come in contact with the virus or come from outside of travel outside of Canada. But in terms of work processes and additional PP&E, there no changes are required.

[Operator]

Your next question comes from Ammar Shah with Eight Capital.

[Ammar Shah, Research Analyst]

Just a quick follow-up here for me. Just curious to see if -- have there been any disruptions pertaining to sourcing linen? And then just a follow-up to that is, does not owning the linen for the Canadian hospitality segment help you in any way?

[Linda Jane McCurdy, President, CEO & Director]

On the sourcing issue, there is just no question. There is a shortage of, we all read the same, newspaper shortage of supplies. In terms of linen, one thing we have always done is have at least 6 months' worth of linen in inventory, in our own internal warehouses. So we are extremely well prepared. We have been able to meet every increase in quota requested. And so we don't feel at risk in that circumstance at all. I will also say that we would do additional pickups of soil and process it through the plant on an expedited basis as it ever got to that point. So we feel very good about that. On the Fishers question where we don't own the linen, I don't see it as a positive or a negative. No real impact.

[Operator]

And there are no further questions at up at this time. I'll turn the call back over to the presenters.

[Linda Jane McCurdy, President, CEO & Director]

Well, thank you, everyone, for joining today. We are committed to providing regular updates and if there's any follow-up questions, we'll get back to you as soon as we can.

[Operator]

Thank you, everyone. This concludes today's conference call. You may now disconnect.