K-Bro Linen Inc

TSX:KBL

Earnings Call Transcript 2020-Q4

[Operator]

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

[Kristie L. Plaquin, Chief Financial Officer]

Thank you, Denise, and good morning, everyone. Thank you for joining us today, and welcome to our fourth quarter and 2020 year-end 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. I'd like to remind everyone that statements made during our prepared remarks or in the question-and-answer 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. Investors are 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 Linda, who will provide her insights and remarks on the quarter. Linda?

[Linda Jane McCurdy, President, CEO & Director]

Thank you, Kristie. Good morning, everyone, and thank you for joining us today for a review of the quarter and the year. On today's call, I'll share my views for the quarter and the year. Kristie will then provide detailed financial performance for the fourth quarter and year-end 2020, and then I'll come back and provide you with an outlook for 2021. As anticipated, the fourth 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 Q4 results are a reflection of this. In terms of highlights, I'm pleased with the fourth quarter results with adjusted EBITDA of $9.6 million and improvements in the adjusted EBITDA margin despite continuing to operate in an extremely challenging environment. Throughout the year, our teams moved very quickly to safely meet the changing needs of our customers, all while eliminating costs and adjusting to reduce customer activity. This performance reflects the resiliency of our business and the responsiveness of our team. Since March 2020, we've seen significantly reduced hotel occupancy rates compared to historical levels. Demand for both business and leisure airline travel has declined significantly on a global basis, and airlines are responding by canceling international and domestic flights. Accordingly, hospitality volumes in all of our Canadian and U.K. markets have slowed to historically low levels. While we saw improvement in the Corporation Hospitality business in Q3, resulting from increased domestic tourism, volumes in Q4 started to quickly taper primarily as the result of the second wave of COVID-19 and restrictive measures to fight new variance. For Q3, hospitality revenues were down 63% from the comparative 2019 period. And for Q4, they were down about 70% from the comparative 2019 period. To date, in 2021, we have seen hospitality client activity down approximately 80%. In terms of health care, in late Q1 and into Q2, we saw decreases in our health care business as a result of hospitals and health authorities, taking measures to prepare for anticipated surges in COVID-19-related occupancy. For example, we saw cancellations of elective surgeries. But as Q2 progressed, we saw a return to more normal health care levels. And as we moved into Q3 and Q4, we saw increases in client activities that were above historical levels. So for Q3, health care revenues were up about 12% from the comparative period; and for Q4, we were up 18% from the comparative 2019 period. To date, in 2021, we have seen similar health care client activity to that of Q4. We remain well-positioned from a balance sheet and liquidity perspective with $58.7 million of additional borrowing capacity on a revolving line of credit, and with an additional $25 million accordion for growth purposes. As we've mentioned earlier, as a precautionary measure, earlier in 2020, we completed an amendment to our credit facility that provides greater financial flexibility during this challenging period, although we expect we will not require this support. Total debt increased in the quarter from $59.3 million to $40.7 million, and our funded debt-to-EBITDA at the end of Q4 remained conservative at about 1x. I'll now take a moment to update everyone on the situation with AHS. In October 2020, AHS issued a request for proposal for linen services. The AHS RFP encompass the linen services provided by the corporation to AHS under the AHS Calgary contract as well as the linen services provided by the corporation to AHS and Edmonton, for which volumes are under contract as part of 2 existing agreements until 2022 and 2023, respectively. The AHS RFP also includes new volume for rural Alberta. The AHS RFP is a significant opportunity for the corporation, but there are no assurances that can be provided that we will be successful in pursuing such opportunity. We expect a decision in Q2 2020. On this note, just one housekeeping point. As we are in the midst of an RFP process for competitive purposes, we're not able to respond to any detailed questions as it pertains to this process. I'll now turn the call over to Kristie to discuss our detailed financial results for the quarter, at which point I'll then return to talk about our outlook for 2021. Kristie, over to you.

[Kristie L. Plaquin, Chief Financial Officer]

Thanks, Linda. The information we are discussing today is also highlighted in our fourth 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 Q4 2020, approximately 83.3% of K-Bro's consolidated revenue was generated from health care institutions, which is significantly higher compared to 56.5% in 2019. And on a year-to-date basis, approximately 76.9% of K-Bro's consolidated revenue was generated from health care institutions, which is higher compared to 55.1% in 2019. This was primarily related to the COVID-19 pandemic's effect on the Hospitality segment of our business. For the quarter, EBITDA on an adjusted basis, without the adoption of IFRS 16, increased by 5.1% to $9.6 million with an adjusted EBITDA margin of 19%, which was 23.4% in Canada and negative 14.5% in the U.K. This includes $0.6 million in [ Q ] subsidy recorded during the quarter. On a year-to-date basis, consolidated adjusted EBITDA decreased in the year to $35 million from $38.9 million in 2019, which is a decrease of 9.5%. The consolidated adjusted EBITDA margin increased to 17.8% in 2020 compared to 15.3% in 2019. Overall, the reduction in the adjusted EBITDA, an increase in adjusted EBITDA margin can be attributed to the reduced hospitality client activity as a result of the COVID-19 pandemic offset by government assistance received in 2020 for the Canadian Division in the amount of $8.3 million, which has been netted against the respective source of the expense and reduced by a restructuring accrual of approximately $1.9 million and bad debt expense of $0.6 million. The U.K. Division also received government assistance during 2020 in the amount of GBP 3.4 million or $5.9 million, which has also been netted against the respective source of the expense. For the first 2 quarters, there was no impact to EBITDA in relation to the government assistance received in the U.K.; however, beginning in the third quarter of 2020 and onwards, government assistance received by the U.K. division through the Coronavirus Job Retention Scheme required the company's share in the cost of the program. And as a result, the impact to EBITDA during 2020 was a cost of approximately GBP 95,000 or $164,000, which represents the U.K. division's contribution for hours and certain benefits in the third and fourth quarters. For greater clarity, until July 2020, the U.K. division received an equivalent amount from the government that was then paid to furlough employees, netting to no impact on EBITDA. However, starting in August 2020, the U.K. division was required to make contributions for hours and certain benefits. Net earnings in the fourth quarter of 2020 decreased by $0.1 million to $2.1 million compared to $2.2 million in the comparative period of 2019, and as a percentage of revenue increased by 0.7% to 4.2%. On a year-to-date basis, net earnings decreased by $7.1 million or 65% from $10.9 million in 2019 to $3.8 million in 2020. And net earnings as a percentage of revenue decreased by 2.4% to 1.9% in 2020 from 4.3% in 2019. The change in net earnings is primarily related to the flow-through items in EBITDA, lower finance costs related to the revolving credit facility and lower income tax expenses.Wages and benefits in the fourth quarter of 2020 decreased by $7.8 million to $16.9 million compared to $24.7 million in the comparative period of 2019, and as a percentage of revenue decreased by 5.8% to 33.5%. On a year-to-date basis, wages and benefits decreased by $32 million to $67.6 million compared to $99.6 million in the comparative period of 2019, and as a percentage of revenue decreased by 5% to 34.4%. The decrease as a percentage of revenue is primarily related to $7.1 million in government assistance received in the Canadian division, through the [ Q ] subsidy, improvements in labor efficiencies, which is offset by escalating minimum wage rates and restructuring costs of $1.4 million related to the COVID-19 pandemic. Linen in the fourth quarter of 2020 decreased by $0.5 million to $6.5 million compared to $7 million in the comparative period of 2019, and as a percentage of revenue, increased by 1.8% to 12.9%. On a year-to-date basis, linen decreased by $2.7 million to $24.8 million compared to $27.5 million in the comparative period of 2019, and as a percentage of revenue, increased by 1.7% to 12.6%. The increase as a percentage of revenue is primarily related to the higher proportion of health care revenue. The reduction in total cost relates to the decreased linen amortization on the hospitality portion of the corporation's business, which is a result of the COVID-19 pandemic.Utilities in the fourth quarter of 2020 decreased by $0.9 million to $3.1 million compared to $4 million in the comparative period of 2019, and as a percentage of revenue decreased by 0.1% to 6.2%. On a year-to-date basis, utilities decreased by $4.8 million to $11.6 million compared to $16.4 million in the comparative period of 2019, and as a percentage of revenue decreased by 0.6% to 5.9%. 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 that were put in place to offset the impact of COVID-19.Delivery in the fourth quarter of 2020 decreased by $2.5 million to $5 million, compared to $7.5 million in the comparative period of 2019, and as a percentage of revenue decreased by 2% to 10%. On a year-to-date basis, delivery decreased by $8.1 million to $20.7 million compared to $28.8 million in the comparative period of 2019, and as a percentage of revenue decreased by 0.9% to 10.5%. The decrease in 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, which is offset by fixed costs, which remain constant regardless of the reduction in volumes resulting from the COVID-19 pandemic and price increases from the renewals of our outsourced freight contracts.Occupancy costs in the fourth quarter of 2020 decreased by $0.2 million to $1 million compared to $1.2 million in the comparative period of 2019, and as a percentage of revenue remained constant at 1.9%. On a year-to-date basis, occupancy costs decreased by $0.9 million to $3.6 million compared to $4.6 million in the comparative period in 2019, and as a percentage of revenue remained constant at 1.8%. This includes fixed costs that remain constant regardless of the reduction in volumes 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, which were recorded in the second quarter of 2020.Materials and supplies in the fourth quarter of 2020 decreased by $0.5 million to $1.7 million compared to $2.2 million in the comparative period of 2019, and as a percentage of revenue decreased by 0.1% to 3.4%. On a year-to-date basis, materials and supplies decreased by $1.3 million to $7 million compared to $8.3 million in the comparative period of 2019, and as a percentage of revenue, increased by 0.3% to 3.6%. The increase as a percentage of revenue is primarily related to additional personal protective equipment required as a result of the COVID-19 pandemic and onetime cost recoveries in 2019.Repairs and maintenance in the fourth quarter of 2020 decreased by $0.7 million to $1.6 million compared to $2.3 million in the comparative period of 2019, and as a percentage of revenue decreased by 0.3% to 3.3%. On a year-to-date basis, repairs and maintenance decreased by $1.8 million to $7 million compared to $8.8 million in the comparative period of 2019, and as a percentage of revenue, remained relatively constant at 3.6%. The decrease in cost is a result of the reduction in volume from the COVID-19 pandemic and timing of maintenance activities.Corporate costs in the fourth quarter decreased by $0.3 million to $2.7 million compared to $3 million in the comparative period of 2019, and as a percentage of revenue, increased by 0.7% to 5.4%. On a year-to-date basis, corporate costs decreased by $0.6 million to $10.5 million compared to $11.1 million in the comparative period of 2019, and as a percentage of revenue increased by 1% to 5.4%. The increase as a percentage of revenue is primarily related to the fixed costs that remain constant regardless of the reduction in volumes from the COVID-19 pandemic, restructuring costs and bad debt expense, which is offset by government assistance received.Now looking at our capital resources. Distributable cash flow for the fourth quarter of 2020 was $6.9 million, and our payout ratio was 46.5%, and respectively, on a year-to-date basis was $31.3 million and 40.9%. In addition, the company paid out $0.3 per share in dividends during the quarter, for a total consideration of $3.2 million. And on a year-to-date basis, paid out $1.20 per share for total consideration of $12.8 million. The corporation had net working capital of $27.9 million at December 31, 2020, compared to its working capital position of $31 million at December 31, 2019. The decrease in working capital is primarily attributable to the decrease in working capital requirements for the U.K. division due to the impact of COVID-19, and the reduction of business activity, timing differences related to cash receipts from customers and a decrease in cash and cash equivalents.At December 31, 2020, total assets decreased to $323.8 million compared to $352.1 million at December 31, 2019, and total liabilities decreased to $134.3 million from $156 million. Shareholders' equity decreased at December 31, 2020, from December 31, 2019 to $189.5 million from $196.1 million. As far as our debt is concerned, we continue to have sufficient room on our credit facility with an operating line of $100 million and a further $25 million accordion for growth purposes. As of the end of Q4, we have an undrawn balance close to $58.7 million, which reinforces 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 COVID-19 pandemic and the impact to our operations. These changes 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, which includes certain onetime add backs to EBITDA. A reduction to the fixed charge covenant for the same period, which reduces to a maximum of 1.1x. A restriction on any further dividend increases during the covenant relief period, which is July 1, 2020, to June 30, 2021.As we mentioned in previous quarters, we did this for cautionary reasons, and we don't expect to need this change. Debt to total capitalization for the year ended December 31, 2020, was 17.9% and the corporation's unused revolving credit facility was 58.7%, nor had we incurred any events of default under the terms of the credit facility agreement. Total debt decreased in the quarter from $59.3 million to 47 -- $40.7 million and was largely due to the timing of collections of accounts receivable, as I noted earlier. We continue to monitor and aggressively pursue our accounts receivable collections. And at this point, we don't anticipate that there will be any material receivables, which are uncollectible, which we have not already provided for.I'll now turn things back over to Linda for addition -- additional commentary. Linda?

[Linda Jane McCurdy, President, CEO & Director]

Thank you, Kristie. So if we look at 2020 as a whole, we're very pleased with how quickly we've been able to adapt to this unprecedented crisis. We began 2020 in a position of strength. For the first 2 months of 2020, consolidated adjusted EBITDA without the adoption of IFRS was $1.8 million higher compared to the same period of 2019, and revenues were up 5.6% for the same period. However, when COVID hit in March -- mid-March, we saw a rapid decline. In order to address the adverse effects from COVID-19, we had to quickly react to implement plans to mitigate the effects, including consolidating operation, reducing headcount and assessing available government assistance programs. Our highly experienced team has been crucial in managing the situation. And in combination with our proven operating model, we will continue to leverage our experience for the challenges ahead. These actions have resulted in performance that we're quite pleased with, given the circumstances. While client activity on the hospitality front is still well below historical norms, the increase we've experienced since Q2 has 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've successfully recalled employees to meet these increased demands, and we'll continue to adjust production schedules as demand warrants.In terms of our 2021 outlook, while we saw a marked improvement in both our health care and hospitality segments relative to when COVID first hit, it's very difficult to predict what revenue will look like for the coming year given the uncertainty in the hospitality segment. While COVID-19 will have a continued significant negative impact on our hospitality revenue, we believe the prospects for our health care business remains strong in the medium to long term. As I mentioned earlier, to date, in 2021, we've seen hospitality activity down approximately 80% year-over-year, and health care continues to trend upward as we saw in 2020.As we move into 2021, we believe it is reasonable to expect a modest improvement in client activity for our hospitality segment when compared to 2020 activity levels, due to a gradual return to business and international travel as restrictions implemented in both Canada and the U.K. began to ease with the rollout of the vaccine. We remain well-positioned from a balance sheet and liquidity perspective, as Kristie discussed, in addition, a strong concentration of our Canadian revenues from the health care sector at approximately 70%. We continue to evaluate tuck-in 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 2021 with current market conditions -- well, current market conditions may lead to opportunistic situations for us.So I would say the main highlights for the year in the quarter would be solid financial performance in an unprecedented adverse environment, improvements in EBITDA margin and strong cash flow generation, quick execution in reducing our cost structure to adjust to reduced client activity and a demonstrated resilience of our business model. And finally, I'm very proud of our employees who have demonstrated continued flexibility and an unwavering commitment to providing essential services to our customers. This year required their extraordinary determination and support. I'll now turn it over to answer any questions you have with regards to the quarter and our annual results.

[Operator]

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

[Michael W. Glen, Equity Research Analyst]

Linda, just hoping that you can comment. So you have seen this accelerating trend on your health care revenue growth through the quarter. I'm just hoping that you can provide a little more information on what exactly was driving the move from 12% growth in October to 24% growth in December?

[Linda Jane McCurdy, President, CEO & Director]

Yes. Michael, thanks so much for the question. I would have to say that it is largely just increased usage. As the additional wave came through and there were more testing centers, more easier accessibility to testing centers, I would say that would be driving most of it. We continue to have strong volumes in health care for January and February. Well, it's highly uncertain. I would not say that most of that increased volume that we're seeing is a permanent factor.

[Michael W. Glen, Equity Research Analyst]

So are you able to isolate out what might be COVID-related out of that volume increase?

[Linda Jane McCurdy, President, CEO & Director]

I would say -- so if you look at the quarter for about -- for 18%, I would say that about 3% of that is price increases. I would say, 3% of that are conversions, permanent conversions. I would say we still are doing some temporary service, which is about 3%, and the remaining 9% of increased usage, whether it's because of COVID and increased testing centers or whether it's a catch-up in surgeries is really hard to determine.

[Operator]

Your next question comes from Derek Lessard with -- sorry, TD Securities.

[Derek J. Lessard, Research Analyst]

Maybe I just wanted to know if you could probably tell us what the main difference is between the Canadian and U.K. health care segment, where the latter hasn't really experienced the same bounce back in growth?

[Linda Jane McCurdy, President, CEO & Director]

So on the health -- you're focused on health care in the U.K. vs Canada?

[Derek J. Lessard, Research Analyst]

U.K. health care?

[Linda Jane McCurdy, President, CEO & Director]

Yes. I mean most of our U.K. business is clean room activity. So the largest part of our business, and we've seen the obvious decline is hospitality. The clean room business remains pretty stable. And most of the acute care health care work is done in-house, where we wouldn't have visibility into what is going on there.

[Derek J. Lessard, Research Analyst]

Okay. And maybe just one last one for me. Just wondering if you had a sense of where you expect your margins to head in 2021?

[Linda Jane McCurdy, President, CEO & Director]

We haven't really provided margin guidance, although I don't expect -- we've given a range historically of between 13% and 18%. I think that's fair. It's a wide range, but I think a lot of it will be highly determined by how strong health care volumes are and what amount they are reduced as COVID resides and how quickly hospitality volume comes back, and to what extent it comes back.

[Operator]

Your next question comes from Endri Leno with National Bank.

[Endri Leno, Associate]

Congrats on the good quarter. A question for me, and I'll start -- just a follow-up on a prior one on the health care strength growth. And I was wondering, first, Linda, are you able to provide in terms of kind of geography within Canada, where most of that strength was? And then as sort of kind of follow-up into the question, if you're seeing some of the strength in the testing centers, I mean, is it fair to assume that as vaccinations ramp up that could continue into Q2 and perhaps into Q3?

[Linda Jane McCurdy, President, CEO & Director]

So from a geography perspective, Endri, it is across the board, so we are not seeing the increases in one geography over the other. It is truly in all the health care provinces where we are providing health care. I think that it is a fair comment as vaccines continue to be to roll out that our health care volumes will stay strong. I just don't think that it is the 9% increase that we saw in the last quarter, getting us to an overall quarterly increase of 18%. I just don't think that's going to be permanent once vaccinations have been administered.

[Operator]

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

[Justin Keywood, Director of Equity Research]

Just on the hotel segment. I'm wondering if any of K-Bro's customers are part of the quarantine hotels? And if that could have any impact as far as helping out with the occupancy rates?

[Linda Jane McCurdy, President, CEO & Director]

Yes. Great question. There are a number of hotels that we serve as our part of the quarantine program. I'd say it's a handful. It's not more than that.

[Justin Keywood, Director of Equity Research]

Okay. And just -- I heard that the kind of hospitality segment, seems like it would be implied down 80% for Q1. With some of these quarantine hotels and perhaps restrictions easing for Q2, would you characterize Q1 as a low for 2021 for the hotel segment?

[Linda Jane McCurdy, President, CEO & Director]

That is our expectation. And we are hoping both in Canada and in the U.K., where the rollout of the vaccine is more advanced. We are hoping that Q2 and certainly Q3, that our low point is Q1. And that is our expectation.

[Justin Keywood, Director of Equity Research]

Okay. That's helpful. Okay. And then on the health care side or hospital, I know there were some contracts in the long-term care space. Is there an opportunity to win some additional awards there for 2021? Or has that largely been captured last year?

[Linda Jane McCurdy, President, CEO & Director]

No, I think that's an area where we continue to keep our head down and work hard at securing long-term contracts and a lot of that -- a certain amount of that business remains in-house and is in-house today. And that is an area that we're focused on and working to secure, Justin.

[Justin Keywood, Director of Equity Research]

Okay. And I was just hoping to clarify, for the testing centers, what is exactly K-Bro doing there as far as the processing? Is it just a reusable PP&E?

[Linda Jane McCurdy, President, CEO & Director]

Yes, absolutely. Distribution of reusable isolation gown.

[Justin Keywood, Director of Equity Research]

Okay. And then just one final question. I know you can't really comment on the potential RFP in Alberta. But just to clarify, the timing that RFP process would conclude in Q2, would it also be disclosed in Q2?

[Linda Jane McCurdy, President, CEO & Director]

We are -- what I will say is that is what the process outlines in the RFP process or in their RFP documentation, we hope that is the time line. It is somewhat of a moving target depending on how it plays out and how negotiations would transpire, I would expect, based on our previous experience.

[Justin Keywood, Director of Equity Research]

And for the winning bidder, how long would it take for the actual implementation? Like would it be a quarter or 2 after the award notice?

[Linda Jane McCurdy, President, CEO & Director]

From a K-Bro perspective, and as I stated earlier, I really don't want to get into too many details. But we obviously have existing plants in Alberta, so I think that from our perspective, a transition would be -- would not take an extended period of time.

[Operator]

Your next question comes from Christian Hartch with Memphre Investments.

[Christian Hartch]

Are you seeing any significant wage pressure either from minimum wage laws or market forces? And how are you doing in terms of employee retention? Because the hospitality demand if it were to come back strong, would that be something you'd be able to scale back up quickly?

[Linda Jane McCurdy, President, CEO & Director]

So thank you for your question. I think, as I mentioned in our prepared remarks, the one thing that we are proud of and happy was our ability to execute in scaling down and really variabilizing many of our costs, as we think of the reverse holding true. As we saw in Q3, we very quickly had to ramp up and bring people back, bring our staff back and we were able to, in a matter of weeks, be able to support those dramatic increases in volumes. I expect that will be the case for Q2 and more importantly, Q3, where those are seasonally high -- that's a seasonally high quarter, I would expect that to be the case.And in terms of minimum wage pressures, most of the minimum wage increases that we've seen have been rolled out over the last number of years. So in Alberta and in B.C., in particular and to some extent, Ontario, but more dramatic increases have been experienced in Alberta and B.C. with the final one in B.C. coming up in June. So we haven't so much experienced wage pressure and given much of the service sector is still suffering, the ability for us to attract new staff or call back existing staff hasn't been a problem to date.

[Operator]

Your next question comes from Endri Leno with National Bank.

[Endri Leno, Associate]

Actually, two -- a couple of quick ones, but following up on that, not per se minimum wage concerns, but rather there've been some sort of anecdotal reports that some businesses are having trouble recruiting because people would prefer to take on the government help there rather than actually go to work? I was wondering if you've seen anything like that at all? Or are people eager to get back to work, Linda?

[Linda Jane McCurdy, President, CEO & Director]

Yes. So we haven't experienced that in a dramatic way to date. I think the real test is going to be in -- again, to some extent in Q2, but materially in Q3, where our hospitalities were hoping and expecting, similar to last year because of domestic travel will increase dramatically as well as -- with the rollout of the vaccine, we're hoping that travel and hotel occupancies will increase. I don't have a perfect crystal ball into what to expect for Q3, other than it wasn't an issue last year. We do stay in contact with our furloughed staff. We have had some permanent terminations as the result where people have found other work or when they've called back, they have been called back based on seniority. They've chosen not to come back. But we do expect that the employees that we've furloughed, the majority of them are interested in coming back.

[Endri Leno, Associate]

Great. And my next question is more involved the U.K., and at least in England, I think, they've presented already a kind of a time line as to when they're opening. And I believe they're targeting a full opening by June of this year. I was wondering if something similar applies in Scotland or whether they have outlined something similar? And what would imply this reopening time line for England? What would it imply for Scotland?

[Linda Jane McCurdy, President, CEO & Director]

Typically, Scotland tends to follow what England is doing. I don't know that there has been a formal announcement, but we believe that we should have a very strong back half of Q2 and Q3 in Scotland from a hospitality perspective. That is what we are believing to be the case.

[Operator]

Your next question comes from Michael Glen with Raymond James.

[Michael W. Glen, Equity Research Analyst]

Linda, just in terms of the conversions to reusable, how has that trend -- has that trend changed at all since over the course of the year? Are you still seeing the same level of interest in reusable that you saw earlier in the year?

[Linda Jane McCurdy, President, CEO & Director]

No change in the trend. Strong interest. And I would say, as disposables have now been more readily available because the supply chain has caught up, there has been no switching back to the disposable product. So we are quite pleased with how sticky it's been and with the acceptance of the product that we have converted.

[Operator]

Your last question comes from Derek Lessard, TD Securities.

[Derek J. Lessard, Research Analyst]

Linda, maybe just one question. I was wondering if you had -- if you could talk about some of the efforts whether organic or M&A to diversify the U.K. mix?

[Linda Jane McCurdy, President, CEO & Director]

Sure. Sure. There's 2 areas: The first, of course, is health care, where we don't have a strong foothold in, largely because it is in-house, like we experienced in Canada 20 years ago. We've certainly been in contact with the local health authorities to see where we can play a role. Again, it's not going to be a quick change because they have existing infrastructure. We've also worked very closely with private hospitals to expand our services into those areas as well as into areas like dental clinics. So those efforts are definitely being made to diversify the hospitality base. We have the clean room business, which has remained steady. And then the second piece of it would be after its increased efforts into workwear, which we do provide some of in Scotland and Northeast of England, which has not seen the same impact, obviously, as the hospitality segment has. So those would be areas in which we are focused from an organic perspective. On an acquisition perspective, we are -- we pursue opportunities in both the health care and hospitality space with the view of being a national player in the U.K. market. And those efforts have not stopped, although they have certainly slowed down to some extent with COVID.

[Operator]

And I'll now turn the call back over to Linda McCurdy for closing remarks.

[Linda Jane McCurdy, President, CEO & Director]

Okay. Well, thank you, everyone, for your participation today and your interest in the company, and everyone, have a great day, and we'll be getting back with our Q1 results in a matter of weeks. Thank you again. Bye for now.

[Operator]

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