Q4 2019 Earnings Call
Greetings and welcome to <unk> fourth quarter earnings call. During the presentation, all participants will be in listen only mode. After weren't sure we'll conduct a question and answer session.
Time, if you have a question Chris first a one follow up about a four on your telephone if Friday night time during the conference you need to reach an operator, Please press star zero.
Now I'd like to turn the conference over to Steven Sintros, President and Chief Executive Officer. Please go ahead.
Thank you and good morning.
Steven Sintros, Unifirst, President and Chief Executive Officer.
Joining me today, Shane O'connor Senior Vice President and Chief Financial Officer, we'd like to well give me the Universe Corporation's conference call to review, our fourth quarter and yearend results for fiscal year 2019 entered its got their expectations going forward.
This call will be on to listen only mode until we complete our prepared remarks, but first a brief disclaimer.
This conference call may contain forward looking statements that reflect the company's current views with respect to future events and financial performance.
These forward looking statements are subject to certain risks and uncertainties. The words anticipate optimistic believe estimate expect intend and similar expressions that indicate future events and trends identify forward looking statements.
Actual future results may differ materially from those anticipated depending on a variety of risks factors for more information. Please report referred to the discussion of these risk factors in our most recent 10-Q and 10-K filings with the Securities and Exchange Commission.
I'm happy to report that Unifirst close the year on a high note with revenues and profits coming in ahead of our expectations. Shane will go into the quarterly details shortly but I wanted to take a minute and step back in a recap our full year results a year that I would characterize as one with a company made good progress toward our objective.
And produced solid results well ahead of our original guidance.
For the full year universe at record highs for both revenues and profits.
Annual revenues achieved another milestone this past year exceeding the 1.8 billion dollar mark coming in at 1.8, or 9 billion, an increase of 6.7% over fiscal year 2018.
4.7% when excluding the impact of an extra week of operations due to work 53 week here fiscal calendar.
Meanwhile, full year net income was 179.1 million an increase of approximately 9.3% when compared to last year.
Fiscal 19, and 2018, both had large onetime items that we reconciled out of our results provide a better comparison net.
Net income after adjusting both years for these onetime items increased approximately 10%.
But of course, we cannot achieve our successes alone so I'd like to take this opportunity to thank those who are so critical to our ongoing accomplishments are 14000, plus employee team partners throughout North and Central America and in Europe work. So hard day in day out to take care of our customers each other and our company.
Overall, we're pretty pleased with the result of both our fourth quarter and the full year.
We do want to highlight however that as we have throughout the year that our results were affected by a number of items in our core laundry operations that favorably impacted comparisons to fiscal year 2018.
These included the adoption of a new accounting pronouncement that impacted our recognition of sales commissions.
A 3 million dollar gain recognized from the settlement of environmental litigation in our first quarter.
Lower health care costs in workers' compensation costs.
And internal cost that were capitalized related to our CRM systems project.
These items together benefited the operating margin of our core laundry operations by approximately 1.5 per se.
When compared to fiscal 2018.
Other than the lower healthcare costs and workers compensation. These items were contemplated in our guidance a year ago, but they're cumulative positive impact was greater than anticipated.
I mentioned these items to help put into context, our overall results for the year.
However, even when excluding the full impact of these items.
I would certainly view this years results very positively, particularly when compared to our original expectations.
There were many encouraging accomplishment within these reported results in areas, we've been focusing on including improved customer retention and record new account sales driven by improved sales rep productivity and reduce sales rep turnover.
We also benefited from a solid pricing environment and strong gross growth in our merchandise recovery charges.
One area of caution with respect to growth relates to where accounts within our existing customers additions versus reductions as we commonly referred to it which slipped some in our fourth quarter, partially due to some weakening weakening in the oil and gas sector.
Although negative movements in this metric can be a lead indicator of overall economic softening in it it's something we'll be watching moving forward. It is premature at this time to call what we're experiencing a concerning trends.
In addition to our core laundry operations, our specialty garments segment, which provides workwear and other specialized services specifically for the nuclear and clean room industries, and our first aid and safety. The Division also contributed positively to our overall results for the year.
Both segments achieved record revenues for the year, coupled with solid profitability.
Looking ahead, we expect to continue capitalizing on the momentum from this past fiscal year and benefiting from our market opportunities.
As we've talked about throughout the year, we continued to be focused on making good investments in our people our infrastructure and our technologies.
All of our investments are designed to deliver solid long term returns to all unifirst stakeholders.
And our integral components to our primary long term objective to be universally recognized as the best service provider in our industry.
Our strong balance sheet healthy cash position and ongoing cash flows allow us to continue making these investments as well is pursuing competitive business acquisitions that makes sense and for considering other capital deployment opportunities.
With that I'd like to turn the call over to Shane who will provide further details on our quarterly and year end results and our outlook for fiscal year 2012.
Thanks, Steve.
Revenues in our fourth quarter of 2019 were 479.6 million up 10.5% from 434.1 million a year ago.
A fourth quarter the fourth quarter of 2019 included an extra week of operations due to the timing of our fiscal calendar, which accounted for revenue growth of approximately 7.9% compared to the fourth quarter of prior year.
Operating income for the fourth quarter increased to 58.9 million from 41.4 million in the prior year period, and net income for the quarter increased to 46 million or $2.40 per diluted share from 35 million dollar 81 per diluted share.
Operating income and net income in the fourth quarter of 2018 were affected by a one time bonus to our employees of approximately $7.2 million to share in the benefits received from the 2018 U.S. tax reform.
This bonus was recorded to selling and administrative expenses.
Excluding the effect of the time bonus operating income increased 21.3% compared to prior years adjusted operating income and net income increased 15.2% from prior years, adjusted net income of 39.9 million or $2.06 per diluted share.
Our adjusted net income comparison was impacted by lower quarterly tax rate in 2018 of 18.4% compared to 24.4% in 2019, primarily due to the positive impact of U.S. tax reform in 2018 as well as other discrete adjust.
Since recorded in prior years fourth quarter, mostly related to tax credits.
Our core laundry operations, which make up close to 90% of universe total business.
Reported revenues for the fourth quarter of 431.5 million up 10.1% from the fourth quarter of 2018.
Core laundry organic growth, which adjusts for the estimated effective acquisitions, the extra week as well as the impact of a weaker Canadian dollar was 2.4%.
During the quarter, our organic growth benefited from strong new account sales and improved customer retention. However, as anticipated was more modest due to the timing of certain pricing adjustments compared to prior year.
Core laundry operating income was 55.6 million for the quarter up from 39.2 million in prior year and the segment's operating margin increased 12.9% compared to 10% in 2018.
Adjusting for the effect of the onetime bonus in prior year adjusted operating income in 2018 would have been 46.3 million or 11.8% of revenues.
The increase in 2019, the operating margin was primarily due to the capitalization of sales commission costs due to the adoption of new accounting guidance in our first quarter of fiscal 2019.
As well as lower workers' compensation expense and energy costs as a percentage of revenues.
In addition, several other operating and administrative expenses trended favorably and contributed to margin improvement, which we believe where at least partly due to the extra week in fiscal 2019.
These items were partially offset by higher service payroll and merchandise amortization cost as a percentage of revenues.
Energy cost decrease of 4.1% of revenues in the fourth quarter of 2019 down from 4.3% a year ago.
Revenues from our specialty government segment, which deliver specialized nuclear decontamination and clean room products and services.
Were 31.2 million for the fourth quarter fiscal 2019, an increase of 7.9% over 2018.
This increase was primarily due to the extra week in the fourth quarter of 2019 compared to the prior year period.
Segment operating income increased to $2.1 million or 6.6% of revenues from $1.2 million were 4.2% of revenues in the year ago period.
This increase was primarily due to lower production and delivery cost as a percentage of revenues, which were partially offset by higher merchandise merchandise amortization costs as a percentage of revenues.
As we've mentioned in the past this segment's results can vary significantly from period to period due to seasonality as well as the timing and profitability of nuclear reactor outages and project.
Our first aid segments revenues in the fourth quarter of 2019 increased by 26.9% to $16.8 million and its operating income increased by 17.8% to $1.2 million.
These increases are primarily due to higher sales in our wholesale distribution business as well as the benefit of the extra week in the fourth quarter of 2019 compared to the prior year period. In addition, we experienced solid growth in our first AIDS and business.
We continue to maintain a solid balance sheet and financial position with no long term debt and cash cash equivalents and short term investments totaling $385.3 million at the end of fiscal 2019.
Cash provided by operating activities for the year was 282.1 million increase of 52.1 million from the prior year.
This increase was primarily due to net income expansion as well as cash received $13 million in our second quarter of fiscal 2019.
From a settlement agreement with the lead contractor for the former version of the CRM system with respect to which we were we recorded a 55.8 million dollar impairment charge in fiscal 2017.
Also contributing to the increase were lower working capital needs for the business as well as $3 million received from the settlement of environmental litigation in the first quarter fiscal 2019.
This increase was partially offset by the onetime bonus paid to our employees also during the first quarter of fiscal 2019.
Capital expenditures for fiscal 2019 totaled $119.8 million as we continue to invest in our future with new facility additions expansions updates and automation systems that will help us meet our long term strategic objectives.
During the quarter, we capitalize $2.8 million related to our ongoing CRM project, which consisted of both third party consulting costs and capitalized internal labor costs.
As of August 30, Onest 2019, we capitalize $10.7 million related to the CRM project.
Which 3.7 million was related to internal internal labor capitalize in fiscal 2019.
Although our acquisition activity in fiscal 19 was relatively nominal we continue to look for in aggressively pursue additional targets as acquisitions remain an integral part of our overall growth strategy.
In September 2019, after our fiscal year end, we completed an acquisition in Kansas City, Missouri, which significantly increases our presence in this market and is anticipated to contribute approximately $12.5 million in additional revenue into fiscal 2020.
During the fourth quarter fiscal 2019, we repurchased 52650 shares of common stock for a total of $9.6 million under our previously announced stock repurchase program.
In the full fiscal year, we repurchased a total of 197150 shares of common stock for $30.5 million under the program.
I'd like to take this opportunity to provide our outlook for fiscal 2020, which will include one less week compared to fiscal 2019.
We anticipate our full year revenues for fiscal 2020 will be between 1.86 billion and 1.8 billion and we expect full year diluted earnings per share to be between $7.47 and $7 in 92 cents.
The topline guidance assumes a core laundry organic growth rate, which excludes the impact of the extra week in fiscal 2019 fluctuations in the Canadian exchange rate as well as the benefit of acquisitions of approximately 4.3% at the midpoint of the range.
In addition, the guidance also includes the benefit of the acquisition in Kansas City that I discussed earlier.
Core laundry operating margin at the midpoint of the range is approximately 10.3%.
The decline in margin from 2019 is primarily due to the benefits the company realized in fiscal 2019 related to healthcare claims and workers compensation expense that are not forecasted to continue in fiscal 2020 as well as additional expense, we expect to incur related to our ongoing CRM initiatives.
In addition, although our merchandise amortization costs have started to flatten.
We're expecting a slight headwind in fiscal 2020 due to the higher amounts of merchandise additions that were placed in service in fiscal 2019.
Based on the current energy prices, we are modeling that energy costs will be 4.2% of revenues in fiscal 2020, which is in line with fiscal 2019 as a percentage of revenues.
Next year, the effective tax rate is assumed to be 25% compared to 24.7% in fiscal 2019.
As a reminder, our tax rate fluctuate from quarter to quarter based on discrete events, including the impact of stock compensation benefits.
Our specialty government segment revenues are forecast to increase between two and 3% coming off historically strong year. However, the segment's operating income is forecast to be relatively flat compared to 2019.
The anticipated decline in its operating margin is due to the timing and relative profitability of its planned outages and project work.
Our first aid segments revenues and operating income are expected to be ahead of fiscal 2019 by approximately 4%.
We expected our capital expenditures in 2020 will approximate $125 million and based on these projections. We expect that we will generate free cash flows in excess of $115 million.
This free cash flow combined with our existing available cash continues to position us to make additional investments in our business pursue acquisition targets aggressively as well as explore additional capital allocation strategies.
Our guidance for fiscal 2020 also assumes our current level of outstanding common shares and no deterioration in the current economic environment.
For an update on our CRM systems project, we continued to be pleased with the project progress of our initiative in 2019.
We still believe that we will capitalize between 30 and 35 million related to this project, which includes license fees consulting costs capitalized internal labor cost handheld devices and hardware costs to support the deployment of the system.
In 2020, we expect that we will again capitalized between five and $10 million to this project and that sometime in the second half of the fiscal year, we will begin piloting and several test locations.
We do not expect that we will incur any depreciation expense related to this project in fiscal 2020.
This concludes our prepared remarks, and we would now be happy to answer any questions that you might have.
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Our first question coming from the line of Andrew Steinerman with JP Morgan. Please proceed with your question.
Good morning, and the guide of core larger you, obviously have a higher organic revenue growth assumption that in the fourth quarter and I think you you mentioned it had to deal with the timing of pricing adjustment I think that might be the timing of what are your annual pricing adjustments OCC kick in and so if you could talk about data with a little more I do.
Tale of.
Those pricing adjustments when do they kick in and into why should we be thinking about.
Outlook, that's kind of higher organic.
Yeah, Andrew I think chain chain covered it you talked about the timing.
The annual adjustments that were a little bit different in the timing this fourth quarter than they were last fourth quarter. So that really caused that year over year change and you saw it in the third year third quarter comparisons as well as we get into next year, we expect more of kind of a normal timing and ER that should have as back around that.
4% range inorganic growth, which is what we've been what we really ran over the course of this full year. So we don't really look at it is an acceleration or deceleration of the organic growth just more of a.
Returned to a normal timing.
Right and you know you're already into your fiscal year. So Mike. My question is our you're already seeing that level of organic growth.
The numbers already.
Well certainly from the visibility we have through September where online for that for sure.
Great. Thanks.
Thank you.
Thank you.
Our next question coming from the line of Andrew Wittmann with Robert W. Baird. Please proceed with your question.
Thanks.
Hi, guys I guess on the margin side of guidance, that's probably the area that people want to hear a little bit more about it sounds like Steve that you mentioned that.
In some flattening in and in some of the trends for some of your costs, but yet in the in the outlook, you're saying well, we don't expect that to continue I guess what are you seeing in the business here today.
Mix to guide that way and if I could just talk a little bit more detail on some of those key items.
That influence the margin guidance for the core laundry segment, I think that would be helpful.
Sure. So as Jane mentioned, a couple of the larger benefits for this year on the health care side and workers comp side, we're modeling, particularly at the at the midpoint of our range being back to what we would consider a little bit more of a normal level. We feel this this year may have been a abnormally low.
I think the higher end of our range indicate that there there is upside there if we continue to perform well in those in those areas, but but those decide when you get back to more of the core operating cost of the business.
Merchandise in payroll being the largest components.
Shane mentioned merchandise would still be somewhat of a headwind next year based on the level of inputs that that we've experienced so far this year. Although we are seeing some flattening of the level of merchandise that we put in in the fourth quarter, which which is encouraging.
With respect to payroll cost and we didn't we didnt have any prepared remarks about this but we did mention some last quarter, how we benefited from a little bit of levels of Understaffing, particularly in the service area, but also somewhat in production and we're working to kind of build up those staffing levels to what we consider more optimal.
We made some strides to that extent.
This quarter and that's another variable as we go into next year.
It's been more of a dynamic environment in terms of staffing levels over the course as last year or so in our projections right now have that overall staffing coming up some some of it related to getting fully staff in some of it related to growth related related ads. So we didnt mention payroll overall, but that that.
Has the impact of being a little bit of a drag on the margins, but just one or two tense.
The bigger pieces I think chain covered in terms of the payroll related costs as well as.
Some of the cost related to the preparation of.
Our system.
Got it in the quarter I think you also kind of mentioned that the extra week may have helped you cover some of your costs and at least in the fourth quarter help maybe give you a little margin benefit there how much how much of a benefit you think the extra week was another some estimation there but.
Every five or six years, we have to answer that question and it's a difficult wanted it could be two or three tenths in the quarter.
And as we've talked about before I mean, we certainly have an extra week of payroll costs and merchandise cost and depreciation all those regular cost, but things like utilities rent and some other supplies that you sort of purchase on a normal schedule you don't always get sort of that extra weeks worth of costs and so that does pro.
Vide, some margin improvement, it's difficult to quantify but certainly certainly on around the edges does kind of boost the quarter.
Got it and then I'm just curious maybe my last question here is as you look at the M&A environment out there.
How active do you feel like you can be in fiscal 2020. This this deal that you announced in Kansas City is actually pretty decent size franchise. I was wondering just seeing in those and just in general on the M&A front today, how you're thinking about that to the opportunities ahead of you and the ability to execute in 2020.
Yeah, I think certainly we're poised to do that I think that.
It does seem like a decent environment, where when when the industry see some of these deals happening I think.
It perks up some of the interest of the sellers and again as we've talked about in the past.
At their core Theres still family businesses that the family decisions drive the sales, but overall multiples have been but healthy on these sales and I think thats getting sellers to take notice and I do think theres opportunities.
For deals like Kansas City to continue to come up I mean, there theres less.
There is less out there than there was 10 years ago as you well no, but we do feel like the environment is reasonably healthy right now.
Great I think I'll leave it there thank you very much.
Thank you.
Thank you.
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Mr. Sintros there are no further questions at this time I will now turn the call back to you.
Okay, well I'd like to thank everyone for joining us today to review, our fourth quarter and year end results. We look forward to speaking with you again in January when we expect to be reporting on our first quarter performance for fiscal 2020, as well as our expectations for the remainder of the year. Thank you and have a great day.
That does conclude the conference call for today, we thank you for your participation and ask that you. Please disconnect your lines.