Q1 2020 Earnings Call
Your telephone if at any time during the conference you to reach an operator. Please press star Zero I would now like to turn the conference over to Mr., Steven Sintros, Unifirst, President and Chief Executive Officer. Please go ahead Sir.
Thank you and good morning.
Steven Sintros Universe, President and Chief Executive Officer, joining me today, Shane O'connor Senior Vice President and Chief Financial Officer, We'd like to welcome you to Universe Corporation's Conference call to review, our first quarter results for fiscal year, 2020 and to discuss our expectations going forward.
This call will be on to listen only mode until we complete our prepared remarks, but first breed disclaimer.
This conference call may contain forward looking statements that reflect the company's current views with respect to future events in 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 risk factors for more information. Please refer to the discussion of these rigs risk factors and our most recent 10-K filing with the Securities and Exchange Commission.
I'm happy to report that Unifirst first quarter of fiscal year 2020 produced solid results for the company relative to both our top and bottom line.
Shane will go into the details shortly but I wanted to first take a moment to step back and recap the quarter's results.
For the first quarter of 2020 units for set.
Record highs for both revenues and profits.
Consolidated first quarter revenues were 465.4 million, an increase of 6.1% over the same quarter a year ago.
Meanwhile, operating income and net income was 60.1 million and 48.2 million, respectively, representing increases of 19.2% and 25.9% when compared to the first quarter of last year.
As always I'd like to acknowledge that we do not achieve our company successes alone.
That said I want to take this opportunity to thank those who are so critical to going to first day to day accomplishments are 14000, plus employee team partners throughout North and Central America and in Europe , who worked so hard weekend in week out to take care of our customers each other and our company.
Our strong first quarter results were primarily influenced by our core laundry operations, which make up approximately 90% of our overall revenues and operating income.
With respect to the primary growth drivers of this segment. The quarterly results were largely positive, but there were some areas of caution to be noted as we look over the remainder of the year.
During the first quarter Newark, New account sales exceeded the strong first quarter sales, we achieved in fiscal year 2019.
However December activity combined with future sales projections have our second quarter, new sales expectations softening when compared to the first quarter in prior years activities.
In addition, our additions versus reductions metric, which measures wearer levels within existing accounts trended negatively compared to the prior year.
Both of these trends are partially due to reduce business activity in the energy dependent markets that we service.
We've used this term energy dependent markets in the past to describe those geographies in the United States in Canada that have a significant portion of their economic activities title to the oil tied to the oil and gas industries.
Of course is always an ever changing macroeconomic environment makes it difficult to predict exactly how long and to what extent this trend may persist.
In addition, overall customer retention slip some in the first quarter, partially related to select large accounts, where we made the economic decision not to renew our service agreements.
We expect these developments to make for more difficult topline comparisons for the remainder of the year when comparing to what was a strong fiscal year performance in 2019 for new account sales and customer retention.
In the meantime will continue to focus on executing on our strategic plan, which includes defined goals for improving customer service and retention sales organization effectiveness and retention retention of our employee team partners.
As far as our other business segments go specialty garments, which provides specialized workwear and niche services for nuclear and clean room industries, and our first date and safety Division both contributed positively to our overall results of the first quarter.
Looking forward, we remain committed to maximizing our results and delivering long term value to our shareholders and our team partners.
We'll achieve these ends with the continued focus on strengthening customer loyalty and growing our base through excellence in personalized business services and continued investments in our service production and sales teams.
Our customer focus philosophy remains at the core of our company success today.
Our strong balance sheet healthy cash position and ongoing cash flows allow us to continue making solid investments and all principal areas of our business as well as to be competitively pursue business acquisitions that makes business sense.
All helping us to meet our primary long term corporate objective to be universally recognized as the best service provider in our industry.
And with that I'd like turn the call back over to Shane who will provide the details of our results for the first quarter and our outlook over the remainder of fiscal year 2020.
Thanks, Steve.
As Steve summarized in our first quarter of 2020 consolidated revenues were $465.4 million up 6.1% from 438.6 million a year ago and consolidated operating income increased to 60.1 million from 50.
Point, fourmillion or 19.2%.
Net income for the quarter increased to $48.2 million for $2.50 52 cents per diluted share from 38.3 million or $1.99 per diluted share.
Our core laundry operations revenues for the quarter were $416.3 million up 6.6% from the first quarter of 2019.
Core laundry organic growth, which adjust for the estimated effect of acquisitions as well as fluctuations in the Canadian dollar was 6.0%.
During the quarter organic growth.
Continued to benefit from the solid new account sales and improved customer retention in fiscal 2019, as well as the improved collection of merchandise recovery charges.
In addition, our core laundry revenues in the quarter benefited by approximately 0.7% from the impact of certain revenue adjustments related to our credit reserves as well as the timing of revenues around the Thanksgiving holiday.
Both of these timing items resulted in a benefit to our first quarter revenues, but are expected to have very little impact on our performance for the full fiscal year.
Core laundry operating income was 53.8 million for the quarter up from 44.8 million in the prior year and the segment's operating margin increased to 12.9% compared to 11.5% in prior year.
This increase was primarily due to lower energy selling payroll and depreciation and amortization as a percentage of revenues as well as the impact of the revenue adjustments I discussed earlier.
In addition, several other costs trended favorably as a percentage of revenues due to the strong revenue growth in the quarter.
These benefits were partially offset by an unfavorable comparison with prior year due to a $3 million pre tax gain from the settlement of environmental litigation recognized in the first quarter of 2019, which equated to 11 cents per diluted share.
Energy costs decreased to 3.9% of revenues in the first quarter 2020 down from 4.2% a year ago.
Revenues from our specialty government segment, which deliver a specialized nuclear decontamination and clean room products and services decreased by 3.0% to 33.4 million in the first quarter.
Decrease was primarily due to decreased outage activity in the U.S. and Canadian nuclear operations, which was partially offset by strong growth in our clean room operations.
This segment's operating margin increased to 14.6% from $4.9 million.
Or or $4.9 million from 13.0% or $4.5 million in the year ago period.
This increase was primarily due to lower merchandise and production payroll costs as a percentage of revenues.
Which were partially offset by higher casualty claims expense.
As we've mentioned in the past this segment's results can vary significantly from period to period due to seasonality and the timing of new nuclear reactor outages and projects that requires specialized services.
Our first aid segments revenues increased by 15.2% to $15.7 million and its operating income increased by 19.9% to $1.4 million.
These increases were primarily due to a strong quarterly performance in the segments wholesale distribution business as well as the company's initiative to expand its first aid van business into new geographies.
We continue to maintain a solid balance sheet and financial position with no long term debt and cash cash equivalents in short term investments totaling $356.6 million at the end of our first quarter of fiscal 2020.
Cash provided by operating activities for the first three months of the year was $52.4 million an increase of 20.2 million from the first three months of fiscal 2019.
This increase was primarily due to our strong operating performance in the quarter as well as lower working capital needs of the business.
In addition, the quarterly comparison benefited from the payout of AG $7.2 million onetime bonus to our employees in the first quarter fiscal 2019.
For the first three months of fiscal 2020 capital expenditures totaled 29.0 million as we continue to invest in our future with new facility additions expansions updates and automation systems that will help US me our long term strategic objectives.
During the quarter, we capitalize $3.4 million related to our ongoing CRM project, which consisted of licensees third party consulting costs and capitalized internal labor costs.
As of the end of our first fiscal quarter, we had capitalize a total of $14.1 million related to the CRM project.
At this time, we still anticipate that sometime in the second half of this fiscal year, we will be began piloting at several test locations and that we do not expect to incur any depreciation expense related to this project in fiscal 2020.
We continue to look for and aggressively pursue additional targets has acquisitions remain an integral part of our overall growth strategy.
As we mentioned in our in our October webcast.
In September 2019, we completed an acquisition in Kansas City, Missouri, which significantly increases our presence in that market and is anticipated to contribute approximately $12.5 million in additional revenue to fiscal 2012.
During the first quarter fiscal 2020, we repurchased 50600 common shares for a total of $10 million under our previously announced stock repurchase program.
As of November Thirtyth 2020, the company had repurchased a total of 247750 common shares at an average price of $163.43 for $40.5 million under the program.
I'd like to take this opportunity to provide an update on our outlook for fiscal 2020.
We now expect that our fiscal 2020 revenues will be between 1.860 and 1.872 billion.
This guidance has more modest expectations at the high end of the range than previously communicated due to the trend Steve discussed previously and the related impact on our expectations for the remainder of the year.
We now also expect our full year diluted earnings per share will be between $7 in 60 cents and $7.92. This revised EPS guidance continues to assume an operating margin at the midpoint of the range of 10.3%.
However, our forecast now includes our revised revenue expectations slightly improved assumptions for interest income as well as a lower tax rate for the year of 24.5%.
As a reminder, our guidance for fiscal 2020 includes one less week of operations in our fourth fiscal quarter compared to fiscal 2019 due to the timing of our fiscal calendar and assumes our current level of outstanding common shares.
This concludes our prepared remarks, and we would now be happy to answer any questions that you might have.
Thank you if you would like to register a question. Please press the one followed by the four on your telephone you will hear a threeq on prompt acknowledge your request. If your question that's been on certain you would like to withdraw your registration. Please press. The one followed by the three one moment. Please for our first question I first question comes from the line of Andrew.
Hi, Newman with JP Morgan you May proceed with your question.
Hi, good jump a little bit more into the assumptions around the energy and market.
So I definitely understand you're saying, it's more challenging environment for energy company.
Could you be a little more specific it hits like tied to number of rare and is there already.
She made up by the fact that as you well now oil prices very recently have actually have picked up.
Sure Andrew.
What we're seeing in terms of some of it is rig counts.
Some of it is.
Simply.
And you've read the articles in the paper like I have.
These companies have a lot of debt coming due and they're trying to trim their operations to where they can take advantage of some of those higher prices to pay down debt and we're seeing it and management of the heads within some of those companies and so.
Over the last couple of years after the big dip and energy activity in say 2016, we had seen some strong recovery in west Texas.
Primarily but now we're seeing softness in really all the energy markets in terms of reducing heads and we don't want to overstate the impact of it you know as you as you saw we trimmed the top end of our of our range and some of that really is in some of those markets last year. At this time, we were positive and adds reductions.
And this year in some of those markets were negative and so we're seeing some of that activity right. The recent developments around.
Potentially spiking oil prices.
May or may not change that but we really haven't had enough time to see what the impact of that might be whether they'll take that additional profit and pay down debt or start reinvesting again, it's probably going to play out over over several months.
Mhm and could you just remind us what your exposure is to then GE end market.
So we've we've talked about over time that oil and gas exploration.
So depending on what year you were talking about was anywhere from 5% to 10% of our business, but really that's not as much the relevant number as.
The overall geographic exposure that we have to markets that.
You know are dependent on oil and gas activity in all the support businesses as well.
I wouldn't saying, we're seeing at this point that depth of an impact down to all the support businesses, but we're seeing the early stages of slowdowns.
Okay. Thank you.
Our next question comes from the line of Andrew Wittmann with Baird. You May proceed with your question.
Okay, Great I, just wanted to dig a little bit more into that last question from Andrew and just fast.
You lost specific contracts with these customers or Steve is this really just a reflection of both where levels add stops.
Since that you're saying.
Yeah, I would say in Andy that it's a little bit of all the above that when you look at our growth drivers and you say new accounts sales adds reductions in lost accounts.
And again I think I made the comment to say that they were partially due to the oil and gas we've seen impacting all when we look at new account activity year over year. This time this year versus last year. There were more energy accounts being sold last year at this time, certainly I just mentioned the ads reduction.
Metric I wouldn't say as much of it is in the last account number. Although there is some we are seeing some smaller smaller customers failing.
Yes.
Got it I mean, I guess, what I do the math here I kinda it looks like you're somewhere implying for the rest of year somewhere in the high run to 2.5% total growth.
In your organic outlook, if if energy is.
Good.
5% to 10% called seven I mean.
From the current rates of underlying organic growth you'd have to see that business could cut in half.
Sounds like it feels like there's there's more there and what you did mentioned that you lost.
One larger or maybe several large accounts I know that going to basis. So I guess can you talk more broadly beyond the energy pass what you're seeing and specifically on the large account. If you could help us understand the size of that so that could help us understand the deceleration implied in your revenue guidance.
So I think taking a step back I think the revenue guidance, we have it at the beginning of the year that assumed organic growth for the year of around 4%.
We're basically saying that.
We're coming off that a little bit for the trends, we're seeing but we were always assuming some deceleration of organic growth partially due to the tougher comps in a number of areas partially related to the strong account sales in 19, but also the higher merchandise recovery charges. So we always sort of had the model assuming.
Some deceleration.
Of organic growth that put us at about that.
4% Mark for the year now over the remainder of the year right now our numbers are a little closer to about 3% organic.
Which obviously assumed some deceleration there is a number of pieces impacting that.
The the a slowdown in energy is a piece on the ads reduction side I talked about.
On the lost accounts side last year, we had as good of a retention years, we've really had over the last decade through the first quarter.
Ticking, a little higher than that for sure part of it being some of you know a couple of these accounts that we made the decision to move away from.
Yeah, I hate to get into too much of the details, but those probably make up a few million dollars of revenue. So it's it's another item around the edges, but as we always talk about our different growth drivers. It's an area. We felt worth mentioning that that retention had slipped some.
On the new sales side, I will say that I made the comment that activity. It slowed some in December and through the holidays and Thats, a having our outlook for Q2, new sales being a little soft.
Last year at this time, we really blew through the holidays with very strong activity.
On the new account side, which really helped fuel.
Full year, New sales result that was by far a record of new account sales and we're seeing a little bit of slowing right. Now again I made the comment partially due to energy, but probably not fully due to energy.
So the combination of some of those factors combined with the the.
Originally built in assumption that there was going to be some tougher year over year comps as the year went along it's kind of getting us to the results in the guidance that we're we're putting forth at this point.
That's great content. Thank you I think it's probably also worth noting here that your margins were really quite good.
And I wanted to dig into that a little bit here as well I mean, you did mentioned that there is.
0.7% of the growth rate was from accounting item of a release and some other stuff there as well the timing.
I mean, even if.
To assume that even if were to take that 0.7% or about $3 million I mean that basically does that come through as like basically pure profit in even if it does I mean your margins are still up a lot is that the right way to think about what you're calling out there in that 0.7%.
Yes.
This is this is shane.
Yes that 0.7%.
Fair amount of that drops to our operating margin line. When you take a look at the operating margin impact of those those equate to about 50 basis points on our margin so clearly.
The lions share of that is translating into profit.
Because there's no cost associated with some of those reserve adjustments.
Okay and then my last question for now.
Okay, I've never heard the the timing of Thanksgiving being a factor inorganic growth.
So I was just wondering the mechanics behind that why why is that the case here, yeah, I figured that that would probably be a question. So.
Again, this sort of relates to our fiscal calendar and actually where Thanksgiving falls.
This year in in the actual calendar so.
At the end of our first quarter Thanksgiving is always the last two days of our quarter.
And in some cases were not able to run the routes related to those two days.
And we have to run those routes some of those routes we run before the holiday some of them we run subsequent to the quarter than in the subsequent week, which falls into our second quarter.
Historically, we've always deferred the revenue related to those routes because we say that deliveries important enough for revenue recognition.
Because Thanksgiving is a week later this year and it's actually closer to Christmas.
We ran more of those routes both for the holiday, which results in that revenue being recognized in the first quarter, where normally would be deferred into the second quarter. Non so again, that's a timing item where the revenue got recognized in our in our first quarter normally it would be in the second quarters.
So.
It will actually be a headwinds to the comparison in the second quarter.
Because not as much as deferred there.
Thank you very much.
Right.
Ladies and gentlemen, as a reminder to and for a question. Please press. The one followed by the foreign your telephone keypad. Our next question comes from the line of Tim Mulrooney, which layer with William Blair. You May proceed with your question.
Good morning.
Morning.
Hi at a couple of questions here so.
On the margin side for Europe for your core laundry business.
Correct me, if I'm wrong, but I.
Thank you were calling for an operating margin of 10.3% at the midpoint for the full year is that correct.
That's correct.
Okay, well with the first first quarter being so strong here I think actually up like 140 basis points year over year.
Do you have updated expectations for that for that segment or are you still expecting a 10.3% midpoint for the full year.
Yeah, I had mentioned that in some of my prepared remarks that the expectations for the remainder or for the full years still have the midpoint being.
10.3% and the first quarter wasn't very strong profit quarter for us, but often times is.
First quarter is usually very strong.
Some of the costs some of the cost escalations that we see just seasonally or in the second half of the year.
I guess I'll take the opportunity to speak to a couple of those first and foremost would be we have sat annual salary increases that take place in January obviously with payrolls being the lions share of our costs.
Our first our first.
Fiscal quarter is benefiting from a lot of the revenue growth during the year, but those salary increases don't hit until those last three quarters.
Our second quarter has certain seasonal cost that caused it to almost always be down from an operating margin perspective, and I think historically, we've talked about some of these things.
They are normal and operating but are the unemployment or the resetting of unemployment taxes, we have a disproportionate amount of real estate taxes that actually get expensed during that quarter and we also have a large payout of unused sick time that takes place in that.
Some of the other things that are that are resulting in the margin being reduced in those last three quarters are we had mentioned the fact that we were forecasting in some additional costs related to our CRM project and we expect those to be heavier in the final quarters as we as Weve.
Uhhuh sports pilot and eventually we start to ramp up for deployments.
And then of course, there's going to be an impact related to the modest revenue growth.
In the second half the more modest revenue growth in the second half of the year.
I guess over.
The last time I'll talk about just because coming into the year. We had commented on the fact that we had some expectations around health care costs.
Starting at the beginning of our fiscal year, we actually read did all our health care plans.
To our employees.
So our employees were introduced to those new plan and right now we have one quarter's worth of experience related to those new plant.
But there does remain a significant amount of uncertainty.
Around it I guess the.
Claims experience related to those plans and the second half of our year is also maintaining a caution as it relates to the costs that are going to be associated with those.
Got it okay. Yeah. Thanks, Thanks for all that extra color that's really helpful.
Maybe one or two more for me.
You just sticking on your guidance you pulled up the low end of your EPS guidance range for the full year.
I think you mentioned in your prepared remarks, I was primarily due to a lower tax rate maybe a more favorable interest expense than you were initially anticipating does that does that make up the majority of well why you're pulling that up.
It does.
It does.
Okay and lastly from me could you just comment on the pricing environment as it's still pretty favorable and could you also comment on your merchandise recovery charges are you still thing a benefit there was that more of a 2019 phenomenon. Thank you.
Sure.
Firemen is relatively stable I think it's you know I've made the comment before that Theres still a fair amount of aggressiveness in our industry in terms of new accounts.
And the sales process with respect to merchandise recovery charges, the first quarter, we still pretty strong.
The growth in that area was higher than than the organic growth was overall. So it was a contributor and I think we're starting to get to the point, where we are annualizing. Some increases there that that also leads to the caution of the second half of the year over the last nine months in terms of tougher comps.
Understood. Thank you gentlemen.
Thank you.
There are no further questions at this time I will now turn to call back to you.
Okay I'd like to thank everyone for joining us today to review our first quarter results for fiscal year 2020, we look forward to speaking with everyone again in March when we expect to be reporting our second quarter in midyear performances for the year as well as our expectations for the remainder of fiscal 2020, Thank you and have a great day.
Ladies and gentlemen that does conclude the conference call for today, we thank you for your participation and ask that you. Please disconnect your lines.