Q2 2020 Earnings Call
Greetings and welcome to the second quarter earnings Conference call. During the presentation, all participants will be in listen only mode. Afterwards, we will conduct a question and answer session at that time. If your other question. Please press the.
One followed by the fourth on your telephone if it anytime during a conference you need to reach an operator. Please press star Zero I would now like to turn the conference over to feeding Central's President and CEO. Please go ahead.
Thank you and good morning, I'm, Steven Sintros, Unifirst, President and Chief Executive Officer, joining me today, Shane O'connor Senior Vice President and Chief Financial Officer.
I'd like to welcome you to get it first Corporation's conference call to review, our second quarter results for fiscal year 2020.
This call will be ought to listen only mode until we complete our prepared remarks, but first a brief disclaimer.
This conference call may contain forward looking statements they reflect the company's 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 risk factors.
For more information please refer to the discussion of these risk factors in our most recent 10-K filing with the Securities and Exchange Commission as well as the form 10-Q that we'll be filing that we will be filing next week.
I want to start the call by saying that our thoughts go out to all those impacted by the Corona virus pandemic.
This is an unprecedented time for our company the country and the world and first and foremost our thoughts are for the safety of all those dealing with the impact of this virus.
As a company that service to so many a central businesses that are critical to keeping our community safe an operating I also want to sincerely. Thank unifirst thousands of employee team partners. We're doing everything they can to continue servicing those customers. During these uncertain times.
We continue to be up and running as a business and are focused on working through the practical challenges of operating in this environment.
Our top priority is working to keep our employee team partners safe well they they work to continue servicing our central customers who remain open.
Customer closures have begun to accelerate over the last two weeks, but it's still too early to determine where we are in the cycle of customer closures not to mention how long they will persist and at what level they will retire.
Due to the uncertainty regarding the overall severity in duration of the pandemic and it's ultimately impact in our business, we're not providing guidance for the remainder of fiscal 2020 at this time.
Although we're not able to provide guidance or quantify the future impact we clearly expect the disruption related to this pandemic 11 negative impact on our revenues and profitability.
We also expect that if sustained for an extended period, the sharp decline in oil prices as well as the decline in the Canadian exchange rate will further challenge our performance.
With respect to the second quarter results revenues and profits were mostly within our expectations.
Consolidated second quarter revenues were 464.6 million, an increase of 6.2% over the same quarter a year ago.
Meanwhile, non-GAAP adjusted operating income and net income were 44.1 million and 34.7 million, respectively, representing increases of 6.8% and 8.2% when compared to the second quarter of last year.
Organic growth for our core laundry operations decelerated sequentially as expected and discussed in our first quarter earnings call.
New sales activity as well as net additions versus reductions lag the second quarter of a year ago, which was a historically strong new sales quarter.
Throughout the quarter, we continued to see weakness in the energy dependent mark to markets that we service, which can be attributed to the slower growth.
Year to date through February we have generated significant free cash flows.
But at the ended the quarter, we have almost 400 million in cash and cash equivalents on our books with no debt.
As a result, we believe we were well positioned to deal with University, we are facing related to this corona virus pandemic.
And with that I'd like to turn the call over to Shane who will provide details on the results of our second quarter.
Thanks, Steve.
As Steve mentioned consolidated revenues in our second quarter of 2020 were $464.6 million up 6.2% from 437.5 billion a year ago.
And consolidated operating income decreased to 44.1 million from $62.4 million or 29.3%.
Net income for the quarter decreased to 34.7 million or $1.82 per diluted share from 47.6 million or $2.48 per diluted share.
As a reminder, operating income and net income in last year's second quarter, both benefited from a pre tax gain of $21.1 million.
This gain related to a settlement we entered into with the lead contractor for a version of the CRM system, which we recorded a 55.8 million dollar impairment charge for in fiscal 2017.
This settlement included the receipt of a onetime cash payment of $13 million that for forgiveness of amounts previously due the contractor as well as the receipt of certain hardware and related maintenance.
Excluding the effect of the CRM related settlement consolidated operating income and net income increased from prior years adjusted amounts by 6.8% and 8.2%, respectively and diluted EPS increased 9% from prior years adjusted amount of $1.67.
Our core laundry operations revenues for the quarter were 412.2 million up 4.5% from the second quarter of 2019.
Core laundry organic growth, which adjusts for the estimated effective acquisitions as well as fluctuations in the Canadian dollar was 3.6%.
During the quarter or our organic growth continued to benefit from solid new account sales and improved customer retention in fiscal 2019, as well as the improved collection of merchandise recovery charges.
Core laundry revenues were negatively impacted by approximately 0.3% from the timing of revenues around the Thanksgiving holiday.
Core laundry operating income was $38.4 million for the quarter down from 59.1 million in the prior year and the segment's operating margin decreased to 9.3% from prior years, 15%.
Adjusting for the effect of the CRM related settlement adjusted operating income in 2019 would've been $38.0 million or 9.6% of revenues.
The decrease from prior years adjusted operating margin was primarily due to higher production and service payroll costs as a percentage of revenues.
As higher amounts were partially offset by lower energy costs, which decreased to 4.1% of revenues in the second quarter of 2020 from 4.3% in prior year.
Revenues from our specialty garment segment, which deliver specialized nuclear decontamination and clean room products and services increased to $36.0 million from 29.8 million in prior year or 21.0%.
This decrease was largely due to higher direct sale activity in the quarter as well as strong growth in our clean room and the European nuclear operations.
The segment's operating margin increased to 12.9% or $4.6 million from 7.5% or $2.2 million in the year ago period.
This increase was primarily due to the higher direct sale activity in the quarter.
As we mentioned in the past this segment's results can vary significantly from period to period due to seasonality and the timing of nuclear reactor outages and projects that requires specialized services.
Our first aid segments revenues increased to 16.4 million from 13.3 million in prior year were 23.2%.
This increase was primarily due to a strong quarterly performance in the segments wholesale distribution business as well as the company's initiative to expand its first date van business into new geographies.
Operating income increased 4.1% compared to prior year.
While operating margin decreased to 7.0% from 8.2% in 2019.
The decrease in operating margin was primarily attributable to higher selling and casualty claims expense during the quarter.
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 $395.3 million at the end of our second quarter of fiscal 2020.
Cash provided by operating activities for the first half of the fiscal year was $136.9 million increase of 8.2 million from the comparable period and prior year.
For the first half of fiscal 2020 capital expenditures totaled 62.3 million as we continue to invest in our future with new facility additions expansions updates and automation systems.
As we look forward toward the second half of our fiscal year, our capex rate will be impacted by our responses to the uncertainty around the corona virus pandemic.
At this time, we have place all growth related expenditures that our practical to suspend on hold until we have more clarity as to the severity and longevity of this pandemics impact on our operations.
During the quarter, we capitalize $2.8 million related to our ongoing CRM project, which consisted of license fees third party consulting costs and capitalized internal labor costs in the first half of our fiscal year, we have capitalized a total of 6.2 million related to this project, we do not expire.
Act to assist US bed is important strategic initiative due to the Corona virus pandemic and remain hopeful that sometime in the second half of this fiscal year, we will began piloting at select locations.
As a reminder, we do not expect to incur any depreciation expense related to this project in fiscal 2020.
During the second quarter fiscal 2020, we repurchased 20500 common shares for a total of $4.2 million under our previously announced stock repurchase program as of February 29, 2020, we had repurchased a total of 268250 common shares.
As for a total of $44.7 million under the program.
This concludes our prepared remarks, and we would now be happy to answer any questions that you may have.
Thank you if you would like to register a question. Please press star one followed by the four on your telephone you will hear three Tom prom to acknowledge request. If your question has been answered and you would like to which dry registration. Please press. The one followed by the three.
Once again to register for your question. Please press the one followed by the four on your telephone. Our first question comes from the line of our Andrew Steinerman with Jpmorgan. Please go ahead.
Good morning.
Able to give us a sense of your decremental margins should your revenue growth decline during this.
Outbreak period.
No Andrew that's not a question that we're prepared to quantify at this point and I think as you can imagine it depends a lot on the depth of the decline in how quick the decline comes I think the decline we're seeing is something like we've never experienced.
Compared to for example, the recession in 2008 or 2009, where.
The company slowly laid off employees or I shouldn't say slowly, but more slowly laid off employees as as the economy faltered right now we're seeing.
More significant sharp declines in revenues due to customer closures and we really have to evaluated the company how aggressively we want to work with our cost structure during that time and I think it's going to take us a little time to evaluate the depth in severity as well as the duration that we think we're going to be experiencing this because there.
During a shorter period, we would not want to take actions that are too aggressive to too.
You know restructure significantly our route structure or unwind some of our salesforce or some of the other things that would be more difficult to bring back quickly. So at this point, we're still in evaluation mode trying to get our arms around.
The depth of what we're going to be experiencing and how long and we'll be working through those plants.
If I if I could just could I just go back to the great recession, just ask one.
A question on on that.
Just give us a sense really a reminder of why it feels like your business was dragged in the great recession on a delayed basis, what I mean is a great recession ended in June of 2009.
But it wasn't really until your fiscal owed and did you see organic revenue growth decline and it was only slightly but it really feels like 2010 FESCO.
Was was more drag than 2009 fiscal why was that kind of delayed response and question. My question is do you feel like there might be a delay here as well.
Short answer is Andrew that you know as customers during 2009 laid off employees. It has the impact of sort of layering on top of each other. So for example, the first two quarters of 2009, although customers were laying off employees. Our revenues, it's still not yet dropped a below the prior year.
We're still showing growth it wasnt until the cumulative effect of those lay offs. So cold later in 2009 that you sort of went into 2010 with a with a lower billing a lower weekly billing rate and you start showing year over year declines in in revenues like you said, albeit slightly but thats really.
That's really where the challenges that's really where the challenge starts when you start having quarters, where your revenues are below the year before the thing that makes this so different and I don't think there will be that similarity is that you know.
For mostly what we're seeing it's less of an issue of.
Employers laying off employees at least right now.
Businesses are just being closed down and quite frankly, we don't even have true visibility as to what's going behind the scenes with those companies are they laying off all those employees will they come back.
If they do come back at what rate will they come back. So I think for this environment. We're in we're going to see a sharper impact quicker and then it remains to be seeing what that ongoing impact is like depending on the duration and how many of these companies can get their operations back going again.
And when there is a in eventual recovery depending on when that is.
Thank you appreciate it.
Thank you.
Our next question comes from the line of Andrew Wittmann with Baird. Please go ahead.
Yes, great. Thanks, good morning, guys.
Several questions are few questions here just.
I think that will be helpful. For you to talk about specifically kind of trying to understand your customer mix a little bit better.
Theres a couple of different ways that I was hoping you could address that.
In particular, maybe first can you talk about as a percentage of your revenue.
How much of your businesses driven by National accounts.
Versus.
Medium size accounts and then maybe.
The small accounts to recognizing that you service all of those customers.
Maybe in your response to that could you also just talked about some of those was heavily impacted areas.
What kind of exposure do you have maybe two restaurants hospitality, then you sort of as we mentioned to oil and gas I think kind of.
Those are the areas that I think a lot of people are focused on maybe there are others that maybe you'd want to highlight but I think given some context around those things would be helpful for everyone on the call.
No that makes sense, Andy so when you look at our customer base just to give you a sense.
We talk about 15% to 20% of our business being in national accounts, either exclusive national accounts or preferred provider relationships. So it's in that 15, 20% range is the number probably goes a little higher than that if you include some larger maybe regional accounts, but.
It's in that ballpark, which obviously the inverse of that is that a relatively high percent is small to midsize local local businesses. When you look at the sort of ESI see break down I'll give you a few of those.
Touch points, you were asking for.
Yes, I see for eating and drinking places is about 6.5%, so thats mostly restaurants.
Some hospitality, we don't do a lot of pure hospitality.
And the energy is about 5% these days.
When you look at some of the other big areas just to round it out we about 17% in manufacturing about 16% and auto related.
But that auto related his car dealerships at some manufacturing its gas stations is.
You know a lot of repair shops.
We have about 8% in food stores in food manufacturing. That's obviously an area that is is going strong right now and being challenged with the volumes that they're actually.
Dealing with.
And then we have about 4% in healthcare as well. So we do do some healthcare related customers not as much the big bulk hospital work, but more some facility service work in hospitals as well as other sort of what we call retail medical clinics and places where you might get your MRC.
Hi, or blood drawn and things like that.
Around the country so.
You know, we're seeing really a mixed bag around the country I think what's probably helpful for the for the listeners is to understand what we're seeing out there in terms of revenue decline were sort of hesitant to provide any discrete numbers, but you know really as of two weeks ago.
That.
Last week in the week before before that we really hadnt seen any revenue decline. The first week, we saw modest revenue decline in last week, we saw a sharper decline as many of the states started to shutter non essential businesses and our billing last week and again.
Giving in this number cautiously because it's not meant to be thought as the bottom or even in a 100%.
Accurate number but direction Directionally, our billing last week was down about 12% from our February average. So that just gives you a first line look at what we're experiencing we continue to field calls around.
Businesses closing and we also.
Continue to see states.
Some of which you haven't put in as stringent guidelines yet.
In terms of what's a central businesses in what aren't.
Ramp that up so we expect some states to sort of catch up so right now it's very much a geographic.
Issue for example in the northeast.
Up in New Hampshire in Vermont, where we service.
Key areas in a little bit more hospitality in restaurants were down quite a bit more than that 12%, but there are markets that haven't taken as stringent actions yet that you know were down quite a bit less than that 12%.
So thats, where we are today, but again, we really want to caution when we give out that directional number that.
We know more is coming and and it goes without saying that the length in duration and recovery is just very unknown at this point.
That's really helpful. Steve.
Yes, I think the natural question that comes out.
Your response there is.
Maybe some comments from you on the contract structures I mean, you do have contracts with these customers.
There's a lot of.
No.
Given take I think with the customer relationships that you have I mean user relationships receive every week and some of these customers you've had for long time, so I understand that maybe not every contract gets enforced to the letter of the contract but can you just talked about how you're dealing with some of these business closures I mean.
Technically you are they contractually obligated to you and then how are you going through those and maybe some perspective, there would be helpful from into.
Yeah, I'll be I'll be honest with you Andy for the most part the businesses that are closed down we're not pushing billing through I think we're trying to be a good partner during these difficult times and we're working with those customers, particularly the larger customers.
But the smaller customers as well with the idea being that were not sacrificing the length of the contract. During this time that they're close.
But the last thing we want to be doing this time is.
You know alienating cussed alienating customers that are going through a very difficult time.
As well as billing customers that may not be able to pay.
Anytime soon or even longer than that.
Depending on the strength of their business. So we are trying to work on it a little bit.
Customer by customer.
But I'll be honest, we're not being overly aggressive in that regard as.
Most of our customers and you're right a lot of these these relationships, particularly the local relationships and contracts are left up to a little bit of ongoing negotiation with the customer it as costs go up.
We are able to put through price increases.
In tough times quite frankly, we have a lot of customers coming to us as you can imagine, saying what can you do for me in terms of price concessions or other other concessions. So we're trying to work through it is as organized as we can with with the customer base, but at the level of closures that are going on right now.
It's challenging even to to connect with all of those customers real time. So we're working through it I think we're trying to do the best we can to preserve the long term relationships with these customers and to also help them whether these tough tops.
Well, that's great really helpful. Again, I just have one kind of last question and I understand the differences between this time.
In 2000 or not I think those are pretty obvious to most people, but one of the things that comes up with catching back to 2910 like like Andrew kind of mentioned in his question your revenues were down, but maybe not as much its peers.
Can you talk about.
I don't know if theres, a strategic decision at the company as making that time to.
If you go low on price or or other things that helps you mitigate the revenue declines for your company.
Yes, you back in 2000 perspective on that one yes back in 2000, I'm hopeful that have some perspective, because I also think that.
Energy prices kind of pulling you guys higher.
Out of 2000 items was a contributor to the positives there as well.
That's right. So I think during 2009, we were going through a little bit of a transformation and reinvestment in our Salesforce, we talked about national accounts.
You know back and I may not have the numbers exactly right, but that back in 2007 2008, our national account presence was was relatively small it was less than 10%, probably seven or 8% and so we had started kind of building our national account.
Sales engine, we had invested a lot in local sales development over those years as well and I think we really sort of hit the ground running and also did not during that time trim. The salesforce because we were actually in the process of growing it and continue to sort of sell through.
With that those challenges.
And so I think that definitely helped us during that time, and then I think you referred to as oil prices rebounded pretty quickly coming out of that time period that transition.
Not only to increased energy exploration activity, but the conversion at that time.
With many customers not only in the energy sector that had to convert to flame resisting garments.
Helped as well so I think we've talked about before in the past when they were renting maybe cotton garments.
You were getting a certain price a week and then the flame resisting garments. So it wasn't only an increase in activity, but it was an increase in the in the cost of the garments and therefore demanding a higher price.
From those from those services, so that all contributed to that time, but you're right the key to maintaining and actually improving margins. During that time was the fact that the revenue never really backed up in a significant way.
I think you understand.
Our infrastructure enough to know that.
You are down 10, 12, 15% or whatever it might land that there are practical challenges in pulling that cost structure in particularly over the short term if that were to persist that I think moves would need to be made two to rightsize. The cost structure. It's just the shock to the system right now in the economy.
Me that this is all happening very quickly and we'll have to make those decisions to best keep in mind the long term.
The long term of the company.
Great. Thanks.
Thank you.
Our next question comes from the line of Tim Mulrooney with William Blair. Please go ahead.
Good morning, Steve Good morning, Shane.
Morning.
So just a couple of follow ups on these guys questions.
I know Andy's question on the Decrementals of hard if you guys can't frame the Decrementals for US maybe you could just talk about your cost structure and a little more detail how much of cost of goods sold do you consider to be variable cost and how much of your SGN aid you consider to be variable versus fixed.
So I will take you through the Pinedale little bit Tim and give you some color there.
And these are 100% spot on numbers, but they are directionally accurate. So they sort of give you an idea when you look at our cost of revenues. There are three primary categories that make up those cost of revenues.
Merchandise production cost, which is really the cost to run the facilities and then service cost service and delivery costs. Those three pieces and again I am using very round numbers, let's say, they're all a third a third a third of your 60% or so cost of revenues, so merchandise will trend with the volume.
Overtime.
If volume can tracks the demand for the garments will come down for sure. Okay. When you get into the other categories. It's more of a mix production. There are a lot of variable cost in production in terms of the labor and the supplies to run those facilities, but there is some portion of those cost Tonight, and I'm not going to give a percent.
And that are more fixed in terms of the facilities themselves.
Rents.
Real estate taxes, and those type of things so there's an element.
Of fixed and variable in there, but probably a little bit more on the variable side your production cost.
When you get to your service and route structure, that's where it gets a lot more complicated.
It really depends on the level of decline is the decline.
In such a way that you can easily take routes off the road do you want to take routes off the road. If you we feel like this business is going to come back. So you know over the long term a lot of your service costs are variable, but that gets back to you know how much you want to scale that down in the short term.
Only to have to put that back in place because that is not an easy structure to quickly flex up and down and so we would be hesitant there in the short term to kind of pull that structure apart.
When you get into your SG, an egg ill start with the sale side, we have a large salesforce that trained and ready to go and that's also not something that we necessarily want to.
Scaled back on significantly when an eventual recovery.
Would require that salesforce more than ever to continue to drive that volume growth back up.
Now again, you can make the decision to trim sales whenever you want but it's going to have an impact on your ability to drive volumes.
And then on the Gionee side, you know I think.
No. There is a mixed bag there as well, it's sorta depends on projects and initiatives that you want to continue to work on eventually you can right size some of that Gionee.
But it's a challenge and depending on how things get.
There are steps, we can take their that I'm sure a lot of companies are considering and instituting to try to trim cost there in the short term while not.
Well not.
Disrupting or or pulling apart your team.
So so hopefully that gives you a general idea of different categories in the way the way we're looking at it.
No. That's that's very helpful. Steve Thanks for walking us through that.
If if I can shift gears here.
Well first let me add build on Andrew's question.
When you say that you aren't sacrificing the length of the contract of all the customers close to should we interpret that as essentially.
The duration of the length of the contract is extended for the period of time that the customers are closed down.
Generally our contracts allows for that.
Again, it's not something that on a large scale basis.
We've sort of had to enact but yes I think those are the case types of conversations you'll have with customers and I think for the most part they are more than willing to to work with you on so you know again, if it's a matter of.
Weeks, you know, it's not a large deal either way our goal is to renew those contracts in the normal course.
If they are closed for longer than that then I think.
You start to getting these conversations about if a business is closed for say four months, what really is the status of that business. When it opens back up and so we really don't know how these these are going to transpire, but you know we expect to be working through them over the course of over the spring in the summer.
Okay. Thank you lastly on capital allocation can you just talk about.
If you're.
If and how your priorities have changed you gave some good color on Capex, but because you also touch on some of the other items, maybe how you're thinking about.
The M&A environment as well as your updated thoughts regarding the dividend and share repurchases I mean your balance sheet is obviously in great shape here, so that'd be helpful.
Yes, right now, we're taking a little bit of a wait and see approach to make any major changes or decisions. We continue with the dividend.
Right now for sure as far as M&A goes.
You know, there's really not much going on right now we will certainly keep our eyes open if this environment causes any sellers two to consider their options given given some of the difficulties and challenges and we'd be willing to look at those opportunities for sure.
In terms of share buybacks. That's also something we will continue to evaluate.
I think at this time, you're right. We have we have a lot of cash on hand, but we're still in the very early stages of trying to determine.
What's the business is going to look like over the next quarter or too and we'll just have to evaluate that as we go and part of that evaluation will be stock reaction and cash generation and potential for share buybacks. So.
That will be at the forefront of what we're evaluating.
Okay. Thank you good luck to the team.
Thank you.
We have no further questions at this time.
Well. Thank you everyone for participating in the call. We look forward to speaking with you again in a few months when we'll be updating you on our third quarter results.
Thank you have a great day and everyone. Please be safe.
This concludes the conference call for today, we thank you for your participation and ask that you. Please disconnect your line.
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Yes.