Q3 2020 UniFirst Corp Earnings Call

July 1, 2020

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Greetings and welcome to the third quarter earnings Conference call. During the presentation, all participants will be in listen only mode. Afterwards, we'll conduct a question answer session at that time. If you have a question. Please press the one followed by the foreign your telephone.

If it anytime during the conference you need to each operator, Please press star Zero I would now like to turn the conference over to Steven Sintros, President and Chief Executive Officer. 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, we'd like to welcome you to Unifirst Corporation's Conference call to review, our third 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 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 risks factors in our most recent form 10-K intend to filings with the Securities and Exchange Commission.

I want to start by saying that our thoughts go out to all the individuals and businesses continuing to be impacted by the Corona virus pandemic.

This is an unprecedented time for our company the country in the World and first and foremost our thoughts are for the safety in wellbeing of all those dealing with the impact of this virus.

It goes without saying that the company's focus in the third quarter centered around our pandemic response efforts, including our top priority of ensuring the safety of our team partners, while continuing to provide our value added services to the many essential businesses in our communities.

We as a company as well as our customers continue to adapt to the practical challenges of operating in this ever changing environment.

I want to sincerely. Thank our team partners for the tremendous effort effort, they put forth and continue to put forth ensuring that they are taking care of each other and our customers. During these challenging times.

During the quarter. Our results were most impacted by customer closures, primarily the result of state mandated shutdowns of non essential businesses.

In addition, we have been dealing with higher than normal reductions of wearers and customers, who have remained open or recently reopened.

Part of this impact has been driven by the decline in demand of oil and the corresponding reduction in business activity in the energy dependent markets that we service.

During the quarter customer closures peaked in mid April, causing the weekly revenues of our core laundry operations to be down about 18% at that time from the weekly revenue runway run rate in the weeks of February and March immediately preceding the disruption.

From that point in April until last week revenues have been steadily have steadily recovered to the point, where last week's revenues were down about 8% from pre pandemic run rates.

This recovery was primarily fueled by the reopening of businesses.

In addition, we have also benefited from the increase in sale of personal protective equipment, primarily face masks in hand, Sanitizers and soaps.

Of the revenue shortfall that remains businesses that remain closed or limited such as restaurants business services hotels schools and entertainment our prominently represented.

As I'm sure you can appreciate it remains a fluid environment with many states recently reporting increases in many of the metrics that you're using to measure the status of the virus spread.

As a result of the evolving nature of the pandemic and its impact on our communities our ability to assess the financial impact on our the ability to assess the financial impact on our business continues to be limited.

As a result, we're not providing guidance for the remainder of fiscal 2020.

With respect to the third quarter results can consolidated third quarter revenues were 445.5 million a decrease of 1.8% over the same quarter a year ago.

The overall shortfall in revenue was mitigated by a large direct sale of 20.1 million to a large healthcare customer as well as strong revenues from our first stage segment.

Our consolidated operating margin was 6.2% and was impacted by the revenue shortfall in our us in Canadian laundry operations as well as numerous costs related to our cobot 19 response efforts.

For example, we instituted certain compensation programs to mitigate the impact of our revenue decline on our service teams wages as well as to show appreciation to all of our frontline workers for their continued dedication and commitment during during the early months of the pandemic.

These programs are temporary in nature and we currently expect they will begin to phase out in the fourth quarter.

Shane will take you through the details of our financial results shortly.

Although we instituted some reduction in labor in cost containment during the quarter based on the evolving situation with our customers our financial strength and our desire to support our employees. During these difficult times, we were patient in our approach.

We will continue to be patient as we work to get our arms around the longer term impact of this pandemic.

In the meantime, we will continue to support our employees, our customers and make decisions in line with improving our business in the long run.

Despite all of the events of the quarter, we continue to generate positive free cash flows and ended the quarter with $421.3 million in cash and cash equivalents on hand, and no debt on our books.

As a result, we believe we are well positioned to deal with the diversity that we are facing related to the corona virus pandemic.

In addition, the pandemic is clearly highlighted the essential nature of our products and services.

We believe the need in the demand for Hygienically clean garments in work environments positions, our company well to support the evolving economic landscape.

Like many businesses, we expect the quarters ahead to be uneven in bumpy, but we're confident in the company's position to weather the storm and take advantage of abroad economic recovery.

And with that I'd like to turn the call over to Shane who will provide the details of the results of our third quarter.

Thanks, Steve.

As Steve mentioned consolidated revenues in our third quarter of 2020 were $445.5 million down 1.8% from 453.7 million a year ago.

Consolidated operating income decreased to $27.7 million from 60.2 million or 54.0%.

Net income for the quarter decreased to $21.3 million.

Dollar 12 per diluted share from $47.2 million or $2.46 per diluted share.

Our core laundry operations revenues for the quarter were $388.4 million down 2.8% from the third quarter of 2019.

Core laundry organic growth, which adjusts for the estimated effective acquisitions as well as fluctuations in the Canadian dollar was negative 3.2%.

During the quarter, our revenues were mostly impacted by customer closures related to the Corona virus pandemic.

As well as related reductions in workforce for customers who remained open.

The company was able to partially offset these declines with a $20.1 million direct sale to a large healthcare customer as well as increased safety NPT sales. The results of our customers increased focus on maintaining a high genetically clean and safe work environment for their employees and patrons.

Core laundry operating margin decreased to 5.1% for the quarter or $19.7 million from 13.4% in prior year or $53.4 million. This segment's profitability was affected by many items, including the impact of the decline in rental revenues on our.

Cost structure.

A higher cost of revenues related to the large $20.1 million direct sale and additional costs the company incurred related to the pandemic.

Some of the more note notable items include.

Merchandise amortization, which is expense that is recognized related to rental merchandise that has been placed in service was up significantly as a percentage of revenues.

This is because our merchandise and services amortized on a straight line basis over the estimated service lines of the related merchandise.

Which averaged approximately 18 months.

Although our new garment additions into service were down significantly in the quarter. The amortization expense was little changed because of the amortization of prior period expenditures.

As Steve discussed our number one priority during the quarter was the safety of our employees and we sourced a significant amount of safety supplies for internal use.

Over the last few months these products, where in high demand and prices were significantly higher than they had been prior to the pandemic.

As prices have recently started to normalize and as a result, we expect that the costs, we will incur in subsequent periods will be dramatically less than our current quarter.

We incurred additional costs related to certain employee compensation programs, we instituted during the quarter also discussed by Steve and some of these programs will continue into the fourth quarter of 2020.

As of last week, our weekly revenues were down about 8% from pre pandemic run rates primarily related to customer locations that remained closed during the quarter. The company recorded additional reserves for uncollectible accounts receivable, primarily due to the increased risk that these customers will.

To be able to pay their outstanding balances.

These items were partially offset by lower incentive compensation due to revised expectations of the company's growth and profitability in fiscal 2020, as well as lower healthcare energy and travel related costs as a percentage of revenues.

Energy costs decreased to 3.4% of revenues in the third quarter of 2020 from 4.2% in prior year.

Revenues from our specialty government segment, which deliver specialized nuclear decontamination and clean room products and services decreased to $36.2 million from 37.3 million in prior year or 3.1%.

This decrease was largely due to lower direct sale activity in the quarter, partially offset by growth in our clean room and European nuclear operations.

The segment's operating margin increased to 17.6% or $6.4 million from 14.4% or $5.4 million in the year ago period. This increase was primarily due to a bad debt recovery from a customer in bankruptcy and lower travel related costs. These.

Items were partially offset by higher merchandise expense and costs incurred responding to that pandemic, including employee compensation and amounts paid for internal use safety supplies.

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 nuclear reactor outages and projects that require our specialized services.

Our first aid segments revenues increased $20.9 million from 16.6 million in prior year or 26.0%.

This increase was primarily due to increased demand for this segment safety and PE offerings.

Operating margin decreased to 7.8% from 8.4%, primarily due to higher merchandise cost as a percentage of revenues.

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 $421.3 million at the end of our third quarter of fiscal 2020.

Cash provided by operating activities for the first three quarters of fiscal year was $205.4 million, an increase of $6.0 million from the comparable period and prior year.

For the first three quarters of fiscal 2020 capital expenditures totaled $91.2 million.

We continue to scrutinize, our capital expenditures due to ongoing uncertainty related to covert 19.

As we move through the remainder of our fiscal year, we will continue to evaluate the timing of our growth related capital expenditures taking into consideration the revenue recovery that we continue to see.

During the quarter, we capitalized $3.3 million related to our ongoing CRM project, which consisted of license fees third party consulting costs and capitalized internal labor costs in the first three quarters of our fiscal year, we have capitalize a total of $9.9 million related to this project.

During the third quarter of fiscal 2020, we repurchased 46667 shares of common stock for a total of $7.5 million under our previously announced stock repurchase program.

The company has not repurchased any additional shares since early in this fiscal quarter due to the uncertainty related to covert 19.

As of May Thirtyth 2020, we had repurchased a total of 314917 shares of common stock for a total of $52.3 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 the one followed by the floor on your telephone you will hear three Tom prompt to acknowledge request. If your question has been answered. Thank you would like to with the dry registration. Please press the one followed by the three.

Our first question comes from the line of Andrew Steinerman with JP Morgan. Please go ahead.

Hi, So obviously I heard you say that last week was minus 8% from pre protect pandemic levels would you be willing to tell us kind of what that means on a year over year basis.

And if you can just give us a little sense, how those year over year decline had narrow from that peak period in April year over year.

Yes, good question Andrew.

I don't have that number specifically in front of me I would say that as we came into the quarter.

Three pandemic.

We would have been looking at ill call it.

3.54% growth in the quarter and so when you get down to the week by week level late in the quarter. It's hard to give you a real from number but it's probably fair to say that if we're down pre.

Down 8% from the run rate going into the pandemic that year over year. The last month of the quarter. A few weeks of the quarter I should say you know it was probably down 5% or so.

5% year over year.

Yes, something like that and when you look earlier in the quarter you can make similar similar judgments in in the peak when we were down 18% year over year that probably meant like 15% or 14.5% or something like that.

Okay. Thank you.

Thank you.

Our next question comes from the line of Andrew Wittmann with Baird. Please go ahead.

Hi.

So you'll see us on.

The.

The pace of reopening is the question that I think a lot of companies are getting and.

Certainly kind of identified what that rate from you know.

Teens to donate last week are you seeing any leveling off in the pace of recover in most of that slowed down.

The V shaped fiscal yes.

Happening and do you expect that you're expecting more to continue here or is this kind of the new right.

It's interesting if you'd asked me the question two weeks ago. It might have been a little different I think two weeks ago, we were seeing a pretty steady.

Recovery.

Slow and steady I would say and last week, we had our lowest week of Reopenings that we've had since since the recovery started.

We do expect the leveling at some point, it's unclear whether this last week, it's only been one week of a little bit lower reopenings.

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Whether that's from some of these states pausing their reopening efforts or whether we're hitting sort of critical mass with the businesses that remain closed and whether those some of those may maybe longer term fallout I think it's a mix of both we're staying in close contact with the customers that remain calm.

Closed and I think many were optimistic in.

Phases of the state reopening plans that they were able there we'd be able to come back in some capacity and now you're seeing a little more pause in that and that.

And that thought process, particularly in some of the southern states.

Are you seeing the rise in in claims so I think we're in a little bit of.

Even more uncertain time, maybe today than we were or what we thought we were maybe two or three weeks ago.

That's helpful inside of that you mentioned that obviously add stops are trending negatively that's not a surprise, but I'm. Just wondering inside of accounts that are opening and are doing business. How the trend of edge stops has has been there or are our employers continuing to just shed employees those third kind of adjusting to the new normal or.

Looking at Seattle about that specific I think there I think there was certainly some of that I mean, I think when you're seeing and we track. It every week because we're tracking.

Credits related to customers that were closed. So if you have a customer was closed and it was doing a thousand dollars a week and then they reopen.

Are they reopening it a thousand dollars a week or during that time or they only bringing back half. The employees. We are seeing some of that.

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I would say moster reopening at decent levels and they're trying to evaluate like we are I think theyre trying to be as patient as they can.

Like we are so I think it's a mixed bag, but.

The revenues have held up reasonably well compared to the reopenings, meaning that there are reductions for sure at quite a bit higher than normal levels, but I think people are taking a wait and see approach and I think thats part of our caution is depending on how long the disruption continues and the demand for products and serve.

Mrs will will will people be able to hold those employment levels or or make further decisions just like just like we're looking at right now.

Got it I have two more questions that I think people want to hear the answers to.

And then recognize that this first took my two questions. Following up is a little bit tricky to answer, but but your performance here in the quarter with your revenues is markedly better than what the largest company in the sector a reported in their updates in May and I was just wondering given your overall since the market do you.

I believe that Youre, taking share of or do you think that this is more maybe a reflection of end market mix that you might have versus some of your peers.

Yeah, I, certainly think it's a mix.

Mix situation as it relates to the quarter.

You know.

We do continue to sell new business have been.

Impressed by the resiliency of the sales team and the fact that there are customers out there is still making some of those decisions.

Sales activity is down as you'd expect but there was activity happening, but that's not the the reason for the better performance, it's really a mix issue our exposure to two restaurants and hospitality and so on although we have some I think just isn't as high as some of the other.

Participants in our industry.

Okay. That's helpful. Then really my last question Charles to dig into the margins a little bit more.

I mean, you called out in the press release, a are you mentioned that there was not a lot of adjustments in the cost structure, but some.

I mean is there had to be a lot of things in the quarter that.

But frankly, we're in there and you guys report gap and not adjusted and and so I guess, maybe the simple way to ask the question is.

How indicative is the margin performance of this quarter based on what you think could actually be happening in the future or similarly, asking like what do you see as the incremental drop through or decremental margins. The operating line either way to answer that question I think would be helpful to give us some context.

That it's an important question and we understand it I think it's it's a difficult one answer I think this quarter itself I wouldn't look at as very indicative I think thats, probably the short answer the question because it will partially based on what you said or what we said with respect to the merchandise.

Just to put in perspective the merchandise.

The demand for garments in the quarter was down significantly now that started to rebound some for sure but it was down far more than our revenues. So if you look at the quarter just as a snapshot from sort of a a cash perspective on the merchandise.

We would have had a benefit in terms of cash impact of merchandise compared to our revenue decline now that's recovering some but we are expecting we would expect for example merchandise to broadly come in line with revenues.

As you moved forward when you get into the rest of the PNM Theres. Just there really are just too many moving parts in the quarter to fully unwind here on the call, but I will say in chain alluded to in his comments a number of the cost in the quarter, we wouldn't expect is being high.

Moving forward.

We did do some headcount reductions really in.

The later part of the second month of the quarter. So the impact of those weren't really felt in would be felt more in the fourth quarter.

But you know as click quick as we did some reductions I mean, we're hiring some of those people back in markets, where where the business has recovered. So there's a lot of a lot of moving pieces. We also received good.

Benefits in the quarter from things like energy cost in travel cost and.

Some other things and so I would say the short answer it's not very indicative to say, where it's going to fall out moving forward.

You know this there's just too many moving parts to kind of put a put a margin.

Forecast on right now.

We'd like to think it would be better right because we had on balance more unusual cost in the quarter than benefits, but a lot of that depends on what goes on with the recovery what goes on with with the employment situation and so on so.

I know not a fully baked answer, but hopefully gives you some flavor.

Thanks.

And as a reminder to register for your question. Please press Star one followed by the four on your telephone.

Our next question comes from the line of Sam can swim with William Blair. Please go ahead.

Hey, guys quick question on the 8% column on baby and areas that have Riocan first the water service levels that compared to pre capital levels, maybe just kind of separating that comment you made by geography would be helpful.

Yes, I think what you're asking is of the businesses that have reopened similar to the question before how much how much capacity or revenues did they bring back compared to what they had before we really don't have that breakdown.

I think many have opened at near full.

Employment, but we are seeing higher higher reduction levels I, we don't have that metric kind of broken out in the way that you're you're asking for there.

You know you ask about geographically.

Because were diverse across the country a lot across a lot of industries.

You really can look at our R.R.R. revenue by geography and match it up pretty closely to what you'd expect.

I think earlier on the closures and some of the southern states weren't is great and they came back quicker, but now some of them are pausing and we've seen some small level I will say of.

You know re closures or request for businesses to cancer cansler or pause service.

Whereas in the northeast for example, it was the closures were deeper and the recovery has been slower, but we're continuing to see steady recovery. So geographically, it's sort of what you'd expect looking at.

The broader impact of the virus across the country, but I can't really give you. The the core answer of what you were looking for as far as how much capacity has reopened compared to before.

But so helpful. Appreciate the commentary good luck on export here.

Thanks.

And we have no further questions.

Well, thank everyone for participating in the call. We look forward to speaking with you again in the fall when we'll be reporting results of our for fourth quarter. 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.

[music].

Greetings and welcome to the third quarter earnings Conference call. During the presentation, all participants will be in listen only mode. Afterwards, we'll conduct a question answer session at that time, if you ever question with respect to one followed by the foreign your telephone if it anytime during the conference you need to reach operator, Please press star zero.

When I like to turn the conference over to Steve in Central.

<unk> Chief Executive Officer. Please go ahead.

Thank you wouldn't 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.

Like the welcome you to Unifirst Corporation's conference call to review, our third quarter results for fiscal year 2020.

This call will be out 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 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 risks factors in our most recent form 10-K intend to filings with the Securities and Exchange Commission.

I want to start by saying that our thoughts go out to all the individuals and businesses continuing to be impacted by the Corona virus pandemic.

This is an unprecedented time for our company the country in the World and first and foremost our thoughts are for the safety in wellbeing of all those dealing with the impact of this virus.

We as a company as well as our customers continue to adapt to the practical challenges of operating in this ever changing environment.

During the quarter. Our results were most impacted by customer closures, primarily the result of state mandated shutdowns of non essential businesses.

In addition, we've been dealing with higher than normal reductions of wearers and customers, who have remained open or recently reopened.

Part of this impact has been driven by the decline in demand of oil and the corresponding reduction in business activity in the energy dependent markets that we service.

From that point in April until last week revenues have been steadily have steadily recovered to the point, where last week's revenues were down about 8% from pre pandemic run rates.

This recovery was primarily fueled by the reopening businesses.

In addition, we have also benefited from the increase in sale of personal protective equipment, primarily face masks in hand, Sanitizers and soaps.

Of the revenue shortfall that remains businesses that remain closed or limited such as restaurants business services hotels schools and entertainment our prominently represented.

As I'm sure you can appreciate it remains a fluid environment with many states recently reporting increases in many of the metrics that you're using to measure the status of the virus spread.

As a result, we're not providing guidance for the remainder of fiscal 2020.

With respect to the third quarter results consult consolidated third quarter revenues were 445.5 million a decrease of 1.8% over the same quarter a year ago.

The overall shortfall in revenue was mitigated by a large direct sale of 20.1 million to a large healthcare customer as well as strong revenues from our first aid segment.

Our consolidated operating margin was 6.2% and was impacted by the revenue shortfall in our us in Canadian laundry operations as well as numerous costs related to our cobot 19 response efforts.

These programs are temporary in nature and we currently expect they will begin to phase out in the fourth quarter.

Shane will take you through the details of our financial results shortly.

We will continue to be patient as we work to get our arms around the longer term impact of this pandemic.

In the meantime, we will continue to support our employees, our customers and make decisions in line with improving our business in the long run.

Despite all of the events of the quarter, we continue to generate positive free cash flows and ended the quarter with 421.3 million in cash and cash equivalents on hand, and no debt on our books.

As a result, we believe we are well positioned to deal with the adversity that we are facing related to the Corona virus pandemic.

In addition, the pandemic is clearly highlighted the essential nature of our products and services.

We believe the needs in the demand for identically clean garments and work environments positions, our company well to support the evolving economic landscape.

Like many businesses, we expect the quarters ahead to be uneven in bumpy, but we're confident in the company's position to weather the storm and take advantage of a broad economic recovery.

And with that I'd like to turn the call over to Shane will provide the details of the results of our third quarter.

Thanks, Steve.

As Steve mentioned consolidated revenues in our third quarter of 2020 were $445.5 million down 1.8% from $453.7 million a year ago.

Consolidated operating income decreased to $27.7 million from 60.2 million or 54.0 per se.

Net income for the quarter decreased to $21.3 million.

Dollar 12 per diluted share from $47.2 million or $2.46 per diluted share.

Our core laundry operations revenues for the quarter were $388.4 million down 2.8% from the third quarter of 2019.

Core laundry organic growth, which adjusts for the estimated effective acquisitions as well as fluctuations in the Canadian dollar was negative 3.2%.

During the quarter, our revenues were mostly impacted by customer closures related to the Corona virus pandemic.

As well as related reductions in workforce for customers who remained open.

The company was able to partially offset these declines with a $20.1 million direct sale to a large healthcare customer as well as increased safety and PE sales. The results of our customers increased focus on maintaining a high gigantically clean and safe work environment for their employees and patrons.

Core laundry operating margin decreased to 5.1% for the quarter or $19.7 million from 13.4% in prior year or $53.4 million.

The segment's profitability was affected by many items, including the impact of the decline in rental revenues on our cost structure.

A higher cost of revenues related to the large $20.1 million direct sale and additional costs the company incurred related to the pandemic.

Some of the more no notable items include.

Merchandise amortization, which is expense that is recognized related to rental merchandise that has been placed in service was up significantly as a percentage of revenues.

This is because our merchandise and services amortized on a straight line basis over the estimated service slides related merchandise.

Which averaged approximately 18 months.

Although our new garment additions into service were down significantly in the quarter. The amortization expense was little changed because of the amortization of prior period expenditures.

As Steve discussed our number one priority during the quarter was the safety of our employees and we sourced a significant amount of safety supplies for internal use.

Over the last few months. These products were in high demand and prices were significantly higher than they had been prior to the pandemic.

As prices have recently started to normalize and as a result, we expect that the costs, we will incur in subsequent periods will be dramatically less than our current quarter.

I'll be able to pay their outstanding balances.

Energy costs decreased to 3.4% of revenues in the third quarter of 2020 from 4.2% in prior year.

Revenues from our specialty government segment, which deliver specialized nuclear decontamination and clean room products and services.

Decreased to $36.2 million from 37.3 million in prior year or 3.1%.

This decrease was largely due to lower direct sale activity in the quarter, partially offset by growth in our clean room and European nuclear operations.

Adams were partially offset by higher merchandise expense and costs incurred responding to that pandemic, including employee compensation and amounts paid for internal use safety supplies.

Our first aid segments revenues increased $20.9 million from 16.6 million in prior year or 26.0%.

This increase was primarily due to increased demand for the segments safety and PE offerings.