Q4 2020 UniFirst Corp Earnings Call

October 21, 2020

[music].

[noise] greetings, everyone and welcome to the fourth quarter earnings call. During the presentation. All participants will be in motion only mode. Later, we will have a question and answer session at that time. If you have a question. Please press the one four on your telephone keypad and if you need to reach an operator at any time, Please press star zero.

It is now my pleasure to turn the call 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 full year and fourth quarter results for fiscal year 2020.

This call will be on a 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 into Q 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 in.

For more information please refer to the discussion of these risk factors in our most recent form form 10-K, and 10-Q filings with the Securities and Exchange Commission.

I want to start by saying that fiscal 2020 is certainly been a year like no other and.

And as we head into fiscal 2021, our company the country in the World continue to deal with the impact of the pandemic.

This continues to be an unprecedented time in first and foremost our thoughts are for the safety and well being of all those dealing with the impact of this virus.

For our full year fiscal 2020, the company reported revenues of 1.8 or $4 billion, which came up just short of last year's 1.8 or 9 billion.

However, as a reminder, fiscal 2019 was a 53 week fiscal year and therefore on an even work week basis revenues in fiscal 2020 grew by 1.6%.

Full year operating income for fiscal 2020 was $172.7 million down from $232 million in fiscal 2019, which included both the positive impact of the extra week as well as a $21.1 million gain related to the settlement related to our CRM systems project.

As you would expect our results over the second half of the year were affected on the top and bottom line by pandemic induced customer closures and reduced overall economic activity as well as costs related to our pandemic pandemic response efforts.

Overall, we are pleased with our results given the headwinds that we faced during the year our big.

Our ability to continue generating solid profits and strong cash flow speaks to the resiliency of our company and the value of the products and services that we provide to our customers I'd.

I want to again to sealy, Thank our team partners for the tremendous 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 they truly continue to deliver in every way.

The pandemic is clearly highlighted the essential nature of our products and services, we believe the need and demand for high Genomically clean garments and work environments positions, our company well to support the evolving economic landscape like.

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

Shane will provide more details on our quarterly results shortly as well as our near term outlook, but let me provide a few comments.

During the quarter, we continue to focus on opportunities in the market to take advantage of new or increased demand for products and services.

Increased demand for mass hand, sanitizer programs as well as full service rental programs for identically clean medical codes and gowns have helped us provide some offset to the overall headwinds we are facing within our customer base.

On not on that note additional reopening of customers since our earnings call in July have been very slow and mostly offset by the impact of reductions of wearers and services.

Part of this impact continues to be driven by the decline in demand for oil and the corresponding reduction in business activity and the energy dependent markets that we service.

As a result, our overall weekly billings continued to be approximately 7% lower than the pre co bid levels experienced in February and early March.

As we head into fiscal 2021, we will continue to position our sales resources to take advantage of opportunities that exist in the market today and as the economy continues to recover.

That being said absent a more dramatic near term economic recovery of economic activity, we do not anticipate showing year over year growth until the second half of fiscal of the fiscal year.

As we've talked about over the last year or two we continue to be focused on making good investments in our people our infrastructure in our technologies all of.

All of our investments are designed to deliver saw 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.

Despite the topline challenges our strong balance sheet healthy cash position and ongoing cash flows allows us to continue making these investments.

Certain investments scheduled for fiscal 2021, we'll continue as planned including the deployment of our new CRM system.

These investments will put pressure on our margins in the near term. However, we feel strongly that keeping these improvements to our company on schedule are critical to our long term success.

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

Thanks, Steve.

Revenues in our fourth quarter of 2020 were $428.6 million down 10.6% from 479.6 million a year ago.

The fourth quarter of 2020 had one less week of operations compared to prior year due to the timing of our fiscal calendar.

Excluding the impact of the extra week in 2019 revenues decreased 3.5%.

Operating income for the fourth quarter decreased to $40.8 million from $58.9 million in the prior year period, and net income for the quarter decreased to $31.6 million or $1.66 per diluted share from $46 million or $2.40 per diluted.

Good share.

Our core laundry operations revenues for the fourth quarter were $384.6 million down 10.9% from the fourth quarter of 2019 core.

Core laundry organic growth, which adjusts for the estimated effect of acquisitions the impact of the extra week in 2019 as well as fluctuations in the Canadian dollar was negative 4.2%.

When we last spoke in July we had indicated that on a weekly basis, we had been seeing recoveries in our revenues related to our customers reopening their businesses after temporary code related closures and a year over year, our weekly run rate was down approximately 4% to 5%. However.

However, we also caution that those recoveries had recently started to moderate.

Since that time as Steve mentioned, our weekly revenues have remained relatively stable with any benefits from customer re openings being largely offset by higher aware and service reductions as well as headwinds we are seeing from our energy dependent markets.

Core laundry operating margin decreased to 9.9% for the quarter or $38.1 million from 12.9% in prior year or $55.6 million.

The segment's profitability was affected by many items, including the impact of the decline in rental revenues on our cost structure additional costs, we incurred responding to the pandemic as well as higher casualty claims expense in the quarter.

In addition, our profitability in the quarter also reflects continued investments we are making in our capabilities and strategic projects, including our CRM initiatives.

These items were partially offset by lower travel related in energy costs during the quarter.

Energy costs decreased 3.5% of revenues in the fourth quarter of 2020 down from 4.1% in prior year.

Revenues from our specialty garment segment, which deliver specialized nuclear decontamination and clean room products and services decreased to $27.6 million from $31.3 million in prior year or 11.6%.

This decrease was primarily due to the extra week in the fourth quarter of 2019 compared to the prior year period. This.

The segment's operating margin increased to 7.1% from 6.6% percent.

As we mentioned in the past this segment's results can vary significantly from period to period due to the seasonality and the timing of nuclear reactor outages and projects that require specialized services.

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 $474.8 million at the end of our fourth quarter of fiscal 2020.

Cash provided by operating activities for the year totaled $286.7 million, which is a slight increase over the $282.1 million in prior year.

In 2020, the impact of lower profitability on our cash flows was primarily offset by reduced working capital needs, including lower accounts receivable and additions to merchandise and service.

Capex in fiscal 2020 totaled $116.7 million, we continue to invest in our future while balancing the uncertainties surrounding the ongoing pandemic during the.

During the year, we capitalized $11.9 million related to our ongoing CRM project, which consisted of license fees third party consulting costs and $5.8 million of capitalized internal labor costs.

As of August 29, 2020, we had capitalized $22.6 million related to the CRM project.

The company did not repurchase any shares during the quarter under its previously announced share repurchase authorization, primarily due to the uncertainty related to covert 90.

As of August 29, 2020, we have repurchased a total of 315000 shares of common stock for a total of $52.3 million under the authorization.

As we look towards 2021 due to the on the continued uncertainty surrounded the code surrounding the COVID-19 pandemic we were.

We will only be providing guidance for our first quarter of 2021 at this time.

We currently expect our Q1 2021 revenues will be between $433 million and $443 million and diluted earnings per share to be between $1.55 and $1.70.

Our topline guidance assumes a core laundry organic growth rate of negative 6.8% at the midpoint of the range allow.

Along with the continuing impacts from the pandemic the timing of certain annual pricing adjustments will also be a headwind to the organic growth in our first fiscal quarter of 2021.

Our though although our visibility remains limited we did want to caution that showing growth for the full fiscal year will be a challenge based on the impact of the COVID-19 pandemic as well as the related impact on the demand for oil and the energy dependent markets that we serve.

Core laundry operating margin at the midpoint of the range is approximately 9.1% base.

Based on the current energy prices, we are modeling to energy costs will be 3.8% of revenues in our first fiscal quarter of 2021, which is down from pilot prior years comparable quarter of 3.9%.

At this time, we expect the quarter's effective tax rate to be 25% as.

As a reminder, our tax rate can fluctuate based on discrete events, including the impact of stock compensation benefits.

In 2021, we will continue to invest in our capabilities and our strategic initiatives. Despite the economic uncertainty as we maintain a long term approach towards managing the business.

For an update on our CRM systems project, we continue to be pleased with the prior progress of our initiatives. We now believe that we will capitalize between 35 and $40 million related to this project, which includes license fees consulting costs capitalized internal labor costs handheld devices and hard.

Where costs to support the deployment of the system.

In 2021, we expect that we will capitalize approximately $8 million to $12 million related to this project.

At this time, we are piloting a number of locations and.

And expect that we will start a broader deployment in the second half of this fiscal year through.

Throughout the year, we will be continuing to build the capabilities to successfully deploy the system, including training and Onsites Fourteens.

Costs related to these deployment teams as well as lower capitalized labor costs as our internal resources transition from implementation and development activities to system support.

Will result in increasing initiative related expenses as we progress through 2021.

We will update you more on these deployment related costs as we move throughout the year.

This concludes our prepared remarks, and we would now be happy to answer any questions that you may have.

Thank you very much ladies and gentlemen, this led to register a question. Please press the one four on your telephone keypad, you will hear Ethree, Tom, prompting on what your request for your question has been answered youd like to withdraw your press one three to remove yourself from the queue. Once again, we welcome your questions. Please press one four on your telephone keypad snap one marketplace with the first question.

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

Great Good morning, guys.

We should start to see.

Maybe we'll start with the margins that were reported in the quarter can you give a little bit of detail here.

I guess last quarter, there was a large number of kind of onetime restructuring costs.

You guys Didnt quantify then I was wondering if there were any.

Carryover, one timeish costs like that in this quarter.

That were worth highlighting.

Yeah Andy.

Last quarter, we had talked about.

Well first of all there were a number of additional costs that we incurred during during the quarter related to responding to the pandemic the two larger items.

That probably warrant talking about individually last last quarter. We mentioned the fact that we had instituted some temporary employee compensation programs.

That sort of impacted our margins last quarter.

And those actually did carry over to the fourth quarter and had some impact on our costs.

In the fourth quarter the other item similar to the items that we talked about in prior quarter, we did incur some additional costs related to internal use pp.

No at this point in time internal use PE has become more of an operating cost for us but there are.

But during the quarter.

We did incur additional costs related to that as the the prices for those continued to adjust to normalize we spoke about it a little bit in the third quarter and the fact that.

Immediately after the pandemic had started the costs so.

Sourcing those items had become a challenge in the cost related to those items.

It was significantly increase although those costs had started to normalize those those elevated costs related to those products carried into the fourth quarter, and we incurred incremental incremental costs related to those as well.

Got it has the.

On the first thing with the I guess.

I guess supplementary pay for your employees.

Does that adjusted now with Kobin being kind of the new normal or is that going to be affecting the fiscal 21 numbers as well.

Yes, Hi, Andy most of it has run its course in the fourth quarter. There is a little bit of carryover into this quarter, but it's a more nominal now and sort of we've adjusted back to to kind of more more.

Traditional cott.

Compensation programs and levels.

Got it sticking I guess with the margins.

It sounds like I mean, clearly just judging by the amount of costs capitalized in the quarter for the CRM.

And then the fact that you'll be capitalize the word here in 21, you're piloting you're getting closer to going live on that one.

Got it appreciate some of the detail you gave on us.

Do you expect Steve that you will be fully live this fiscal year, and then I'm just kind of curious as to.

Given that you're going to be capitalizing totaled $35 million to $40 million what that means for annualized.

Depreciation burden that you'll be recognized into the piano.

I guess I'll take the first part of the question being will we be fully deployed this year no I think as Shane Shane referred to we will be we will be initiating a full deployment at some point kind of mid year and it will be a phased rollout that will certainly go up into 2022.

To.

Not prepared at this point to give an exact timeline on the on the end date to that some of it will depend on how the early pacing of the deployment goes and so on.

I don't believe we have the fully baked depreciation numbers.

Put together right now there are some moving pieces.

The broader investment in the system will be depreciated over a somewhat longer period of time than maybe normal software right. So you're probably looking at a 7% to 10% seven to 10 years sort of average depreciation probably for the investments some items will be less like the handheld devices, but.

So as we get closer in the year. We can we can give you a little more discreet information about that.

Got it okay.

It sounds like the energy end market in particular is that it's a pretty significant headwind to the revenues. There I was just wondering if you could give us.

I remember in 2013 heading into it or even early 14 heading into that would you know.

Thought that energy was no pushing probably 10% of your company's revenues certainly I think because of high margin more than that in terms of your company's overall profits.

It could be wrong on that but I think that's generally right. It never fully rebounded from that decline I'm kind of curious as to heading into this most recent oil bust.

We're energy stood as a percentage of revenue and what you're seeing in the in the revenue trends for that end market in particular today.

Sure.

Yes, you are correct I think after the last dip, but never fully recovered. Although there was some solid recovery, particularly in west, Texas and somewhat in Western Canada.

You know, we probably peg it and we're always cautious when we say no direct energy markets versus indirect support industries and so on but you're right. We were probably closer to 10% at its peak and probably closer to five or six outcomes.

Coming into this recent decline what I would say is and I think it's maybe a way to frame geographically, what we're seeing as additional headwind headwinds when we talked about these energy dependent markets.

Our us and Canadian operations are broken into 10 regions and we have two regions that that straddle, Texas.

And the surrounding states and when you look at the number I referenced in the in the earnings call, saying, we were down about 7% from pre co bid levels, though.

Those two regions are down double.

Double digits and the one that encompasses west Texas is down.

You know into the teens and so you look at that as you say there are parts of the country that have recovered a lot better, but those ones that touch oil and those economies continue.

Continued to be more impacted I think our operators in those parts of the country would say that the coal that impact on on energy and the demand for energy in that trickle down effect has been more significant than customer closures. For example in those parts of the country and I'll throw in our region that.

Encompasses what in Canada is impacted more than the average for the company as well. So I think that just give you a sense of of the level of impact we're seeing in those parts of the country.

Okay.

My last question for now.

It's just looking at the one Q guidance here core laundry down.

6.8% at the midpoint revenue wise versus.

Versus just over 4% this quarter so sequential degradation.

Steve I was wondering is that a compare issue.

Is this because you are seeing businesses that were reopening now re shutting where levels.

Probably some commentary as to why sequential trends in organic revenue itself is when it goes in the guidance.

Yeah, Andy and Shane mentioned this comment about the timing of some annual price investments that we've talked historically about a fair amount of those annual adjustments happening in the summer timeframe closing in on the end of our fiscal year during the.

During that you'd given that that was somewhat at the height of some of the challenges our customers were having we pushed some of those.

Annual price adjustments further out to help our customers during that time. So there is there is some timing impact and some of that pricing impact will be realized as as we move toward later in our first quarter and into the rest of the year. So some of it is a timing issue and a comp issue as you sort of a low.

Added to I would say just to just to be clear the core fundamentals of what we're seeing in terms of volume.

Growth or degradation.

Got to split the difference, it's sorta right down the middle right now we continue to sell a fair amount of new business given the environment.

Our retention is okay and its really we are still seeing some reductions, but we're not really seeing sequential degradation in the core business.

Okay. That's helpful.

Thats helpful. Thanks, guys I might chime in later, but thats good for now thank you so much.

Thank you thanks.

Ladies and gentlemen, as a reminder for questions. Please press one four on your telephone keypad. Our next question comes from the line of Tim Mulrooney with William Blair. Please go ahead.

[noise], Steve Shane Good morning Lee.

Morning.

Hi.

Just a couple of questions. This morning, My first one I'd like to focus on labor availability and service levels, if we could for a minute.

In this environment have you found it harder or easier to source labor I know there are millions who remain unemployed, but I've spoken to some of your smaller provider or some smaller providers I should say, who who said sourcing labor has been a real challenge given some of the government programs higher unemployment benefits et cetera.

Well what are you guys seem in your business and has that impacted service levels at all during the pandemic period, either favorably or unfavorably.

Yes, it's an interesting question, Tim and I think it's something we certainly dealt with over the course of the of the last six months.

I think in particular some of the government subsidies.

Subsidies around unemployment and the increased levels that that went through.

Primarily through July and then have been extended at lesser levels.

I'll have that have had some impact I think it was greater back in the in the June July timeframe, I think things have opened up a little bit.

I I would say that we remain mostly staff to levels that we would want at this time.

And I think that market by market. There is still some hiring challenges, but broadly I would not say, it's impacted our ability to service at this point.

I think the challenges around.

No we've been looking to ramp up sales heads in some cases, it's been a little challenging just dealing with a lot more of the remote environment and getting together with candidates and so on and so forth, but overall I think we see somewhat of a somewhat of a reluctance of some employees to come back to work.

And it's not just I think the government subsidies I think you have childcare issues for sure with a lot of employees with schools situations and so I think when when candidates are balancing the desire to come into the workforce or or or or not there is more more issues than just.

Unemployment subs subsidies for them to deal with so we are seeing some of it but we've been able to be I think reasonably staff to support the customers.

Okay Thats great color. Thank you.

Yes, certainly schools also a major issue Romo.

Yes.

Shifting gears slightly I mean stand in your core laundry segment, I mean, you mentioned the timing of pricing adjustment.

Would negatively impact organic growth from the first quarter is there any way you can quantify that impact for us and would you expect that to carry throughout the year or is that timing pretty specific to the first quarter.

Yes, it's more of a full first quarter timing issue.

And we'd expect the overall impact that for the year to be a little bit more normal.

I think overall the pricing environment out there in general is fairly.

Fairly tight in aggressive as you'd expect.

In a in a difficult economy I think all customers are looking for their vendors to assist in helping them through these difficult times. So it is a it is a challenging environment, but I think that from Premier particular question is more of a first quarter comp issue.

Okay, and speaking of helping through challenging times, maybe we could that's a good segue to your first aid business. I mean, there was a little bit of a decline which was a little surprising for us.

For customers with larger orders of safety MPP knee in the beginning of a pandemic have have you seen a leveling off in orders or has that quantity been consistent I guess I'm, hoping to gauge how much of the initial orders was due to stockpiling versus kind of a sustained increase in PDP.

Any usage.

Yeah. That's a good question and just to be clear some of our pp is being sold in our first aid segment, but we're also selling it through our core laundry business.

If we're servicing from our core laundry routes, whether it be sanitizer or mask. So we have some of those sales in both places.

In General I think we're seeing.

We're probably seeing a little bit of a slowdown there and again, it's somewhat geographic.

As you know I guess.

I guess I'll say early on in the pandemic when the key.

The cases around the country were primarily focused in the northeast most significantly we weren't sales selling any masks in the south and that sorta transitioned as the cases peaked in those parts of the country and and as cases.

Uh huh.

Improve in certain markets, you do see a little bit of a slowdown. So it's it's up and down I would say probably right now we're a little down, particularly on the mask side than we were earlier on.

But but I'd say hand, sanitizer and I think other kind of hygienic program type things continue to be.

Reasonably strong and I think people for the most part with some of those products.

There will be with us for some time.

Okay, well. Thank you for all the color this morning and good luck.

Good luck over the next several months here.

Thank you.

Ladies and gentlemen, once again for questions. Please press one four on your telephone keypad one for.

And we have a follow up from Andrew Wittmann. Please go ahead.

Good we don't want you guys to get off that is usually two separate products.

We wouldn't expect that Andy.

I mean the.

You guys. The family has a big ownership stake the company is always thought very long term.

It's a challenging time for your customers means that the challenging times for you the balance sheet sitting with.

Right.

Large amount of cash you didnt buy any stock in the quarter I'm curious as to why that seems like maybe a time, where a long term owner like the company would be likely to take advantage of some of the uncertainty and take a longer term view.

Steve I just thought maybe you could give some perspective on that.

You know with respect to share buybacks, we had ceased the program in the third quarter just given some of the uncertainty certainly it's something we will continue to evaluate as we go forward here and you're right. We're obviously company confident in the company's ability to continue to generate cash.

You know when you look at valuations from from a stock perspective, it's not as if our our stock or or has been unduly punished due to the uncertainty from the pandemic, either but but regardless I mean, we'll continue to evaluate that as we go forward I think certainly.

Sitting here today, although there is still a fair amount of uncertainty there is a a better feeling then then back in the April may timeframe, when maybe things were a little more uncertain. So it's something we will continue to evaluate as we as we generate cash obviously as you know during this type of cyclical time.

We do generate some more cash with lower investments in merchandise.

You know we benefited during the quarter being able to defer some payroll taxes now that that will be paid a little bit later in 2021, So we'll be evaluating what the cash balances look like and continue to have those conversations, but you're right I think the family and the board we've always taken a long term view and we'll continue to do that.

Oh.

Thanks for that the.

Well one thing that it appears the pandemic has made abundantly clear is that.

These facilities service offerings, which have always been a relatively small portion of your business whether it's his sanitize. Each review your first aid business.

You can have a pretty significant benefits.

And do you.

You couple the company from being kind of employ uniformed fercs focused and I think really broadens out the opportunity set.

Think you disagree with that I would.

I was just kind of curious as to your thought given this experience on.

Centrally investing more in expanding those facility services offerings more quickly.

In response to what is clearly what was a large opportunity which is probably grown significantly as results Derrick.

You know I'll take them a little bit separately on the first day side that is is part of our strategic roadmap. Our first aid business has always been relatively small certainly as a percentage of our overall revenues compared to at least our largest competitor and we do think there's opportunities. There. So we have been looking for acquisitions.

As well as have a plan to organically grow that business, a little bit more rapidly than we have in the past.

You know so that is something that we feel makes a lot of sense given given the current environment, but also just our overall position in the industry and the opportunities that are out there as far as the other core facility service products that we deliver on our core laundry routes like you.

Said sanitizers hands so.

Bathroom products, you know weakened we continue to be invested in that and continue to to.

Ill.

Aggressively try to work and take our share of the of the market in that area.

I think we have a pretty broad offering on a lot of those core products and and this is an environment that we're working to take additional adcs.

Additional advantage.

Last year, we we've started to build sales resources.

Beyond our route personnel that focus on selling into our existing accounts and during the quarter those resources, certainly pay dividends being able to take advantage of more opportunities that existed with existing accounts, whereas you know getting appointments with with a new accounts was more challenging, particularly at the height of the pandemic.

So it is an area of focus that that we feel like begin we can we can do more and.

Okay.

Alright, Thanks, a lot.

Thank you.

And gentlemen, those are all the questions we have I'll turn it back to you.

Great I'd like to thank everyone for joining us today to review our fourth quarter results for 2020, we look forward to speaking with you again in January January when we expect to report our first quarter performance. Thank you and have a great day.

And ladies and gentlemen that does conclude the call for today. We thank you for your participation everyone have a great rest for today and you may disconnect your line.

[music].

Greetings, everyone and welcome to the fourth quarter earnings call. During the presentation. All participants will be in motion only mode. Later, we will have a question and answer session at that time. If you have a question. Please press the one 400 telephone keypad and if you need to reach an operator at any time. Please press star zero and it is now my pleasure to turn the call over to us.

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 full year and fourth quarter results for fiscal year 2020.

This call will be on a 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 into Q future events into.

Trends identify forward looking statements.

Actual future results may differ materially from those anticipated depending on a variety of risk factors for more.

For more information please refer to the discussion of these risk factors in our most recent four form 10-K, and 10-Q filings with the Securities and Exchange Commission.

I want to start by saying that fiscal 2020 is certainly been a year like no other and.

And as we head into fiscal 2021, our company the country in the World continue to deal with the impact of the pandemic.

This continues to be an unprecedented time in first and foremost our thoughts are for the safety and well being of all those dealing with the impact of this virus.

For our full year fiscal 2020, the company reported revenues of $1.84 billion, which came up just short of last year's 1.8 or 9 billion.

However, as a reminder, fiscal 2019 was a 53 week fiscal year and therefore on an even work week basis revenues in fiscal 2020 grew by 1.6%.

Full year operating income for fiscal 2020 was $172.7 million down from $232 million in fiscal 2019, which included both the positive impact of the extra week as well as the $21.1 million gain related to the settlement related to our CRM systems project.

Overall, we are pleased with our results given the headwinds that we faced during the year are above.

Our ability to continue generating solid profits and strong cash flow speaks to the resiliency of our company and the value of the products and services that we provide to our customers.

Want to again to Sealy, Thank our team partners for the tremendous 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 they truly continue to deliver in every way.

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

Shane will provide more details on our quarterly results shortly as well as our near term outlook, Let me provide a few comments.

During the quarter, we continue to focus on opportunities in the market to take advantage of new or increased demand for products and services and.

Increased demand for masks hand, sanitizer programs as well as full service rental programs for identically clean medical codes and gowns have helped us provide some offset to the overall headwinds we are facing within our customer base.

On not on that note additional reopening of customers since our earnings call in July have been very slow and mostly offset by the impact of reductions of wearers and services.

Part of this impact continues to be driven by the decline in demand for oil and the corresponding reduction in business activity in the energy dependent markets that we service.

As a result, our overall weekly billings continued to be approximately 7% lower than the pre coven levels experienced in February and early March.

As we head into fiscal 2021, we will continue to position our sales resources to take advantage of opportunities that exist in the market today and as the economy continues to recover.

That being said absent a more dramatic near term economic recovery of economic activity, we do not anticipate showing year over year growth until the second half of fiscal of the fiscal year.

As we've talked about over the last year or two we continue to be focused on making good investments in our people our infrastructure in our technologies.

All of our investments are designed to deliver saw solid long term returns to all unifirst stakeholders in our integral components to our primary long term objective to be universally recognized as the best service provider in our industry.

Despite the topline challenges our strong balance sheet healthy cash position and ongoing cash flows allows us to continue making these investments.

Certain investments scheduled for fiscal 2021, we'll continue as planned including the deployment of our new CRM system.

These investments will put pressure on our margins in the near term. However, we feel strongly that keeping these improvements to our company on schedule are critical to our long term success.

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

Thanks, Dave.

Revenues in our fourth quarter of 2020 were $428.6 million down 10.6% from 479.6 million a year ago.

Fourth quarter of 2020 had one less week of operations compared to prior year due to the timing of our fiscal calendar.

Excluding the impact of the extra week in 2019 revenues decreased 3.5%.

Good share.

Our core laundry operations revenues for the fourth quarter were $384.6 million down 10.9% from the fourth quarter of 2019 core.

Core laundry organic growth, which adjusts for the estimated effect of acquisitions the impact of the extra week in 2019 as well as fluctuations in the Canadian dollar was negative 4.2%.

When we last spoke in July we had indicated that on a weekly basis, we had been seeing recoveries and our revenues related to our customers reopening their businesses after temporary cobot related closures and that year over year, our weekly run rate was down approximately 4% to 5%. However.

However, we also caution that those recoveries had recently started to moderate.

Since that time as Steve mentioned, our weekly revenues have remained relatively stable with any benefits from customer re openings being largely offset by higher wear and service reductions as well as headwinds we are seeing from our energy dependent markets.

Core laundry operating margin decreased to 9.9% for the quarter or $38.1 million from 12.9% in prior year or $55.6 million.

In addition, our profitability in the quarter also reflects continued investments we are making in our capabilities and strategic projects, including our CRM initiatives.

These items were partially offset by lower travel related in energy costs during the quarter.

Energy cost decreased 3.5% of revenues in the fourth quarter of 2020 down from 4.1% in prior year.

This decrease was primarily due to the extra week in the fourth quarter of 2019 compared to the prior year period.

Segment operating margin increased to 7.1% from 6.6% percent.

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 $474.8 million.

At the end of our fourth quarter of fiscal 2020.

Cash provided by operating activities for the year totaled $286.7 million, which is a slight increase over the $282.1 million in prior year.

In 2020, the impact of lower profitability on our cash flows was primarily offset by reduced working capital needs, including lower accounts receivable and additions to merchandise and service.

Capex in fiscal 2020 totaled $116.7 million, we continue to invest in our future while balancing the uncertainties surrounding the ongoing pandemic.

During the year, we capitalized $11.9 million related to our ongoing CRM project, which consisted of license fees third party consulting costs and $5.8 million of capitalized internal labor costs.

As of August 29, 2020, we had capitalized $22.6 million related to the CRM project.

The company did not repurchase any shares during the quarter under its previously announced share repurchase authorization, primarily due to the uncertainty related to COVID-19.

As of August 29, 2020, we have repurchased a total of 315000 shares of common stock for a total of $52.3 million under the authorization.

As we look towards 2021 due to the continued uncertainty surrounding the code surrounding the COVID-19 pandemic.

We will only be providing guidance for our first quarter of 2021 at this time.

We currently expect our Q1 2021 revenues will be between $433 million and 443 million and diluted earnings per share to be between $1.55 and $1.70.

Our topline guidance assumes a core laundry organic growth rate of negative 6.8% at the midpoint of the range allow.

Along with the continuing impacts from the pandemic the timing of certain annual pricing adjustments will also be a headwind to the organic growth in our first fiscal quarter of 2021.

Core laundry operating margin at the midpoint of the range is approximately 9.1% base.

Based on the current energy prices, we are modeling the energy costs will be 3.8% of revenues in our first fiscal quarter of 2021, which is down from pipe prior years comparable quarter of 3.9%.

At this time, we expect the quarter's effective tax rate to be 25% as.

As a reminder, our tax rate can fluctuate based on discrete events, including the impact of stock compensation benefits.

In 2021, we will continue to invest in our capabilities and our strategic initiatives. Despite the economic uncertainty as we maintain a long term approach towards managing the business.

Where costs to support the deployment of the system.

In 2021, we expect that we will capitalize approximately $8 million to $12 million related to this project.

At this time, we are piloting a number of locations and.

And expect that we will start a broader deployment in the second half of this fiscal year through.

Throughout the year, we will be continuing to build the capabilities to successfully deploy the system, including training and onsite support teams.

Costs related to these deployment teams as well as lower capitalized labor costs as our internal resources transition from implementation and development activities to system support.

Will result in increasing initiative related expenses as we progress through 2021.

We will update you more on these deployment related costs as we move throughout the year.

This concludes our prepared remarks, and we would now be happy to answer any questions that you may have.

Thank you very much ladies and gentlemen, this led to register a question. Please press the one for one on your telephone keypad, you will hear it three Tom Crompton on what your request. The question has been answered youd like to withdraw your press one three to remove yourself from the queue. Once again, we welcome your questions. Please press one four on your telephone keypad snap one marketplace with the first question.

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

Great Good morning, guys.

We should start to.

Maybe we'll start with the margins that were reported in the quarter can you give a little bit of detail here.

I guess last quarter, there was a large number of kind of onetime restructuring costs.

You guys Didnt quantify then I was wondering if there were any.

Carryover, one timeish cost like that in this quarter.

That were worth highlighting.

Yeah Andy.

Last quarter, we had talked about.

Well first of all there were a number of additional costs that we incurred during during the quarter related to responding to the pandemic the two larger items.

That probably warrant talking about individually.

Last last quarter, we mentioned the fact that we had instituted some temporary employee compensation programs.

That sort of impacted our margins last quarter.

And those actually did carry over to the fourth quarter and had some impact on our costs.

In the fourth quarter the other item similar to the items that we talked about in prior quarter, we did incur some additional costs related to internal use people.

Okay.

No at this point in time internal use PE has become more of an operating cost for us but.

But during the quarter.

We did incur additional costs related to that as the the prices for those continued to adjust to normalize.

Spoke about it a little bit in the third quarter and the fact that.

Immediately after the pandemic had started the costs so.

Sourcing those items had become a challenge in the cost related to those items.

It was significantly increased although those costs had started to normalize those those elevated costs related to those products carried into the fourth quarter, and we incurred incremental incremental costs related to those as well.

Got it has the.

On the first thing with the I guess.

I guess supplementary pay for your employees.

Does that adjusted now with Covidien being kind of the new normal or is that going to be affecting the fiscal 21 numbers as well.

Traditional cott.

Compensation programs at levels.

Got it sticking I guess with the margins.

It sounds like I mean, clearly just judging by the amount of costs capitalized in the quarter for the CRM.

And then the fact that you'll be capitalize the word here in 21, you're piloting you're getting closer to going live on that one.

Good appreciate some of that you tell you gave a positive.

Do you expect Steve that you will be fully live this fiscal year, and then I'm just kind of curious as to.

Given that you're going to be capitalizing totaled $35 million to $40 million what that means for annualized.

Depreciation burden that you'll be recognize it to the piano.

Into 2022 now.

Not prepared at this point to give an exact timeline on the on the end date to that some of it will depend on how the early pacing of the deployment goes and so on.

I don't believe we have the fully baked depreciation numbers.

Put together right now there are some moving pieces.

Rob.

Depreciation probably for the investments some items will be less like the handheld devices, but so.

So as we get closer in the year. We can we can give you a little more discreet information about that.

Got it okay.

It sounds like the energy end market in particular is this a pretty significant headwind to the revenues. There I was just wondering if you could give us.

However, in 2013 heading into it or even early 14 heading into that what you see.

I thought that energy was pushing probably 10% of your company's revenues certainly I think because of high margin more than that in terms of your company's overall profits.

It could be wrong on that but I think that's generally right. It never fully rebounded from that decline I'm kind of curious as to heading into this most recent oil bust.

We're energy stood as a percentage of revenue and what you're seeing.

In the in the revenue trends for that end market in particular today.

Sure.

You're correct I think after the last dip, but never fully recovered. Although there was some solid recovery, particularly in west, Texas and somewhat in Western Canada.

Our us and Canadian operations are broken into 10 regions and we have two regions that that straddle, Texas.

And the surrounding states and when you look at the number I referenced in the in the earnings call, saying, we were down about 7% from pre co bid levels those.

Those two regions are down double.

Double digits and the one that encompasses west Texas is down.

You know into the teens and so you look at that as you say there are parts of the country that have recovered a lot better, but those ones that touch oil and those economies continue.

Continue to be more impacted I think our operators in those parts of the country would say that the coal that impact on on energy and the demand for energy in that trickle down effect has been more significant than customer closures. For example in those parts of the country and I'll throw in our region that.

Encompasses what in Canada is impacted more than the average for the company as well. So I think that just gives you a sense of the level of impact we're seeing.

In those parts of the country.

Okay.

My last question for now.

Just looking at the one Q guidance here core laundry down.

6.8% at the midpoint revenue wise.

Versus just over 4% this quarter so sequential degradation.

Steve I was wondering is that a compare issue.

Is it because you're seeing businesses that were reopening no re shutting where levels.

Probably some commentary as to why sequential trend is organic revenue is is when it goes in the guidance.

Yeah, Andy and Shane mentioned this comment about the timing of some annual pricing adjustments that we've talked historically about a fair amount of those annual adjustments happening in the summer timeframe closing in on the end of our fiscal year during the.

During that given that that was somewhat at the height of some of the challenges our customers were having we pushed some of those.

Annual price adjustments further out to help our customers during that time. So there's there's some timing impact and some of that pricing impact will be realized as as we move toward later in our first quarter and into the rest of the year. So some of it is a timing issue and a comp issue as you sort of a low.

Added to I would say just to just to be clear the core fundamentals of what we're seeing in terms of volume.

Growth or degradation.

How to split the difference it's sorta right down the middle right now we continue to sell a fair amount of new business given the environment.

Our retention is okay and its really we are still seeing some reductions, but we're not really seeing sequential degradation in the core business.

Okay. That's helpful.

Thats helpful. Thanks, guys I might chime in later, but thats good for now thank you so much.

Thank you thanks.

Ladies and gentlemen, as a reminder for questions. Please press one four on your telephone keypad. Our next question comes from line of Tim Mulrooney with William Blair. Please go ahead.

Steve Shane Good morning Lee.

Morning.

Just a couple of questions. This morning, My first one I'd like to focus on labor availability and service levels, if we could for a minute.

In this environment.

Have you found it harder or easier to source labor I know there are millions who remain unemployed, but I've spoken to some of your smaller provider or some smaller providers I should say, who who said sourcing labor has been a real challenge given some of the government programs higher unemployment benefits et cetera. What are you guys seem to be.

Your business and has that impacted service levels at all during the pandemic period, either favorably or unfavorably.

Yes, it's an interesting question, Tim and I think it's something we certainly dealt with over the course of the of the last six months.

I think in particular some of the government.

Subsidies around unemployment and the increased levels that that went through primarily through July and then have been extended at lesser levels.

Have have had some impact I think it was greater back in the in the June July timeframe, I think things have opened up a little bit.

I would say that we remain mostly staff to levels that we would want it this time.

And I think that market by market. There is still some hiring challenges, but broadly I would not say, it's impacted our ability to service at this point.

I think the challenges around.

We've been looking to ramp up sales heads in some cases it's.

Spend a little challenging.

Just dealing with a lot more of the remote environment and getting together with candidates and so on and so forth, but overall I think we see somewhat of a somewhat of a reluctance of some employees to come back to work and it's not just I think the government subsidies I think you have childcare issues for sure with a lot of employee.

Please with schools situations and so I think when when candidates are balancing the desire to come into the workforce or or or or not there is more more issues than just a.

Payments up subsidies for them to deal with so we are seeing some of it but we've been able to be I think reasonably staff to support the customers.

Okay Thats great color. Thank you.

Yes, certainly schools also a major issue Romo.

Shifting gears slightly I mean, staying in your core laundry segment I mean, you mentioned the timing of pricing adjustment.

Would negatively impact organic growth in the first quarter is there any way you can quantify that impact for us and would you expect that to occur.

Carry throughout the year or is that timing pretty specific to the first quarter.

Yes, it's more of a full first quarter timing issue.

And we'd expect the overall impact that for the year to be a little bit more normal.

I think overall the pricing environment out there in general is fairly.

Fairly tight in aggressive as you'd expect.

In a in a difficult economy I think all customers are looking for their vendors to assist in.

Helping them through these difficult times. So it is a it is a challenging environment, but I think that from from your particular question is more of a first quarter comp issue.

Okay, and speaking of helping through challenging times, maybe we could that's a good segue to your first aid business I mean, there was a little bit of it.

Decline, which was a little surprising for us.

Any usage.

Yeah. That's a good question and just to be clear some of our pp is being sold in our first aid segment, but we're also selling it through our core laundry business.

If we're servicing from our core laundry routes, whether it be sanitizer or mask. So we have some of those sales in both places.

In General I think we're seeing.

We're probably seeing a little bit of a slowdown there and again, it's somewhat geographic.

As you know I guess.

I guess I'll say early on in the pandemic when the.

The cases around the country were primarily focused in the northeast most significantly we weren't sales selling any masks in the south and that sort of transitioned as the cases peaked in those parts of the country and and as cases.

Improve in certain markets, you do see a little bit of a slowdown. So it's it's up and down I would say probably right now we're a little down, particularly on the mask side than we were earlier on.

But but I'd say hand, sanitizer and I think other kind of high Genic program type things continue to be reasonably strong and I think people for the most part with some of those products.

They will be with us for some time.

Okay, well. Thank you for all the color this morning and good.

Good luck over the next several months here.

Thank you.

Ladies and gentlemen, once again for questions. Please press one for when your telephone keypad one for.

And we have a follow up from Andrew Wittmann. Please go ahead.

Good we don't want you guys to get off that is usually two thats the question.

We wouldn't expect that Andy.

[music].

I mean the.

You guys.

Family has a big ownership stake the company is always thought very long term.

It's a challenging time for your customers means that the challenging times for you the ballot shoot sitting with.

Right.

Large amount of cash you didnt buy any stock in the quarter Im.

Im curious as to why this seems like maybe a time, where a long term owner like the company would be likely to take advantage of some of the uncertainty and take a longer term view.

Steve I just thought maybe you could give some perspective on that.

You know with respect to share buybacks, we had ceased the program in the third quarter just given some of the uncertainty certainly it's something we'll continue to evaluate as we go forward here and you're right. We're obviously company confident in the company's ability to continue to generate cash.

We do generate some more cash with lower investments in merchandise.

Thanks for that fee.

Well one thing that it appears the pandemic has made abundantly clear is that.

These facilities service offerings, which have always been a relatively smaller portions of your business, whether it's it's sanitizing Servier first aid business.

Can have.

Pretty significant.

Benefits.

And you can.

You couple the company from being kind of employ uniformed fercs focused and I think really broadens out the opportunity set.

Think you disagree with that I will.

I was just kind of curious as to your thoughts given this experience.

Potentially investing more in expanding those facilities services offerings more quickly.

In response to what is clearly what was a large opportunity which is probably grown significantly as a result.

Yeah, I'll take them a little bit separately on the first date side that is is part of our strategic roadmap. Our first aid business has always been relatively small certain.

Certainly as a percentage of our overall revenues compared to at least our largest competitor and we do think there's opportunities. There. So we have been looking for acquisitions as well as have a plan to organically grow that business.

A little bit more rapidly than we have in the past.

So that is something that we feel makes a lot of sense given given the current environment, but also just our overall position in the industry and the opportunities that are out there as far as the other core.

Facility service products that we deliver on our core laundry routes like you said sanitizers hands. So.

Bathroom products.

We can we continue to be invested in that and continue to to.

Ill.

Aggressively try to work and take our share of the of the market in that area.

I think we have a pretty broad offering on a lot of those core products and and this is an environment that we are working to take additional addition.

Additional advantage.

Last year, we started to build sales resources beyond our route personnel that focus on selling into our existing accounts and during the quarter. Those resources, certainly pay dividends being able to take advantage of more opportunities that existed with existing accounts, whereas.

Getting appointments with with new accounts was more challenging, particularly at the height of the pandemic.

So it is an area of focus that that we feel like we can we can we can do more and.

Okay.

All right. Thanks, a lot.

Thank you.

And gentlemen, those are all the questions we have I'll turn it back to you.

And ladies and gentlemen that does conclude the call for today. We thank you for your participation everyone have a great rest of your day and you may disconnect Your line.

Q4 2020 UniFirst Corp Earnings Call

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