Q1 2021 UniFirst Corp Earnings Call

January 6, 2021

[music].

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

Before and your telephone.

If at any time during the conference you need to reach an operator, Please press star zero.

I would now which and the converts over to Steven Sintros, President and CEO. Please go ahead.

Thank you and good morning, I'm, Steven Sintros, Unifirst, President and Chief Executive Officer, joining me today, Shane O'connor Executive Vice President and Chief Financial Officer.

I'd like to welcome you to Unifirst Corporation's conference call to review, our first quarter results for fiscal year 2021.

This call will be on a listen only mode until we complete our prepared remarks for the first a brief disclaimer. This.

This conference call may contain forward looking statements that reflect the company's current views with respect to future events and financial performance. These forward looking statements are subject to certain risks and uncertainties. The words anticipate optimistic believe estimate expect intend and similar expressions that indicate future events and trends identify forward looking.

Statements actual future results may differ materially from those anticipated depending on a variety of risk factors for more information. Please refer to the discussion of these risk factors and our most recent form 10-Q, and 10-K filings with the Securities and Exchange Commission.

As I have said the last couple of quarters I want to start by saying that first and foremost our thoughts are for the safety and well being of all those dealing with the impact and this virus.

I also want to once again sincerely. Thank our team partners for the tremendous effort. They continue to put forth taking care of each other and our customers during these challenging times.

Overall, we're pleased with the results of our first quarter, which came and mostly as expected from a top line perspective.

Consolidated revenues for the quarter were 446.9 million down 4% from our fiscal 2021st quarter.

These results were impacted by a strong quarter from both the nuclear and Cleanroom operations of our specialty garment segment.

Fully diluted earnings per share for the quarter was $2.20, which exceeded our expectations as many variable expenses trended lower than our projections.

As we have discussed the pandemic has clearly highlighted the essential nature of our products and services.

We believe the need and 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 and bumpy, but we continue to be confident in the company's position to weather the storm.

We also continue to position our sales resources to take advantages of opportunities that exist in the market today as the <unk> and as the economy recovers.

Some positive trends of note for the quarter include new business installs and roughly the same level as the first quarter a year ago as well as improved customer retention.

In addition, although reductions and where is continue at higher than normal levels, the significant reductions experienced and our energy dependent markets. During the third and fourth quarters of fiscal 2020 have started to moderate.

Overall, the outlook continues to be difficult to forecast.

Vaccine optimism is being balanced by uncertainty as to when and how quickly the vaccine will create positive movement in the economy and.

In addition, the recent surge and positive Cobot cases has started to cause increased business restrictions and certain states provinces and municipalities.

The impact of these or further potential restrictions could have an impact on our results moving forward.

As a result of the ongoing uncertainty we will not be providing any guidance at this time.

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

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

Our solid balance sheet positions us well to meet the ongoing challenges presented by the COVID-19 pandemic, while continuing to invest in growth and strengthen our business.

Certain investments scheduled for this year will continue as planned including the deployment of our new CRM system.

As we have talked about before some of these investments will pressure on margins and the near term. However, we feel strongly that keeping these improvements to our company on schedule will be critical to our long term success.

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

Thanks Steven.

As Steve mentioned and our first quarter of 2021 consolidated revenues were $446.9 million day.

Down 4% from $465.4 million, a year ago, and consolidated operating income decreased to $56 million from 60.1 million or 6.7%.

Net income for the quarter decreased to $41.9 million or $2.20 per diluted share from $48.2 million or $2.52 per diluted share.

Our effective tax rate in the quarter was 25 per cent compared to 22.1% and the prior year, which unfavorably impacted EPS comparison.

Our core laundry operations revenues for the quarter were $393.2 million down 5.6% from the first quarter of 2020.

Core laundry organic growth, which adjusts for the estimated effect of acquisitions as well as fluctuations and the Canadian dollar was also 5.6% through.

Throughout our quarter, our weekly revenues remained relatively stable however, as expected our organic growth rate trended and favorably compared to our prior sequential quarter due to the timing of certain annual pricing adjustments in the prior year.

Core laundry operating margin decreased to 12.4% for the quarter or $48.9 million from 12.9% and prior year or $53.8 million. The decrease in this segment's profitability was primarily due to the impact of the decline and rental revenues on our cost structure.

Which was partially offset by lower travel related health care and energy costs.

However, the segment's operating income exceeded our expectations due to a slightly stronger revenue performance combined with a number of other costs that trended favorably compared to our expectations.

As we have discussed in the past some of our expenses can be variable from quarter to quarter and difficult and forecast in the short term.

We do expect that a number of these costs that have been trending favourably will eventually normalize and pressure margins in the quarters ahead.

Energy cost decreased 3.6% of revenues in the first quarter of 2021 down from 3.9% and prior year.

Revenues from our specialty garment segment, which deliver specialized nuclear decontamination and clean room products and services increased to $38.1 million from $33.4 million in the prior year or 14.2%.

This increase was primarily due to higher direct sales and project related work in the us and Canadian nuclear operations as well as continued growth in the Cleanroom operations.

Segment's operating margin increased to 18.8% from 14.6%.

This increase was primarily due to lower production and delivery cost as a percentage of revenues as well as lower travel related health care and energy Corp.

These items were partially offset by higher merchandise expense as a percentage of revenue.

The specialty garments quarterly top line and profit performance significantly exceeded our expectations.

As certain direct sales and project related work that had been deferred and the second half of fiscal 2020 related to the COVID-19 pandemic. We're finally realised.

As well as some additional direct sale activity that was anticipated later in fiscal 2021 came through early.

As we have 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 a specialized services.

Our first day segments revenues were $15.5 million compared to $15.7 million and prior year.

However, the segment's operating profit was nominal compared to $1.4 million in the comparable period of 2020.

This decrease is primarily due to reduced sales from the segments higher margin.

Wholesale business combined with continued investment in the company's initiative to expand its first aid van business into new geographies.

We continue to maintain a solid solid balance sheet and financial position with no long term debt and cash cash equivalents and short term investments totaling $473 million at the end of our first quarter of fiscal 2021.

For the first three months of fiscal 2021 capital expenditures totaled $41.8 million as we continue to invest in our future with new facility additions expansions updates and automation systems that will help us meet our long term strategic objectives.

Our quarterly Capex spend was elevated primarily due to the purchase of a building and New York City for $14.1 million, which will provide us a strategic location for a future service center.

During the quarter, we capitalized $2.9 million related to our ongoing CRM project, which consisted of license fees third party consulting costs and capitalized internal labor costs.

As of the end of our quarter, we had capitalized and total of $25.5 million related to the CRM project.

As discussed on our last call.

Piloting a number of locations.

And expect that we will start a broader deployment and the second half of this fiscal year at which time, we will begin depreciating the system.

Eventually the depreciation of the system combined with additional hardware, we will install to support our new capabilities like.

Like mobile handheld devices for our route drivers will ramp to an estimated $6 million to $7 million of additional depreciation expense per year.

During the first quarter fiscal 2021, and we repurchased 41000 common shares for a total of $7.2 million under our previously announced stock repurchase program.

As of November 28, 2021, the company had repurchased a total of 355917 common shares for 50 $59.5 million under the program.

As Steve discussed due to consent continued uncertainty regarding how states provinces municipalities and our customers will respond to the recent surge and positive koby cases.

As well as how quickly this vaccine will provide pandemic relief to the economy, we will not be providing guidance at this time.

However, I will remind you that our second fiscal quarter tends to be a lower margin quarter due to the seasonality of certain expenses that we incur.

And as we have done and our recent quarters. We also wanted to provide you an update on our current revenue trends.

Throughout December the weekly rental billings and our core laundry operations have been trending down compared to the comparable weeks and prior year by approximately 3.5% to 4%.

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

Thank you if you would like to register a question. Please press the one followed by the four on your telephone.

Here are three total prompt to acknowledge your request.

Question has been answered and you would like to his CCI registration.

Please press the one followed by the free again to register for a question. Please press. The one followed by the four and our first question comes the line of Andrew Steinerman with Jpmorgan. Please proceed.

Hi, happy new year am I getting cash and what are you doing. Thank you. So much I hope all is well I didn't catch your last statement when you said.

John 3.5% to 4%, what Kevin said was that referring to and was that referring to total revenues or core laundry because I'm. Most interested in hearing how your core laundry business did and the month of November and into December on a year over year basis.

Yeah, Andrew that actually was our revenue is related to our core laundry operations.

And the time period was throughout December.

So that was the last throughout December.

Thats right. Okay. So could you just give us a sense of how that capacity year over year and November then.

So.

That would be similar.

Okay and last question when did your annual price increase I kick in and did it affect your core laundry you know revenue trends that you're just went over with I in November and December.

Yes, so Andrew this is Steve we're not going to get into the exact timing. It was later in the quarter, it's fully baked into the December numbers that we just talked about.

And as we talked about that would be.

That would change kind of a little bit of the year over year trend compared to what a lot of the first quarter was running at based on that timing, so that and those numbers. The chain. Just gave you a pretty good indication of where we stand right now.

Thank you.

[noise] and our next question comes the line of Andrew Wittmann with Baird. Please proceed.

Yeah, Good morning, guys.

Good morning, and I think digging and hi, I think digging into the margins probably makes sense at this point in time.

Just to understand I guess, I guess that the margins are still down and so you had that you have the decremental margins from reduced operating leverage I guess and and these are the factors that helped offset it I was wondering if there are any other things you would also want to flag or quantify for us that are moving pieces and the margins maybe any onetime items in particular would.

Be of interest to us.

Yes.

I would say that the quarter obviously in this environment continues to from a cost perspective be relatively dynamic.

When we talk about the impact of the lower revenues on our cost structure, that's primarily.

Impacting our payroll costs as well as our depreciation costs as a percentage of revenues I think we've talked about before.

We havent necessary, we continue to invest in our initiatives and our capabilities from a geographic perspective, and we continue to invest in our our our sales organization.

So given the fact that we havent necessarily rightsized those payroll cost as a percentage of revenue is those have gone on similarly, we continue to invest in.

Our our facilities and our ITC initiatives as well and Capex continues to.

Increased but the revenue decline has increased those expenses as a percentage of revenue.

When you when you boil it down really the largest items are the ones that we called out.

The healthcare energy and travel the largest and those really being a travel and.

The impact of the restrictions that we've implemented on our travel.

As a result of the pandemic.

Yeah, that's probably 70 to 80 basis points of difference.

Going in the opposite direction, and then our lower fuel or lower fuel costs and other energy costs, they sort of called out the percentage of revenues in my prepared remarks related to those those were 30 basis points and then healthcare.

Compared to prior comparable period is 40 to 50 basis points as well. So those are the largest items, but I will say debt you know there are.

Other items that trended favorably theres just it continues to be a very dynamic time from a cost perspective.

I mean I didnt in that response, I mean, I heard investing in sales and some investments I didn't hear that there is anything.

And that you did actually to or anything significant I'm sure you're always seemed a little bit but you didn't do anything significant in terms of looking at the cost structure more holistically and trying to adjust to a newer revenue level you guys have been pretty methodical about that so far the fair to assume that continued and this quarter as well.

Yeah, I would say that's right I think when you look at SGN, a with the with the initiatives and investments going on and we didn't make any major changes there to heads through this through this process on the obviously on the.

Direct cost side and service and production those cost.

More and more follow the revenue trend, particularly on the production side services, a little more challenging with the route structure and our service costs are up a little bit compared to the prior year, just because of the less less efficiency and more capacity now and some of the routes.

But you are correct and look at agency there.

Yeah, Okay, and then just my last question I guess, you talked about customer retention.

And what was pretty pretty good in the quarter and I guess my question on that Steve is is that exclusive of customers that went out of business or inclusive of customers going out of business and maybe it's just a lot of customers that shut down during the quarter.

Yes, some context on your retention rate from the prepared and that's a good that's a good question Andrew So since the pandemic has started.

We've been.

We have been and we've talked about this previously we've not billed customers that had to be closed down because of the pandemic. So.

Most of the revenue shortfall, we were experiencing right now some has come from reductions and where its but some come from customers that are still shut down or at far reduced capacity and those are sort of off to the side. So those accounts have not been lost yet but to your point those still do represent potential future either lost and.

Counts, a further reductions and services or increases in services that come back and so thats still the wildcard that remains on on some of these businesses that we still have relationships with that are either at significantly reduced levels or still shut down and so.

I think that's that's the wild card as as vaccine.

Takes hold does that business start to come back more to some of those fall out further some of them have come through and the way of further reductions I talk about reductions being higher than.

Higher than normal what we've been seeing is as businesses reopened and we start to reinstitute services and different customers. They are coming back at reduced levels.

So it it's part of the reason why it's difficult to project the outlook and I guess my commentary around retention is more of a steady state. Excluding some of the businesses that are shut down and we've sorta suspended services for the true lost accounts and someone's out of business and and their lost those are being reflected in our lost accounts now.

What's not being reflected or the unknowns of just to give some examples some restaurants that are significantly reduce capacity or or other hospitality hotels education schools that you know and some other businesses where services have been significantly reduced but we're still reflecting them as opportunities to come back.

Got it. Thank you very much the comments have a good day.

Thank you thanks.

As a reminder to register for a question. Please press the one followed by the four and.

Our next question comes line of Tim Mulrooney with William Blair. Please proceed.

Good morning, Steve Good morning, Shane Good morning morning.

A couple of quick ones for you guys. So I mean, we've continued to see the broader industry benefit from PPV sales to customers given the high demand and.

And what was called out in the press release, but did you have any material revenue from PPV sales.

He tried per for you and if the trend line there changing at all.

As far as pp sales, we have we have had some offsetting benefits from increased ERP sales, whether it be masks are sanitizer or other products you know.

<unk> I would say that.

It continues to to be steady but.

But not necessarily surging or decreasing at this point and I think a big question there.

And is is what is the long term outlook for some of those sales I will save for us and maybe has been a little less significant than some of our competitors as we continue to be focused on more of the ongoing programs, but it has provided us some lift debt.

During this time.

But but not not any major blips more more ongoing.

Providing of some of those products to existing customers and some new customers as well.

No I think that that's really helpful and book, that's telling me that probably didn't see any major spikes, but wouldnt expect any major drop off and most testing and their future anyway. So that's very helpful.

I think thats right.

Okay. Okay.

Shifting gears to your specialty business, you know specialty garments have a pretty strong quarter revenue and profit wise is there and I know you touched on it in your prepared remarks, but in the Q and a section here just anything else to call out here as we model out the rest of the fiscal year or where they are just a few larger order.

Gross in the first quarter.

Yeah. The first quarter was pretty unusual for them usually they do despite the volatility of their business from quarter to quarter that that management team, usually does a pretty good job with their forecasting, but we did have one customer whose relationship ended in the quarter and we had some kind of close up business.

To kind of close down that project and that that that provided some upside and as Shane mentioned there were some projects that were sort of uncertain to the timing of them with the with the pandemic that came through as well as some direct sales the kind of pulled up from later in the year. So it was by far the best quarter profit wise, they've really ever had and.

It's not something that certainly should be modeled you know as you as you look to the rest of the year.

You know again, we're not really giving guidance, but if you look at what that division did last year I think some of the first quarter.

Be probably will be there in the yen, but it we will moderate as the year goes along and just just as a reminder that segment really is made up of two businesses are clean rooms segment and our nuclear services segment. The Cleanroom segment has been strong in this environment and it is a lot steadier and it's really the nuke.

Earlier projects and customers that provide the volatility so.

Well, we'll see how the year shapes up but we don't expect the same type of a beat in future quarters.

Understood Okay.

One one more for you here Steve.

And your net cash position now at $473 million.

I was hoping you could give us an update on your plans for capital allocation. This year I see you did some share repurchase and this quarter I think but just just a general update on your thoughts and ill honestly have your views on capital allocation changed and the last 24 hours with the what special elect.

And results being where they are right now.

And you really getting up to the uptake.

And excellent question and probably not one unprepared to.

And so I don't think so I habits and.

And the here, but.

It's a very good question and one that we're going to continue to look at as far as our overall plans I mean I think.

We had shown a willingness to start buying some shares back and we will continue to monitor the market and and events to determine what we think makes sense there and.

You know we continue to look for opportunities to put that money to use and like we said, we're not going to be shy about making the capital investments we need for the long term and will.

We will be opportunistic from as far as other opportunities, whether it be acquisitions or share share buyback opportunity. So and we'll we'll digest the events of the week and have some more next quarter.

And so still open to further share repurchases and and additional M&A.

As the year.

Okay. Okay. That's great. Thank you so much for your time line.

And Mr. current there are no other questions at this time.

Thank you I'd like to thank everyone again for joining us to for our review of our first quarter financial results and we look forward to speaking with you again in March when we expect to be reporting our second quarter financial performance. Thank you and have a great day.

Okay.

Thank you that does conclude the call for today, we thank you for your participation and ask that you. Please disconnect your lines have a great.

[music].

Greetings and welcome to the Unifirst first quarter earnings call. During the presentation, all participants will be in a listen only mode. Afterwards, we will conduct a question and answer session.

That time, if you have a question. Please press the one followed by the four on your telephone.

If at any time during the conference you need to reach an operator, Please press star zero.

I would now and the comments over to Steven Sintros, President and CEO. Please go ahead.

Thank you and good morning, I'm, Steven Sintros, Unifirst, President and Chief Executive Officer, joining me today, Shane O'connor Executive Vice President and Chief Financial Officer, We'd like to welcome you to Unifirst Corporation's Conference call to review, our first quarter results for fiscal year 2021.

This call will be on a listen only mode until we complete our prepared remarks, but first a brief disclaimer.

As I've said the last couple of quarters I want to start by saying that first and foremost our thoughts are for the safety and well being of all those dealing with the impact of this virus.

I also want to once again sincerely. Thank our team partners for the tremendous effort. They continue to put forth taking care of each other and our customers during these challenging times.

Overall, we're pleased with the results of our first quarter, which came and mostly as expected from a top line perspective.

Consolidated revenues for the quarter were 446.9 million down 4% from our fiscal 2021st quarter.

These results were impacted by a strong quarter from both the nuclear and Cleanroom operations of our specialty garment segment.

Fully diluted earnings per share for the quarter was $2.20, which exceeded our expectations as many variable expenses trended lower than our projections.

As we have discussed the pandemic has clearly highlighted the essential nature of our products and services.

We believe the need and demand for high generally 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 and bumpy, but we continue to be confident in the company's position to weather the storm.

We also continue to position our sales resources to take advantages of opportunities that exist in the market today as the <unk> and as the economy recovers.

Some positive trends of note for the quarter include new business installs and roughly the same level as the first quarter a year ago as well as improved customer retention.

In addition, although reductions and wears continue at higher than normal levels, the significant reductions experienced and our energy dependent markets. During the third and fourth quarters of fiscal 2020 have started to moderate.

Overall, the outlook continues to be difficult to forecast.

Vaccine optimism is being balanced by uncertainty as to when and how quickly the vaccine will create positive movement and the economy and.

In addition, the recent surge and positive Cobot cases has started to cause increased business restrictions and certain states provinces and municipalities.

The impact of these or further potential restrictions could have an impact on our results moving forward.

As a result of the ongoing uncertainty we will not be providing any guidance at this time.

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

Our solid balance sheet positions us well to meet the ongoing challenges presented by the COVID-19 pandemic, while continuing to invest in growth and strengthen our business.

Certain investments scheduled for this year will continue as planned including the deployment of our new CRM system.

As we've talked about before some of these investments will pressure on margins and the near term. However, we feel strongly that keeping these improvements to our company on schedule will be critical to our long term success.

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

Thanks, Steve.

As Steve mentioned and our first quarter of 2021 consolidated revenues were $446.9 million day.

Down 4% from $465.4 million, a year ago, and consolidated operating income decreased to $56 million from $60.1 million or 6.7%.

Net income for the quarter decreased to $41.9 million or $2.20 per diluted share from $48.2 million or $2.52 per diluted share.

Our effective tax rate in the quarter was 25 per cent compared to 22.1% and the prior year, which unfavorably impacted the EPS comparison.

Our core laundry operations revenues for the quarter were $393.2 million down 5.6% from the first quarter of 2020.

Core laundry organic growth, which adjusts for the estimated effect of acquisitions as well as fluctuations and the Canadian dollar was also 5.6%.

Throughout our quarter, our weekly revenues remained relatively stable however, as expected our organic growth rate trended on favorably compared to our prior sequential quarter due to the timing of certain annual pricing adjustments and the prior year.

Core laundry operating margin decreased to 12.4% for the quarter were $48.9 million from 12.9% and prior year or $53.8 million. The decrease in this segment's profitability was primarily due to the impact of the decline and rental revenues on our cost structure.

Which was partially offset by lower travel related health care and energy costs.

As we have discussed in the past some of our expenses can be variable from quarter to quarter and difficult to forecast in the short term.

We do expect that a number of these costs that have been trending favourably will eventually normalize and pressure margins in the quarters ahead.

Energy cost decreased 3.6% of revenues in the first quarter of 2021 down from 3.9% and prior year.

This increase was primarily due to higher direct sales and project related work in the us and Canadian nuclear operations as well as continued growth in the Cleanroom operations.

Segment's operating margin increased to 18.8% from 14.6%.

This increase was primarily due to lower production and delivery costs as a percentage of revenues as well as lower travel related health care and energy Corp.

These items were partially offset by higher merchandise expense as a percentage of revenue.

The specialty garments quarterly top line and profit performance significantly exceeded our expectations.

As certain direct sales and project related work that had been deferred and the second half of fiscal 2020 related to the COVID-19 pandemic. We're finally realized as well as some additional direct sale activity that was anticipated later in fiscal 2021 came through early.

Our first day segments revenues were $15.5 million compared to 15.7 million and prior year.

However, the segment's operating profit was nominal compared to $1.4 million in the comparable period of 2020.

This decrease is primarily due to reduced sales from the segments higher margin wholesale business combined with continued investment in the company's initiative to expand its first day van business into new geography.

Our quarterly Capex spend was elevated primarily due to the purchase of a building and New York City for $14.1 million, which will provide us a strategic location for a future service center.

During the quarter, we capitalized $2.9 million related to our ongoing CRM project, which consisted of licensees third party consulting costs and capitalize internal labor costs.

As of the end of our quarter, we had capitalized and total of $25.5 million related to the CRM project.

As discussed on our last call we.

Piloting and number of locations.

And expect that we will start a broader deployment and the second half of this fiscal year at which time, we will begin depreciating the system.

Eventually the depreciation of the system combined with additional hardware, we will install to support our new capabilities like.

Like mobile handheld devices for our route drivers will ramp to an estimated $6 million to $7 million of additional depreciation expense per year.

During the first quarter fiscal 2021, we repurchased 41000 common shares for a total of $7.2 million under our previously announced stock repurchase program.