Q3 2021 UniFirst Corp Earnings Call

June 30, 2021

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Ladies and gentlemen, please standby the conference and we will begin shortly and we thank you for your patience.

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Good morning, everyone and greetings and we will.

Come to the unit first Corporation third quarter earnings call.

During the presentation all participants are in a listen only mode. Afterwards, we will have a question and answer session at that time and do you have a question. Please press the 1.4 on your telephone keypad and if you need to reach and operator, Please press star zero and I will now.

I would now like to turn the call over to Steven <unk>, President and Chief Executive Officer. Please go ahead.

Thank you and good morning, and Steven Central's unit first President and Chief Executive Officer. Joining me today is Shane O'connor Executive Vice President and Chief Financial Officer.

We'd like to welcome you to the unit first Corp Conference call to review, our third 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.

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 and 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-K, and 10-Q filings with the Securities and Exchange Commission.

As I have the last several quarters I want to start by saying that first and foremost our thoughts are for the safety and well being for all those dealing with the impact of the COVID-19 pandemic.

The good news is that during the quarter, we have seen real improvement from a health and safety standpoint, both in our company and and our communities related to COVID-19.

And I also want to again highlight that for over a year now our team partners have continued to put forth tremendous efforts in the face of many obstacles created by the pandemic.

We have worked extremely hard to take care of each other and our customers. During these challenging times and I want to personally thank them for their extraordinary performance.

Consolidated revenues for our third quarter were $464.3 million up 4.2% from the prior year and fully diluted earnings per share were $2.21 up from $1.12, and the third quarter a year ago.

Our core laundry operations revenues were positively impacted by a modest level of customer re openings as well as increases and the sale of PPE.

Our specialty garment segment also contributed to our overall performance with a very with very strong results during the quarter that exceeded our expectations.

Shane will provide you with the details of our quarterly results. Shortly clearly are comparisons to the prior year third quarter are being positively impacted by the significant effect that COVID-19. The COVID-19 pandemic had on our <unk>.

Fiscal 2023rd quarter.

As a reminder that quarter a year ago was the quarter most impacted by customer closures during the pandemic.

Overall, we are pleased with the results of our quarter, which exceeded our expectations from a top and bottom line perspective.

Increased business activity from a recovering economy is a welcome sight for share after a challenging year.

In addition, we have started to see early signs of improved activity and the energy dependent markets that we service.

Our new accounts sales and account retention experience were solid during the quarter and we continue to position our sales resources to take advantage of current opportunities as well as capitalize on future opportunities as the economy recovers.

As I'm sure. Many of you are aware, we are operating and an increasingly inflationary environment the cost of labor as well as other business inputs are clearly on the rise.

In addition, we expect and have begun to experience a rebound of several cost trended significantly lower during the pandemic such as merchandise healthcare energy travel and others.

For example, and merchandise amortization for the full year fiscal 2021 is running at least 100 basis points lower than more historical levels.

As we look ahead beyond our fourth quarter into fiscal 2022, we expect that the increases and these costs as well as the inflationary impact on labor and other business inputs will pressure our margins.

We will provide you with further insights into our outlook for fiscal 'twenty 2 during our fourth quarter earnings call.

Our solid balance sheet positions us well to meet our ongoing challenges, while continuing to invest and growth and strengthen our business as.

As we've talked about over the last year or 2 we continue to be focused on making good investments and our people our infrastructure and our technologies.

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

We continue to make good progress on these core initiatives such as our CRM systems project.

Our CRM deployment is certainly a foundational change to our infrastructure that will allow for service improvements and efficiency moving forward.

We will continue to invest and our infrastructure and future over the next several years, including key investments and supply chain other technology infrastructure route efficiency as well as our brand.

We will provide additional details as we progress with some of these key initiatives and the quarters ahead.

As always we will continue to focus on providing our valuable products and services to existing customers and selling new customers on the value of that unit first can bring to their business.

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

We believe the need and demand for hygienic Lee clean garments and work environments and positions our company well to support the evolving economic landscape.

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

Thanks, Steve.

And as Steve mentioned consolidated revenues and our third quarter of 2021 were $464.3 million.

And increase of 4.2% from $445.5 million a year ago and consolidated operating income increased to $54.2 million from $27.7 million or <unk> 95, 5%.

Net income for the quarter increased to $42 million or $2.21 per.

Per diluted share from $21.3 million or $1.12 per diluted share.

Our effective tax rate and the quarter was 22, 9% compared to 21, 8% and the prior year as a reminder, our tax rate can move from period to period based on discrete events, including excess tax benefits and deficiencies associated with employee share based payments.

Our core laundry revenues for the quarter were $409 million and increase of 5.3% from the third quarter of 2020 core.

Core laundry organic growth, which adjusts for the estimated effect of acquisitions as well as fluctuations and the Canadian dollar was 4.3%.

This increase was primarily driven by the COVID-19, pandemic significantly impacting our customers operations and wear levels and prior year, which was partially offset by a large $21 million direct sales also on prior year.

And as Steve discussed our quarterly top line performance exceeded exceeded our expectations as the impact of the pandemic on our customer base continues to subside as well as from increased sales of PPE.

Core laundry operating margin increased to 11, 2% for the quarter from $45.6 million.

From 5.1% and prior year or $19.7 million. The increase was primarily driven by a number of items affecting our prior year period, including the impact of the decline and rental revenues on our cost structure higher cost of revenues related to the large $21 million.

Net sales higher bad debt expense and additional costs, which the company incurred responding to the COVID-19 pandemic.

The current quarter operating margin continued to benefit from certain costs that have trended favorably during the pandemic, including lower merchandise and travel related costs. In addition, the segment's operating results benefited from lower payroll costs due to understaffing caused.

By the challenging employment environment.

Company also relieved some of its bad debt reserves and the quarter that is <unk>.

Provided for during the pandemic as our expectations around future uncollectible accounts have moderated.

These benefits were partially offset by higher health care claims cost, which trended unfavorably due to what we believe was pent up demand from our team partners deferring elective activities during the pandemic.

And energy costs were 4.2% of revenues in the third quarter of 2021 compared to 3.4% and prior year.

Our specialty garments segment, which delivers specialized nuclear decontamination and clean room products and services had a very strong quarter and exceeded our expectations and both revenues and operating income.

Revenues increased to $38.2 million from $36.2 million and prior year or 5.7% and were primarily driven by growth and our clean room and European nuclear operations.

Segment operating margin increased to 21, 7% from 17, 6%, primarily due to lower merchandise costs and bad debt expense as a percentage of revenues as well as costs incurred in the prior year responding to the COVID-19 pandemic.

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

Our first aid segment's revenues were $17.1 million compared to $20.9 million and the prior year. However, the segment's operating profit was nominal compared to $1.6 million and the comparable period of 2020.

These decreases were primarily due to elevated PPE sales and prior year.

In addition, the current quarter operating results reflect continued investment and the company's initiative to expand its first aid van business into new geographies.

We continue to maintain a solid balance sheet and financial position with no long term debt and cash cash equivalents and short term investments totaling $535 million at the end of our third quarter of fiscal 2021.

For the first 3 quarters of fiscal 2021 capital expenditures totaled $96.6 million as we continued to invest and our future with new facility additions expansions updates and automation systems that will help us meet our long term strategic objectives.

During the quarter, we capitalized $4.2 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 a total of $32 million related to the CRM project.

And the third fiscal quarter of 2021, we began to depreciate part of the system over a 10 year life and our quarterly depreciation approximated $7 million.

As a reminder, the depreciation of the full system combined with additional hardware, we will install to support our new capabilities like mobile handheld devices for our route drivers will eventually ramp to an estimated $6 million to $7 million of additional depreciation expense per year.

The company did not repurchase any shares during the quarter under its previously announced stock repurchase program as of May 29, 2021, the company had repurchased approximately 368000 shares of common stock for $61.8 million under the program.

Based on our results to date as well as our outlook for the remainder of the year. We now expect that our fiscal 2021 revenues will be between 181 billion.

And $1.$8.1.7 billion.

And we further expect that full year diluted earnings per share will be between $7.80 and $8.

This outlook assumes that our core laundry operating margin in the fourth quarter will approximate 10, 6% at the midpoint of the range.

This outlook also reflects continued benefits and areas that have trended lower during the pandemic, including merchandise and travel costs.

We have also assumed that those benefits will continue to moderate.

We further assume that our payroll costs will increase as a percentage of revenues as we work to fill open positions and begin to adjust compensation levels and certain high demand rolls and response to the current employment landscape.

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

And thank you very much ladies and gentlemen, if you'd like to register a question. Please press 1.4 on your telephone keypad and you will hear a 3 pronged toward knowledge and a request once again for questions. Please first 1 for 1 moment for the first of all day.

And our first question is from Tim Mulrooney with William Blair. Please go ahead.

Good morning.

Good morning, good morning.

So based on the midpoint of your revenue guide it.

It looks like you're expecting an acceleration.

And revenue growth from the from the third quarter to the fourth quarter, a little bit I was wondering if you could comment on how weekly revenue trended through the quarter and how weekly revenue has trended through June so far.

Sure we can give you a little insight there Tim.

And 1 of the things, we talked about and the prepared remarks with some increase and PPE that we had during the quarter.

We were able to sell some products that.

And that we add good inventories for.

During the quarter that helped.

And we mentioned before during this time of year, where usually going into a little bit of a seasonal slowdown and the summer we haven't really seen that because we are still seeing some.

Some recovery of customers and reopening that would offset and normal seasonal slowdown. So I think it's been.

I would characterize it as modest and steady through the quarter.

In terms of recovery as far as what we're seeing.

During June.

Say steady not necessarily and acceleration.

So I don't want to paint the picture and I don't think we should be paid and the picture that there's going to be a significant step up from Q3 to Q4 in terms of further re openings.

For the most part most of our customers. There is still some stragglers are back and business at some level, we're still seeing shortfalls from the pre pandemic timeframe, particularly and the energy sector, but also others because not everyone's back at the full levels that they were before.

So hopefully that helps provide a little context.

No that's really helpful.

Characterizing it as steady through the quarter steady through June, but during a period, where you'd normally see a little seasonal weakness and not seeing that.

That's really helpful.

1 more from me before I pass it along I just wanted to ask about new accounts sales you mentioned your new account sales and.

Your.

Initial opening remarks.

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You said that they were solid.

So thats great to hear I think last quarter, you had mentioned that they were kind of flattish with last year.

And through the first half from the fiscal year, which was obviously a good result.

And the pandemic.

Have you seen a pickup here at all or still kind of flattish on a year over year basis.

Well I think when you compare it to the third quarter of 2020, which was really the hardest hit pandemic quarter.

We're selling more new business, we've sold more new business this quarter than we did that quarter a year ago. So I would say that it's somewhat improved over the second quarter.

But that's why you sort of a solid versus <unk>.

Spectacular I think it's solid and when you look at the mix is changing a little bit.

There is a need for a lot more ancillary products and I think we've taken advantage of that through this cycle.

Uniform sales is starting to pick up again.

So again stronger than last year's third quarter I draw on the comparison to our fiscal 19, which was a very strong sales year.

Still a little bit short of that and Shane mentioned Understaffing were a little lower on the number of sales reps would really like to be carrying right now to be honest and we are trying to ramp up a little further as we as we move into the fourth quarter and into next year.

Got it thanks very much guys.

Thank you.

Our next question is from Andy Wittman of Baird. Please go ahead.

Thanks.

Excuse me good morning, I, just wanted to get a better sense of the guidance here.

Clear, saying that quarter came in above revenue.

And on profit as well.

The guidance is obviously raise but it looks like it's entirely attributable at least in my estimation on asking the question that.

It really came from the third quarter and not the change in the fourth quarter. So I just wanted to kind of check on that Steve and tier 4 and understanding that correctly.

And just it looks like.

I mean, you gave us the margin levels you gave us some puts and takes but can you just talk a little bit more about.

John.

I guess the margin outlook.

And here because it looks like the revenue guidance kind of brackets and we're already thinking about the margins, probably maybe a little bit softer than maybe I would've thought so I just wanted to understand a little bit more detail.

And I'll start and then Shane can provide some details I mean in general for the third quarter.

I think you are right and the way youre kind of <unk>.

Analyzing the beat and how it how it filters to the fourth quarter. The third quarter was obviously strong from our specialty garment standpoint and from a.

Core standpoint, the quarter benefited from some things Shane mentioned some bad debt.

Our reserve relief relief.

As we felt like we don't need some of those reserves coming out of the pandemic things turned out a little bit better and that area than we than we anticipated. He mentioned some of the understaffing.

To answer your question, you're really sort of have to go back to the comments I made about.

Some of the the cost that will start to rise here pretty soon.

We've kind of talked about this in the past sometimes these costs take time to rise like merchandise is coming back strong we put a lot more and service. It was very unusually depressed first.

And for 6 months or so at the beginning of the pandemic and even into our second quarter of this year, but the last few months, we've really start seeing a surge back and merchandise additions not just from new sales, but replacement almost like the healthcare where during the pandemic things were just activity overall was unusually depressed and now we're seeing it.

Come back strong so some of that is built into the fourth quarter guidance and that is certainly some of the caution that we're that we're speaking to as we think forward to 2022 and you heard my comment about merchandise being sort of historically low.

During fiscal 'twenty 1.

Shane also mentioned Understaffing it continues to be challenging.

We continue to modify wages as necessary for production workers and other positions to attract more workers were expecting that to improve over the next few months whether that will fully.

Rectify itself over the next few months remains to be seen but we do expect that to be a challenge and a headwind kind of going into 2022. So I don't know if that fully answers. Your question I can ask Shane add to some of the some of the feedback on the third quarter to give you a sense of that and why it may or may not repeat and the fourth quarter.

Yes, Steve I think I think you covered the majority of it when.

When we take a look at the change in our top line guidance.

Our guidance went up by about the midpoint of our range went up by about $15 million.

A good portion of that was specialty garments performance and the quarter and we've talked.

At length about how they are core or their quarterly performance is a little bit more unpredictable.

And and can fluctuate from quarter to quarter.

But some of that did come from the benefit that we saw.

And our core laundry operations.

And clearly that wasn't all or I guess, the increase and our revenues wasn't.

Completely attributable to our third quarter performance, because we are expecting and anticipating that and some of the benefit that we're seeing and the core will carryover to the 4.2 a portion of that.

Is is related to the core and is permeating into the fourth our specialty garments.

Performance expectations for the fourth really haven't changed.

And then Steve spoke about the majority of the benefits that we saw during the quarter.

When we talk about the Understaffing when we talk about the adjustments that we made to the reserves that sort of benefited the quarter.

And those broadly.

On translated into.

Our margin performance.

Things like the beneficial tax rate that we had in the quarter.

Related to some of the discrete events.

Again were.

Captured and that third quarter, and arent necessarily anticipated or included in our assumptions that theyre going to continue.

Continuing to the fourth Nam, but some other things that Steve talked about.

And have influenced our expectations for the fourth alright, like he mentioned the fact that our.

Our third quarter, and we started to see the our merchandise and return to a level that sort of where similar to pre pandemic and eventually the expectation is that that merchandise over time.

Given the way that we account for it will eventually start to normalize back to our normal percentage of revenues.

And our health care claims costs during the quarter were higher we had mentioned that we believe that there is.

Some pent up demand for that and that sort of influenced our expectations for the fourth quarter as well.

And so some of those dynamics are sort of informing I guess, what youre seeing on the margin side and some of those benefits that our third quarter benefited from.

Really we're sort of captured in that quarter and arent necessarily benefits, we would expect going forward.

Are you able to can you just give us a sense of the bad debt relief.

And for the quarter or how much the understaffing or health care. We're just trying to get an order of magnitude. So we understand the impact and the quarter.

First I want to speak out about that.

Yes, absolutely our bad debt or I guess, the benefit that our quarter had related to our bad debt reserve is probably 40% to 50 basis points.

And as far as the Understaffing is a little bit more challenging to quantify the impact on the quarter, because obviously youre benefiting from the lower payrolls.

But those payrolls are providing your benefits and you're also incurring some costs related to overtime and temp labor et cetera, but.

The benefit related to the Understaffing was probably 1 million 5.2 million again, that's not ideal for us thats not what we and that's without what we hope to have going forward, but financially at least we saw that short term benefit and the third.

That's helpful and then sorry, just 1 last question.

And you had some comments on.

And you called the PPE, but some of them put in with like the hand, sanitizer and things that.

I would think would start to be rolling off or at least be starting to face tough comparison and maybe it wasn't because you had and may quarter and the supply chain wasn't fully there and the beginning days of.

Covid last year, but.

It was just interesting to hear you guys, saying that that was a benefit year over year does that as we move to <unk>.

Some of these PPE benefits that you have does it become headwinds what is the current run rate on that saying or do you think that it's the <unk>.

Got to up on and year over year basis, I guess I'm trying to understand that dynamic would be helpful. Yes. It's a good question.

And your comment about the supply chain and I think is correct from the third quarter last year, we werent quite ramped up to where we want it to be the biggest benefit to be honest and the current quarter was in the area of gloves as opposed to soap and sanitizer.

There's been a shortage in that area.

Prices are quite a bit higher for those products and and we were and are pretty good position from an inventory perspective to go out and take take some advantage of that and I think with the reopening youre seeing some people.

Need some of that product so.

As far as the fourth quarter goes.

And the Magic question I think how long will some of this blip last.

I think we have some of it going through the fourth quarter, and then moderating a little bit from the third quarter run rate, that's probably impacting our fourth quarter and little bit as well I think the bigger question. As you go into next year, what does that look like can can we sustain and I think we've invested and sales resources to sell into our existing accounts.

Over the last couple of years, and we're hopeful that the experience of the pandemic will help us.

Have some ongoing benefit in that area in terms of penetration with our customers, but I think as you look into the fourth quarter and next year more next year than the fourth quarter.

And there might be some tougher comps, but and the fourth quarter, you, probably still a little bit getting a little bit of a benefit year over year to be honest from from some of those if what we saw on the third quarter continues and it has so far.

Yes.

Thank you.

Okay.

And our next question is from Andrew Steiner and J P. Morgan. Please go ahead.

Hi, I wanted to ask you about your preliminary questions comments on margins for next year.

Assume now that organic revenue growth is positive and getting more positive into the force that there is somewhat and offsetting element of operating on.

Leverage and so on my question is assuming the economy continues to move.

We move forward.

Do you feel like this is going to be a couple of quarters of margin drag that.

Youre signaling or do you feel like from what you already know about kind of the cost elements.

And it's gonna be a whole year of margin drag and then my second question is do you think you might be the way you said it conflating inflation, which is obviously input cost inflation.

And that costs are just coming back more travel more more uniforms, and it's not particularly inflation.

Discretionary costs coming back.

Yes, it's an important question Andrew and.

When we when you start to look at look at next year and we're not here to provide guidance for next year, but we made the comments for a reason when we think about the different areas of costs, we're going to be dealing with looking into 2022. It really is and what I would call 3 different areas you have the area that you mentioned would call it the.

Generic environment, clearly the cost and availability of labor is a challenge now.

And how long will it be a challenge is it is it a surge that moderates is it and ongoing challenge I think it's something we're going to have to deal with we are dealing with it now and it is going to cause cost horizon.

And as costs rise, whether it's with labor energy.

Fabric costs or any other inputs that are currently being impacted by call. It the inflationary environment. We will we will work with our customers to pass along cost where we can so that's 1 category you are right about the second category is being sort of this bounce back of cost and Thats why we made the comment particularly on.

Merchandise, which is the largest piece first 6 to 8 months starting at the beginning of the pandemic call at March 2020, we started seeing a significant amount of lower needs from merchandise ads.

Not just from new accounts, but from replacement garments, which is the bulk of our merchandize requirements. Those as you understand how we amortize our merchandize those caused our overall merchandise expense for 2021 to be quite a bit lower than our historical norm, we're starting to see that bounce back now.

As you as you can understand as it bounces back for example, this quarter is probably 1 of the almost the low point because as you start to put in more right that amortization starts to build again, so over the course of 2021.

Confident and saying, we will be experiencing higher merchandise amortization as a percentage of revenues.

Hopefully in October we'll be able to give you a better sense with 3 or 4 months more information as to what we think that looks like but the caution here is to say that the merchandise amortization. We're experiencing today is over 100 basis points lower than sort of historical levels. When do we get back to those historical levels how does the.

Energy sector intersect with that how does sales intersect with that Theres a lot of factors, but we just wanted to highlight that that cost is running historically low and we fully expect it to normalize and similarly with travel, which we obviously can control a little bit more.

We are benefiting still from less travel.

And a bit less travel and then sort of the pre pandemic time and like a lot of companies. We're looking at travel to say where can we be more efficient what have we learned during the pandemic that can help us manage travel costs more effectively and there are ways, but we need to be out in front of our customers. There is this travel that will come back.

And then the third category of cost, which is sort of inherent and some of our comments as well is our initiatives like the ABS deployment and some other things that we'll have going on in 2022.

We will.

Be more proactive about speaking about those cost and probably even.

Giving you sort of an indication of adjusted operating margin as we go into 2022 and these costs continue to be more significant. So it is 3 discrete areas I tried to mention all of them and our prepared remarks, because we do want to caution a little against I think what you are talking about which is the economy is.

And recovered everything is back to normal well.

And our business has always benefited during slow times from a cost perspective enduring growth times, there can be margin challenges from things like energy merchandise and others. This is even probably accentuated even more than that because I would say during the pandemic things like merchandise and energy.

And health care and travel were all things that were.

Abnormally benefiting compared to say the last recessionary cycle, where you didn't see that dynamic with healthcare you didn't see that dynamic with travel.

So it is a unique cycle that we're working towards and that's why we're trying to provide that caution for 2022 and.

Depending on how the economy recovers and the top line and all those other things, we'll see where it shakes out, but we did want to provide that clarity.

Yes, correct and just try and 1 last follow up on the same subject. When you look at those 3 buckets for 'twenty, 2 which 1 seems the most sizable hubs and 3 buckets you just described.

So the most what I missed the last word size sizable begins and the big advisable.

The biggest headwind to margins here.

Well, it's a good question I mean merchandise is probably the biggest singular factor that will normalize but it won't it won't normalize overnight. So youre going to look at the first quarter of 2022, and youre going to say well merchandise and so back but it's going to quickly ramp as we continue to put in higher levels of.

Dice overtime, I would say to be honest, Andrew the bounce back of cost is probably the 1 to kind of most be cognizant of the inflationary environment and something we're going to have to deal with but.

As we as we try to look at pricing opportunities and work through that that's more.

It's a sizable challenge, but it's more business as normal I would say.

And then the investments are the investments I don't think.

That's something that overly concerns me because it's investments, we're making it's capital we have to invest and we'll let you know what those numbers are so it's really that middle 1 that you'll have some bounce back that we want to make sure people are aware of.

Got it thanks for the time I got it.

Thank you.

Okay.

And gentlemen, and those are other questions. We have I'll turn it back to you for closing remarks.

I'd like to thank everyone for joining us today to review our third quarter results. We look forward to speaking with you again in October when we expect to be reporting our fourth quarter performance as well as our full outlook for fiscal 2022, Thank you and have a great day.

And ladies and gentlemen that concludes our call for today. We thank you all for your participation have a great rest of your day you may disconnect your line.

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Good morning, everyone and greetings and welcome to the unit first Corporation third quarter earnings call.

And the presentation all participants are in a listen only mode and afterwards, we will have a question and answer session at that time. If you have a question. Please press the 1.4 on your telephone keypad and if you need to reach and operator, Please press star zero.

I would now like to turn the call over to Steven Central's, President and Chief Executive Officer. Please go ahead.

Thank you and good morning, I'm, Steven Central's unit first President and Chief Executive Officer. Joining me today is Shane O'connor Executive Vice President and Chief Financial Officer.

And we'd like to welcome you to the unit first Corp Conference call to review, our third 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.

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-K, and 10-Q filings with the Securities and Exchange Commission.

As I have the last several quarters I want to start by saying first and foremost our thoughts are for the safety and well being for all those dealing with the impact of the COVID-19 pandemic.

Good news is that during the quarter, we have seen real improvement from a health and safety standpoint, both in our company and and our communities related to COVID-19.

And I also want to again highlight that for over a year now our team partners have continued to put forth tremendous efforts in the face of many obstacles created by the pandemic.

They have worked extremely hard to take care of each other and our customers. During these challenging times and I want to personally thank them for their extraordinary performance.

Consolidated revenues for our third quarter were $464.3 million up 4.2% from the prior year and fully diluted earnings per share were $2.21 up from $1.12, and the third quarter a year ago.

Our core laundry operations revenues were positively impacted by a modest level of customer re openings as well as increases and the sale of PPE.

Our specialty garment segment also contributed to our overall performance with a very with very strong results during the quarter that exceeded our expectations.

Fiscal 2023rd quarter.

As a reminder that quarter a year ago was the quarter most impacted by customer closures during the pandemic.

Overall, we are pleased with the results of our quarter, which exceeded our expectations from a top and bottom line perspective.

Increased business activity from a recovering economy is a welcome sight for share after a challenging year and.

In addition, we have started to see early signs of improved activity and the energy dependent markets that we service.

Our new account sales and account retention experience were solid during the quarter and we continue to position our sales resources to take advantage of current opportunities as well as capitalize on future opportunities as the economy recovers.

As I'm sure. Many of you are aware, we are operating and an increasingly inflationary environment the cost of labor as well as other business inputs are clearly on the rise.

In addition, we expect and have begun to experience a rebound of several cost that trended significantly lower during the pandemic such as merchandise healthcare energy travel and others.

And for example, merchandise amortization for the full year fiscal 2021 is running at least 100 basis points lower than more historical levels.

We will provide you with further insights into our outlook for fiscal 'twenty 2 during our fourth quarter earnings call.

Our solid balance sheet positions us well to meet our ongoing challenges, we will continue to invest and growth and strengthen our business as.

As we've talked about over the last year or 2 we continue to be focused on making good investments and our people our infrastructure and our technologies.

We continue to make good progress on these core initiatives such as our CRM systems project.

Our CRM deployment is certainly a foundational change to our infrastructure that will allow for service improvements and efficiency moving forward.

We will provide additional details as we progress with some of these key initiatives and the quarters ahead.

As always we will continue to focus on providing our valuable products and services to existing customers and selling new customers on the value of that unit first can bring to their business.

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

We believe the need and demand for hygienic Lee clean garments and work environments and positions our company well to support the evolving economic landscape.

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

Thanks, Steve.

And as Steve mentioned consolidated revenues and our third quarter of 2021 were $464.3 million and increase of 4.2% from $445.5 million a year ago and consolidated operating income increased to $54.2 million.

And from $27.7 million or <unk> 95, 5%.

Net income for the quarter increased to $42 million or $2.21.

<unk> per diluted share from $21.3 million or $1.12 per diluted share.

Our core laundry revenues for the quarter were $409 million and increase of 5.3% from the third quarter of 2020.

Core laundry organic growth, which adjusts for the estimated effect of acquisitions as well as fluctuations and the Canadian dollar was 4.3%.

As Steve discussed our quarterly top line performance exceeded exceeded our expectations as the impact of the pandemic on our customer base continues to subside as well as from increased sales of PPE.

Core laundry operating margin increased to 11, 2% for the quarter from $45.6 million.

Sales and higher bad debt expense and additional costs, which the company incurred responding to the COVID-19 pandemic.

By the challenging employment environment.

The company also relieve some of its bad debt reserves and the quarter that had provided for during the pandemic as our expectations around future uncollectible accounts have moderated.

And energy costs were 4.2% of revenues in the third quarter of 2021 compared to 3.4% and prior year.

Revenues increased to $38.2 million from $36.2 million and prior year or 5.7% and were primarily driven by growth and our clean room and European nuclear operations.

These decreases were primarily due to elevated PPE sales and prior year.

In addition, the current quarter operating results reflect continued investment and the company's initiative to expand its first aid van business into new geographies.

For the first 3 quarters of fiscal 2021 capital expenditures totaled $96.6 million as we continue to invest and our future with new facility additions expansions updates and automation systems that will help us meet our long term strategic objectives.

During the quarter, we capitalized $4.2 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 a total of $32 million related to the CRM project.

And the third fiscal quarter of 2021, we began to depreciate part of the system over a 10 year life and our quarterly depreciation approximated $7 million.

Based on our results to date as well as our outlook for the remainder of the year. We now expect that our fiscal 2021 revenues will be between 181 billion.

And $1.$8.1.7 billion.

And we further expect that full year diluted earnings per share will be between $7.80 and $8.

This outlook assumes that our core laundry operating margin in the fourth quarter will approximate 10, 6% at the midpoint of the range.

This outlook also reflects continued benefits and areas that have trended lower during the pandemic, including merchandise and travel costs.

Though we have also assumed that those benefits will continue to moderate.

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

And thank you very much ladies and gentlemen, if you'd like to register a question. Please press 1.4 on your telephone keypad and you will hear a $3 on prompt to acknowledging request once again for questions. Please press 1 for 1 moment for the first quarter.

And our first question is from Tim Mulrooney with William Blair. Please go ahead.

Okay.

Good morning.

Good morning morning.

So based on the midpoint of your revenue guide it.

It looks like you're expecting an acceleration and.

Sure we can give you a little insight there Tim.

1 other things, we talked about and the prepared remarks, with some increase and PPE that we had during the quarter.

We were able to sell some products that.

And that we add good inventories for.

During the quarter that helped.

Like we mentioned before during this time of year, where usually going into a little bit of a seasonal slowdown and the summer we haven't really seen that because we are still seeing some.

Some recovery of customers and reopening that would offset and normal seasonal slowdown. So I think it's been.

I would characterize it as modest and steady through the quarter.

In terms of recovery as far as what we're seeing.

During June.

Steady not necessarily and acceleration.

So I don't want to paint the picture and I don't think we should be paid and the picture that there's going to be a significant step up from Q3 to Q4 in terms of further re openings.

So hopefully that helps provide a little context.

No that's really helpful.

Characterizing it as steady through the quarter steady through June, but during a period, where you'd normally see a little seasonal weakness and cannot say.

John.

And that's really helpful.

1 more from me before I pass it along I just wanted to ask about your new accounts sales you mentioned your new account sales and.

On your.

Initial opening remarks, there Steven.

You said that they were solid.

So thats great to hear I think last quarter, you had mentioned that they were kind of flattish with last year.

Through the first half from the fiscal year, which was obviously a good result.

The pandemic.

Have you seen a pickup here at all or still kind of flattish on a year over year basis.

Well I think when you compare it to the third quarter of 2020, which was really the hardest hit pandemic quarter.

We're selling more new business, we've sold more new business this quarter than we did that quarter a year ago. So I would say that it's somewhat improved over the second quarter.

But that's why you sort of a solid versus.

Spectacular I think it's solid and when you look at the mix is changing a little bit.

There is a need for a lot more ancillary products and I think we've taken advantage of that through this cycle.

Uniform sales is starting to pick up again.

So again stronger than last year's third quarter I draw on the comparison to our fiscal 19, which was a very strong sales year.

Still a little bit short of that and Shane mentioned Understaffing were a little lower on the number of sales reps would really like to be carrying right now to be honest and were trying to ramp up a little further as we as we move into the fourth quarter and into next year.

Got it thanks very much guys.

Thank you.

Our next question is from Andy Wittman of Baird. Please go ahead.

Thanks.

Excuse me good morning, I, just wanted to get a better sense of the guidance here.

And the clear, saying that quarter came in above revenue.

On profit as well.

The guidance was obviously raise but it looks like it's entirely attributable at least from my estimation on asking the question that.

It really came from the third quarter and not a change in the fourth quarter. So I just wanted to kind of check on that Steve and tier 4 and understanding that correctly and just it looks like.

I mean, you gave us the margin levels, you can give us some puts and takes but can you just talk a little bit more about.

John.

I guess the margin outlook, that's implied here because it looks like the revenue guidance kind of brackets and we're already thinking about the margins, probably maybe a little bit softer than maybe I would have thought so I just wanted to understand that a little bit more detail.

And I'll start and then Shane can provide some details I mean in general for the third quarter.

I think you are right and the way youre kind of <unk>.

Analyzing the beat and how it how it filters to the fourth quarter and the third quarter was obviously strong from our specialty garment standpoint and from a.

Core standpoint, the quarter benefited from some things Shane mentioned some bad debt.

Our reserve relief relief.

To answer your question, you're really sort of have to go back to the comments I made about.

Some of the cost that will start to rise here pretty soon.

We've kind of talked about this in the past sometimes these costs take time to rise like merchandise is coming back strong we've put a lot more and service. It was very unusually depressed first.

And for 6 months or so at the beginning of the pandemic and even into our second quarter. This year, but the last few months, we've really start seeing a surge back and merchandise additions not just from new sales, but replacement almost like the healthcare where during the pandemic things were just activity overall was unusually depressed and now we're seeing it.

During fiscal 'twenty 1.

Shane also mentioned Understaffing it continues to be challenging.

We continue to modify wages as necessary for production workers and other positions to attract more workers were expecting that to improve over the next few months whether that will fully.

Rectify itself over the next few months remains to be seen but we do expect that to be a challenge and a headwind kind of going into 2022. So I don't know if that fully answers. Your question I can ask Shane add to some of the some of the feedback on the third quarter to give you a sense of that be and why it may or may not repeat and the fourth quarter.

Yes, Steve I think I think you covered the majority of it when.

When we take a look at the change and our top line guidance.

Our guidance went up by about the midpoint of our range went up by about $15 million.

And.

A good portion of that was specialty garments performance and the quarter and we've talked.

At length about how they are core or their quarterly performance is a little bit more unpredictable.

And and can fluctuate from quarter to quarter.

But some of that did come from the benefit that we saw.

And our core laundry operations.

And clearly that wasn't all or I guess, the increase and our revenues wasn't.

Is is related to and the core and is permeating into the fourth our specialty garments.

Performance expectations for the fourth really Havent change.

And then Steve spoke about the majority of the benefits that we saw during the quarter.

When we talk about the Understaffing when we talk about the adjustments that we made to the reserves that sort of benefited the quarter.

And those broadly.

On translated into.

Our margin performance.

Things like the beneficial tax rate that we had in the quarter.

Related to some of the discrete events.

Again, we're <unk>.

Captured and that third quarter, and arent necessarily anticipated or included in our assumptions that theyre going to continue.

Continue into the fourth Nam, but some other things that Steve talked about.