Unifirst Corporation

Greetings and welcome to the second quarter earnings conference 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 1 followed by the 4 on your telephone. If at any time during the conference you need to reach an operator, please press star 0. I would now like to turn the conference over to Steven Sintros, President and CEO. Please go ahead.

Thank you and good morning. I'm Steven Sintros, Unifirst's President and Chief Executive Officer. Joining me today is 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 second 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 views with respect to future events and financial performance. These forward-looking statements are subject to certain risks and uncertainties. The words anticipate, optimistic, believe, estimate, expect, intend, and similar expressions that indicate future events and trends identify forward-looking statements. Actual future results may differ materially from those anticipated, depending on a variety of risk factors. For more information, please refer to the discussion of these risk factors in our most recent 10-K filing with the Securities and Exchange Commission as well as the Form 10-Q that we will be filing next week. I want to start the call by saying that our thoughts go out to all those impacted by the coronavirus pandemic. This is an unprecedented time for our company, the country, and the world. And first and foremost, our thoughts are for the safety of all those dealing with the impact of this virus. As a company that services so many essential businesses that are critical to keeping our community safe and operating, I also want to sincerely thank Unifor's thousands of employee team partners for doing everything they can to continue servicing those customers during these uncertain times. We continue to be up and running as a business and are focused on working through the practical challenges of operating in this environment. Our top priority is working to keep our employee team partners safe while they work to continue servicing our essential customers who remain open. Customer closures have begun to accelerate over the last two weeks, but it is still too early to determine where we are in the cycle of customer closures, not to mention how long they will persist and at what level they will return. Due to the uncertainty regarding the overall severity and duration of the pandemic and its ultimate impact on our business, we are not providing guidance for the remainder of fiscal 2020 at this time. Although we are not able to provide guidance or quantify the future impact, we clearly expect the disruption related to this pandemic will have a negative impact on our revenues and profitability. We also expect that if sustained for an extended period, the sharp decline in oil prices as well as the decline in the Canadian exchange rate will further challenge our performance. With respect to the second quarter results, revenues and profits were mostly within our expectations. consolidated second quarter revenues were $464.6 million, an increase of 6.2% over the same quarter a year ago. Meanwhile, non-GAAP adjusted operating income and net income were $44.1 million and $34.7 million respectively, representing increases of 6.8% and 8.2% when compared to the second quarter of last year. Organic growth for our core laundry operations decelerated sequentially as expected and discussed in our first quarter earnings call. New sales activity as well as net additions versus reductions lagged the second quarter of a year ago, which was a historically strong new sales quarter. Throughout the quarter, we continue to see weakness in the energy dependent markets that we service, which contributed to the slower growth. Year to date through February, we have generated significant free cash flows. At the end of the quarter, we have almost $400 million in cash and cash equivalents on our books with no debt. As a result, we believe we are well positioned to deal with the adversity we are facing related to this coronavirus pandemic. And with that, I'd like to turn the call over to Shane, who will provide details on the results of our second quarter.

Thanks, Steve. As Steve mentioned, consolidated revenues in our second quarter of 2020 were $464.6 million. up 6.2% from $437.5 million a year ago, and consolidated operating income decreased to $44.1 million from $62.4 million, or 29.3%. Net income for the quarter decreased to $34.7 million, or $1.82 per diluted share, from $47.6 million, or $2.48 per diluted share. As a reminder, operating income and net income in last year's second quarter both benefited from a pre-tax gain of $21.1 million. This gain related to a settlement we entered into with the lead contractor for a version of the CRM system, which we recorded a $55.8 million impairment charge for in fiscal 2017. This settlement included the receipt of a one-time cash payment of $13 million. The forgiveness of amounts previously due the contractor as well as the receipt of certain hardware and related maintenance. Excluding the effect of the CRM related settlement, consolidated operating income and net income increased from prior years adjusted amounts by 6.8% and 8.2% respectively. And diluted EPS increased 9% from prior years adjusted amount of $1.67. Our core laundry operations revenues for the quarter were $412.2 million, up 4.5% from the second quarter of 2019. Core laundry organic growth, which adjusts for the estimated effect of acquisitions, as well as fluctuations in the Canadian dollar, was 3.6%. During the quarter, our organic growth continued to benefit from solid new account sales and improved customer retention in fiscal 2019. as well as the improved collection of merchandise recovery charges. Core Laundry revenues were negatively impacted by approximately 0.3% from the timing of revenues around the Thanksgiving holiday. Core Laundry operating income was $38.4 million for the quarter, down from $59.1 million in the prior year, and the segment's operating margin decreased to 9.3% from prior year's 15%. Adjusting for the effect of the CRM-related settlement, adjusted operating income in 2019 would have been $38.0 million, or 9.6% of revenues. The decrease from prior years adjusted operating margin was primarily due to higher production and service payroll costs as a percentage of revenues. These higher amounts were partially offset by lower energy costs, which decreased to 4.1% of revenues in the second quarter of 2020. from 4.3% in prior year. Revenues from our specialty garment segment, which delivers specialized nuclear decontamination and cleanroom products and services, increased to $36.0 million from $29.8 million in prior year, or 21.0%. This decrease was largely due to higher direct sale activity in the quarter, as well as strong growth in our cleanroom and European nuclear operations. The segment's operating margin increased to 12.9%, or $4.6 million, from 7.5%, or $2.2 million, in the year-ago period. This increase was primarily due to the higher direct sale activity in the quarter. As we'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 increased to $16.4 million from $13.3 million in prior year, or 23.2%. This increase was primarily due to a strong quarterly performance in the segment's wholesale distribution business, as well as the company's initiative to expand its first aid van business into new geographies. Operating income increased 4.1% compared to prior year, while operating margin decreased to 7.0% from 8.2% in 2019. The decrease in operating margin was primarily attributable to higher selling and casualty claims expense during the court. We continue to maintain a solid balance sheet and financial position with no long-term debt and cash, cash equivalents and short-term investments totaling $395.3 million at the end of our second quarter of fiscal 2020. Cash provided by operating activities for the first half of the fiscal year was $136.9 million, an increase of $8.2 million from the comparable period and prior year. For the first half of fiscal 2020, capital expenditures totaled $62.3 million as we continue to invest in our future with new facility additions, expansions, updates, and automation systems. As we look forward toward the second half of our fiscal year, Our CapEx rate will be impacted by our responses to the uncertainty around the coronavirus pandemic. At this time, we have placed all growth-related expenditures that are practical to suspend on hold until we have more clarity as to the severity and longevity of this pandemic's impact on our operations. During the quarter, we capitalized $2.8 million related to our ongoing CRM project, which consisted of license fees, Thank you for joining us today. As a reminder, we do not expect to incur any depreciation expense related to this project in fiscal 2020. During the second quarter of fiscal 2020, we repurchased 20,500 common shares for a total of $4.2 million under our previously announced stock repurchase program. As of February 29, 2020, we had repurchased a total of 268,250 common shares for a total of $44.7 million under the program. This concludes our prepared remarks, and we would now be happy to answer any questions that you may have.