Unifirst Corporation

Greetings, everyone, and welcome to the fourth quarter earnings call. During the presentation, all participants will be in listen-only mode. Later, 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 an operator at any time, please press star-0. It is now my pleasure to turn the call over to Stephen Cintros, President and Chief Executive Officer. Please go ahead.

Thank you, and good morning. I'm Stephen Cintros, Unifor'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 Uniforce 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 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 Form 10-K and 10-Q filings with the Securities and Exchange Commission. I want to start by saying that fiscal 2020 has certainly been a year like no other. And as we head into fiscal 2021, our company, the country, and the world continue to deal with the impact of the pandemic. This continues to be an unprecedented time, and 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 $1.804 billion, which came up just short of last year's $1.809 billion. However, as a reminder, fiscal 2019 was a 53-week fiscal year, and therefore on an even workweek 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 to 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 response efforts. Overall, we are pleased with our results given the headwinds that we faced during the year. Our ability to continue generating solid profits and strong cash flows speaks to the resiliency of our company and the value of the products and services that we provide to our customers. I want to again sincerely 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 has clearly highlighted the essential nature of our products and services. We believe the need and demand for hygienically 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 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 masks, hand sanitizer programs, as well as full-service rental programs for hygienically clean medical coats and gowns have helped us provide some offset to the overall headwinds we are facing within our customer base. 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 continue to be approximately 7 percent lower than the pre-COVID 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 recovery of economic activity, we do not anticipate showing year-over-year growth until the second half 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, and our technologies. All of our investments are designed to deliver solid long-term returns to all universe 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 top-line 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 will 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 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 share. Our core laundry operations revenues for the fourth quarter were $384.6 million. down 10.9% from the fourth quarter of 2019. 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 COVID-related closures, and that year over year, our weekly run rate was down approximately 4% to 5%. However, we also cautioned 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 reopenings 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. 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 initiative. These items were partially offset by lower travel-related and 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 delivers specialized nuclear decontamination and cleanroom 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. The segment's operating margin increased to 7.1% from 6.6%. As we've 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 our 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 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 had repurchased a total of 315,000 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 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 top line guidance assumes a core laundry organic growth rate of negative 6.8% at the midpoint of the range. 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. 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. The core laundry operating margin at the midpoint of the range is approximately 9.1%. Based on the current energy prices, we are modeling that energy costs will be 3.8% of revenues in our first fiscal quarter of 2021, which is down from prior year's comparable quarter of 3.9%. At this time, we expect the quarter's effective tax rate to be 25%. 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 progress of our initiative. 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 hardware costs to support the deployment of the system. In 2021, we expect that we will capitalize approximately $8 to $12 million related to this project. At this time, we are piloting a number of locations and expect that we will start a broader deployment in the second half of this fiscal year. 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.