Unifirst Corporation

Q1 2021 Earnings Conference Call

1/6/2021

spk00: 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 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 Stephen Sintros, President and CEO. Please go ahead.
spk05: Steven Cintros, Thank you, and good morning. I'm Steven Cintros, Uniforce 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 Uniforce 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. 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 10Q and 10K 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 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 in mostly as expected from a top-line perspective. Consolidated revenues for the quarter were $446.9 million, down 4% from our fiscal 2020 first 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 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 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 and as the economy recovers. Some positive trends of note for the quarter include new business installs at roughly the same level as the first quarter a year ago, as well as improved customer retention. In addition, although reductions in wearers continue at higher than normal levels, the significant reductions experienced in 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. In addition, the recent surge in positive COVID cases has started to cause increased business restrictions in 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 in our people, infrastructure, and technologies. All of our investments designed to deliver solid long-term returns to all UNIFER stakeholders and our integral components to our primary long-term objective to be universally recognized as the best service provider in 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 in 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 turn the call back over to Shane, who will provide the details of our results for the first quarter.
spk03: Thanks, Steve. As Steve mentioned, in our first quarter of 2021, consolidated revenues were $446.9 million, 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% compared to 22.1% in 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 in the Canadian dollar, was also 5.6%. Throughout our quarter, our weekly revenues remained relatively stable, However, as expected, our organic growth rate trended unfavorably 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% in prior year, or $53.8 million. The decrease in the segment's profitability was primarily due to the impact of the decline in rental revenues on our cost structure, which was partially offset by lower travel-related healthcare 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 to forecast in the short term. We do expect that a number of these costs that have been trending favorably will eventually normalize and pressure margins in the quarters ahead. Energy costs decreased 3.6% of revenues in the first quarter of 2021, down from 3.9% in prior year. Revenues from our specialty garments segment. which delivers specialized nuclear decontamination and cleanroom 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 U.S. 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 healthcare and energy costs. These items were partially offset by higher merchandise expense as a percentage of revenues. The specialty garment's quarterly top line and profit performance significantly exceeded our expectations. as certain direct sales and project-related work that had been deferred in the second half of fiscal 2020 related to the COVID-19 pandemic were finally realized, as well as some additional direct sale activity that was anticipated later in fiscal 2021 came through early. 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 segments revenues were $15.5 million compared to $15.7 million in prior year. However, the segments 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 segment's higher margin wholesale business combined with continued investment in the company's initiative to expand its first aid van business into new geography. 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 $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 in 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 a total of $25.5 million related to the CRM project. As discussed on our last call, we are piloting a number of locations and expect that we will start a broader deployment in 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 mobile handheld devices for our route drivers, will ramp to an estimated $6 to $7 million of additional depreciation expense per year. During the first quarter of fiscal 2021, we repurchased 41,000 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 355,917 common shares for $59.5 million under the program. As Steve discussed, due to continued uncertainty regarding how states, provinces, municipalities, and our customers will respond to the recent surge in positive COVID cases, as well as how quickly the 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. As we have done in our recent quarters, we also wanted to provide you an update on our current revenue trends. Throughout December, The weekly rental billings in our core laundry operations have been trending down compared to the comparable weeks in 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.
spk00: Thank you. If you would like to register a question, please press the 1 followed by the 4 on your telephone. You will hear a three-tone prompt to acknowledge your request. If your question has been answered and you would like to withdraw your registration, please press the 1 followed by the 3. Again, to register for a question, please press the 1 followed by the 4. And our first question comes from Andrew Steinerman with J.P. Morgan. Please proceed.
spk01: Hi. Happy New Year. Happy New Year. Thank you so much. I hope all is well. I didn't catch your last statement. When you said down 3.5% to 4%, what period... 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 in the month of November and into December on a year-over-year basis.
spk03: Yeah, Andrew, that actually was our revenues related to our core laundry operations, and the time period was throughout December. So that was the last couple weeks.
spk01: Throughout December.
spk03: That's right.
spk01: Okay, so could you just give us a sense of how that compares to year over year in November then?
spk03: That would be similar.
spk01: Okay, and last question. When did your annual price increase kick in and did it affect your core laundry, you know, revenue trends that you just went over with in November, December?
spk05: Yeah, 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, you know, 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 those numbers that Shane just gave you are a pretty good indication of where we stand right now. Perfect. Thank you. Thank you.
spk00: And our next question comes from Andrew Whitman with Baird. Please proceed.
spk04: Good morning, guys. I think digging into the margins probably makes sense at this point in time. I guess if you could help us maybe a little bit, you quantified the energy, but healthcare and travel were the other two things that you mentioned. Just want to understand the order of magnitude that those had on a year-over-year basis. Just to understand, I guess the margins are still down. So you had the decremental margins from reduced operating leverage, I guess, 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 in the margins, maybe any one-time items in particular would be of interest to us.
spk03: Yeah, 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 continue to invest in our initiatives and our capabilities from a G&A perspective, and we continue to invest in our sales organization. So given the fact that we haven't necessarily right-sized, you know, those payroll costs as a percentage of revenues, those have gone up. Similarly, we continue to invest in, you know, our facilities and our IT initiatives as well. CapEx continues to... but the revenue decline has increased those expenses as a percentage of revenue. When you boil it down, really the largest items are the ones that we called out, the healthcare, energy, and travel. The largest of those really being the travel, the impact of the restrictions that we've implemented on our travel as a result of the pandemic. That's probably 70 to 80 basis points of difference going in the opposite direction. And then our lower fuel costs and other energy costs, I 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 that, you know, there are you know, other items that trended favorably. There's just, it continues to be a very dynamic time from a cost perspective.
spk04: Okay. I mean, I didn't, in that response, I mean, I heard, you know, investing in sales, there's been some investments. I didn't hear that there was anything that you did actually or anything significant. I'm sure you're always doing a little bit, but you didn't do anything significant in terms of looking at the cost structure more holistically and and trying to adjust to a newer revenue level. You guys have been pretty methodical about that so far. Is it fair to assume that that continued in this quarter as well?
spk05: Yeah, I would say that's right. I think when you look at SG&A, with the initiatives and investments going on, we didn't make any major changes there to heads through this process. Obviously, on the direct cost side in service and production, those costs, more follow the revenue trend, particularly on the production side. Service is 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 efficiency and more capacity now in some of the routes. But you're correct. No major changes there.
spk04: Yeah. Okay. And then just my last question. I guess you talked about customer retention issues. It sounded like it was pretty good in the quarter. And I guess my question on that, Steve, is that exclusive of customers that went out of business or inclusive of customers going out of business and maybe there just weren't a lot of customers that shut down during the quarter? Maybe get some context on your retention rate from the prepared remarks.
spk05: Yeah, that's a good question, Andrew. So since the pandemic has started, we've 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 in wares, but some come from customers that are still shut down or at far reduced capacities. 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 accounts, further reductions in services, or increases in services that come back. And so that's still the wild card that remains 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 the wild card as vaccine takes hold. Does that business start to come back more? Does some of those fall out further? Some of them have come through in the way of further reductions. I talk about reductions being higher than normal. What we've been seeing is as businesses reopen and we start to reinstitute services in different customers, they're coming back at reduced levels. So 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 sort of suspended services for the true lost accounts. If someone's out of business and they're lost, those are being reflected in our lost accounts now. What's not being reflected are the unknowns of, just to give some examples, some restaurants that are significantly at reduced capacity or other hospitality, hotels, education, schools, that, you know, in some other businesses where services have been significantly reduced, but we're still reflecting them as opportunities to come back.
spk04: Got it. Thank you very much for the comments. Have a good day. Thank you. Thanks.
spk00: As a reminder to register for a question, please press the 1 followed by the 4. And our next question comes from Tim Mulrooney with William Blair. Please proceed.
spk02: Good morning, Steve. Good morning, Shane. Good morning. Good morning. Just a couple quick ones for you guys. So, I mean, we've continued to see the broader industry benefit from PP&E sales to customers given the high demand. I don't think this was called out in the press release, but did you have any material revenue from PP&E sales? Is this a driver for you, and is the trend line there changing at all?
spk05: As far as PPE sales, we have had some offsetting benefits from increased PPE sales, whether it be masks or sanitizer or other products. I would say that it continues to be steady, but not necessarily surging or decreasing at this point. And I think a big question there is what is the long-term outlook for some of those sales? I will say for us, it 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 during this time. But not any major blips, more ongoing providing of some of those products to existing customers and some new customers as well.
spk02: No, I think that's really helpful. That's telling me that you probably didn't see any major spikes, but wouldn't expect any major drop off from those types of things in the near future anyway. So that's very helpful.
spk05: I think that's right.
spk02: Okay. Okay. Shifting gears to your specialty business, you know, specialty garments had a pretty strong quarter revenue and profits wise. Is there, I know you touched on it in your prepared remarks, but in the Q and a section here, is there anything else to call out here? as we model out the rest of the fiscal year, or were there just a few larger orders in the first quarter?
spk05: Yeah, the first quarter was pretty unusual for them. Usually they do, despite the volatility of their business from quarter to quarter, 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 provided some upside. And as Shane mentioned, there were some projects that were sort of uncertain to the timing of them with the pandemic that came through, as well as some direct sales that 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 as you look to the rest of the year. 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 B probably will be there in the end, but it will moderate as the year goes along. And just as a reminder, that segment really is made up of two businesses, our clean room segment and our nuclear services segment. The clean room segment has been strong in this environment and is a lot steadier, and it's really the nuclear projects and customers that provide the volatility. So, you know, we'll see how the year shapes up, but we don't expect the same type of – uh, of beat in future quarters.
spk02: Understood. Okay. Um, one, one more for you here, Steve, um, with your net cash position now at $473 million, uh, I was hoping you could give us an update on your plans for capital allocation this year. I see you did some share repurchase in this quarter, I think, um, But just a general update on your thoughts and, you know, honestly, have your views on capital allocation changed in the last 24 hours with the special election results being where they are right now?
spk05: You're really getting some up-to-date questions. It's an excellent question and probably not one I'm prepared to answer.
spk02: I didn't think so. I had to try.
spk05: The uncertainty 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, you know, we had shown a willingness to start buying some shares back and we will continue to monitor the market and, and, and, and events to, to determine, you know, what we think makes sense there. And, um, you know, we continue to look for opportunities to put that money to use. And like we've said, you know, we're not going to be shy about making the capital investments we need for the longterm. And, um, you know, we'll be opportunistic as far as other opportunities, whether it be acquisitions or share buyback opportunities. So, you know, we'll digest the events of the week and have some more next quarter.
spk02: I'm still open to further share repurchases and additional M&A as the year progresses. Okay. Okay. That's great. Thank you so much for your time. Thank you.
spk00: Mr. O'Connor, there are no other questions at this time.
spk05: Thank you. I'd like to thank everyone again for joining us 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.
spk00: 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
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