Unifirst Corporation

Greetings and welcome to the Unity First Corporation Second Quarter Earnings Conference Call. During the presentation, all participants will be in a listen-only mode. Later, 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 the operator, please press star 0. It is now my pleasure to turn the conference over to Stephen Cintros, President and Chief Executive Officer. Please go ahead.

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 would like to welcome you to the Uniforce Corporation conference call to review our second quarter results for fiscal 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 10-K and 10-Q filings with the Securities and Exchange Commission. As I have 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 the COVID-19 pandemic. Our second quarter results continue to be impacted by the pandemic, as well as severe winter storms in Texas and the surrounding states during February. Considering these challenges, we were pleased with the solid results for our quarter. I want to thank our team partners and sincerely for the tremendous effort that they continue to put forth, ensuring that they take care of each other and our customers during these challenging times. They truly continue to deliver in every way. Consolidated revenues for our second quarter were $449.8 million, down 3.2% from the prior year, and fully diluted earnings per share was $1.71 million, down 6% from the prior year. Shane will provide the details of our quarterly results shortly. Our second quarter began during a time where positive COVID-19 cases were surging and there was strong potential for further economic shutdowns. Cases have sharply declined during the quarter from those peaks and vaccinations have started to pick up, creating more stability in our overall operating environment. That being said, economic activity remains somewhat stagnant, and we have yet to see significant recovery activities take hold. This is especially true in the energy-dependent markets that we service, which have also stabilized but have not yet begun to recover. We continue to focus on providing our valuable products and services to existing customers and selling new customers on the value that Unifers 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 hygienically clean garments and work environments positions our company well to support the evolving economic landscape. We continue to position our sales resources to take advantage of the opportunities that exist in the market today and as the economy recovers. Although our new account sales have been solid during the first six months of the year, and comparable to the first half of fiscal 2020, they are down from the record level set in fiscal 19. The overall impact from COVID-19, as well as sharp declines in activity in the energy dependent markets that we service, are contributing to those comparisons. This decline has been partially offset by increased sales to existing customers. On a positive note, we do expect stronger activity over the second half of the year, And from a retention standpoint, we are showing marked improvements over the first half of fiscal 2020. Although the trajectory of an eventual recovery is difficult to forecast, we do feel that the improved stability in the overall environment allows us enough comfort to share with you our outlook for the remainder of the year, which Shane will provide shortly. Vaccine optimism continues to be balanced by uncertainty as to when and how quickly the vaccine will create strong positive movement in the economy. Our solid balance sheet positions us to meet these ongoing challenges presented by the COVID-19 pandemic while continuing to invest in growth and strengthen our business. As we have talked about over the last year or two, we continue to be focused on making good investments in our people, our infrastructures, and our technologies. All of these investments are designed to deliver solid long-term returns to universe stakeholders and are integral components to our primary objective to being universally recognized as the best service provider in our industry. We continue to make good progress on these core initiatives such as our CRM systems project. We are pleased to report that we have successfully completed several pilot locations and have now officially moved into the deployment phase of the initiative. Our CRM deployment is certainly a foundational change to our infrastructure that will allow for service improvements and efficiencies moving forward. We will continue to invest in our future over the next several years, including key investments in 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 in the quarters ahead. And with that, I'd like to turn the call over to Shane, who will provide the details of our results for the second quarter.

Thanks, Steve. As Steve mentioned, our second quarter of 2021's consolidated revenues were $449.8 million, down 3.2% from $464.6 million a year ago. And consolidated operating income decreased to $40.7 million from $44.1 million, or 7.8%. Net income for the quarter decreased to $32.6 million, or $1.71 per diluted share, from $34.7 million, or $1.82 per diluted share. Our effective tax rate in the quarter was 22.7% compared to 24.2% in the prior year, which favorably impacted the EPS comparison. 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 operations revenues for the quarter were $398.2 million, down 3.4% from the second quarter of 2020. Core laundry organic growth, which adjusts for the estimated effect of acquisitions, as well as fluctuations in the Canadian dollar, was negative 3.6%. Throughout the quarter, our weekly revenues remained relatively stable, as we did not experience any significant headwinds from states, provinces, municipalities, or our customers responding to the surge in positive COVID-19 case counts during the holiday period, nor did we see any significant tailwind from the impact of the rollout of the COVID-19 vaccines. However, during the quarter, our top-line performance was impacted by approximately $2 million from the effect of severe winter storms in Texas and the surrounding states on our operations as well as our customer locations. Core laundry operating margin decreased to 8.9% for the quarter, or $35.4 million, from 9.3% in prior year, or $38.4 million. The segment's profitability was negatively impacted by the decline in rental revenues on our cost structure, as well as higher health care claims costs. In addition, the lost revenue and additional expense we incurred from the severe winter storms in Texas and the surrounding states reduced our operating income by approximately $2.6 million, or 10 cents, on EPS. These items were partially offset by lower merchandise and travel-related costs. As Steve discussed, throughout the pandemic, we have maintained our long-term perspective when managing the business, and as a result, we continue to invest in our core initiatives, including the further development and upcoming deployment of our CRM system. Energy costs increased to 4.2% of revenues in the second quarter of 2021, up from 4.1% in prior year. This increase was primarily due to additional utility expenses the company incurred related to higher demand during the severe winter storms in Texas and the surrounding states. Excluding those elevated expenses, energy costs would have been 3.9% of revenues, as the benefit that we had been seeing over the last several quarters started to moderate with the price of fuel increasing nationally. Revenues from our specialty garment segment, which delivers specialized nuclear decontamination in cleanroom products and services, decreased to $35.2 million from $36 million in prior year, or 2.1%. This decrease was primarily due to lower activity in the U.S. and Canadian nuclear operations, which was partially offset by continued growth in the cleanroom business. Both periods discussed benefited from significant one-time direct sales, which contributed to strong top-line performance in a quarter that is usually negatively impacted by seasonality. The segment's operating margin increased to 14.9% from 12.9%, primarily due to higher gross margin on its direct sales as well as lower travel-related costs. These items were partially offset by higher payroll costs as a percentage of revenues. 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 $16.3 million compared to $16.4 million in the prior year. However, the segment's operating profit was nominal compared to $1.1 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 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 $509.6 million at the end of our second quarter of fiscal 2021. For the first half of fiscal 2021, Capital expenditures totaled $66.9 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. As a reminder, CapEx spend is elevated primarily due to the purchase of a $14.1 million building in New York City in our first quarter of 2020. which will provide us a strategic location for a future service center. During the quarter, we capitalized $2.2 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 $27.7 million related to our CRM project. At this time, we have started a deployment of this application to our numerous locations and anticipate this will continue through fiscal 2022 and into fiscal 2023. As a result, we will start to depreciate the system over a 10-year life in our third fiscal quarter of 2021, with depreciation in the second half of the year approximating $1.5 to $2 million. for 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 second quarter of fiscal 2021, we repurchased 12,200 shares of common stock for a total of $2.3 million under our previously announced stock repurchase program. As of February 27, 2021, The company had repurchased a total of 368,117 shares of common stock for $61.8 million under the program. At this time, we believe our ability to project our results has improved, and I would like to take this opportunity to provide an update on our outlook for fiscal 2021. We expect our fiscal 2021 revenues to be between $1.793 billion and $1.803 billion, which at the midpoint of the range assumes an organic growth rate in our core laundry operations of 3.5%. As a reminder, the prior year comparison for the second half of fiscal 2021 will be negatively impacted by a $20.1 million large direct sale to a healthcare customer that we recorded in our third fiscal quarter of 2020. Full year diluted earnings per share is expected to be between $7.30 and $7.65. This outlook assumes an operating margin in our core laundry operations for the second half of the year of 10.4%, and reflects additional expense we expect to incur related to the deployment of our CRM system of approximately $5 million. Just to be clear, this amount includes the depreciation expense that I mentioned earlier. This concludes our prepared remarks and we would now be happy to answer any questions that you might have.