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spk00: 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.
spk03: 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.
spk05: 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.
spk00: Thank you. If you would like to register a question or comment, 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. One moment, please. Our first question comes from Andrew Whitman of Baird. Please go ahead.
spk04: Excuse me. Uh, yeah. Thanks for taking my question guys. Um, and good morning. Uh, I guess I wanted to just talk a little bit. I wanted to talk a little bit on the top line trends. I heard you guys say in the quarter, kind of no headwinds, no tailwinds, kind of stable performance, um, marches in the books as of today, Steve, and with another month of vaccine in and people trying to get out a little bit more, are you seeing March pick up over the February levels? Can you just talk about what you saw here this month as it relates to the second half 3.5% guidance that you just gave?
spk03: Sure, Andy. I think maybe I would characterize March as a slight pickup from February. Now, seasonally, typically coming out of the winter months, we have somewhat of a pickup anyway. So I wouldn't say that we've seen any strong rebound from March. customer closures, reopening, and so on. And talking to some of our team, there's still some optimistic looking forward, but still haven't seen a lot of real activity through March. Obviously, February was a tough month with some of the storms as well, so things are improved certainly from there. But from a COVID perspective, and we always obviously keep a close eye on the energy markets, No strong movement in March.
spk04: Are there any leading indicators that you have that, or what are those leading indicators that you're looking at to give you some confidence? I mean, the second half revenue guidance, obviously it comes against an easier compare, and that's probably a big part of it. But what are the things that you're looking at that gives you confidence in that 3.5% outlook, either positively or negatively? Maybe there are things that you're thinking could happen that aren't baked in, or maybe some of the areas of risk, if you could just kind of, talk about some of those factors. That'd be helpful.
spk03: Yeah, when we look at our revenue trends, I guess compared to three months ago when we decided not to give guidance, I think the concerns back then were of additional shutdowns that might significantly impact the trends. I think with what we're seeing right now, we just have more confidence that, you know, those are less likely. Obviously, those are things that could impact if things were to shift uh... you know from when you look at our growth metrics uh... i talked about new account sales we're seeing a little bit better momentum there as as we look toward the second half of the year retention has been pretty stable and then we have this population of customers which we sort of talked about before that we're staying in close contact with that are either shut down or significantly reduced services because of the environment and those are the ones that we feel like uh... we could see some pull for for the second half of the year. I will say we haven't built a tremendous amount of it in, but I think any benefits that we may get from some of those customers at least offsets the risk that there could be some further bumps in the road and make us confident that we should be able to kind of at least maintain sort of the status quo environment. And like you said, a lot of the growth that we're projecting over the second half of the year is really about better comps compared to the third and fourth quarter of last year.
spk04: Great. That's really helpful. I wanted to ask one other, on one other topic here, and actually it turns out that your guys' line died a little bit while you were talking about in the script on the CRM. So I'm going to have you go through that a little bit more so that we all get that. I think it was a problem on the line that at least all of us on our team had. Okay. I think I heard that you capitalized some costs, $2.2 million on the CRM in the quarter. I think I also heard that you're going to have $1.5 to $2 million of depreciation in the second half of this year. That's where the line went out. So if you could talk again, Steve, just reiterate what the annual depreciation number was. I think you said $7 million, but then I heard later in the guidance commentary that there was like a $5 million number. Anyway, I'm throwing out a lot of numbers here. Could you just go through the cost that you're incurring on CRM one more time for this year in an annualized basis, and when you think that you'll start being able to realize some of the savings from it as well. Sorry, not there, but that'd be helpful. Thank you.
spk05: Yeah, and thanks for pointing that out, Andy, and apologize for the technical difficulty. Just Just to make sure we're all clear, during the quarter we capitalized an additional $2.2 million related to the CRM project. At this point in time, we're at the end of our quarter, we capitalized a total of $27.7 million related to that project. Because we're now in the deployment phase, we're going to start depreciating that system within estimated useful life of about 10 years. So in the second half of the year, our expectation is that we'll incur between $1.5 and $2 million related to the depreciation of that system. Eventually, the depreciation of that system, we expect to ramp to between $6 and $7 million. A large part of that is going to be some of the additional hardware that we will install as we deploy our locations. related to things like mobile handheld devices that we'll put in the hands of our route drivers. The $5 million number that I quoted later in my prepared remarks really was the additional expense that we expect to incur related to the deployment of that system in the second half of the year. And that $5 million is... Some of it is... You know, lower cap labor. We have been capitalizing some of our internal labor against that project. And as we move into deployment, some of that is actually going to move through the P&L. The depreciation that I had mentioned earlier, the expectations for the year. And then we expect to incur additional costs related to, you know, travel and training as we deploy those locations.
spk04: Okay. That's helpful. Then let's just drill in on that. If the second half of this year is $5 million of things like that, I guess that means on an annualized basis, that's 10. So that is, as we think about fiscal 22, you've got, I guess, another $5 million wrap, assuming none of the rates of these things increases or decreases. Is that the right way to think about how that layers into your fiscal 22 numbers? And given that the system is really supposed to be getting rolled out into 23, like you said, early on the call,
spk05: these costs are going to be with you for the next whatever 18 months or so is that kind of the right way of thinking about a change yeah that's the right way to think about it we do expect that these could or when we're fully rolling out the system that these could ramp or be in the 10 million dollar range we will be ramping up the number of locations that we deploy over the remainder of the calendar year And some of that experience is going to inform those. As we move along, though, we will continue to update you on our expectations around those numbers. But I think that the way you're thinking about it, you know, is appropriate.
spk03: And just to be clear, Andy, when we talk about that $10 million or so, that could be on top of the depreciation, right? So the depreciation is just going to come through and, you know, end up at $5, $6 million a year. It won't hit that rate until you're closer to fully deployed because, like Shane said, a bunch of that is the hardware that comes with the deployment. But when you think about the extra costs that aren't depreciation, so it's travel, it's the teams deploying, it's the IT team continuing to support through deployment, that could be in the $10 million range on an annualized basis. With the bulk of that you know, the biggest year being, you know, 2022, which is next year, and then it's going to bleed over.
spk04: All right, guys. Those are helpful comments. Thank you. Have a good day. Thank you.
spk00: Thank you. As a reminder, via the phone lines, you may press the 1-4 to register a question or comment. The 1-4. Our next question comes from Andrew Stouderman of J.P. Morgan. Please go ahead.
spk01: Hi, Steve and Shane. So you mentioned that you haven't seen recovery activity overall yet. The first thing I want to just clarify is I assume you mean still growth in the second half of March just because of year-over-year comps, and we haven't seen recovery yet is really just a sequential comment. My second question is you called out energy as a market that's stable and Are there any other marketplaces and markets to call out that are either recovering stable or really exceptional in any way? And then my last question is, could you just give any other puts and takes we should think about for the core operating margin being 10.4% in the second half of the year, not related to the CRM system, perhaps with a thought towards merchandise amortization?
spk03: Okay, very thorough, multi-part question. So I will hit the different pieces. As far as the first piece I think you were talking about, the answer was yes, you're thinking about that the right way. When we're talking about recovery, we're talking more about sequential improvements in customers reopening and the such. You're also correct that March, we started to see declines last year in the second half of March. So we're probably getting to the point where some of our revenues are exceeding some of those late March declines. But you're right. The recovery comments are more sequential. Refresh my memory on the second part of the question.
spk01: Oh, I think you talked about the second part. Any end market comments that are not related to energy.
spk03: Yeah. So, you know, in general, I think we've talked a little bit about that there are places where we're seeing improved activity. And even in no programmers with dentist office and some other sort of healthcare applications that have become a larger part of our end market offerings during COVID in particular. So certainly there's some strength there. I think we aren't as heavy in food and beverage and hospitality. I think you are seeing... improvements in that sector but they're not providing us a tremendous pull because we're not as as heavy in those areas but we are seeing some some slow improvements in those areas and then I think when you just look at the broader sectors that we that we service you know whether it's manufacturing or automotive or other I would I would go back to that stable comment but nothing in particular that's that's providing a particular pull As far as the margin questions for the second half of the year, I'll pass it to Shane because there are a few other items that are impacting.
spk05: Yeah. So when we take a look at the margins, not only for the second half of the year, but broadly they were the items that were impacting our second quarter. We've mentioned for the last number of quarters that we continue to receive a benefit from travel costs. In this current quarter, that was no different. Um, as we look towards the second half of the year, we can, or we expect that that benefit is going to continue, um, at some point in time and, and our forecast for the remainder of the year has slight increases in that regard. Uh, as we do think that as the vaccines continue to get rolled out, that we will probably start to allow a little bit more travel. Uh, that being said, you know, throughout the pandemic, We do feel around this area we have learned some things and that the travel in the end probably won't return to the area it was pre-pandemic. Clearly during this we've learned that there are very, very capable tools available to us that allow us to work with people face-to-face, whether it be Microsoft Teams or Zoom, that we will be utilizing and we probably will have more of a permanent benefit as it relates to our travel expenses. That being said, they will ramp from where they are currently. From a healthcare perspective, and we sort of called it out in my prepared remarks, this quarter our healthcare claims cost was high. It was actually higher than it had been for a number of quarters, and in previous quarters we had been talking about the benefit that we had been receiving. where a lot of discretionary surgeries and other doctors' visits had been put off during the pandemic. What we believe we're seeing now is maybe some of that pent-up demand as vaccines are starting to get rolled out and maybe people are becoming a little bit more comfortable with the environments. people are starting to go back to the doctor and we're seeing some increase in the healthcare claims costs we're experiencing. Throughout the remainder of the year, our second quarter experience has informed some of our forecast and we are anticipating that those claims costs are going to be at least elevated from what we've experienced during the pandemic. You had mentioned merchandise. Again, During the last number of quarters, we had been talking about a headwind that we had been experiencing from merchandise, and a lot of that was around the way that we account for the amortization of our merchandise costs. We had articulated the fact that we were putting less merchandise into service, but because we amortized those over an extended period, an average life of 18 months, that it was going to take a while before we started to see some of those lower expenses. During the second quarter, we really hit that inflection point where now all of a sudden you're starting to see a benefit from merchandise. And in the second half of the year, we expected that that benefit is going to continue as, you know, the, I guess the amount of merchandise we're putting into service continues to be favorable. Clearly during the last, you know, three or four quarters, it's not as favorable as it was maybe during the depths of the pandemic. But we're still putting in less merchandise than maybe we were pre-pandemic. So again, the second half of the year does provide for or does include that merchandise benefit.
spk03: One other thing I would add, Andrew, is on energy. I don't know if Shane mentioned that. Energy, certainly, when you look at the average cost of a gallon of gasoline right now in the high twos, 280, 290, that compared to our previous sort of internal projections is providing some headwind for the second half of the year compared to the second half of last year, which during, again, the depths of the pandemic, a cost of a gallon of gasoline on average is probably below $2, at least for part of that time last summer. So you will see an energy pickup as well.
spk01: Got it. Okay, thank you.
spk00: Thank you. As a reminder, via the phone lines, it is 1-4 to register a question or comment. The next question comes from John Cummings, Copeland Capital. Please go ahead.
spk02: Hi, good morning. Thanks for taking the question. We wanted to get an update on your dividend philosophy and just trying to understand if you plan on increasing or evaluating the dividend on an annual basis. And then also just any general comments you can make in terms of like a target payout ratio or goal with the dividends.
spk03: Yeah, thanks for the question. I mean, over the last few years, we have had a couple of step-ups in the dividend, and our commentary to this point was that we will continue to evaluate on an annual basis and look at increases somewhat commensurate with increases in our free cash flows. Now, obviously, over the last year with the pandemic, You know, it's been a bumpy year, but it will be something as things smooth out that we'll continue to look at. We don't have a formal communicated policy in place right now, but it is something you can count on us looking at it on an annual basis and evaluating.
spk02: Okay, thanks. And then one follow-up on the balance sheet. Your cash position continues to increase. I'm just curious, at what point would you look to actively return some of that cash, you know, either via special dividend or buyback?
spk03: Yeah, we had to have, I guess, a buyback program in place. And, you know, over the course of the last quarter, we've purchased a small amount of stock back. It's also something we'll continue to evaluate based on, you know, our comfort level around the trajectory of the business here going forward coming out of the pandemic, you know, as well as other plans we may have for that capital. So, again, similar to the dividend, it's something we We will take a look at, we probably put the brakes on it a little bit during the pandemic, and it will be something we'll continue to evaluate going forward. Thank you. Thank you.
spk00: And gentlemen, that was our final question. I'll turn the call back over to you.
spk03: Great. I would like to thank everyone for joining us today to review our second quarter financial results. We look forward to speaking with you again in June when we expect to be reporting our third quarter performance. Thank you and have a great day.
spk00: This does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines. Thank you and have a good day.
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