Unifirst Corporation

Good morning, everyone, and greetings. Welcome to the Uniforce Corporation third quarter earnings call. During the presentation, all participants are in listen-only mode. Afterwards, 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, please press star-zero. I would now like to turn the call over to Stephen Cintros, President and Chief Executive Officer. Please go ahead.

Thank you, and good morning. I'm Stephen Centros, 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 the Uniforce Corporation conference call to review our third 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 10-K and 10-Q filings with the Securities and Exchange Commission. As I have the last several quarters, I want to start by saying that first and foremost, our thoughts are for the safety and well-being for all those dealing with the impact of the COVID-19 pandemic. Good news is that during the quarter, we have seen real improvement from a health and safety standpoint, both in our company and in our communities related to COVID-19. I also want to again highlight that for over a year now, our team partners have continued to put forth tremendous efforts in the face of many obstacles created by the pandemic. They have worked extremely hard to take care of each other and our customers during these challenging times, and I want to personally thank them for their extraordinary performance. Consolidated revenues for our third quarter were $464.3 million, up 4.2% from the prior year, and fully diluted earnings per share were $2.21, up from $1.12 in the third quarter a year ago. Our core laundry operations revenues were positively impacted by a modest level of customer reopenings, as well as increases in the sale of PPE. Our specialty garment segment also contributed to our overall performance with very strong results during the quarter that exceeded our expectations. Shane will provide you with the details of our quarterly results shortly. Clearly, our comparisons to the prior year third quarter are being positively impacted by the significant effect that the COVID-19 pandemic had on our fiscal 2020 third quarter. As a reminder, that quarter a year ago was the quarter most impacted by customer closures during the pandemic. Overall, we are pleased with the results of our quarter, which exceeded our expectations from a top and bottom line perspective. Increased business activity from a recovering economy is a welcome sight for sure after a challenging year. In addition, we have started to see early signs of improved activity in the energy-dependent markets that we service. Our new account sales and account retention experience were solid during the quarter, and we continue to position our sales resources to take advantage of current opportunities as well as capitalize on future opportunities as the economy recovers. As I'm sure many of you are aware, we are operating in an increasingly inflationary environment. The cost of labor as well as other business inputs are clearly on the rise. In addition, we expect and have begun to experience a rebound of several costs that trended significantly lower during the pandemic, such as merchandise, healthcare, energy, travel, and others. For example, merchandise amortization for the full year fiscal 2021 is running at least 100 basis points lower than more historical levels. As we look ahead beyond our fourth quarter into fiscal 2022, we expect that the increases in these costs, as well as the inflationary impact on labor and other business inputs, will pressure our margins. We will provide you with further insights into our outlook for fiscal 22 during our fourth quarter earnings call. Our solid balance sheet positions us well to meet our ongoing challenges. We'll continue to invest in growth and strengthen our business. 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 universe stakeholders and are integral components to our primary long-term objective to be universally recognized as the best service provider in the industry. We continue to make good progress in these core initiatives, such as our CRM systems project. Our CRM deployment is certainly a foundational change to our infrastructure that will allow for service improvements and efficiency moving forward. We will continue to invest in our infrastructure and future over the next several years, including key investments in supply chain, other technology infrastructure, route efficiency, as well as our brand. We'll provide additional details as we progress with some of these key initiatives in the quarters ahead. As always, we will continue to focus on providing our valuable products and services to existing customers and selling new customers on the value that Unifirst 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. And with that, I'll turn the call over to Shane, who will provide the details of our results for the third quarter.

Thanks, Steve. As Steve mentioned, consolidated revenues in our third quarter of 2021 were $464.3 million, an increase of 4.2% from $445.5 million a year ago, and consolidated operating income increased to $54.2 million from $27.7 million, or 95.5%. The net income for the quarter increased to $42 million, or $2.21 per diluted share, from $21.3 million, or $1.12 per diluted share. Our effective tax rate in the quarter was 22.9% compared to 21.8% in the prior year. 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 revenues for the quarter were $409 million, an increase of 5.3% from the third quarter of 2020. Core laundry organic growth, which adjusts for the estimated effect of acquisitions as well as fluctuations in the Canadian dollar, was 4.3%. This increase was primarily driven by the COVID-19 pandemic significantly impacting our customers' operations and wearer levels in prior year, which was partially offset by a large $20.1 million direct sale also in prior year. As Steve discussed, our quarterly top line performance exceeded our expectations as the impact of the pandemic on our customer base continues to subside, as well as from increased sales of PPE. Core laundry operating margin increased to 11.2% for the quarter from $45.6 million, from 5.1% in prior year, or $19.7 million. The increase was primarily driven by a number of items affecting our prior year period, including the impact of the decline in rental revenues on our cost structure, higher costs of revenues related to the large $20.1 million direct sales, higher bad debt expense, and additional costs which the company incurred responding to the COVID-19 pandemic. The current quarter operating margin continued to benefit from certain costs that have trended favorably during the pandemic, including lower merchandise and travel-related costs. In addition, the segment's operating results benefited from lower payroll costs due to understaffing caused by the challenging employment environment. The company also relieved some of its bad debt reserves in the quarter that it had provided for during the pandemic, as our expectations around future uncollectible accounts have moderated. These benefits were partially offset by higher healthcare claims costs, which trended unfavorably due to what we believe was pent-up demand from our team partners deferring elective activities during the pandemic. Energy costs were 4.2% of revenues in the third quarter of 2021, compared to 3.4% the prior year. Our specialty garment segment, which delivers specialized nuclear decontamination and cleanroom products and services, had a very strong quarter and exceeded our expectations in both revenues and operating income. Revenues increased to $38.2 million from $36.2 million prior year, or 5.7%, and were primarily driven by growth in our cleanroom and European nuclear operations. Segment's operating margin increased to 21.7% from 17.6%, primarily due to lower merchandise costs and bad debt expense as a percentage of revenues, as well as costs incurred in the prior year responding to the COVID-19 pandemic. 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 $17.1 million compared to $20.9 million in the prior year. However, the segment's operating profit was nominal compared to $1.6 million in the comparable period of 2020. These decreases were primarily due to elevated PPE sales in prior year. In addition, the current quarter operating results reflect 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 $535 million at the end of our third quarter of fiscal 2021. For the first three quarters of fiscal 2021, capital expenditures totaled $96.6 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. During the quarter, we capitalized $4.2 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 $32 million related to the CRM project. In the third fiscal quarter of 2021, we began to depreciate part of the system over a 10-year life, and our quarterly depreciation approximated $0.7 million. As a reminder, the depreciation of the full system, combined with additional hardware we will install to support our new capabilities, like mobile handheld devices for our route drivers, will eventually ramp to an estimated $6 to $7 million of additional depreciation expense per year. The company did not repurchase any shares during the quarter under its previously announced stock repurchase program. As of May 29, 2021, the company had repurchased approximately 368,000 shares of common stock for $61.8 million under the program. Based on our results to date, as well as our outlook for the remainder of the year, we now expect that our fiscal 2021 revenues will be between $1.81 billion and $1.817 billion. We further expect that full-year diluted earnings per share will be between $7.80 and $8. This outlook assumes that our core laundry operating margin in the fourth quarter will approximate 10.6% at the midpoint of the range. This outlook also reflects continued benefits in areas that have trended lower during the pandemic, including merchandise and travel costs, although we have also assumed that those benefits will continue to moderate. We further assume that our payroll costs will increase as a percentage of revenues as we work to fill open positions and begin to adjust compensation levels in certain high-demand roles in response to the current employment landscape. This concludes our prepared remarks, and we would now be happy to answer any questions that you might have.