Unifirst Corporation

Greetings and welcome to the UniFirst Corporation fourth 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 Sentros, President and Chief Executive Officer. Please go ahead.

Thank you and good morning. I'm Stephen Sentros, 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 full year and fourth 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 we look back over our fiscal year 2021, we are pleased with what we have accomplished as a team in the face of what continues to be a unique and challenging operating environment. During the year, our company and the communities that we operate in and serve continue to deal with the impact of the COVID-19 pandemic. Progress was certainly made as the introduction of vaccines has allowed for improvements in the overall public health situation, as well as the reopening of many businesses. As you are all keenly aware, however, the challenges related to COVID-19 continue to evolve and are not fully behind us just yet. I also want to continue to highlight that for over a year now, our team partners have continued to put forth tremendous efforts in the face of the many obstacles created by the pandemic. They've worked extremely hard to take care of each other and our customers during these extraordinarily challenging times. And I want to personally thank them for their extraordinary performance. For our full year fiscal 2021, the company reported revenues of $1.826 billion exceeding fiscal 2020's total of $1.804 billion. When we provided guidance at the beginning of the fiscal year, we had articulated that showing any growth during fiscal 2021 would be a challenge. Therefore, overall, we were pleased with this outcome. Our core laundry operations revenue over the second half of the year were positively impacted by a modest level of customer reopenings, as well as increases in the sale of PPE. In addition, our specialty garment segment was also a strong contributor to our overall results, producing a record year from a top and bottom line perspective. From a profit perspective, full year diluted earnings per share was 794 compared to 713 in fiscal 2020. The improved earnings comparison for the full year was primarily due to our depressed results in the second half of fiscal 2020, when the impact of the COVID-19 pandemic was greatest on our business, primarily in the form of customer closures. Shane will provide the details of our fourth quarter results shortly. As we have 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 designed to deliver solid long-term returns to our universe stakeholders and our integral components to our primary long-term objective to be universally recognized as the best service provider in the industry. As we look ahead to fiscal 2022, there are a number of key initiatives we are excited about progressing as we continue to transform the company in terms of our overall capabilities and competitive positioning. The first being the rollout of our new CRM system, which we have spoken quite a bit about previously. We continue to make solid progress on this key initiative, which will continue through fiscal 2022 and well into fiscal 2023. The second is an investment in the Unifirst brand. Our brand is an area that has not been significantly invested in over the years, and we are excited for this revitalization, which will not only evolve the look and feel of who Unifirst is, but will solidify our message internally and externally around what we stand for as a company and why we are a great choice for existing and prospective customers and employees. Finally, during fiscal 2022, we will be embarking on a multi-year project to implement a corporate-wide ERP system with a strong focus on supply chain and procurement automation and technology. This phased initiative will become the core of Unifor's technology footprint and will integrate and complement the capabilities of the CRM system we are currently deploying. From an operating standpoint, heading into fiscal 2022, we carry solid momentum from a top-line perspective into the year. Despite the external challenges that the team has endured, our sales performance has been very solid, selling both new business as well as internally to our existing customers. In addition, our customer retention for fiscal 2021 was much improved compared to recent years. We also will clearly be looking to work with our customers to share in the cost increases that we are experiencing in various aspects of the business. As a result of these top-line drivers, We expect organic growth for fiscal 2022 to exceed what we've been experiencing in recent years. Shane will provide the details of our outlook shortly. From a bottom-line perspective, there are two categories of costs we expect to present challenges from a margin perspective in fiscal 2022. The first group consists of costs that are bouncing back from depressed levels during the pandemic and costs that are being impacted by the increasingly inflationary environment. Last quarter, I highlighted some of these items, including merchandise amortization, costs related to raw materials and the overall supply chain disruption, the cost to hire and retain labor, energy, and travel. The second group consists of investments we are making in the future of our company. A subset of these costs relate to building stronger overall capabilities as a company that we feel are necessary to enhance our competitiveness, accelerate growth, and ultimately improve efficiency and profitability. These investments are being made in several areas, including human resources, supply chain, central services, and marketing, among others. In addition, significant costs are expected to be invested in fiscal 2022 and upcoming years related to the three discrete initiatives I discussed earlier. Going forward, we'll be carving out the portion of costs related to these initiatives that we view are transitionary in excluding them from a measure of adjusted profitability that we will continue to report until these key initiatives are completed. You can expect we'll be providing regular communication during our quarterly earnings calls regarding costs that we are expending during these large initiatives so investors can have a better sense of what our results look like excluding some of these costs. Even excluding these transitory costs related to these large initiatives Our margins will be pressured in fiscal 22 by investments we continue to make in our overall capabilities. However, we feel strongly about the need to invest in these areas and believe in the future benefits they will provide. We also firmly believe on the other side of these initiatives, there will be opportunities not only to rationalize the direct costs related to these initiatives, but to improve the overall efficiency of our cost structure that currently is working to support multiple systems through this technology transformation. Our solid balance sheet positions us well to meet our ongoing challenges while continuing to make these investments in growth and strengthen our business. We also continue to routinely evaluate our strategy around capital allocation. As part of that review, we announced earlier today we will be increasing our quarterly dividend by 20% to $0.30 per share of the company's common stock and $0.24 per share on the company's Class B common stock. At this time, we believe that a continued annual increase to our dividend with overtime expands commensurate with our free cash flow generation will be a foundational piece to our capital allocation strategy. In addition, we have reloaded our share purchase authorization program to allow for the company to purchase up to $100 million of its outstanding shares. And finally, as always, we continue to focus on providing our valuable products and services to existing customers and selling new customers on the value 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. And with that, I'd like to turn the call over to Shane, who will provide the details of our results for the fourth quarter and our outlook for fiscal 22. Thanks, Steve.

Consolidated revenues in our fourth quarter of 2021 were $465.3 million, an increase of 8.5% from $428.6 million a year ago. Consolidated operating income increased to $44.9 million from $40.8 million or 10.1%. Net income for the quarter increased to $34.6 million or $1.82 per diluted share from $31.6 million, or $1.66 per diluted share. Our effective tax rate in the quarter was 22% compared to 26.6% 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 operations revenues for the quarter were $415.1 million, an increase of 7.9% from the fourth quarter of 2020. Core laundry organic growth, which adjusts for the estimated effect of acquisitions as well as fluctuations in the Canadian dollar, was 7.2%. This increase was primarily driven by the COVID-19 pandemic significantly impacting our customer operations and wearer levels in prior year, as well as solid sales performance and improved customer retention in 2021. Core laundry operating income was $41.8 million for the quarter, up from $38.1 million in prior year, and the segment's operating margin increased to 10.1% compared to 9.9% in 2020. The increase in 2021's operating margin was primarily due to lower merchandise amortization as a percentage of revenues, partially offset by higher energy, healthcare claims cost, and travel. In addition, production payroll costs increased as a percentage of revenues, but were offset by costs we incurred responding to the pandemic in prior year, providing a favorable comparison. Companies' G&A costs also trended higher during the quarter as we prepared for and advanced the key initiatives that Steve discussed earlier. Energy costs increased to 4.2% of revenues in the fourth quarter of 2021, up from 3.5% a year ago. Revenues from our specialty garment segment, which delivers specialized nuclear decontamination and cleanroom products and services, were $33.9 million, for the fourth quarter of fiscal 2021, an increase of 22.5% over 2020. The segment's strong top-line growth was driven by improved performance in both its cleanroom, as well as its U.S. and European nuclear operations. The segment's operating income increased to $4.1 million, or 12.1% of revenues from $2 million, or 7.1% of revenues in the year-ago period. This increase was primarily due to the improved revenue performance resulting in strong operating leverage as well as lower casualty claims expense as a percentage of revenues. These benefits were partially offset by higher merchandise 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 as well as the timing and profitability of nuclear reactor outages and projects. Our first aid segment's revenues in the fourth quarter of 2021 decreased to $16.3 million from $16.4 million, primarily due to elevated PPE sales in the prior year, partially offset by growth in the first aid van business. In addition, the segment had an operating loss in the quarter of $1 million compared to operating income of $0.7 million in 2020. The current quarter's 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 $512.9 million at the end of fiscal 2021. Cash provided by operating activities for the year was $212.3 million, a decrease of $74.4 million from the prior year. This decrease was primarily due to sizable working capital needs of the business, as some of our asset positions, which were abnormally depressed during the pandemic, have returned to pre-pandemic balances. Capital expenditures for fiscal 2021 totaled $133.6 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 $2.3 million related to our ongoing CRM project, which consisted of both third-party consulting costs and capitalized internal labor costs. As of August 28th, 2021, we had capitalized $34.2 million related to the CRM project. As a reminder, we started deploying this system to our locations earlier in the fiscal year and anticipate this will continue through fiscal 2022 and well into 2023. We are depreciating this system over a 10-year life. Including the additional hardware we installed to support our new capabilities, like mobile handheld devices for our route drivers, we incurred approximately $2 million in depreciation and amortization in fiscal 2020. In 2022, we expect that the amortization of the system and depreciation of the related hardware will approximate $5 million in total and eventually will ramp to an estimated $6 to $7 million per year. Although our acquisition activity in fiscal 2021 was relatively nominal, we continue to look for and aggressively pursue additional targets as acquisitions remain an integral part of our overall growth strategy. I'd like to take this opportunity to provide our outlook for fiscal 2022. At this time, we anticipate our full-year revenues for fiscal 2022 will be between between $1.92 billion and $1.945 billion. This top line guidance assumes a core laundry organic growth rate of approximately 6.1% at the midpoint of the range. As Steve mentioned, this strong expected organic growth rate is primarily a result of customer reopenings, solid sales performance, and improved customer retention in fiscal 2021, as well as anticipated efforts to share with our customers the cost increases that we are seeing in our business. For fiscal 2022, we further expect that our fully diluted earnings per share will be between $5.70 and $6.10. This guidance includes $38 million of costs that we expect to incur in the fiscal year directly attributable to the three key initiatives that Steve discussed. our CRM and ERP system initiatives, and our branding efforts. Excluding these transitionary investment costs, our core laundry operations adjusted operating margin assumption at the midpoint of the range is 9.5%. This adjusted operating margin reflects certain costs that are normalizing from depressed levels during the pandemic, like merchandise amortization and travel costs, costs we are incurring to hire and retain labor in this challenging employment environment, elevated input costs related to the current inflationary environment and global supply chain challenges, as well as additional investments we are making in strengthening our overall capabilities. Based on the current energy prices, we are modeling that energy costs in our core laundry operations will increase to 4.6% of revenues in fiscal 2022, from the previously discussed 4.2% in 2021. Next year's effective tax rate is assumed to be 24% compared to 22% in fiscal 2021. Our specialty garments segments revenues are forecast to be relatively flat compared to 2021. However, the segments operating income is expected to be down approximately 11%. As a reminder, Fiscal 2021 was a record year for this segment from both a top and bottom line perspective, and the anticipated decline in operating margin is due to the timing and relative profitability of its planned outages and project work. Our first aid segments revenues are expected to be up approximately 10% compared to 2021. However, this segment's profitability will be relatively marginal in 2022 as a result of the investments we continue to make in building out the geographic footprint of our van operations. We expect that our capital expenditures in 2022 will approximate $125 million. Our guidance for fiscal 22 also assumes our current level of outstanding common shares, no impact related to potential tax reform, and no deterioration in the current economic environment. In addition, as I'm sure that you are aware, last month President Biden issued broad sweeping vaccine and or testing requirements for all companies with more than 100 employees. These rules have not yet been finalized, nor has an effective date been communicated. As such, we have not included any costs in our forecast that we do expect would be incurred to comply with these requirements. This concludes our prepared remarks, and we would now be happy to answer any questions that you may have.