UniFirst Corporation
Q1 2021 Earnings Call Transcript

Published: 6 Jan 2021

[Operator:]

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. I would now like to turn the conference over to Steven Sintros, President and CEO. Please go ahead.

[Steven Sintros:]

Thank you and good morning. I am Steven Sintros, UniFirst’s 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 UniFirst 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.

[Shane O'Connor:]

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.

[Operator:]

Thank you. Our first question comes from the line of Andrew Steinerman with J.P. Morgan. Please proceed.

[Andrew Steinerman:]

Hi, happy New Year. I didn't…

[Shane O'Connor:]

Happy New Year.

[Andrew Steinerman:]

Thank you so much. 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?

[Shane O'Connor:]

Yes, Andrew, that actually was our revenues related to our core laundry operations and the time period was throughout December, so that was the last…

[Andrew Steinerman:]

So, throughout December?

[Shane O'Connor:]

That’s right.

[Andrew Steinerman:]

Okay so could you just give us a sense of how that compares to year-over-year in November then?

[Shane O'Connor:]

That would be similar.

[Andrew Steinerman:]

Okay, and last question, when did your annual price increase kick in and did it affect your core laundry revenue trends that you just went over with in November, December?

[Steven Sintros:]

Yes, so Andrew this is Steve. We’re not going to get into the exact timing and 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 trends compared to what a lot of the first quarter was running at based on that timing. So that -- those numbers that Shane just gave you are a pretty good indication of where we stand right now.

[Andrew Steinerman:]

Perfect. Thank you.

[Shane O'Connor:]

Thank you.

[Operator:]

And our next question comes from the line of Andrew Wittmann with Baird. Please proceed.

[Andrew Wittmann:]

Yes, good morning guys.

[Shane O'Connor:]

Good morning.

[Steven Sintros:]

Good morning.

[Andrew Wittmann:]

I think digging in, hi, I think digging into margins probably makes sense at this point in time. I guess if you could help us may be 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 that 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 that 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?

[Steven Sintros:]

Yes, 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 those payroll costs as a percentage of revenues those have gone. Similarly, we continue to invest in our facilities and our IT initiatives as well. CapEx continues to increase, 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 call down, 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 or 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 there are other items that trended favorably., It continues to be a very dynamic time from a cost perspective.

[Andrew Wittmann:]

Okay. In that response, I mean, I heard no investing in sales, there's been some investments. I didn't hear that there's 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 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?

[Steven Sintros:]

Yes, 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. On the -- obviously on the direct cost side and service and production, those costs, more follow the revenue trend, particularly on the production side. Service is a little more challenging with the route structuring, 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.

[Andrew Wittmann:]

Yes. Okay and then just my last question, I guess you talked about customer retention. It sounds like it was pretty good in the quarter. And I guess my question on that, Steve is, 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 just some context on your retention rate from the prepared remarks?

[Steven Sintros:]

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 build customers that had to be closed down because of the pandemic. So, most of the revenue shortfall we're 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, do some of those fallout further? Some of them have come through in the way of further reductions. I talked 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 in some other businesses where services have been significantly reduced, but we're still reflecting them as opportunities to come back.

[Andrew Wittmann:]

Got it. Thank you very much for the comments. Have a good day.

[Steven Sintros:]

Thank you.

[Shane O'Connor:]

Thanks.

[Operator:]

And our next question comes from the line of Tim Mulrooney with William Blair. Please proceed.

[Tim Mulrooney:]

Good morning, Steve. Good morning, Shane.

[Steven Sintros:]

Good morning.

[Shane O'Connor:]

Good morning.

[Tim Mulrooney:]

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 because is it – is this a driver for you and has the trend minor changing at all?

[Steven Sintros:]

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.

[Tim Mulrooney:]

No, I think that's really helpful, but 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.

[Steven Sintros:]

I think that's right.

[Tim Mulrooney:]

Okay. Okay. Shifting gears to your Specialty business, 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&A section here, is just there anything else to call out here, as we model out in the rest of the fiscal year or whether just a few larger orders in the first quarter?

[Steven Sintros:]

Yes, 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, 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, we'll see how the year shapes up, but we don't expect the same type of beat in future quarters.

[Tim Mulrooney:]

Understood. Okay, one more for you here, Steve. With your net cash position now at $473 million, 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, but just a general update on your thoughts and honestly, have your views on capital allocation changed in the last 24 hours with the -- with special election results being where they are right now?

[Steven Sintros:]

You're really getting some up-to-date questions . An Excellent question and probably not one I'm prepared to answer.

[Shane O'Connor:]

I didn’t think so. I had to try.

[Steven Sintros:]

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 we had shown a willingness to start buying some shares back and we will continue to monitor the market and events to determine what we think makes sense there. And we continue to look for opportunities to put that money to use and what -- like we've said, we're not going to be shy about making the capital investments we need for the long term and we'll be opportunistic from as far as other opportunities, whether it be acquisitions or share buyback opportunities. So we'll digest the events of the week and have some more next quarter.

[Tim Mulrooney:]

And still open to further share repurchases and additional M&A as the year…

[Steven Sintros:]

Yes.

[Tim Mulrooney:]

Okay, okay. That's great. Thank you so much for your time.

[Steven Sintros:]

Thank you.

[Operator:]

And Mr. O'Connor, there are no other questions at this time.

[Shane O'Connor:]

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.

[Operator:]

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 day.