Market

UniFirst Corporation (UNF) Q4 2021 Earnings Call Transcript | The Motley Fool

Image source: The Motley Fool.

UniFirst Corporation (NYSE:UNF)
Q4 2021 Earnings Call
Oct 20, 2021, 9:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Greetings and welcome to the UniFirst Corporation Fourth Quarter Earnings Call. [Operator Instructions]

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

Steven S. SintrosPresident and Chief Executive Officer

Thank you and good morning. I’m Steven Sintros, UniFirst 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 UniFirst 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 and then serve continue to deal with the impact of the COVID-19 pandemic. Progress was certainly made at 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 Garments 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 $7.94 compared to $7.13 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’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 designed to deliver solid long-term returns to our UniFirst stakeholders and are 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 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 we will continue — 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 phase initiative will become the core of UniFirst 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 hindered, 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 sharing 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 competitors — 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, and excluding them from a measure of adjusted profitability and 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 cost that we are expanding 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 was over time 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 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 — 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.

Shane F. O’ConnorExecutive Vice President and Chief Financial Officer

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 efficiencies associated with employee share based payments.

Our Core Laundry operations revenues for the quarter were $415.1 million and increased 7.9% from the fourth quarter of 2020. Core Laundry organic growth which adjusts for the estimated effective 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 [Phonetic] 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 cost increased as a percentage of revenues, but were offset by costs we incurred responding to the pandemic in prior year providing a favorable comparison. Company’s 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 Garments segment which deliver 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 US 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 cost 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 28, 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 2021 [Phonetic]. In 2022, we expect that the amortization of the system and depreciation of the related hardware will approximate $5 million in total and eventually ramp to an estimated $6 million 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 $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 the energy costs in our Core Laundry operations will increase to 4.6% of revenues in fiscal 2022, up 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’ segment revenues are forecast to be relatively flat compared to 2021. However, the segment’s 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 segment’s 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 operation.

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.

Questions and Answers:

Operator

Thank you. [Operator Instructions] Our first question comes from the line of Tim Mulrooney with William Blair. Please proceed with your question.

Tim MulrooneyWilliam Blair — Analyst

Steve, Shane, good morning.

Steven S. SintrosPresident and Chief Executive Officer

Good morning.

Shane F. O’ConnorExecutive Vice President and Chief Financial Officer

Good morning.

Tim MulrooneyWilliam Blair — Analyst

So maybe one on guidance first, excluding the $38 million of transitory investment costs, you’d be — Core Laundry would be closer to 9.5% operating margin in 2022. If I look back a few years, the segment was more in the 11% to 12% range. So my question is, as volumes come back and you can start to get leverage off of some of these extra costs and is there any structural reason why long term, the business can’t get back to that double-digit operating margin range.

Steven S. SintrosPresident and Chief Executive Officer

Yeah, that’s certainly the goal, Tim. I think when you look at it in the short term, certainly some of the challenges that not only we’re seeing in the environment, but a lot of companies around, energy, labor costs, supply chain disruption are impacting the numbers for this year. So certainly, it’s hard to say, how all of those things will play out over the next year or two, but some of those cost we view as being hopefully temporary as things smooth out in terms of the supply chain world and even some of the labor situation. And so, yes, I think that is certainly the goal, I mean part of what’s causing the margin headwind. We talk about investments we’re making, not only the big three initiatives, but some other things we’re doing to strengthen our capabilities in light of some of these challenges in the market, yes, I think, eventually, we will as volumes grow kind of grow into that cost structure and get the benefit of those investments to move the margin back over time. Certainly a lot of things are hitting at once in this environment right now, causing the outlook to be what it is.

Tim MulrooneyWilliam Blair — Analyst

Okay, thanks. Yeah, I can appreciate that some of some of these costs, maybe have a little bit more of a tail to them. So thank you for that answer. Moving to labor. I know you mentioned last quarter, and you talked about again this quarter labor availability is an issue filling all the needed service positions. I’m curious, though, as you kind of look at the labor environment sequentially from last quarter to this quarter, if you would characterize the environment as having improved at all or gotten worse or is it about the same over the last six months as it relates to sourcing talent and labor availability specifically?

Steven S. SintrosPresident and Chief Executive Officer

Yeah, I would probably characterize it Tim is still extremely challenging, but probably, marginally better. I think some of that relates to our efforts around investing in additional capabilities and sourcing and so on. But also moving quite frankly just moving wages. So I think between, continuing to move wages along in different key areas as well as, and again there — a lot of it’s market by market, but in some markets, we have heard more improvements that some of our local operators would tied to some of the unemployment benefits lapsing. So I would say, marginally better, but still — it’s still very challenging.

Tim MulrooneyWilliam Blair — Analyst

Okay, great. Thank you. And the last one from me, yeah, I think maybe I just missed the fact that you guys were taking a concerted effort to build out your First Aid business by building out the geography of your van operations. So I understand why operating profit was negative in the quarter. I’m curious, though, what that effort looks like, if we look at it on a percentage of completion basis? I think the way — the best way to ask the question is, what is your current overlap right now geographically between your First Aid business in your Core Laundry business and where would you like that to ultimately be?

Steven S. SintrosPresident and Chief Executive Officer

Yeah, so I can give you a little bit of context, if you go back, say, a couple of years, our First Aid business was very, very regional and there were many markets that we were not in on it from a First Aid and safety perspective that we had, Core Laundry operations. And still, we have done two things. We have — we have done some small acquisitions in key markets. We have continued to add vans organically into some markets and even even just as importantly we have — we have really more integrated the operations together where they’re more, much more closely working together. I don’t have a percent — a reliable percent, I can give you right now on the call. But I would say right now, we are — we are hitting most of the major markets that we operate in as a laundry business. There still needs to be scale and depth that added to some of those markets, like for example, we may have had one or two vans in a market that’s a big market and we have a lot of customers from a — from a laundry perspective.

So what would be doing in that market is adding some sales and service resources, so we can more effectively take advantage of the cross-selling opportunity. So I’d say for the most part, we have a little bit of a presence in the majority of our markets, but some of those need to continue to be filled out and will be continued to filled out over the next couple of years. And so when you look at, yeah, the operating margin challenges of that segment, it’s really about adding routes with capacity in sales resources to build those operations to scale over the next few years. There’s not as many larger acquisitions in that that segment. And so this is the way we’re sort of attacking it, early returns are — have been — has been very solid from a cross-selling opportunity perspective, but we really just need to continue to invest and get the scale.

Tim MulrooneyWilliam Blair — Analyst

Yeah, understood. Thank you and thanks for taking my questions. Good luck for ’22.

Steven S. SintrosPresident and Chief Executive Officer

Thank you, Tim.

Shane F. O’ConnorExecutive Vice President and Chief Financial Officer

Thanks, Tim.

Operator

Thank you. [Operator Instructions] And there are no further questions at this time. Actually, one question just came up. We do have a question coming from the line of Andrew Steinerman with J.P. Morgan. Please proceed with your question.

Andrew SteinermanJ.P. Morgan — Analyst

Hi, Steve and Shane, could you just circle for us which categories you’re calling transitory costs, both in terms of what are they and if you could give us the amount and then specifically define for us what you mean by transitory costs? Do you mean that they go in fiscal ’22 and they stay at that level going forward or do you mean that they going in ’22 and they don’t repeat?

Steven S. SintrosPresident and Chief Executive Officer

Yeah, absolutely, Andrew, so from — when we were talking about transitionary costs in the call, we’re primarily talking about the three large initiatives that we have. So we have a lot of cost tied up in the deployment of our CRM, some of the branding stuff that I talked about as well as our ERP project that will be kicking off this year. So those costs will be present certainly in 2022, some of them will continue certainly into 2023. For example, the CRM rollout, I mentioned would be 2022 and 2023 and then those costs will start to be rationalized out. The ERP project will be a multi-year project that will have to continue to talk about the investment in for a few years. So Shane can give you a little more detail about maybe the magnitude of each of those for 2022 and then we’ll continue to update you on what they’ll be in future years. Some will fade, some will ramp, some will transition from operating expenses to more capital as we get further into our ERP project. So Shane can give you a little more there.

Shane F. O’ConnorExecutive Vice President and Chief Financial Officer

Yeah, Andrew. So when we take a look at those three key initiatives, that $38 million break down between each of them. For the CRM system, we’re expecting to incur $20 million — approximately $20 million worth of costs related to that and that’s obviously including the teams that we have built to deploy to assist incremental travel costs that we will have for those teams who are going to be traveling to our locations and supporting during the conversions. The ERP, we have is $6 million. Again for that a lot of that is going to be system implementation, additional people that we are bringing on specifically to support. I guess the Company’s responsibilities and activities as we go throughout that initiative and then incremental consulting costs. And then for branding we have $12 million attributable to that. A large portion of that will be the rebranding of our trucks as we consistently move our new image out to, I guess our most visible — our most visible billboards out there are trucks will be rebranded in the new image and then there is additional costs for advertising as well as consulting costs as well.

Andrew SteinermanJ.P. Morgan — Analyst

Right. And Shane you did mentioned, maybe on the branding costs, is that a one-time thing has had a ’22 thing? Does that go away in ’23 or is branding now kind of an ongoing cost?

Steven S. SintrosPresident and Chief Executive Officer

Yeah. The big investment in branding will be primarily ’22, may bleed over into ’23 depending on the timing of certain things. But then, that will ratchet back down to more of a maybe somewhat elevated rate as we do invest somewhat more in that area, but not nearly to the level of this transition.

Andrew SteinermanJ.P. Morgan — Analyst

Okay, thank you very much.

Steven S. SintrosPresident and Chief Executive Officer

Thank you.

Operator

Thank you. And there are no further questions at this time.

Steven S. SintrosPresident and Chief Executive Officer

Okay. I would like to thank everyone for joining us today to review our fourth quarter and full year results for the — for fiscal ’21. We look forward to speaking with you again in January when we expect to report our first quarter performance as well as our outlook for the remainder of fiscal 2022. Thank you and have a great day.

Operator

[Operator Closing Remarks]

Duration: 33 minutes

Call participants:

Steven S. SintrosPresident and Chief Executive Officer

Shane F. O’ConnorExecutive Vice President and Chief Financial Officer

Tim MulrooneyWilliam Blair — Analyst

Andrew SteinermanJ.P. Morgan — Analyst

More UNF analysis

All earnings call transcripts


AlphaStreet Logo

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.



Most Related Links :
newsbinding Governmental News Finance News

Source link

Back to top button