UniFirst Corp (UNF) 2019 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the second 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.

Thank you, and good morning.

I'm Steve Sintros, UniFirst President and Chief Executive Officer.

Joining me today is Shane O'Connor, Senior Vice President and Chief Financial Officer.

We'd like to welcome you to UniFirst Corporation's conference call to review our second quarter results for fiscal year 2019 and to discuss our expectations going forward.

(Operator Instructions)

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.

I refer you to the discussion of these risk factors in our most recent 10-K and 10-Q filings with the Securities and Exchange Commission.

I'm happy to report that UniFirst's second quarter of fiscal 2019 produced solid results for both our company and our shareholders.

Overall, revenues achieved a new record high for the second quarter at $437.5 million, up 4.3% from the same period last year.

On the profit side, fully diluted earnings per share for the quarter came in lower at $2.48 per share compared to $2.85 reported for the same quarter a year ago.

However, it should be noted that both periods' earnings were positively affected by significant onetime events.

The 2018 second quarter earnings per share was strengthened by the financial impact of the U.S. Tax Reform, while the 2019 quarterly earnings per share was aided by a settlement with our previous lead contractor for our CRM systems development project.

Shane will provide you with further details on these 2 nonrecurring items in a moment.

Excluding these items, adjusted operating income for the second quarter was $41.3 million, down slightly from $42 million we reported in the same quarter in 2018.

Both our revenues and profit performances for the quarter came in ahead of our internal expectations.

As always, I'd like to sincerely thank all of our thousands of employee Team Partners throughout North America, Central America and Europe for their continued loyalty to our customers and to our company as a whole, loyalty that helped us achieve solid financial results.

As our Team Partners drive our successes, we will continue to focus our efforts on strengthening our customer-focused family culture company-wide, all designed toward creating an engaged and motivated workforce that is empowered and committed to providing exemplary customer service.

As we look to the remainder of the year, we will continue to count on our Core Laundry Operations to drive the vast majority of UniFirst ongoing revenue growth.

We are encouraged by the strong performance of our sales organization, with new account sale totals for the first 6 months of this year exceeding last year's record levels.

In addition, customer retention has been marginally favorable compared to a year ago.

While we continue to expect to be challenged by higher payroll levels in merchandise over the remainder of the year, we continue to aggressively focus on managing our costs across our laundry locations without sacrificing service levels to our customers.

Our ability to execute on this plan will allow us to continue producing solid results and fuel our investments in our Team Partners, our technology and our overall service infrastructure to ultimately achieve the overall objective of being universally recognized as the best service provider in our industry.

Finally, as we discussed on our last earnings call, our strong balance sheet and healthy cash flow position will continue to allow us the opportunity to further invest in strategic growth drivers while simultaneously pursuing opportunities to deploy capital and create additional value to our shareholders.

And with that, I'd like to turn it over to Shane, who will provide additional details on our quarterly results and our outlook for the remainder of fiscal 2019.

Thanks, Steve.

Revenues in our second quarter of 2019 were $437.5 million, up 4.3% from $419.3 million a year ago.

Operating income increased by 48.9% to $62.4 million from $42 million in the prior year period.

And net income for the quarter decreased to $47.6 million or $2.48 per diluted share from $58.4 million or $2.85 per diluted share in the second quarter of 2018.

Our operating income and net income both benefited from a pretax gain of $21.1 million in the second quarter of fiscal 2019.

This gain related to a settlement we entered into with a lead contractor for the version of the CRM system which we recorded a $55.8 million impairment charge for in fiscal 2017.

This settlement included the receipt of a onetime cash payment in the amount of $13 million, the forgiveness of amounts previously due the contractor as well as the receipt of certain hardware and related maintenance.

The quarterly net income and EPS comparisons were affected by uneven tax rates.

Our effective tax rate in the second quarter of 2019 was 24.9% compared to a negative provision for income taxes in the second quarter of 2018.

The prior year period tax rate was significantly impacted by the Tax Reform that was enacted on December 22, 2017, which resulted in a onetime benefit to our provision for income taxes of $20.1 million.

This benefit was largely due to a onetime revaluation of our U.S. net deferred tax liabilities.

Excluding the impacts of the CRM-related settlement and the onetime Tax Reform benefit I just discussed, our adjusted operating income in the second quarter of fiscal 2019 was $41.3 million compared to $42 million in the prior year period.

Adjusted net income for the quarter was $32 million or $1.67 per diluted share compared to $38.2 million or $1.87 per diluted share in the year-ago period.

The decline in adjusted net income and diluted earnings per share was primarily due to a lower adjusted effective tax rate in the second quarter of fiscal 2018.

The EPS decline was limited by the effective share repurchases we have made over the last 12 months, which resulted in 6% fewer diluted shares outstanding this year compared to a year ago.

Our Core Laundry Operations, which make up approximately 90% of UniFirst total business, reported revenues for the quarter of $394.4 million, up 4.1% from the revenues achieved during last year's second quarter.

Adjusting for the estimated effect of acquisitions as well as the impact of a weaker Canadian dollar, our Core Laundry organic revenue growth was 4%.

During the quarter, our organic growth continued to benefit from solid new account sales, slightly improved customer retention as well as the impact of certain price adjustments and increases in merchandise recovery charges.

Core Laundry operating income was $59.1 million for the quarter, up from $38.1 million in the prior year period.

The segment's operating margin, which was positively impacted by the CRM-related settlement, was 15% compared to 10% in the second quarter of fiscal 2018.

Excluding the impact of the CRM-related settlement, the adjusted Core Laundry operating margin decreased from 10% in the second quarter of fiscal 2018 to 9.6%.

This decrease was primarily due to higher production and service payroll costs as well as higher merchandise amortization as a percentage of revenues.

These items were partially offset by lower health care claims as well as the capitalization of sales commission costs due to our adoption of new accounting guidance in the first quarter of fiscal 2019.

In addition, energy costs decreased to 4.3% of revenues in the second quarter of 2019, down from 4.4% a year ago.

During our quarter, the segment's operating income also benefited from the capitalization of internal labor costs for our new CRM project.

However, these were largely offset by increased non-capitalizable consulting costs that we incurred for the project and other technology-related initiatives.

Revenues from our Specialty Garments segment, which delivers specialized nuclear decontamination and cleanroom products and services, increased by 10.1% to $29.7 million in the second quarter.

This increase was primarily due to the benefit of acquisitions in fiscal 2018, which increased quarterly revenues by 10.8%.

Segment's operating income was $2.2 million compared to $2.8 million in the year-ago period.

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.

Specialty Garments operating margin decreased to 7.5% from 10.4% in the prior year period, primarily due to higher costs related to its 2018 acquisitions as well as higher production payroll, merchandise amortization and casualty claims expense as a percentage of revenues.

Our First Aid segment reported revenues and operating income of $13.3 million and $1.1 million, respectively, for the quarter, which were relatively consistent with the segment's performance in the prior year period.

We continued to maintain a solid balance sheet and financial position with no long-term debt and cash, cash equivalents and short-term investments totaling $335.3 million at the end of our second quarter of fiscal 2019.

This balance represents an increase of $64.8 million from the end of our prior fiscal year.

Cash provided by operating activities for the first half of the year was $128.7 million, an increase of $9.7 million from the first half of the prior year when cash provided by operating activities was $118.9 million.

This increase was primarily due to cash received of $13 million in the second quarter of fiscal 2019 from the CRM-related settlement as well as $3 million received related to the settlement of environmental litigation in the first quarter of fiscal 2019.

These amounts were partially offset by the payout of the previously announced $7.2 million onetime bonus to our employees in September of 2018.

For the first half of fiscal 2019, capital expenditures totaled $52.2 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 new CRM project, which consisted of both consulting costs and capitalized internal labor costs.

At this time, we now expect full year capital expenditures to be approximately $115 million, down from the originally anticipated $130 million.

This decrease is primarily due to slower-than-anticipated progress on a couple of large building projects.

During the second quarter of fiscal 2019, we repurchased 45,000 common shares at an average share price of $139.57.

Although our acquisition activity in the first half of fiscal 2019 was 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 an update on our outlook for fiscal 2019.

We now expect that our fiscal 2019 revenues will be between $1.785 billion and $1.795 billion.

As Steve previously mentioned, during the quarter, both our operating income and net income exceeded our expectations.

Based on these better-than-expected results as well as the inclusion of the CRM-related settlement, we now expect our full year diluted earnings per share will be between $7.65 and $7.90.

The impact of the stronger-than-anticipated quarterly results on our revised outlook was tempered by an increase to our forecasted merchandise amortization for the second half of fiscal 2019 due to the continued merchandise investments we have had to make to support our new sales as well as our existing customer base.

We also now expect that our effective tax rate for 2019 will be approximately 25.6%.

This guidance for fiscal 2019 includes 1 extra week of operations compared to fiscal 2018 due to the timing of our fiscal calendar and assumes no future share repurchases.

This concludes our prepared remarks.

And we would now be happy to answer any questions that you might have.

(Operator Instructions) Our first question comes from the line of Andrew Steinerman with JPMorgan.

Steve, you talked about sales performance being strong in the second quarter.

Do you sense that the fourth -- I mean, the third quarter, the current quarter's organic revenue growth will be similar or better than the second quarter?

And did the winter season at all hold up selling?

Yes.

Our guidance over the second half of the year has the organic growth right around that 4% range at the midpoint.

So I think the strong sales performance from last year continues into this year.

I think we marginally beat last year's record levels, so it continues to be a key portion of that organic growth rate that we're -- we experienced in the second quarter and that we're projecting.

So I don't think it will be much higher but at the same levels, which were a little bit better than we had projected.

As far as the other impacts, we did not have any particularly unusual impacts from the winter season.

Our next question comes from the line of Andrew Wittmann with Robert W. Baird.

Yes.

Just kind of want to build on the last one in a little bit different way.

Steve, when you look at the guidance raise, obviously net of the onetime item, and you beat consensus at least here and said in your press release that you beat your internal plan, I'm just trying to understand, of the guidance raise, how much of that was due to the quarter being better than expected versus your view on the balance of the year being better than expected?

Recognizing you mentioned a couple of things during your guidance comments, but I thought you could just kind of tie that up for us so that we can have a sense of how you're thinking about the rest of the year.

Yes.

I think as we look at the rest of the year, I mean, I think certainly, the quarter was better than some of our internal projections.

I think the places where we did a little bit better were on the revenue side.

Obviously, Shane mentioned the health care beat, which is something that we often have trouble pegging very accurately quarter-to-quarter.

Other than that, I think there were some beats along the lines and some miscellaneous expenses we've been working to control.

But the overall key drivers of payroll and merchandise that we referenced earlier in the year continue to be there.

I would say payroll impacted us about as expected and merchandise probably impacted us or did impact us a little more negatively than expected.

So as we look to the remainder of the year, again, I think that some of the beat from the current quarter, at least as far as our internal expectations, is being tempered by what continues to be accelerating merchandise.

We continue to work to control payrolls and improve the revenues where we can.

I think the merchandise is the one area that -- as you know how our merchandise amortization works, the die is mostly cast on how our merchandise amortization's going to look over the next quarter or so.

And that projects higher to what we have.

Some of the beats in the quarter like on the health care, we have not carried forward to the third and fourth quarter.

So that probably tempered some of the back half at least compared to the second quarter as well.

Okay, that's helpful.

I think maybe for my next question, I wanted to just get an update here on your CRM implementation.

You haven't given us a lot of details other than it's happening on this one.

Can you maybe -- as you're moving into this and getting a better sense of what it's all going to entail, can you give us your new estimate for total cost on that one and, maybe more importantly, even the timing as to when you think you can go live?

And any thoughts that you'd have on the depreciation expense that's going to be associated to this once you do go live?

So I can give you a little bit additional color, but I probably won't give you every component that you just asked for.

Right now, we're working toward an eventual go-live and rollout, so we have not begun a rollout of that new system just yet.

As far as the cost estimates, and I don't have those numbers in front of me, but the one Shane had referenced previously when we first introduced this new iteration of this initiative, I think, are still holding pretty well.

At this point, I will not be communicating when we'll be going live with that system.

As I'm sure you can appreciate based on our last endeavor, we want to be pretty confident as to that time line before we introduce it publicly.

And that's probably something we're another quarter or so away from being able to communicate publicly.

I will say anecdotally -- or not anecdotally but qualitatively, that the process is going well and that we're optimistic about the progress we're making, and we'll be able to provide some more clear guidance as we get into our year-end discussion.

Okay, that's helpful.

And then I'm just going to kind of step back and I guess ask a kind of bigger-picture question here.

And just wanted to get your sense here about UniFirst's overall competitive positioning today.

Obviously, the large transactions that have happened a couple of years, these questions have been asked and asked.

But wanted to get your sense of now that those transactions are becoming more integrated at your competitors, how you're positioned competitively.

And certainly recognizing here that your margins, while better than expected here, still on a historical basis aren't really where they've been at your own company.

So I just wanted to get kind of your sense on where you guys stand today relative to competition and your ability to maintain or gain share as well as your overall profitability profile versus your peers and how you think that all stacks up when the rubber meets the road.

Yes.

I -- Andy, it's a good question.

I think we -- and I think we feel we are still doing a good job gaining some share against some of our larger competitors.

We talk about a lot of investments and initiatives that we're doing to continue to improve and shore up our service to make sure it's as strong as it can be, but we do feel we can continue to win in this market.

And I think our results are proving it such in terms of our wins versus losses versus a lot of our competitors in the market.

You talk about the consolidation and the kind of operating environment out there today.

I would say it's largely unchanged from a year ago.

Certainly from 3 or 4 years ago, we are seeing the dynamic change with having less competitors in the market.

But at the end of the day, we try to stay more internally focused and say, we're doing a good job in providing a service at the levels that we know we're capable of doing, that we can win business and be competitive.

So I think we still feel like that those opportunities are there and that the investments we're making will provide for margin expansion opportunities in the future as we improve some of our technology, automation and efficiencies.

So we feel that, that game plan is sound and that we're executing toward that.

And similar to your question about the technology initiative, we still have some work to be done, but we feel like we're making good progress.

(Operator Instructions) Our next question comes from the line of Tim Mulrooney with William Blair.

I'm just -- what are you guys expecting for specialty, your specialty business for the back half of the year?

I have in my notes here that you were, I think, initially maybe expecting that to be down a little bit into the full year, but I don't know if that's right.

What are you expecting for this business?

Yes, I'll take that.

Tim, when we take a look at specialty, coming off of 2018, 2018 was historically a very, very strong year as our nuclear segment continued to penetrate some of its larger Canadian customers as well as got some benefit from its European business as well.

We were anticipating that nuclear is going to be relatively flat this year compared to the prior year.

And at this point in time, we did -- or the second quarter was stronger than we had originally anticipated, so we do expect, at least from the top line perspective, that our Specialty Garments segment is going to be nominally ahead of the prior year.

However, from a profitability perspective -- and you've sort of been able to see it at least in the second quarter of this year, and we know that the profitability of that segment can vary depending upon the projects that it's got going.

We do expect that the profitability of that segment will be backwards slightly compared to the prior year.

Okay, that's helpful, Shane.

Moving on to the margin, I think just on the Core Laundry business, it benefited from lower health care costs and adoption of the new accounting standard, but there were some negative impacts, like higher payroll and merchandise amortization.

I'm just wondering if you can put some numbers behind these.

How much of these things -- how much were into these things that had [an impact on that one]?

So you're talking about the quarter compared to the prior year?

Yes, that's right.

If we take a look at the quarter -- yes, so if we take a look at the quarter compared to the prior year and adjust it -- I guess, this year, adjust it to exclude the CRM settlement, our operating margin and our core went from 10% down to 9.6%, so about 40 basis points.

About 0.5 point was attributable to both merchandise -- I'm sorry, about 50 basis points was attributable to both merchandise as well as our payroll costs.

And sort of as we had guided previously, we expected those to be up.

Our health care claims was about 50 basis points of benefit as well.

And then our selling -- our sales commissions as well as our selling -- related selling payroll also provided us a benefit as well.

So is that 50 basis points each for merchandise and payroll or on a combined basis?

That's for each.

Okay, okay, perfect.

And lastly, you talked about what's driving revenue growth, and you mentioned new account sales.

I'm just wondering if new account sales -- how is that trending relative to last couple of quarters?

How much of that is driving organic growth?

I think as I alluded to before, last year was a very strong new sales year, the best we'd ever done by about 10%, 12% on the new sales side.

And so that has driven some momentum into this year.

And for the first 2 quarters, we are somewhat ahead of the first 6 months of 2018, not to the same extent that '18 was over '17.

So we're ahead of what was a very strong year, and that is helping the momentum.

I think we mentioned merchandise recovery charges being higher as well.

I mean, like with -- like always with our growth, it's all the components.

And in this year, I'd say it is all the components, a little bit better retention, better new sales, better extra charges performance, are all contributing to the organic growth coming in a little bit ahead of our expectations.

And there appears to be no further questions at this time.

Okay.

Thank you very much.

I want to thank everyone for joining us today to review UniFirst's second quarter call.

We look forward to speaking with you again in June when we expect to be recording -- reporting our third quarter results.

Thank you, and have a great day.

Ladies and gentlemen, that does conclude the conference call for today.

We thank you for your participation and ask that you please disconnect your line.