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Unifirst Corp (UNF) Q4 2019 Earnings Call Transcript

By Motley Fool Transcribers - Oct 23, 2019 at 6:23PM

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UNF earnings call for the period ending September 30, 2019.

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Unifirst Corp (UNF 1.33%)
Q4 2019 Earnings Call
Oct 23, 2019, 9:00 a.m. ET


  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Greetings and welcome to the 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. Sintros -- President 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, Senior Vice President and Chief Financial Officer. We'd like to welcome you to UniFirst Corporation's conference call to review our fourth quarter and year-end results for fiscal year 2019 and to discuss our expectations going forward. 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 10-Q and 10-K filings with the Securities and Exchange Commission.

I'm happy to report that UniFirst closed the year on a high note with revenues and profits coming in ahead of our expectations. Shane will go into the quarterly details shortly, but I wanted to take a minute and step back and recap our full year results, a year that I would characterize as one where the Company made good progress toward our objectives and produced solid results well ahead of our original guidance.

For the full year, UniFirst set record highs for both revenues and profits. Annual revenues achieved another milestone this past year exceeding the $1.8 billion mark coming in at $1.809 billion, an increase of 6.7% over fiscal year 2018, 4.7% when excluding the impact of an extra week of operations due to our 53-week year fiscal calendar. Meanwhile, full year net income was $179.1 million, an increase of approximately 9.3% when compared to last year.

Fiscal '19 and 2018 both had large one-time items that we reconciled out of our results to provide a better comparison. Net income after adjusting both years for these one-time items increased approximately 10%; but. of course, we do not achieve our successes alone. So I'd like to take this opportunity to thank those who are so critical to our ongoing accomplishments. Our 14,000 plus employee Team Partners throughout North and Central America and in Europe who work so hard day-in/day-out to take care of our customers, each other and our Company.

Overall, we're pleased with the results of both our fourth quarter and the full year. We do want to highlight, however, that as we have throughout the year, that our results were affected by a number of items in our core laundry operations that favorably impacted comparisons to fiscal year 2018. These included the adoption of a new accounting pronouncement that impacted our recognition of sales commissions; a $3 million gain recognized from the settlement of environmental litigation in our first quarter; lower healthcare costs and workers' compensation costs, and internal costs that were capitalized related to our CRM systems project. These items together benefited the operating margin of our core laundry operations by approximately 1.5% when compared to fiscal 2018. Other than the lower healthcare costs and workers' compensation, these items were contemplated in our guidance a year ago, but their cumulative positive impact was greater than anticipated.

I mentioned these items to help put into context our overall results for the year. However, even when excluding the full impact of these items, we would certainly view this year's results very positively, particularly when compared to our original expectations. There were many encouraging accomplishments within these reported results in areas we've been focusing on, including improved customer retention and record new account sales, driven by improved sales rep productivity and reduced sales rep turnover.

We also benefited from a solid pricing environment and strong growth in our merchandise recovery charges. One area of caution with respect to growth relates to ware accounts within our existing customers; additions versus reductions as we commonly refer to it, which slid some in our fourth quarter partially due to some weakening in the oil and gas sector.

Although negative movements in this metric can be a lead indicator of overall economic softening, and it is something we'll be watching moving forward, it is premature at this time to call what we are experiencing a concerning trend.

In addition to our core laundry operations, our Specialty Garments segment, which provides workwear and other specialized services specifically for the nuclear and cleanroom industries, and our first air and safety division also contributed positively to our overall results for the year. Both segments achieved record revenues for the year coupled with solid profitability.

Looking ahead, we expect to continue capitalizing on the momentum from this past fiscal year and benefiting from our market opportunities. As we've talked about throughout the year, 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 all UniFirst stakeholders are integral components to our primary long-term objective to be universally recognized as the best service provider in our industry.

A strong balance sheet, healthy cash position and ongoing cash flows allow us to continue making these investments as well as pursuing competitive business acquisitions that make sense and for considering other capital deployment opportunities.

And with that, I'd like to turn the call over to Shane, who'll provide further details on our quarterly and year-end results and our outlook for fiscal year 2020.

Shane O'Connor -- Senior Vice President & Chief Financial Officer

Thanks, Steve. Revenues in our fourth quarter of 2019 were $479.6 million, up 10.5% from $434.1 million a year ago. The fourth quarter of 2019 included an extra week of operations due to the timing of our fiscal calendar, which accounted for revenue growth of approximately 7.9% compared to the fourth quarter of prior year.

Operating income for the fourth quarter increased to $58.9 million from $41.4 million in the prior year period and net income for the quarter increased to $46 million or $2.40 per diluted share from $35 million for $1.81 per diluted share. Operating income and net income in the fourth quarter of 2018 were affected by a one-time bonus to our employees of approximately $7.2 million to sharing the benefits received from the 2018 US Tax Reform. This bonus was recorded to selling and administrative expenses.

Excluding the effect of the one-time bonus, operating income increased 21.3% compared to prior year's adjusted operating income and net income increased 15.2% from prior year's adjusted net income of $39.9 million or $2.06 per diluted share. Our adjusted net income comparison was impacted by a lower quarterly tax rate in 2018 of 18.4% compared to 24.4% in 2019, primarily due to the positive impact of US Tax Reform in 2018 as well as other discrete adjustments recorded in prior year's fourth quarter mostly related to tax credits.

Our core laundry operations, which make up close to 90% of UniFirst total business, reported revenues for the fourth quarter of $431.5 million, up 10.1% from the fourth quarter of 2018. Core laundry organic growth, which adjusts for the estimated effect of acquisitions, the extra week as well as the impact of a weaker Canadian dollar was 2.4%.

During the quarter, our organic growth benefited from strong new account sales and improved customer retention. However, as anticipated, was more modest due to the timing of certain pricing adjustments compared to the prior year. Core laundry operating income was $55.6 million for the quarter, up from $39.2 million in prior year and the segment's operating margin increased to 12.9% compared to 10% in 2018.

Adjusting for the effect of the one-time bonus in prior year, adjusted operating income in 2018 would have been $46.3 million or 11.8% of revenues. The increase in 2019's operating margin was primarily due to the capitalization of the sales commission cost due to the adoption of new accounting guidance in our first quarter of fiscal 2019; as well as lower workers' compensation expense and energy cost as a percentage of revenues.

In addition, several other operating and administrative expenses trended favorably and contributed to margin improvement, which we believe were at least partly due to the extra week in fiscal 2019. These items were partially offset by higher service payroll and merchandise amortization cost as a percentage of revenues. Energy cost decreased to 4.1% of revenues in the fourth quarter of 2019, down from 4.3% a year ago.

Revenues from our Specialty Garments segment, which delivers specialized nuclear decontamination and cleanroom products and services, were $31.2 million for the fourth quarter of fiscal 2019, an increase of 7.9% over 2018. This increase was primarily due to the extra week in the fourth quarter of 2019 compared to the prior year period.

The segment's operating income increased to $2.1 million or 6.6% of revenues from $1.2 million or 4.2% of revenues in the year-ago period. This increase was primarily due to lower production and delivery cost as a percentage of revenues, which were partially offset by higher merchandise amortization 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 2019 increased by 26.9% to $16.8 million and its operating income increased by 17.8% to $1.2 million. These increases are primarily due to higher sales in our wholesale distribution business as well as the benefit of the extra week in the fourth quarter of 2019, compared to the prior year period.

In addition, we experienced solid growth in our First Aid van business. 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 $385.3 million at the end of fiscal 2019.

Cash provided by operating activities for the year was $282.1 million, an increase of $52.1 million from the prior year. This increase was primarily due to net income expansion as well as cash received of $13 million in our second quarter of fiscal 2019, from a settlement agreement with the lead contractor for the former version of the CRM System with respect to which we reported a $55.8 million impairment charge in fiscal 2017. Also contributing to the increase were lower working capital needs for the business as well as $3 million received from the settlement of environmental litigation in the first quarter of fiscal 2019. This increase was partially offset by the one-time bonus paid to our employees also during the first quarter of fiscal 2019.

Capital expenditures for fiscal 2019 totaled $119.8 million as we continue to invest in our future with new facility additions, expansions, updates in our automation systems that will help us meet our long-term strategic objective.

During the quarter, we capitalized $2.8 million related to our ongoing CRM project, which consisted of both third-party consulting costs and capitalized internal labor cost. As of August 31, 2019 we had capitalized $10.7 million related to the CRM project, of which $3.7 million was related to internal labor capitalized in fiscal 2019.

Although our acquisition activity in fiscal 2019 was relatively nominal, we continue to look for and aggressively pursue additional targets as acquisitions remain an integral part of our overall growth strategy. In September 2019 after our fiscal year end, we completed an acquisition in Kansas City, Missouri, which significantly increased our presence in this market and is anticipated to contribute approximately $12.5 million in additional revenue into fiscal 2020.

During the fourth quarter of fiscal 2019, we repurchased 52,650 shares of common stock for a total of $9.6 million under our previously announced stock repurchase program. In the full fiscal year, we repurchased a total of 197,150 shares of common stock for $30.5 million under the program.

I'd like to take this opportunity to provide our outlook for fiscal 2020, which will include one less week compared to fiscal 2019. We anticipate our full year revenues for fiscal 2020 will be between $1.86 billion and $1.88 billion and we expect full year diluted earnings per share to be between $7.47 and $7.92.

The top line guidance assumes a core laundry organic growth rate, which excludes the impact of the extra week in fiscal 2019, fluctuations in the Canadian exchange rate, as well as the benefit of acquisitions of approximately 4.3% at the midpoint of the range.

In addition, the guidance also includes the benefit of the acquisition in Kansas City that I discussed earlier. The core laundry operating margin at the midpoint of the range is approximately 10.3%. The decline in margin from 2019 is primarily due to the benefits the Company realized in fiscal 2019 related to healthcare claims and workers' compensation expense that are not forecasted to continue in fiscal 2020, as well as additional expense we expect to incur related to our ongoing CRM initiative.

In addition, although our merchandise amortization costs have started to flatten, we are expecting a slight headwind in fiscal 2020 due to the higher amounts of merchandise additions that were placed in service in fiscal 2019. Based on the current energy prices, we are modeling that energy costs will be 4.2% of revenues in fiscal 2020, which is in line with fiscal 2019 as a percentage of revenues. Next year, the effective tax rate is assumed to be 25% compared to 24.7% in fiscal 2019.

As a reminder, our tax rate will fluctuate from quarter-to-quarter based on discrete events, including the impact of stock compensation benefits. Our Specialty Garments segment revenues are forecast to increase between 2% and 3% coming out off a historically strong year.

However, the segment's operating income is forecast to be relatively flat compared to 2019. The anticipated decline in its operating margin is due to the timing and relative profitability of its planned outages and project work.

Our First Aid segment's revenues and operating income are expected to be ahead of fiscal 2019 by approximately 4%. We expect that our capital expenditures in 2020 will approximate $125 million and based on these projections, we expect that we will generate free cash flows in excess of $115 million.

This free cash flow, combined with our existing available cash, continues to position not to make additional investments in our business, pursue acquisition targets aggressively as well as explore additional capital allocation strategies.

Our guidance for fiscal 2020 also assumes our current level of outstanding common shares and no deterioration in the current economic environment. For an update on our CRM systems project, we continue to be pleased with the progress of our initiative in 2019. We still believe that we will capitalize between $30 million and $35 million related to this project which includes license fees, consulting costs, capitalized internal labor costs, handheld devices and hardware cost to support the deployment of the system.

In 2020, we expect that we will again capitalize between $5 million and $10 million to this project and at some time in the second half of the fiscal year, we will begin piloting at several test locations. We do not expect that we will incur any depreciation expense related to this project in fiscal 2020.

This concludes our prepared remarks, and we would now be happy to answer any questions that you might have.

Questions and Answers:


[Operator Instructions] Our first question coming from the line of Andrew Steinerman with JPMorgan. Please proceed with your question.

Andrew Steinerman -- JPMorgan -- Analyst

Good morning. In the guide of core laundry, you, obviously, have a higher organic revenue growth assumption than in the fourth quarter and I think you mentioned it had to do with the timing of pricing adjustment. I think that might be the timing of when your annual pricing adjustments kick in. And so if you could talk about that with a little more detail of those pricing adjustments, when do they kick in and why should we be thinking about an outlook that's kind of higher organic?

Steven S. Sintros -- President and Chief Executive Officer

Yes, Andrew. I think Shane covered it. He talked about the timing, the annual adjustments that were a little bit different in the timing this fourth quarter than they were last fourth quarter. So that really caused that year-over-year change and you saw it in the third year -- third quarter comparisons as well.

As we get into the next year, we expect more kind of a normal timing and that should have us back around that 4% range in organic growth, which is what we've been-what we really ran over the course of this full year. So we don't really look at it as an acceleration or deceleration of the organic growth, just more of a return to a normal timing.

Andrew Steinerman -- JPMorgan -- Analyst

Right. And you're already into your fiscal year. So my question is, are you already seeing that level of organic growth in the numbers already?

Steven S. Sintros -- President and Chief Executive Officer

Well, certainly from the visibility we have through September, we're on line for that for sure.

Andrew Steinerman -- JPMorgan -- Analyst

Okay. Great. Thanks.

Steven S. Sintros -- President and Chief Executive Officer

Thank you.


Thank you. Our next question coming from the line of Andrew Wittmann with Robert W. Baird. Please proceed with your question.

Andrew Wittmann -- Robert W Baird -- Analyst

Thanks. Hi, guys. I guess on the margin side of guidance, that's probably the area that people want to hear a little bit more about. It sounded like, Steve, that you mentioned that you've seen some flattening in some of the trends for some of your cost, but yet in the outlook you're saying, well, we don't expect that to continue. I guess what are you seeing in the business here today that makes you guide that way and if you could just talk a little bit in more detail on some of those key items that influence the margin guidance in the Core Laundry segment, I think that would be helpful?

Steven S. Sintros -- President and Chief Executive Officer

Sure. So as Shane mentioned, a couple of the larger benefits for this year on the healthcare side and workers' comp side were modeling particularly at the midpoint of our range, being back to what we would consider a little bit more of a normal level, we feel this year may have been abnormally low. I think the higher end of our range indicate that there's upside there if we continue to perform well in those areas.

But those aside, when you get back to more of the core operating cost of the business, merchandise and payroll being the largest component. Shane mentioned merchandise would still be somewhat of a headwind next year based on the level of inputs that we've experienced so far this year, although we are seeing some flattening of the level of merchandise that we put in in the fourth quarter, which is encouraging.

With respect to payroll cost, and we didn't have any prepared remarks about this, but we did mention some last quarter, how we benefited from a little bit of levels of under staffing, particularly in the service area, but also somewhat in production and we're working to kind of build up those staffing levels to what we consider more optimal. We made some strides to that extent this quarter and that's another variable as we go into next year.

It's been more of a dynamic environment in terms of staffing levels over the course of the last year or so. And our projections right now have that overall staffing coming up some. Some of it related to getting fully staffed and some of it related to growth-related ads.

So we didn't mention payroll overall but that has the impact of being a little bit of a drag on the margins, but just one-tenths or two-tenths. The bigger piece is, I think Shane covered in terms of the payroll-related cost, as well as some of the cost related to the preparation of our system.

Andrew Wittmann -- Robert W Baird -- Analyst

Got it In the quarter, I think you also kind of mentioned that the extra week may have helped you cover some of your costs and -- at least in the fourth quarter helped, maybe gave you a little margin benefit there. How much of a benefit do you think the extra week was? I know there's some estimation there but..

Steven S. Sintros -- President and Chief Executive Officer

Every five or six years, we have to answer that question. And it's a difficult one, it could be two or three-tenths in the quarter, and as we've talked about before, I mean, we certainly have an extra week of payroll costs and merchandise cost and depreciation, all those regular cost. But things like utilities, rent and some other supplies that you sort of purchase on a normal schedule, you don't always get sort of that extra week's worth of cost. And so that does provide some margin improvement, it's difficult to quantify but certainly on around the edges does kind of boost the quarter.

Andrew Wittmann -- Robert W Baird -- Analyst

Got it. And then, just curious maybe my last question here, is as you look at the M&A environment out there, how active do you feel like you can be in fiscal 2020? This deal that you announced in Kansas City is actually pretty decent size franchise. I was wondering just seeing in those and just in general on the M&A front today, how you're thinking about that, the opportunities ahead of you and the ability to execute in 2020?

Steven S. Sintros -- President and Chief Executive Officer

Yes. I think, certainly, we're poised to do that. I think, that it does seem like a decent environment where when the industry sees some of these happening, I think it perks up some of the interest of the sellers and, again, as we've talked about in the past, at their core they're still family businesses that the family decisions drive the sales. But overall multiples have been healthy on these sales. And I think that's getting sellers to take notice and I do think there's opportunities for deals like Kansas City to continue to come up. I mean, there's less out there than there was 10 years ago as you well know, but we do feel like the environment is reasonably healthy right now.

Andrew Wittmann -- Robert W Baird -- Analyst

Great. I think I'll leave it there. Thank you very much.

Steven S. Sintros -- President and Chief Executive Officer

Thank you.


[Operator Instructions] Mr. Sintros, there are no further questions at this time. I will now turn the call back to you.

Steven S. Sintros -- President and Chief Executive Officer

Okay. Well, I'd like to thank everyone for joining us today to review our fourth quarter and year-end results. We look forward to speaking with you again in January when we expect to be reporting on our first quarter performance for fiscal 2020, as well as our expectations for the remainder of the year. Thank you and have a great day.


[Operator Closing Remarks]

Duration: 28 minutes

Call participants:

Steven S. Sintros -- President and Chief Executive Officer

Shane O'Connor -- Senior Vice President & Chief Financial Officer

Andrew Steinerman -- JPMorgan -- Analyst

Andrew Wittmann -- Robert W Baird -- Analyst

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