Greetings, everyone. And welcome to the Fourth Quarter Earnings Call. During the presentation, all participants will be in a listen-only mode. Later we will have a question-and-answer session. [Operator Instructions] And it is now my pleasure to turn the call over to Steven Sintros, President and Chief Executive Officer. Please go ahead..

Thank you and good morning. I am Steven Sintros, UniFirst’s President and Chief Executive Officer. Joining me today is Shane O'Connor, Senior Vice President and Chief Financial Officer. We would like to welcome you to UniFirst Corporation’s conference call to review our full year and fourth quarter results for fiscal year 2020.

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.

I want to start by saying that fiscal 2020 has certainly been a year like no other and as we head into fiscal 2021, our company the country and the world continue to deal with the impact of the pandemic.

This continues to be an unprecedented time, and first and foremost, our thoughts are for the safety and well-being of all those dealing with the impact of this virus. For our full year of fiscal 2020, the company reported revenues of $1.804 billion, which came up just short of last year’s $1.809 billion.

However, as a reminder, fiscal 2019 was a 53-week fiscal year, and therefore, on an even work week basis revenues in fiscal 2020 grew by 1.6%.

Full year operating income for fiscal 2020 was $172.7 million, down from $232 million in fiscal 2019, which included both the positive impact of the extra week, as well as a $21.1 million gain related to the settlement related to our CRM systems project.

As you would expect, our results over the second half of the year were affected on the top and bottom line by pandemic-induced customer closures and reduced overall economic activity, as well as costs related to our pandemic response efforts. Overall, we are pleased with our results given the headwinds that we faced during the year.

Our ability to continue generating solid profits and strong cash flows speaks to the resiliency of our company, and the value of the products and services that we provide to our customers.

I want to again sincerely thank our team partners for the tremendous effort they put forth and continue to put forth ensuring that they are taking care of each other and our customers during these challenging times. They truly continue to deliver in every way. 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. Like many businesses, we expect the quarters ahead to be uneven and bumpy, but we are confident the company’s position to weather this storm and take advantage of an eventual recovery.

Shane will provide more details on our quarterly results shortly, as well as our near-term outlook, but let me provide a few comments. During the quarter, we continued to focus on opportunities in the market to take advantage of new or increased demand for products and services.

Increased demand for masks, hand sanitizer programs, as well as full service rental programs for hygienically clean medical coats and gowns have helped us provide some offset to the overall headwinds we are facing within our customer base.

On that note, additional reopening of customers since our earnings call in July have been very slow and mostly offset by the impact of reductions of wearers and services. Part of this impact continues to be driven by the decline in demand for oil and the corresponding reduction in business activity in the energy dependent markets that we service.

As a result, our overall weekly billings continue to be approximately 7% lower than the pre-COVID levels experienced in February and early March. As we head into fiscal 2021, we will continue to position our sales resources to take advantage of opportunities that exist in the market today and as the economy continues to recover.

That being said, absent a more dramatic near-term economic -- recovery of economic activity, we do not anticipate showing year-over-year growth until the second half of fiscal -- of the fiscal year.

As we have talked about over the last year or two we continue to be focused on making good investments in our people, our infrastructure and our technologies.

All of our investments are designed to deliver solid long-term returns to all UniFirst stakeholders in our integral components to our primary long-term objective to be universally recognized as the best service provider in our industry.

Despite the top-line challenges, our strong balance sheet, healthy cash position and ongoing cash flows allows us to continue making these investments. Certain investments scheduled for fiscal 2021 will continue as planned including the deployment of our new CRM system. These investments will put pressure on our margins in the near-term.

However, we feel strongly that keeping these improvements to our company on schedule are critical to our long-term success. And with that, I’d like to turn the call over to Shane, who will provide the details of our results of our fourth quarter..

Thanks, Steve. Revenues in our fourth quarter of 2020 were $428.6 million, down 10.6% from $479.6 million a year ago. Fourth quarter of 2020 had one last week of operations compared to prior year due to the timing of our fiscal calendar. Excluding the impact of the extra week in 2019, revenues decreased 3.5%.

Operating income for the fourth quarter decreased to $40.8 million from $58.9 million in the prior year period and net income for the quarter decreased to $31.6 million or $1.66 per diluted share from $46 million or $2.40 per diluted share.

Our Core Laundry operations revenues for the fourth quarter were $384.6 million, down 10.9% from the fourth quarter of 2019. Core Laundry organic growth, which adjusts for the estimated effect of acquisitions, the impact of the extra week in 2019, as well as fluctuations in the Canadian dollar was negative 4.2%.

When we last spoke in July, we had indicated that on a weekly basis we had been seeing recoveries in our revenues related to our customers reopening their businesses after temporary COVID-related closures and that year-over-year our weekly run rate was down approximately 4% to 5%.

However, we also cautioned that those recoveries had recently started to moderate. Since that time, as Steve mentioned, our weekly revenues have remained relatively stable with any benefits from customer re-openings being largely offset by higher wearer and service reductions, as well as headwinds we are seeing from our energy dependent markets.

Core Laundry operating margin decreased to 9.9% for the quarter or $38.1 million from 12.9% in prior year or $55.6 million.

The segment’s profitability was affected by many items, including the impact of the decline in rental revenues on our cost structure, additional costs we incurred responding to the pandemic, as well as higher casualty claims expense in the quarter.

In addition, our profitability in the quarter also reflects continued investments we are making in our capabilities and strategic projects, including our CRM initiative. These items were partially offset by lower travel-related and energy costs during the quarter.

Energy costs decreased 3.5% of revenues in the fourth quarter of 2020, down from 4.1% in prior year. Revenues from our Specialty Garments segment, which delivers specialized nuclear decontamination and clean room products and services decreased to $27.6 million from $31.3 million in prior year or 11.6%.

This decrease was primarily due to the extra week in the fourth quarter of 2019 compared to the prior year period. The segment’s operating margin increased to 7.1% from 6.6%.

As we have mentioned in the past, this segment’s results can vary significantly from period to period due to the seasonality and the timing of nuclear reactor outages and projects that require our specialized services.

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 $474.8 million at the end of our fourth quarter of fiscal 2020.

Cash provided by operating activities for the year totaled $286.7 million, which is a slight increase over the $282.1 million in prior year. In 2020, the impact of lower profitability on our cash flows was primarily offset by reduced working capital needs, including lower accounts receivable in additions to merchandise and service.

CapEx in fiscal 2020 totaled $116.7 million. We continued to invest in our future, while balancing the uncertainties surrounding the ongoing pandemic. During the year, we capitalized $11.9 million related to our ongoing CRM project, which consisted of license fees, third-party consulting costs and $5.8 million of capitalized internal labor costs.

As of August 29, 2020, we had capitalized $22.6 million related to the CRM project. The company did not repurchase any shares during the quarter under its previously announced share repurchase authorization, primarily due to the uncertainty related to COVID-19.

As of August 29, 2020, we had repurchased a total of 315,000 shares of common stock for a total of $52.3 million under the authorization. As we look towards 2021, due to the continued uncertainty surrounding the COVID -- surrounding the COVID-19 pandemic, we will only be providing guidance for our first quarter of 2021 at this time.

We currently expect our Q1 2021 revenues will be between $433 million and $443 million, and diluted earnings per share to be between a $1.55 and a $1.70. Our topline guidance assumes a Core Laundry organic growth rate of negative 6.8% at the midpoint of the range.

Along with the continuing impacts from the pandemic, the timing of certain annual pricing adjustments will also be a headwind to the organic growth in our first fiscal quarter of 2021.

Although, our visibility remains limited, we did want to caution that showing growth for the full fiscal year will be a challenge based on the impact of the COVID-19 pandemic, as well as the related impact on the demand for oil and the energy dependent markets that we serve.

Core Laundry operating margin at the midpoint of the range is approximately 9.1%. Based on the current energy prices, we are modeling the energy costs will be 3.8% of revenues in our first fiscal quarter of 2021, which is down from prior year’s comparable quarter of 3.9%. At this time we expect the quarter’s effective tax rate to be 25%.

As a reminder, our tax rate can fluctuate based on discrete events, including the impact of stock compensation benefits. In 2021 we will continue to invest in our capabilities and our strategic initiatives, despite the economic uncertainty, as we maintain a long-term approach towards managing the business.

For an update on our CRM systems project we continued to be pleased with the progress of our initiative.

We now believe that we will capitalize between $35 million and $40 million related to this project, which includes license fees, consulting costs, capitalized internal labor costs, handheld devices and hardware costs to support the deployment of the system.

In 2021, we expect that we will capitalize approximately $8 million to $12 million related to this project. At this time, we are piloting a number of locations and expect that we will start a broader deployment in the second half of this fiscal year.

Throughout the year, we will be continuing to build the capabilities to successfully deploy the system, including training and on-site support teams.

Costs related to these deployment teams, as well as lower capitalized labor costs, as our internal resources transition from implementation and development activities to systems support will result in increasing initiative related expenses as we progress through 2021.

We will update you more on these deployment related costs as we move throughout the year. This concludes our prepared remarks and we would now be happy to answer any questions that you may have..

[Operator Instructions] Our first question comes from the line of Andrew Wittmann with Baird. Please go ahead..

Great. Good morning, guys..

Good morning..

I should start, yeah, maybe we will start with the margins that were reported in the quarter and you gave a little bit of detail here. I guess last quarter it was a large number of kind of one-time restructuring costs that you guys didn’t quantify then.

I was wondering if there were any carryover one-time-ish costs like that in this quarter that were worth highlighting?.

Yeah. Andy, last quarter we had talked about -- well, first of all, there were a number of additional costs that we incurred during the quarter related to responding to the pandemic. The two larger items that probably warrant talking about individually.

Last quarter we had mentioned the fact that we had instituted some temporary employee compensation programs, that sort of impacted our margins last quarter and those actually did carry over to the fourth quarter and had some impact on our costs in the fourth quarter.

The other item similar to the items that we talked about in prior quarter we did incur some additional costs related to internal use PPE. At this point in time, internal use PPE has become more of an operating cost for us. But during the quarter we did incur additional costs related to that as the prices for those continued to adjust and normalize.

We spoke about it a little bit in the third quarter and the fact that immediately after the pandemic had started the cost, sourcing those items had become a challenge and the costs related to those items was significantly increased, although those costs had started to normalize.

Those elevated costs related to those products carried into the fourth quarter and we incurred incremental costs related to that as well..

Got it.

Has the -- on the first thing with, I guess, supplementary pay for your employees, is that adjusted now with COVID being kind of the new normal or is that going to be affecting the fiscal ‘21 numbers as well?.

Yeah. Andy, most of it has run its course in the fourth quarter. There’s a little bit of carryover into this quarter, but it’s a more nominal now and sort of we have adjusted back to kind of more traditional compensation programs and levels..

Got it. Sticking I guess with the margins, it sounds like, I mean, clearly, just judging by the amount of costs capitalized in the quarter for the CRM and then the fact that you will be capitalizing more here in ‘21 and you are piloting -- you are getting closer go in live on that one, and I appreciate some of the detail you gave up on this.

Do you expect, Steve, that you will be fully live this fiscal year? And then I am just kind of curious as to given that you are going to be capitalizing the total of $35 million to $40 million, what that means for an annualized depreciation burden that you will be recognized to the P&L?.

I guess I will take the first part of the question being will we be fully deployed this year? No, I think as Shane referred to, we will be initiating a full deployment at some point kind of mid-year and it will be a phased rollout that will certainly go into 2022, not prepared at this point to give an exact timeline on the end date to that.

Some of it will depend on how the early pacing of the deployment goes and so on. I don’t believe we have the fully baked depreciation numbers put together right now. There’s some moving pieces.

The broader investment in the system will be depreciated over a somewhat longer period of time than maybe normal software, right? So you are probably looking at a 7% to 10% -- seven years to 10 years sort of average depreciation probably for the investments.

Some items will be less like the handheld devices but, so as we get closer in the year, we can give you a little more discreet information about that..

Got it. Okay. It sounds like the energy end market in particular is a pretty significant headwind to the revenues there.

I was just wondering, if you could give us, I remember in 2013, heading into the or even early ‘14 heading into that one, it was thought that energy was pushing probably 10% of your company’s revenues certainly, I think, because high margin, more than that in terms of your company’s overall profits.

I could be wrong and if I think that’s generally right. It never fully rebounded from that decline. I am kind of curious as to heading into this most recent oil bust where energy stood as a percentage of revenue and what you are seeing in the revenue trends for that end market in particular today..

Sure. Yeah. You are correct. I think after the last dip, it never fully recovered, although, there was some solid recovery particularly in West Texas and somewhat in Western Canada. We probably peg it and we are always cautious when we say, direct energy markets versus indirect support industries and so on. But you are right.

We were probably closer to 10% at a peak and probably closer to 5% or 6% coming into this recent decline. What I would say is and I think it’s maybe a way to frame geographically what we are seeing as additional headwinds when we talked about these energy dependent markets. Our U.S.

and Canadian operations are broken into 10 regions and we have two regions that Straddle, Texas and the surrounding states. And when you look at the number I referenced in the earnings call saying we were down about 7% from pre-COVID levels. Those two regions are down double-digits. And the one that encompasses West Texas is down into the teens.

And so you look at that and you say, there are parts of the country that have recovered a lot better, but those ones that touch oil and those economies continue to be more impacted.

I think our operators in those parts of the country would say that, the COVID impact on energy and the demand for energy and that trickledown effect has been more significant than customer closures for example in those parts of the country.

And I will throw in our region that encompasses Western Canada is impacted more than the average for the company as well. So I think that just gives you a sense of the level of impact we are seeing in those parts of the country..

Okay. My last question for now then is just looking at the 1Q guidance here Core Laundry down 6.8% at the midpoint revenue wise versus just over 4% this quarter, so sequential degradation. I was wondering is that a compare issue, is this because you are seeing businesses that were re-opening now, re-shutting is it where levels.

Just probably some commentary as to why sequential trend in….

Yeah..

… organic revenue is what it is in the guidance?.

Yeah. Andy and Shane mentioned this comment about the timing of some annual price adjustments that. We have talked historically about a fair amount of those annual adjustments happening in the summer time frame closing in on the end of our fiscal year.

During the -- given that that was somewhat at the height of some of the challenges our customers were having, we pushed some of those annual price adjustments further out to help our customers during that time.

So there’s some timing impact and some of that pricing impact will be realized as we move toward later in our first quarter and into the rest of the year. So some of it is a timing issue and a comp issue, as you sort of alluded to.

I would say just to be clear the core fundamentals of what we are seeing in terms of volume, growth or degradation, we kind of split the difference. It’s sort of right down the middle right now.

We continue to sell a fair amount of new business given the environment, our retention is okay and it’s really we are still seeing some reductions, but we are not really seeing sequential degradation in the core business..

Okay. That’s helpful. Thanks guys. I might chime in later but that’s good for now. Thank you so much..

Thank you..

Thanks..

[Operator Instructions] Our next question comes from the line of Tim Mulrooney with William Blair. Please go ahead..

Steve, Shane, good morning..

Good morning..

Hi..

Just a couple questions this morning. My first one, I’d like to focus on labor availability and service levels if we could for a minute. You know in this environment, have you found it harder or easier to source labor. I know there are millions who remain unemployed.

But I have spoken to some of your smaller provider or some smaller providers, I should say, who said sourcing labor has been a real challenge, given some of the government programs, higher unemployment benefits, et cetera.

What are you guys seen in your business and has that impacted service levels at all during this pandemic period either favorably or unfavorably?.

Yeah. It’s an interesting question Tim. And I think it’s something we certainly dealt with over the course of the last six months. I think in particular some of the government subsidies around unemployment and the increased levels that went through primarily through July and then have been extended at lesser levels have had some impact.

I think it was greater back in the June, July timeframe. I think things have opened up a little bit. I would say, that we remain mostly staff to levels that we would want at this time and I think that market-by-market there’s still some hiring challenges, but broadly, I would not say, it’s impacted our ability to service at this point.

I think the challenges around we have been looking to ramp-up sales heads in some cases. It’s been a little challenging, just dealing with a lot more of the remote environment and getting together with candidates and so on and so forth.

But overall, I think, we see somewhat of a reluctance of some employees to come back to work and it’s not just I think the government subsidies, I think you have childcare issues for sure with a lot of employees with school situations and so I think when candidates….

Right..

…are balancing the desire to come into the workforce or not there’s more issues than just unemployment subsidies for them to deal with. So we are seeing some of it, but we have been able to be, I think, reasonably staffed to support the customers..

Okay. That’s great color. Thank you. Yeah. Certainly school is also a major issue I know. Shifting gears slightly, I mean, staying in your Core Laundry segment, I mean, you mentioned the timing of pricing adjustments would negatively impact organic growth in the first quarter.

Is there any way you can quantify that impact for us and would you expect that to carry throughout the year or is the timing pretty specific to the first quarter?.

Yeah. It’s more of a first quarter timing issue and we would expect the overall impact that for the year to be a little bit more normal. I think, overall, the pricing environment out there in general is fairly tight and aggressive as you would expect.

In a difficult economy, I think, all customers are looking for their vendors to assist in helping them through these difficult times. So it is a challenging environment. But I think that from your particular question it’s more of a first quarter comp issue..

Okay. And speaking of helping through challenging times, maybe we could -- it’s a good segue to your First Aid business. I mean there was a little bit of a decline, which was a little surprising for us.

For customers with larger orders of safety in PP&E in the beginning of a pandemic, have you seen a leveling off in orders or has that quantity been consistent? I guess, I am hoping to gauge how much of the initial orders were due to the stockpiling versus kind of a sustained increase in PP&E usage?.

Yeah. That’s a good question. And just to be clear, some of our PPEs being sold in our First Aid segment, but we are also selling it through our Core Laundry business, if we are servicing from our Core Laundry routes, whether it be sanitizer or masks. So we have some of those sales in both places..

Okay..

In general, I think, we are seeing -- we are probably seeing a little bit of a slowdown there, and again, it’s somewhat geographic as, I guess, I will say, early on in the pandemic when the cases around the country were primarily focused in the Northeast most significantly, we weren’t still selling any masks in the South.

And that sort of transitioned as the cases peaked in those parts of the country and as cases improve in certain markets you do see a little bit of a slowdown. So it’s up and down, I would say, probably right now we are a little down particularly on the masks side than we were earlier on.

But I’d say, hand sanitizer and I think other kind of hygienic program type things continue to be reasonably strong and I think people for the most part with some of those products they will be with us for some time..

Okay. Well, thank you for all the color this morning and good luck over the next several months here..

Thank you..

[Operator Instructions] And we have a follow-up from Andrew Wittmann. Please go ahead..

Good. We don’t you guys get off that is usually two sets of question..

We didn’t expected, Andy..

I mean, the -- you guys, the family has a big ownership stake. The company has always thought very long-term. It’s a challenging time for your customers, I mean, the challenging time for you, the balance sheet sitting with a large amount of cash, you didn’t buy any stock in the quarter.

I am curious as to why this seems like maybe a time where a long-term owner like the company would be likely to take advantage of somebody and certainly take a longer term view.

Steve, I just thought maybe you could get some perspective on that?.

With respect to share buybacks, we had ceased the program in the third quarter, just given some of the uncertainty. Certainly, it’s something we will continue to evaluate as we go forward here. And you are right we are obviously company -- confident in the company’s ability to continue to generate cash.

When you look at valuations from a stock perspective, it’s not as if our stock or has been unduly punished due to the uncertainty from the pandemic either. But regardless, I mean, we will continue to evaluate that as we go forward. I think, certainly, sitting here today, although, there is still a fair amount of uncertainty.

There is a better feeling than back in the April, May timeframe when maybe things were a little more uncertain. So it’s something we will continue to evaluate as we generate cash. Obviously, as you know, during this type of cyclical time, we do generate some more cash with lower investments in merchandise.

We benefited during the quarter being able to defer some payroll taxes now that will be paid a little bit later in 2021. So we will be evaluating what the cash balances look like and continue to have those conversations. But you are right, I think the family and the Board, we have always taken a long-term view and we will continue to do that..

Thanks for that.

The -- one thing that it appears that pandemic has made abundantly clear is that these facility service offerings, which have always been a relatively smaller portion of your business whether in sanitizers or even your First Aid business, can have pretty significant benefits and will decouple the company from being kind of employee uniform focused and I think it really broadens out the opportunity set, I don’t think you disagree with that.

I was just kind of curious as to your thought given this experience on potentially investing more and expanding those facilities services offerings more quickly in response to what is clearly -- what was a large opportunity which has probably grown significantly as a result of this pandemic?.

I will take them a little bit separately. On the First Aid side that is part of our strategic roadmap. Our First Aid business has always been relatively small. Certainly as a percentage of our overall revenues compared to at least our largest competitor and we do think there’s opportunities there.

So we have been looking for acquisitions, as well as have a plan to organically grow that business a little bit more rapidly than we have in the past. So that is something that we feel makes a lot of sense given the current environment. But also just our overall position in the industry and the opportunities that are out there.

As far as the other core facility service products that we deliver on our Core Laundry routes, like you said, sanitizers, hand soaps, bathroom products. We continue to be invested in that and continue to aggressively try to work and take our share of the market in that area.

I think we have a pretty broad offering on a lot of those core products and this is an environment that we are working to take additional advantage.

Last year we have started to build sales resources beyond our route personnel that focus on selling into our existing accounts and during the quarter those resources certainly paid dividends, being able to take advantage of more opportunities that existed with existing accounts, whereas getting appointments with new accounts was more challenging, particularly at the height of the pandemic.

So it is an area of focus that we feel like we can do more in..

All right. Thanks a lot..

Thank you.

And gentlemen those are all the questions we have. I will turn it back to you..

Great. I’d like to thank everyone for joining us today to review our fourth quarter results for 2020. We look forward to speaking with you again in January when we expect to report our first quarter performance. Thank you and have a great day..

Ladies and gentlemen that does conclude the call for today. We thank you for your participation. Everyone have a great rest of your day and you may disconnect your line..