Good morning, everyone, and greetings. Welcome to the UniFirst Corporation Third Quarter Earnings Call. During the presentation, all participants are in listen only mode. Afterwards, we will have a question and answer session. I would now like to turn the call over to Stephen Sintros, President and Chief Executive Officer.
Please go ahead.
Thank you, and good morning. I'm Stephen Sintros, UniFirst's 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 the UniFirst Corporation Call. 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 anticipated depending on a variety of risk factors. For more information, please refer to the discussion of these risk factors in I want to start by saying that 1st and foremost, our thoughts are for the safety and well-being for all those dealing with the impact of the COVID-nineteen pandemic. Good news is that during the quarter we have seen real improvement from a health and safety standpoint both in our company and in our communities related to COVID-nineteen.
I also want to again highlight that for over a year now, our team partners have continued to put forth tremendous efforts in the face of many obstacles created by the pandemic. They have worked extremely hard to take care of each other and our customers during these challenging times, and I want to personally Thank them for their extraordinary performance. Consolidated revenues for our Q3 were $464,300,000 up 4.2% from the prior year and fully diluted earnings per share were $2.21 up from $1.12 in the Q3 a year ago. Our Core Laundry operations revenues were positively impacted by a modest level of customer reopenings as well as increases in the sale of PPE. Our Specialty Garments segment also contributed to our overall performance with very strong results during the quarter that exceeded our expectations.
Shane will provide you with the details of our quarterly results shortly. Clearly, our comparisons to the prior year Q3 are being impacted by the significant effect that the COVID-nineteen pandemic had on our fiscal 20 2Q3. As a reminder, that quarter a year ago was the quarter most impacted by customer closures during the pandemic. Overall, we are pleased with the results of our quarter, which exceeded our expectations from a top and bottom line perspective. Increased business activity from a recovering economy is a welcome sight for sure after a challenging year.
In addition, we have started to see early Signs of improved activity in the energy dependent markets that we service. Our new account sales and account retention experience We're solid during the quarter, and we continue to position our sales resources to take advantage of current opportunities as well as capitalize on As I'm sure many of you are aware, we are operating in an increasingly inflationary environment. The cost of labor as well as other business inputs are clearly on the rise. In addition, we expect and have begun to experience a rebound of several costs that trended significantly lower during the pandemic, such as merchandise, healthcare, energy, travel and others. For example, merchandise amortization for the full year fiscal 2021 is running at least 100 basis points lower than more historical levels.
As we look ahead beyond our Q4 into fiscal 2022, we expect that the increases in these costs Our outlook for fiscal 2022 during our Q4 earnings call. Our solid balance sheet positions us well to meet our ongoing challenges. We'll continue to invest in growth and strengthen our business. As we've talked about over the last year or 2, we continue to be focused on making good investments in our our infrastructure and our technologies. All of our investments designed to deliver solid long term returns to UniFirst stakeholders and our integral components to our primary long term objective to be universally recognized as the best service provider in the industry.
We continue to make good progress in these core initiatives such as our CRM systems project. Our CRM deployment is certainly a We will continue to invest in our infrastructure and future over the next several years, including key investments in supply chain, other technology infrastructure, route efficiency as well as our brand. We'll provide additional details as we progress with some of these key initiatives in the quarters ahead. As always, we will continue to focus on providing our valuable products and services to existing customers and selling new customers on the value that 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 in work environments
Thanks, Steve. As Steve mentioned, consolidated revenues in our Q3 of 2021 were $464,300,000 Operating income increased to $54,200,000 from $27,700,000 or 95.5 percent. Net income for the quarter increased to $42,000,000 or $2.21 per diluted share from $21,300,000 or $1.12 per diluted share. Our effective tax rate in the quarter was 22 Our Core Laundry revenues for the quarter were $409,000,000 an increase of 5.3% from the Q3 of 2020. Core Laundry organic growth, which adjusts for the estimated effect of acquisitions as well as fluctuations in the Canadian dollar was 4.3%.
This increase was primarily driven by the COVID-nineteen pandemic significantly impacting our customers' operations and wearer levels in prior year, which was partially offset by a large $20,100,000 direct sale also in prior year. As Steve discussed, Our quarterly top line performance exceeded our expectations as the impact of the pandemic on our customer base continues to subside as well as from increased sales of PPE. Core Laundry operating margin increased to 11.2% for the quarter from $45,600,000 from 5.1% in prior year or $19,700,000 The increase was primarily driven by a number of items affecting our prior year period, including the impact of the decline in rental revenues on our cost structure, Higher costs of revenues related to the large $20,100,000 direct sales, higher bad debt expense and Additional costs which the company incurred responding to the COVID-nineteen pandemic. The current quarter operating margin We continue to benefit from certain costs that have trended favorably during the pandemic, including lower merchandise and travel related costs. In addition, the segment's operating results benefited from lower payroll costs due to under staffing caused by the challenging employment environment.
The company also relieved some of its bad debt reserves in the quarter that it had provided for during the pandemic as our expectations around future uncollectible accounts have moderated. These benefits were partially offset by higher healthcare claims costs, which trended unfavorably due to what we believe was pent up demand from our team partners deferring elective activities during the pandemic. Energy costs were 4.2% of revenues Our Specialty Garments segment, which delivers Specialized nuclear decontamination and clean room products and services had a very strong quarter and exceeded our expectations In both revenues and operating income, revenues increased to $38,200,000 from $36,200,000 prior year or 5.7% and were primarily driven by growth in our clean room and European nuclear operations. Segment's operating margin increased to 21.7 percent from 17.6%, primarily due to lower merchandise costs And bad debt expense as a percentage of revenues as well as costs incurred in the prior year responding to the COVID-nineteen pandemic. 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.
Our First Aid segment's revenues were 17 point $1,000,000 compared to $20,900,000 in the prior year. However, the segment's operating profit was nominal compared to $1,600,000 in the comparable period of 2020. These decreases were primarily due to elevated PPE sales in prior year. In addition, the current quarter operating results reflect continued investment in the company's initiative to expand its 1st 8 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 $535,000,000 at the end of our Q3 of fiscal 2021.
For the 1st three quarters of fiscal 2021, capital expenditures totaled $96,600,000 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 $4,200,000 related to our ongoing CRM project, which consisted of license fees, 3rd party consulting costs and capitalized internal labor costs. As of the end of our quarter, We had capitalized a total of $32,000,000 related to the CRM project. In the 3rd fiscal quarter of 2021, we began to Appreciate part of the system over a 10 year life and our quarterly depreciation approximated $700,000 As a reminder, the depreciation of the full system combined with additional hardware we will install to support our new capabilities like mobile handheld devices for our route We'll eventually ramp to an estimated $6,000,000 to $7,000,000 of additional depreciation expense per year. The Company did not repurchase any shares during the quarter under its previously announced stock repurchase program.
As of May 29, 2021, the company had repurchased Approximately see 368,000 shares of common stock for $61,800,000 under the program. Based on our results to date as well as our outlook for the remainder of the year, we now expect that our fiscal 2021 revenues This will be between $1,810,000,000 $1,817,000,000 We further expect that full year diluted earnings per share will be between $7.80 $8 This outlook assumes that our Poor Laundry operating margin in the 4th quarter will approximate 10.6% at the midpoint of the range. This outlook also reflects continued benefits in areas that have trended lower during the pandemic, including merchandise and travel costs. Although we have also assumed that those benefits will continue to moderate. We further assume that our payroll costs will As a percentage of revenues as we work to fill open positions and begin to adjust compensation levels in certain high demand roles in response to the current employment landscape.
This concludes our prepared remarks and we would now be happy to answer any questions that you might have.
Thank you very much. And our first question is from Tim Mulrooney with William Blair. Please go ahead.
Good morning.
Good morning. Good morning.
So based on the midpoint of your revenue guide, It looks like you're expecting an acceleration in revenue growth from the Q3 to the Q4 a little bit. I was wondering if you could comment On how weekly revenue trended through the quarter and how weekly revenues trended through June so far?
Sure. We can give you a little insight there, Tim. One of the things we talked about in the prepared remarks was some increase in PPE that we had During the quarter, we were able to sell some products that we had good inventories for during the quarter that helped. Like we mentioned before, during this time of year, we're usually going into a little bit of a seasonal slowdown in the summer. We haven't really seen that because we're still Seeing some recovery of customers in reopenings that would offset a normal seasonal slowdown.
So I think it's been I would characterize it as modest and steady through the quarter in terms of recovery. As far as what we're seeing During June, I'd say steady, not necessarily an acceleration. So I don't want to paint the picture and I don't think we should be painting the picture that there's going to be a significant step up From Q3 to Q4 in terms of further reopenings, for the most part, most of our customers, there's still some stragglers, Our Because not everyone's back at the full levels that they were before. So hopefully that helps provide a little context.
No, that's really helpful. I mean, characterizing it as steady through the quarter, steady through June, but during a period where you'd normally see a little seasonal weakness and not Seeing that. So that's really helpful. One more from me before I pass it along. I just wanted to ask About your new account sales, you mentioned your new account sales in your initial opening remarks There, Stephen, you said that they were solid.
So that's great to hear. I think last quarter you'd mentioned that they were kind of Flattish with last year through the first half of the fiscal year, which was obviously a good result given the pandemic. Have you seen a pickup here at all or still kind of flattish on
a year over year basis?
Well, I think when you compare it to the Q3 of 2020, which was really the This hit pandemic quarter, we're selling more new business. We've sold more new business this quarter than we did that quarter a year ago. So I would say that It's somewhat improved over the Q2, but that's why you saw the solid versus Spectacular. I think it's solid. And when you look at the mix is changing a little bit.
There's a need for a lot more ancillary products, and I think we've taken advantage of that through this cycle. The Uniform sales are starting to pick up again. So again, stronger than last year's Q3. I draw in the comparison to our fiscal 2019, which was Very strong sales year. We're still a little bit short of that.
And Shane mentioned under staffing, we're a little lower on the number of sales reps We'd really like to be carrying right now, to be honest, and we're trying to ramp up a little further as we move into the Q4 and into next year.
Got it. Thanks very much guys.
Thank you.
Our next question is from Andy Wittmann, Baird. Please go ahead.
Thanks. Excuse me, guys. Good morning. I just wanted to get a better sense of the guidance here. You were pretty clear saying that Quarter came in above revenue, above on profit as well.
The guidance is obviously raised, but it looks like it's Entirely attributable, at least to my estimation, so I'm asking the question that really came from the Q3, not a change in the Q4. So I just wanted to Check on that, Steve, and see if we're understanding that correctly. And just it looks like, I mean, you gave us the margin levels, you gave us some puts and takes, but Can you just talk a little bit more about, I guess, the margin outlook that's implied here? Because it looks like the revenue guidance Kind of brackets what we're already thinking about the margins probably maybe a little bit softer than maybe I would have thought. So I just want to understand that a little bit more detail.
Yes. I'll start and then Shane can provide some details. I mean, in general, for the Q3, I think you're right in the way you're Kind of analyzing the bead and how it filters to the Q4. The Q3 was obviously strong from a specialty garment standpoint. And from a core standpoint, the quarter benefited from some things.
Shane mentioned some bad debt Reserve relief, as we felt like we don't need some of those reserves coming out of the pandemic, things turned The comments I made about some of the costs that will start to rise here pretty soon. We've kind of talked about this In the past, sometimes these costs take time to rise, like merchandise is coming back strong. We put a lot more in service. It was very unusually depressed for 6 months or so at the beginning of the pandemic and even into our Q2 this year. But the last few months, we've really started seeing a surge back in merchandise additions, not just from new sales, but replacements, almost like Healthcare, where during the pandemic, things were just activity overall was unusually depressed and now we're seeing it come back strong.
So Some of that is built into the 4th quarter guidance and that is certainly some of the caution that we're speaking to as we think Forward to 2022, and you heard my comment about merchandise being sort of historically low during fiscal Shane also mentioned under staffing. It continues to be challenging. We continue to modify wages as necessary for production workers in other positions to attract more workers. We're Expecting that to improve over the next few months, whether that will fully rectify itself over the next few months remains to be seen, But we do expect that to be a challenge and a headwind kind of going into 2022. So I don't know if that fully answers your question.
I can have Shane add to Some of the feedback on the Q3 to give you a sense of that beat and why it may or may not repeat in the Q4.
Yes. No, Steve, I think you covered the majority of it. When we take a look at the change in our top line guidance, Right. Our guidance went up by about the midpoint of our range went up by about $15,000,000 A good portion of that was Specialty Garments performance in the quarter and we've talked at length about how their quarterly performance This is a little bit more unpredictable and can fluctuate from quarter to quarter. But some of that did come from the benefit that we So, in our core laundry operations.
Clearly, that wasn't all or I guess the increase in our revenues Wasn't completely attributable to our Q3 performance because we are expecting and anticipating that some of the benefit We're seeing in the core will carry over to the 4th. So a portion of that is related to The core is permeating into the 4th. Our specialty garments performance expectations for the 4th really haven't changed. And then Steve spoke about the majority of the benefits that we saw during the quarter. When we talk about the under staffing, when we talk about the adjustments that we made to the reserves that sort of benefited the quarter, those broadly Translated into our margin performance, things like the beneficial tax rate that we had in the quarter related to some of the discrete events.
Again, we're captured in that Q3 and aren't necessarily anticipated or Included in our assumptions that they're going to continue into the 4th. But some of the things that Steve has talked about Have influenced our expectations for the 4th, right? Like he's mentioned the fact that our Q3, We started to see our merchandise adds return to a level that sort of were similar to pre pandemic And eventually, the expectation is that, that merchandise over time, given the way that we account for, will eventually start to normalize Back to a normal percentage of revenues. Our healthcare claims costs during the quarter were higher. We had mentioned that.
We believe that there's Some pent up demand for that and that sort of influenced our expectations for the Q4 as well. So some of those dynamics are Sort of informing, I guess, what you're seeing on the margin side, but some of those benefits that our 3rd quarter benefited from Really, we're sort of captured in that quarter and aren't necessarily benefits we would expect going forward.
Shane, are you able to can you just give us a sense of the bad debt release? How much that benefit of the quarter? Or how much the under staffing or Healthcare, we're just trying to get an order of magnitude, so we understand the impact in the quarter.
Yes.
You guys have always been good about that in the past.
Yes, absolutely. Our bad debt or I guess the benefit that our quarter had related to our bad debt reserve is probably 40 to 50 basis points. As far as the under staffing, it's a little bit more challenging to quantify the impact on the quarter because obviously you're Fitting from the lower payrolls, but those payrolls are providing you benefits and you're also incurring some costs related to Over time in temp labor, etcetera, but the benefit related to the understaffing was probably $1,500,000 to $2,000,000 Again, that's not ideal for us. That's not what we hope to have going forward. But financially, at least, we saw that short term benefit in the third.
It's helpful. And then sorry, just one last question. You had some comments on You call it PPE, but some of this I put in with like the hand sanitizer, things that I would think would start to be rolling off or at least be starting to face tough comparison. And maybe it wasn't because you had a May Quarter and the supply chain wasn't fully there in the beginning days of COVID last year, but it was just interesting to hear you guys Saying that, that was a benefit year over year. Does that as we move to 4Q, Steve, are some of these PPE benefits that you have, Should they become headwinds?
What is the current run rate on that saying? Or do you think that it's flat to up on a year over year basis? Just trying to understand that dynamic would be helpful.
Yes, it's a good question. I mean, your comment about the supply chain, I think, is correct from the Q3 last year. We weren't quite You know ramped up to where we wanted to be. The biggest benefit, to be honest, in the current quarter was in the area of gloves as opposed to soap and sanitizer. There's been a shortage in that area.
Prices are quite a bit higher for those products. And we were in a pretty good position from an inventory perspective to go out and take some advantage of that. And I think with the reopenings, You're seeing some people need some of that product. So as far as the 4th quarter goes, That's the magic question. I think how long will some of this blip last?
I think we have Some of it going through the Q4 and then moderating a little bit from the Q3 run rate, that's probably impacting our Q4 a little bit as well. I think the bigger question is you go into next year, what does that look like? Can we sustain? I think we've Invested in sales resources to sell into our existing accounts over the last couple of years, and we're hopeful that the experience of the pandemic will help us You know, have some ongoing benefit in that area in terms of penetration with our customers. But I think as you look Into the Q4 and next year, more next year than the Q4, there might be some tougher comps.
But in the Q4, You're probably still a little bit getting a little bit of a benefit year over year to be honest from some of those if what we saw in the Q3 continues and it has so far.
Thank you.
And our next question is from Andrew Steinerman of JPMorgan. Please go ahead.
Hi. I wanted to ask you about your preliminary cautious comments about margins for next year. I just assume now that organic revenue growth is positive and getting more positive into the 4th that there is Somewhat an offsetting element of operating leverage. And so my question is, assuming the economy continues to move Forward. Do you feel like this is going to be a couple of quarters of margin drag that You're signaling Gordon, you feel like from what you already know about kind of the cost element That it's going to be a whole year of margin drag.
And then my second question is, do you think you might be the way you You said it conflating inflation, which is obviously input cost inflation, with that costs are just coming back, More travel, more uniforms and it's not particularly inflation, it's discretionary costs coming back.
Yes. It's an important question, Andrew. And when you start to look at next year, and we're not here to provide guidance Next year, but we made the comments for a reason. When we think about the different areas of costs we're going to be dealing with looking into 2022, it really isn't What I'd call 3 different areas. You have the area that you mentioned, we call it the inflationary environment.
Clearly, the cost and Availability of labor is a challenge. Now how long will it be a challenge? Is it a surge that moderates? Is it an ongoing challenge? I think it's something we're going to be having to deal with.
We are dealing with it now, and it is going to cause costs to rise. And As costs rise, whether it's with labor, energy, fabric costs or any other inputs That are currently being impacted by, call it, the inflationary environment, we will work with our customers to pass along costs where we can. So that's one category. You're right about the second category is being sort of this bounce back of cost. And that's why we made the comment particularly on merchandise, which is the largest For 6 to 8 months, starting at the beginning of the pandemic, call it March 2020, we started seeing a significant amount of lower needs for merchandise adds, not just from new accounts, But from replacement garments, which is the bulk of our merchandise requirements, those as you understand how we Amortize our merchandise, those caused our overall merchandise expense for 2021 to be quite a bit lower than our historical norm.
We're starting to see that bounce back now. As you could understand, as it bounces back, for example, this quarter is probably one of the Almost a low point because as you start to put in more, right, that amortization starts to build again. So over the course of 2020 I'm confident in saying we will be experiencing higher merchandise amortization as a percentage of revenues. Hopefully, in October, we'll be able to give you a better sense with 3 or 4 months more information as to what we think that looks like. But the caution here is to say that the merchandise amortization we're experiencing today is over 100 basis It's lower than sort of historical levels.
When do we get back to those historical levels? How does the energy sector intersect with that? How does sales intersect with that? There's a lot of Factors, but we just wanted to highlight that, that cost is running historically low and we fully expect it to normalize. Similarly with travel, which we obviously can control a little bit more, we are benefiting still from less travel, quite a bit less travel than So the pre pandemic time and like a lot of companies, we're looking at travel to say where can we be more efficient, what have we learned during the pandemic that can help us Manage travel costs more effectively and there are ways, but we need to be out in front of our customers.
There's travel that will come back. And then the 3rd category of cost, which is sort of inherent in some of our comments as well, is our initiatives, Like the ABS deployment and some other things that we'll have going on in 2022, we will Probably be more proactive about speaking about those costs and probably even giving you sort of an indication of adjusted operating margin As we go into 2022 and these costs continue to be more significant. So it is 3 discrete areas. I tried to mention all of them in Prepared remarks because we do want to caution a little against I think what you're talking about, which is the economy has recovered, Everything is back to normal. Well, our business has always benefited during slow times from a cost perspective.
And during growth times, there can be margin challenges from things like energy, merchandise and others. This is even probably accentuated even more than that because I'd say during the pandemic, things like merchandise and energy and healthcare and travel were all things that were Abnormally benefiting compared to, say, the last recessionary cycle where you didn't see that dynamic with Healthcare, you didn't see that dynamic with travel. So it is a unique cycle that we're working towards and that's why we're Trying to provide that caution for 2022 and depending on how the economy recovers and the top line and all those other things, We'll see where it shakes out, but we did want to provide that clarity.
Yes. Can I just try one last follow-up on the same subject? When you look at those 3 buckets for 'twenty To which one seems the most sizable of the 3 buckets you just described?
It's the most what? I missed Sizable, the biggest
headwind to margins, yes.
Well, it's a good question. I mean, merchandise is probably the biggest singular factor that will normalize, but it won't normalize Overnight, so you're going to look at the Q1 of 2022 and you're going to say, well, merchandise isn't so bad, but it's going to quickly ramp as we Continue to put in higher levels of merchandise over time. I would say, to be honest, Andrew, the bounce back of cost is probably the one To kind of most be cognizant of, the inflationary environment is something we're going to have to deal with, but As we try to look at pricing opportunities and work through that, that's more it's a sizable challenge, but It's more business as normal, I would say. And then the investments are the investments. I don't think that's something that It really concerns me because it's investments we're making, it's capital we have to invest and we'll let you know what those numbers are.
So it's really that middle one that You'll have some bounce back that we want to make sure people are aware of.
Got it. Thanks for the time. I got it.
Thank you.
Gentlemen, those are all the questions we have. I'll turn it back to you for closing remarks.
I'd like to thank everyone for joining us today to review our Q3 results. We look forward to speaking with you again in October when
And ladies and gentlemen, that concludes our call for today. We thank you all for your participation. Have a great rest of your day. You may disconnect your line.