EVI Industries, Inc. (EVI) Earnings Call Transcript

This conference call has forward-looking statements as defined by SEC laws and regulations that are made pursuant to the safe harbor provisions of these various laws. Forward-looking statements are subject to a number of risks and uncertainties, and ultimate results may differ materially from those expressed in or implied by the forward-looking statements, including, without limitation, the acquisitions, including the acquisition of CLE described herein may not be consummated or result in the benefits anticipated and that other plans, strategies, assumptions and beliefs may not prove to be accurate. This call also includes a discussion of adjusted EBITDA, which is a non-GAAP financial measure, which the company believes is useful in evaluating performance. Please refer to EVI's earnings press release for additional information regarding adjusted EBITDA, including EVI's definition of adjusted EBITDA and a reconciliation of adjusted EBITDA to and the presentation of net income, the most comparable GAAP financial measure. With that, let me turn the call over to Henry Nahmad, our Chairman, President and Chief Executive Officer.

Thank you. Welcome to EVI Industries' Earnings Call for the Second Quarter of Fiscal Year 2020. Before we share our operating results, please note that for those of you that may be new to our company, following our remarks to our operating performance, we will provide you a description of our company and our long-term growth strategy. During the second quarter of fiscal 2020, EVI produced records in revenue, gross profit and operating cash flow. Revenue increased 10% from $61 million to a record $67 million. This revenue increase was due to the results of operations of acquired businesses that were not consolidated into the company's financial statements for all or a part of the prior year periods. The revenue increase was also due to the effectiveness of certain sales growth strategies executed by the company to increase market share in existing geographies. Gross profit increased 3% from $13.7 million to a record $14.1 million as a result of increased revenues. Gross margin, however, decreased modestly from 22.5% to 21.1%, driven largely by certain market share growth initiatives in connection with our long-term growth strategy. More specifically, gross margin for the quarter reflects our aggressive efforts to build market share by increasing the installed base of commercial laundry equipment the company represents. It is important to note that our company's strategic goal is to build a larger and recurring customer base into which the company may increasingly sell or lease complementary equipment, sell additional products and enter into contracted service relationships, all of which may generate higher gross margins in the future. For that reason and others, from time to time, we may engage in sales growth strategies that have an adverse impact on gross margins, as experienced during this quarter. Operating income decreased from $2.1 million to $805,000. Net income decreased from $1.3 million to $300,000, and adjusted EBITDA decreased from $3.2 million to $2.2 million. These decreases were principally the result of our market share growth initiatives, which resulted in lower gross profit dollars and were the result of ongoing investments aimed to modernize our operating businesses, corporate expenses related to the growing nature of our public company and continued expenses related to the execution of our buy-and-build growth strategy. Moving to our balance sheet and statement of cash flows. Current assets at December 31, 2019, decreased approximately $3.6 million as compared to June 30, 2019. The decline in current assets was primarily due to a $7 million decrease in accounts receivable resulting from the timing of collection of payments and a decrease in the amounts that were owed to the company related to progress building on longer-term contracts. These decreases were partially offset by an increase in inventory, primarily attributable to the inventory acquired in connection with the PLS acquisition completed on August 1, 2019. Current liabilities at December 31, 2019, increased $2.5 million as compared to June 30, 2019, which was largely attributable to an increase in customer deposits related to future orders reflected in the company's backlog and an increase in the current portion of operating lease liabilities related to the adoption of the new lease standard effective for the company July 1, 2019. These increases were partially offset by a decrease in accounts payable and accrued expenses. The changes to current assets and current liabilities produced a favorable decline in working capital of approximately $6 million from $37 million to $31 million. Consequently, cash provided by operating activities during the quarter was a record $9.6 million as compared to cash used by operating activities of $9.9 million for the same quarter of the prior year. This represents a nearly $20 million positive swing in operating cash flows compared to the same period of the prior year. In summary, the company used its record $9.6 million in operating cash flows to invest in its long-term growth strategy. The company also used available cash to reduce net debt 19% to $29 million. As such, we believe that the company maintains a healthy balance sheet and access to the necessary capital resources to continue investing in its operations and completing acquisitions and other strategic transactions. That summarizes our operating performance. And at this point, we will review attributes and successes of our operating model. We believe that our operating model provides our entrepreneurs and their management teams the necessary autonomy to invest in achieving revenue and market share growth. As such, I'm pleased to share that the 2-year, compounded annual revenue growth rate for the 4 subsidiaries that the company has owned for at least 24 months as of December 31, 2019, was 8%. This is a favorable indication that the investments we're making in our businesses are yielding attractive, organic revenue growth even without the full adoption of the additional products and services we seek to add and that which we believe will increase our customer value proposition. While our leaders are focused on driving revenue growth, they routinely collaborate to develop best operating practices and consider the consolidation of regional operations, the combination of which may create operating efficiencies beneficial to achieving our long-term profit goals. We strive to support these efforts while also pursuing other areas of optimization for our businesses. Our playbook to buying and building businesses is a balanced approach with a focus on revenue growth and operating efficiency over the long term while mitigating a significant level of risk along the way. We recognize that our approach may result in lower operating profit today. However, we believe this is merely a short-term tradeoff for a larger business with significantly more attractive operating performance in the future. At this point, we will provide an update on our acquisition activity. During the first quarter, we completed the acquisition of Professional Laundry Systems and affiliates. PLS is principally a vended laundry distributor and service provider, partnering with customers in highly competitive territories in and around New York. Consistent with our general operating model, the PLS team continues to represent the branded products they have historically represented and is aggressively pursuing market share growth with the support of EVI's primary Northeast business unit, PAC Industries. During the second quarter, we entered into a definitive agreement to purchase Laundry Systems of Tennessee, a distributor of industrial, on-premise and vended laundry products and a provider of complementary technical services. This acquisition was completed on January 31, 2020, subsequent to the completion of the second quarter. The addition of Laundry Systems of Tennessee expands our geographic footprint into Tennessee and enhances our total capabilities by adding experience around a diverse revenue and profit stream. We intend to build on Laundry Systems of Tennessee's knowledge, experience and success across our other business units. Earlier today, we announced that EVI entered into another definitive agreement, pursuant to which we have agreed to acquire Commercial Laundry Equipment Company, a Richmond, Virginia-based distributor of on-premise and vended laundry products and a provider of related installation and maintenance services. CLE is a unique acquisition for us in that it serves customers in a geography where EVI already has 3 businesses operating with wide-ranging capabilities and with distinct product representations. Given CLE has a large customer base that is loyal to the knowledge, experience and capabilities of its sales and service organization, we believe CLE's customers will benefit from our approach to maintaining business continuity and from our far-reaching sales and service capabilities in the region. The common theme among these acquisitions is that each contributes to building distribution and service density in geographic markets through which EVI may sell and/or lease more equipment, sell parts, accessories and consumables and enter into contracted maintenance service agreements. Including Laundry Systems of Tennessee, we have now acquired 13 businesses since October of 2016, 10 of which were acquired during the past 24 months. We believe that this track record has earned us the reputation of a knowledgeable, efficient and trustworthy acquirer with an entrepreneurial growth culture that is attractive to business owners in and around the commercial laundry industry. Consequently, our pipeline of acquisition opportunities is deep, and we are continuing our efforts to cultivate new opportunities that we believe will be impactful to achieving our long-term growth goals. Overall, our operating results continue to reflect the investments we are making across our company in the pursuit of a larger, stronger and more profitable business. As a result of our attractive organic growth, solid operating cash flow, healthy balance sheet, accessible financial resources, entrepreneurial culture, credible reputation and belief in the values and principles of our buy-and-build growth strategy, we have great confidence in our ability to achieve our long-term goals. This concludes our comments related to the second quarter of fiscal year 2020. In closing, I want to thank our valued employees, our loyal suppliers and customers, our shareholders and the investor community for your interest and participation in EVI. Until next time, be well. At this point, we will provide you a description of our company, our long-term buy-and-build growth strategy and our operating model. What is our buy-and-build growth strategy? Candidly, buying and building businesses is not an original idea. But what makes EVI different is the way we execute, the EVI way, and our unwavering commitment to achieving significant shareholder value over the long term. The buy component of our strategy focuses on acquisitions and other strategic transactions that complement our businesses or that might, otherwise, offer growth opportunities for our company. We are disciplined and conservative in our acquisitions, and we generally seek to identify opportunities that fit certain financial and strategic criteria. The build component of our strategy principally involves encouraging growth at our acquired businesses by adding products, hiring sales professionals, expanding service operations, implementing scalable technologies and promoting the exchange of ideas and business concepts between the management teams of our businesses. Our acquired businesses have access to our capital resources, functional support specialists and established vendor relationships from which to achieve growth and increase profitability. What are our financial principles? We remain a debt-conservative company and seek innovative ways to structure our investments to maintain financial strength and flexibility. When acquiring businesses, we generally structure our transactions with both cash and stock consideration. We believe that the issuance of stock aligns the interest of the sellers of the acquired businesses who we seek to retain to operate their businesses with the interest of all EVI shareholders. What is our operating model? We believe the most effective operating model is to maintain decentralized operating businesses. Our acquired businesses serve thousands of customers across local markets in North America with distinct preferences and with whom the sales, service and management teams that comprise our businesses have built trusting relationships. As a result, we empower our leaders to operate locally, and we encourage them to operate in a manner that builds upon the long-standing relationships they have established with their customers and their suppliers. To that end, we preserve the name of our acquired businesses, we seek to retain their employees, we continue their product brand name offerings and we empower and support management to execute on long-term growth and profitability opportunities. We also have a specialized staff on our corporate team and a series of contracted professionals that provide functional support for our businesses, including specialists in finance, accounting, product procurement, treasury and working capital management, tax planning, risk management and safety. We maintain a culture that rewards performance through a variety of performance-based commission programs, cash incentives and stock-based equity programs. Our equity compensation plans are designed to promote long-term performance as well as to create long-term employee retention, continuity of leadership and an ownership culture where management and employees think and act as owners of our company. Our restricted stock program supports these goals because in most cases, the majority of an employee's restricted share grants vest at the end of his or her career, which is generally aged 62 or later. Lastly, our operating model derives the benefits of size without the risks that come with centralization and corporate integration. Ultimately, we benefit by fostering an entrepreneurial culture where our leadership teams communicate, collaborate and compete to create substantive growth opportunities and best operating practices available to all of our businesses. So what is EVI today? Today, our company is a value-added distributor and a provider of technical and advisory services, primarily in the commercial laundry industry. More specifically, through our vast and growing sales organization, we partner with our customers to provide planning, designing and consulting services related to their commercial laundry operations. We sell and lease commercial laundry equipment specializing in washing, drying, finishing, material handling, water heating, power generation and water reuse applications, and we sell related parts and accessories. Finally, through our extensive network of commercial laundry technicians, we provide our customers installation, maintenance and repair services generally meant to optimize our customers' commercial laundry operations. We offer these products and services to retail, commercial, industrial, institutional and government customers serving the end users in the health care, hospitality, cruise line, food service, correctional, multi-housing and vended laundry customer categories. In effect, our target market includes any commercial operator engaged in laundering linens, uniforms, blankets, textiles and the like. What makes our business attractive? We generally sell and increasingly lease most of the commercial laundry equipment brands we represent on an exclusive basis. We offer our products and services predominantly to the replacement market and also to the new construction market of the commercial, industrial, vended and route laundry industry. Given the nature of our customers' operations, the fact that laundry is a critical function to their business, our customers need the very products and services we provide in order to effectively and profitably deliver clean linens to the end users they serve. As mentioned on our previous call, demand for our products and services is driven by both functional and economic obsolescence. Specifically, demand increases as a result of the aging of the installed base of equipment and the introduction of new equipment with advanced technologies that yield attractive returns on invested capital derived from water, utility and labor savings. One key differentiator to our business is where we sit in the industry value chain. We own the end customer relationship. As a result, we can capitalize on our visibility into the complementary industrial products and services our customers purchase for their laundry and other operations. These other products and services represent long-term growth opportunities for EVI and are also the focus of our buy-and-build growth strategy.