EVI Industries, Inc. (EVI) Earnings Call Transcript

Good afternoon, everyone. Welcome to EVI Industries Earnings Call for the Quarter and Fiscal Year Ended June 30, 2020. This is Henry Nahmad, Chairman and CEO of EVI. Before we proceed, our cautionary statement. This earnings call has forward-looking statements as defined by the SEC laws and regulations. Forward-looking statements are subject to a number of risks and uncertainties, including those set forth in our earnings press release filed today and in our SEC filings, including the Risk Factors sections of our annual report on Form 10-K for the fiscal year ended June 30, 2020. And accordingly, ultimate results may differ materially from those expressed in or implied by the forward-looking statements. 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 our press release and SEC filings for additional information. Once again, good afternoon. Our fiscal fourth quarter and fiscal 2020 operating results reflect the impact of COVID-19. They also reflect our continued investment in the future growth, modernization and optimization of our company. As we continue to execute on our plans, it is important to note that our company is still in the early years of a long-term, growth-focused journey. Amid the turbulence and chaos caused by COVID-19, we are comforted by the attributes of our fundamentally resilient industry and we are excited about significant growth opportunities that have become available to our company. Before elaborating on our financial condition and performance and our future plans, we will take this opportunity to elaborate on the attractive fundamentals of our industry. Industrial and on-premise laundries serve the needs of health care, hospitality, government, institutional, veterinary, correctional, sports and similar establishments and businesses. Vended laundries principally serve the needs of those without home laundry appliances and multifamily laundries serve the needs of residents within those communities. Although the volume of linens and textiles laundered by some of these end users fluctuates with general economic activity, demand for operable and efficient laundry equipment has historically remained steady, including through different economic cycles. Given these laundry operations, in aggregate, laundered tens of millions of pounds of soiled linens on a daily basis, either for a profit or as a service, the operating and financial efficiency of their operations is critical to their success. Accordingly, laundry operators are focused on the total cost of ownership of equipment rather than the initial investment. For example, reduced water consumption and improved energy efficiency lower ongoing operational expenses and complies with increasing government regulation. Additionally, laundry operators require solutions that satisfy higher cleaning, sanitation and disinfecting requirements for their operations. The combination of striving to meet rising health and environmental standards and reduce operating cost creates replacement demand and potentially increases equipment expenditure and reliance on installation and maintenance service capabilities. Further, growing interest for innovative and connected equipment has also driven demand as customers seek equipment that reduces labor expenses. Consequently, as more technologically advanced equipment is introduced, we believe that will accelerate a new equipment replacement cycle. Given these attractive fundamentals and the similarities across our targeted complementary product and service categories, we seek to build the industry's most dominant distributor and service provider. To that end, today, we source commercial laundry equipment from 12 domestic and international OEMs and we sell over 25 brand names with a variety of price points, features and capabilities to meet the needs of varying commercial laundry operators. Accordingly, over 65,000 customers across the many states we serve rely on the expertise of our people and the capabilities of our company to achieve their performance goals. For these reasons, we continue to expand our portfolio of commercial laundry products. We continue to invest in more sales and service professionals. We continue to enhance our installation and maintenance service capabilities and we continue to invest in the next-generation technology. Ultimately, we believe that the combination of solid underlying demand, a broad product range and a diverse customer base across a wide geography mitigates the risk that a disruption to any one product category, any one customer group or any one geography can materially impact our company. At this point, we will highlight our financial condition. To effectively navigate through these turbulent times and to simultaneously capitalize on a growing number of potential long-term growth opportunities, the strength of our balance sheet is critical. For those reasons, we uphold a low leverage principle. Despite the disruption to the economy and to our business, net debt in successive quarters decreased 31% from approximately $26 million at March 31, 2020 to approximately $18 million at June 30, 2020. This represents a 50% decrease in net debt compared to prior fiscal year-end. Our current net debt is the lowest in 2 years, a period during which we agreed to deploy $20 million of cash in connection with the acquisition of 9 businesses. The significant decrease in net debt is the result of a record $23 million of operating cash flows during fiscal '20. This record accomplishment in operating cash flow represents a nearly $32 million positive swing in operating cash flow over the prior year and is a function of attractive working capital dynamics and the successful implementation of an effective cash management program. Moving to our financial performance. During the second half of fiscal '20, government orders resulted in the unprecedented sudden closure businesses, the cessation of travel and restrictions that limited access to our customers' facilities. This triggered a deceleration of revenue that started in March, continued into April, but started to rebound in May and continued to rebound through June. Revenue from industrial laundry customers was consistent with preplanned delivery and installation schedules, reflected in our backlog. And encouragingly, we accepted customer deposits for future planed industrial laundries. Revenue from on-premise laundry customers varied by end user and geography. Revenue from vended laundry customers was strong, due in part to low interest rates that continue to spur investment from entrepreneurs. And revenue from multifamily customers was consistent with contractual obligations. Although revenue rebounded quickly, revenue for the fourth quarter of fiscal '20 was $54 million compared to a record $65 million in the fourth quarter of fiscal 2019. Ultimately, however, revenue for fiscal year '20 increased 3% to a record $236 million. Gross margins for the fourth quarter increased from approximately 24% in fiscal '19 to 25% in fiscal '20. And gross margin for the fiscal year '20 increased 30 basis points to 23.4%. Meanwhile, the decline in adjusted EBITDA for the fourth fiscal quarter and fiscal '20 principally reflect the unexpected impact of COVID-19. They also reflect the retention of substantially all of our employees, the cost of operating 14 independent businesses and the inefficiencies related to outdated enterprise resource planning software. Given the essential nature of our business and the resilience of our industry, our employees were and remain integral to the success of our company. In addition, we believe that a large portion of the value of the 13 businesses we spent over $100 million to acquire is derived from the expertise of the laundry professionals we employ. Consistent with our buy-and-build strategy, during fiscal '20, we completed 3 acquisitions, 1 of which expanded our footprint into the Northeast, 1 that increased our market share in the mid-Atlantic and 1 that increased our market share in the Southeast. These newly acquired businesses are also distributors of on-premise and vended laundry products and providers of related installation and maintenance services that met our strategic plan to increase distribution and service density. While we generally maintain a healthy pipeline of acquisition opportunities, COVID-19 has increased the number of acquisition opportunities we are pursuing at this time in the commercial laundry industry and across our targeted complementary industries. To amplify our efforts, we have allocated additional resources to internal and third parties, which, given our reputation, entrepreneurial culture and long-term growth plans, we believe will improve our ability to secure additional successful acquisitions for our company. As we look at our business today, we believe we are in a strong position to manage through COVID-19, including that we continue to partner with our customers through these uncertain times to solve their problems. In doing so, we are uncovering new product and service opportunities that support our customers' need to ensure their operations are functioning effectively and their operations adapt to new cleaning and sanitation requirements. We also believe our long-term growth opportunities remain robust, driven by a large, aggregate, addressable market across our targeted industries, our leading and growing market position and our focus on providing our growing customer base with customized solutions. While we pursue these long-term growth opportunities, our decentralized and entrepreneurial operating philosophy remains unchanged. During the second half of fiscal '20, we commenced an initiative to consolidate our company into 5 primary subsidiaries with 9 operating branches and to implement an ERP capable of supporting our future growth and our needs for business intelligence. Beyond the near-term benefits of realizing certain operating efficiencies, we believe that this technology will improve the effectiveness of future sales and marketing initiatives, will result in more efficient service operations, will facilitate predictive parts sales, will augment the future generation of sales and service professionals with intuitive selling and servicing solutions, will create a more connected and powerful experience with our customers, will be the foundation of our future e-commerce platform and will enhance our competitive advantages. Additionally, we believe this plan will be instrumental in achieving a greater level of profitability from successive acquisitions earlier in our ownership than we have historically experienced. While this is a significant undertaking, our team is well-advised and has worked diligently towards accomplishing these objectives without significant operating disruption or time delays. As of today, we are pleased to share that subsequent to the completion of fiscal '20, we successfully implemented our new ERP and related technologies at 1 of our 5 primary subsidiaries. And in consideration of this accomplishment, we have accelerated our company-wide consolidation plan and corresponding technology implementations. Finally, our financial position remains strong with ample liquidity, well-managed working capital and resilient cash flows. Assuming a gradual, if uneven, recovery from the COVID-19 impact, we also believe we have the right strategies to capture substantial growth in and around our businesses through strategic investments and organic growth, and that the benefit of such growth will be amplified by the continued modernization and optimization of our company. We believe looking beyond the near-term uncertainty and focusing on these sustainable, long-term business drivers will yield superior, long-term performance and results for EVI and our shareholders. This concludes our comments related to the quarter and fiscal year ended June 30, 2020. In closing, I want to thank our valued employees, our loyal suppliers and customers and our shareholders for your support and participation in EVI. Until next time. Be well.