EVI Industries, Inc. (EVI) Earnings Call Transcript & Summary

Hello, and welcome to EVI Industries' Earnings Call for the Second Quarter of the Fiscal Year ending June 30, 2024. This is Henry Nahmad, Chairman and CEO of EVI. Before we proceed, we would like to disclose our cautionary statement. This earnings call contains forward-looking statements as defined by 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 issued today, and in our SEC filings, including the Risk Factors section of our annual report on Form 10-K for the fiscal year ended June 30, 2023. Actual 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 that the company believes is useful in evaluating performance. Please refer to our earnings press release issued today for additional information regarding adjusted EBITDA, including the definition of adjusted EBITDA, a reconciliation of adjusted EBITDA to net income and the most comparable GAAP financial measure. Today, I will summarize our operating results for the second quarter of fiscal '24, and I will share our progress in connection with our long-term goals. For those of you that may be new to our company and our long-term growth plans, please refer to the recorded earnings call published on October 4 related to fiscal '23, where I describe the fundamentals of our industry and key attributes of our principles and values. As I've previously shared, EVI invests and manages with a long-term perspective. We uphold a financial discipline aimed to ensure our financial strength and flexibility. In buying businesses, we respect the entrepreneurs and management teams that join the EVI family. We promote an entrepreneurial culture and instill a growth and profitability mindset that seeks continuous improvement. We maintain a highly decentralized operating model where the original entrepreneurs and leaders of our operations operate as a local business. Given this approach, we empower them to make local decisions and trust that through continuous collaborations and communications, we will achieve the most effective strategies for our company. It is through disciplined execution of our buy-and-build growth strategy and a thriving entrepreneurial culture that we have established EVI as a leader in the highly fragmented North American commercial laundry distribution and services market. We also have been steadfast in our approach to capital allocations in connection with the buy-and-build component of our long-term growth strategy. We believe the merit to our approach has been demonstrated through a consistently growing company with low leverage, a strong balance sheet, an attractive equity currency and a significantly lower cost of capital compared to other industry participants. We believe that the combination of these factors provides our company with the financial wherewithal to invest across continuous operations and execute on strategic transactions of various size at any time. As a result of our approach and various initiatives, since 2016, our revenue, net income and adjusted EBITDA have grown at compounded annual growth rate of 36%, 21% and 33%, respectively. EVI achieved record revenue and gross profit for the 3 and 6 months ended December 31, 2023, and record operating cash flows for the 6 months ended December 31, 2023. The second quarter results include a record $91 million in revenue, reflecting an 11% increase compared to the second quarter of fiscal '23, and record gross profit of approximately $26 million or a 29% gross margin. For the 6-month period, revenues increased 8% over the prior year period to a record $179 million, and gross profit increased 6% to a record $52 million, while gross margin was 29%. Despite record revenues, we also maintained a strong customer sales order backlog as of December 31. This strong performance in the 3- and 6-month periods ended December 31 comes against the backdrop of record-breaking performance in the comparable periods of the prior fiscal year. Specifically, during the 6 months ended December 31 of '22, revenue, net income and adjusted EBITDA increased by 33%, 99% and 67%, respectively, compared to the same period in fiscal '21, and revenue, net income and adjusted EBITDA grew 36%, 321% and 94%, respectively, during the 3 months ended December 31 of '22 compared to the same period in fiscal '21. Last fiscal year's performance was driven by pent-up demand, increased OEM pricing and strength across each end market of the commercial laundry industry. In contrast, OEM pricing actions to date in fiscal '24 have been more moderate. Lead times have been shorter, resulting in improved speed in the customer sales order fulfillment process and end market demand continues to be strong. While we're pleased with our strong revenue and gross profit performance for the 3- and 6-month periods, we note that our results were impacted by expenses related to our continued investment in our acquisition program, heavy investment in efforts to grow sales and service operations, investments in new and additional facilities required to support our growth plans, and investments in connection with the development and deployment of advanced technologies. These investments aim to drive growth and improve productivity and efficiency in the future, which I will describe in greater detail later in my commentary. From a financial strength and liquidity perspective, during fiscal '23, we made significant investments in working capital, primarily in inventory required to support short-term customer equipment and parts needs and to fulfill customer sales order contracts. During the second quarter of fiscal '24, we continued to monetize a portion of our inventory investment, resulting in $11 million of operating cash flows for the 6 months ended December 31 of '23, reflecting a $16 million increase in operating cash flows as compared to the same period of the prior fiscal year. This record level of operating cash flows follows the payment of a special cash dividend of $0.28 per share or $4.1 million, which we paid during the second fiscal quarter. Given our financial strength, record operating cash flows and growth prospects, net debt was reduced by 8% to $27 million as of December 31 of '23. On acquisitions, each acquisition is integral to achieving our long-term goal to build North America's largest value-added distributor of commercial laundry and related products and the most dynamic network of commercial laundry technicians. During the 6-month period, we completed the acquisition of ALCO Washer Center, a commercial laundry distributor and service provider. The acquisition strengthens EVI's leading market share position in the Northeast region of the United States. Outside of ALCO, we are experiencing a strong deal pipeline and believe that business owners, customers and prospective leaders continue to be attracted to joining the EVI family and to working with our company in the months and years ahead. As such, we continue to pursue acquisition and other strategic opportunities in the commercial laundry industry and across those products and service categories that meet our financial and strategic criteria. On investments in continuing operations, in connection with our long-term growth and profitability objectives, we increased investments in the following key areas during the 3- and 6-month periods ended December 31 of '23. Sales professionals are the backbone of our company. We maintain the single largest sales organization in the industry, including 185 sales and sales support professionals. Therefore, a core component of our growth strategy includes the deployment of additional sales professionals into geographies that represent market share growth opportunities. Accordingly, results of operations for the 6-month period ended December 31 of '23 include 18 more sales professionals, representing a 13% increase in sales professionals compared to December 31 of '22. We expect future returns on this investment in additional sales personnel in the form of new customer relationships, additional product sales and installation revenues, followed by recurring parts and routine service revenues. Our expectation is based on the success our leadership teams experienced after making similar investments in prior years. Service technicians are integral to completing laundry installations and to ensuring that our customers' laundry operations remain in good working order. With nearly 400 personnel devoted to daily installation and service opportunities, our company maintains the single largest service operation in the industry. Given the importance of the function these professionals serve, another core component of our growth strategy includes the deployment of additional installation and service technicians in support of sales activities and service opportunities industry wide. In connection with these efforts, we actively develop the next generation of technicians to address service opportunities across all 4 segments of the commercial laundry industry. Accordingly, results of operations for the 6-month period ended December 31 of '23 include 28 more service technicians, representing a 9% increase in service decisions compared to December 31 of '22. While we build a larger service operation, it is equally important that we provide our service operations with the technologies required to fulfill customer service needs at the standards we expect for our company and with a greater level of efficiency. In connection with this objective, during the second fiscal quarter, we commenced the configuration and implementation of our Field Service Management platform, which we also believe will transform the customer experience. Our future FSM Platform will provide our field service technicians with real-time access to critical information aimed to maximize technician utilization and efficiency, including real-time access to time-sensitive product detail, technical support, parts pricing and inventory availability, warranty management and route optimization. We believe that this advanced technology will not only improve the efficiency of service operations, but also drive future product sales growth and provide for an unrivaled customer experience. To support these initiatives, it is paramount that our business be built upon enterprise resource planning systems capable of sustaining our growth over the long term. All but 2 of EVI's 25 acquired businesses joined the EVI family on their end state ERP system. Therefore, over the last 4 years, we have regionalized operations and made significant investments to modernize our operations, including successful efforts to implement our ERP systems at legacy business units without operational disruptions. Our new enterprise resource planning systems provide previously unavailable analytics that management now uses to make strategic growth decisions and to make decisions aimed to fine-tune continuing operations. At this point, the initiatives in connection with legacy business units are nearing completion as approximately 85% of these business units are transacting on their end state system. In closing, our mission is to build the undisputed leader in and around the commercial laundry industry. As we have stated from the beginning, to achieve our goals, we are, and remain a long-term growth-focused company. Thus far, we have stayed true to our financial principles, consistently acquired good businesses, strengthened our customer value proposition and delivered growth. As such, we have earned a reputation for being a company that is thoughtful and committed, and a company that acts with conviction when the opportunity is right. Given our financial strength, as evidenced by our balance sheet, access to lower cost capital and growth goals and objectives, we remain well positioned to execute on strategic growth opportunities when the time is right. For these reasons, and the others mentioned during this earnings call, we remain excited and optimistic about our long-term growth plans and outlook. This concludes my comments related to the second quarter of fiscal '24. 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.