UniFirst Corporation (NYSE:UNF) Q1 2024 Earnings Call Transcript

UniFirst Corporation (NYSE:UNF) Q1 2024 Earnings Call Transcript January 3, 2024

UniFirst Corporation beats earnings expectations. Reported EPS is $2.38, expectations were $2.33. UNF isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Greetings, and welcome to the UniFirst Corporation First Quarter Earnings Call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. [Operator Instructions] I would now like to turn the conference over to Steven Sintros, President and Chief Executive Officer. Please go ahead.

Steven Sintros: Thank you, and good morning. I’m Steven 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 UniFirst Corporation’s conference call to review our first quarter results for the fiscal year 2024. This call will be on a listen-only mode until we complete our prepared remarks, but first 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. We’re pleased with the results of our first quarter, which represent a solid start to our new fiscal year. I want to thank all of our team partners who continue to always deliver for each other and our customers as we strive towards our vision of being recognized as the best service provider in the industry. All while living our mission of serving the people who do the hard work. The people who do the hard work are the workforce that keeps our communities up and running. So many of them are our existing and prospective customers, as well as our own UniFirst team partners.

Our mission is to support those employees by providing the right products and services that allow them to do their job successfully and safely. Whether that means providing uniforms, work wear, facility service, first aid and safety, clean room or other products and services, our goal is to partner with our customers to ensure we have the right structure to ensure that we structure the right program, products, and services for their business and their teams. Overall, revenues in our first quarter were up 9.5% compared to the first quarter of 2023. Consolidated growth benefited from the acquisition of clean uniform in March of 2023 and strong growth in our first aid and safety division. Core Laundry operations organic growth in the quarter was 5.2%.

Profits were up over 20% in the quarter compared to a year ago, largely driven by the growth of our top line and lower cost expended during the quarter related to key initiatives. As a reminder, we have been expending costs over the last couple of years related to our technology transformation, as well as a rebranding initiative. As expected, these costs are declining due to the completion of our rebranding, as well as activities surrounding the deployment of our CRM largely winding down. We continue to expend dollars related to our ERP project. However, as we enter implementation phases of the project, more costs are being capitalized. Our performance in the quarter from a new account sales perspective was very strong, exceeding our new sales from a year ago at this time by a healthy margin.

Part of this outcome was driven by the addition of a top three account in our core Laundry operations. We continue to sell prospects on the value that UniFirst can bring their businesses. Our approach is a consultative one, where, as I mentioned, we focus on creating the right programs with the right [indiscernible] products for our customers. Conversely, we did experience more headwinds against our top line performance as the quarter progressed in the areas of price and customer retention. And although still stable overall, we are getting less tailwind from wearer levels currently than we were a year ago. Although our first quarter top line results were well within our range of expectations, we do expect these items will pressure organic growth as the year progresses.

As we look towards the rest of fiscal 2024 and beyond, margin improvement will certainly be a key focus of the organization. Executing on our growth model, while also managing costs in areas we control will be critical, all while assuring we don’t impact the ability to execute on our transformational initiatives or adversely affect customer service levels. In addition to day-to-day execution, we are focused on margin opportunities in many areas. We continue to work to optimize the use of our new CRM, including leveraging some of Clean’s proprietary technology across all of UniFirst. Areas such as strategic pricing and account profitability, as well as strategic manufacturing and sourcing, represent significant opportunities. Although some of these benefits going forward will be more significantly enabled through the implementation of our ERP, we continue to focus on these areas and others that we feel can move the needle in the near to midterm.

Our Clean acquisition continues to perform very well with several recent wins, resigning long-term customer relationships. This shows the confidence that Clean’s customer base has in joining UniFirst and continuing to receive industry-leading service. We continue to believe very strongly in the bright future of our first aid and safety division which grew 22.4% in the current quarter compared to the first quarter of 2023. We continue to make investments in sales and service infrastructure of this segment to expand our footprint and ensure we can reach existing UniFirst customers, as well as new prospects in the markets that have a strong need for these products and services. As we progress, increasing route density in addition to penetrating customers with the full breadth of services that we provide will be critical steps in building the profitability of this segment.

As I mentioned last quarter, the company continues to make solid progress and contributions in the area of environmental, social, and governance. The nature of the industry and rental model has always allowed us and the company to do our part enhancing the economy’s environmental footprint, given our role as a natural recycler, as well as the better utilization of resources and operations like ours enables. As an example of our efforts, during the quarter we engaged a company that is going to convert the remainder of our operating plants and our core laundry to energy efficient LED lighting. We continue to be focused on making the right investments to meaningfully impact the environment, support our customers, and have a positive impact on our business.

With that, I’ll turn the call over to Shane, who will provide more details of our first quarter, as well as the outlook for the remainder of 2024.

Shane O’Connor: Thanks, Steve. In our first quarter of 2024, consolidated revenues were $593.5 million, up 9.5% from $541.8 million a year ago. And consolidated operating income increased to $53.1 million from $43.4 million, or 22.4%. Net income for the quarter increased to $42.3 million, or $2.26 per diluted share, from $34 million or $1.81 per diluted share. Consolidated EBITDA increased to $86.2 million compared to $69.7 million in the prior year or 23.7%. Our financial results in the first quarters of fiscal 2024 and 2023 included approximately $2.9 million and $10 million, respectively, of cost directly attributable to the key initiatives that Steve discussed. The effect of these items on the first quarter of fiscal 2024 and 2023 combines to decrease operating income and EBITDA by $2.9 million and $10 million respectively, net income by $2.4 million and $7.6 million, respectively, and EPS by $0.12 and $0.40 respectively.

Net income and EPS also benefited from approximately $2.1 million of interest income recognized in the first quarter of 2024 as a result of a tax dispute we were able to favorably resolve. Our core laundry operations revenues for the quarter were $524 million, up 9.8% from the first quarter of 2023. Core laundry organic growth, which adjusts for the estimated effect of acquisitions, as well as fluctuations in the Canadian dollar was 5.2%. This solid organic growth rate was primarily the result of solid new account sales and improved pricing related to the efforts over the last year to share with our customers the cost increases that we incurred in our business. Core Laundry operating margin increased to 8% for the quarter, or $42.1 million, from 7.1% in prior year, or $33.8 million, and the segment’s EBITDA margin increased to 14% from 12.2%.

The costs we incurred related to our key initiatives were recorded to the core laundry operations segment and combined to decrease the core laundry operating and EBITDA margins for the first quarter of fiscal 2024 and 2023 by 0.6% and 2.1%, respectively. Excluding these items, the segments operating and EBITDA margins were also impacted by higher costs we incurred related to investments we have made in building our corporate capabilities over the last year and higher merchandise costs. These items were partially offset by lower energy costs during the quarter, which decreased to 4.1% of revenues in the first quarter of 2024, down from 4.7% in 2023. Revenues from our specialty garment segment, which deliver specialized nuclear decontamination and cleanroom products and services increased slightly to $44.7 million from $44.1 million in prior year, or 1.3%.

This increase was primarily due to growth in our cleanroom operations. Segments operating margin increased 27.1% from 23.1%, primarily the result of lower merchandise costs in our cleanroom operations. As we’ve mentioned in the past, this segment’s results can vary significantly from period to period due to seasonality as well as timing and profitability of nuclear reactor outages and projects. Our first aid segment’s revenues increased to $24.9 million from $20.3 million in prior year or 22.4%. However, the segment had an operating loss of $1.1 million during the quarter. These results continue to reflect the investments we have been making in our first aid van business that Steve discussed. At the end of our first fiscal quarter, we continued to reflect a solid balance sheet and financial position with no long-term debt and cash, cash equivalents, and short-term investments totaling $88.8 million.

Cash provided by operating activities for the first quarter increased to $45.7 million from $27.7 million in prior year, or 64.9%, primarily due to our improved profitability. And we continue to invest in our future with capital expenditures during this period of $39.1 million. I’d like to take this opportunity to provide an update on our outlook. At this time, we continue to expect our full-year consolidated revenues for fiscal 2024 will be between $2.415 billion and $2.435 billion. However, due to recent trends in our core Laundry operations in the latter half of the quarter, we anticipate that the lower half of this range is more likely. We continue to expect diluted earnings per share to be between $6.52 and $7.16. This concludes our prepared remarks, and we would now be happy to answer any questions that you might have.

Operator: Thank you. [Operator Instructions] Our first question comes from the line of Manav Patnaik with Barclays. Please proceed with your question.

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Q&A Session

Ronan Kennedy: Hi good morning this is Ronan Kennedy on for Manav. Happy New Year and thank you for taking my question.

Steven Sintros: Good morning.

Ronan Kennedy: Good morning. Could you please kind of unpack with regards to what you alluded to, I think, the headwinds from price and customer retention, also less of a tailwind from wearer levels, and if that is specifically the driver of guiding to the lower half of guidance, you know, and what you anticipate based on what had played out in the latter stages of the quarter, just if you could unpack that in further detail, please.

Steven Sintros: Sure. Ronan, this is — that is the driver of us tweaking down the guidance or making the commentary that the lower end is more likely. Yes, over the back half of the quarter, we certainly started seeing some more price sensitivity. And again, this is all compared to what our expectations were kind of coming in. Not somewhat, not surprising, maybe based on some moderating cost, energy, and so on, that we are seeing. But that was a little bit off of what we had projected kind of coming into the year. And any of those type of changes kind of early on in the year have more of an impact as sort of you think about it over the course of the year. With respect to customer retention, we had mentioned over the back half of last year that things were trending a little bit lower.

We saw some of that over the quarter. A couple of strategic losses, I’ll call them, during the quarter that ended up being recognized. And again, those kind of things have more of an impact as you work them out over the full year. With respect to the adds versus reductions, we’ve been talking about the environment being relatively stable. And I would still categorize it as such, but certainly compared to a year ago and even somewhat compared to maybe the back half of last year, we’re seeing a little less in the way of wearer additions. I wouldn’t say net-net, it’s turned negative in a large way, but a little off of our expectation for the quarter.

Ronan Kennedy: That’s helpful. Thank you. And then, could I just ask for your assessment or characterization of demand and what the conversations with customers are like and how that’s incorporated within the guidance for the remainder of the year?

Steven Sintros: Yes, in general, we guide looking at things in the environment as we see them today. We often make the comment that we don’t assume sort of more deterioration if there were to be broader pickup in wearer reductions at our customers. We don’t really build that in. That being said, I’m not sure that we’re hearing loud from our customers that that’s imminent. I think people are taking a little bit more of a cautious tone out there with respect to hiring, but we’re also not hearing broad calls for reductions. I mean, one of the things that makes us reporting this time of year somewhat unique is that, a lot of those conversations with customers start to become clearer sort of after the holidays as they kind of get into their new year, see what demand looks like coming out of the holidays and set their plan going into their calendar year.

So, it’s a little bit of a tricky time having those conversations this time of year. But in general, we’re not hearing anything that should raise major flags, but some caution.

Ronan Kennedy: Thank you. Appreciate it.

Steven Sintros: Thank you, Ronan.

Operator: Our next question comes to the line of Andy Wittmann with Baird. Please proceed with your question.

Andrew Wittmann: Great. Good morning. Thanks for taking my questions, guys. I guess, I first started — the first thing I wanted to do was drill in a little bit more on the customer retention, Steve. I guess in prior quarters you’ve talked a little bit about how it might be moderating somewhat. But I guess the question is, so what do you attribute the customer retention? Is it customers that are closing doors, closing up shop? Is it the pricing initiatives that you’re trying to get and going other ways? You heard the term — I think you used the term here, strategic losses, which I guess means that customers that — you try to get the price and it wasn’t going and you’re okay with — not okay with losing, but okay with losing, because it wasn’t a profitable account. I mean, maybe you could just elaborate on the retention factors in more detail.

Steven Sintros: Sure. It’s a little bit of all of the above, Andy. A couple of those strategic accounts, I think they were in instance where sort of at the end of the day, we decided not to move forward. I do — I should have said in my answer to the first question, I do believe that the pricing environment is a factor, at least in the way we measure retention. When we measure retention, we’re looking at sort of the all-in impact of these accounts over the last 12 months. And I do think that through the strong period of inflation that as we all were trying to get more from customers, not saying that’s necessarily the reason that you lose an account, but if you do lose that account, it may be priced higher than it otherwise would have been a year or so ago, if that makes sense.