UniFirst Corporation (NYSE:UNF) Q3 2023 Earnings Call Transcript

UniFirst Corporation (NYSE:UNF) Q3 2023 Earnings Call Transcript June 28, 2023

UniFirst Corporation misses on earnings expectations. Reported EPS is $1.66 EPS, expectations were $1.79.

Operator: Greetings and welcome to the UniFirst Corp Third 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 CEO. 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 the UniFirst Corporation conference call to review our third quarter results for fiscal year 2023. 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 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 are pleased with our strong top line performance in the quarter and continue to be excited about a number of key areas of investment in our company. As always, I want to thank our over 14,000 team partners, who continue to always deliver for each other and our customers as we strive towards our vision of being universally recognized as the best service provider in our industry. Profits in the quarter compared to our expectations in our Core Laundry operations were negatively impacted by significantly higher healthcare claims than we had forecasted, driven primarily by one very large claim as well as expenses in the quarter related to a legal matter.

In addition to the impact of these discrete items in the quarter, the margins of the Core Laundry operation continue to be pressured by higher operational cost, which are being impacted by the inflationary environment. We will continue to manage costs in areas we can control, while assuring we don’t impact our ability to execute on our transformational initiatives or adversely affect our customer service levels. And as always we maintain a sharp focus on taking care of our employees, our customers and bringing new customers into the UniFirst family. Our consolidated profits were positively impacted by record revenues and profits from our Specialty Garments segment. As a reminder, our Specialty Garments segment is made up of both our nuclear and cleanroom operations.

Our cleanroom division continues to show steady growth and profitability, which we expect to continue as we move forward. As we’ve mentioned over the years, our nuclear division’s results can be more volatile based on the impact of certain projects as well as swings in activity with some very large customers. I would also like to report that the early days of our recently closed acquisition of Clean Uniform have been very constructive with initial efforts being focused primarily on retaining Clean’s most important assets, its people and its customers. We continue to be excited about the strength and quality of the Clean business and what we continue to believe the combined companies will be able to achieve in the markets we serve together. As we discussed last quarter, due to the strong leadership and service reputation that Clean brings with it, as well as the complexities of where we are from our technology transformation, we will be strategic and patient in the integration of the two businesses.

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We also continue to be focused on and pleased with the progress of our two large technology initiatives designed to transform the company in terms of overall capabilities and competitive positioning. These initiatives are the rollout of our new CRM system and a corporate-wide ERP system. As we have discussed, we continue to be focused on making long-term investments in our business, designed to accelerate growth and profitability, as well as ensure we are providing industry-leading services for years to come. Just as a reminder, up until the second quarter of this year, we had reconciled the impact of these initiatives in addition to our largely completed brand transformation out of our operating results, so investors could get a better perspective of our performance, excluding these cost related to these large transformational projects.

Based on new guidance provided by the SEC regarding non-GAAP financial measures and the comment from the SEC in a recent SEC comment letter, we modified our disclosure and are no longer providing adjusted operating results, excluding these costs. We will however continue to provide disclosure and quantification of these initiative costs, so investors can clearly understand the impact that they are having on our overall results and profitability. In addition, we will also be disclosing any significant direct cost that we incurred or will be incurring related to the closing and integration of the Clean acquisition. To further assist investors in understanding trends in our operating results, we have also begun this quarter to disclose EBITDA by segment.

We believe this is especially valuable as we move forward, due to the increase in non-cash intangibles amortization that we will be incurring as a result of the Clean acquisition. With respect to our CRM systems project, we are making good progress deploying our new system in line with our internal schedule. As of today, we continue to be on track with having nearly a 100% of our US Core Laundry locations deployed by the end of fiscal 2023. Over the remainder of fiscal 2023, we will also continue to be focused on the global design phase of our ERP project. The implementation of our new Oracle Cloud system will be a multi-year initiative designed to transform our overall supply chain and procurement capabilities as well as provide an overall technological foundation for growth and efficiency.

Overall, we continue to be excited about how these investments will position the company for future success. We also maintain — remain very focused in the near term on doing all we can to manage the margin and cost challenges that we have been experiencing. With that, I’d like to call — turn the call over to Shane who will provide more details on our third quarter results.

Shane O’Connor: Thanks, Steve. In our third quarter of 2023, consolidated revenues were $576.7 million, up 12.7% from $511.5 million a year ago and consolidated operating income decreased to $33.4 million from $33.7 million or 0.9%. Net income for the quarter decreased to $24.3 million or $1.29 per diluted share from $25.1 million or $1.33 per diluted share. As Steve discussed, due to the increase in non-cash intangibles amortization that we will be incurring as a result of the Clean Uniform acquisition, we will begin including EBITDA in the discussion of our financial performance. Consolidated EBITDA increased to $64 million, compared to $60.3 million in the prior year or 6.3%. Our financial results in the third quarters of fiscal 2023 and 2022 included approximately $8.4 million and $11.4 million, respectively, of costs directly attributable to our three key initiatives the CRM, ERP, and branding initiatives.

In addition, we incurred costs related to the acquisition of Clean Uniform during the third quarter of fiscal 2023 of approximately $0.7 million. The effect of these items on the third quarter of fiscal 2023 and 2022 combined to decrease operating income and EBITDA by $9.1 million and $11.4 million respectively. Net income by $6.8 million and $8.4 million respectively and EPS by $0.37 and $0.44 respectively. Our Core Laundry operations revenues for the quarter were $501.7 million, up 11.5% from the third quarter of 2022. Core Laundry organic growth, which adjusts for the estimated effect of acquisitions as well as fluctuations in the Canadian dollar was 7.8%. The strong organic growth rate was primarily the result of strong pricing efforts over the last year to share with our customers the cost increases that we have incurred in our business due to the ongoing inflationary environment as well as continued solid sales performance.

Core Laundry operating margin decreased to 4.2% for the quarter or $21 million from 5.9% in prior year or $26.4 million. And the segment’s EBITDA margin decreased to 9.9% from 11.4%. Cost we incurred related to our key initiatives and the Clean acquisition were recorded to the Core Laundry Operations segment and combined to decrease the Core Laundry operating and EBITDA margins for the third quarter of fiscal 2023 and 2022 by 1.8% and 2.2% respectively. Excluding these items, the segment’s operating and EBITDA margins were also impacted by high health care claims expense, which exceeded prior year by approximately $4 million and costs we incurred in the quarter related to a legal matter of approximately $1.3 million. In addition, margins continue to be pressured by higher merchandise and other operating costs as a percentage of revenues, which are being impacted by the inflationary environment.

The preliminary purchase accounting for the recent Clean Uniform acquisition further impacted the segment’s operating margin, most notably in the form of elevated noncash intangibles amortization. Partially offsetting these headwinds were lower energy costs during the quarter, which decreased to 4.3% of revenues in the third quarter of 2023, down from 5.2% in 2022. The previously announced acquisition of Clean Uniform, which closed on March 13th, 2023, contributed to the Core Laundry Operations operating results for the quarter approximately $20 million of revenue, a nominal operating loss and approximately $3 million to the segment’s EBITDA. Revenues from our Specialty Garments segment, which delivers specialized nuclear decontamination and cleanroom products and services, increased to $49.4 million from $41.2 million in the prior year or 19.9%.

This increase was primarily due to strong growth in our cleanroom operations and increased project work in our North American nuclear operations. Segment’s operating margin increased to 25.2% from 17.4% primarily the result of its strong top line performance. Segment’s operating performance from both a top line and profitability perspective was very strong and exceeded our expectations. Our First Aid segment’s revenues increased to $25.5 million from $20.3 million in prior year or 25.8%. However, the segment had an operating loss of $0.1 million during the quarter. These results continue to reflect our investment in expanding the First Aid van business and building a foundation for what we expect to eventually be a much larger business. At the end of our third 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 $69.3 million.

We did not repurchase any additional common stock under our current stock repurchase program during the quarter. Cash provided by operating activities for the first three quarters of the year increased to $142.8 million compared to $88.8 million in the prior year primarily due to lower working capital needs of the business. We continue to invest in our future with capital expenditures during this period of $124.1 million and the acquisition of five businesses for which we paid $306.2 million. The most significant being the Clean Uniform acquisition for a purchase price of $300 million. We now believe that our capital expenditures for the year will be between $155 million and $160 million due to a number of large facility projects we have been advancing throughout the year.

I’d like to take this opportunity to provide an update on our outlook. At this time, we expect our full year consolidated revenues will be between $2.22 billion and $2.23 billion primarily as a result of the strong top line performance in the Specialty Garments business. We continue to expect diluted earnings per share to be between $5.02 and $5.37, which currently reflects reduced Core Laundry Operations operating and EBITDA margins at the midpoint of the range of 4.7% and 10.5% respectively. Resulting from more modest revenue expectations for the remainder of the year and the impact of the cost pressures we continue to experience in our current quarter. The impact of the strong profitability in the Specialty Garments business in the current quarter as well as improved expectations for the remainder of the year and an estimate of $37 million of costs directly attributable to our key initiatives and $3 million of Clean related acquisition costs, which combined to decrease the Core Laundry Operations operating and EBITDA margin assumptions by 2.1% and EPS by $1.60.

Our revised guidance now assumes an effective tax rate for fiscal 2023 of 25.75% and does not assume any future share buybacks or unexpected significantly adverse economic developments. This concludes our prepared remarks and we would now be happy to answer any questions that you might have.

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Q&A Session

Operator: [Operator Instructions] Our first question is coming from the line of Andy Wittmann with Baird. Please go ahead.

Andrew Wittmann: Yeah. Great. Thanks for taking my questions. Good morning, guys.

Steven Sintros: Good morning.

Andrew Wittmann: I guess I just want to dig into the margins a little bit more here. That’s a really big step-up for the quarter on healthcare, $4 million is not insignificant. It sounds like it’s more just I mean you’re self-insured up to a pretty high level. So when things episodic things happen, you have to bear that cost in the period. Is there anything related to the plan here, Steve, that has changed that you would expect that the healthcare costs would remain high like this? Or really, is this just unfortunate circumstances that arose during the quarter?

Steven Sintros: Yes. I would say it’s really unfortunate circumstances. When you look at just the last couple of years, healthcare costs declined during the pandemic. There was some bounce back after that. And then we really over the last to six to eight quarters sort of seen a flattening of the healthcare costs pretty predictable. This quarter driven primarily by one claim that was over a couple of million dollars, which was, to be honest, the largest claim we’ve seen in the last, well, maybe ever, so it was really to answer your question, we think, extraordinary circumstances. And there’s nothing in the trends we’ve seen up until this point or in the plan changes or anything like that, that would indicate a step-up.

Andrew Wittmann: Got it. Okay. So I mean so I guess the other way of kind of digging into the margins here is if you think about the benefit that you had from fuel kind of offsets the same amount that you had penalizing, I guess, on the healthcare. So the margins were down a decent amount year-over-year. So you talked about kind of other items. You mentioned merchandise I guess maybe if you could just give a little bit more commentary on other things in the P&L and maybe their magnitude. I always ask about labor and merchandise in particular, but maybe if you could talk about those. And any other factors that you think might be worth calling out inside the P&L.

Shane O’Connor: Sure. Yes, I can give some additional commentary on that. Aside from to your point, the two items that we called out, the health and the legal matter largely offset by the benefit that we were seeing in energy year-over-year. The largest item outside of that impacting our margins are the item that we’ve sort of been talking about for a number of quarters and that would be our merchandise expense. In the quarter, we saw that about a point of headwind related to merchandise. Clean and their profitability, I had mentioned the fact that there was a nominal loss related to their operating results in our operating income was about 30 basis points as well. Outside of that, right, like there were just a number of areas that we saw some cost headwinds as a percentage of revenues across a number of different payroll areas, obviously, the effect of the challenging wage environment over the last year.

And then inflation also impacting some of those other — or other cost areas, probably most notably in the costs that we’re incurring related to the running of our processing facilities. So those really are the most significant items that are impacting the margin in the quarter.