UniFirst Corp

NYSE:UNF

Earnings Call Transcript 2023-Q1

[Operator]

Greetings, and welcome to the UniFirst Corp. First Quarter Earnings Call. During the presentation, all participants will be in a listen-only mode after which we'll conduct a question-and-answer session. [Operator Instructions]

I would now like to turn the conference over to Steven Sintros, UniFirst President and Chief Executive Officer. Please go ahead.

[Steven Sintros, President and CEO]

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. I'd like to welcome you to UniFirst Corporation's conference call to review our first 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.

Overall, our results for the first quarter came in largely as anticipated, and I continue to be pleased with the steady progress of our key technology and infrastructure initiatives. 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. I want to thank our thousands of dedicated team partners to continue to always deliver for each other and our customers.

Consolidated revenues in the first quarter grew 11.4% and adjusted earnings per share grew 10.5%. Shane will provide the details of our first quarter results shortly as well as comment on our outlook for the full fiscal year, which remains unchanged from our year-end earnings call. We are pleased with the execution of our team, which continue to deliver solid performances in both new account sales as well as customer retention.

Continuing the trend from prior quarters, the strong revenue growth in the quarter also reflects the impact of price adjustments from throughout 2022 as we have worked with our customers to share and cost increases we have experienced related to the inflationary environment.

As we have discussed in prior calls, we will continue to be focused on three large initiatives designed to transform the Company in terms of our overall capabilities and competitive positioning. These initiatives are the rollout of our CRM system, a corporate-wide ERP system and investments in the UniFirst brand.

With respect to our CRM systems project, we are making good progress deploying our new system in line with our internal schedule. As we communicated during the last earnings call, we have deployed over 50% of our U.S. Core Laundry locations, and we expect the remaining U.S. locations to be deployed by the end of fiscal 2023. The deployment of our smaller Canadian and cleanroom operations will carry over into fiscal 2024.

During fiscal 2023, we will be focused on -- we will also be focused on the global design phase of our ERP project. The implementation of our new Oracle Cloud ERP system will be a multiyear initiative designed to transform our supply chain and procurement capabilities as well as provide an overall technology foundation for growth and efficiency.

And finally, as we also discussed on prior earnings calls, during fiscal '22, we officially launched our new brand through a series of national TV ads. Our message focuses on serving people who always deliver for their companies, their customers and their families. At UniFirst, our ongoing focus will be to always deliver for them. Although some costs related to this brand transformation will be expended in fiscal '23, the larger one-time expenditures are mostly behind us.

All of our investments are designed to deliver solid long-term returns for UniFirst stakeholders and are integral components of our primary long-term objective to be universally recognized as the best service provider in our industry. We continue to report results adjusted for the impact of direct costs related to these investments.

As we continue through fiscal 2023, we'll be watching the dynamic market conditions closely. During the quarter, we did not see a significant change to the operating environment and where levels that our customers have been stable. When and what impact higher interest rates will have on our customer base and the overall market remain to be seen. Over the years, our business has proved resilient in many different economic cycles and regardless of what the next cycle brings, we are confident in our ability to execute against our plan.

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'll maintain a sharp focus on taking care of our employees, our customers and bringing new customers into the UniFirst family.

And with that, I'd like to turn the call over to Shane, who will provide more details on our first quarter results.

[Shane O'Connor, EVP and CFO]

Thanks, Steve. In our first quarter of 2023, consolidated revenues were $541.8 million, up 11.4% from $486.2 million a year ago, and consolidated operating income decreased to $43.4 million from $44.8 million or 3.1%. Net income for the quarter increased to $34 million or $1.81 per diluted share from $33.7 million or $1.77 per diluted share. Our financial results in the first quarters of fiscal 2023 and 2022 included approximately $10 million and $5.9 million, respectively, of costs directly attributable to the three key initiatives that Steve discussed.

Excluding these initiative costs, adjusted operating income increased to $53.5 million compared to $50.7 million in prior year or 5.4%. Adjusted net income increased to $41.5 million from $38.1 million, and adjusted diluted earnings per share increased to $2.21 from $2 or 10.5%.

Our Core Laundry Operations revenues for the quarter were $477.4 million, up 11.3% from the first quarter of 2022. Core Laundry organic growth, which adjusts for the estimated effect of acquisitions as well as fluctuations in the Canadian dollar, was 10.7%. This strong organic growth rate was primarily the result of solid sales performance and customer retention as well as efforts over the last year to share with our customers cost increases that we have incurred in our business due to the ongoing inflationary environment.

Core Laundry operating margin decreased to 7.1% for the quarter or $33.8 million from 8.5% in prior year or $36.5 million. The costs we incurred related to our key initiatives were recorded to the Core Laundry Operations segment. And excluding these costs, the segment's adjusted operating margin decreased to 9.2% from 9.9% in prior year.

The largest item impacting our adjusted operating margin compared to prior year continues to be merchandise amortization, resulting from the inflationary effect on the cost of our products as well as higher levels of merchandise put in service with our customers in 2022 to support solid new account sales, increased activity in our energy-dependent markets, elevated wearer additions at our customers as well as certain national account investments.

Energy costs also increased to 4.7% of revenues in the first quarter of 2023, up from 4.3% in 2022. Partially offsetting these headwinds was lower health care claims expense in the quarter compared to prior year.

Revenues from our Specialty Garments segment, which delivers specialized nuclear decontamination and cleanroom products and services, increased to $44.1 million from $39.5 million in prior year or 11.6%. This increase was primarily due to strong growth in our cleanroom operations as well as increased project work in our North American nuclear operations.

The segment's operating margin increased to 23.1% from 21.9%, primarily the result of its strong top line performance. As we've mentioned in the past, this segment's results can vary significantly from period to period due to seasonality and the timing of nuclear reactor outages and projects that require our specialized services.

Our First Aid segment's revenues increased to $20.3 million from $17.8 million in prior year or 13.9%. However, the segment had an operating loss of $0.6 million during the quarter. These results reflect our continued investment in expanding our First Aid van business and building out the infrastructure necessary to eventually support a much larger business.

We continue to maintain a solid balance sheet and financial position with no long-term debt and cash, cash equivalents and short-term investments totaling $351.2 million at the end of our first quarter of fiscal 2023. We did not repurchase any additional common stock under our current stock repurchase program during the quarter.

Cash provided by operating activities for the quarter increased to $27.7 million compared to $7.8 million in prior year, primarily due to lower working capital needs of the business. We continue to invest in our future with capital expenditures in the quarter totaling $39 million and the acquisition of two businesses for which we paid $6.6 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 revenues for fiscal 2023 will be between $2.145 billion and $2.160 billion. We further continue to expect diluted earnings per share will be between $5.50 and $5.90. This outlook also continues to assume an estimate of $40 million of costs directly attributable to our key initiatives that will be expensed in fiscal 2023.

Core Laundry Operations adjusted operating margin at the midpoint of the range of 8.1%, a GAAP and adjusted tax rate of 25% and adjusted diluted earnings per share between $7.10 and $7.50, as well as no impact from 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. Operator, we can open the line for questions.

[Operator]

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

[Andy Wittmann, Baird]

Great. I just thought I would start with a question on your outlook. The organic growth in the core segment was 10.7%. Good, I'd say, a pretty good result there. But the implied revenue guidance for the rest of the year suggests total growth of like 5.8% to 6.8% for the rest of the year. So pretty market deceleration. I totally understand that this is just the first quarter, but I'm just curious as to why there wasn't a guidance raised because that level of deceleration is a little bit surprising. So hoping you can provide a little bit of detail as to the thought process behind that.

[Steven Sintros, President and CEO]

Yes, Andy, it's a good question. I think when you look at next year and you look at the trajectory of our revenues and what happened in 2022 with the heavy inflation, some of which we're still obviously experiencing. We were obviously working with our customers as we've been talking about to try to offset some of the inflationary impact of all the things we've been talking about that have impacted the business.

We don't expect that to be as significant as we annualize some of that activity that happened in the latter half of 2022. And so therefore, when you look at the result of our first quarter, we made the comment that it was mostly as expected. That was really the case from a top line perspective as well. So, I think that deceleration is something that we anticipate and is largely the result of some of those pricing activities, including some specifically related to the energy prices.

[Andy Wittmann, Baird]

Got it. So energy prices, maybe there's fuel surcharges or other things that might go away with prices coming down. Are there other things on the cost structure? I mean, obviously, you talked a lot about merchandise, not just this quarter for the last several quarters, talked about labor. Are there -- are you seeing moderating trends in those other key categories that would, I guess, support lower price adjustments for the balance of '23 than you've had over the last year or so?

[Steven Sintros, President and CEO]

Yes, I think when you look at the inflationary environment you've hit on a couple of the larger areas, sort of labor and energy. I would say the environment is still challenging from a cost perspective, but we are seeing some moderation. And you can see it in the cost of, say, gasoline.

Some other aspects of energy are still dynamic, like natural gas was still pretty high during the quarter. Electricity has remained high. We're probably not seeing things accelerate the way they were during 2022, but there are many things we're also not seeing retreat and some -- many remain high.

So, we're cautiously optimistic that the balance of '23 will be less dynamic than '22 from a cost increase perspective. But there's still pockets of challenging and labor still one of the larger ones, although we're seeing some, I'd say, minor improvements in that area in terms of labor availability, the cost of labor remains high.

[Operator]

Thank you. And our next question is from the line of Andrew Steinerman with JPMorgan. Please go ahead. Your line is open.

[Andrew Steinerman, JP Morgan]

Would you be willing to share with us how much kind of in basis points in percentage terms? Merchandise amortization was a drag to the core margins in the first quarter. How much you're suggesting merchandise amortization will affect the full year?

[Shane O'Connor, EVP and CFO]

Yes, absolutely. Sort of at the end of last year, I had indicated that the merchandise headwind for the year was going to approximate about a point. I still believe that that's the case. And in the first quarter, the headwind that we saw from merchandise amortization was about a point. So, we expect that, that headwind is going to continue throughout the year.

[Andrew Steinerman, JP Morgan]

Great. And could you also tell us what you're penciling in for energy as a percentage of revenues for the year?

[Shane O'Connor, EVP and CFO]

Yes. So for the year, my energy expectation is 4.5%.

[Operator]

Thank you. [Operator Instructions] And at this moment, I'm showing no further questions.

[Steven Sintros, President and CEO]

Okay. I'd like to thank everyone for joining us to review our first quarter fiscal 2023. We look forward to speaking with everyone again in March when we expect to report our second quarter performance as well as the outlook for the remainder of fiscal 2023. Thank you, and have a great day.

[Operator]

Thank you. Ladies and gentlemen, that does conclude today's call. We thank you for your participation and ask that you please disconnect your lines, and have a good day.