Unifirst Corporation

Greetings and welcome to the UniFirst Corporation Second Quarters Earnings Conference Call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. At that time, if you have a question, please press the 1 followed by the 4 on your telephone. If at any time during the conference you need to reach an operator, please press star 0. I would now like to turn the conference over to Stephen Cintros. President and Chief Executive Officer. Please go ahead.

Thank you and good morning. I'm Stephen Cintros, Uniforce President and Chief Executive Officer. Joining me today is Shane O'Connor, Executive Vice President and Chief Financial Officer. We would like to welcome you to Uniforce Corporation's conference call to review our second quarter results for fiscal year 2022. 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. During the quarter, as always, our team continued to focus on providing industry-leading service to our customers, as well as selling prospective customers on the value that Uniforce can bring to their businesses. I want to thank our thousands of team partners who, in the face of a challenging operating environment, continue to always deliver for each other and our customers. Overall, our second quarter results reflect a strong top-line performance with consolidated revenues growing 8.2%. The team continues to execute well, producing solid performances in both new account sales as well as customer retention so far this year. In addition, wearer additions versus reductions year-to-date are positive, indicating the continued growth and recovery of our customer base. The strong year-over-year growth in the quarter was also impacted by adjustments to customer pricing as we continue to work with our customers through this inflationary environment. As a reminder, we discussed during our year-end earnings call that going forward over the next few years, we're going to be focused on three discrete strategic initiatives that are critical in our efforts to transform the company in terms of our overall capabilities and competitive positioning. These initiatives are the rollout of our new CRM system, investments in the universe brand, and a corporate-wide ERP system with a strong focus on supply chain and procurement automation and technology. As we have talked about over the last year or two, we continue to be focused on making good investments in our people, our infrastructure, and our technologies. All of our investments are designed to deliver solid long-term returns for universe 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 adjusted results for the direct impact related to these investments. Speaking of these key initiatives, we are excited to report that during March, we officially launched our new brand through a series of ads in the NCAA March Madness Tournament, featuring real Uniforce customers and employees. We are very excited to rally our company around our new master brand message. a message that focuses on serving people who always deliver for their companies, their customers, and their families. At UniFirst, our focus will continue to be to always deliver for them. What makes this message exciting for us is we feel it is genuine to our culture and purpose as it was developed through extensive research and feedback from our employees and customers. We are very much looking forward to delivering on this promise. With respect to our CRM systems project, we continue to make good progress deploying our new system in line with our internal schedule. Assuming we progress as expected, we will have approximately half of our core laundry locations on the new system by the end of fiscal 2022. After excluding the impact of cost that we are expending on our key initiatives, our diluted earnings per share for the quarter was $1.24. Although our core laundry operating margin was somewhat lower than our internal expectations, the quarter played out mostly as expected. As a reminder, our second quarter is seasonally our lowest margin quarter due to the impact of the holidays as well as the timing of other certain costs. The shortfall in margin compared to our expectations was largely due to the continued impact from the inflationary environment as well as somewhat improved staffing levels as we continue to work through the challenging labor environment. We do expect that increasing cost of labor, raw materials, and energy will continue to have a direct impact on our results as well as translate into higher cost from our vendor partners who are experiencing similar challenges. As I mentioned, we have and will continue to work with our customers to appropriately share in these cost increases as well as work to mitigate them through operational efficiencies. Despite the challenges in the overall operating environment, we continue to be confident in our ability to manage and execute through these obstacles. We maintain a sharp focus of taking care of our employees, our customers, and bringing new customers into the Unifers family. And with that, I would like to turn the call over to Shane, who will provide the details of the results of our second quarter and our outlook for the remainder of fiscal 22.

Thanks, Steve. In our second quarter of 2022, consolidated revenues were $486.7 million of 8.2% from $449.8 million a year ago. and consolidated operating income decreased to $22.6 million from $40.7 million. Net income for the quarter decreased to $18.5 million, or 97 cents per diluted share, from $32.6 million, or $1.71 per diluted share. Our financial results in the second quarter of fiscal 2022 included $6.7 million of costs directly attributable to the three key initiatives that Steve discussed. Excluding these initiative costs, adjusted operating income was $29.4 million, adjusted net income was $23.5 million, and adjusted diluted earnings per share was $1.24. Although our financial results in the prior year may have included direct costs related to these key initiatives, which in our second quarter of 2021 would have primarily been for our CRM initiative, company did not specifically track the amounts that were being expensed. This was because the amount was less significant in value and a large number of the costs were still being capitalized. As a result, we will not be providing adjusted amounts for the prior year comparable period. Our core laundry operations revenues for the quarter were $433.1 million. of 8.7% from the second quarter of 2021. Core Laundry organic growth, which adjusts for the estimated effect of acquisitions as well as fluctuations in the Canadian dollar, was 8%. This strong organic growth rate was primarily the result of customer reopenings in fiscal 2021, solid sales performance, and improved customer retention. as well as efforts to share with our customers the cost increases that we are seeing in our business due to the current inflationary environment. Core laundry operating margin decreased to 4.3% for the quarter, or $18.7 million, from 8.9% in prior year, or $35.4 million. The costs we incurred during the quarter related to our key initiatives were recorded to the core laundry operations segment, and excluding these costs, the segment's adjusted operating margin was 5.9%. The decrease from prior year's operating margin was primarily due to higher merchandise amortization, which continues to normalize from depressed levels during the pandemic, as well as the effect of large national account installations, which are providing additional merchandise amortization headwinds. During the quarter, the adjusted operating margin was also impacted by higher travel and energy costs as a percentage of revenues, as well as wage inflation we continue to experience responding to the very challenging employment environment. Energy costs increased to 4.7% of revenues in the second quarter of 2022, up from 4.2% in the prior year. Revenues from our specialty garment segment, which delivers specialized nuclear decontamination and cleanroom products and services, increased to $35.5 million from $35.2 million in prior year, or 0.9%. This increase was primarily due to growth in our cleanroom and European nuclear operations, which was partially offset by higher direct sale activity in the prior year. Segment's operating margin decreased to 10.8% from 14.9%, primarily due to higher gross margin on its prior year direct sales, as well as higher labor costs as a percentage of revenues. 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 segments revenues increased to $18.1 million from $16.3 million in the prior year, or 11%, primarily due to strong growth in the first aid van business. However, the segments operating income was nominal during the quarter, primarily due to continued investment in the company's initiative to expand its first aid van business into new geographies. 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 $425.9 million at the end of our second quarter of fiscal 2022. In the first half of 2022, cash provided by operating activities was impacted by our reduced profitability, including the impact of initiative costs, as well as heavier than normal working capital needs of the business. Contributing to these higher working capital needs were elevated accounts receivable balances, as well as supply inventory, primarily due to ongoing supply chain disruption. In addition, rental merchandise and service has increased as our balance sheet position continues to normalize coming out of the pandemic impacted period. In 2022, we also paid an additional $12.2 million in FICA payments that we were able to defer from prior years as part of the CARES Act. For the first half of fiscal 2022, we continued to invest in our future with capital expenditures totaling $60.2 million and the acquisition of eight businesses for which we paid $42.3 million. During the second quarter of fiscal 2022, we also purchased 52,500 common shares for a total of $10 million under our previously announced stock repurchase program. I'd like to take this opportunity to provide an update on our outlook. At this time, we now expect revenues for fiscal 2022 will be between 1.967 billion and 1.980 billion. We further expect that our diluted earnings per share for fiscal 2022 will now be between $5.62 and $5.82. This earnings per share guidance assumes an effective tax rate of 24% and includes a revised estimate of $30 million worth of costs directly attributable to our key initiatives that will be expensed during the year. Please also note the following assumptions regarding our fiscal 2022 guidance. Core Laundry Operations adjusted operating margin at the midpoint of the range is now 8.6% and implies an adjusted operating margin over the second half of our fiscal year of 9.4%. This revised outlook reflects continued pressure from the current inflationary environment, including the recent surge in energy prices. Our adjusted tax rate for fiscal 2022 is 24.2%. The adjusted diluted earnings per share is expected to be between $6.80 and $7. Guidance does not include the impact of any future share buybacks or potential tax reform, and guidance assumes a stable economic environment with no pandemic-related headwinds. This concludes our prepared remarks, and we would now be happy to answer any questions that you might have.