Unifirst Corporation

Greetings and welcome to the UniFirst Corp fourth quarter earnings conference call. During the presentation, all participants will be in a listen-only mode. Later, 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 the operator, please press star 0. It is now my pleasure 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. I'd like to welcome you to Uniforce Corporation's conference call to review our fourth 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 10-K and 10-Q filings with the Securities and Exchange Commission. We are very excited to be announcing today that we have officially reached another major milestone as a company, as we reported just over $2 billion in annual revenues for our fiscal 2022. UniFirst has come a long way from our humble beginnings back in 1936, operating out of a single location in Boston, Massachusetts, and we continue to be very excited about our future. 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. They are the engine that makes Unifirst go, and they deserve all the credit for our ability to be celebrating this milestone today. During the quarter, as always, our team focused on providing industry-leading service to our customers, as well as selling prospective customers on the value that Unifirst can bring to their businesses. Our fourth quarter results reflect a strong top-line performance that allowed us to hit that $2 billion mark. with consolidated revenues growing 11%. We are pleased with the execution of our team, which delivered solid performances in both new account sales as well as customer retention in fiscal 22. Continuing the trend from prior quarters, the strong revenue growth also reflects the impact of price adjustments from throughout the year as we continue to work with our customers to share in cost increases related to the inflationary environment. As we discussed in prior calls, we 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 new CRM system, a corporate-wide ERP system, and investments in the universe brand. As we have talked about over the last few years, we continue to be focused on making good investments in our people, our infrastructure, and our technologies. With respect to our CRM systems project, we are making good progress deploying our new system in line with our internal schedules. As of our fiscal year end, over 50% of our U.S. laundry locations have been deployed, and we expect the remaining U.S. locations to be deployed by the end of fiscal 23. The deployment of our smaller Canadian and cleanroom operations will carry into fiscal 24. During fiscal 23, we will also be focused on the global design phase of our ERP initiative. Our new Oracle Cloud ERP system project 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 discussed on prior earnings call, during fiscal 22, we officially launched our new brand through a series of national TV ads featuring real Unifirst customers and employees. 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 extend into fiscal 23, the larger one-time expenditures are mostly behind us. 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 results adjusted for the direct impact of these costs related to these investments. Similar to our message last quarter, our adjusted profitability continues to be challenged by the broad impact that the inflationary environment is having on many of our costs, as well as the challenging labor environment. The largest item impacting our margins compared to the prior year is higher merchandise amortization that is being influenced both by the inflationary effect on the cost of our products, as well as higher levels of merchandise being put in service with our customers. These higher levels are partially being driven by a number of growth-related factors, including a pickup in activity in our energy-dependent markets, solid new account sales, elevated wearer additions at our customers, as well as certain national account investments. As we look ahead into fiscal 23, we'll be watching the dynamic market environment closely. Although there have been some signs that the higher interest rate environment will slow overall economic demand and hopefully moderate costs, we have yet to see any significant change in our business. As a result, we are not assuming any change to the current economic conditions in our forecast. Shane will provide further details shortly, but in summary, our outlook for fiscal 23 reflects solid continued momentum on the top line in a similar operating margin as fiscal 22. Despite the challenges in the overall operating environment, we continue to manage through these obstacles and execute against our plans. We will continue to manage costs in areas we can control while assuring we don't impact the ability to execute on our transformational initiatives or adversely affect our customer service levels. As always, we maintain a sharp focus on taking care of our employees, our customers, and bringing new customers to the Unifers family. And while we are confident that we will ultimately be able to improve our operating margins back to more historical levels and beyond, We also firmly believe that building a stronger company for the future will take a certain level of time and investment. And with that, I would like to turn the call over to Shane, who will provide the details of our results for the fourth quarter and our outlook for fiscal 2023. Thanks, Steve.

Consolidated revenues in our fourth quarter of 2022 were $516.4 million, an increase of 11% from $465.3 million a year ago. and consolidated operating income decreased to $33.3 million from $44.9 million, or 26%. Net income for the quarter decreased to $26.2 million, or $1.39 per diluted share, from $34.6 million, or $1.82 per diluted share. Our financial results in the fourth quarter of fiscal 2022 included $9.1 million of costs directly attributable to our three key initiatives that Steve discussed. Excluding these initiative costs, adjusted operating income was $42.3 million, adjusted net income was $33.7 million, and adjusted diluted earnings per share was $1.79. Although our financial results in the prior year may have included direct costs related to these key initiatives, The company did not specifically track the amounts that were being expensed. This was because the amount was less significant in value and a number of costs were still being capitalized. As a result, similar to previous quarters this fiscal year, we will not be providing adjusted amounts for the prior year comparable periods. Our core laundry operations revenues for the quarter were $458.6 million, an increase of 10.5% from the fourth quarter of 2021. Core Laundry organic growth, which adjusts for the estimated effect of acquisitions as well as fluctuations in the Canadian dollar, was 9.9%. Our organic growth rates continue to benefit from solid sales performance and improved customer retention in fiscal 2022, as well as efforts to share with our customers the inflationary cost increases that we have been experiencing in our business. Core laundry operating margin decreased to 6.3% for the quarter, or $29 million, from 10.1% in prior year, or $41.8 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 8.3%. As Steve discussed, merchandise amortization continues to be the most significant item impacting our adjusted operating margin in the quarter. In addition, our operating results were also impacted by higher energy costs as a percentage of revenues, as well as increased input and labor costs due to the current inflationary environment. These cost increases were partially offset by lower healthcare and payroll-related costs as a percentage of revenues. Energy costs increased to 5.3% of revenues in the fourth quarter of 2022, up from 4.2% a year ago. Revenues from our specialty garment segment, which delivers specialized nuclear decontamination and cleanroom products and services, were $36.7 million for the fourth quarter of fiscal 2022, an increase of 8.3% over 2021. Segment's top-line growth was primarily driven by its cleanroom operations. Segment's operating income during the quarter was $4 million, relatively consistent with prior year. As we've mentioned in the past, this segment's results can vary significantly from period to period due to seasonality as well as the timing and profitability of nuclear reactor outages and projects. Our first aid segment's revenues in the fourth quarter of 2022 increased to $21.2 million from $16.3 million, with both the wholesale and van operations contributing to this growth. However, the segment's operating income was nominal during the quarter due to our continued investment in the segment's van 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 $376.4 million at the end of fiscal 2022. Cash provided by operating activities for the year was $122.6 million, a decrease of $89.7 million from the prior year. This decrease was primarily due to reduced profitability, including the impact of our key initiative costs, as well as heavier than normal working capital needs of the business. In fiscal 2022, we continue to invest in our future, capital expenditures totaling $144.3 million, and the acquisition of 13 businesses for which we paid a total of $44.2 million. During the fourth quarter of fiscal 2022, we repurchased 47,775 shares of common stock for $8 million under our previously announced stock repurchase program, and also repurchased 35,714 shares of Class B common stock for $6 million in a privately negotiated transaction. I'd like to take this opportunity to provide our outlook for fiscal 2023. At this time, we anticipate our full year revenues will be between $2.145 billion and $2.16 billion. This top line guidance assumes core laundry revenue growth at the midpoint of the range is 7.7% and organic growth to be 8.3%. For fiscal 2023, we further expect that our diluted earnings per share will be between $5.50 and $5.90. This guidance includes $40 million of costs that we expect to incur in the fiscal year directly attributable to our three key initiatives. Excluding these transitionary investment costs, our core laundry operations adjusted operating margin assumption at the midpoint of the range is 8.1%. This adjusted operating margin reflects continued pressure from the current inflationary environment higher levels of merchandise amortization, elevated energy costs, indirect costs we are incurring related to our key initiatives, as well as additional investments we are making in strengthening our overall capabilities. Based on the current energy prices, we are modeling that energy costs will be 4.7% of revenues in fiscal 2023 compared to 4.9% in 2022. Next year's effective tax rate is assumed to be 25%. Our specialty garments revenues are forecast to be relatively flat compared to 2022. However, the segment's operating income is expected to be down approximately 5%, primarily due to the timing and relative profitability of its planned outages and project work. Our first aid segment's revenues are expected to be up approximately 18% compared to 2022. However, this segment's profitability is once again expected to be relatively marginal in 2023 as a result of the investments we continue to make in building out the infrastructure to support a national geographic footprint for our grant operations. We expect that our capital expenditures in 2023 will approximate $140 million and our guidance assumes our current level of outstanding common shares and no deterioration in the current economic environment. This concludes our prepared remarks and we would now be happy to answer any questions that you might have.