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spk01: Greetings and welcome to the Uniforce Corp second quarter earnings call. During the presentation, all participants will be in the 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 the President and CEO, Mr. Stephen Sintraus. Please go ahead.
spk03: 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 2023. The 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 our 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, which was partially fueled by our ongoing efforts to mitigate the cost pressures that we've been experiencing in our business. As always, I want to thank our over 14,000 team partners who continue to always deliver for each other and our customers. We are also pleased with the progress we are making advancing our technology and infrastructure initiatives. 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. Consistent with the theme of making long-term investments, I am happy to announce that on March 13th, we successfully closed our previously announced purchase of Clean Uniform and officially welcomed the Clean team and their customers into the Unifirst family. Founded in 1938, And headquartered in St. Louis, Missouri, Clean is one of the largest independent uniformed workwear and facility service program providers in the United States with locations servicing Missouri, Illinois, Arkansas, Kansas, and Oklahoma. Over the years, Clean has built a highly respected business with a market-leading reputation for quality service with a strong customer focus. We believe that the combination of the two companies will provide a foundation for us to deliver an enhanced service experience for all customers in the markets that we serve together. Due to the strong leadership and service reputation that Clean brings with it, as well as the complexities of where we are in our technology transformation, we will be strategic and patient in the integration of the two businesses to minimize the impact and risks on Clean's most valuable assets, its employees and its customers. Currently, the Clean business is operating at an EBITDA margin of approximately 10%. We believe that over the next two to three years, we will be able to more than double that performance as we bring the companies together. Shane will provide more details shortly regarding the impact we expect CLEAN to have on our fiscal 2023 operating results shortly. As we've discussed in prior calls, we continue to be focused on three large initiatives designed to transform the company in terms of 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. The last several quarters, we have reconciled the impact of these initiatives out of our operating results so that investors could get a better perspective of our performance, excluding these costs related to these transformational projects. Based on new guidance provided by the Securities and Exchange Commission regarding non-GAAP financial measures and a comment from the SEC in a recent SEC comment letter, We are going to be modifying our disclosure going forward and no longer providing adjusted operating results excluding these costs. We will, however, generally 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. 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 have deployed approximately 75% 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 24. Over the remainder of fiscal 23, we will also continue to be focused on the global design phase of our ERP project. The implementation of our new Oracle Cloud ERP 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. All of our investments are designed to deliver solid long-term returns for Unifor stakeholders and are integral components of our primary long-term objective to be universally recognized as the best service provider in our industry. As we continue to go through fiscal 2023, we will be watching the dynamic market conditions closely. During the quarter, we did not see a significant change to the operating environment and where our levels at 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 plans. 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 years, the strong revenue growth also reflects the impact of price adjustments from throughout the year as we have worked with customers to share in cost increases we have experienced related to the inflationary environment. We will continue to manage costs in areas we can control while assuring that 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 universe family. With that, I'll turn the call over to Shane, who will provide more details on our second quarter results.
spk06: Thanks, Dave. In our second quarter of 2023, consolidated revenues were $542.7 million. up 11.5% from $486.7 million a year ago, and consolidated operating income decreased to $20.7 million from $22.6 million, or 8.4%. Net income for the quarter decreased to $17.8 million, or 95 cents per diluted share, from $18.5 million, or 97 cents per diluted share. Our financial results in the second quarters of fiscal 2023 and 2022 included approximately $9.1 million and $6.7 million, respectively, of cost directly attributable to the three key initiatives that Steve discussed. In addition, we incurred costs related to the acquisition of clean uniform during the second quarter of fiscal 2023 of approximately $2 million. The effect of these items on the second quarters of fiscal 2023 and 2022 combined to decrease operating income by $11.1 million and $6.7 million, respectively, net income by $8.3 million and $5.1 million, respectively, and EPS by 44 cents and 27 cents, respectively. Our core laundry operations revenues for the quarter were $477.1 million, up 10.2% from the second quarter of 2022. Core laundry organic growth, which adjusts for the estimated effective acquisitions as well as fluctuations in the Canadian dollar, was 10.1%. This 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 and customer retention. Core laundry operating margin decreased to 2.9% for the quarter, or $13.6 million, from 4.3% in prior year, or $18.7 million. Costs we incurred related to our key initiatives in the clean acquisition were recorded to the core laundry operations segment and combined to decrease the core laundry operating margin for the second quarter of fiscal 2023 and 2022 by 2.3% and 1.6% respectively. Excluding these items, the segment's operating margin continues to be impacted by increasing merchandise costs, 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, partially offsetting these headwinds with lower healthcare and casualty claims expense during the quarter compared to prior year. Energy costs increased to 4.8% of revenues in the second quarter of 2023, up from 4.7% in 2022. Revenues from our specialty garment segment, which delivers specialized nuclear decontamination in cleanroom products and services, increased to $42.1 million from $35.5 million in prior year, or 18.5%. 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 19.1% from 10.8%, primarily the result of its strong top-line performance. The segment's operating performance from both a top-line and profitability perspective was very strong in what is normally a seasonally down quarter and exceeded our expectations. As we 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 $23.5 million from $18.1 million in prior year, or 29.9%, with both the wholesale distribution and van operations contributing to the growth. However, the segment had an operating loss of $1 million during the quarter. These results reflect our continued investment in expanding the first-aid van business and building out the infrastructure necessary to eventually support a much larger business. At the end of our second fiscal quarter, we continued to reflect a solid balance sheet and financial position with no long-term debt and cash-cash equivalents in short-term investments totaling $345.1 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 half of the year increased to $64.2 million compared to $44.9 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 the period of $74.8 million and the acquisition of four businesses for which we paid $7.1 million. As Steve mentioned, on March 13th, we closed on our previously announced purchase of Clean Uniform for an aggregate purchase price of approximately $300 million. This acquisition was financed with our cash reserves and availability under our existing line of credit. As a result of this acquisition, on March 9th, we exercised the accordion feature of our existing credit agreement, which increased the aggregate commitments under the credit agreement by $100 million, resulting in a total commitment of $275 million. Our current assumptions regarding the impact of the CLEAN acquisition on our operating results for the year which will be recorded to the core laundry operations, include an increase in revenues of $42 million, a decrease in operating income of a half a million dollars, which includes 3 million of purchase-related intangible amortization expense, and acquisition-related expenses of $4 million, which includes the 2 million expensed in our second quarter of 2023. I would like to highlight that we have estimated the impact of the purchase price accounting on Clean's operating results using assumptions from due diligence, but we'll need to confirm and update, if necessary, those assumptions as we finalize the purchase accounting process. I'd like to take this opportunity to provide an update on our outlook, which now includes the assumed impact of the Clean acquisition. At this time, we expect our full-year consolidated revenues will be between $2.21 billion and $2.22 billion, and our diluted earnings per share will be between $5.02 and $5.37. This revised guidance also assumes a core laundry operations operating margin at the midpoint of the range of 5.2%. An estimate of $40 million of cost directly attributable to our key initiatives, as well as the $4 million of clean related acquisition costs. These two items combine to decrease the core laundry operations operating margin assumption by 2.2% and EPS by $1.76. Our revised guidance reflects continued pressures impacting our core laundry operations, most notably merchandise costs, which are being partially offset by a stronger than previously expected operating performance during the quarter in our specialty garments business. Our revised guidance further assumes an effective tax rate for fiscal 2023 of 25% 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.
spk01: Thank you. If you would like to register a question, please press the 1-4 on your telephone. You will hear a three-time prompt to acknowledge your request. If your question has been answered and you would like to withdraw your registration, please press the 1 followed by the 3. Once again, to register a question, please press the 1-4 on your telephone keypad. One moment, please, for the first question. Our first question comes from Andrew Steineran with JP Morgan. Please proceed.
spk00: Hi, Shane. I was hoping you could break down the $9.1 million into the three key initiatives in the quarter, and then also give us a sense of what the cost related to the three key initiatives will be in the second half of the year. And if it's okay, I'm just going to give my second question as well. Do you have a sense yet when the Oracle Cloud ERP system will go into deployment, meaning starting deployment?
spk06: Yeah, sure. So I'll start with the breakout of the key initiatives for the quarter as well as the expectations for the remainder of the year. So for the quarter, about two-thirds of those costs really related to the CRM project, most notably the deployment of that system. I think as we've spoken about in the past, Right now, we are deploying that system to our locations, and we have numerous teams that are going and supporting our locations throughout that deployment. When I take a look at the costs that I'm going to incur throughout the remainder of the year, similar assumption on the CRM costs, about two-thirds of the costs for the year will be supporting that deployment as well. Largely, we're going to be The lion's share of the cost related to the deployment will be throughout the remainder of this fiscal year. By the end of the fiscal year, our expectation is that our domestic locations will be largely deployed. Some of those costs will carry into 2024 as we continue to deploy some of our cleanroom and Canadian locations. the majority of the costs related to the CRM deployments will take place in this fiscal year. Right now, when you take a look at the other two initiatives, the majority of that one-third at this point in time is the ERP costs, and again, for the remainder of the year, the remainder of the one-third is ERP as well. My quarterly experience you know, CRM, ERP, and then some residual branding carrying over from last year when we spent the majority of the cost supporting that initiative. My quarterly breakout was very, very similar to what I'm expecting for the full year.
spk03: The only thing I'll add to that, Andrew, is that the branding, Shane mentioned the branding work having some tail of cost into this year. That'll continue to reduce over the next couple of quarters.
spk06: As far as the ERP, the ERP project is still very early on in that project. Right now, we are largely involved in design work, in designing the system and how it's going to interface with other ancillary systems that support our business. That'll be going on throughout the remainder of the year. And coming out of that design work, we'll also be finalizing the timeline and the roadmap for the deployment of the different modules. But we expect that the deployment and the implementation of that system will be over a number of years. So since we haven't finalized that roadmap, and we'll be working the remainder of this year to do that at this point in time, I can't definitively say exactly when that deployment is going to take place. But we do expect that it will be a multi-year project.
spk00: Understood. Thanks for the time. Thank you.
spk01: Our next question comes from Andy Whitman with Baird. Please proceed.
spk05: Yeah, great. Thanks for taking my questions this morning, guys. I guess I wanted to ask about the profit margins. and the revised guidance to make sure that I've got this right. I think you gave us the gap core laundry plus the items. I get that to be on an adjusted base about 7.5%. I think last quarter you guys were saying we're like 7.7% and that was despite, sounded like a little bit better quarter than you expected out of a specialty segment. So I guess the question is, what is the incremental change it's been merchandise costs for the last several quarters and i think and it's reiterated that again this quarter that the merchant a lot of the merchandise costs have been driven by new infusions or redressing whatever happened in 2022 so i would expect all sequel that that those government costs would be close to um being in the annualized base but it seems like there's something else that's changed. So maybe, Steve, could you just talk a little bit about the dynamic of the merchandise costs today and what other factors are leading you to have this revised outlook on your margins today?
spk03: Sure. I'll start, and then Shane can probably jump in as well. With respect to merchandise in particular, again, As you know, following us for a long time, merchandise sort of ebbs and flows in different economic cycles. Certainly during the pandemic, the amount of merchandise we were putting in for a lot of reasons really dipped, and that obviously started to trend back up over the last 18 months or so. We've continued to see a lot of merchandise put in. You're right, it is the factors we talked about. We did have some large infusions last year, but we continue to sell strategic accounts and so on. So there are a number of pieces continuing to influence it. I think the one piece I'll add to that is, and we probably haven't discreetly said this as much, but as we talk about inflation, Inflation is impacting merchandise as well. I think the amount of units we're putting in is mostly in line, but we're still paying more for merchandise. Some of that comes from outside vendors. Some of it comes from internally manufactured. Some of that goes down to the cost of raw materials, which continues to be high, although we do expect with things like cotton and other things starting to moderate that we should start to get some relief on the cost of merchandise As I don't even want to say as the year goes along because as we procure that You know those raw materials that kind of gets through our supply chain Then we got to put the garments in service and amortize them We're probably not going to get the benefit from some of those lower costs until next year. So the combination of The factors we've talked about as well as the cost of merchandise continue to impact us you know as we go and I think Shane can give you a little bit of the breakdown and closing the gap, but the biggest piece, and it's probably about a quarter of a point from our prior expectations, is merchandise, and then there's just a couple other smaller pieces that we're seeing, so I'll let Shane fill in the gaps there.
spk06: Yeah, so when we're talking about our current guidance for the year, yeah, I think that sort of what you articulated, excluding the impact or after the impact of my key initiatives and the transaction-related costs that I'm going to incur, you're sort of spot on there. I think when you take a look at the guidance that we had last year, I was sort of indicating that after the effects of those two items, I was largely in line with last year. Right now, my guidance is about 60, 70 basis points lower than that previous guidance. When I unpack that change, about 20 basis points of that relates to the clean acquisition. Obviously, some of that's being influenced by the purchase accounting assumptions that I had articulated earlier. Even last quarter, I had indicated that my expectation of the headwind related to merchandise on the year was still going to approximate about a point. of headwind on my margin. At this point in time, my assumption is slightly heavier than that, with about 20 to 30 basis points of additional headwind compared to that previous assumption. And then, energy. Based on where energy was, I guess, tracking towards in our assumptions, I thought that we were going to get a slightly larger benefit from my energy comparison than I think now. So that's sort of like a 10 basis point headwind compared to that prior guidance as well. So those three items are really largely explaining that change.
spk05: Okay. I might follow up a little bit more offline to get a little bit more detail on that, but that's helpful discussion. I guess I guess stepping back then and thinking about the fact that the CRM is 75% installed in some of these locations, it's been installed for a while now. I guess, Steve, can you talk about how much benefit to your margins is being harvested already from the systems that are live? And I know that at some of the locations where it is live, it's still kind of being phased in where the old isn't completely gone yet. So I recognize that you're not getting the full benefit of this. But can you just talk about how much benefit, if any, you are getting today? And as you turn the page to the next couple of quarters or maybe even the next fiscal year, when do you expect the benefits to your profit margins are going to ramp more substantially as a result of that investment?
spk03: Yeah, I think when you look at the CRM, you're right. We're still in the midst of it, even though we're through about 75% of the U.S. laundries. There's still a lot of what I'll call learning and change management going on for locations adopting the new system. I think broadly, as we kind of go through that deployment, in fact, in the months, probably up to six months surrounding a deployment, probably not a net advantage because there's a lot of time and training and data conversion and a lot of work that's being done. And so we're seeing it takes location six to nine months to sort of hit their stride, you know, in using the new system. That's not to say there aren't benefits immediately, right? We've talked about enhanced merchandise control. We've talked about time for our route drivers and additional efficiency effectiveness on the routes. Some of that is recognized immediately. Some of those are soft benefits versus hard benefits as well. But we are seeing better merchandise controls resulting in our ability to control garments coming back, making sure we're charging appropriately for garments. And we think that'll continue to advance as we go through the remainder of the year and into next year. And I think, you know, really as the last year and a year and a half has been so focused on deployment, I think, you know, we will kind of go through an optimization phase where, you know, the locations and we learn to sort of optimize the capabilities of the new system. And we think that will happen over the course of the next year or so. So there are a lot of learnings with the new system. Anytime you're coming off a system that you've been on for 30 years, You put in the new system, there's immediately advantages, there's opportunities to improve certain things, and we're still working through some of those things. But, you know, I do think over the next year or so, there'll be optimization there. We can start to see some of that improvement. Again, you know, some of the improvement, I talk about merchandise controls. It may be hard to see because we're still seeing such of a ramp up coming off the depths of the pandemic, and we're seeing the inflationary impact of higher merchandise costs. So, Part of our effort has to continue to be working pricing angles where we can to recover some of that margin. So a lot of moving pieces for sure, but we do feel good about where we are in terms of the deployment of the technology and our ability to optimize it going forward. Okay.
spk05: I'll leave it there, guys.
spk03: Thanks a lot. Thanks, Andy. Thank you.
spk01: Our next question comes from Tim Mulrooney with William Blair. Please proceed.
spk04: Hi, guys. This is Sam Karlovan for TIM. Thanks for taking my questions.
spk03: Absolutely.
spk04: Can you give us an idea of how much of that 10.1% organic growth this quarter was from pricing? And if you could break that down further, how much of that comes from your fuel surcharge?
spk03: Yeah, so we've never really kind of got into that granular level of detail, and we really won't now. A couple of comments I can make is That, you know, pricing activities over the last couple of years has been a meaningful factor in our growth. You know, one thing I will say about the energy surcharge, and we did not mention this in our prepared remarks, but, you know, as energy peaked last year is when we kind of put in that surcharge. We did take the surcharge a small step down as energy costs, particularly fuel, has come down a bit. That was sort of a commitment to our customers that, you know, we would look to do that when some of the energy came back. And we still are retaining some of it because, as Shane mentioned, energy as a whole still remains relatively high. So, you know, I won't break down the components any further there other than to say that we continue to push price. In some ways, it is a difficult – analysis, to be honest, to really ferret out exactly how much pricing we are keeping because, you know, we've said this before, but new accounts come in at lower prices than accounts in some cases that you've had for a little while, and so the net impact of price continues to be something that we work on, and I think we still have opportunities there, and our customers have been receptive, understanding the environment, and it's something we'll continue to work through.
spk04: That's helpful. Thanks. And then one follow-up. You updated your guidance. Sorry, your updated guidance includes about $60 to $65 million of additional top-line growth for the full year, with $42 million of that coming from the clean uniform acquisition. How much of that additional $20 million was from strong performance in the second quarter versus higher growth expectations for the second half of the year?
spk03: It's a good question. I think a lot of it is based on the estimates or the performance through the six months of the year. As Shane mentioned, some of it relates to the specialty garment segment. Some of that specialty garment strength probably continues to the back half of the year and contributing it to it as well. But I think a fair amount of it is from the first half of the year, maybe two-thirds of it, and I'm going off the top of my head a little bit.
spk04: That's helpful. Thanks.
spk03: Thank you.
spk01: Our next question comes from Karthik Mehta with North Coast Research. Please proceed.
spk02: Good morning. This is Jack Boyle on behalf of Karthik Mehta. Good morning, everyone. Good morning. Good morning. Just a quick question regarding the clean uniform acquisition. You guys said that you plan on doubling the EBITDA margins from 10 to 20 percent in the next two to three years. Could you just give us a little more color as to maybe what strategy you plan to pursue to do that or maybe what opportunities you saw within Clean Uniform?
spk03: Sure. I think, as I mentioned, one of the things that attracted us to Clean the most is their service reputation in that market. When you look at that market, We have a decent presence in some of the markets they service, but in others we really don't have that significant of a presence. So when you think about the ability to integrate operations, optimize routes, synergize sales forces, the supply chain efficiencies, working together on sourcing products, some of our self-manufactured goods. So it's really all of the typical things you would think of when you think about what we can gain from integrating with any sort of acquisition in our industry. I think the one that made this, you know, even more attractive is, you know, some of these markets aren't some of our top performing markets. And that's really as a result of scale and density, which we've said, you know, for a long time is really key to profitability in all of our markets. And so really the combination of the two companies will provide us a strong strong platform in really all of the markets that clean and universe serve commonly in that Midwest area. And so as I mentioned before, it's going to take a little time because we're still deploying technology. You know, I don't think I mentioned this, but they are deployed on the same ABS software that we're deploying. Now both different versions of ABS have different bells and whistles that we sort of have to synergize as we work through it. But that will help us as well in terms of trying to put the companies together.
spk02: Great. I appreciate that. And just as an extra follow-up, could you go into any more detail as to maybe some of that footprint overlap? Could you quantify how many or how much you guys had existing service in the area and maybe how much was unserved by you?
spk03: Yeah, I would say that every market that they're servicing, we service as well. So a good example would be St. Louis, which is really their home market. They have three operating plants in the greater St. Louis area, all within 30, 40 miles of St. Louis. And we have one branch. Our nearest plant is Springfield, Missouri. So that's a good example of how, well, eventually our... Depot facility in St. Louis will be merged into their St. Louis operations. And there's some other operations in different markets like Tulsa and Kansas City that go in the other direction. But every market we do commonly serve together, but it's amount of scale, who has a processing facility, and being able to kind of merge those operations to optimize the markets.
spk02: Very good. Thank you for the additional detail.
spk03: Thank you.
spk01: Gentlemen, there are no further questions at this time.
spk03: Okay. I'd like to thank everyone for joining us today to review our second quarter results, and we look forward to speaking with everyone again in June when we expect to be reporting our third quarter performance as well as our outlook for the remainder of 2023. Thank you, and have a great day.
spk01: That does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your line. Have a great day, everyone.
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