Unifirst Corporation

Greetings and welcome to the Unifirst Corporation fourth quarter earnings 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 Centros, President and Chief Executive Officer. Please go ahead.

Stephen Sintros Thank you and good morning. I'm Stephen Sintros, UNIFRS 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 UNIFRS Corporation's conference call to review our fourth quarter results for the fiscal year 2023. This call will be on a listen-only mode until we complete our brief 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. I'm pleased to report that we closed the year with a fourth quarter that modestly exceeded our expectations in both top and bottom line performance. We accomplished a lot as a team in fiscal 2023 that will help strengthen our company as we move forward, growing our business, making strong progress in our technology transformation, and closing on our mid-year acquisition of Clean Uniform. I want to sincerely thank all of our 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 the industry, all while living our mission of serving the people who do the hard work. I want to take a couple minutes to expand on fiscal year 23, what we accomplished as a company, and what we have in store moving forward. It comes as no surprise that as we report our final 2023 results, that we have continued the company's long standing record of always growing our top line. Our full year fiscal 2023 fiscal revenues increased 11.6% to 2.233 billion. Our core laundry operations showed strong organic growth during the year, driven by solid new account sales, as well as the impact of the effort to work with our customers to share in the impact of the inflationary environment. Overall growth was also bolstered by our mid-year acquisition of Clean Uniform. We couldn't be more pleased with what we were able to bring clean into the Unifers family. We continue to feel they are a tremendous fit within our organization in terms of their focus on service excellence as well as overall culture. The early days of bringing our companies together have been very constructive with initial efforts being focused primarily on retaining Clean's most important assets, its people, and its customers. We are also very excited about leveraging some of the experience and knowledge that the Clean team has with respect to Unifor's CRM technology, as well as some of the proprietary applications that Clean has built to further enhance the usability and efficiency of our CRM. 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 in our technology transformation, we will be strategic and patient in the full integration of the two businesses. That being said, in the six months since the closing date, Clean has produced very solid operating results. Our specialty garment segment contributed very strongly on the top and bottom line in fiscal 2023, with record revenues and profits during the year. As a reminder, our specialty garment segment is made up of both our nuclear and clean room operations. Our clean room division continues to show steady growth and profitability, which we expect to continue as we move forward. As we have 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. In fiscal 24, we do expect the nuclear division of this segment to take a step back from its record-setting 2023 results due to decreased revenue from its Canadian customers. We believe very strongly in the bright future of our first aid and safety division, which grew 22.5% in fiscal 23. We continue to make investments in the sales and service infrastructure of this segment to expand our footprint and ensure that we can reach existing universe customers as well as new prospects in the market that have a strong need for these products and services. As expected, the investments to expand our reach and route structure have certainly limited our ability to expand the profitability of this segment, but we are happy with the progress toward the longer-term goal of building a much larger, more profitable business that meets our customers' needs. As we have discussed throughout the year, we have continued to progress on two large technology initiatives designed to transform the company in terms of our overall capabilities and competitive positioning. These initiatives are the rollout of our new CRM and our corporate-wide Oracle ERP system. With respect to our CRM systems project, as of today, we've effectively deployed 100% of our U.S. core laundry operations onto the new system. Going forward, there is still work to be done to optimize the new system, including further enhancements to our CRM, full conversion to our new barcode technology, aligning with Queen's technology footprint, as well as integrating with our ERP. Over the next two or three years, we will continue to expend costs through our operating results and capital expenditures, related to these key initiatives. Shade will provide additional commentary and estimates of these costs in his comments shortly, as we think it is important to understand the impact that these initiatives are having on our results. Overall, we continue to be excited about how these investments will continue to position the company for future success. I am proud of the fact that the company continues to make solid progress in contributions in the area of environmental social governance, ESG. The nature of our industry and rental model has always allowed us as a company to do our part of enhancing the economy's environmental footprint, given our role as a natural recycler, as well as the better utilization of resources an operation like ours enables. We continue to make investments in progress in the areas of reduction of water consumption, growing our fleet of electric delivery vehicles, renewable sources of energy like solar, upgrading facilities with LED lighting, environmentally efficient laundry detergent, creative textile recycling, and more. While many of these efforts have been ongoing, we are preparing ourselves to increase the level of measurement and reporting to ensure we are focused on making the right investments to meaningfully impact the environment, support our customers, and have a positive impact on our business. As we've discussed throughout the year, our profits in our core laundry compared to prior years have continued to be pressured by higher operational costs being impacted by the inflationary environment. As we look forward to fiscal 24 and beyond, margin improvement will certainly be a key focus of the organization. Executing on our growth model while also managing costs in areas we can control will be critical, all while assuring we don't impact our ability to execute on our transformational initiatives or adversely affect our customer service levels. In addition to day-to-day execution, we are focused on margin opportunities in many areas. As I mentioned, there is work being done optimizing the use of our new CRM, including leveraging some of CLEAN's proprietary technology across all of Unifirst. Areas such as strategic pricing and account profitability and strategic manufacturing and sourcing represent significant opportunities. Although some of these benefits going forward will be more significantly enabled through the implementation of our ERP, which Shane will discuss more about shortly, we continue to focus on these areas and others we feel can move the needle in the near to midterm. Overall, we expect fiscal 24 to be another solid year for Unifirst. As our outlook includes, we expect our top line to surpass $2.4 billion, and at the midpoint, consolidated EBITDA to improve by approximately 20%. Although some of that growth is attributable to lower key initiative costs, even excluding this benefit, EBITDA is projected to show double-digit growth. Overall, we expect to accomplish these goals, all while continuing to always deliver for our customers and continue our journey to transform the company in terms of technology and overall capabilities. I'd like to once again thank our thousands of dedicated team partners who make everything we accomplish as a company possible. With that, I'd like to turn the call over to Shane, who will provide more details on our fourth quarter results, as well as our outlook for fiscal 24.

Thanks, Steve. Consolidated revenues in our fourth quarter of 2023 were $571.9 million, an increase of 10.7% from $516.4 million a year ago. And consolidated operating income increased to $36.1 million from $33.3 million, or 8.5%. Net income for the quarter increased to $27.6 million, or $1.47 per diluted share, from $26.2 million, or $1.39 per diluted share. As we mentioned last quarter, due to the increase in non-cash acquisition-related intangibles amortization that we will be incurring as a result of the CLEAN acquisition, We believe that EBITDA will become a valuable metric for us to include in our commentary going forward. Consolidated EBITDA increased to $69.2 million compared to $60.2 million in the prior year, or 15%. Our financial results in the fourth quarters of fiscal 2023 and fiscal 2022 included $6.1 million and $9.1 million, respectively, of costs directly attributable to our key initiatives. In addition, we incurred costs related to the acquisition of clean uniform during the fourth quarter of fiscal 2023 of approximately $0.3 million. The effect of these items on the fourth quarter of fiscal 2023 and 2022 combined to decrease both operating income and EBITDA by $6.4 million and $9.1 million, respectively, net income by $5.3 million and $7.6 million, respectively, and diluted EPS by 28 cents and 40 cents, respectively. Our core laundry operations revenues for the quarter were $505 million, an increase of 10.1% from the fourth quarter of 2022. Core laundry organic growth, which adjusts for the estimated effect of acquisitions, as well as fluctuations in the Canadian dollar, was 5.3%. This organic growth rate was impacted by pricing efforts over the last year to share with our customers the cost increases that we have incurred in our business, as well as solid sales performance. Core laundry operating margin decreased to 6% for the quarter from 6.3% in prior year. However, the segment's EBITDA margin increased to 12.2% from 11.8%. The costs we incurred related to our key initiatives and the clean acquisition were recorded to the core laundry operations segment. and combined to decrease both the core laundry operating and EBITDA margins for the fourth quarter of fiscal 2023 and 2022 by 1.3% and 2% respectively. The segments operating in EBITDA margins were further impacted by higher merchandise, payroll, and payroll-related costs, which were partially offset by lower energy and legal costs as a percentage of revenues. The purchase accounting for the most for the recent clean uniform acquisition additionally impacted the segment's operating margin, most notably in the form of elevated non-cash purchase-related intangibles amortization. Energy costs for the quarter were 4.3% of revenues, down from 5.3% a year ago. Revenues from our specialty garments segment, which delivers specialized nuclear decontamination and cleanroom products and services, were $41.4 million for the fourth quarter of fiscal 2023, an increase of 13% over 2022. The segment's top-line growth was primarily driven by its cleanroom and North American nuclear operations. Segment's operating income during the quarter was $6.8 million, an increase of 69.4% over 2022. Our first aid segment's revenues in the fourth quarter of 2023 increased to $25.4 million from $21.2 million, with both the wholesale and van operations contributing to this growth. However, the segment had an operating loss of $0.9 million during the quarter. These results continue to reflect our investment in expanding our first aid van business and building the foundation for what we expect to eventually be a much larger business. At the end of fiscal 2023, 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 $89.6 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 year increased to $215.8 million compared to $122.6 million in prior year, primarily due to lower working capital needs of the business. In fiscal 2023, we continue to invest in our future with capital expenditures of $172 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 approximately $300 million. I'd like to take this opportunity to provide our outlook for fiscal 2024, which will include one extra week of operations compared to fiscal 2023 due to the timing of our fiscal calendar. At this time, we expect our full year revenues for fiscal 2024 will be between $2.415 billion and $2.435 billion. We further expect that our fully diluted earnings per share will be between $6.52 and $7.16. This guidance includes $16 million of costs that we expect to incur attributable to our key initiatives. which at this point relate only to the CRM and ERP projects. These key initiative costs decreased our EPS assumption by 64 cents. Consolidated EBITDA is expected to be $307.8 million, an increase of 21.5%. This outlook assumes core laundry revenue growth at the midpoint of the range is 9.4%. and its organic growth, which also excludes the effect of the extra week to be 4.8%. Core laundry operations operating and EBITDA margins are assumed to be 6.4% and 12.5% respectively, which were decreased by our key initiative cost assumptions by 0.7%. Our core laundry operations operating and EBITDA margin improvement compared to 2023 reflects lower direct costs we expect to incur related to our key initiatives, primarily due to the conclusion of the domestic rollout of our CRM system and our ERP initiative entering implementation phases that are largely capitalizable. as well as moderating merchandise costs and other input costs as the inflationary headwinds that have been impacting our operating environment have continued to ease. Energy costs are expected to be 4.3% of revenues in fiscal 2024, and next year's effective tax rate is assumed to be 25%. Our specialty garments revenues are forecast to be down from 2023 by approximately 2% due to projected declines in the Canadian nuclear business, partially offset by continued growth in the cleanroom business. The change in business mix will have a larger impact on the profitability of this segment, and we expect operating income will be down approximately 17%. As we have commented 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 are expected to be up approximately 13% compared to 2023 and the segment's profitability is expected to be marginally positive. We expect that our capital expenditures in 2024 will approximate $150 million, which reflects lower new facility investments that have strategically run high over the last few years, partially offset by higher application development investments, most significantly related to our ERP implementation. Throughout 2023, we have focused our efforts on the global design phase of our ERP initiative, which was not capitalizable. Starting in the first quarter of 2024, we will be entering implementation phases of our initiative, where the majority of the costs will now be capitalized. We expect our ERP implementation will be a multi-year initiative that will continue through 2027, with early phases focused on master data management and finance capabilities, followed by subsequent phases with a procurement and the supply chain focus. We expect the total amount of this project to be approximately $85 million and have partnered with one of the world's largest strategy through execution professional services firms to assist us in our implementation effort. We expect this initiative and the capabilities it will enable will provide the following benefits to our organization. Improved inventory planning and forecasting will allow us to manage our inventory levels more effectively, improve the time to install new accounts, and fulfill the daily needs of our existing customers, as well as improve direct sourcing costs. Improved visibility and centralized management of local stockroom inventory will enable us to more effectively utilize our used garments inventory. Enhanced procurement capabilities will enable us to centralize sourcing, with enhanced strategies around vendor management and negotiation, as well as improved visibility, oversight, and analytics into organizational spend. Automation of manual processes will enhance the efficiency of our back-end office functions, and simplification of our IT architecture and improvement in our data quality will reduce operational complexity and cost to deliver. We believe that these benefits will provide 150 to 200 basis points of improvement to our EBITDA margins. However, we caution that the larger value will be derived from the later phases of the project and will take time to realize. Our guidance assumes our current level of outstanding common shares and no unexpected changes generally affecting the economy. This concludes our prepared remarks. And we would now be happy to answer any questions that you might have.