Unifirst Corporation

Good day and thank you for standing by. Welcome to the fourth quarter 2024 UniFirst earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during this session, you will need to press star 11 on your telephone. You will then hear an automated message advising you your hand is raised. To withdraw your question, please press star 11 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Stephen Sintros, President and Chief Executive Officer. Please go ahead.

Thank you and good morning. I'm Steve Sintros, Uniforce 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 Uniforce Corporation conference call to review our fourth quarter results for fiscal year 2024. This call will be on a listen-only mode until we complete our prepared remarks, but first, brief disclaimers. 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 strong fourth quarter that modestly exceeded our expectations in both top and bottom line performance. We accomplished a lot as a team in Fiscal 24 that will help strengthen our company as we move forward, continuing to grow our company, as well as advancing our technology and other organizational initiatives. 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. We serve the people who do the hard work as they are the workforce that keeps our communities up and running. They are our existing and prospective customers, as well as our own universe team partners. Our mission is to enable those employees and their organizations by providing the right products and services to do their jobs successfully and safely. Whether that means providing uniforms, workwear, facility services, first aid and safety, clean room or other products and services, our goal is to partner with our customers to ensure that we structure the right program, products and services for their businesses and their team, all while providing an enhanced customer service experience. Shane will provide the details of our quarter shortly, but a quick recap of our full fiscal year. Our full year revenues came in at a record $2.427 billion, an increase of 8.7% from fiscal 2023. Our full year revenue growth benefited from an extra week of operations, as well as a full year of revenues from our March 2023 acquisition of Clean Uniform. Our core laundry operations organic growth for fiscal 24 was a very solid 4.6%. Operating income and adjusted EBITDA increased significantly for the full year compared to fiscal 23, benefiting partially from lower cost expended during the year related to our key initiatives. Excluding these benefits, we still experienced strong operating income and adjusted EBITDA growth for the full year, the result of solid growth, as well as moderating cost trends in key areas. We are also pleased with the improvement in our cash flows from operating activities for the full year, which grew 36.8% compared to fiscal 2023. As a reminder, we've been incurring costs over the last couple of years related to our technology transformation. As expected, the expense we are incurring related to these key initiatives declined during the current year due to activities surrounding the deployment of our CRM largely winding down and the amounts we are expending on our ERP project now being largely capitalized as we enter the implementation phases of the project. During the quarter, our sales organization continued to perform well, selling prospects on the value that Unifers can bring their businesses. Overall, we were pleased with the organic growth for the quarter, despite our more challenging pricing environment. Although we would classify our existing customer wearer levels as mostly stable, we have continued to see a sequential decline in our net wearer metrics, indicating a less robust hiring environment. As we discussed last quarter, as the market emerged from a period of significantly elevated inflation levels, the more challenging pricing environment and its corresponding impact on our retention rates has impacted our sequential revenue trends, which will impact growth rates in fiscal 25. Shane will provide more detail on our guidance for fiscal 25 shortly, but we currently expect organic growth in our core laundry operations to be between 1.3% and 2.3% in 2025. Although these are not the growth rates we ultimately aspire to deliver, we do feel there are reasons to be positive about some of the trends we are recently experiencing. We finished fiscal 24 with a strong year in new account sales, and many of our leading indicators would suggest that we are poised to have an improved performance in fiscal 25 from a revenue trend and retention perspective. For example, we were renewing contracts at improved rates. Our NPS scores, which is a newer program from us, have been steadily increasing throughout the year, and we feel as good from a service staffing perspective as we have in the last couple of years. In addition, our teams are becoming more and more comfortable with our new systems and taking advantage of their benefits. As a company, we continue to focus on investments in the business to enhance our ability to attract new customers, sell additional products to existing customers, as well as enhance our customers' experience and drive improved retention. In addition to our ongoing efforts to drive growth, we continue to focus on our operating excellence and cost reductions to enhance our margin profile. We are pleased with some of the recent progress in this area and the related trends in key costs, such as merchandise, as well as other input costs. As I mentioned, our team continues to be more proficient utilizing and optimizing the capabilities of our new CRM, including leveraging some of Clean's proprietary technology across all universe, with all efforts focused on deploying standard processes across our local operations and driving productivity. In addition, areas such as strategic pricing and account profitability, as well as strategic manufacturing and sourcing, represent significant margin enhancement opportunities. Although some of these benefits going forward will be more significantly enabled through the implementation of our ERP, we continue to focus on these areas and others that we feel can move the needle in the near to mid-term. We continue to believe strongly in the bright future of our first aid and safety division. We finished fiscal 2024 with this segment exceeding 100 million for the first time, and we expect double-digit growth again in fiscal 2025. We continue to make investments in sales and service infrastructure on the van operations to expand our footprint and ensure we can reach existing Uniforce customers, as well as new prospects in the market that have a strong need for these products and services. Customers expect solutions to their most pressing issues, and first aid and safety is an important contributor to these integrated solutions. These investments have delivered strong growth that we once again achieved in the quarters. As we continue to improve route density as well as penetrate our customers with the full breadth of services that we provide, we expect the profitability of this segment to steadily improve. And last but certainly not least, we are thrilled to welcome Kelly Rooney to our senior leadership team and the role of Chief Operating Officer. Kelly brings significant experience working in route-based business-to-business services coming out of a long career in the waste industry. The role of COO is new to Unifirst but one that we feel strongly can help us enhance service and operational execution, especially given how well we feel Kelly's experiences translate to where we are on our journey as a company. Her experience and ability to affect positive change will be critical as we continue to evolve. Alongside her deep operational experience, her talent and passion for empowering workforces to succeed fits like a glove with our culture and our promise to always deliver for our customers and our employees. 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 2025. Thanks, Steve.

Consolidated revenues in our fourth quarter of 2024 were $639.9 million, an increase of 11.9% from $571.9 million a year ago. As a reminder, the fourth quarter as well as the full fiscal year included an extra week of operations due to the timing of our fiscal calendar. This extra week accounted for revenue growth in the fourth quarter and full fiscal year of fiscal 2024 of approximately 8% and 2% respectively. Consolidated operating income for the quarter increased to $54 million from $36.1 million, or 49.8%. Net income for the quarter increased to $44.6 million, or $2.39 per diluted share, from $27.6 million, or $1.47 per diluted share. Over the last six quarters, due to the increase in non-cash amortization expense that we started to incur as a result of the acquisition of Clean Uniform in March of 2023, the company started to disclose EBITDA as a more prominent metric in its commentary. Starting this quarter, the company will migrate to an adjusted EBITDA metric that we believe is more meaningful and is defined as net income before interest, income taxes, depreciation, and amortization, further adjusted for share-based compensation expense, acquisition costs, and other items impacting comparability. We believe that this more wholesome non-GAAP measure will provide a more refined view of the company's profitability and is a better indication of the company's capacity to generate future cash flows. The adjusted EBITDA metric does not adjust for the key initiative costs we incur, but the company will provide visibility to those items separately. Consolidated adjusted EBITDA for the quarter increased to $95 million compared to $71.7 million in the prior year, or 32.5%. Our financial results in the fourth quarters of fiscal 2024 and 2023 included $1.8 million and $6.1 million, respectively, of costs directly attributable to our key initiatives. The effect of these items on the fourth quarter of fiscal 2024 and 2023 decreased operating income and adjusted EBITDA by $1.8 million and $6.1 million, respectively. Net income by $1.3 million and $5 million, respectively, and diluted EPS by $0.07 and $0.27, respectively. Our core laundry operations revenues for the quarter were $564.1 million, an increase of 11.7% from the fourth quarter of 2023. Core laundry organic growth, which adjusts for the estimated effect of acquisitions, fluctuations in the Canadian dollar, as well as the impact of the extra week, was 3.9%. Core laundry operating margin increased to 8% for the quarter, or $45.4 million from 6% in prior year, or $30.2 million. And the segment's adjusted EBITDA margin increased to 14.9% from 12.7%. Costs we incurred related to our key initiatives were recorded to the core laundry operations segment and decreased the core laundry operating and adjusted EBITDA margins for the fourth quarters of fiscal 2024 and 2023 by 0.3% and 1.2% respectively. Segment operating and adjusted EBITDA margin comparisons benefited from the additional week in the fourth quarter of fiscal 2024, as well as from lower merchandise, payroll, and other operating input costs as a percentage of revenue. Energy costs for the quarter were 4.1% of revenues, down from 4.3% a year ago. Revenues from our specialty garment segment, which delivers specialized nuclear decontamination and cleanroom products and services, were $46.5 million for the fourth quarter of fiscal 2024, an increase of 12.3% over prior year. After adjusting for the impact of the extra week, organic growth was 4.4%, primarily due to growth in the segment's clean room business and stronger results from the U.S. nuclear operations. Segment's income during the quarter was $8.6 million, an increase of 26.2% over the prior year. As we mentioned in the past, the 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 2024 increased to $29.3 million, or 15.1%. Organic growth within the segment was 6.8%, primarily due to growth in the segment's route-based van operations. Segment's operating income was nominal in the quarter and continued to reflect the investments we are making to grow our first aid van business. At the end of our fiscal year, 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 $175.1 million. In fiscal 2024, we continued to see solid improvement in our cash flows from operating activity. which increased 36.8% to $295.3 million, primarily due to improved profitability and lower working capital needs of the business. Capital expenditures for fiscal 2024 totaled $160.4 million as we continue to invest in our future with new facility additions, expansions, updates, and systems that will enable us to meet our long-term strategic objectives. During the year, we capitalized $16.7 million related to our ongoing ERP, which consisted primarily of both third-party consulting costs and capitalized internal labor costs. As of August 31, 2024, we capitalized $18.9 million related to the project. During fiscal 2024, we also repurchased $23.8 million worth of common stocks. I'd like to take this opportunity to provide our outlook for fiscal 2025, which will include one less week of operations compared to fiscal 2024 due to the timing of our fiscal calendar. At this time, we expect our full-year revenues for fiscal 2025 will be between $2.425 billion and $2.445 billion. We further expect that our fully diluted earnings per share will be between $6.79 and $7.19. This guidance includes $16 million in costs that we expect to incur directly attributable to our key initiatives, which reduced our EPS assumption by $0.64 and at this point relate primarily to our ERP project. At the midpoint of our range, our guidance further assumes consolidated adjusted EBITDA is $330 million. Core laundry organic revenue growth, which excludes the impact one last week of operations, is 1.8%. Core laundry operations operating in adjusted EBITDA margins are 5.9% and 13.2% respectively. Key initiative costs are recorded to our core laundry operations and decrease both operating and adjusted EBITDA margins by 0.7%. Core laundry operating results continue to benefit from favorable trends in merchandise and other input costs, a result of inflationary headwinds continuing to subside, the company capitalizing on investments it has made in building procurement capabilities, and enhanced merchandise controls in the CRM system that we recently deployed. Energy costs are expected to be 4.1% of revenues in fiscal 2025. and next year's effective tax rate is assumed to be 25%. Our specialty garments revenues are forecast to be down from 2024 by approximately 4% due to projected declines in the nuclear business and the impact of the extra week in fiscal 2024, 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 to be down approximately 12%. 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 2024, and the segment's operating income is projected to be nominally positive. We expect that our capital expenditures in 2025 will approximate $155 million, which remains elevated as a percentage of revenues primarily due to higher application development investments we are making, most significantly related to our ERP implementation. For an update on our ERP initiative, we are pleased with the progress we made in fiscal 2024. We continue to expect our ERP implementation will carry through 2027, with fiscal 2025 focused on master data management and progressing the implementation of the solution's finance capabilities. Through fiscal 2025, we have capitalized approximately $18.9 million related to this initiative and expect that the project total will be between $85 million and $100 million. 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.