Q3 2022 UniFirst Corp Earnings Call
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readetings and welcome to the uni first Corporation third quarter earnings conference callduring the presentation, all participants will be a listen only morede afterwards we will conduct a question and answer session. At that time, if you would like to register for a question, please press the one followed by the four on your telephone. If you require operator assistance, simply pressstar zero. As a reminder, this conference is being recorded today Wednesday, June 20. ninth two thousand 20 two. It is now my pleasure to turn the conference or to stpheven centros.
President and Chief Executive Officer. Please go ahead, sir. Thank you and good morning. I'm Steve intro UniFirst President and Chief Executive officerir.
Joining me today, as always in shano'connor: Executive Vice President and Chief Financial Officer.
Speaker 1: We'd like to welcome youing in the first Corporation's conference call to review our third quarter results for fiscal year 2020.
This call will be on a listen-only mode until we complete our prepared remarks. But first a brief disclaimer.
Speaker 1: This conference call may contain forward-looking statements that reflect the company's current views with respect to future events and financial performance.
Speaker 1: These forward-looking statements are subject to certain risks and uncertainties.
The words anticipate optimistic believeli 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: -k, 10 -k and 10 -q filings with the Securities and Exchange Commission.
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 it uniiffirst bring to their businesses.
I want to thank our thousands of team partners who are in the face of a challenging operating environment. Continue to always deliver for each other and our customers.
Overall our third quarter results reflect a strong top line performance, with consolidated revenues growing 10%. We are pleased with the execution of our team, which has delivered solid performances in both new account sales as well as customer retention so far this year.
In addition, whereare additions versus reductions are positive this year-to-d, indicating growth in our customer base.
The strong revenue growth in the quarter also reflects the impact of price adjustments throughout the year as we work with our customers to share in cost increases related to the inflationary environment.
This includes more recent efforts to help offset surging energy and related costs.
As a reminder, we have discussed in prior calls 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 uniifir brand and a corporate wide ERP system with a strong focus on supply chain and procurement automation and technology.
As we've talked about over the last year or 2, we continue to be focused on making good investments in our people, our infrastructure and our technologies.
All of our investments designed to deliver solid long-term returns for our stakeholders and integral components- and our 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 costs related to these investments.
With respect to our CRM systems project, we are making good progress deploying our new system in line with our internal schedule. Assuming we progressed as expected, we have approximately half of our core Laundry locations on the new system by the end of fiscal' twenty-two.
And as we discussed on our last earnings call in March, we officially launched our new brand through a series of national TVs featuring really inunithe first customers and employees.
Our message focuses on serving people who always deliver for their companies, their customers and their families and, at utiffirst, our ongoing focus will be to always deliver for them.
Similar to our message last quarter. Our adjusted profitability continues to be challenged by the broad impact that the increasingly inflationary environment is having on many of our costs, as well as ongoing supply chain disruption in a challenging labor environment.
In addition to these cost-related pressures, we have also recently been infusing higher-than-expected levels of merchandise into service with our customers ue due to a number of factors, including a pickup in activity in our energy dependent markets. Solid new account sales addition, Al weare additions at our customers, as well as certain national account investments.
Speaker 1: Although much of this investment is related to growth activities, it is also contributing to the near-term margin pressures.
Despite the challenges in the overall operating environment, we are confident in our ability to manage and execute through these obstacles.
We will continue to manage costs in areas we can control, while assuring we don't impact our 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 bring new customers into the uniifvers family.
Speaker 1: And with that I'd like to turn the call over to Shane, who will provide the details of our results for the third quarter and our outlook for the remainder of the fiscal year.
Thanks de.
Speaker 2: In our third quarter of 2022, consolidated revenues were $511.5 million of 10% from 464.3 million a year ago, and consolidated operating income decreased to $33.7 million from $54.2 million.
Net income for the quarter decreased to $25.1 million, or our dollar 33 per deated share, from $42 million or $2 in 21 cents per devoated share.
Our financial results in the third quarter of fiscal 2022 included $11.4 million of costs directly attributable to our three key initiatives that Steve discussed.
Excluding these initiative costs, adjusted operating income was $45.1 million, adjusted net income was $33.5 million and adjusted diluted earnings per share was a dollar seventy-seven.
Although our financial results in the prior year may have included direct costs related to these key initiatives which, in our third 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 number of the 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 coor Laundry operations. Revenues for the quarter were $45 million, of 10% from the third quarter of 2021.
Core launderry organic growth, which adjusts for the estimated effect of acquisitions as well as fluctuations in the Canadian dollar, was 9%. Our organic growth rates this year continueed to benefit from solid sales performance and improved customer retention, as well as efforts to share with our customers the cost increases that we have been seeing in our business due to the ongoing inflationary environment.
Core Laundry operating margin decreased to 6% for the quarter, or $26.4 million, from 11% in prior year or $45.6 million.
The costs we incurred during the coarter 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% and.
Most significant item impacting our adjusted operating margin in the quarter compared to the prior year was our merchandise cost, which has increased as a percentage of revenues due to the continued normalization to merchandise amortization from depressed levels during the pandemic, ongoing supply chain disruption, the effect of some large national account reinvestments, as well as increased activity in our energy-related marke.
During the quarter. The adjusted operating margin was also impacted by higher energy cost as a percentage of revenues, as well as increased input and labor costs due to the inflationary environment and the challenging employment landscape.
Energy costs increased to 5% of revenues in the third quarter of 2022 of from 4% in the prior year.
Revenues from our specialty garment segment, which delired specialized nuclear decontamination in clean room products and services, increased to $41.2 million from 38.2 million in prior year or 8%.
This increase was primarily due to growth in our clean room operation.
Segment's operating margin decreased to 17% from 22%, primarily due to higher merchandise labor and energy 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 $20.3 million from $17.1 million in the prior year, or 19%, primarily due to strong top line performance from the segment' wholesale distribution business.
However the segment's 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 in short-term investments totaling $410.6 million at the end of our third quarter of fiscal 2022 we.
Speaker 2: For the first nine months of 2022. cash provided by operating activities has been impacted by our reduced profitability, including the impact of our key initiative costs, as well as heavier than normal working capital needs of the businesscontributing to these higher working capital needs were elevated accounts, receivable balance, S 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, payment that we were able to defer from prior years as part of the CARES Act.
Also during the first three quarters of 2022, we continuue to invest in our future, with capital expenditures total ninety-seven point three million dollars and the acquisition of 10 businesses, for which we paid a total of $42.7 million.
During the third quarter of fiscal 2022, we repurchased 90.394 thousand common shares for a total of $15.7 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 our full year revenues for fiscal 2022 will be between one point nine nine three billion and $2 billion.
We further expect that our diluted earnings per share for fiscal 2022 will now be between $5 and 40 cents and $5 and 60 cents.
This earnings per share guidance assumes an effective tax rate of 24: 4% and includes a revised estimate of 32 million of costs directly attributable to our key initiatives that will be expensed during the year.
Please also note that the following assum or the following assumptions regarding our fiscal 2022 guidance.
Core Laundry operations. Adjusted operating margin at the midpoint of the range is now 8% and.
Our adjusted tax rate for fiscal 2022 is twentthousandy-four 0%.
Adjusted diluting earnings per share is expected to be between $6 and 65 cents and $6 and 85 cents.
And guidance does not include the impact of any future share buybacks or other unexpected, significantly adverse economic developments.
This concludes our prepared remarks, and we would now be happy to answer any questions that you might have.
Thank you. If you would like to register your question, please press the 1, followed by the four on your telephone, you will hear a three home prompt to acknowledge your request. If your question has been answered and you would like to withdraw, please press the one and the three
Our first question is from Andrew Whitman with bayard. Please go ahead some.
Yeah great good morning guys.
Speaker 3: Morning you talked about this a little bit in the prepared remarks on the merchandise and service. $12 million injection in the quarter's obviously a really big number for you guys.
He talked about.
National account investment. It sounds like maybe redressed somebody there. You talk about energy patch, that that's all helpful, but how? How much? This is just new account sales. You're happy with it but Steve, maybe you could just give a little bit more color on of new account sales and particularly you could talk about the amount of of no programmers that are in the market. Is there still good new business to convert to a rental program for the first time? I'm asking because obviously there's a lot of uncertainty about the economy and so I'd be, you know, curious to your thoughts on no programmers And if there's any recent changes.
Speaker 3: In add stopss. What you said have been positive through the reporting period, but maybe in the more recent time period, if you D comment on that.
Sure So as far as new account sales are, our ratio of new account sales that come from competitive wins versus no program is remains consistent so far this year, and I'm willing to say probably in the more recent period quarter as well, where it's about 60% to 65% competitive and the remaining no programmers, as we've talked about before. No programmers could be someone who doesn't have a uniform program or someone who mayy buys uniforms direct that we convert into a full, full service rental program, and again not just uniforms But other other products as well.
So that ratio remains reasonably consistent. As far as our merchandise infusions, we've always said that about two thirds of the merchandise we put in service is for existing customers, just the normal cycle of redress and reinvestments into our accounts. So we we are trending toward a record year in new account sales, which is obviously very positive, and that is causing some of the merchandise rise, which is which is positive. But there's still a large chunk that relates to reinvestment in existing accounts.
Which can be sick with the which can trend when accounts are adding whereares or needing reinvestment you mentioned and there has been a couple of reinvestments to national counts from a redress perspective. So I would say like I said in the prepared remarks that there's there is a fair amount of the merchandise investments. You would view as kind of positive trends of good growth activity. But it is. It's also being impacted by the higher cost of merchandise right and higher raw material cost and freight in a number of other things that's impacting the cost of our merchandise. So it's really a mixed bag of all those different factors. But like we said in our remarks there.
Speaker 1: There are some positive things in there for sure. On merchandise being tied to growth growth activities, could you talk about Shane, maybe quantify the year-over-year headwind to your margin from those merchandise and maybe comment on labor as well, if you could?
Yeah.
Speaker 2: Andy, I know that I've provided some of that information in the past, that level of, I guess granularity, but I'm not going to get into that level of detail this quarter, and the reason is just: there continues to be a lot of disruption in our cost and as a result, at least in my opinion, it's not as valuable as it is in a more normalized environment.
What I will say though, is that, when you take a look, is the primary things that are influencing the comparability to prior year. I did call out the increase in energy costs in my prepared remarks and indicated that the headwind related to that was about 100 basis pointsmerchandise more than that, and is the largest item I'm seeing a headwind from, and Steve obviously just have talked a lot about the factors that are influencing that, but included in that- and it's not just merchandise amortization, but it's other merchandise costs as well.
To my earlier point. There are costs relate that we're incurring from a merchandise perspective that are related to ongoing supply chain disruption, which are causing those costs to be somewhat elevated.
The other areas that I called out- input and labor cost. Those were also headwinds for our quarter, but to a lesser extent than the primary two items that were impacting us, which would be merchandise and energy. And one other comment and y just on the labor side. We talked a little bit last quarter about.
Our staffing coming up a bit. Obviously, staffingand 'has been a challenge throughout the fiscal year. We feel we're in a better place right now. To some extent, a better place actually comes with higher heads and I think we we're closer to staff right now or maybe even a little bit heavy on the staff as a result of increased turnover and trying to get our feet under us from a hiring perspective. So there's some positives there. But that did cause a little bit of the missth in the quarter that we're probably a little bit higher than we projected from a heads, which is a kind of a good news, bad new situation, but it does, I think, reflect maybe a little bit improved ability to bring people in.
Speaker 1: But it's still a ol labor environment for sure. Ok, this is really helpful, So. So just want to make sure that I'm understanding on the merchandise costs a little bit more here. I mean that you generally have an average amortization period of like 18 months for for the merchandise that you put in rental service. Was there anything that's in today's merchandise cost of amortizes faster than that? Or should we expect these elevated cost that we've been seeing here to kind of stick around for a while because of the way the accounting were? So we have- we have- useful lives for all the different types of products that we put into service.
On average. We've talked about that 18 months being the average life, and that hasn't significantly changed.
Right our the average life of the merchandise that we've been putting into service is still a that 18 months is still a good proxy for that.
Got it. Okay, I guess I'll leave it there. If you have any others, a full up. Thanks guys.
Thank davny. Our next question is from ktec MEA with the North Coast research. Please go ahead.
Good morning on. Thank you, this is actually Jack bole and behalf of card made. A keeping with the same line of questioning here we questions just like with the pricing environment, considering know how merchandise energy gas, these are all these things just continually going up. Are you seeing any kind of pushback or any kind of pricing ceiling here, any any kind of pricing that might be impacting momentum going forward? And also, are you seeing any pricing impact changes, differences between maybe small and large businesses?
Good question obviously very relevant to the environment. You know I wouldn't say you know. It's an important question. I guess whether there's a price deingand. I'm not sure we know the answer to that. Yet I mean we continue to work through the process as we've talked about you know look. There's always push back from time to time as all customers are dealing with higher costs. They're trying to manage their own costs as inflation goes. It's sort of a circular challenge. But you know we have been working well with our customers and haven't seen. I would what I would call tremendous pushback at this point and we will continue to work with them as a.
Our next question is from Tim malononey, with William Blair. Please go ahead.
yesgood morning. Good morning, shan. Thank for my questions is just: we'll just stick with pricing here, because a lot of the questions we're getting right now are around pricing power. So can you just talk about how much of your organic growth right now is pricing versus volume and how that compares to your historical average?
yesit's a good question. I mean, we've never really broken out pricing and it's difficult to do for a lot of reasons, but what I would say is it's a healthy portion of that.
That that organic growth. When you look at the historical, if we were growing 3% or 4% in the past, would say well, maybe there's one point, a 5% in there from price and that was always an estimate, it wasn't a hard and fast number. And we're growing nine and I talked about. We're having a very good sales. You were having an improved retention here. Ad versus reductions are positive, which is is AIS a development that isn't always part of that organic growth. So there are other things that our causing probably our core growth to be higher than say, historical organic levels.
Speaker 1: But the pricing is certainly a healthy piece of that. As we work, as we work through things, that's really helpful. Just what more for me. Can you remind us the different ways that you capture price is at all structural price increase or fuel surcharges or other ways to help offset the inflationary headwinds? And and are you able to have those pricing conversations on an annual basis, or is it primarily just when the contract is up for renewal? thankyou.
There are certainly price discussions on an annual basis in this environment, certainly So.
Not to get into the weeds about the industry and how we build our customers, but there are a number of things. There's core rental prices, there's extra charges that relate to, in some cases merchandise, and there's also delivery charges, some of which encapsulate fuel. So there are different aspects of how we would look at adjusting pricing to deal with the different specific cost pressures and, as you can imagine, we're looking at all of them as needed.
The weeds about. You know the industry and how we build our customers, but there are a number of things. There's core rental prices, there's extra charges that relate to, in some cases merchandise, and there's also delivery charges, some of which encapsulate fuel. So there are different aspects of how we would look at adjusting pricing to deal with the different specific cost pressures and, as you can imagine, where we're looking at all of them as needed. Very helpful, Thank you.
Thank you as a reminder. If you would like to register for question, please press the 1, follow by the four.
And our next question is from andrews Simon withb. Jp Morgan, Please go ahead.
umhi, I just wanted to make sure I got the fourth quarter implied a core operating margin rightate. You know 8, three for the year, by my math, makes an eight point 8% operating margin for core Laundry in the fourth quarter, which of course is is not that much different than what we just reported in the May quarter. And so if you could just over over any you know kind of puts and takes that you think of when comparing the fourth quarter margin, which is guided to the third quarter margin, that was just actual.
Yes So Andrew, correct. The implied margin and our core Laundry operations for the fourth quarter is 9% and the things that we expect to be impacting the fourth quarter are are largely the items that impacted are third quarter merchandise energy, some of our other cost labor, the other costs that have been increasing as a result of the inflationary pressures and obviously, you assumptions around what we're going to be able to offset those with from a price.
A little bit more will be benefiting us in the fourth quarter than did in the third quarter. Makes sensethank.
Thank you.
And we have no further questions at this time. I'll return the call back to you for closing remarks.
Speaker 1: Okay I'd like to thank everyone, as always, for joining us to review our third quarter results, and we look forward to speaking with everyone again in October , when we expect to be reporting our fourth quarter performance and our outlook for fiscal' 23. Thank you and have a great day.
And that does conclude the conference call for today. We thank you all for your participation and currently ask that you please disconnect your lines. Have a great day.
Greetings and welcome to the uni first Corporation third quarter earnings conference callduring the presentation, all participants will be in the listen, only MO afterwards we will conduct the question and answer session at that time. If you would like to register for a question, please press the 1, followed by the four on your telephone. If you require operator assistance, simply pressstar zero. As a reminder of this, conference is being recorded today Wednesday, June 20, ninth two thousand 20 two. It is now my pleasure to turn the conference or to stpheven centro. President and Chief Executive Officer, Please go ahead, sir.
Thank you and good morning. I'm Steve centintro' ununiiffirst President and Chief Executive Officer.
Joining me today, as always, the shano'connor Executive Vice President and Chief Financial Officer.
Speaker 1: We'd like to welcome you ING in the first Corporation's conference call to review our third quarter results for fiscal year 2020.
This call will be on a listen-only mode until we complete our prepared remarks. But first a brief disclaimer.
Speaker 1: This conference call may contain forward-looking statements that reflect the company's current views with respect to future events and financial performance.
Speaker 1: These forward-looking statements are subject to certain risks and uncertainties.