Q3 2023 UniFirst Corporation Earnings Call

June 28, 2023

Okay.

Greetings and welcome to the Uni first Corp, third 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 one followed by the four on your telephone.

At any time during the conference you need to reach an operator. Please press star Zero I would now like to turn the conference over to Steven Centros, President and CEO . Please go ahead.

Thank you and good morning, I'm, Steven Central's unit first President and Chief Executive Officer. Joining me today is Shane Oconnor Executive Vice President and Chief Financial Officer I'd like to welcome you to the unit First Corporation Conference call to review, our third quarter results for fiscal year 2023.

This call will be on a listen only mode until we complete our prepared remarks, but first a brief disclaimer.

This conference call may contain forward looking statements that reflect the company's current views with respect to future events and financial performance.

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.

We are pleased with our strong topline performance in the quarter and continue to be excited about a number of key areas of investment in our company.

As always I want to thank our over 14000 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 our industry.

Profit in the quarter compared to our expectations and our core laundry operations were negatively impacted by significantly higher healthcare claims than we had forecasted driven primarily by one very large claim as well as expenses in the quarter related to a legal matter and.

In addition to the impact of these discrete items in the quarter the margins of the core laundry operation continued to be pressured by higher operational costs, which are being impacted by the inflationary environment.

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 and as always we maintain a sharp focus on taking care of our employees, our customers and bringing new customers into the unit first family.

Our consolidated profits were positively impacted by record revenues and profits from our specialty garments segment.

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 divisions results can be more volatile based on the impact of certain projects as well as swings in activity with some very large customers.

I would also like to report that the early days of our recently closed acquisition of clean uniform have been very constructive with initial efforts being focused primarily on retaining cleans most important assets its people and its customers. We continue to be excited about the strength and quality of the clean business and what we continue to believe the combined companies will be.

<unk> able to achieve in the markets we serve together.

As we discussed last quarter due to the strong leadership and service reputation that cleans brings with it as well as the complexities of where we are from our technology transformation, we will be strategic and patient and the integration of the two businesses.

We also continued to be focused on and pleased with the progress of our two large technology initiatives designed to transform the company in terms of overall capabilities and competitive positions positioning excuse me.

These initiatives are the rollout of our new CRM system, and a corporate wide ERP system. 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.

Just as a reminder, up until the second quarter of this year, we had reconciled the impact of these initiatives. In addition to our largely completed brand transformation out of our operating results. So investors can get a better perspective of our performance. Excluding these costs related to these large transformational projects based on new guidance provided.

The SEC regarding non-GAAP financial measures and the comments from the SEC and our recent SEC comment letter, we modified our disclosure and are no longer providing adjusted operating results. Excluding these costs.

We will however 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 in.

In addition, we will also be disclosing any significant direct costs that we incurred or will be incurring related to the closing and integration of the clean acquisition.

To further assist and assist investors in understanding trends in our operating results. We have also begun this quarter to disclose EBITDA by segment. We believe this is especially valuable as we move forward due to the increase in noncash intangibles amortization that we will be incurring as a result of the clean acquisition.

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 continue to be on track with having nearly 100% of our U S core laundries locations deployed by the end of fiscal 2023.

Over the remainder of fiscal 2023, we will also continue to be focused on the global design phase of our ERP projects. The implementation of our new Oracle cloud system will be a multi year initiative designed to transform our overall supply chain and procurement capabilities as well as provide an overall technological foundation for.

And efficiency.

Overall, we continue to be excited about how these investments will position the company for future success. We also maintain remained very focused in the near term on doing all we can to manage the margin and cost challenges that we have been experiencing.

With that I'd like to turn the call over to Shane who will provide more details on our third quarter results.

Thanks, Steve.

And our third quarter of 2023 consolidated revenues were $576 7 million up 12, 7% from $511 $5 million a year ago.

And consolidated operating income decreased to $33 4 million from $33 7 million or 9% net.

Net income for the quarter decreased to $24 $3 million or $1 29 per diluted share from $25 1 million or $1 33 per diluted share.

As Steve discussed due to the increase in noncash intangible amortization that we will be incurring as a result of the clean uniform acquisition, we will begin including EBITDA and the discussion of our financial performance.

Consolidated EBITDA increased to $64 million compared to $60 3 million in the prior year or six 3%.

Our financial results in the third quarters of fiscal 2023, and 2022 included approximately $8 4 million and $11 4 million respectively of cost directly attributable to our three key initiatives, the CRM ERP and branding initiatives and.

In addition, we incurred costs related to the acquisition of clean uniform during the third quarter of fiscal 2023 of approximately $7 million.

The effect of these items on the third quarter of fiscal 2023, and 2022 combined to decrease operating income and EBITDA by $9 1 million and $11 $4 million respectively.

Net income by $6 8 million and $8 $4 million, respectively, and EPS by 37 and 44, respectively.

Our core laundry operations revenues for the quarter were $501 7 million up 11, 5% from the third quarter of 2022.

Core laundry organic growth, which adjusts for the estimated effect of acquisitions as well as fluctuations in the Canadian dollar was seven 8%.

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.

Core laundry operating margin decreased to four 2% for the quarter or $21 million from five 9% in prior year or $26 $4 million and the segment EBITDA margin decreased to nine 9% from 11, 4%.

The cost we incurred related to our key initiatives and the clean acquisition were recorded to the core laundry operations segment and combined to decrease the core laundry operating and EBITDA margins for the third quarter of fiscal 2023, and 2022 by one 8% and two 2% risk.

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Excluding these items the segment's operating and EBITDA margins were also impacted by healthcare high health care claims expense, which exceeded prior year by approximately $4 million and costs, we incurred in the quarter related to a legal matter of approximately $1 3 million.

In addition margins continued to be pressured by higher merchandise and other operating costs as a percentage of revenues, which are being impacted by the inflationary environment.

The preliminary our preliminary purchase accounting for the recent clean uniform acquisition further impacted the segment's operating margin most notably in the form of elevated noncash intangibles amortization.

Partially offsetting these headwinds were lower energy costs during the quarter, which decreased to four 3% of revenues in the third quarter of 2023 down from five 2% in 2022.

The previously announced acquisition of clean uniforms, which closed on March 13th 2023 contributed to the core laundry operations operating results for the quarter of approximately $20 million of revenue.

Nominal operating loss and approximately $3 million to the segment's EBITDA.

Revenues from our specialty garments segment, which delivers specialized nuclear decontamination and clean room clean room products and services increased to $49 4 million from $41 2 million in the prior year or 19, 9%.

This increase was primarily due to strong growth in our clean room operations and increased project work in our North American nuclear operations.

Segment operating margin increased to 25, 2% from 17, 4%, primarily the result of its strong topline performance.

<unk> operating performance from both the topline and profitability perspective was very strong and exceeded our expectations.

Our first aid segment's revenues increased to $25 5 million from $23 million.

In prior year or 25, 8%.

However, the segment had an operating loss of $1 million during the quarter.

These results continue to reflect our investment in expanding the first aid band business and building a foundation for what we expect to eventually be a much larger business.

At the end of our third fiscal quarter, we continued to reflect our solid balance sheet and financial position with no long term debt and cash cash equivalents and short term investments totaling $69 $3 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 three quarters of the year increased to $142 8 million compared to $88 8 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 this period of $124 $1 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 $300 million.

We now believe that our capital expenditures for the year will be between $155 million and $160 million due to a number of large facility projects, we have been advancing throughout the year.

I'd like to take this opportunity to provide an update on our outlook.

At this time, we expect our full year consolidated revenues will be between $2, two 2 billion and $2 3 billion.

Primarily as a result of the strong topline performance in the specialty garment business.

We continue to expect diluted earnings per share to be between $5 <unk> and $5 37.

Which currently reflects reduced core laundry operations operating and EBITDA margins at the midpoint of the range of four 7% and 10, 5%, respectively, resulting from more modest revenue expectations for the remainder of the year and the impact of.

The cost pressures, we continue to experience in our current quarter.

The impact of the strong profitability in our specialty garment business in the current quarter as well as improved expectations for the remainder of the year and an estimate of $37 million of costs directly attributable to our key initiatives and $3 million of clean related acquisition cost.

Which combined to decrease the core laundry operations operating and EBITDA margin assumptions by two 1% and.

And EPS by $1 60.

Our revised guidance now assumes an effective tax rate for fiscal 2023 of 25, 75% and does not assume any future share buybacks or unexpected significant adverse economic developments.

This concludes our prepared remarks, and we would now be happy to answer any questions that you might have.

If you would like to register for a question. Please press the one followed by the four on your telephone.

Well here is to reach one comp to acknowledge your request is your question has been answered and you would like to withdraw your registration. Please press. The one followed by the three once again. Please press one for to register for a question.

Our first question is coming from the line of Andy Wittmann with Baird. Please go ahead.

Yeah, great. Thanks for taking my questions. Good morning, guys.

Good morning.

I guess I just wanted to dig into the margins a little bit more here.

A really big step up for the quarter on healthcare about $4 million.

Insignificant it sounds like it's more.

Just I mean, you've got yourself shops to a pretty high level.

So when things are episodic things happen.

You have to bear that cost in the period is there anything related to the plan.

Here's Steve that that has changed that that you would expect that those costs would remain highlight this or really is it's just unfortunate circumstances.

Yes, it rose during the quarter.

Yes, I would say, it's really an unfortunate circumstances. When you look at just the last couple of years healthcare costs declined during the pandemic. There was some bounce back after that and then we really over the last six to six to eight quarters sort of seen a flattening of the healthcare costs pretty pretty predictable this quarter driven.

<unk>, primarily by one claim that was over a couple of million dollars, which was to be honest the largest claim we've seen in the last while maybe ever.

So it was really to answer your question, we think extraordinary circumstances and there is nothing in the trends we've seen up until this point or in the plan changes or anything like that that would indicate a step up.

Got it.

Okay. So I mean.

So I guess the other way of kind of digging into the margins here is if you think about the benefits that you had some fuel.

It kind of offsets the same.

Same amount that you had.

<unk> I guess on a health care. So the margins were down a decent amount year over year, you talked about kind of other items you mentioned merchandise I guess, maybe if you could just give a little bit more.

The commentary on other things in the P&L and maybe their magnitudes.

I always ask about labor and merchandising in particular, but maybe if you could talk about those and then any other factors that you see.

It might be worth calling out.

The P&L.

Sure Yes.

I can give some additional commentary on that.

Aside from to your point, the two items that we called out the health and the legal matter largely offset by the benefit that we were seeing in energy.

Year over year, the largest item outside of that impacting our margins are the item that we've sort of been talking about for a number of quarters and that would be our merchandise expense.

In the quarter, we saw that.

A point of.

Headwind related to merchandise.

Clean clean and their profitability I had mentioned the fact that there was a nominal loss related to their operating results.

And our operating income.

It's about 30 basis points as well outside of that there were just a number of Aida of areas that we saw some cost headwinds as as a percentage of revenues.

Across a number a number of different payroll areas obviously.

The effect of the challenging wage environment over the last year.

And then inflation also impacting some of those other or other cost areas, probably most notably in the costs that were incurring related to you.

The running of our processing facilities.

So those really are the most significant items that are impacting impacting the margin in the quarter and just to add to that Andy many.

Many of those were anticipated so pulp part of the way, we certainly look at the breakdown of the quarter is what did we anticipate and what didn't we for the most part the health spend excuse me the energy benefit was anticipated most of the merchandise headwind was anticipated although it was a bit higher than we had.

Built in and then Shane mentioned a number of these other areas that maybe were a little bit more.

Unanticipated are higher than we expected, but I didn't want to give you the impression that the merchandise headwind, which was the largest piece was largely unanticipated because for the most part.

Core merchandise amortization was within our expectations.

That makes sense I guess just final one on this.

What is the net.

I know your purchase accounting is probably not totally complete but last quarter you had an estimate about what the intangible amortization.

What's going to be in that can you just talk about what the quarterly impact is as it stands currently from the intangible amortization related to claims that we have that.

Yes. So if you take a look at the impact of the EBITDA related to the clean acquisition. It was about three point or $3 million.

The operating loss was nominal so the depreciation and amortization was just a little over $3 million.

And about $2 $3 million of that was intangibles amortization.

Okay.

And just to follow up on that Andy that's obviously not a full quarter based on where we acquired acquired it's there'll be a little higher than that in the fourth quarter.

Yeah and.

Alright at a full quarterly run rate of more like sorry.

Go ahead, no I was just going to say you had sort of preface to your question with it but I will caution we are still early in the purchase accounting process. So we will be refining those over the next three quarters.

Okay. So the fully loaded quarterly run rate should be closer to like $3 million.

Before clean versus after clean run rate for the intangible amort is that about the right way to think about to take the $2 three partial quarter up a little bit that's about yes, you're in the ballpark yep.

Okay.

Alright.

I will leave it there for now and yield the floor. Thanks for the color here guys.

Thank you.

Our next question is coming from the line of Tim Mulrooney with William Blair. Please go ahead.

Hey, guys. This is sand carloads on for Tim Thanks for taking my question.

Sure can you talk about what youre seeing in regard to customer behavior have you seen any pockets of strength or weakness began to emerge across any particular geographies or end markets.

I think it's been a pretty stable environment.

Across our employee base.

I didn't talk a lot about sales in the quarter, but the sales environment has still been pretty productive for us.

From a from aware level, we still see sort of what we had talked about last quarter pretty good stability.

So we're not we're not seeing.

Nothing to speak of by geography or industry that I would say are particularly positive nor negative at this point.

Based on your question.

Okay. Thanks, and then a follow up in terms of pricing can you just remind us where pricing is at today relative to historical standards and does it remain elevated.

Related to historical levels.

Yes, I would say absolutely.

The pricing that we've had to work through and our competitors as well in.

In the market.

I would say that pricing is up some over the last couple of years.

As we've talked about before continues to be a very competitive industry and so competition for new accounts is still is still very strong.

But overall, yes, the market is still accepting some pricing, although as we've said before I think as.

As some of the inflationary factors start to moderate that may become a bit more challenging but.

Based on our commentary we are still seeing.

On the input side.

The impact of that inflation. So I think I think the pricing environment is still productive.

And I would say pricing is certainly elevated as an overall customer base compared to a couple of years ago for sure.

Okay. Thanks.

Thank you.

Our next question is coming from the line of Andrew <unk> with Jpmorgan. Please go ahead.

This this might be an old question, but.

From pricing could you just remind us about the fuel surcharge I do think first charges that fuel surcharge when <unk>.

Gas is up and stops when it's down so just remind us when did the fuel surcharge go into effect has at sunset. It now and what's that kind of revenue impact because once you sunset that that's a.

That's a drag.

So to give you some color there Andrew.

About.

I guess it was a little over a year ago now.

When fuel sort of spiked to almost $5 a gallon nationally.

We did put in an incremental.

Fuel charge.

Which has been partially rolled back.

During the course of this year as fuels moderated now fuel still remains elevated from a few years ago. So we maintain a portion of that.

But it has caused some some portion of the.

Organic revenue decline.

Hesitant to kind of quantify it totally because theres a number of things, obviously that impact pricing over time, so but thats the timing of when it went in and we have seen some rollback right and.

Could you just mentioned like when would you start you said it went in around a year ago, when with some of the rollback because at a certain time.

It was believed during our second quarter, primarily okay. Thank you.

Thank you.

Our next question is coming from the line of Kartik Mehta with Northcoast Research. Please go ahead.

Hey, good morning, Steve maybe just on attrition.

Going to see some bankruptcies increase on the SMB side and I'm wondering as you look at your customer base, what youre seeing from attrition standpoint today versus maybe a year ago.

We have seen a tick up in our what we consider overall lost accounts over the last several months.

Sort of digging into that detail a little bit I can't say.

<unk> here, whether it's been because of more out of businesses or so on but as we do do business with with many small businesses. It's still the biggest portion of our of our customer base and out of business situations has always been a decent percent of our attrition.

You could probably make that connection, but we have seen some tick up in attrition over the last few months.

And what about from a add stop metric just job openings. It seems like there are a lot of job openings, but.

Also it seems as though companies that maybe pulled back a little bit on the hiring so if you kind of look at.

What you see in terms of job openings at your customers.

Versus what Youre seeing in terms of add stop metric.

Yes, we would still view that as pretty stable I'm not sure I would say that there's a dramatic difference from three months ago on what we're seeing there we are hearing a little bit more anecdotally some caution from our customers, but I still believe and you see this in some of the job numbers that.

Because of the difficulty hiring in the last year to 18 months people people who have been hesitant.

To ratchet back on those blue collar employees that were our uniforms and so we're still seeing reasonably healthy where levels.

Yes.

Thank you.

The only thing I was going to add as it relates to the our customer retention.

During the pandemic and even a couple of years subsequent to that our retention levels had trended favorably I just want to make sure that we're.

<unk>, indicating that our customer retention levels are lower than they maybe were in the period that preceded the pandemic at this point in time.

Our retention is sort of trending back closer to the experience that we had pre pandemic.

Okay.

It seems logical and just one last question on your ERP implementation.

Obviously I'm sure you've received some benefits, but once its a 100% and saw where do you anticipate the initial benefits.

And maybe if it's possible to quantify it if it's from an expense side or.

The level of benefits you anticipate.

Just to clarify.

The two large initiatives on the technology side, we've kind of bifurcated between CRM and ERP CRM is the one that we have made a lot of progress and we are mostly deployed the ERP. We're still in the earlier stages and it'll be over multiple years before we sort of are fully installed on the ERP.

Side. So I think I think your question is probably more relevant on the CRM side.

And what I would say there is as we've as we've deployed the CRM system over our locations over the last year and a half or so that the.

Patients that have been on it the longest are starting to kind of hit their stride in terms of optimizing the new system and being comfortable with the new technology in some of the changes that were made but there's still some work to be done as newer locations are deployed there is a lot of training. There is a lot of data conversion. There's a lot of there is some distraction and so I think over the course of.

Next year as everyone's been on the system for a bit we'll start to see more of the benefits, but nothing really more there to specifically quantify at this time.

Alright, Thank you really appreciate it.

Thank you. Thank you.

As a reminder to register for a question. Please press the one followed by the four.

Our next question is coming from the line of Josh Chan with UBS. Please go ahead.

Hi, Good morning, Stephen chain. Thanks for taking my question good morning.

Hi, Yes, I was wondering if you could talk about the trajectory of inflation that you're seeing and I realize you can't predict the health care and legal costs, but wondering what youre seeing in terms of material labor production inflation.

Are you at the point of seeing any moderation in inflation in any of those areas.

Yeah, I think when you when you break down and get to the core of inflation, certainly compared to a year ago.

Cost of all of those categories. You mentioned are still higher I would say there is some moderation occurring and you read about some of it so certain supply chain freight cost overseas freight some raw material cost, we're starting to see come down, but I think it's.

It's slow and there still are other vendors and inputs we use that.

We have been experiencing higher cost in their business, including labor.

Not really seeing a moderation of so I think it's a little bit of a mixed bag right now.

Moderation is probably the right term.

Not seeing things continue to inflate at the same rate as they did over the last year, but we are still experiencing some of those higher cost in and many of them certainly have not taken a step back.

Right, Yeah, that's really helpful color thanks for that.

And so I guess as we look into 2024.

I guess could you talk about the different margin moving pieces. It sounds like inflation is still going to be a headwind, but you might get some benefit from the CRM side. So how do you think about margins in 2000 and for setting up versus where you finish in 'twenty three.

Yes, I think certainly we'd probably stop short of really making too many predictions as you know over the course of the summer will be going through kind of our heavy budgeting and forecasting process.

I will just kind of point to the commentary I made in the in the call about we're very focused right now on on turning the tide on the margin trajectory.

So we have a number of things we're focused on and we're hopeful with that focus and continuing to try to do what we need to do to optimize pricing as well as control our inputs that we'll be able to move things in the right direction, but at this point, we're not positioned to make specific specific commentary.

Okay that sounds good and then I guess the last one for me it's more of a clarifying question I think Shane you mentioned.

In the outlook more modest revenue expectations in core laundry, if I heard that right is that is that just because of that year over year comps getting tougher or is there anything to call out there in terms of revenue and core laundry.

Yes, I'll take that one I think I think we made some commentary that our attrition ticked up a bit.

I think some of it is is the year over year comps becoming tougher.

But I think theres, a little caution there in terms of.

The revenue trajectory new sales continued to be strong. So I don't think it's on the new sales side, but.

We are just seeing a little softness in some pieces of it.

Some of the some due to attrition.

Okay perfect. Thanks for the color and thanks for the time.

Thank you.

As a reminder, please press one four if you'd like to register for a question just one moment. Please.

And at this time, there appears to be no further questions.

I would like to thank everyone for joining us today to review our results. We look forward to speaking with you again in October when we expect to be reporting on our fourth quarter performance as well as providing further outlook for our fiscal 'twenty four thank you and have a great day.

That does conclude the conference call for today, we thank you for your participation and ask that you. Please disconnect your line.

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Greetings and welcome to the Uni first Corp, third quarter earnings call.

At any time during the conference you need to reach an operator. Please press star Zero I would now like to turn the conference over to Steven Centros, President and CEO . Please go ahead.

Thank you and good morning, I'm, Steven <unk> unit first President and Chief Executive Officer. Joining me today is Shane Oconnor Executive Vice President and Chief Financial Officer, I would like to welcome you to the unit First Corporation conference call to review, our third quarter results for fiscal year 2023.

This call will be on a listen only mode until we complete our prepared remarks, but first a brief disclaimer.

This conference call may contain forward looking statements that reflect the company's current views with respect to future events and financial performance.

These forward looking statements are subject to certain risks and uncertainties. The words anticipate optimistic believe estimate expect intend and similar expressions that indicate future events and trends identify forward looking statements actual future results may differ materially from those anticipated depending on a variety of risk factors.

For more information please refer to the discussion of these risk factors in our most recent 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 and continued to be excited about a number of key areas of investment in our company.

Profits in the quarter compared to our expectations and our core laundry operations were negatively impacted by significantly higher healthcare claims than we had forecasted driven primarily by one very large claim as well as expenses in the quarter related to a legal matter in.

We will continue to manage cost 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 and as always we maintain a sharp focus on taking care of our employees, our customers and bringing new customers into the unit first family.

Our consolidated profits were positively impacted by record revenues and profits from our specialty garments segment.

As we have mentioned over the years, our nuclear divisions results can be more volatile based on the impact of certain projects as well as swings in activity with some very large customers.

To achieve in the markets we serve together.

We also continue to be focused on and pleased with the progress of our two large technology initiatives designed to transform the company in terms of overall capabilities and competitive positions positioning excuse me.

Based on new guidance provided by the SEC regarding non-GAAP financial measures and the comment from the SEC and our recent SEC comment letter, we modified our disclosure and are no longer providing adjusted operating results. Excluding these costs.

In addition, we will also be disclosing any significant direct costs that we incurred or will be incurring related to the closing and integration of the clean acquisition.

And efficiency.

With that I'd like to turn the call over to Shane who will provide more details on our third quarter results.

Thanks, Steve.

And our third quarter of 2023 consolidated revenues were $576 7 million.

Up 12, 7% from 511 5 million a year ago, and consolidated operating income decreased to $33 4 million from $33 7 million or 9%.

Net income for the quarter decreased to $24 3 million or $1 29 per diluted share from $25 1 million or $1 33 per diluted share.

Consolidated EBITDA increased to $64 million compared to $60 3 million in the prior year or six 3%.

Our financial results in the third quarters of fiscal 2023, and 2022 included approximately $8 4 million and $11 $4 million, respectively of cost directly attributable to our three key initiatives the CRM ERP and branding initiatives. In addition, we.

Incurred costs related to the acquisition of clean uniform during the third quarter of fiscal 2023 of approximately <unk> 7 million.

These items on the third quarter of fiscal 2023, and 2022 combined to decrease operating income and EBITDA by $9 1 million and $11 4 million respectively.

Net income by $6 8 million and $8 $4 million, respectively, and EPS by 37, and <unk> 44, respectively.

Our core laundry operations revenues for the quarter were $501 $7 million.

Up 11, 5% from the third quarter of 2022.

Core laundry organic growth, which adjusts for the estimated effect of acquisitions as well as fluctuations in the Canadian dollar was seven 8%.

Core laundry operating margin decreased to four 2% for the quarter or $21 million from five 9% in prior year or $26 4 million in the segment's EBITDA margin decreased to nine 9% from 11, 4%.

Cost, we incurred related to our key initiatives and the clean acquisition were recorded to the core laundry operations segment and combined to decrease the core laundry operating and EBITDA margins for the third quarter of fiscal 2023 and 2022.

By one 8% and two 2% respectively.

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In addition margins continued to be pressured by higher merchandize and other operating costs as a percentage of revenues, which are being impacted by the inflationary environment.

The preliminary preliminary purchase accounting for the recent clean uniform acquisition further impacted the segment's operating margin most notably in the form of elevated noncash intangibles amortization.

Partially offsetting these headwinds were lower energy costs during the quarter, which decreased to four 3% of revenues in the third quarter of 2023 down from five 2% in 2022.

The previously announced acquisition of clean uniforms, which closed on March 13th 2023 contributed to the core laundry operations operating results for the quarter approximately $20 million of revenue a nominal operating loss and approximately $3 million to the segment's EBITDA.

Yes.

This increase was primarily due to strong growth in our clean room operations and increased project work in our North American nuclear operations.

Segment operating margin increased to 25, 2% from 17, 4%, primarily the result of its strong topline performance.

Segment's operating performance from both the topline and profitability perspective was very strong and exceeded our expectations.

Our first aid segment's revenues increased to $25 5 million from $23 million in prior year or 25, 8%.

However, the segment had an operating loss of $1 million during the quarter.

These results continue to reflect our investment in expanding the first aid band business and building a foundation for what we expect to eventually be a much larger business.

We did not repurchase any additional common stock under our current stock repurchase program during the quarter.

We continue to invest in our future with capital expenditures during this period of $124 $1 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 $300 million.

We now believe that our capital expenditures for the year will be between $155 million and $160 million due to a number of large facility projects, we have been advancing throughout the year.

I'd like to take this opportunity to provide an update on our outlook.

At this time, we expect our full year consolidated revenues will be between $2, two 2 billion and $2 two 3 billion.

Primarily as a result of the strong top line performance in the specialty garment business.

We continue to expect diluted earnings per share to be between $5 <unk>.

And $5 37.

Of the cost pressures, we continue to experience in our current quarter.

Which combined to decrease the core laundry operations operating and EBITDA margin assumptions by two 1% and.

And EPS by $1 60.

Our revised guidance now assumes an effective tax rate for fiscal 2023 of 25, 75% and does not assume any future share buybacks or unexpected significant adverse economic developments.

This concludes our prepared remarks, and we would now be happy to answer any questions that you might have.

Thank you I would like to register for a question. Please press the one followed by the four on your telephone.

You'll hear us retail comp to acknowledge your request is your question has been answered and you would like to withdraw your registration. Please press. The one followed by the three once again. Please press one for to register for a question or.

Our first question is coming from the line of Andy Wittmann with Baird. Please go ahead.

Yeah, great. Thanks for taking my questions. Good morning, guys.

Good morning.

I guess I just wanted to dig into the margins a little bit more here.

A really big step up for the quarter on healthcare about $4 million is not.

Insignificant it sounds like it's more.

Just I mean, you itself share up to a pretty high level.

So.

When things episodic things happen.

You have to bear that cost in the period is there anything related to the plan.

Steve that that has changed that that you would expect.

Costs would remain highlight this or really is it's just unfortunate circumstances.

It rose during the quarter.

I would say, it's really an unfortunate circumstances. When you look at just the last couple of years healthcare costs declined during the pandemic. There was some bounce back after that and then we've really over the last six to six to eight quarters sort of seen a flattening of the healthcare costs pretty pretty predictable.

This quarter driven primarily by one claim that was over a couple of million dollars, which was to be honest the largest claim we've seen in the last while maybe ever.

So it was really to answer your question, we think extraordinary circumstances and Theres nothing in the trends we've seen up until this point or in the plan changes or anything like that that would indicate.

Step up.

Got it.

So I mean, so I guess, the other way of kind of digging into the margins here is if you think about the benefits that you had some fuel.

It kind of offsets the.

The same amount that you had.

Penalising here I guess on healthcare, so but margins were down a decent amount year over year. So you've talked about kind of other items you mentioned merchandise I guess, maybe if you could just give a little bit more.

Commentary on other things in the P&L, maybe theyre magnitudes.

I always ask about labor and merchandising in particular, but maybe if you could talk about those and any other factors that you think might be worth calling out inside the P&L.

Sure Yes.

I can give some additional commentary on that.

Aside from to your point, the two items that we called out the health and the legal matter were largely offset by the benefit that we were seeing in energy.

Year over year, the largest item outside of that impacting our margins are the item that we've sort of been talking about for a number of quarters and that would be our merchandise expense.

In the quarter, we saw that about a point of headwind related to merchandise.

Clean clean and their profitability I had mentioned the fact that there was.

I'm gonna loss related to their operating results.

In our operating income.

About 30 basis points as well outside of that right like they were just a number of Aida of areas that we saw some cost headwinds as as a percentage of revenues.

Across a number a number of different payroll areas obviously.

Fact of the challenging wage environment over the last year.

And then inflation also impacting some of those other or other cost areas, probably most notably in the costs that were incurring related to you.

The running of our processing facilities.

So those really are the most significant items that are impacting impacting the margin in the quarter and just to add to that Andy.

Many of those were anticipated so part of the way, we certainly look at the breakdown of the quarter is what did we anticipate and what didn't we for the most part the health excuse me the energy benefit was anticipated most of the merchandise headwind was anticipated although it was a bit higher than we had.

Built in and then Shane mentioned a number of these other areas that maybe were a little bit more.

Anticipated are higher than we expected, but I didn't want to give you the impression that the merchandise headwind, which was the largest piece was largely unanticipated because for the most part the core merchandise amortization was within our expectations.

That makes sense I guess just.

Final one on this.

<unk>.

What is the net.

I know your purchase accounting is probably not totally complete but last quarter you had an estimate of what the intangible amortization.

What's going to be and then can you just talk about what the quarterly impact is as it stands currently from the intangible amortization related to claims that we have that.

Yes. So if you take a look at the impact of the EBITDA related to the clean acquisition. It was about three point or $3 million.

The operating loss was nominal so the depreciation and amortization was just a little over $3 million.

And about $2 $3 million of that was intangibles amortization.

Okay.

And just to follow up on that Andy that's obviously not a full quarter based on where we acquired acquired there'll be a little higher than that in the fourth quarter.

And.

Sort of a full quarterly run rate of more like sorry.

Okay. So the fully loaded quarterly run rate should be closer to like $3 million.

Before clean versus after clean run rate for the intangible amort is that about the right way to think about it take the $2 three partial quarter up a little bit that's about yes, you're in the ballpark yep.

Okay.

Alright.

I will leave it there for now and yield the floor. Thanks for the color here guys.

Thank you.

Our next question is coming from the line of Tim Mulrooney with William Blair. Please go ahead.

Hey, guys. This is Sam carload on for Tim Thanks for taking my question.

Sure can you talk about what youre seeing in regard to customer behavior have you seen any pockets of strength or weakness began to emerge across any particular geographies or end markets.

I think it's been a pretty stable environment.

Across our employee base.

I didn't talk a lot about sales in the quarter, but the sales environment has still been pretty productive for us.

Or from aware level, we still see sort of what we had talked about last quarter pretty good stability.

So we're not we're not seeing.

Nothing to speak of by geography or industry that I would say are particularly positive nor negative at this point.

Based on your question.

Okay. Thanks, and then a follow up in terms of pricing can you just remind us where pricing is at today relative to historical standards and does it remain elevated.

Related to historical levels.

Yes, I would say absolutely.

The pricing that we've had to work through and our competitors as well in.

In the market.

Would say that pricing is up some over the last couple of years.

As we've talked about before continues to be a very competitive industry and so competition for new accounts is still is still very strong.

But overall, yes, the market is still accepting some pricing, although as we've said before I think as.

As some of the inflationary factors start to moderate that may become a bit more challenging but.

Based on our commentary we are still seeing on the input side.

The impact of that inflation. So I think I think the pricing environment is still productive.

And I would say pricing is certainly elevated as an overall customer base compared to a couple of years ago for sure.

Okay. Thanks.

Thank you.

Our next question is coming from the line of Andrew <unk> with Jpmorgan. Please go ahead.

This this might be an old question, but.

From pricing could you just remind us about the fuel surcharge I do think first charges have fuel surcharge when.

Gas is up and stops one is down so just remind us when did the fuel surcharge go into effect has at sunset. It now and what's that kind of revenue impact because once you sunset that that's a that's.

That's a drag.

So to give you some color there Andrew.

About.

I guess it was a little over a year ago now.

When fuel sort of spike to almost $5 a gallon nationally.

We did put in an incremental fuel charge.

Which has been partially rolled back.

During the course of this year as fuels moderated now fuel still remains elevated from a few years ago. So we maintain a portion of that.

But it has caused some some portion of the.

Let's say organic revenue decline.

I'd be hesitant to kind of quantify it totally because theres a number of things obviously that impact pricing over time, so but thats the timing of when it went in and we have seen some rollback right and could you just mentioned like when would you start you said it went in around a year ago, when some of the rollback because it at a certain time.

It was believed during our second quarter, primarily okay. Thank you.

Thank you.

Our.

Next question is coming from the line of Kartik Mehta with Northcoast Research. Please go ahead.

Hey, good morning, Steve maybe just on attrition.

We're starting to see some bankruptcies increase on the SMB side and I'm wondering as you look at your customer base, what youre seeing from attrition standpoint today versus maybe a year ago.

We have seen a tick up in our what we consider overall lost accounts over the last several months.

Sort of digging into that detail a little bit I can't say definitively here, whether it's been because of more out of businesses or so on but as we do do business with with many small businesses. It's still the biggest portion of our of our customer base and out of business situations has always been a day.

Percent of our attrition.

You could probably make that connection, but we have seen some tick up in attrition over the last few months.

And what about add stop metric just job openings. It seems like there are a lot of job openings, but.

It also seems as though companies that maybe pulled back a little bit on the hiring so if you kind of look at.

What you see in terms of job openings at your customers.

Versus what Youre seeing in terms of add stop metric.

Because of the difficulty hiring in the last year to 18 months people people who have been hesitant.

To ratchet back on on those Blue collar employees that were our uniforms and so we're still seeing reasonably healthy where levels.

Yes.

Thank you.

Only thing I was going to add as it relates to the our customer retention.

During the pandemic and even a couple of years subsequent to that our retention levels had trended favorably I just want to make sure that we're <unk>.

<unk>, indicating that our customer retention levels are lower than they maybe were in the period that preceded the pandemic at this point in time.

Our retention is sort of trending back closer to the experience that we had pre pandemic.

Okay.

Seems logical and just one last question on your ERP implementation.

Obviously I'm sure you've received some benefits, but once its a 100% and saw where do you anticipate the initial.

<unk> and <unk>.

Maybe if it's possible to quantify it if it's from an expense side or.

The level of benefits you anticipate.

Just to clarify.

The two large initiatives on the technology side, we've kind of bifurcated between CRM and ERP CRM is the one that we have made a lot of progress and we are mostly deployed the ERP, we're still in the earlier stages.

And it'll be over multiple years before we sort of are fully installed on <unk>.

ERP side. So I think I think your question is probably more relevant on the CRM side.

And what I would say there is.

As we've deployed the CRM system over our locations over the last year.

Year, and a half or so that this is the.

The locations that have been on it the longest are starting to kind of hit their stride in terms of optimizing the new system and being comfortable with the new technology in some of the changes that were made but there's still some work to be done as newer locations are deployed there is a lot of training. There is a lot of data conversion as a lot of there is some distraction and so I think over.

Of course of the next year as everyone's been on the system for a bit we will start to see more of the benefits, but nothing really more there to specifically quantify at this time.

Alright, Thank you I really appreciate it.

Thank you. Thank you.

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Our next question is coming from the line of Josh Chan with UBS. Please go ahead.

Hi, Good morning, Stephen chain. Thanks for taking my question good morning.

Hi, Yes, I was wondering if you could talk about the trajectory of inflation that youre seeing you I realize you can't predict the health care and legal costs, but wondering what youre seeing in terms of material labor production inflation.

Are you at the point of seeing any moderation in inflation in any of those areas.

Yes, I think when you when you break down and get to the core of inflation, certainly compared to a year ago.

Our other vendors and inputs we use that.

Have been experiencing higher cost in their business, including labor.

Not really seeing a moderation of so I think it's a little bit of a mixed bag right now.

The moderation is probably the right term, we're not seeing things continue to inflate at the same rate as they did over the last year, but we are still experiencing some of those higher costs and many of them certainly have not taken a step back.

Right yes.

Full color and thanks for that.

And so I guess as we look into 2024.

I guess could you talk about the different margin moving pieces. It sounds like inflation is still going to be a headwind, but you might get some benefit from the CRM side. So how do you think about margins in 'twenty for setting up versus where you finish in 'twenty three.

Yes, I think certainly we'd probably stop short of really making too many predictions as you know <unk>.

Over the course of the summer will be going through kind of our heavy budgeting and forecasting process.

I will just kind of point to the commentary I made in the in the call about we're very focused right now on on turning the tide on the margin trajectory.

Okay that sounds good and then I guess the last one for me it's more of a clarifying question I think Shane you mentioned.

Yes, I'll take that one I think I think we made some commentary that our attrition ticked up a bit.

I think some of it is is the year over year comps becoming tougher.

But I think theres, a little caution there in terms of.

The revenue trajectory new sales continued to be strong. So I don't think it's on the new sales side, but.

We are just seeing a little softness in some pieces of it.

Some of the some due to attrition.

Okay perfect. Thanks for the color and thanks for the time.

Thank you.

As a reminder, please press one four if you'd like to register for a question just one moment. Please.

And at this time, there appears to be no further questions.

Wed like to thank everyone for joining us today to review our results. We look forward to speaking with you again in October when we expect to be reporting on our fourth quarter performance as well as providing further outlook for our fiscal 'twenty four thank you and have a great day.

That does conclude the conference call for today, we thank you for your participation and ask that you. Please disconnect your line.

Q3 2023 UniFirst Corporation Earnings Call

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