Q2 2024 UniFirst Corp Earnings Call
Bad business.
At the end of our second fiscal quarter, we continued to reflect the solid balance sheet and financial position with no long term debt and cash cash equivalents and short term investments totaling $101 9 million.
Cash flows from operating activities in fiscal 2024 have increased to $106 7 million.
Compared to $64 2 million in prior year, or <unk> 66, 3%, primarily due to improved profitability and lower working capital needs of the business.
During the first half of the year, we continue to invest in our future with capital expenditures of $72 $9 million and we repurchased 46750 shares of common stock for $8 1 million.
Speaker Change: I'd like to take this opportunity to provide an update on our outlook.
Speaker Change: We now expect our revenues for fiscal 2024 to be between 241 5 billion and 242 5 billion in line with the message at the end of our last fiscal quarter.
Speaker Change: We further expect that our diluted earnings per share will be between $6 $87 16.
Speaker Change: Our guidance for fiscal 2024 continues to include one extra week of operations compared to fiscal 2023 due to the timing of our fiscal quarter and assumes core laundry operations operating and EBITDA margin at the midpoint of the range.
Speaker Change: Of six 5% and 12, 6% respectively.
We now estimate that the cost directly attributable to our key initiatives that will be expensed in fiscal 2024 will be $12 million and will reduce both core laundry operations operating and EBITDA margins by <unk>, 6%.
Speaker Change: We fully expect the full year effective tax rate will be 25%.
Speaker Change: And our guidance assumes no future share buybacks or unexpected significantly adverse economic development.
Speaker Change: This concludes our prepared remarks, and we would now be happy to answer any questions that you may have.
Speaker Change: Thank you.
Speaker Change: Ladies and gentlemen, as a reminder to ask a question. Please press star one on your telephone and wait to hear your name announced.
To withdraw your question. Please press star one again.
Speaker Change: Please standby, while we compile the Q&A roster.
Our first question comes from.
Speaker Change: Lineup Manav Patnaik with Barclays. Your line is open.
Speaker Change: Hi, Good morning. This is roni Kennedy on for me. Thank you for taking my questions first one if I may just to look to unpack I know you historically don't disaggregated break out the organic growth algo, but you did comment on.
roni Kennedy: Strong performance with a 10% increase in new account installations, just wondering if you could unpack that.
roni Kennedy: A bit further with some further detail as to the drivers there who you're winning from.
roni Kennedy: So further details.
Sure.
roni Kennedy: From a sales perspective, I think if you look at it as we've talked about in the past.
roni Kennedy: About 60% of our new account sales come from competition, and Thats sort of a wide range of competition and the other 40% of no programmers. So those are either people that had a different type of program, maybe a direct purchase program or.
roni Kennedy: No program at all or opening a new business and so on from an industry perspective, I think it's pretty pretty widespread.
We haven't seen any significant shift in.
roni Kennedy: The type of business that we're winning we're still winning a healthy amount of uniform business, which did run a little bit higher this year at least year to date compared to a year ago.
roni Kennedy: So I would say the wins are pretty broad based.
Speaker Change: That's helpful. Thank you and then as a follow up also on the organic growth I think you had referenced.
Speaker Change: A somewhat more challenging pricing environment, which you had also previously spoken of seeing price sensitivity I think it was relative to initial expectations and also a function of moderating costs, but can you just talk about how pricing is trending and whether you're seeing some <unk>.
Speaker Change: You need to see what was previously some strategic losses and then also just any comments on attrition and how that is trending please.
Speaker Change: Sure with respect to pricing I think my comments, probably held from last quarter as well it is a little bit more sensitive out there.
Speaker Change: I think you just look at the cycle that we've gone through from an inflationary perspective, and although cost theyre not going backwards. Some of the cost trends just out in the marketplace have moderated and I think a lot of companies are starting to look at their cost and maybe putting programs out to bid a little bit more than they did certainly during the pandemic I think this is.
Speaker Change: A lot of this is in the context of comparing to the pandemic where.
Speaker Change: Retention for a lot of service companies was better price sensitivity wasn't as strong, especially with the inflation that was being experienced across the market. So I wouldn't say during the quarter. We had any further change in that environment. It continues to be on balance a little more challenging in that area compared to say a year.
Speaker Change: To go from an attrition perspective, I know, we had talked about it picking up a bit over the last couple of quarters I would say no real change there, although compared to maybe the second half of last year, maybe some recent recent improvement.
Speaker Change: Little bit so.
Speaker Change: Nothing really significantly different in the environment.
Speaker Change: Thank you I appreciate it.
Thank you.
Please standby for our next question.
Speaker Change: Our next question comes from the line of I'd say no.
Northcoast research: With Northcoast research your line is open.
Northcoast research: Steve just to understand pricing, a little bit more from a sensitivity standpoint.
Speaker Change: Are you at a point, where your year over year are starting to have to see.
Speaker Change: Go negative pricing or decreased pricing.
Steve: Are you still able to get a little bit of a price increase but maybe just not as much as you were getting during the pandemic.
Steve: Yes, I think I think its the latter I think we still feel like we're securing some price.
Steve: But as we as we all have talked about over the last couple of years on balance there was more impact as we work through what had been sort of rapidly rising fuel prices and other inflationary areas I think that the.
Steve: The ability to share and price was was on balance easier.
Steve: But no I would say, we're still getting some benefit from pricing for sure.
Steve: The current quarter and in the current environment.
Steve: And then I know you talked a little bit about attrition, but as you look at your add stop metric.
Steve: Is that trending.
Speaker Change: Yeah, Ed stops as it is very stable right now I think I made the comment that.
Speaker Change: Year ago, we were seeing a little bit more of a pull.
Speaker Change: From positive AD and you just don't need to look much further than sort of the job numbers kind of month to month over the last couple of years to see that.
Speaker Change: You can kind of make the connection that we were getting more pull over that period of time and less pull now right now I'd say its stable. We obviously look closely to see if theres any signals of industry sort of pulling back and although we've seen select layoffs here and there broadly it's been very stable overall.
Speaker Change: And just one last question.
Speaker Change: For the year, what would you just to try to understand the adjusted EPS I know you gave the EPS number.
Speaker Change: What kind of impact would you anticipate from your key initiatives.
Speaker Change: I know the acquisition knowledge you.
Speaker Change: You are lapping it but just for the year.
Speaker Change: Yes, I think the estimate for my key initiatives.
Speaker Change: Is $12 million for the year.
Speaker Change: Thank you very much.
Speaker Change: Thank you.
Speaker Change: Please standby for our next question.
Speaker Change: Our next question comes from the line of Tim Mulrooney with William Blair. Your line is open.
Speaker Change: Hi, Good morning. This is Luke on for Tim Thanks for taking my questions today.
Speaker Change: So.
Luke: Last quarter.
Luke: Had mentioned detecting more cautious posture from some clients as it pertains a business outlook at.
Luke: At least on the margin, but given that many of our clients have now likely going through their own annual budgeting process.
Luke: I'm just curious to hear if you've noticed any shift in sentiment one way or another as it relates to the outlook for the balance of 2024.
Speaker Change: So I wouldn't say, there's really been any shifts and I think you sort of seeing that in the in the adds reductions right I think.
Speaker Change: We're probably seeing people a little bit more cautious about growth outlook overall, which is causing maybe some some pull back in hiring.
Speaker Change: But again I think it's sort of incrementally cautious, but I wouldn't say compared to a quarter ago that that's really changed a heck of a lot.
Speaker Change: Okay.
Speaker Change: Understood.
Speaker Change: And then if I can.
Speaker Change: <unk> to your ERP implementation could you just provide any update on progress as it relates to that initiative to date.
Speaker Change: Just in terms of kind of where that's trended in term in terms of your internal expectations and in light of that progress since the $150 million number that you gave given in the past for Capex for <unk>.
Speaker Change: Full year 2024, still the right way to be thinking about that.
Speaker Change: Yeah.
Speaker Change: Yes, our ERP project continues to progress sort of in line with our expectations again, we're in the earlier implementation phases, where we're focusing on maybe some more of the foundational items.
Speaker Change: As we implement that system at this point in time, I would say largely it's progressing as expected.
Speaker Change: When you take over or as it relates to your question around the Capex for the year the $150 million I think.
Speaker Change: Through two quarters, we spent a little over $72 million in Capex.
Speaker Change: And I think the way things are trending that $150 million number still is a good number.
Speaker Change: Alright, thanks, so much.
Speaker Change: Thank you.
Speaker Change: Please standby for our next question.
Jpmorgan: Our next question comes from the line and juice finer man with Jpmorgan. Your line is open.
Andrew Charles Steinerman: Hi, could you talk a little bit about universe.
Speaker Change: Success in cross selling like right now how much is cross selling existing accounts, helping the organic revenue growth.
Speaker Change: Overall, I know you talked about building out your vans business and first first day. This is really kind of.
Let's say core laundry question, but are you getting.
Speaker Change: More cross sell.
Speaker Change: Core of core laundry from your band customers in first aid.
Speaker Change: Yes, I'll take the second part of the question first and certainly we are getting a lot of energy and cross sell with our with our first date expansion and that was sort of the.
Speaker Change: The purpose of expanding that infrastructure to really take advantage of our universe customer base and I think that that's being successful as far as from a core laundry perspective.
Speaker Change: And again I know, we don't always break down the components of that growth.
Speaker Change: We're probably seeing a consistent amount of cross sell going on right now.
Speaker Change: In the in the in the core.
Speaker Change: <unk>.
Speaker Change: Yeah.
Speaker Change: I really don't want to break down the components of the four eight it gets a little messy with adds reductions in cross sell and so on but.
Speaker Change: I think it's pretty consistent I think there's more we can do there and some of our strategy over the next couple of years is to.
Speaker Change: Increase some investments in that area.
Speaker Change: I think without getting into some of the details about some of the products and other things that we're looking at we think there's incremental opportunity. There. So right now it's probably been pretty steady based on what we've been doing but we think there's opportunity to improve that area.
Speaker Change: Thank you very much.
Speaker Change: Thank you.
Speaker Change: Please standby for our next question.
Speaker Change: Yeah.
Speaker Change: Our next question comes from the line of Justin Hauke with Baird. Your line is open.
Hi, Good morning, Hey, its Andrew Wittmann, sorry for the confusion there.
Speaker Change: Morning.
Andrew John Wittmann: Just wanted to I wanted to ask Shane on the you talked about the environmental liability on some of your sites.
Andrew John Wittmann: Increased and impacted your margins. This question really two parts to this one.
Speaker Change: How much.
Speaker Change: Was the reserve this quarter.
Speaker Change: Do you see that reserve being kind of an adjustment that is one time, where do you think this is an ongoing level of greater cost that you'll be having to take in your P&L.
Speaker Change: Forward basis.
Speaker Change: Yes.
Speaker Change: Yes, so the first thing I'll say about those reserve adjustments as those relate to legacy sites that and those environmental issues to probably from three or four decades ago. So.
Speaker Change: There are reserves that we've carried.
Speaker Change: For a significant amount of time.
Speaker Change: The headwind that we saw during the quarter, our legal expenses were actually 50 basis points of headwind. The vast majority of that was related to the environmental reserves that we recorded.
Speaker Change: That isn't in ongoing.
Speaker Change: You Shouldnt expect that theres going to be ongoing reserve adjustments on a quarterly basis from time to time, we do have to adjust those one of the adjustments that we make to those reserves are change in discount rate and we've talked about that from time to time. So.
Speaker Change: We've had some variability go through our operating margins as a result of those types of changes, but they arent normal operating expenses that are that are routine and consistent. So every now and then we'll have to make some adjustments to those reserves.
Speaker Change: But it's sporadic the only other thing I'll add Andy is that.
Speaker Change: Some of these some of the progress related to these sites.
Speaker Change: Transpires over years, and so we will we will be asked to do a little bit more work on our side and we'll try to estimate the impact of that and then.
Speaker Change: Two years later.
Speaker Change: We will have some more feedback about something so as Shane mentioned it was both that this quarter as well as somewhat of the.
Speaker Change: Interest rate adjustments that we made to those reserves as well.
Speaker Change: Yes, Okay that all makes perfect sense, and then I guess the other key thing that you mentioned here on your margins.
Speaker Change: As related to merchandise costs. This is Ben.
Ben: Lingering headwind, but it sounds like this quarter, where you saw a little positive benefit from there do you feel like.
Ben: That bottom is in place on the merchandise costs I thought it was particularly interesting given that new account installs were sounded like they are pretty good.
Ben: Positive things about that so.
Ben: Does that give a firmer base do you think Steve.
Ben: Merchandize crossing it can you give us a quantum of most of the benefit that you saw in the quarter on that one as well.
Steve: Yes, I think in the quarter compared to year over year.
Steve: We're still sort of flat or maybe even up a 10th or something in merchandise, but compared to our expectations. We saw some some some benefits there.
Steve: And to answer your question I think clearly now we feel like we are seeing that flattening right. We've been we've been growing growing we started to see some early signs of flattening and.
Steve: We really are seeing that now and just as a reminder.
Steve: Generally.
Steve: More than two thirds of the merchandise is just regular replacement merchandise for existing accounts and about a third is related to new accounts, so even with new accounts higher.
Steve: We're seeing we're seeing some benefits in that area, which are great to great to see.
Speaker Change: Yes, the only thing I'll add to that is as we came into the year, we hit sort of message that merchandise was starting to flatten.
Speaker Change: And we had indicated that maybe we were four or where we're looking at 10 basis points headwind during the year.
Speaker Change: Based on what we've seen through six six months.
Speaker Change: We've obviously seen some.
Speaker Change: Flattening and the additional add to our merchandise and service.
Speaker Change: The way that we account for our merchandise.
Speaker Change: Won't have as much of a meaningful impact on the current year, because we amortize that over an extended life at this point in time when I take a look at the year I'm looking at merchandise being relatively flat or maybe.
Speaker Change: Slight benefit.
Speaker Change: Around 10 basis points.
Speaker Change: But again because of the way that we account for that.
Speaker Change: That trend will aggregate over time.
Speaker Change: Okay.
Speaker Change: That's helpful. I guess I'm just going to ask one question maybe on.
Speaker Change: On the top line here, because I'm hearing some puts and takes I am hearing.
Speaker Change: Increase in new account installs, which.
Speaker Change: It sounds like a really good.
Speaker Change: Good performance year over year and would otherwise suggest that maybe.
Speaker Change: Potentially I guess the question is do you think can that lead to an inflection in your growth rate up from here just given that you installed a lot of new business in the quarter and I guess previously you kind of shoot you were talking about the revenue being maybe on the lower end of guidance.
Speaker Change: And so does the sales performance.
Speaker Change: That commentary or does the add stops.
Speaker Change: Now more flat instead of positive like you were getting a year ago does that happen.
In fact, I guess ultimately just still like the low end of the revenue guidance or are you more positive this quarter given the factors that you saw play out.
Speaker Change: Yes, probably right down the middle there, Andy and I think that.
Speaker Change: The guidance reflects that right I think all we did on the top line guidance with sort of a narrow the range and shifted a bit to reflect the commentary we made last quarter and I do think the impact of some of those things you are mentioning whether it be the.
Speaker Change: The impact of solid new account sales price adds reductions all of those things kind of have us looking.
Speaker Change: Very much in the same place that we were a few months ago I guess.
Speaker Change: Okay I'll leave it there guys have a good day.
Speaker Change: Thank you. Thank you. Thank you as a reminder, ladies and gentlemen that star one to ask a question.
Speaker Change: Hey, Sam Baccarat next question.
Speaker Change: Our next question comes from the line of Josh Jayne UBS. Your line is open.
Joshua K. Chan: Hi, good morning, Stephen and chain.
Joshua K. Chan: Good morning, good morning.
Joshua K. Chan: Good morning on your core laundry margin I guess, even if you add back the 50 basis points of legal it still seems that it's down versus last year.
Joshua K. Chan: Kind of could you help us understand then what drives margin expansion in the second half because I think that's what you need to get to your mid point.
Speaker Change: Yes, I can add some additional light there.
Speaker Change: Dart with saying that our second quarter from a profitability perspective is seasonally our lowest quarter because of certain items that annually land in that quarter. So if you take a look at our history. It usually is our lowest quarter.
Speaker Change: When you take a look at the year over year trend.
Speaker Change: The other things that are contributing to that margin headwind would be the acquisition of clean which accounts for about 20 basis points.
Speaker Change: We've made the investments that we've talked about over the last year, primarily in the second half of.
Speaker Change: 2023, and our corporate capabilities, which have contributed 20% to 30 basis points to that margin headwind energy was a benefit of 40 basis points and then there were a number of other items.
Speaker Change: Debt.
Speaker Change: Happened within the second quarter, which contributed to some additional expenses a lot of which were anticipated and originally provided for in our guidance. As an example, during the second quarter, we had two new facility openings.
Speaker Change: And usually there is incremental expenses that we incur as we get those facilities up and running and stabilized there were certain selling incentives that landed during the quarter.
Speaker Change: That were previously or in past years were timed in different quarters.
Speaker Change: And then there were a number of other items and timing items that happened in our second quarter that contributed to that delta of 30 to 40 basis points.
Speaker Change: Again, the seasonality as well as some of these items were largely.
Speaker Change: Provided for in our original guidance.
Speaker Change: And as we look throughout the remainder of the year, we are expecting that that margin will trend northward of maybe <unk> <unk>.
Speaker Change: Experience.
That's really helpful color, thank you for bringing that down.
Speaker Change: As my follow up could you talk about your CRM and now that you've had that for a while at least in the U S. Could you talk about the progress towards capturing any savings and what how you expect those to trend over the coming years. Thank you.
Speaker Change: Yes, I think certainly I made the comments in my prepared remarks that.
Speaker Change: When you change the system like we have Theres a lot of learning there is a lot of change management I think.
Speaker Change: The teams are becoming much more comfortable kind of optimizing the use of the new system and we've always talked about that one of the areas.
Speaker Change: That we expect to benefit from with the CRM has sort of increased merchandise management.
Speaker Change: Kind of a a more sophisticated barcode technology and some other controls and I think that's partially maybe what we're starting to see.
Speaker Change: With the improvements in merchandise.
Speaker Change: Over the last couple of years as we were deploying the new system. There was probably incrementally some additional costs as we transition and re barcoded a lot of our garments, but we're through most of that now and I think we expect that to start to smooth out. So I think thats one of the biggest areas and then I just think the efficiency.
Speaker Change: Kind of a day to day plant operations I mean, when you think about our our cost structure merchandise is such a big part of it and then efficiency in the plants as.
Speaker Change: As well and then we've always said kind of the service execution side of it with the automation, we're giving our route drivers is a big part and although there was change management, we have been happy with the adoption of the new technology by our frontline service workers and I think the more they continue to get comfortable with that it's just going to provide.
Speaker Change: Good for that enhanced customer experience, which will help our overall growth overtime.
Speaker Change: Great. Thanks for the color and thank you both for your time.
Speaker Change: Thank you.
Speaker Change: Thank you.
Speaker Change: I'm showing no further questions in the queue I would now like to turn the call back over to Stephen for closing remarks.
Stephen: Well, thank you I'd like to thank everyone for joining us today to review our second quarter results and we look forward to speaking with you again in June when we expect to be reporting our third quarter performance. Thank you and have a great day.
Speaker Change: Ladies and gentlemen, this concludes today's conference call. Thank you for your participation you may now disconnect.
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