Greetings, and welcome to the UniFirst Corporation Third Quarter Earnings Conference Call. [Operator Instructions]. As a reminder, this conference is being recorded today, Wednesday, June 29, 2022.

It is now my pleasure to turn the conference over to Steven Sintros, President and Chief Executive Officer. Please go ahead, sir.

Steven S. Sintros - President and Chief Executive Officer

Thank you, and good morning. I'm Steve Sintros, UniFirst's President and Chief Executive Officer. Joining me today, as always, is Shane O'Connor, Executive Vice President and Chief Financial Officer. We'd like to welcome you to UniFirst Corporation's conference call to review our third quarter results for fiscal year 2022 [Phonetic]. 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.

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 UniFirst can 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 10.2%. 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, wearer additions versus reductions are positive this year-to-date, 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 UniFirst brand and a corporate-wide ERP system with a strong focus on supply chain and procurement automation and technology.

As we have talked about over the last year or two, 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 progress as expected, we have approximately half of our Core Laundry locations on the new system by the end of fiscal '22.

And as we discussed in our last earnings call, in March, we officially launched our new brand through a series of national TV ads featuring real UniFirst customers and employees. Our message focuses on serving people who always deliver for their company, their customers and their families. And at UniFirst, 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 due to a number of factors, including a pickup in activity in our energy-dependent markets, solid new account sales, additional wearer additions at our customers as well as certain national account investments.

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 bringing new customers into the UniFirst family.

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.

Shane F. O'Connor - Executive Vice President & Chief Financial Officer

Thanks, Steve. In our third quarter of 2022, consolidated revenues were $511.5 million, up 10.2% 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 $1.33 per diluted share from $42 million or $2.21 per diluted 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 $1.77.

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 Core Laundry operations revenues for the quarter were $450 million, up 10% from the third quarter of 2021. Core Laundry organic growth, which adjusts for the estimated effect of acquisitions as well as fluctuations in the Canadian dollar, was 9.3%. Our organic growth rates this year continue 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 5.9% for the quarter or $26.4 million from 11.2% in prior year or $45.6 million. The costs we incurred during the quarter related to our key initiatives were recorded to the Core Laundry Operations segment. And excluding these costs, the segment's adjusted operating margin was 8.4%.

The 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 markets.

During the quarter, the adjusted operating margin was also impacted by higher energy costs 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 5.2% of revenues in the third quarter of 2022, up from 4.2% in the prior year.

Revenues from our Specialty Garments segment, which delivers specialized nuclear decontamination and cleanroom products and services, increased to $41.2 million from $38.2 million in prior year or 7.7%. This increase was primarily due to growth in our cleanroom operations.

Segment's operating margin decreased to 17.4% from 21.7%, 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 segment's revenues increased to $20.3 million from $17.1 million in the prior year or 19.1%, primarily due to strong top line performance from the segment's 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 and short-term investments totaling $410.6 million at the end of our third quarter of fiscal 2022. 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 business. Contributing to these higher working capital needs were elevated accounts receivable balances 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 payments that we were able to defer from prior years as part of the CARES Act. Also during the first three quarters of 2022, we continued to invest in our future with capital expenditures totaling $97.3 million 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 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 $1.993 billion and $2 billion. We further expect that our diluted earnings per share for fiscal 2022 will now be between $5.40 and $5.60. This earnings per share guidance assumes an effective tax rate of 24% [Phonetic] 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 assumptions regarding our fiscal 2022 guidance. Core Laundry Operations adjusted operating margin at the midpoint of the range is now 8.3%. Our adjusted tax rate for fiscal 2022 is 24.4%. Adjusted diluted earnings per share is expected to be between $6.65 and $6.85, and guidance does not include the impact of any future share buyback 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.

Question & Answers

Operator

Thank you. [Operator Instructions]. Our first question is from Andrew Wittmann with Baird. Please go ahead, sir.

Andrew Wittmann - R.W. Baird - Analyst

Yeah. Great. Good morning, guys. You talked about this a little bit in the prepared remarks on the merchandise and services $12 million injection in the quarter. It's obviously a really big number for you guys. You talked about national account investment. It sounds like maybe you redressed somebody there. You talked about energy patch. That's all helpful. But how much of 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, if you could talk about the amount of no programmers that are in the market. Is there still good 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 curious to your thoughts on no programmers and if there's any recent changes in ad stops, which you said have been positive through the reporting period, but maybe in the more recent time period, if you could comment on that.

Steven S. Sintros - President and Chief Executive Officer

Sure. So as far as new account sales, our ratio of new account sales that come from competitive wins versus no programmers 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 in 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 maybe buys uniforms direct that we convert into a full-service rental program. And again, not just uniforms but 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 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 positive. But there's still a large chunk that relates to reinvestment in existing accounts, which can be cyclical, which can trend when accounts are adding wearers or needing reinvestment you mentioned, and there has been a couple of reinvestments in national accounts from a redress perspective. So I would say, like I said in the prepared remarks that 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 and a number of other things 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 are some positive things in there for sure on merchandise being tied to growth activities.

Andrew Wittmann - R.W. Baird - Analyst

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?

Shane F. O'Connor - Executive Vice President & Chief Financial Officer

Yeah. 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, is there 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 at 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 points. Merchandise is more than that and is the largest item I'm seeing a headwind from. And Steve obviously just 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 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 costs, those were also headwinds for our quarter, but to a lesser extent in the primary two items that were impacting us, which would be merchandise and energy.

Steven S. Sintros - President and Chief Executive Officer

And one other comment, Andy, just on the labor side, we talked a little bit last quarter about our staffing coming up a bit. Obviously, staffing 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're closer to staffed 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 are some positives there, but that did cause a little bit of the miss in the quarter that we're probably a little bit higher than we projected from a heads, which is kind of a good news, bad news situation. But it does, I think, reflect maybe a little bit improved ability to bring people in. But it's still a volatile labor environment for sure.

Andrew Wittmann - R.W. Baird - Analyst

Okay. This is all really helpful. So sorry, I just want to make sure that I'm understanding on the merchandise cost a little bit more here. I mean I think you generally have an average amortization period of like 18 months for the merchandise that you put in rental service. Was there anything that's in today's merchandise cost that amortizes faster than that? Or should we expect these elevated costs that we've been seeing here to kind of stick around for a while because of the way the accounting works?

Shane F. O'Connor - Executive Vice President & Chief Financial Officer

Yeah. So 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? The average life of the merchandise that we've been putting into service is still - that 18 months is still a good proxy for that.

Andrew Wittmann - R.W. Baird - Analyst

Got it. Okay. I guess I'll leave it there. If I have any others, I'll follow up. Thanks, guys.

Steven S. Sintros - President and Chief Executive Officer

Thanks, Andy.

Operator

Our next question is from Kartik Mehta with Northcoast Research. Please go ahead.

Jack Boyle - Northcoast Research - Analyst

Good morning, all, and thank you. This is actually Jack Boyle on behalf of Kartik Mehta. Keeping with the same line of questioning here, we have questions, just like with the pricing environment, considering how merchandise, energy, gas, diesel, all these things just continually going up. Are you seeing any kind of pushback or any kind of pricing ceiling here? 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?

Steven S. Sintros - President and Chief Executive Officer

Good questions. Obviously, very relevant to the environment. I wouldn't say - it's an important question, I guess, whether there's a price ceiling. And 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. Look, there's always pushback from time to time as all customers are dealing with higher costs, they're trying to manage their own costs. So as inflation goes, it's sort of a circular challenge. But we have been working well with our customers and haven't seen what I would call a tremendous pushback at this point, and we will continue to work with them as appropriate. Yeah, I think naturally, the larger customers can be more challenging. The contracts are typically somewhat more refined with the larger customers and more prescriptive on what can be done and what can't be done. But even some of those larger accounts have been opened to working with us through this time. So I would say it's a little different on the larger accounts for sure, but we're exploring efforts on all avenues.

Jack Boyle - Northcoast Research - Analyst

Great. That's all I've got. Thank you.

Steven S. Sintros - President and Chief Executive Officer

Thank you.

Operator

Our next question is from Tim Mulrooney with William Blair. Please go ahead.

Tim Mulrooney - William Blair - Analyst

Yeah. Good morning, Steve. Good morning, Shane. Thanks for taking my questions. 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?

Steven S. Sintros - President and Chief Executive Officer

Yeah, it'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 organic growth. When you look at the historical, if we were growing 3% or 4% in the past, we'd say, well, maybe there's 1%, 1.5% in there from price and that was always an estimate. It wasn't a hard and fast number. And we're growing 9%. And I talked about we're having a very good sales here. We're having an improved retention here. Adds versus reductions are positive, which is a development that isn't always part of that organic growth. So there are other things that are causing probably our core growth to be higher than, say, historical organic levels, but the pricing is certainly a healthy piece of that as we work through things.

Tim Mulrooney - William Blair - Analyst

That's really helpful. Just one more for me. Can you remind us the different ways that you capture price? Is it all structural price increase or do you have fuel surcharges or other ways to help offset the inflationary headwinds? 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? Thank you.

Steven S. Sintros - President and Chief Executive Officer

There are certainly price discussions on an annual basis and in this environment, certainly so. Not to get into the weeds about the industry and how we bill 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.

Tim Mulrooney - William Blair - Analyst

Very helpful. Thank you.

Steven S. Sintros - President and Chief Executive Officer

Thank you.

Operator

[Operator Instructions]. Our next question is from Andrew Steinerman with J.P. Morgan. Please go ahead.

Andrew Steinerman - J.P. Morgan - Analyst

Hi. I just wanted to make sure I got the fourth quarter implied core operating margin right, 8.3% for the year, by my math, makes an 8.8% operating margin for Core Laundry in the fourth quarter, which of course is not that much different than what we just reported in the May quarter. And so if you could just go over any 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.

Shane F. O'Connor - Executive Vice President & Chief Financial Officer

Yeah. So Andrew, correct, the implied margin and our Core Laundry operations for the fourth quarter is 8.8%. And the things that we expect to be impacting the fourth quarter are largely the items that impacted our third quarter, right? Merchandise, energy, some of our other costs, labor, and the other costs that have been increasing as a result of the inflationary pressures and obviously the assumptions around what we're going to be able to offset those with from a pricing perspective, but largely, you mentioned the fact that the third quarter operating margin is not significantly different than the fourth and the factors influencing the two are largely the same.

Andrew Steinerman - J.P. Morgan - Analyst

Okay.

Steven S. Sintros - President and Chief Executive Officer

And one thing I'll add to that, Andrew, is that we talked about merchandise, the nature of our merchandise as we put more in. Merchandise costs will continue to come up. So sequentially, they'll be higher in the fourth quarter than the third quarter. One thing that we probably will do a little bit better in the fourth quarter and we project to do is offsetting some of the increased fuel cost with some pricing adjustments because as we've reacted to the higher fuel cost, a little bit more will be benefiting us in the fourth quarter than it did in the third quarter.

Andrew Steinerman - J.P. Morgan - Analyst

Makes sense. Thank you.

Steven S. Sintros - President and Chief Executive Officer

Thank you.

Operator

And we have no further questions at this time. I'll return the call back to you for closing remarks.

Steven S. Sintros - President and Chief Executive Officer

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.

Operator

AI Assistant

UNIFIRST CORP

Q3 2022

Earnings Transcript

Find Answers

Ask about any part of the document to get insights, explanations, or key details.