UniFirst Corporation (NYSE:UNF) Q2 2024 Earnings Call Transcript

UniFirst Corporation (NYSE:UNF) Q2 2024 Earnings Call Transcript March 27, 2024

UniFirst Corporation isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Hello. And thank you for standing by. Welcome to UniFirst Second Quarter 2024 Earnings Conference Call. At this time, all participants will be in a listen-only mode. After the speakers’ presentation there will be a question-and-answer session. [Operator Instructions] I would now like to turn the conference over to Steven Sintros, UniFirst President and Chief Executive Officer. Sir, you may begin.

Steven Sintros: Thank you, and good morning. I’m Steven Sintros, UniFirst’s President and Chief Executive Officer. Joining me 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 second quarter results for fiscal year 2024. 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 the results from our second quarter which met our internal expectations. I want to sincerely thank our team partners who continue to always deliver for each other and our customers as we strive toward our vision of being universally recognized as the best service provider in the industry, all while living our mission of serving the people who do the hard work. The people who do the hard work are the workforce that keeps our communities up and running. So many of them are our existing and prospective customers as well as our own UniFirst team partners.

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Our mission is to support those employees by providing the right products and services enabling them to do their jobs successfully and safely. Whether that means providing uniforms, work wear, facility services, first aid and safety, cleanroom or other products and services, our goal is to partner with our customers to ensure that we structure the right program, products and services for their business and their team, all while providing an enhanced customer service experience. Overall, revenues in our second quarter were up 8.8% compared to the second quarter of fiscal 2023. The current quarter benefited from the acquisition of Clean Uniform, which just passed its one-year anniversary of becoming part of UniFirst this month. We continue to be pleased with the overall performance of Clean as we have been able to retain its customers and continue to move its top line positively over the last year.

Core Laundry operations organic growth totaled 4.8% in the quarter. Net income and EBITDA increased 14.9% and 23.8% respectively in the quarter compared to a year ago, benefiting from growth in our top line and lower cost expended during the quarter related to key initiatives. Excluding the impact of the key initiatives, we still experience solid EBITDA growth in the first six months of the year. We are also pleased with the significant improvement in cash flows from our operating activities compared to 2023, as well as some positive trends in certain key areas such as merchandise costs. As a reminder, we have been expending costs over the last couple of years related to our technology transformation. As expected, these costs are declining due to activities surrounding the deployment of our CRM largely winding down.

We continue to expend dollars related to our ERP project. However, as we enter implementation phases of the project, more costs are being capitalized. During the quarter, we saw continued strong performance from our sales organization, delivering a 10% increase in new account installations compared to the prior year. We continue to sell prospects on the value that UniFirst can bring to their businesses. Our approach is a consultative one, where as I mentioned, we focused on creating the right programs with the right garments and products for our customers. Overall, we are pleased with solid organic growth for the quarter, despite a somewhat more challenging pricing environment. In addition, wearers versus reductions were flat in the quarter compared to a positive impact in wearer levels that we had a year ago.

As we look forward to the rest of 2024 and beyond, we will continue to focus on delivering profitable growth fueled by strong execution from our sales organization and our continuing efforts to drive superior service execution and customer satisfaction. In addition to executing our growth model, we continue to focus on opportunities to improve our efficiency and profitability. Our team continues to become more proficient utilizing and optimizing the capabilities of our new CRM, including leveraging some of Clean’s proprietary technology across UniFirst, with all efforts focused on deploying standard processes and driving productivity. In addition, areas such as strategic pricing and account profitability, as well as strategic manufacturing and sourcing, represent significant margin enhancement opportunities.

Although some of these benefits going forward will be more significantly enabled through the implementation of our ERP, we continue to focus on these areas and others that we feel can move the needle in the near to midterm. We continue to believe strongly in the bright future of our first aid and safety division. During the quarter, we continue to deliver strong growth in our van operations, which was partially offset by a decline in our wholesale operations. We continue to make investments in the sales and service infrastructure of the van business to expand our footprint and ensure we can reach existing UniFirst customers, as well as new prospects in the market that have a strong need for these products and services. As we progress, increasing route density in addition to penetrating customers with the full breadth of services that we provide will be critical steps in building the profitability of this segment.

With that, I’ll turn the call over to Shane, who will provide more details on our second quarter, as well as the outlook for the remainder of fiscal ‘24.

Shane O’Connor: Thanks, Dave. In our second quarter of 2024, consolidated revenues were $590.7 million, up 8.8% from $542.7 million a year ago. And consolidated operating income increased to $27.9 million from $20.7 million, or 34.9%. Net income for the quarter increased to $20.5 million, or $1.9 million per diluted share, from $17.8 million, or $0.95 per diluted share. Consolidated EBITDA increased to $62.5 million compared to $50.5 million in the prior year, or 23.8%. Our financial results in second quarter of fiscal 2024 and 2023 included approximately $3.2 million and $9.1 million, respectively, of cost directly attributable to our key initiatives. In addition, we incurred costs of approximately $2 million in our second quarter of fiscal 2023 related to the acquisition of Clean Uniform.

The effect of these items on the second quarter of fiscal 2024 and 2022 combined to decrease both operating income and EBITDA by $3.2 million and $11.1 million, respectively. Net income by $2.5 million and $8.3 million respectively, and EPS by $0.13 and $0.44 respectably. Year-over-year, net income and EPS comparisons were also unfavorably impacted by lower interest income in our second quarter of 2024 due to lower cash reserves subsequent to the acquisition of Clean in our third quarter of fiscal 2023. Our Core Laundry Operations revenues for the quarter were $522.4 million, up 9.5% from the second quarter of 2023. Core Laundry organic growth, which adjusts for the estimated effect of acquisitions as well as fluctuations in the Canadian dollar, was 4.8%.

The solid organic rate was primarily the result of solid new account sales and improved pricing with our customers. Core Laundry operating margin increased to 3.6% for quarter, or $19 million, from 2.9% in prior year or $13.6 million and the segment’s EBITDA margin increased to 9.9% from 8.7%. The costs we incurred related to our key initiatives were recorded to the Core Laundry Operation segment and combined to decrease both the Core Laundry Operating and EBITDA margins for the second quarter of fiscal 2024 and 2023 by 0.6% and 2.3% respectively. Excluding these items, the segment’s operating and EBITDA margins were also impacted by additional reserves we recorded related to our legacy environmental sites and higher costs we incurred related to investments we have made in building our corporate capabilities over the last year.

These items were partially offset by lower energy costs during the quarter, which decreased to 4.4% of revenues down from 4.8% in 2023. Revenues from our Specialty Garment segment, which delivers specialized nuclear decontamination and cleanroom products and services, increased slightly to $43.5 million, from $42.1 million in prior year, or 3.2%. This increase was primarily due to growth in our cleanroom operations. Segment’s operating margin increased to 22.8% from 19.1%, primarily the result of lower merchandise expenses in our cleanroom operations. As we’ve mentioned in the past, the segment’s results can vary significantly from period to period due to seasonality as well as the timing and profitability of nuclear reactor outages and projects.

Our First Aid segment’s revenues increased to $24.8 million from $23.5 million in prior year or 5.6%. As Steve discussed, this increase was fueled by strong growth in our van operations, partially offset by a decline in the wholesale operations. Segment had an operating loss of $1 million during the quarter as the segment results continue to reflect the investments we are making in our First Aid van business. At the end of our second fiscal quarter, we continued to reflect a solid balance sheet and financial position with no long-term debt and cash, cash equivalents, and short-term investments totaling $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 66.3%, primarily due to improved profitability and lower working capital needs of the business.

During the first half of this year, we continue to invest in our future with capital expenditures of $72.9 million and we repurchased 46, 750 shares of common stock for $8.1 million. I’d like to take this opportunity to provide an update on our outlook. We now expect our revenues for fiscal 2024 to be between $2.415 billion and $2.425 billion in line with the message at the end of our last fiscal quarter. We further expect that our diluted earnings per share will be between $6.80 and $7.16. 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 of 6.5% 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 0.6%. We fully expect the full year effective tax rate will be 25% and our guidance assumes no future share buybacks or unexpected significantly adverse economic developments. This concludes our prepared remarks and we would now be happy to answer any questions that you may have.

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