UniFirst Corporation (UNF) CEO Steven Sintros on Q1 2022 Results - Earnings Call Transcript

UniFirst Corporation (NYSE:UNF) Q1 2022 Earnings Conference Call January 5, 2022 9:00 AM ET

Company Participants

Steven Sintros - President and Chief Executive Officer

Shane O’Connor - Executive Vice President and Chief Financial Officer

Conference Call Participants

Andrew Steinerman - JPMorgan

Tim Mulrooney - William Blair

Andrew Wittmann - Baird

Operator

Greetings and welcome to the UniFirst Corporation First Quarter Earnings Call. [Operator Instructions] I would now like to turn the conference over to Steven Sintros, President and Chief Executive Officer. Please go ahead, sir.

Steven Sintros

Thank you and good morning. I am Steven Sintros, UniFirst President and Chief Executive Officer. Joining me today 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 first quarter results for fiscal year 2022. 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 events, 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.

Overall, we are pleased with our results for the first quarter of fiscal 2022. Our team continues to focus on providing industry leading services to our customers as well as selling prospective customers on the value that UniFirst can bring to their businesses. I want to thank our thousands of team partners who in the face of a challenging operating environment continue to deliver everyday for each other and our customers. The results for our first quarter were largely as we anticipated, with consolidated revenues growing 8.8% and an overall adjusted operating margin for our Core Laundry Operations of approximately 10%. The team continues to execute well, producing solid performances in both new account sales as well as customer retention during the quarter.

In addition, wearer additions versus reductions during the quarter were positive, indicating the continued growth and recovery of our customer base. This is a favorable comparison to a year ago when many customer wearer levels remain depressed due to the impact of the pandemic. The strong year-over-year growth in the quarter was also impacted by adjustments to customer pricing as we continue to work with our customers through this inflationary environment.

As a reminder, from a profitability perspective, we discussed during our year end earnings call that going forward over the next few years, we are going to be reporting adjusted results, which exclude the impact of costs that we are expending on three discrete strategic initiatives that are critical in our efforts to transform the company in terms of our overall capabilities and competitive positioning. As a reminder, these three 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 the investment is designed to deliver solid long-term returns for UniFirst stakeholders and are integral components of our primary long-term objective to be universally recognized as the best service provider in our industry. After excluding our costs in our quarter related to these investments, our adjusted operating margin is showing an anticipated decline compared to a year ago. The comparison of adjusted margin is being impacted by increases in cost we have been highlighting for a couple of quarters now. Some are simply bouncing back from depressed levels during the pandemic and others are being impacted by the inflationary environment and some are being impacted by both. As a reminder, these costs include merchandise amortization, costs related to raw materials in the overall supply chain disruption, the cost to hire and retain labor, energy and travel.

Our solid balance sheet positions us well to meet these ongoing challenges, while continuing to make investments in growth and strengthen our business. Along those lines during December, we closed on two small acquisitions, which will improve our footprint in key markets. As we have highlighted before, acquisitions continued to be part of our overall growth strategy. Despite the challenges in the overall operating environment, we continue to be confident in our ability to manage and execute through these obstacles. We maintain a sharp focus on taking care of our employees, our customers and bringing new customers into the UniFirst family. As we have discussed previously, the pandemic has clearly highlighted the essential nature of our products and services and we feel the company is positioned well to support the evolving economic landscape.

And with that, I’d like to turn the call over to Shane, who will provide the details of our results for the first quarter and our outlook for the remainder of the year.

Shane O’Connor

Thanks, Steve. In our first quarter of 2022, consolidated revenues were $486.2 million, up 8.8% from $446.9 million a year ago and consolidated operating income decreased to $44.8 million from $56 million or 20.1%. Net income for the quarter decreased to $33.7 million or $1.77 per diluted share from $41.9 million or $2.20 per diluted share. Our financial results in the first quarter of fiscal 2022 included $5.9 million of cost directly attributable to the three key initiatives that Steve discussed. Excluding these initiative costs, adjusted operating income was $50.7 million, adjusted net income was $38.1 million, and adjusted diluted earnings per share, was $2.

Although our financial results in the prior year may have included direct cost related to these key initiatives, which in our first quarter of 2021 would have primarily been for our CRM initiative, the company did not specifically track the amounts that were being expensed. This is because the amount was less significant in value and a large number of the costs were still being capitalized. As a result, we will not be providing adjusted amounts for the prior year comparable periods.

Our Core Laundry Operations revenue for the quarter was $428.8 million, up 9.1% from the first quarter of 2021. Core Laundry organic growth, which adjusts for the estimated effect of acquisitions as well as fluctuations in the Canadian dollar, was 8.6%. This strong organic growth rate was primarily the result of customer re-openings, solid sales performance and improved customer retention in fiscal 2021 as well as efforts to share with our customers the cost increases that we are seeing in our business due to the current inflationary environment.

Core Laundry operating margin decreased to 8.5% for the quarter or $36.5 million from 12.4% in the prior year or $48.9 million. Costs we incurred during the quarter related to our key initiatives were recorded to our Core Laundry operation segment and excluding these costs, the segment’s adjusted operating margin was 9.9%. The decrease from prior year’s operating margin was primarily due to higher merchandise amortization, which continues to normalize from depressed levels during the pandemic as well as the effect of large national account installations, which are providing additional merchandise amortization headwinds. Also inflationary pressures and the overall supply chain disruption continued to impact our other merchandise costs. During the quarter, the adjusted operating margin was also impacted by higher travel and energy costs as a percentage of revenues as well as wage inflation we are experiencing responding to the very challenging employment environment.

Energy costs increased to 4.3% of revenues in the first quarter of 2022, up from 3.6% in prior year. Revenues from our Specialty Garment segment, which delivered specialized nuclear decontamination and cleanroom products and services, increased to $39.5 million from $38.1 million in prior year, or 3.5%. This increase was primarily due to growth in our cleanroom and European nuclear operations. The segment’s operating margin increased to 21.9% from 18.8%, primarily due to lower merchandise cost as a percentage of revenues. As we 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 $17.8 million from $15.5 million in prior year, or 14.8%. This increase was due to improved top line performance in both our wholesale distribution as well as our First Aid van business. However, the segment had an operating loss of $0.3 million 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 $478.1 million at the end of our first quarter of fiscal 2022.

During the quarter, our net cash provided by operating activities was impacted by our reduced profitability as well as heavier than normal working capital needs of the business. Contributing to these higher working capital needs were elevated supply inventory balances related to the ongoing supply chain disruption as well as increases to rental merchandise and service as our balance sheet position continues to normalize coming out of the pandemic impacted period.

Capital expenditures for the quarter totaled $31.1 million as we continued to invest in our future with new facility additions, expansions, updates and automation systems that will help us meet our long-term strategic objectives. Now that our CRM project has transitioned from a development phase to deployment, the majority of the costs are now being expensed. As a result, the capitalization of costs related to our CRM project in the quarter totaled only $1.7 million. During the first quarter of fiscal 2022, we have repurchased 22,750 common shares for a total of $4.8 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 $1.94 billion and $1.955 billion. This revised top line guidance includes the anticipated impact of the two small acquisitions we closed in December that Steve discussed. These acquisitions are expected to add approximately $10 million to our fiscal 2022 revenues. We further expect that our diluted earnings per share for fiscal 2022 will now be between $5.50 and $5.80. This earnings per share guidance assumes an effective tax rate of 24% and continues to include an estimate of $38 million worth of costs directly attributable to our key initiatives that will be expensed during the year.

Please also note the following assumptions regarding our guidance. Core Laundry Operations adjusted operating margin at the midpoint of the range is now 9.2%, which reflects continued pressure from costs that trended lower during the pandemic and the current inflationary environment. Our assumed adjusted tax rate for fiscal 2022 is 24.25%. Adjusted diluted earnings per share, is expected to be between $7 and $7.30. Guidance does not include the impact of any future share buybacks or potential tax reform and guidance assumes a stable economic environment with no pandemic-related headwinds, including potential expenses related to government COVID-19 mandates.

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

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of Andrew Steinerman with JPMorgan. Please go ahead.

Andrew Steinerman

Hi, Steve and Shane. So, I heard your positive comments about ad stops in the quarter. I wanted you to talk a little bit more about December and into January and if you think there will be any effect because of absenteeism around Omicron?

Steven Sintros

Yes, that’s a good question, Andrew. I do think it will have some disruption. I mean, really, the situation is changing very rapidly over the last week and a half. Obviously, we have seen even in our employee base a lot more impact. So, I do think that could cause some pause in some of the momentum in terms of hiring by our customers. So, it’s a little early to say, I wouldn’t say we have seen much impact of it in December as really the acceleration of the Omicron is really hit over the last almost 10 days.

Andrew Steinerman

Okay. Thank you very much.

Steven Sintros

Thank you.

Operator

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

Tim Mulrooney

Shane, Steve, good morning.

Steven Sintros

Good morning.

Shane O’Connor

Good morning.

Tim Mulrooney

Couple questions for you. So, first on the numbers, Shane, on the EPS guidance, I just want to make sure I have got everything right. So, it looks like you lowered GAAP EPS guide by a quarter. And I haven’t had enough time to work through everything, but it looks like your adjustment figure of $38 million didn’t change. So, does that mean in effect, that you have also lowered your adjusted EPS guide by $0.25?

Shane O’Connor

That’s correct. The adjustment to the GAAP EPS would flow down to the non-GAAP as well. I know we didn’t provide that non-GAAP range at the end of or coming into the year, but we thought it made sense to do that going forward as well just for clarity purposes, but that adjustment would have also been felt through the non-GAAP.

Tim Mulrooney

Okay. Yes, that’s helpful. So, can you then talk about the primary factors leading to that decrease in guide because, frankly, organic revenue growth look really good and you only lowered your Core Laundry margins slightly for the year, are the small acquisitions slightly dilutive this year or what else might account for that decrease?

Steven Sintros

I think it’s a variety of factors. I think broadly, it continues to be in the same categories of costs that we have been referencing. Obviously, we continue to work with our customers on inflation and do what we can from a pricing perspective. But when you look at whether it’s labor costs, whether it’s the cost of outside products, and merchandise and raw materials. There has just been a number of things that continue to be challenging that as we forecast out, we see it being incremental headwinds to our original forecast. You mentioned the acquisitions, that’s probably a little bit of it as well. Usually in the first six months to nine months, you are not going to get a tremendous pull as you integrate those acquisitions and there is some purchase price accounting and so on. So, that’s part of it. But it really I think, broadly, the message we would probably give is that, incrementally from a few months ago, some of those cost challenges are a little bit tougher.

Tim Mulrooney

Yes. It makes sense. Thank you. And maybe lastly, just on those acquisitions? Steve, I know they were small, but I was kind of hoping you could talk a little bit more about them, because it can help provide some insight for investors and how you are thinking about positioning the company? I mean, can you talk about maybe, either how big each of these companies were, or what general regions they were in or what kind of returns do you expect to see just for these types of bolt-ons? Any color is always helpful.

Steven Sintros

Sure. So, from a sizing perspective, there are acquisitions that the little bit larger one was doing about $10 million or $11 million a year, the smaller one was doing, say $6 million a year or something like that. One was in the Cleveland, Ohio area, in Canton, Ohio, the other one was in Los Angeles. So, both are in markets that we’re already in. In the Ohio area, it’s one where as we expand our service area south out of Cleveland, you start to get into an area that we had a little less density. And so, this acquisition sort of gave us logical expansion opportunities sort of south of where we were in Cleveland and added some density down in that area. And then in the LA market, I would say that LA is obviously a large and growing market for us. We put a new plant, a second plant in LA, a few years ago. So, this will continue to add to that density and presence. And like I said, I mean, we have always said with these acquisitions, they take time, we want to make sure we keep the customers, we want to make sure we keep the employees, so really for the first year or so they don’t produce tremendous returns. But as over time, we expect them to be above average in terms of sort of EBITDA levels incrementally. And that’s sort of how we look at it. And obviously, we have a strong balance sheet. And I wouldn’t say these acquisitions are cheap by any means. But over time we feel good about the return, particularly compared to the cash sitting around. So, I think that – hopefully, that gives you an idea of how we are looking at them.

Tim Mulrooney

Yes, very helpful. Thanks so much, guys.

Steven Sintros

Thank you

Operator

[Operator Instructions] Our next question comes from the line of Andrew Wittmann with Baird. Please go ahead.

Andrew Wittmann

Hi, yes. Thanks. Good morning, guys. I guess I just wanted to build on.

Steven Sintros

Good morning.

Andrew Wittmann

Hi, I just want to build on Andrew’s question a little bit with the Omicron. Like you said, you expect it’s going to have probably some sort of negative effect. So, it – would your revenue guidance have been higher, if not for Omicron? Is that factored in to the no change? I mean, you beat the consensus, it looks like the organic growth rate was pretty attractive. And so I guess that’s the genesis of the question. Could there have been a guidance raise, if not for this new development here in the last couple of weeks?

Steven Sintros

Yes. No, I wouldn’t say that it would have Andrew, when looking at kind of how the year plays out, we really weren’t factoring in I think Shane mentioned that, we really weren’t factoring in our guidance any further headwind, it’s difficult, because obviously, the COVID is still with us in the environment and provides day-to-day challenges. But no, we were not sort of projecting a pullback of activity from Omicron. I think when you look at the trajectory of our organic growth, I think the first quarter as we look through the year will be – will always be sort of the best comparison quarter. I shouldn’t say always, but for this year, it will be the best comparison quarter to the prior year, because things started to recover through the course of 2021. And so I think that’s one of the reasons why the organic growth was so strong in the first quarter, as well as some of the price adjustments. And I think that Omicron really didn’t impact the way we prepared our guidance. Shane, I don’t know if you want to add anything to that?

Shane O’Connor

No, the only thing I would say is, as Steve had mentioned earlier, the significantly elevated case counts that we are seeing have been only over the last couple of weeks. And at this point in time, we haven’t seen impact on our financial results. I think more what Steve was talking about was the uncertainty as to how our customers as well as governments and municipalities react to these elevated case counts. But no, like I had mentioned in my comments and one of the reasons why we included it was it assumes a stable environment with no pandemic related headwinds. So, we did not adjust our guidance to take into account future potential headwinds from these elevated counts.

Andrew Wittmann

Okay, that is a helpful answer. And then Shane, I just passed, you flattered us with a little bit of detail on the margin impact from some of these other things that you gave the energy year-over-year impact, but labor, travel and merchandise was I guess the three other things that you called out specifically? Are you able to tell us what those impacts were specifically on a year-over-year basis as well?

Shane O’Connor

Yes. I can give you some context there. The largest items were the energy and our merchandise costs, and merchandise being heavily influenced by the amortization. My merchandise costs were elevated over last year by about 70 basis points, 70 basis points to 80 basis points. Again and that’s the factors that we discussed the normalizing of our balance sheet, as well as some of the supply chain disruption impacting those costs. Travel, we mentioned coming into the year that we were expecting that to be a headwind. As our travel starts to come back not with the expectation that it will come back to where it was pre-pandemic, but we were expecting to be doing some additional travel, and that provided about 30 basis points a headwind. And then labor, again, when you take a look at labor, I guess the wage inflation that we discussed. We are seeing that in all of our different roles, maybe we are not seeing it as a percentage of revenue, because of our strong revenue growth. I guess the area that we are seeing it the most elevated is within our production group. And as a percentage of revenue, the headwind that we are seeing there is probably 50 basis points to 60 basis points in and of itself. Again, maybe the reason that we are not necessarily seeing more operating leverage in those other payroll areas with our strong revenue growth is because, again, it’s challenging across all of the different roles. But as a percentage of revenue with the headwind that we are seeing is primarily in those lower wage roles and affecting our production labor.

Andrew Wittmann

Thank you for that context Shane. Last quarter, I think Steve, you said that the labor environment? I mean, this is obviously not new this quarter, or even last quarter, I think last quarter, you had said that felt like maybe it was stabilizing some that, it improves, I think over the prior quarter. What is it trend on that labor line as it stands here today?

Steven Sintros

Yes, it’s a challenging question, Andrew. I think we have some ups and downs, market to market, I think wage adjustments that we made, are helping, and I think providing a little bit more stability. But in general, turnover is higher than historical, just because I think it is a challenge out there even to keep the forces stable for a lot of different reasons. So, I would say that, we are probably a little bit better staff today than we were. We are better staff today than we were three months, four months ago. But if you ask any of our operators, they would say it’s still very challenging compared to sort of a historical environment.

Andrew Wittmann

Great. Thank you for your answers. Have a great day. Thanks.

Steven Sintros

Thank you.

Shane O’Connor

Thank you.

Operator

We have no further questions on the phone lines.

Steven Sintros

Okay. I would like to thank everyone for joining us to review our first quarter results. We look forward to speaking with you again in March when we expect to be reporting our second quarter performance as well as our outlook for the remainder of fiscal 2022. Happy New Year and have a great day.

Operator

That concludes today’s call. We thank you for your participation and ask you to please disconnect your lines.