Greetings and welcome to the UniFirst Corporation Second Quarter's Earnings Conference Call. During the presentation all participants will be in a listen-only mode. Afterwards we will conduct a question-and-answer session. [Operator Instructions] I would now like to turn the conference over to Steven Sintros, President and Chief Executive Officer.

Please go ahead..

Thank you and good morning. I'm Steven Sintros, UniFirst, President and Chief Executive Officer. Joining me today is Shane O'Connor, Executive Vice President and Chief Financial Officer. We would like to welcome you to UniFirst Corporation's conference call to review our second 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 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 and our most recent Form 10-K and 10-Q filings with the Securities and Exchange Commission.

During the quarter as always, our team continued to focus on providing industry-leading service to our customers, as well as selling prospective customers on the value that UniFirst can bring to their businesses.

I want to thank our 1000s of team partners, who in the face of a challenging operating environment continued to always deliver for each other and our customers. Overall, our second quarter results reflect a strong top-line performance with consolidated revenues growing 8.2%.

The team continues to execute well producing solid performances in both new account sales as well as customer retention so far this year. In addition, where additions versus reductions year-to-date are positive, indicating the continued growth and recovery of our customer base.

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, we discussed during our year-end earnings call 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've 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 are 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. We continue to report adjusted results for the direct impact related to these investments.

Speaking of these key initiatives, we are excited to report that during March, we officially launched our new brand through a series of ads in the NCAA March Madness tournament, featuring real UniFirst customers and employees.

We are very excited to rally our company around our new master brand message, a message that focuses on serving people who always deliver for their companies, their customers and their families. At UniFirst, our focus will continue to be to always deliver for them.

What makes this message exciting for us as we feel it is genuine to our culture and purpose, as it was developed through extensive research and feedback from our employees and customers. We are very much looking forward to delivering on this promise.

With respect to our CRM systems project, we continue to make good progress deploying our new system in line with our internal schedule. Assuming we progress as expected, we will have approximately half of our core laundry locations on the new system by the end of fiscal 2022.

After excluding the impact of cost that we are spending on our key initiatives, our diluted earnings per share for the quarter was $1.24. Although our core laundry operating margin was somewhat lower than our internal expectations, the quarter played out mostly as expected.

As a reminder, our second quarter is seasonally our lowest margin quarter due to the impact of the holidays as well as the timing of other certain costs. The shortfall in margin compared to our expectations was largely due to the continued impact from the inflationary environment, as well as somewhat improved staffing levels.

As we continue to work through the challenging labor environment. We do expect an increase in cost of labor, raw materials and energy, will continue to have a direct impact on our results as well as translate into higher costs from our vendor partners who are experiencing similar challenges.

As I mentioned, we have and will continue to work with our customers to appropriately share in these cost increases, as well as work to mitigate them through operational efficiencies. 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 of 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 the results of our second quarter and our outlook for the remainder of fiscal '22..

Thanks, Steve. Our second quarter of 2022, consolidated revenues were $486.7 million up 8.2% from 449.8 million a year ago, and consolidated operating income decreased to $22.6 million from $40.7 million. Net income for the quarter decreased to 18.5 million, or $0.97 per diluted share from 32.6 million or $1.71 per diluted share.

Our financial results in the second quarter of fiscal 2022 included $6.7 million of costs directly attributable to the three key initiatives that Steve discussed. Excluding these initiative costs, adjusted operating income was $29.4 million, adjusted net income was 23.5 million and adjusted diluted earnings per share was $1.24.

Although our financial results in the prior year may have included direct costs related to these key initiatives, which in our second 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 large number of the costs were still being capitalized. As a result, we will not be providing adjusted amounts for the prior year comparable period. Our core laundry operations revenues for the quarter were $433.1 million up 8.7% from the second 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%.

This strong organic growth rate was primarily the result of customer reopenings in fiscal 2021, solid sales performance and improved customer retention 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 4.3% for the quarter, or $18.7 million from 8.9% in prior year, or $35.4 million. The cost we incurred during the quarter related to our key initiatives were recorded to the core laundry operations segment. And excluding these costs, this segment's adjusted operating margin was 5.9%.

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.

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 continue to experience responding to the very challenging employment environment. Energy costs increased to 4.7% of revenues in the second quarter of 2022 up from 4.2% in the prior year.

Revenues from our specialty garments segment which delivered specialized nuclear decontamination and cleanroom products and services increased to $35.5 million from $35.2 million in prior year or 0.9%.

This increase was primarily due to growth in our cleanroom and European nuclear operations, which was partially offset by higher direct sale activity in the prior year.

Segment's operating margin decreased to 10.8% from 14.9%, primarily due to higher gross margin on its prior year direct sales, as well as higher labor costs as a percentage of revenues.

As we mentioned in the past, this segments results can vary significantly from period to period due to seasonality and the timing of nuclear reactor outages and projects that require a specialized services.

Our first aid segments revenues increased to $18.1 million from $16.3 million in the prior year, or 11%, primarily due to strong growth in first aid van 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 $425.9 million at the end of our second quarter of fiscal 2022.

In the first half of 2022, cash provided by operating activities was impacted by our reduced profitability, including the impact of 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. For the first half of fiscal 2022, we continued to invest in our future, with capital expenditures totaling $60.2 million, and the acquisition of eight businesses for which we paid $42.3 million.

During the second quarter of fiscal 2022, we also purchased 52,500 Common shares for a total of $10 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 full year revenues for fiscal 2022 will be between 1.967 billion and 1.980 billion.

We further expected our diluted earnings per share for fiscal 2022 will now be between $5.62 and $5.82. This earnings per share guidance assumes an effective tax rate of 24% and includes a revised estimate of $30 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 fiscal 2022 guidance. Core laundry operations adjusted operating margin at the midpoint of the range is now 8.6% and implies an adjusted operating margin over the second half of our fiscal year of 9.4%.

This revised outlook reflects continued pressure from the current inflationary environment, including the recent surge in energy prices. Our adjusted tax rate for fiscal 2022 is 24.2%. The adjusted diluted earnings per share is expected to be between $6.80 and $7.

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

Thank you. [Operator Instructions] Our first question comes from Andrew Wittmann with Baird. You may proceed with your question..

Great. Good morning, guys and thanks for taking my question. I guess Steve, I wanted to ask about the profit margins from the perspective of the merchandise costs. And it seems like the way you talked about it that this was probably the largest bucket? Maybe you can talk about that specifically in your answer.

But I guess how can you get as comfortable that the pricing that you're realizing in the market is sufficient or is at a level where you're able to get the profit margins that you want. I understand that energy prices are volatile and those move around a lot and the labor markets changed a lot.

But I feel like that the pricing you're getting and the amount of labor -- merchandise cost that you're feeling should be priced for in your [costs] [ph] to your customers. And I just feel like the margins are a little bit softer than I would have expected, even adjusted for the fuel and labor prices out there.

And I just want to hear your comments on how you're able to price the business. It says an increasing competition that might be driving some of that or just basically comment on all that in its totality..

Sure. When you look at it, in particular, how you're approaching the question in terms of merchandise and overall our ability to price in the market. I don't think that's how we should be viewing the higher merchandise costs impacting the quarter.

I mean, certainly some of the cost bounce back that we're experiencing in terms of things like merchandise compared to the prior year quarter, is a result of the depressed level of merchandise or the reduced level of merchandise that was being input during some of the pandemic periods. So that bounce back in merchandise is a year-over-year challenge.

When you look at the cost of merchandise, there is a factor in there as well, related to inflation, as well as the cost of raw materials, transportation and labor that are impacting merchandise as well. So it's really, it's really a two-fold impact on merchandise. I wouldn't say the broader commentary around pricing, in terms of the environment.

We've talked before, it's a competitive industry, it's a competitive environment. I'm not sure that the dynamic has changed significantly over the last couple of years. When you look at the margin shortfall taking a step back over the last few years, there's been lots of dynamic.

It's been a dynamic environment, as far as our results go, things helping and hurting our numbers during the pandemic. We talked during the pandemic about how lower merchandise energy, travel and some other things, we're going to bounce back and that certainly happening.

Now, that's also being exacerbated now by the inflationary environment, energy and so on.

And then, as we've also talked about, some of the margin headwinds relate to not only the initiative costs that we've specifically carved out, but some of the investments in, I'll say disruption around, some of the projects we're doing do have cost that are outside of the direct cost that we're reconciling out.

So all of those things are contributing to the margin story.

But like we talked about, I think the biggest delta between our expectations and what the results are, are some of those inflationary pressures around not only labor and energy, but also the flow through impact that those are having on things like merchandise and other supplies and services.

So we continue to work with our customers from a pricing perspective and we'll continue to do that to offset it the best that we can..

Got it. Okay. I just follow up on that, I guess, obviously, energy prices are more predictable.

But I guess could you comment on what you're seeing in the labor market in terms of -- are things normalizing in terms of the rate of growth in wages? And can you talk about and I know, this is a hard question, but can you talk about when you believe that you'll be on the better side, or at least breakeven on the price cost dynamic for your margins? I know, that's a tricky one.

But just wondering how you're thinking about that today..

So I guess the first comment on labor, I would say that, I mentioned in my comments that we are a little bit better staffed today than we were a few months ago. So that's certainly positive.

I would say it's still a challenging environment in terms of, we're experiencing higher employee turn, which I don't think is unique in this market from prior years. And so there's sort of a cost associated with that as well. As far as normalizing.

I would say that, as we continue to experience the higher turnover, we have to continue to evaluate that, that sort of breakeven between turn and wages. So I would say that the environment is improving, but I wouldn't categorize it as wholly stable.

Second part of your question as to when that normalization occurs between sort of price and inflation and costs. We're going to continue to work through some of these increases and what we can extract out of pricing in this environment.

And I think that there's some positive trends that hopefully will occur over the -- of the upcoming quarters in that regard, meaning that, the pace of cost increases, hopefully, will slow, and we can sort of grow into the new cost environment. So that's obviously our goal and what we're going to be working towards.

And I think there's some signs of that, I think when you look at less pressure from COVID related absences, and so on, as well as some of the supply chain disruptions starting to ease a little bit.

Again, I want to I hesitate to say, we're beyond all of those challenges, but I do see a time where we can start, normalizing or flattening some of those increases and grow into the new cost structure..

Great. Thanks for those perspectives..

Thank you..

Our next question comes from Sam Kushner with William Blair. You may proceed with your question..

Hey, good morning, and thanks for taking our questions here. Want to touch on labor again.

Do you have a sense for how much of that step up in your labor costs are really related to base wage rate increases versus say, paying overtime or turnover costs to cover the labor shortage issue?.

Yes. That's an excellent question. It's not something that we have a breakdown prepared for. I would say that, when you look at the year-over-year increase in cost, it's certainly both. I think the lion's share of it is wage increases.

But it is more difficult to assess the cost of turnover in a production environment where or a service environment where you have the impact of newer employees training, not just the hard costs of training, but the soft cost of management distraction to be hiring more often bringing people up to speed more often.

So we don't have a great numerical answer for that. I would still say that there is a heavy cost from the pure wages. Certainly those other costs and that's why I talked about the balance of continuing to find the right wage point where you're optimizing the wage versus overtime training and so on. So it's a complex way to approach it.

But that's what we're trying to find the balance of..

No, totally understand it's a complex issue, but appreciate your characterization there. Maybe pivoting to customer utilization. We get the sense when talking to some of your smaller competitors, that most customers have fully reopened to this point, but that the utilization rates are still well below pre-COVID norms.

Is that how you would characterize the current state of the market as well? And if so, do you still have a sense of what your customer utilization rates are at relative to pre-COVID? Are we talking 70%, 80%, 90%? Just any sense you give us on that issue?.

Yes. I would probably say that I feel like that numbers on the higher side. I think, depending on the industry. I know from some of our experience and from talking to smaller competitors, as well, certainly the food and beverage arena is one where -- although there's reopening, there's some less level of activity, and some hospitality as well.

We're not overweighted in some of those sectors. So we are probably experiencing some of that. But the vast majority of what I'll consider are more traditional industrial customers, not in those sectors, I feel like we are at pretty healthy levels right now, compared to pre-pandemic.

Again, you do hear pockets and I'll make the comment in the energy sector. That although we're seeing some increased activity, we've heard commentary from customers in the energy sector and other sectors that there would be more hiring if they could find the people and more activity.

So I do think that the labor environment is causing some shortfall and activity. But I do feel like that a lot of our industrial accounts are pretty close to pre-pandemic levels..

Excellent. Appreciate the answers to the questions here..

Thank you..

Our next question comes from Andrew Steinerman with JPMorgan. You may proceed with your question..

Hi, Steve. I was hoping you might be willing to quantify kind of realized client pricing in the second quarter since it's sort of so pivotal here, like, for example, is realized pricing in the second quarter above 2%.

And you're going to have to remind me if you include or exclude or charge a fuel surcharge, I just forgot exactly how you do pricing? And then, I'll just give you my second question as well.

Do you think you have better visibility on margins over the next two quarters than you did three months ago?.

So to partially answer the first part of your question. I would hesitate to give an exact impact of pricing, it's certainly dynamic in this environment. I would say we've been able to do a little bit more than normal for sure. And this recent surge in energy prices will have us revisiting what we can do and maybe need to do.

In terms of energy surcharges, we as well as I think most of our competitors, or people in the industry have some component of the bill that roughly aligns with delivery costs and energy costs. But we continue to look at what we need to do, given the dynamic nature of the environment. With respect to the outlook over the next couple of quarters.

Andrew, I would say that it's a difficult question. I think when you look at the outlook, I would say that the commentary we made about inflationary impact and vendors sort of having to do things to try to balance their margins and their cost pressures. I think we still think the environment is somewhat dynamic.

When you look at staffing levels and whether it's energy prices or other activity from vendors, I do think it's still a pretty dynamic environment. So I wouldn't necessarily consider it a better time to be projecting the numbers than a few months ago.

But I will say, that being said, with the smoothing out of the environment from a COVID perspective, there was more disruption a few months ago when we were trying to give an outlook then then there is now from that perspective..

Thank you. That makes sense..

Thank you..

We have no further phone questions at this time, sir..

Well, I'd like to thank everyone for joining today to review our second quarter results. We look forward to speaking with you again in June when we expect to be reporting our third quarter performance, as well as our outlook for the remainder of the year. Thank you all and have a great day..

That does conclude the conference call for today. We thank you for your participation and we ask that you please disconnect your lines..