Yahoo Finance UniFirst Corporation (NYSE:UNF) Q3 2024 Earnings Call Transcript
UniFirst Corporation (NYSE:UNF) Q3 2024 Earnings Call Transcript June 26, 2024
UniFirst Corporation beats earnings expectations. Reported EPS is $2.19, expectations were $1.88.
Operator: Good day, and thank you for standing by. Welcome to the Third Quarter 2024 UniFirst Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there'll be a question-and-answer session. [Operator Instructions] Please be advised today's conference is being recorded. I would now like to hand the conference over to your speaker today, Steven Sintros, President and Chief Executive Officer. Please go ahead.
Steven Sintros: 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. I'd like to welcome you to UniFirst Corporation's conference call to review our third 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. At UniFirst, we are the people who always deliver. We serve the people who do the hard work as they are the workforce that keeps our communities up and running. They are our existing and prospective customers as well as our own UniFirst team partners. Our mission is to enable those employees and their organizations by providing the right products and services to do their job successfully and safely. Whether that means providing uniforms, workwear, 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 businesses and their team, all while providing an enhanced customer service experience.
I want to sincerely thank all of our team partners and our customers as we strive towards our vision of being universally recognized as the best service provider in the industry, all while living our mission. We are pleased to report the results from our third quarter of 2024, which showed solid growth in the top line and strong improvement in our bottom line. Overall revenues in the third quarter were up 4.6% compared to the third quarter of 2023, and our Core Laundry Operations' organic growth totaled 4.7%. Operating income and EBITDA increased significantly in the quarter compared to a year ago, benefiting from lower cost expended during the quarter related to key initiatives, as well as favorable comparisons to the third quarter of last year related to elevated healthcare and legal costs a year ago.
Excluding these benefits, we still have experienced strong operating income and EBITDA growth during the quarter as well as year-to-date. We are also very pleased with the improvement in cash flows from operating activities compared to 2023, which were up 35.2%. As a reminder, we've been incurring costs over the last couple of years related to our technology transformation. As expected, the expense we are incurring related to these key initiatives is declining due to activities surrounding the deployment of our CRM largely winding down, and the amounts we are spending on our ERP project now being largely capitalized as we enter the implementation phases of the project. During the quarter, our sales organization continued to perform well, selling prospects on the value that UniFirst can bring to their businesses.
Overall, we are pleased with the solid organic growth for the quarter, delivering strong results despite a more challenging pricing environment. Although we would classify our wearer levels as mostly stable, we have seen a bit of a decline in our net wearer metrics during the quarter. Our updated full year guidance, which Shane will discuss shortly, implies Core Laundry Operations' organic growth in our fourth quarter to be approximately 3.5% at the midpoint of the range. During the last few quarters, as the market has emerged from a period of significantly elevated inflation levels, we have discussed a more challenging pricing environment and its impact on our sequential organic growth rates. Although it is too early to be making too many comments about next year, we did want to communicate that based on these trends, we currently expect organic growth in fiscal '25 to be more modest than our fourth quarter.
At the same time, we continue to focus on investments in the business to enhance our ability to attract new customers, sell additional products to existing customers, as well as enhance our customers' experience and drive improved retention. Opportunities to win national account customers remain healthy and we have had very good success adding a number of large programs this year, including a top three account in our first quarter. Although the sale of these accounts can be difficult to predict, we are well-positioned to take advantage of opportunities in the market. In addition to our ongoing efforts to drive growth, we continue to focus on our operating excellence and cost reductions to enhance our margin profile. We are pleased with some of the progress in recent trends in key cost areas such as merchandise as well as other input costs.
Our team continues to be more proficient utilizing and optimizing the capabilities of our new CRM, including leveraging some of Clean's proprietary technology across all UniFirst, with all efforts focused on deploying standard processes across our local operations 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 due to the implementation of our ERP, we continue to focus on these areas and others we feel can move the needle in the near- to mid-term. We are also excited about the opening of new facilities this year in New York, Michigan, and Ontario, Canada.
These projects are good examples of investments designed to not only enhance our service execution and customer experience, but also improve our capacity for growth, operational efficiency, and profitability. We continue to believe strongly in the bright future of our First Aid & Safety division. We continue to make investments in the sales and service infrastructure of the van operations 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. Customers expect solutions to their most pressing issues and First Aid & Safety are important contributors to these integrated solutions. These investments have delivered the strong growth that we once again achieved in the quarter.
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 would like to turn the call over to Shane, who'll provide more details on our third quarter as well as the updated outlook for the remainder of the year.
Shane O'Connor: Thanks, Steven. In our third quarter of 2024, consolidated revenues were $603.3 million, up 4.6% from $576.7 million a year ago, and consolidated operating income increased $48.5 million from $33.4 million, or 45.1%. Net income for the quarter increased to $38.1 million, or $2.03 per diluted share from $24.3 million, or $1.29 per diluted share. Consolidated EBITDA increased to $82.5 million from $64 million in the prior year, or 29%. Our financial results in the third quarters of fiscal 2024 and 2023 included approximately $3.9 million and $8.4 million, respectively, of cost directly attributable to our key initiatives. In addition, we incurred costs related to the acquisition of Clean Uniform during the third quarter of fiscal 2023 of approximately $0.7 million.
The effect of these items on the third quarters of fiscal 2024 and 2023 combined to decrease both operating income and EBITDA by $3.9 million and $9.1 million, respectively; net income by $2.9 million and $6.8 million, respectively; and EPS by $0.16 and $0.37, respectively. Our effective tax rate in the quarter was 22.9% compared to 27.2% in the prior year. As a reminder, our tax rate can move from period to period based on discrete events, including adjustments to our tax reserves and excess tax benefits and deficiencies associated with employee share-based payments. Our Core Laundry Operations revenues for the quarter were $528.5 million, up 5.3% from the third quarter of 2023. Core Laundry organic growth, which adjusts for the estimated effect of acquisitions as well as fluctuations in the Canadian dollar, was 4.7%.
This solid organic growth rate was primarily the result of solid new account sales, including a large national account we installed in our first fiscal quarter of 2024 and the impact of pricing efforts over the last year. Core Laundry operating margin increased to 7% for the quarter, or $36.9 million from 4.2% in prior year, or $21 million, and the segment's EBITDA margin increased to 13.1% from 9.9%. The costs we incurred related to our key initiatives and the Clean acquisition were recorded to the Core Laundry Operations segment and combined to decrease both the Core Laundry operating and EBITDA margins for the third quarter of fiscal 2024 and 2023 by 0.7% and 1.8%, respectively. Segment's operating and EBITDA margin comparisons benefited from elevated expense in the prior year related to high healthcare claims and costs incurred related to a legal matter.
Excluding these items, our segment's operating results also reflected favorable trends in merchandise, payroll, and other operating input costs. Energy costs in both the third quarter of 2024 and 2023 were 4.3% of revenues. Revenues from our Specialty Garments segment, which delivers specialized nuclear decontamination in clean room products and services, decreased to $47.6 million from $49.4 million in prior year, or 3.7%. At the same time, the segment's operating margin decreased to 23.9% from 25.2%. This performance was due to a decline in revenues and profitability in the segment's North American nuclear business. As we 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 $27.3 million from $25.5 million in prior year, or 6.9% due to strong growth in our van operations. Segment had a nominal operating profit of $0.1 million during the quarter as the segment's results continued to reflect the investments we are making in our first aid van business. At the end of our third fiscal quarter, we continued to reflect a solid balance sheet and financial position with no long-term debt and cash, cash equivalents in short-term investments totaling $125.4 million. In the first nine months of fiscal 2024, we saw significant improvement in our cash flow from operating activities, which increased 35.2% to $193 million, primarily due to improved profitability and lower working capital needs of the business.
We also continue to invest in our future with capital expenditures of $121.9 million and repurchased $16 million worth of common stock. I'd like to take this opportunity to provide an update on our outlook. We continue to expect our revenues for fiscal 2024 to be between $2.415 billion and $2.425 billion. However, we now expect that our diluted earnings per share will be between $7.17 and $7.49. Our outlook for fiscal 2024 includes an extra week of operations in our fourth fiscal quarter compared to 2023 due to the timing of our fiscal calendar. This outlook also assumes Core Laundry Operations' organic growth at the midpoint of the range will be 4.5%. Core Laundry Operations' operating and EBITDA margin at the midpoint of the range will be 6.6% and 12.7%, respectively, an estimate of $12 million of cost directly attributable to our key initiatives that will be expensed in fiscal 2024 and will decrease both the Core Laundry Operations' operating and EBITDA margins by 0.6%, an effective tax rate of 24.5%, and no future share buybacks or unexpected, significantly adverse economic developments.
*** While we acknowledge the potential of UNF as an investment, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than UNF but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock. ***
This concludes our prepared remarks and we would now be happy to answer any questions that you might have.
To continue reading the Q&A session, please click here.
