Greetings, and welcome to the UniFirst Corp. Fourth Quarter Earnings Conference Call. [Operator Instructions] It is now my pleasure 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's 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 fourth 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 in our most recent 10-K and 10-Q filings with the Securities and Exchange Commission. We are very excited to be announcing today that we have officially reached another major milestone as a company as we reported just over $2 billion in annual revenues for our fiscal 2022. UniFirst has come a long way from our humble beginnings back in 1936, operating out of a single location in Boston, Massachusetts, and we are very -- we continue to be very excited about our future. I want to thank our thousands of Team Partners who in the face of a challenging operating environment continue to Always Deliver for each other and our customers. They are the engine that makes UniFirst go and they deserve all the credit for our ability to be celebrating this milestone today. During the quarter, as always, our team focused on providing industry-leading service to our customers as well as selling prospective customers…

Thanks, Steve. Consolidated revenues in our fourth quarter of 2022 were $516.4 million, an increase of 11% from $465.3 million a year ago. And consolidated operating income decreased to $33.3 million from $44.9 million or 26%. Net income for the quarter decreased to $26.2 million or $1.39 per diluted share from $34.6 million or $1.82 per diluted share. Our financial results in the fourth quarter of fiscal 2022 included $9.1 million of costs directly attributable to our three key initiatives that Steve discussed. Excluding these initiative costs, adjusted operating income was $42.3 million. Adjusted net income was $33.7 million, and adjusted diluted earnings per share was $1.79. Although our financial results in the prior year may have included direct costs related to these key initiatives, the 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 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 period. Our Core Laundry Operations revenues for the quarter were $458.6 million, an increase of 10.5% from the fourth quarter of 2021. Core Laundry organic growth, which adjusts for the estimated effect of acquisitions as well as fluctuations in the Canadian dollar was 9.9%. Our organic growth rates continue to benefit from solid sales performance and improved customer retention in fiscal 2022, as well as efforts to share with our customers the inflationary cost increases that we have been experiencing in our business. Core Laundry operating margin decreased to 6.3% for the quarter or $29 million from 10.1% in prior year or $41.8 million. The costs we incurred during the quarter related to our key initiatives were recorded to the Core Laundry…

[Operator Instructions] The first question comes from Andrew Steinerman with JPMorgan. Please go ahead.

Hi, good morning. It's Andrew.

Good morning.

Two questions. One, would you be willing to quantify for us the merchandise amortization drag in the fourth quarter and assumed in '23? And then I have a second question. You were very good at going over the key initiatives and what's driving fiscal year '23 spend. Could you just tell us how much spend there should be and meaning in terms of investments in the key initiatives past '23?

So let me start with the key initiatives and then I'll turn the merchandise over to Shane. From a key initiative standpoint, as I talked about, about two-thirds of the key initiative cost this year will be related to completing or mostly completing our CRM systems rollout. A lot of that will fall off as we get into '24. The other large chunk of '23 initiative cost is related to ERP system. As we get to '24, the ERP system will transition more from the design phase into a build and implementation phase where more costs will likely be capitalized in '24 than '23. So I'm getting ahead of myself a little bit, but there'll probably be some less direct cost initiative costs that are growing through the P&L in 2024 than '23. So we do expect, in short, for '23 to be the high watermark of initiative costs going through the P&L although in '24 and '25, as we continue to work through our -- excuse me, our ERP, there will be higher levels of capitalization related to that initiative. Hopefully, that sort of makes sense, Andrew.

Yes. Sure.

And I'll turn it to Shane on the merchandise.

Yes. So as it relates to the merchandise drag for both the fourth quarter as well as we look into 2023. Yes, when I take a look at the fourth quarter, carving out the actual amount related to merchandise amortization. I don't think it's as meaningful when I compare that to prior year, just some of the disruption that we were still incurring at that point in time. What I will say is that as you can see from my comments, my energy drag during that quarter was about 110 basis points. And my merchandise amortization headwind exceeded that, right? So it was a significant [technical difficulty] As we look into next year, my merchandise amortization is the largest headwind that we're seeing. And the expected headwind there is about a point to our margin. Again, a lot of the things that Steve had articulated in his prepared comments are continuing to impact our merchandise amortization. And as that ramps throughout the year, yes, it's carrying into 2023.

Okay. Thank you.

A couple of other quick comments there, Andrew, on the merchandise. As Shane talked about, it's really being impacted, as I said in my prepared remarks, it's a combination of higher cost of merchandise and more being placed in service as well as some of the older tranches related to the pandemic time that are dropping off that represented much lower merchandise being placed in service, particularly for some of our longer lived garments in the FR flame-resistant area that last 24 months. So you're just still having some of that natural build going on during '23.

Right. And if you don't mind, I just -- Steve, I just guess one quick follow-up. And when you think about '24 the CRM system being in place for all of U.S. laundry by the end of '23. Just talk about the benefits that you expect from the new CRM system as we go a year out?

Yes. I think one of the things we've always talked about and it actually ties back to merchandise is continued improvement of merchandise controls. Obviously, we're already starting to see some of the benefit. Maybe it's a little more intangible on our team, shorter hours for the route drivers, more ability to provide automation and transparency to the customers. So the route efficiency of the route day has improved quite a bit as we deploy. Now some of that's being offset, that there's a lot of learning and change going on going from our old system. But we expect that to really help once they have sort of, in many cases, a full year of the new system under their belt and really start taking advantage of the benefits.

Okay, thank you. Appreciate it.

Thank you.

Thank you. The next question comes from Andy Wittmann of Baird. Please go ahead.

Yes, great. Good morning, guys. I guess I wanted to talk about cash flow a little bit here, a couple of things. Could you just talk about the reasons behind the working capital investment this past year in '22 being higher than normal? And if you expect in '23, if you could just give us kind of the net of what you're expecting, maybe a range on free cash flow? You gave us kind of the components here, but maybe there's a working capital drawdown that you'll be able to pick up next year. So I wanted to just get your sense of what a reasonable range of free cash flow for '23 might be?

Yes. So as we look into 2023, our expectations, clearly, in 2022, we had a significant amount of working capital needs for the business. And when you take a look at those, those relate to I guess, first and foremost, our merchandise and service. We've been talking about our merchandise amortization ramping. And as we put more products into service, you can see the adjustment in the investment reflected on our balance sheet. During 2023, our expectation around that is that it will be more normalized and less significant than it was in 2022. We also have elevated accounts receivable balances. And some of that relates to the deployment of our system as we continue to work through some of that change management, et cetera. And then there were -- one of the things that I had mentioned last quarter was we had deferred some FICA payments under some of the stimulus related to the pandemic that we had to pay back last year. So again, our expectations coming into 2023 is that there's going to be significantly less working capital needs of the business compared to 2022, not necessarily forecasting that there is going to be a draw down, which is going to result in a cash infusion. But when we take a look at our expectations around free cash flow, it's probably around $75 million, right? And that's obviously still being impacted by the investment in our initiatives and our current profitability as well as the elevated capital expenditures that we're expecting as we advance some of these initiatives.

And there's another FICA payment coming here in the next couple of months too, Shane?

The second half of that payment is expected in December of this year, yes.

And how much was that again?

It's a little over $12 million.

Yes. Okay. And then maybe, Steve, as my follow-up. Can you talk about price cost dynamics? When do you feel like you're going to be able to get on the right side, is the guidance for the year that you gave here for like the core margin -- the Core Laundry segment margins, is that kind of down a little bit in the front half of the year and then you think in the second half of the year that margins can start comping positively? I guess I'd like to hear a little bit more about that and any initiatives that you've got going on price, whether it's fuel surcharges or anything like that would just be helpful context for, I think, for us all to know.

Yes, I think what you said about the trajectory of the margin during the year is somewhat embedded into our forecast. I think when you look at the environment, again, we're forecasting sort of current status quo. And I think -- I sort of made this comment in my prepared remarks, you're seeing some signs that certain things may be reducing, certain freight costs, certain -- even some raw material costs potentially. Now some of those may not take hold until later in the year, and you think about supply chain, buying fabric and things like that, there's sort of a long, long cycle of that before you start to see it in your merchandise amortization. But we're hopeful that some of that stuff starts to take hold later in the year, and you start to see some turnaround there. And from a price environment perspective, I mean, I think we continue to do multiple things. You talked about fuel surcharges to try to stay on top of the situation. And we'll continue to do that. I think -- our customers have worked with us well through the environment, and it's just an ongoing effort as we work through the dynamic environment right? You talk about fuel, it goes down, it goes up. We're really trying just to evaluate what makes sense as we go forward and we build that strategy for '23.

Yes, Andy, the only thing that I would add to that is, back to your margin question as it relates to the quarters. We've mentioned this before that the profitability of our quarters has some seasonality to it. With oftentimes our first quarter being more profitable in our second quarter being our least profitable again. Back to Steve's comment about the trajectory, I would say that, that trajectory is the quarterly comparisons to the comparable prior year period, meaning the -- I guess, the momentum or the improvement that we're seeing is really the delta between the current or any individual quarter and the prior year comparable, if that makes sense.

Right. You're basically saying the year-over-year margin change will be potentially more negative in the earlier quarters and then hopefully turn more positive in the second half of the year. I think -- kind of what we're just trying to say.

Yes. I'm glad you were able to get it.

I'll leave it there guys. Have a good day.

Thank you.

Thank you. The next question comes from Jack Boyle, Northcoast. Please go ahead.

Good morning, everyone. Thank you for taking my questions. Just real quick, I have a question here. You guys are great on answering some of the seasonal cadence here. Just have a question about stabilizing the margins. Is there -- in terms of continuing to grow the revenue, do you guys believe that -- is there any time of type of minimal revenue growth that you guys believe that you would need to attain -- or continue attaining to stabilize the margins or improve them?

Yes, it's a good question. I mean, we've obviously been through a period of higher growth here over the last year or so, tied to the inflationary environment. But you're right, you have to continue to keep that top line momentum say, beyond the periods that the higher inflation takes hold, let's say, things slow down a bit, and we're back to more of a normal operating environment. Yes, we still have to be pushing growth towards the mid-single digits to get those margins to recover, right? You're not going to really be able to do low single digits growth and improve the margins. The one thing I will say is that there are a number of sort of countercyclical influences of our cost when the business does slow down, like some of the things we're talking about with fuel, if we went into somewhat of a slowdown and you have to be careful because no one wants a deep recession, right? But obviously, what's going on now is trying to cool the economy appropriately, I guess. And sometimes, that can help our costs because I talked about merchandise being placed in service. When you think about how we put merchandise and service with our customers, the more -- our customers are adding employees, the more garments we're putting in service and there's sort of an upfront cost associated with that. The more turnover there is amongst our customers' employees which a lot of companies are experiencing elevated turnover in this environment, there's more merchandise placed in service. So, yes, that being said, to answer your real question, you do need to maintain some healthy growth to continue to move the margins in the right direction. And as we move past the true inflationary period, it will be back to that core of selling retention and making sure we're getting appropriate pricing along the way.

Very good. And just as a quick follow-up to your merchandise comment there. Are you guys seeing any kind of elongation and how long you're having to store that merchandise? Is there any change in the length of the sales process?

I would say, no, I think we continue to work on utilizing our used garments, which is a key part of improving our profitability. And quite frankly, as we move into our ERP systems project, one of the key areas of focus is improved utilization of used inventory across our locations. So -- but no, I wouldn't say we're seeing a significant change there.

Very good. Thank you.

Thank you.

Thank you. [Operator Instructions] And the next question comes from Tim Mulrooney of William Blair. Please go ahead.

Yes. Good morning Shane, Steve. Two quick questions from me. Can you talk about trends in new customer account growth? I'm assuming that ad stops with customers is still okay given that unemployment remains so low. But I'm thinking maybe where you'd start to see signs of macro weakness first might be with new customer leads. So if you could just comment on how that's trended over the last quarter?

Yes. No. I would say new customer wins continues to be very solid. I mean for the full year, we sold more new business than we did in fiscal '21. And I think that trend was reasonably consistent over the back half of the year. So I wouldn't say we're seeing a slowdown there. In a typical environment where we do start to see economic slowdown, it really does show up typically in the wearers first. Now this environment might be a little different, right? And this is sort of the dynamic where people are expecting a slowdown with the higher interest rates, but hiring is still pretty good, unemployment is still very low. So you're right, we have not seen that real slowdown or pullback in wearer levels that is our normal indicator that the slowdown is coming. But obviously, we're keeping a sharp eye open for it, and it's something that I'm sure will be a factor eventually during the year one way or another.

Right. No, that's helpful. So the way I should think about it normally is you actually do see it in that ad stop first. But given this type of environment, it might be different this time around. So -- maybe I'll ask you about it again next quarter.

Yes, absolutely. When you think about the last 15 years, the recession in 2008, 2009, we certainly saw it in the wearers first. I would say the other time we saw wearers pullback was when energy sort of tanked in 2015, '16, after the many years of an energy boom, we saw some were pull back pretty quickly. So yes, it's usually our leading indicator.

That's great. Thank you. And just as my follow-up, I wanted to ask about just if labor availability has eased at all in recent months, we've heard from some folks that the labor environment has gotten a touch better, while others say it's -- it was just as difficult as it's ever been all year. So curious to hear your thoughts as it relates to maybe both your route drivers and your production plant workers. Thank you.

Yes. No, great question. And I think I'd say our experience is very consistent with what I've been sort of reading in the broader economy, which is we are seeing more applicants. And so we are better staffed today than we were six, nine months ago. There's no question on both the route driver and the production side. I will say turnover is not -- was not really better in the fourth quarter though. Turnover continues to be high, but we continue to -- or we're seeing improvement in the ability to fill those physicians and find applicants. So I think you're -- your -- it seems very consistent with what I'm seeing from other companies. There's a little bit of an improvement in the ability to find people.

Okay. That's very helpful. Thank you.

Thank you.

Thank you. That was our final phone question. I'll turn the call back over for any closing remarks.

Yes, I'd like to thank everyone for joining us today for our fourth quarter results, and we look forward to speaking with you again in January when we expect to be reporting our first quarter performance. Thank you all, and have a great day.

Thank you. This does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines. Thank you, and have a good day.