Greetings, and welcome to the UniFirst Corp. Second Quarter Earnings 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 the President and CEO, Mr. Steven Sintros. 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. We would like to welcome you to UniFirst Corporation's conference call to review our second quarter results for fiscal year 2023. The 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 factors – these risk factors in our most recent Form 10-K and 10-Q filings with the Securities and Exchange Commission. We are pleased with our strong top-line performance in the quarter which was partially fueled by our ongoing efforts to mitigate the cost pressures that we’ve been experiencing in our business. As always, I want to thank our over 14,000 team partners who continue to always deliver for each other and our customers. We are also pleased with the progress we are making advancing our technology and infrastructure initiatives. As we have discussed, we continue to be focused on making long-term investments in our business designed to accelerate growth and profitability, as well as ensure we are providing industry-leading services for years to come. Consistent with the theme of making long-term investments, I am happy to announce that on March 13, we successfully closed our previously announced purchase of Clean Uniform and officially welcome the…

Thanks, Steve. In our second quarter of 2023, consolidated revenues were $542.7 million, up 11.5% from $486.7 million a year ago, and consolidated operating income decreased to $20.7 million from $22.6 million or 8.4%. Net income for the quarter decreased to $17.8 million or $0.95 per diluted share from $18.5 million or $0.97 per diluted share. Our financial results in the second quarters of fiscal 2023 and 2022 included approximately $9.1 million and $6.7 million, respectively, of costs directly attributable to the three key initiatives that Steve discussed. In addition, we incurred costs related to the acquisition of Clean Uniform during the second quarter of fiscal 2023 of approximately $2 million. The effect of these items on the second quarters of fiscal 2023 and 2022 combine to decrease operating income by $11.1 million and $6.7 million, respectively, net income by $8.3 million and $5.1 million, respectively and EPS by $0.44 and $0.27, respectively. Our Core Laundry Operations revenues for the quarter were $477.1 million, up 10.2% from the second quarter of 2022. Core Laundry organic growth, which adjusts for the estimated effect of acquisitions, as well as fluctuations in the Canadian dollar was 10.1%. This strong organic growth rate was primarily the result of strong pricing efforts over the last year to share with our customers the cost increases that we have incurred in our business due to the ongoing inflationary environment, as well as continued solid sales performance and customer retention. Core Laundry operating margin decreased to 2.9% for the quarter or $13.6 million from 4.3% in prior year or $18.7 million. The costs we incurred related to our key initiatives and the Clean acquisition were recorded to the Core Laundry Operations segment and combine to decrease the Core Laundry operating margin for the second quarter of fiscal 2023…

[Operator Instructions] Our first question comes from Andrew Steinerman with JP Morgan. Please proceed.

Hi, Shane. I was hoping you could break down the $9.1 million into the three key initiatives in the quarter. And then also give us a sense of what the cost related to the three key initiatives will be in the second half of the year. And if it's okay, I'm just going to get my second question as well. Do you have a sense yet when the or Oracle Cloud ERP system will go into deployment, meaning starting deployment?

Yeah, sure. So I'll start with the breakout of the key initiatives for the quarter, as well as the expectations for the remainder of the year. So, for the quarter, about two-thirds of those costs really related to the CRM project, most notably the deployment of that system. I think as we've spoken about in the past, right now, we are deploying that system to our locations and we have numerous teams that are going and supporting our locations throughout that deployment. When I take a look at the costs that I'm going to incur throughout the remainder of the year, similar assumption on the CRM cost about two-thirds of the cost for the year will be supporting that deployment as well. Largely, we're going to be the lion's Share of the cost related to the deployment will be throughout the remainder of this fiscal year - by the end of the fiscal year. Our expectation is that our domestic locations will be largely deployed. Some of those costs will carry into 2024 as we as we continue to deploy some of our cleanroom in Canadian locations. But the majority of the costs related to the CRM deployments will take place in this fiscal year. Right now, when you take a look at the other two initiatives, the majority of that one-third at this point in time is the ERP cost. And again for the remainder of the year, the remainder of the one-third is ERP as well. My quarterly experience, CRM, ERP and then some residual branding carrying over from last year when we spent the majority of the cost supporting that initiative, my quarterly breakout was very, very similar. What I'm expecting for the full year.

The only thing I'll add to that, Andrew, is that the branding is - Shane, mentioned the branding work having some tale of cost into this year. That'll continue to reduce over the next couple of quarters.

Okay.

And as far as the ERP, the ERP project is still very early on in that project right now. We are largely involved in in design work - in designing the system and how it's going to interface with other ancillary systems that support our business. That'll be going on throughout the remainder of the year. And coming out of that design work, we will also be finalizing the timeline and the roadmap for the deployment of the different modules. But we expect that will – the deployments and the implementation of that system will be over a number of years. Because since we haven't finalized that roadmap and we will be working the remainder of this year to do that at this point in time, I can't definitively say exactly when that deployment is going to take place. We do expect that it will be a multi-year project.

Understood. Thanks for the time.

Thank you.

Our next question comes from Andy Wittmann with Baird. Please proceed.

Yeah. Great. Thanks for taking my questions this morning, guys. I guess, I wanted to ask about the profit margins and the revised guidance to make sure that I've got this right? I think you gave us the gap Core Laundry, plus the items. I get that to be on an adjusted basis of about 7.5%. I think last quarter, you guys were saying we’re like 7.7% and that was despite, it sounded like a little bit better quarter than you expected out of the Specialty segment. So I guess the question is, what is the incremental change? It's been merchandize cost for the last several quarters and I think and it's reiterated that again in this quarter that the merchants - a lot of the merchandize costs have been driven by new infusions or redressing, whatever happened in 2022. So, I would expect, all else equal that those garment cost would be close to being in the annualized base. But it seems like there's something else that's changed. So, maybe, Steve, could you just talk a little bit about the dynamic of the merchandize costs today? And what other factors are leaving you to have this revised outlook on your margins today?

Sure. I'll start and then, Shane can probably jump in, as well. With respect to merchandize in particular, as you know following us for a long time merchandize sort of ebbs and flows, right, in different economic cycles. Certainly, during the pandemic, the amount of merchandize we were putting in for a lot of reasons really dipped. And that obviously started to trend back up over the last 18 months or so. We've continued to see a lot of merchandize put in. You’re right. It is the factors we talked about. We did have some large infusions last year, but we continue to sell strategic accounts and so on. So, there are a number of pieces continuing to influence it. I think the one piece I’ll add to that is - and we probably haven't discretely said this as much but, as we talk about inflation, inflation is impacting merchandize, as well. I think the amount of units we’re putting in, is mostly in line but we're still paying more for merchandize. Some of that comes from outside vendors. Some of it comes from internally manufactured. Some of that goes down to the cost of raw materials, which continues to be high although we do expect with things like cotton and other things starting to moderate that that we should start to get some relief on the cost of merchandize as I don't even want to say as the year goes along, because as we procure that those raw materials that kind of gets to our supply chain, then we got to put the garments and service and amortize them. We're probably not going to get the benefit from some of those lower costs until next year. So the combination of the factors we've talked about, as well as the cost of merchandize continue to impact us as we go. And I think Shane can give you a little bit of the breakdown closing the gap, but the biggest piece and it's a, it's probably about a quarter of a point from our prior expectations is merchandize and then there's just a couple other smaller pieces that we're seeing. So, I'll let Shane fill in the gaps there.

Yeah. So when we're talking about our current guidance for the year, yeah. I think, I think that sort of what you articulated excluding the impact or after the impact of my key initiatives and the transaction-related cost that I'm going to incur, you sort of spot on there. I think when you take a look at the guidance that we had last year, I was sort of indicating that after the effects of those two items that was largely in line with last year. Right now my guidance is about 60, 70 basis points lower than that previous guidance. When I, when I unpacked that change, about 20 basis points of that relates to the Clean acquisition. And obviously some that being influenced by the purchase accounting assumptions that I had articulated earlier. I had even last quarter, I had indicated that my expectation of the headwind-related merchandize on the year was still going to approximate about a point of headwind on my margin. At this point in time, my assumption is, is slightly heavier than that with about 20 to 30 basis - 20 to 30 basis points of additional headwind, compared to that previous assumption. And then, Energy, because based on where Energy was I guess tracking towards in our assumptions, I thought that we were going to get a little - slightly larger benefit from Energy - from my Energy comparison than I think now. So that's sort of like a 10 basis point headwind compared to that prior guidance, as well. So those three items are really largely explaining that change.

Okay? I might follow up a little bit more offline to get a little bit more detail on that, but that's helpful discussion. I guess, stepping back and thinking about the fact that the CRM is 75% installed and some of these locations it's been installed for a while now. I guess, Steve, can you talk about how much benefits to your margins is being harvested already from the systems that are live? And I know that some of the locations where it is live, it's still kind of being phased in where the old isn't completely gone yet. So, I recognize that it's not - you're not getting the full benefit of this. But can you just talk about how much benefit if any, you are getting today? And as you turn the page to the next couple quarters, and maybe even the next fiscal year, when do you expect the benefits to your profit margins are going to wrap more substantially, as a result of that investment?

Yeah, I think when you look at the CRM, you're right, we're still, we're still in the midst of it. Even though we're through about 75% of the U.S. laundries, there's still a lot of, what I'll call learning and change management going on for locations adopting the new system. I think broadly, as we kind of go through that deployment. In fact, in the months, probably up to six months surrounding a deployment is probably not a net advantage, because there's a lot of time and training and data conversion and a lot of work that's being done. And so we're seeing it takes locations six to nine months to sort of hit their stride, and using the new system. That's not to say there aren't benefits immediately, right? We've talked about enhanced merchandize control. We've talked about time for our route drivers and additional efficiency effectiveness on the routes. Some of that is recognized immediately. Some of those are soft benefits versus hard benefits, as well. But we are seeing better merchandize controls resulting in our ability to, control garments coming back, making sure we're charging appropriately for garments and we think that will continue to advance as we go through the remainder of the year and into next year. And then, I think, really as the as the last year, a year and a half has been so focused on deployment. I think, we will kind of go through an optimization phase where, the locations and we learned to sort of optimize the capabilities of the new system. And we think that that'll happen over the course of the next year or so. So, there are a lot of learnings with the new system. When anytime you're coming off a system that you've been on for 30 years, you put in the new system. There's immediately advantages. There's opportunities to improve certain things and we're still working through some of those things. But, as you think over the next year or so, there'll be optimization there and we can start to see some of that improvement. And again, some of the Improvement I talked about merchandize controls, it may be hard to see because we're still seeing such of a ramp up coming off the depths of the pandemic and we're seeing the inflationary impact of higher merchandize costs. So, part of our effort has to continue to be working pricing angles where we can to recover some of that margin. So, a lot of moving pieces, for sure. But we do feel good about where we are in terms of the deployment of the technology and our ability to optimize it going forward.

Okay. I'll leave it there, guys. Thanks a lot.

Thanks, Andy.

Thank you.

Our next question comes from Tim Mulrooney with William Blair. Please proceed.

Hi guys. This is Sam Karlov on for Tim. Thanks for taking my questions.

Absolutely.

Can you give us an idea of how much of that 10.1% organic growth this quarter was from pricing? And if you could break that down further, how much of that comes from your fuel surcharge?

Yeah, so we've never really kind of got into that granular level of detail and we really won't now. The ones – the couple of comments I can make is that pricing activities over the last couple of years has been a meaningful factor in our growth. One thing I will say about the energy surcharge and we did not mention this in our prepared remarks, but as energy peaked last year is when we kind of put in that surcharge. We did take the surcharge a small step down as energy cost, particularly fuel has come down a bit. That was sort of a commitment to our customers that we would look to do that when some of the energy came back and we still are retaining some of it, because as Shane mentioned energy as a whole still remains relatively high. So, I won't break down the components any further there, other than say that we continue to push price in some ways. It is a difficult analysis to be honest. To really fair it out exactly how much pricing we are keeping because, we've said this before, but new accounts come in at lower prices than accounts in some cases that you've had for a little while. And so the net impact of price continues to be something that we work on. And I think we still have opportunities there. And our customers have been receptive understanding the environment and it's something we'll continue to work through.

That's helpful. Thanks. And then one follow-up. You updated your guidance - sorry your updated guidance includes about $60 million to $65 million of additional top-line growth for the full year with $42 million of that coming from the cleanroom or Clean Uniform acquisition. How much of that additional $20 million was from strong performance in the second quarter versus higher growth expectations for the second half of the year?

It's a good question. I think a lot of it is based on the estimates or the performance through the six months of the year. As Shane mentioned some of it relates to the Specialty Garment segment. Some of that Specialty Garment strength probably continues to the back half of the year and contributing it to, as well. But I think I think a fair amount of it is from the first half of the year. Maybe two-thirds of it and I'm going off the top of my head a little bit.

That's helpful. Thanks.

Thank you.

Our next question comes from Kartik Mehta with Northcoast Research. Please proceed.

Good morning. This is Jack Boyle on behalf of Kartik Mehta. Good morning, everyone.

Good morning.

Morning.

Just a quick question regarding the Clean Uniform acquisition. You guys have said that you plan on doubling the EBITDA margins from 10% to 20% percent in the next two to three years. Could you just give us a little more color as to maybe what strategy you are planning to pursue to do that? Or maybe what opportunities you saw within Clean Uniform?

Sure. I think, as I mentioned, one of the things that attracted us to Clean, the most is their service reputation in that market. When you look at that market, we have a decent presence in the some of the markets they service, but in others we really don't have that significant of a presence. So, when you think about the ability to integrate operations, optimized routes, synergize sales forces, the supply chain efficiencies, working together on sourcing products, some of our self-manufactured goods. So, it's really all of the typical things you would think of when you think about what we can gain from integrating with any sort of acquisition in our industry. I think the one that made this, even more attractive is, some of these markets aren't some of our top performing markets. And that's really as a result of scale and density, which we've said for a long time is really key to profitability in all of our markets. And so, really the combination of the two companies will provide us a strong platform in really all of the markets that Clean and UniFirst serve commonly in that in that Midwest area. And so, as I mentioned before, it's going to take a little time, because we're still deploying technology. I don't think I mentioned this, but they are deployed on the same ABS software that we're deploying. Now, both different versions of ABS have different bells and whistles that we sort of have to synergize as we work through it. But that will help us as well in terms of trying to put the companies together.

Great. I appreciate that. And just as an extra follow-up, could you go into any more detail as to, maybe some of that footprint overlap? Could you quantify how many or how much you guys had existing service in the area? Maybe how much that was unserved by you?

Yeah, I would say that every market that they're servicing, we service, as well. So a good example would be St. Louis, which is really their own market. They have three operating plants in the Greater St. Louis area, all within 30, 40 miles of St. Louis, and we have one branch. Our nearest plant is Springfield Missouri. So that's a good example of how, well eventually our depot facility in St. Louis will be merged into their St. Louis operations. And there's some other operations in different markets like Tulsa and Kansas City that go in the other direction. But every market we do commonly serve together, but it's amount of scale who has a processing facility and being able to kind of merge those operations to optimize the markets.

Very good. Thank you for the additional detail.

Thank you.

Gentlemen are no further questions at this time.

Okay, I'd like to thank everyone for joining us today to review our second quarter results, and we look forward to speaking with everyone again in June, when we expect to be reporting our third quarter performance, as well as our outlook for the remainder of 2023. Thank you, and have a great day.

That does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your line. Have a great day everyone.