Greetings and welcome to the UniFirst Corporation's Fourth 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 Steven Sintros, President and Chief Executive Officer. Please go ahead.

Thank you, and good morning. I am 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 the UniFirst Corporation conference call to review our fourth quarter results for fiscal year 2023. This call will be on a listen-only mode until we complete our brief 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. I am pleased to report that, we closed the year with the fourth quarter that modestly exceeded our expectations in both top and bottom-line performance. We accomplished a lot as a team in fiscal 2023 that will help to strengthen our company as we move forward, growing our business, making strong progress in our technology transformation, and closing on our mid-year acquisition of Clean Uniform. I want to sincerely thank all of our team partners who continue to always deliver for each other 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 of serving the people who do the hard work. I want to take a couple of minutes to expand on fiscal year '23, what we accomplished as a…

Thanks, Steve. Consolidated revenues in our fourth quarter of 2023, were $571.9 million, an increase of 10.7% from $516.4 million a year ago. And consolidated operating income increased to $36.1 million from $33.3 million or 8.5%. Net income for the quarter increased to $27.6 million or $1.47 per diluted share from $26.2 million or $1.39 per diluted share. As we mentioned last quarter, due to the increase in non-cash acquisition-related intangibles amortization, that we will be incurring as a result of the Clean acquisition, we believe that EBITDA will become a valuable metric for us to include in our commentary going forward. Consolidated EBITDA increased to $69.2 million compared to $60.2 million in the prior year or 15%. Our financial results in the fourth quarters of fiscal 2023 and fiscal 2022 included $6.1 million and $9.1 million, respectively, of costs directly attributable to our key initiatives. In addition, we incurred costs related to the acquisition of Clean Uniform, during the fourth quarter of fiscal 2023 of approximately $0.3 million. The effect of these items on the fourth quarter of fiscal 2023 and 2022 combined to decrease both operating income and EBITDA by $6.4 million and $9.1 million, respectively. Net income by $5.3 million and $7.6 million, respectively, and diluted EPS by $0.28 and $0.40, respectively. Our Core Laundry operations revenues for the quarter were $505 million, an increase of 10.1% from the fourth quarter of 2022. Core Laundry organic growth, which adjusts for the estimated effect of acquisitions, as well as fluctuations in the Canadian dollar, was 5.3%. This organic growth rate was impacted by pricing efforts over the last year to share with our customers the cost increases that we have incurred in our business as well as solid sales performance. Core Laundry operating margin decreased to 6% for…

[Operator Instructions]. Our first question comes from the line of Manav Patnaik with Barclays. Please proceed with your question.

Hi, good morning. This is Ron Kennedy on for Manav. Can I just please confirm the overall contribution to the extent you disclose them from pricing versus new business? And then the cross-sell penetration and how those compare to historic levels and what the outlook for each of those components is contemplated in the guidance for '24?

So, we have not historically broken out those components, but I can give you directionally what we're seeing with respect to, I guess, the broader 2023 and what we expect going forward. Particularly pricing being a large item that we've talked about, given the inflationary condition, we expect that impact to decrease. We've seen some of that over the back half of '23, and we expect that in '24 as well. We expect contribution from new account sales and retention to be similar in 2024. As well as cross-sell. I think we, the other components of our growth, reasonably stable trajectory. In terms of often one of the other components we talk about is wearer levels. And I would say wearer levels have continued to be stable through the back half of this year, and that's at this point what we've assumed going through '24.

That's helpful. And as a follow-up, if I may, just confirm the assumptions for the broader macro and then more specifically for the merchandise amortization materials, commodity, and labor inflation. And how pricing -- where you will be pricing with regards to capturing the impact of those?

Yes. In terms of a couple of different things you mentioned there. In terms of our overall merchandise costs, we have talked a lot in the last couple of years, how we've seen escalating merchandise costs, both from a quantity perspective coming off some of the lows of the pandemic, when less merchandise was infused given the labor environment. The strong growth in heads, in labor coming out of the pandemic has obviously caused our merchandise to escalate, exacerbated by higher cost of merchandise in a number of different areas, including freight, raw materials, and so on. A number of things are happening at this point that are causing our merchandise costs and trajectory to start to flatten. And it really exists in all areas. We're getting a little bit more to a mature population coming off the lows of the pandemic. And also, as you can imagine, we are experiencing lower freight costs, bringing in product, raw material costs, if you follow things like cotton and in some cases, on a smaller extent, things like rubber for mats and so on, have also moderated from a year ago. So those things are starting to work our way through the supply chain and contribute to the fact that our merchandise cost overall is starting to flatten a bit.

Our next question comes from the line of Tim Mulrooney with William Blair. Please proceed with your question.

Thanks for taking my question. I just wanted to follow up on the retention aspect of the business. I know last quarter, you mentioned that you've seen a slight tick-up in customer attrition over the last few months, but I know your retention rates historically been pretty darn high. So, we're just curious how your current rate compares to historical standards? And if you've seen any change in customer attrition relative to when you were talking about this last quarter.

Yes. I would say not much of a change since last quarter. It's just been a few months. I think overall for the year; the comment stands that we were a bit higher. When you say historical, I would say that our retention had improved for a couple of years. And then we kind of took a little bit of a step back this year. A lot of feedback during the pandemic and so on, maybe a lot of decisions from customers, whether it's changing vendors, both on the sales and retention side, were sort of delayed and maybe a little more energy around that this year as people looking to control their own costs, maybe put more things out to bid. It's just anecdotally maybe some of the things that could have impacted it. So certainly, our ongoing growth model assumes continued high retention rates and a lot of the things that we're focused on as a company. With our technology transformation and process transformation is to continue to improve that retention. So, I would say not much of a change from a few months ago.

Okay. Steve. One other -- actually, I have two more quick ones. So, following up on the ERP comments, Shane, that you made at the end. I just want to make sure I've got this right. It's a multiyear initiative that's going to continue through 2027. Benefits should be 150 basis points to 200 basis points EBITDA margins, but most of that's going to be realized towards the end of the project. So -- and it will maybe take some time after that. So is that -- just want to make sure I'm thinking about this correctly. Like the benefits from this, we likely won't see a lot of this until fiscal 2027 or later. Is that correct?

Yes. I think that, that's sort of what I was communicating there. Now in the earlier -- in some of the earlier phases, there will be benefits that will be realized right, as we go through some of those FICO-centric or finance-centric activities. But the more meaningful value that is being sort of communicated here is really around the supply chain capabilities, as well as the procurement capabilities that are some of the later phases. So yes, the more meaningful value is expected to be realized in those later phases when we get to, I guess, the capabilities that I had mentioned.

One thing I want to add to that, and I sort of alluded to it in my comments, is we certainly think supply chain is a big area of opportunity. And during the pandemic, as many companies experienced is disruption in their supply chain. In many cases, it was more about getting product than being able to optimize, maybe where you got product and how you've got product. And so, we are making efforts and initiatives to improve in those areas that we think can help our cost and profitability over the next few years. Even leading into the benefits that the supply chain ERP benefit will ultimately accelerate and enable. So, I just wanted to make that comment in the context is we're not waiting to the end of the ERP to make improvements in these areas, but the ERP will eventually enable those fully.

understood it's a longer-term project I wanted to make sure I just had the timing right on that stuff, but I appreciate the extra color there. My apologies to be their analysts. I'm going to try to sneak one more in really quick, which is just wanted to -- on a housekeeping question, just wanted to understand how much the Clean Uniform acquisition contributed to revenue in the quarter? And what quarter do you expect to see that impact from that extra work week in fiscal 2024? Tanks for taking my question.

Yes. So again, when we acquired Clean, it was about $90 million. Their run rate for the quarter is largely in line with that. And actually -- I'm sorry, I missed the second part of the question.

No worries. I was just curious, is that extra work week always in the fourth quarter? Does it sometimes sit in different quarters? just curious when we should be adjusting for that out of organic growth?

Yes, that's a good question. Yes, the extra week is going to be in our fourth quarter. And we usually time it in the fourth quarter, historically have over the last number of instances, where we've had a 53-week year.

Got it. Thank you.

Our next question comes from the line of Kartik Mehta with Dorscoast Research. Please proceed with your question.

Good morning. Steve, maybe just your thoughts on where -- how your customers are feeling about the economy. And obviously, based on the guidance, it seems as though you're not anticipating much of a pullback on the economy, and I'm assuming that your customers are giving you pretty positive feedback on how they're feeling about their business.

Yes. I would say a pretty stable environment. I think you see it with the some of the job creation numbers coming out recently. We're obviously always cautious given the environment with interest rates, whether there's another shoe to drop. But right now, I would say companies are still making investments, hiring. We see it a little bit on our own hiring side. It may be a little bit easier to bring in employees, but it's still a competitive labor environment out there. Which, to us, tells us that people aren't pulling back, and that's really what we're seeing from our customers right now. So, we think it's a pretty healthy environment right now. Obviously, we continue to look out for any indicators of that turning, but we have not built any of that into our assumptions.

And then, Steve, I think you had said or maybe, Shane, on pricing that you're expecting a little bit of a pullback from where you were last year just because of what's happened with inflation. And I'm wondering, is any of that pullback related to a change in the environment, where you're seeing extra competition? Or is this all related to just lower inflation or customers are asking -- aren't willing to pay that extra like they did a year or two ago?

Yes. I think everyone is trying to be as cautious as they can with cost. Ourselves included and our customers included. I think as far as the competitive environment goes, I think it remains, right? It remains stable from prior quarters, prior years. It's aggressive, it's competitive, but I wouldn't say there's been any near-term change in that. And we continue to work with our customers. So, I don't want to give the impression that we can't obtain price as necessary given the environment, but it's a little bit pulled back from a year ago, I would say.

Right. And just one last question. I think, Shane, you talked about on the Specialty Garment side that you're expecting nuclear. That part of the business to be down, but Clean energy should continue to grow. What's the breakout of that business within that segment?

At this point in time, that segment is about 50-50 nuclear versus cleanroom.

Our next question comes from the line of Andy Wittman with Brad. Please proceed with your question.

Good morning. I guess I just wanted to make sure I understood the '24 guidance a little bit better. So, Shane, I guess maybe this one is coming our way. If I looked at it on a Clean basis, excluding your key initiatives costs, it looks like the EBITDA margins implied about 13% compares to about 13% if you adjust out the factors in '23 by my calculation. So, first I wanted to confirm that. But also, it feels like with the cleanroom -- not the cleanroom, the nuclear business being down and penalizing margin there, you're picking up a little bit of margin on the Core segments because the merchandise because of the labor, some of the things you called about, but it's just a pretty modest increase on those factors. Am I thinking about that the way you're thinking about the '24 guidance correctly, just to start out with?

No, that's exactly right. If I take a look at my Core, I'm expecting a little bit of margin improvement the 20 basis points, 30 basis points of improvement. Sort of excluding the impact of the lower key initiative costs. Really what that is, just to break that down for you, we had mentioned the fact that merchandise is moderating. Still seeing a little bit of a headwind. It's probably 10 basis points to 20 basis points on the merchandise side. But obviously, the headwind that we're seeing there is significantly reduced from the -- what we've experienced over the last couple of years, which is a positive trend. The Clean acquisition and the nontangible amortization, which actually is impacting my operating income, but not my EBITDA. But on the operating income side, that's probably about 30 basis points of headwind as well. Energy is about 20 points or 20 basis points of benefit. And then there's a number of other input costs that have trended lower as Steve sort of articulated -- and I articulated in my comments, as the inflationary pressures are continuing to ease, we're seeing some favorable trends there as a percentage of revenues that are sort of offsetting those other items.

Okay. That makes sense. I guess maybe my question is with the CRM being effectively fully implemented here, the items that you talked about really are not, I don't think, affected by the implementation of the CRM. So, the question, I guess, is where can there be benefits to the CRM in 2024, that may arise as positive or maybe why isn't there more contribution from some of the efficiencies that -- I know you've talked about this as kind of a customer retention tool and it's not all about efficiencies. But I would think there'd be maybe a little bit more. So maybe, Steve, could you address that?

Sure. I think some of it -- you mentioned some of it, right? And we talked about some of the modernization of the work that our route drivers have to do, which was critical in us kind of getting in place from an employee retention perspective and a customer service perspective. Overall, I've talked about merchandise control, as being one of the areas that the CRM helps enhance. And I think we are starting to see some of that. So, when we talk about the moderation of our merchandise. And our ability to collect on charges, if there's loss merchandise and the overall tracking of merchandise, I think we are seeing improvements in that area. I think as we've deployed the CRM, some of that has been muddied by the inflationary condition. And so hopefully, as we move forward, we'll continue to see more of that come through in the area of lower merchandise as a percent of revenue and start really seeing some of that that benefit. I will say, and I made comments in my prepared remarks about this. We continue to enhance the CRM. Clean had some good experience with the CRM and some applications that they had built to enhance the usability of the CRM, some of that in the area of account profitability, tracking and maintenance. And so, we think that getting some of that benefit as well. We think we can improve around the edges in the areas of price management and so on. So, it's really customer retention, merchandise management and I'd say, management of revenue and pricing, there are the areas. And so, it's implicit in our results, and we'll continue to drive efficiency of the CRM to try to pull as much out of it as possible.

Our next question comes from the line of Andrew Steinerman with JPMorgan. Please proceed with your question.

Hi, Shane, did you mention the intangible amortization from Clean in the fourth quarter? And could you just also give us a sense of what that amortization will be in '24?

Yes. Let me get that in front of me. So -- so one of the things that we did do to provide that visibility in our press release, we've included in a footnote underneath our cash flow, what the non-cash intangibles amortization is, so that you can see that component of that. Just to call that out, that amount in the fourth quarter was $19.3 million, versus $15.1 million in last year's comparable quarter. And the majority of that difference equates to the Clean Uniform acquisition. Right? That difference being about $3.5 million in the quarter is sort of what the run rate would project for next year as well.

Okay, thank you.

[Operator Instructions]. Our next question comes from the line of Josh Chan with UBS. Please proceed with your question.

Hi, good morning, and thanks for taking my questions. I guess for your core margin improvement of 20 basis points to 30 basis points next year, could you give us a sense of how that would flow through the year? Are you expecting margins to be down in the first part of the year and then you recover some of it in the back half? Just kind of could you help us with kind of the shape?

Yes. Yes. I mean that margin realization really, I mean, aside from some of the seasonality that we see in our quarters where oftentimes, we have slightly higher profitability in our first quarter. And obviously, our second quarter is down from a margin perspective because of the timing of some costs that we incurred as well as the impact of the holidays. Right? There's slight -- or there's a slight margin improvement, as we go throughout the year. Again, primarily driven by the impact of the merchandise continuing to moderate, as we go throughout the year as a percentage of revenues. But it's relatively -- it's relatively nominal. Again, our profitability will trend mainly towards the seasonal experience it historically had.

Okay. Perfect thanks for the color. And I guess for my follow-up, you did mention that CapEx would be tapered off a little bit from, at least on the facility side of things. And so, could you just talk about the rationale behind that? Do you feel like your facilities are in good shape heading into next year? Thank you.

Yes. In general, when you look at the elevated CapEx, that elevated CapEx really comes from new facility, new plant processing plant builds. That's the biggest a plant runs $20 million or so these days. And so, if you have two or three of those going on, that's where you sort of get that elevated CapEx. And we had more projects to sort of centralizing around the last couple of years. Overall, we continue to invest in our existing facilities, make sure we're replacing equipment, increasing automation where we can. The commentary around lowering the CapEx really is around, when you look at the outlook for this year and into next year, less large project builds going on. And a couple of the ones we had going on with replacing facilities, older facilities that we had obtained through acquisitions. So, we're a little further along in that road map, but we will continue to invest in the facilities, just at a little bit of a lower rate on the new plant builds.

[Operator Instructions]. There are no further questions at this time. I will turn the call back over to you.

Great. I'd like to thank everyone for joining us today to review our fourth quarter results. We look forward to speaking to everyone again in January, when we expect to report our first quarter performance. 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.