UniFirst Corporation Q3 FY2025 earnings call

• Recent investments are yielding measurable returns, with gross margin improvement and effective execution across the business. - Core Laundry Operations key costs are trending favorably, but there are headwinds from newly imposed tariffs with vendors increasing prices. - Top line trends: positive from sales and service organizations, more new business than a year ago, improved customer retention, but challenging pricing and soft wearer levels limit top line momentum. - Profitability focus on ongoing efforts in operational execution, strategic pricing, procurement, inventory management, and new ERP system investments. - Shane discussed financial results: consolidated revenues up 1.2%, operating income down slightly, net income up; Core Laundry adjusted EBITDA margin improved with cost reductions; Specialty Garments and First Aid segment details provided.

Core Laundry Operations: Revenues for the quarter were $533.2 million, an increase of 0.9% from the third quarter of 2024. Core Laundry organic growth (adjusting for acquisitions and Canadian dollar fluctuations) was 1.1%. The segment's operating margin declined to 6.9% for the quarter, while the adjusted EBITDA margin remained unchanged at 13.5%. Specialty Garments segment: Revenues increased to $47.8 million from $47.6 million in the prior year, a 0.5% increase. The segment's operating margin was 22.8%, down from 23.9% in the prior year. First Aid segment: Revenues increased to $29.8 million from $27.3 million in the prior year, a 9% increase, driven by growth in van operations. The segment had nominal operating income during the quarter.

• Maintaining annual revenue guidance within the range of $2.422 billion to $2.432 billion. - Increasing diluted earnings per share guidance to a range of $7.60 to $8, due to revised key initiative costs down to approximately $7.5 million from a previous estimate of $12 million. - Guidance does not assume future share buybacks or unforeseen economic events.

• Tariff situation is fluid with vendors increasing prices and potential future increases. - Challenging pricing environment and incremental softness in customer wearer levels limiting top line momentum. - Legal and advisory costs incurred in the quarter, including costs related to prior strategic discussions and an ongoing legal matter.

Q: Please unpack organic growth further, characterize demand environment and end markets/client size, and how it relates to investments to enhance new customers, etc.

A: Existing customer base is somewhat cautious in terms of headcount investments, with some targeted reductions in manufacturing sectors. New account sales and retention trajectory are positive, but other areas are impacting overall growth. Investments in the business aim to attract new customers, sell additional products, and improve customer experience.

Q: Understand new sales environment, lengthening of sales cycle, and contribution to growth compared to 3-6 months ago.

A: New sales are incrementally positive today compared to 6 months ago, but not dramatically different as a component of overall growth.

Q: On add-stop metric, status and impact on business.

A: Add-stop metric flipped to negative position and remains more negative in the current quarter.

Q: Change in environment for selling ancillary products.

A: Customers are cautious overall, which has some ancillary impact on selling ancillary products, but there are still opportunities to penetrate customers more holistically.

Q: Update on key initiatives, progress, and drivers behind cost reduction.

A: Key initiatives are related to ERP implementation. The project is moving along well, with current costs primarily related to activities, and potential additional costs ahead related to change management and training.

Q: Impact of tariffs on cost structure.

A: Tariffs impact merchandise costs as garments are sourced from outside the US with many countries subject to tariffs, and the situation is fluid.

Q: First Aid business strength and success areas.

A: First Aid business grew over 9% this quarter, with mid-double digit growth in the van business. Strong penetration with existing UniFirst customers and broad services like safety training, etc., showing positive momentum.

Q: Labor costs and immigration impact.

A: Labor costs are pretty stable with improvements in execution due to stable labor force. Immigration changes have some impact but not notable.

Q: Strategic advisory and legal costs.

A: $5.7 million includes costs related to prior strategic discussions with Cintas and an ongoing legal matter with an increased reserve.

Q: Wearer levels and broad-based impact.

A: Lower wearer levels are a bit more broad-based across the customer base.

Q: Impact of direct sales on Core Laundry growth.

A: Direct sales in the third quarter were a few million dollars lower than the prior year, impacting Core Laundry growth.

Q: Systems around key initiatives, CRM, ERP, etc.

A: ABS system is utilized with benefits in merchandise control and route efficiency. ERP will not handle route optimization, but ABS and telematics implementation will aid in route optimization.