UniFirst Corp (UNF) 2002 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. And welcome to the UniFirst Corporation second quarter earnings release conference call.

During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. At that time, if you have a question, please press the one followed by the four on your telephone.

I would now like to turn the conference over to Mr. John Bartlett, Senior Vice President and Chief Financial Officer. Please go ahead, sir.

Thank you and welcome to UniFirst conference call to review our results for the second quarter of fiscal 2002. And to discuss our expectations going forward.

My name is John Bartlett and I'm the Chief Financial Officer. Joining me Ronal Croatti UniFirst's President and CEO and Dennis Assad, Senior Vice President Sales and Marketing.

This conference call may contain forward-looking statements that reflect the company's current views with respect to future events and financial performance. Thus, forward-looking statements are subject to certain risks and uncertainties.

The words anticipate and should and other 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 factors.

Including, but not limited to performance of acquisitions, economic and business changes, fluctuations in the cost of materials, fuel and labor. Economic and other developments associated with the ongoing war on terrorism, including the recent uprising in Israel.

Priced unemployment levels, demand in price for the company's products and services. Improvement in under performing rental operations and the outcome of pending and future litigation in environmental matters.

OK. Now I'd like to turn it over to Ron for his comments. And then it will be followed with comments from myself and Dennis Assad.

I'd like to welcome all of you are joining us for the review of our second quarter and the year-to-date results. I really want to thank you for participating.

As you see in our financial release, unadjusted revenues for the quarter are up 11 percent over last year's second quarter. And revenues for the first two quarters were up 6 percent over those of last year's firs two quarters.

This year we benefited from an extra week at both the second quarter and the first half. So on a comparable quarter-to-quarter basis, revenues were up about 3 percent with most of the increase attributed to our UniTech division.

John will get to all our direct comparison percentages in a few minutes.

We said last time, that the soft economy was impacting our results, and certainly some of that continued through the second quarter.

We still saw reductions in the number of wearers at many customer locations,

lots of additional accounts due to closings.

As well as decisions not to renew service agreements. These conditions hurt us in both the short and long-term because the lost volume doesn't automatically return when the economy improves.

Reemployment always lags recovery. And of course, companies that have discontinued service or gone out of business may never reappear on the customers rolls.

This puts more pressure on our professional sales organization to not only sell for growth, but also sell to replace volume lost to the business downturn.

In times like these, every business has to work harder to produce the results they want.

So competition tends to be a especially tough. I think we been seeing some of this reflected in competitive price quotes for new business that are in many cases, lower than makes practical sense given our industry's normal cost structure.

Nevertheless, these are the situations that we are often faced with and choose to avoid low pricing gains, and the self imposed limitations of reducing our pool of opportunity. Still, even under these conditions, we've been doing a pretty good job of finding and selling new accounts.

On the profit side, we continue to do better. Operating income showed an increase quarter-to-quarter and half to half, despite a slight up tick in selling and administrative expenses.

Net income was up about 20 percent quarter-to-quarter and 15 percent half-to-half. While these numbers unadjusted for the extra week of operations I noted earlier.

On a straight comparison basis, income before operations was up about 8 percent for the quarter to 3.5 percent for the half, and net income was up 11 percent for both the quarter and the half.

As I noted when talked in January, the company is taking steps to cut spending where possible without effecting our customer service levels or hurting our sales initiatives.

We continue with the same careful financial management as move forward. But we haven't yet seen evidence of the economic recovery everyone is talking about.

When it comes, you will it will make our task of managing for growth a bit easier. That's why we continue to be optimistic about our prospects for the full year.

Now for some additional details regarding the quarter, here's John Bartlett.

As Ron explained, the second quarter was very good from a financial standpoint considering the economic situation.

We continue to be cautiously optimistic in spite of the slow down in the economy. Revenues increased 6 percent for the first six months of fiscal 2002 and 11 percent for the 14 weeks ended in March 2nd, 20002, versus the 13 weeks ended in February 2001.

The extra week in fiscal 2002 accounted for approximately 8 percent of the increase in the second quarter. The balance of the increase was primarily due to a strong performance by our UniTech business.

As a percent of revenues, operating costs decreased from 62.4 percent to 61.2 percent for the second quarter, and from 61.9 percent to 60.5 percent for the first six months. These decreases are primarily due to lower merchandise costs as we continue to benefit from our transition to manufacturing in Mexico and our new location stock rooms.

To a lesser extent, we've benefited from lower energy cost.

The energy cost decreases were somewhat less than they might have been due to our hedging program.

All natural requirements have been hedged through December of 2002. We also continue to benefit from lower costs from our central distribution center, and the strong performance from the UniTech business.

As a percent of revenues, selling and administrative costs increased from 23.2 percent to 24.8 percent for the second quarter. And from 22.7 percent to 24.4 percent for the first six months of fiscal 2002.

These increases are primarily due to higher selling costs as we have added to our sales force. New sales have increased approximately 5 percent year-over-year.

However, higher lost business and additional shrinkage in our existing customers have offset these new sales. Although we are optimistic that the economy is turning around, we have seen little evidence of it.

We have also seen a significant increase in our health care expenses. Year-to-date, these costs have increased more than 30 percent over last year, or almost $2 million.

Amortization of intangibles declined 410,000 in the second quarter, and 900,000 for the first six months, due primarily to no longer amortizing goodwill. Depreciation expense increased slightly for the six -- the first six months from 15.2 million, to 15.9 million and was slightly lower as a percent of revenues.

Primarily as a result of the factors noted above, operating income increased 16.2 percent from 10.2 million to $11.8 million for the second quarter. And 7.5 percent from $24.1 million to $25.9 million for the first six months.

EBITDA was $44.4 million or $2.31 for the six months versus $42.8 million or $2.20 in fiscal 2001.

Net interest expense of $3.5 million in the second quarter, $300,000 higher in the second quarter of 2001.

For the first six months of fiscal 2002, net interest expense was $5.3 million, $900,000 or less in the $6.2 million in fiscal 2001.

The company benefited from lower borrowings and lower interest rates during both periods.

However, during the second quarter, the company recorded a $2.3 million interest charge, which is an estimate of the interest which will be do from settling a revenue agent review with the IRS. This issue -- these issues were resolved in what the company feels was an equitable basis.

And resolved a number of issues going back to 1994. There was no impact on the company's tax provisions as the adjustments related primarily to the timing tax deductions.

Finally, net income increased 19.9 percent from $4.3 million in the second quarter of 2001, to $5.2 million in fiscal 2002, and 15 percent from $11.1 million for the first six months of 2001, to $12.8 million in fiscal 2002. Net income per share increased from 22 cents to 27 cents per share, or 22.7 percent in the second quarter, and from 57 cents to 67 cents of 17.5 percent for the first six months.

Our balance sheet continues to be very strong and continued to improve in 2002. New inventory increased from $22.3 million at August of 2001 to $25.9 million as we prepare to transition to our second plant in Mexico.

Now merchandise and service decreased from $56.7 million to $51.4 million from August 2001. This means we'll have garments and service to amortize as we had in prior years.

Net property and equipment increased modestly from $265.7 million to $267.5 million. We spent approximately $18 million on new fixed assets.

Current plans are to spend approximately $30 million for the full year.

Total debt decreased $11-and-a-half million from 19 -- from 1996 $1 million at August of 2001 to 84.6 million at March 2nd, 2002.

Overall, we are pleased we are pleased with results for the first six months in difficult economic times. Looking ahead, we continue to be optimistic about the balance of the year.

We continue to estimate that revenues for 2002 will be approximately $580 million, and earnings per share will be approximately $1.40.

Now Dennis Assad, our Senior Vice President of Marketing and Sales has a few comments.

Thank you. As Ron previously pointed out, we've been working through a period of tough selling caused by an economic slow down. Nevertheless, throughout this period we have continued to expand and upgrade our professional sales organization.

We continue to see better candidates. And are increasingly successful in recruiting people who have previous experience in similar business-to-business new account acquisition sales.

Of course, it takes at least six months for new people who don't understand the business to learn our product systems, sales methods and competition. It also takes a while for them to understand how to differentiate our products and services to successfully demonstrate how we provide superior value.

But we're working hard to accelerate the process.

As we've mentioned to you in the past, we continue to direct our professional sale people towards note programmer prospects ,opportunities, for businesses that are currently using a rental service program.

In the second quarter, though, this category of prospects represented a somewhat lower percent of the new customers sold, as we found it to be more necessary and far more productive, to go after traditional businesses as a shorter sales cycle. As we get back to more solid economic footing and businesses are more willing to commit to new programs, we expect note programmer selling to again dominate.

Finally, during the quarter, we continued to put considerable effort into our national account program. In addition to signing three major pieces of new business, we added two more national account territory managers, one in the southeast and one in the southwest.

We also began recruiting for a Canadian territory manager to allow us to take better advantage of the growing opportunities in that market. And we completed installation of our new buy by men ordering program, that makes it easier for our large rental and mixed service accounts to track, monitor and limit the authorized purchases of their employees no matter where they are.

The first two quarters have been challenging. We expect that the second half of the year to produce better results than the first, as the economy rebounds and our newer people gain experience.

We'll now turn it over to

for our question-and-answer period.

Ladies and gentlemen, if you would like to register a question, please press the one followed by the four on your telephone.

You will hear a three tone prompt to acknowledge your request. If your question has been answered and you would like to withdraw your registration, please press the one, followed by the three.

If you are using a speakerphone please lift your handset before entering your request. One moment please for our first question.

Our first question comes from

with William Blair and Company, please go ahead.

Good afternoon, gentlemen.

Hi,

. How are you?

Fine, thank you.

John, did you give a break out of new sales? Or would you be willing to sort of go into a little bit more detail as to the elements of the revenue growth of the quarter?

Well we talked to -- if you look at the laundry the sales growth was essentially flat. I mean the growth in the quarter primarily was from the extra week in UniTech division, which is what I said.

Now, if you look at the laundry division, the new sales were effectively offset by losses and reductions in existing customers. And Dennis or Ron, would you like to add to that?

Afraid not.

I'm OK.

And is that sort of kind of high single digits in each direction then?

Yes.

Well I mean the -- what is it probably closer to 10 percent, I think

. The losses...

Yeah, the losses and the shrinkage within the customer base were a little more than 10 percent.

OK. And then, could you expand a little bit about the new national accounts that were signed in the quarter?

you said three's new, what does that bring the total to? And any idea about -- can you share with us anything about the size or the contract structure of those? Thanks.

They're moderate in size. But the key issue with national accounts is we fully expect to hit our national account rental targets this year.

And by gaining these three accounts, I think it pretty much insures that we're going to be able to accomplish that.

OK. And would you be willing to share what the targets are? Or just so we have some sense of what percentage the total revenue that is, where it is? Thanks.

Well when you talk about total revenue -- our total revenue in national accounts is relatively small compared to our competitors. We're probably in the three to four maybe 5 percent range at the max.

But when I talked about targets, I'm talking about new sales that as, you know, will be installed over a period of time.

And we've been ramping up now for the past several years in order to accomplish, you know, increasingly higher objectives.

So we're pleased that we're going to hit this year's objective on the rental side. And we know next year that with these new additions that we'll have even tougher goals.

OK. And then, if you could just talk a little bit about specific cost saving measures that you guys have been rolling through? I know you said, anything that doesn't effect customer service is really fair game.

Well basically,

we've been able to take a little bit out of the plants, as the plants been adjusting their volumes. Some of them are sliding backwards, and we've been adjusting our labor accordingly.

So we picked a little on the production labor site. And we turn around and whatever we saved in the plant, we put right back into the sales organization.

Plus some significant, you know, we've done things on the energy side, starting plant times, shutting plant times. But it's merchandise and a little bit on a plant labor that we've been experiencing in the cost savings.

Those are the two primary ones.

OK. And lastly, if you just talk a little bit about I know you said the competitive landscape is pretty difficult with people selling at perhaps unsustainably low prices.

Beyond pricing, is there any changes to competitive landscape, given the recent transactions and it seems like an accelerated pace of acquisitions within the industry. Thank you.

I think obviously, you know, there's one big acquisition in the mix right now. Anything else that's gone on has been fairly routine, a plant here, a plant there.

What's happening is everybody's been struggling to keep the growth line moving. And the pricing of new business or competitive businesses deteriorated.

And I think it's just a pressure for all of the public companies to try to keep that revenue alive.

But as far as the decision making process goes, it's still a little slow out there, although it is improving.

And we expect that as we go forward into the year, that things are going to get back to normal.

Thanks.

with Robert W. Baird, please proceed with your question.

Good afternoon, guys.

Good afternoon.

First, maybe you could address just the revenue guidance? I missed the number.

Could you repeat that please, John?

Well we said approximately $580 million.

I think in prior quarters we've said 580 to 585, so I guess we think we're going to be closer to the 580 than -- in that range.

OK. And the acquisition environment, you just spoke a minute about it.

Could you confirm though that there are more properties for sales these days in the wake of the recession?

We have seen more companies of late -- recently that are interested.

That's all basically I can tell you. I mean we've seen probably about probably about a half dozen out there right now that we know of.

OK.

I think partially was drives this is this is the end of the year when they get their tax returns, they review the year.

I mean it's not that they don't get a report through the year, but it's just you sort of take stock at the end of the year. And if these single plant operators are -- were making 400,000 and they're making 300,000, they sort of wake up and wonder whether they should do something.

I think that's drives it more than the recession or anything else, just personal considerations about whether they have family in their business or what's going to happen them.

OK. Could you describe your appetite for acquisitions right now, given your -- the growth status of the industry and your company specifically?

This is Ron. We're certainly interested in making some acquisitions, particularly in markets that we're not in. So, you know, we're hot for those and, you know, we will be very competitive.

OK. And in the pricing arena, obviously we've heard from other competitors as well that the pricing market is more competitive than ever. Who is most aggressive right now in pricing, is the larger players and specifically who?

Or is it the smaller players?

I think it's primarily the larger players.

But the smaller players are in the mix as well. But I think larger players are more aggressive.

OK. And then final question, just in terms of cap ex, how many plants does your cap ex budget actually cover for this year?

We have two going right now.

That's really what it entails. I mean but it's a little strong for the first half because we spent about $5 million for trucks during the first half of the year.

Right. OK. Thank you.

We spend a considerable amount in our second plant in Mexico in the last 12 months too.

Yeah, that's true.

Our next question comes from

with William Blair and Company, please proceed with your follow up.

I have a follow up. Can you review the targets for the year for cap ex and for cash flow?

Well we believe that we will have about $30 million of capital expenditures. And that may fluctuate a little bit based on just the timing of when we get the bills in.

But I think that absent acquisitions or stock buy backs, most of the cash flow will flow through to pay down debt. And so it's really just looking at the balance sheet. And we've paid down about $12 million in six months.

I think there's no reason to believe we won't -- well let me back up. I mean there's -- we mentioned this interest special charge.

We are going to have a substantial tax payment we're going to have to make for the IRS probably in the third quarter we resolve that issue. So that's going to be probably in the neighborhood of $15 million with interest.

But -- so that's going to be a big factor in the actual cash flow.

Absent that, the cash flow from the business will flow through to pay down debt.

And I think even with that, we'll still pay down a little bit more debt in the balance of the year.

So how much total free cash flow would you expect all in for the fiscal year.

Well, our EBITDA will be approximately $85 million.

You know, if we spend $30 million in capital expenditures, then our tax provision will be -- it's going to be probably roughly $60 million plus that additional tax that I'm talking about.

So I mean, I think it's just math from looking at the balance sheet.

There will be a little bit of money going into working capital.

OK. And then John, when you say I think $1.40 is the EPS you used, is that right?

That's correct, yeah.

So now that is on the basis of inclusive of the impact of the swap, right?

So that's using 40 cents in your first quarter, a 27 cents in this quarter?

That's correct, yeah.

OK, so that's 67. So we're looking at 73 cents including whatever impact of the swap in the next two quarters is your guidance.

Right, and if that swap swings around a lot more favorably it could be more than that.

I mean I think that we just don't know what will happen to interest rates with that. It could be a big swing in that, or it could stay about where it is.

I mean I think it will swing a little bit positive, but it could swing a lot positive.

OK. So this is really the first quarter, it's come around in your favor, isn't it?

That's correct.

OK. That's everything I have. Thanks a lot, guys.

Our next question comes from

with Columbia Management Group, please go ahead.

Good afternoon, guys.

Hi.

Good afternoon.

Just to pick at that, the IRS issue, this is the -- can you get specific? What is this, the life insurance things that was closed up a couple of years ago?

Well it's -- that's part of it. But really that isn't part the charge.

What -- we had a revenue agent in here, I believe he started with 1994. And he was reviewing '94, '95 and '96.

And then got on to the

in '96 or '97 and that's handled by a special office and so they shipped it off to some other office in Cincinnati.

And so the examination stayed open for I think almost five years.

The

was dealt with in 1999 and there's nothing in this entry that was impacted by that. And as we provided for that in 1999, and we provided for the interest in that issue since then.

The issues that were the other issues there were some things like capitalization -- or expensing of consultant fees and software and some timing of bad debt provisions. But the big one was the merchandise and service issue.

And we have traditionally expensed all of the merchandise that we put in service, merchandise and math and so forth. And early on, we -- he identified that the math which we use a 24-month like to amortize, we really needed to capitalize, not amortize.

And so that is a big part of it. There was also a small adjustment for some of the other garments. I think we got a generally favorably result.

But we got about 80 percent of what we had in the past, but you had something like seven or eight years of timing differences that the interest accrued on them which, you know, accumulates into a relatively large number. And since this was really -- it was unknown until we made the settlement with the agent, if we had actually lost on the merchandise and service that number could have been multiples of $2 million.

So once we determine as the accounts say that's the period you have to recognize the unknown contingency. So this is the quarter where we identified what it was and we recorded it.

OK. So you had -- was there a reserve set up for the tax payment X the interest?

With the -- basically with the exception of the

which we provided for in '99, all of these are simply timing differences.

In other words, we have provided the taxes, we provide what's called a deferred tax that you don't have to pay it until you have to pay the taxes, but it was an expense in our P&L. But there was no impact on the tax provision from this entry.

OK. And...

And

interest that we're going to have to pay taxes. The IRS is saying that should have paid taxes sooner than we had traditionally paid them.

So they're saying that we should have paid taxes on some of the stuff back in 1994, '95, '96, '97 and so it's interest from that date.

OK. And I assume the practice has changed on how you -- on the merchandising service?

Well for the books it will continue the same. I mean it will change in when we have to pay taxes one it. But the books, it does not effect the bookkeeping.

OK. Thank you.

Ladies and gentlemen, as a reminder, to register for a question, please press the one four at this time.

I am showing no further questions at this time. Please continue with your presentation or closing remarks.

Well...

Thank you for calling in.

We appreciate the continued interest in the company -- we'd be happy to -- we look forward to the next call, I guess. Ron, do you want to add anything?

No, I think we look forward optimistically for the remainder of the year. And we certainly appreciate everybody for listening in and come and see us.

Thanks a lot.

Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines.

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