UniFirst Corp (UNF) 2002 Q4 法說會逐字稿

Ladies and gentlemen thank you for standing by and welcome to the UniFirst Corporation fourth quarter 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 you will need to press the 1 followed by the 4 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 fiscal 2002 operating results and to discuss our expectations going forward.

My name is John Bartlett and I'm the Chief Financial Officer.

Joining me are Ronald Croatti our President and CEO and Dennis Assad Vice President of Sales and Marketing.

As you know, this call will be on a listen only mode until we complete our prepared remarks.

We released our earnings earlier this afternoon.

I hope you've been able to access them on the web.

I apologize for being late but our board meeting ran longer than anticipated.

As you know, this conference call may contain forward-looking statements to 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 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 change, fluctuations in the cost of material, fuel and labor, economic and other developments associated with the on going war on terrorism, strikes and unemployment levels.

Demand and price for the company's products and services.

And the outcome of pending and future litigation.

Let's turn the call over to Ron for his comments.

Thank you John.

During fiscal year 2002 we basically met the challenge of predicted numbers for both revenue and profits.

In spite of the tough time, we were able to produce 4% revenue growth and net income was up 15.7% year to year as we continue to see margins improve.

The economy hurt us throughout the year.

We were impacted by customer losses caused by downsizing and closing of current customers.

Even so, we were able to move ahead.

Certainly not at the rate we would have liked.

Our earnings gain was favorable year to year and was positively affected by reduced merchandise cost, lower energy cost and continued efficiencies in our distribution center.

These savings were somewhat offset by higher health care expenses and spending in the new sales area.

Fiscal '02 saw overall customer loss percentage jump to the highest we've seen in many years.

Much of this was what we call uncontrollable losses resulting from closings and decisions to discontinue service for economic reasons.

This, coupled with job loss inside many accounts kept us challenged throughout the year.

We anticipate the market conditions will remain soft into fiscal '03.

We plan to add to our sales force as a step to counteract this.

We are also increasing our focus on adding more ancillary products and services at current customers to increase service, profitability while at the same time aiding revenues.

During the year we were able to realize new sales by our professional sales organization at 9% above the preceding year.

Still productivity per rep was up only slightly.

Much of the increase is due to the additions we made in the number of reps.

A plan for fiscal year 2003 will be to continue to ramp up sales force size and of course we will be focused on continuing to improve per rep productivity.

During the year we invested some $35 million in capital additions in improvements.

A substantial portion of this investment went into the manufacturing area with information systems coming in second.

In addition, we continue to invest in laundry facilities with upgrades and expansions where they were appropriate.

Looking to fiscal year 2003, we expect capital expenditures to run into the $30 million to $35 million range.

As for other investments we continue to look serious for good quality acquisitions.

But we also remain sensitive to the pricing of businesses which have sold in the past couple of years at all time high rates.

We will be highly selective.

On our fourth quarter '01 to fourth quarter '02 basis we saw total revenues up about 1.7%.

We continue to see price pressure both from our current customer base looking to hold down their own expenses and from increased price discounting in new business situations were competition is involved.

As you may suspected in the current economy implementing price increases with current customers is difficult at best.

And we expect to see more of that in '03.

Heading into the new fiscal year we can't be certain about the short-term prospects.

Like most companies we hope to see a turnaround in the second half, but at present our best guide is to look for revenues in the $585 to $595 million range and earnings in the $1.60 area.

We're looking diligently to retain every customer while at the same time aggressively pursuing new business.

We're also committed to keeping a tight rein on costs so we can make '03 another successful year for the company.

Now I'd like to turn it back to John for a little more detail on this year's numbers.

Thank you, Ron.

As Ron explained, 2002 was a solid year from a financial standpoint considering the economic times.

Last November, we provided guidance that we expected the revenues to be between $585 and $590 million dollars and earnings per share to be between $1.35 and $1.40.

As the year progressed we reduced our guidance for revenues to between $575 and $580 million and noted that we expected earnings per share to be at the high end of the range.

We are pleased to report that we've met both expectations as the revenues for the year were $575 million dollars, 4% greater than fiscal year 2001 and net income was $26.9 million or $1.40 per share versus revenues of $556.4 million in 2001 and net income of $23.2 million dollars or $1.20 per share in 2001.

I should point out that we benefited from an extra week in fiscal 2002 which really accounted for about half of that 4% increase.

There are a number of factors which impacted our operating results.

Some of them include -- our merchandise was over $4 million less than in 2001 due to the benefit from our transition to manufacture in Mexico as well as better control of garment usage.

The cost of our operator distribution center declined approximately $2 million as we continue to benefit from the transition to the central distribution center in Kentucky.

Our nuclear tech site business had an excellent year and greatly exceeded our expectations.

Energy cost including natural gas and vehicle fuel decreased over $2 million from the prior year.

We also discontinued our natural gas hedging program during the year.

On the other hand, we incurred a significant increase in the cost of health care and these costs exceeded fiscal 2001 by approximately $4 million.

We also incurred significantly higher costs in the sales and marketing areas, we ramped up the number of sales people.

Last November, we forecasted the net interest expense would be $5.5 million, almost $4.5 million less than 2001 due to lower borrowings and no impact from our $40 million interest rate swap.

The net decrease turned out to be only $1.4 million.

The reason for the difference was due it a $2.5 million interest charge in conjunction with resolving an internal revenue agent review and an additional charge from our $40 million swap.

Due to the new SFAS 143 accounting for derivatives which became effective in January 2001 we incurred a $2.2 million expense in 2001 and an additional $1.3 million in 2002.

The good news is that these non-cash bookkeeping entries will reverse and flow through income over the next 24 months.

The timing of this credit will depend on interest rates between now and October of 2004, the $3.5 million will flow through our income statements as a result of reduction of interest expense.

Our tax provision for all periods remained the same at 38%.

Most of the above items were anticipated as we begin the year.

But the impact of them in certain cases was significantly greater both positively and negatively than we expected.

None of them have a significant impact on the long-term strength of the company.

Finally, net income increased 15.7%.

From $23.2 million to $26.9 million and net income per share increased %16.7 from 1.20 to 1.40 per share.

A higher rate of increase for EPS is due to a slightly lower number of shares outstanding.

The result was in line with the guidance we gave last November that income per share would be between 1.35 and 1.40.

Our balance sheet continues to be very strong and improved substantially in 2002.

Receivables decreased from $55.4 million to $54.6 million. [Inaudible] receivables declined from approximately 36.5 days to 35.5 days.

Due inventory increased from $22.3 million to $24.8 million.

As we are ramping up the new shirt manufacturing plant in Mexico.

Normal merchandise and service decreased from $56.7 million to $56 million.

Net profit and equipment increased modestly from $265.7 to $269.8 million.

We spent approximately $35 million in new fixed assets.

Current plans are to spend a comparable amount or slightly less than 2002.

EBITDA increased from $85.1 million to $90.1 million or $4.69 per share.

Overall, we were pleased with the 2002 results in the difficult economic times.

Looking ahead, we are cautiously optimistic 2003 will be another difficult but good year.

As Ron noted, we currently believe revenues for 2003 will be between $585 million and $595 million.

And income per share will be approximately $1.60 before the impact of the new SFAS 143 regarding asset retirement obligations.

This SFAS will be adopted in the first quarter of fiscal 2003 and will result in a significant charge.

This SFAS which is effective for fiscal year beginning after June 15th, 2002 will require companies to approve the estimated cost to reclaim long lived assets at the end of their useful life.

UniFirst currently has nine facilities using our UNItech Corporation which garments[Inaudible] nuclear power plants and certain other customers including the department of defense.

The NRC or a state agency regulates all of these facilities.

For each of these plants, we have provided letters of credit to assure funds would be available to decommission the facilities at the end their useful life, however, current accounting did not require us to set up a liability for these costs until a decision was made to close them.

We have closed six of these facilities over the last ten years and included the closure costs in our normal operating results.

We are currently in the process of calculating entries that will need to be recorded.

It is a complicated calculation which requires a number of estimates including how long we expect to operate at the facility, how much we expect it will cost to reclaim the facility and the appropriate rate of installation and discount it back to its present value.

On a very preliminary basis, we think we will need to accrue approximately $8 to $15 million.

Of this amount, approximately 50% will be charged as a current expense in the period we adopt the SFAS which represents the amortization which would have been incurred if this accounting method was in place at the original in service day.

And the balance will be amortized over the remaining [Inaudible] of the facilities.

I would like to caution you that these are preliminary estimates, but we felt it was important to make you aware of this new requirement.

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

Thanks, John.

We've talked throughout the year about how the continued economic slowness has impacted our business and effective sales results.

Our professional sales team has a climate in which purchase decision delays, severe price demands and heavier competition from available business made their jobs very difficult.

Indeed they maintain a sharper focus on time and management assets and had to keep more prospect balls in the air than they did in better economic times.

Still they were able to bring in new sales at a rate of about 9% ahead of last year, a good showing considering what they were up against.

As we look at full year results, we know that improvements in facility service performance has essentially flat direct sales results which we credit largely to delay purchase decisions and we're able to more than hold our own in the uniform rental sales.

To be sure, overall revenues were negatively impacted by account losses, but the net was still a gain and that's a credit to a solid effort in tough times.

With a sluggish economy the sales averages didn't improve even though we continue to put more emphasis on big accounts selling.

Of course, it's difficult to maintain a big account focus on a downed market and all sales are tougher to make.

But we've learned that the selling cycle for larger accounts is not appreciably longer and we know that the payoff is better.

So all in all we think this is the right direction to go in

The key to more and larger sales is to have better qualified, better prepared better supported sales people in front of more highly qualified prospects more often.

In the final analysis, greater sales success is really a numbers game and we continue to try to stack the deck in our favor.

We have all our reps focused on working with and building their personal territory databases and to each week extract the higher number of qualified contacts.

In good economic times we can afford to devote a greater share of effort to developing a smaller number of contacts simply because our closing ratios are likely to be higher that day.

But in times like these, when sale rates go down we need more opportunities in the pipeline everyday.

That was the mission through much of fiscal year 2002 and it will continue in 2003.

Now we're ready for questions.

give me a couple of minutes to prepare your questions and we'll be happy to respond to whatever you may have.

Thank you.

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

You'll hear a three tone prompt to acknowledge your request.

If your question has been answered and if you would like to withdraw your registration, please press one followed by three.

If you're using a speaker phone, please lift up your hand set before entering your request.

One moment please for the first question.

Once again, ladies and gentlemen if you do have a question, you will need to press the one followed by the four at this time.

The first question comes from Michael Grefens from Robert W Baird.

Please go ahead with your question.

Good afternoon.

I'm wondering if you can comment on this current quarter you're roughly two months or so through the quarter have you seen the trends in the employment data within your company and operating rates you guys are experiencing?

Well, I think this is relatively consistent with prior months if anything we would have seen a slightly favorable trend.

This is Ron.

Okay.

We're still seeing shrinkage within our accounts but not at the rates we saw in I'd say May, June, July.

okay.

It's at a slower rate.

And what are your largest industries if you have them by SAC code, for instance, that you serve?

I would say our largest industry is the related wheel industry, service industry, automotive industry.

Okay.

Thank you.

Ladies and gentlemen, if there are any additional questions, you will need to press the one followed by the four at this time.

The next question comes from the line of Bruce Simpson from William Blair and Company.

Please go ahead with your question.

Good afternoon, gentlemen.

good afternoon, Bruce.

I wonder how much you're willing to give about the components of internal growth?

Well, I think we can share in broad terms that we did have the extra week.

So if you back the extra week out, the growth year over year was 2% and substantially all of that growth was from the UNItech division, so the laundries were basically flat year over year.

So to talk about the growth effectively what happened was we had significant amounts of new sales but they were offset by losses and shrinkage in the accounts.

So it's new sales plus a price increase plus shrinkage just about netted out.

Is that right, Ron.

That's right on.

And relative to prior quarters and the trend, how do you guys feel about the trend of new sales and new business written?

Does it feel like it's accelerating?

Decelerating?

Flat?

Actually I think it's accelerating a bit.

Our growth has really been pretty good for the first two months.

We're seeing productivity really improve substantially.

We're hoping that's going to continue but at this point in time, we really don't know.

Right now, what's in the pipeline looks very favorable.

So the drop add for the whole quarter if you could on a year over year basis, could you give me some ball park where that is?

I think it's still preliminary, but at this point, it looks like the shrinkage is a little better, still negative as Ron said, but not negative as it was a year ago.

So if you had to quantify it for the whole quarter the whole August quarter against the prior August quarter, could you quantify about what the drop did to your total growth rate.

I have this year's August quarter.

I don't have last year's in front of me.

Okay.

So just sort of directionally it feels like it's flattening out though, people are starting to not lay off as many people as a year ago is that right?

That seems to be the trend.

Can you talk a little bit about the sales first turn over and is it getting better, worse, can you please quantify it?

And in terms of productivity, Dennis, why is it that productivity is improving?

Thanks.

I mentioned that productivity is improving in the last couple of months.

Sales have been very, very good.

But in relation to last year, last year, productivity was flat from the year before.

We increased the number of reps and it did not really increase productivity at all.

So right now, for the next two months, or the last two months, however, our productivity has gone up about 15%.

And to what do you attribute that.

Well, hopefully again, times are getting a little bit better out there.

Secondly, we put on a good number of reps last year.

It normally takes somewhere between six and nine months for these people to become productive.

And right now, they're getting into that stage, so I think that's having an impact on the current number.

Where do we stand in total number of reps?

We've never really disclosed that.

Okay.

And then, will you quantify for me where your turnover is and whether that's improved over the last couple of quarters?

The turnover has been the same as it was a year ago and again, we don’t disclose that as well.

Okay.

But not really changing one way or the other with these new guys added in the last year.

It really hasn't moved.

Okay.

Please talk a little bit about competitive landscape.

Does the purchase of Omni impact you?

Does ARAmark being public impact you?

Does it feel like the business is more difficult, less difficult?

Are there little guys going out of business?

Does it a give you Leeway to price and so forth.

I don't think ARAmark going public has any impact one way or the other.

I don't think -- I think impact by Omni just makes the difference even more significant between them and rest of us.

I don't think a lot of small guys are going out of business, there's still some very private companies in the business.

In terms of competitive environment we don't think that's having a significant impact.

Frankly I think with the current economy, everybody is just very competitive.

Very cautious of what's going on out there right now.

What do you see in terms of acquisition pricing?

It seems like the last couple we've heard from your publicly traded competitors have actually suggested that acquisition pricing has gone up?

That is correct.

I think we have seen that, that the multiples that are being paid are, I would call, very high.

And Ron, if there's kind of a blanket rule of thumb, was it sort of two times the revenue?

I think it's 2.1, 2.2.

And why is that happening?

I would think if anything it might be a buyer's market in a downturn?

Is it more players entering the market or why is pricing going up?

I -- we don't know, Bruce.

We walked away from a couple recently we just weren't willing to pay what the market apparently was.

I think it's just the companies -- our competitors, I believe.

Last thing is, guys, I did, I must confess I got on the call a little bit late.

Did you go into any detail about the swap interest charges and you know, sort of where that stands in the quarter?

Yes, we did.

I mean the swap was negative in the quarter and for the year.

I mean for the year, the number was about $1.2 million.

I think -- let me see for the quarter it was $809,000 negative in the quarter $1,256,000 for the year.

I have to believe that will turn around going forward into the year. [Inaudible] to end up with the quarter being negative has to turn around.

But no change in your thinking about the way in which that thing kind of unravels back in the remaining term to maturity on it.

It's got to go back to zero over time.

It's got to go to zero, these are just bookkeeping entries.

October of 2004 it will be zero.

Okay.

I said that was the last one, but I thought of one more.

New products, any kind of new product development in the pipeline?

Are you guys looking at offering anything you don't currently offer?

Not really in the garment arena, but we are, as with our competition, getting much more involved in the facility service aspect of the business and looking at new products in that arena.

On the garment side, we don't expect anything new in the near term.

Thanks a lot, guys.

Thank you.

The next question comes from the line of Alex Paris from Bearington Research.

Please go ahead with your question.

Hi, guys.

Just a couple of follow-up questions.

You said in terms of guidance for the coming year, $1.60 is going to exclude the impact of FAS 133 half of which is going to come in a charge in the current first fiscal quarter the other half of which is going to be overtime.

Yeah, over the next.

Couple years.

Basically what this new accounting rule says is that if you know, if you build a facility for $5 million and you think that in 25 years when you stop using it, it will cost you a million dollars, you clean it up you record $6 million asset and you pay cash for the $5 million cost or borrow the money or whatever and then you set up a $1 million liability on your books and you amortize the $6 dollars over the life of the facility and you have that $1 million there to pay for the decommissioning.

But what they are saying is since we have facilities that have been in service for half their life, we have to accrue half that cost when we adopt the accounting rule.

And so we really haven't done a lot of work on it.

We were so busy with the new people implementation and other issue, that we have some rough numbers, but nothing concrete.

I guess my only question is how many years did you say the balance would come off over?

It will be based on the life of each facility.

So one facility might be five years and a new facility might be 30 years.

So you have to do a calculation for each facility.

Okay.

It is possible though you said, I know it's preliminary, that there's $8 million to $15 million, you know, and half of that will be taken in one fell swoop.

The balance is going to be taken over a number of years.

Right.

And that will come out of normal operating earnings on a pretax basis.

That will be just like depreciation, yeah.

Okay.

Then your guidance again of 160, does that include the reversing of the swap in trust?

Are you making an allowance for that in your thinking?

Yes.

Okay.

Most of the increase we're anticipating is some reduced interest expense next year.

We're not expecting significant increases in revenues or operating profits.

Okay.

And you have roughly $3.0 million in interest expense to reverse over the next two years, over the next eight quarters roughly.

$3.5 million, I think.

Okay. $3.5 million.

Follow up as to the sales force.

I know you haven't disclosed what the total number of the professional sales force is, but you said the increase would be less in the coming year.

What was the increase on a percentage basis last year?

9%.

Pardon me?

9%.

9%.

It will be less than that this year in terms of the number of bodies.

It might be just a little more.

We're currently struggling between that five and nine.

Okay.

Thanks very much.

Thank you.

Ladies and gentlemen if there are any additional questions you will need to press the one followed by the four at this time.

The next question comes from John Lavry from CMF Capital Management.

Please go ahead with your question.

Maybe you answered this already so I apologize.

But I was looking at the new business that you won in the quarter.

Can you give us a sense of how much of that was from first time uniform guys versus coming from competitors?

We're still languishing a little bit below the 50% mark.

For some reason in this current economy we just can't seem to get above that.

But it's right around the 50% mark.

Okay.

Thanks.

The next question comes from the line of Michael Grefens from Robert W. Baird.

Please go ahead with your follow up questions.

Two just follow-ups on that last question.

First the lost business rates component of internal growth.

And secondly where pricing has been.

Our lost business rate was at an all-time high.

It was about 2% more than our normal run rate.

Our normal run rate is right around that 7, 7 1/2 range.

Okay.

And pricing?

Is it below 1% now?

We've been running just slightly below 1%.

Okay.

Thank you.

The next question comes from the line of -- I'm sorry, George Vander Haydn from Fidelity Investments.

Please go ahead with your question.

Hi, I got disconnected temporarily during the first question or two.

So I'm not sure if this is a repeat question.

But it looks like if you do $1.60 you'll have EBITDA close to $100 million or so and with cap ex and dividends probably consuming $35 million of that, what are your plans for the rest of the free cash flow that you're going to generate this year?

Well, we did pay down debt.

If we do any acquisitions, I think that's -- I mean those two the two, we just have a line of credit, so it can move up or down as we did reduce the line because we didn't feel we needed as much this year, $125 million.

How do you balance between paying 2.1 or 2.2 times sales for an acquisition, given that your stock is selling at say two-thirds of sales versus the use of cash would be to paying down debt or buying in your stock?

Well, I think it's difficult analytically sometimes, but we feel it's difficult to get into a market we're not in that it's the most cost effective way to do it, so we have basically curtailed a lot of acquisitions, but in some situations, there's still some markets we would like to get in to be able to compete for national account sales on a more competitive basis.

Okay.

It's something we look at.

With low interest rates it's easier to make the numbers look like it's positive, too.

How about Mexico?

Are you still going to be seeing margin improvements, cost improvements coming out of Mexico in the coming fiscal year?

Yeah, I think we're going to get a big bang in Mexico next year because we're -- we just are ranking up to full production in shirts and there's a delay in recognizing the benefits because we have to, you know, put our goods towards those operations so we don't make any money until we ship them out to our customers and put them in service and amortize them.

So I anticipate we'll have another several million dollar benefit in merchandise next year in Mexico.

Finally, how about UNItech.

How is pricing looking there?

And that was a big contributor to the earnings gain this year.

Would you expect that incrementally over this year, I mean the past fiscal year that '03 would show better margins?

It's hard it say because that business is a little lumpier than our regular business which is very predictable.

They had a spectacular year this year, I think they expect to have another good year next year.

But I'm doubtful they will do a lot better.

On the positive side in Europe, I think we're expecting to do better there.

So where we sit, we expect five year over year.

This may be an old issue, but it's put to bed.

I just want to make sure that there won't be any sale of stock to meet any estate taxes or anything like that?

Is that issue all done with?

Not necessarily, George.

It's really not in our hands.

It's really the attorneys in the estate and the estate was substantially settled.

They did borrow a small amount of money and there probably will be some relatively modest sales of stock over the next year or so.

You know more about that than I do?

I do.

I think, George, you know, there's about $3 million loan to pay the tax and we will drift that out in small portion over the next Lee years.

Okay.

Now, will the company buy that stock?

I don't think the company can.

No, the company can't.

The company can't, okay.

Okay.

Good.

Thank you.

Very good.

Ladies and gentlemen if there are any additional questions you will need to press the one followed by the four at this time.

The next question comes from the line of Vern Simpson from Blair and Company.

Go ahead with your question.

Just a follow up.

Ron, you mentioned your lost business rate is a little bit higher, is that because more people are going out of business or you're losing market share to competitors?

Where does that come from?

I think the biggest part of it was out of business people looking to save money.

We did lose more business to complications as a percentage we normally do.

You know, we measure it constantly.

By percent, what we lose by customer and so forth, we did lose a slightly higher percentage to competition.

Okay.

And the other thing is, John, did you give guidance for revenue for next year?

Yeah, we did. $585 to $595 million.

Okay.

Thanks a lot, guys.

Once again, ladies and gentlemen, if you do have a question, you will need to press the one followed by the four at this time.

I'm showing no further questions at this time.

Please continue with your presentation or any closing remarks you may have.

This is Ron.

I think we're very happy with 2002.

We think we're off to a good start in 2003, even though the economy is in a slow range.

I think we've been conservative with our forecast.

And if we can get our new sales in line the way we should, we're very comfortable with our projections.

We want to thank you for participating in our webcast.

Ladies and gentlemen, that does conclude your conference call for today.

You may all disconnect and thank you all for participating.