UniFirst Corp (UNF) 2003 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the UniFirst Corporation first 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 please press the one followed by a four on your telephone.

I will turn the call over the John Bartlett Senior Vice President and Chief Financial Officer for UniFirst.

Please go ahead, sir.

Thank you and welcome to UniFirst's conference call to review our first quarter operating results for fiscal 2003 and to discuss our expectations going forward.

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

Joining me are Ronald Croatti, UniFirst President and CEO, and Dennis Assad, Senior Vice President of Sales and Marketing.

This call will be on a listen only mode until we complete our prepared remarks.

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 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 or possible war in Iraq, strikes and unemployment level, demand and price for the underperforming [rental] company's products and services, improvements in operations and the outcome of pending and future litigation and environmental matters.

Now that we've completed that I'll turn the call over the Ron for his comments.

Thank you, John and welcome to all of you that are joining us for this review of our first quarter results.

We'll go into details of the numbers shortly.

Let me start off with a brief recap.

Revenues for the first quarter were up 4.6 compared to the same period a year ago.

With all business segments contributing positively.

Despite some continuing impact from reductions and account losses, our core uniform business moved ahead.

That's a positive sign in an economy that remains uncertainty about exactly what it wants to do.

Based on our on the street experience, we're not ready to call the economic turnaround yet.

Businesses in many quarters are still fearing the effects of the slump and that means many companies continue to delay new financial commitments commitments. and defer the expansion of programs already in place.

Nevertheless we are encouraged by the fact that new sales results are trending up.

Part of this is simply due to the fact we have more reps onboard but part is due to a better productivity as we're seeing weekly sales averages move up in the number of accounts sold quarter to quarter itch crease.

Our national account team continues to target and pursue big account opportunities and we're focusing more sales resources on niche applications, particularly those requiring specialized clothing services for personnel and process protection.

Operating income showed a 4.4% increase primarily due to another solid contribution from our UniTech service division and positive flow through from our manufacturing operations.

Earnings per share are up 12.5% quarter to quarter even though we saw sales expenses increase slightly due to our greater success acquiring new business and experience of upward wage pressure as well as increasing healthcare costs.

Net income prior to accumulated accounting changes increased 13.5%.

Important to this advance were savings from the positive effect of our swap plus reduced interest payments on total debt.

During the quarter we adopted a accounting standard SAFAS143 which has a cumulative one-time impact that affects the quarters numbers.

John will cover this in detail during his presentation explaining the immediate impact and implications moving forward.

As was the case throughout this fiscal year 2002 we continue to monitor our spending very carefully.

And committing funding to only the most essential capital projects.

We are, however, continue to invest in the growth of our sales organization.

Both to bolster results in the slow period and to position us for accelerating growth when the economy gets back on track.

Details regarding our financial performance here's John Bartlett.

Thank you, Ron.

As Ron explained the first quarter of fiscal 2003 was a solid quarter from a financial standpoint.

The first quarter was a difficult one from an accounting standpoint for a couple of reasons.

First and foremost was we implemented a new accounting system effective with the beginning of the fiscal year.

As with most new implementations it came with problems.

We're working through the issues and are confident it will be a significant benefit to the company as we move forward.

We are now able to reflect more accurately invoices outstanding tend of a period and the appropriate balance sheet accounts.

Also certain amount that are reflected in accrued liable are now reflected in accounts payable.

There are some small inconsistencies in amounts of operating costs versus selling and administrative expenses.

We are confident the amounts presented for both quarters accurately reflect our operating results.

However, it is difficult to make meaningful comments on variations in some of the comfortable balances.

There are a few significant factors that impacted our operating results for the first quarter that I would like to highlight.

Our net merchandise [face] cost was lower in fiscal 2003 primarily due to more profits realized from our transition to manufacturing in Mexico.

Our UniTech business had another excellent quarter.

We had positive results from our sales efforts but it came with a small increase in selling costs.

We continued to see a year over year increase in our healthcare costs.

The overall effect of these and other variations was that income from operations increased from $14.1m to $14.7m or 4.4% which is consistent with our revenue growth.

Our net interest expense was 617,000 in fiscal 2003 versus $1.8m in the prior year.

This was due to $500,000 less interest due to lower debt and borrowing rate and a benefit of $209,000 from the change in fair market value of our $40m interest rate swap as opposed to an expense of $534,000 in the prior year.

We increased our tax provision to 38.5% versus the 38% used in fiscal 2002.

Finally, net income or income before the accumulative effect of the accounting change and the adoption of [FASD] 143 increased 13.5% from $7.6m to $8.7m and income per share increased from 40 cents to 45 cents per share.

Overall we are pleased with the results for first quarter of fiscal 2003.

Our balance sheet continues to be very strong.

As previously noted, because of the implementation of the new accounting software it is difficult to make meaningful comparisons with prior periods.

Perhaps the most significant fact is that total debt declined $12m from the 86.3m in August of 2002 to $74.3m in November of 2002.

Unfortunately part of this reduction is due to our being behind in voucher and paying invoices as one of the issues with implementing the new system.

The other significant factor in the first quarter was the adoption of FASD 143 regarding asset retirement obligations.

This FASD requires that a liability be establish established for the estimated costs to decommission facilities tend of their useful life.

The company currently has 11 facilities which are used in our UniTech subsidiary.

The NRC or state regulatory agency regulates each of these facilities.

Their primary business is to launder clothes worn by workers in nuclear power plants or Department of Energy sites.

Over the course of their useful lives, these facilities become contaminated with low levels of radiation and need to be decommissioned at the end of their useful life.

Over the last several years we have decommissioned several of these facilities and included the costs in our recurring operating expenses.

This new FASD requires that a liability be established over the useful life of a facility to provide for the decommissioning when a facility is closed.

The calculation of this liability required us to estimate the cost to decommission each facility at the end of its useful life.

This [inaudible] amount backed with present value [inaudible] the facility is placed in service at a credit adjusted risk free interest rate and then to depreciate this amount as an asset over its useful life.

We also must accrete the amount using the credit adjusted risk free interest rate to the estimated cost to decommission the facility at the end of its useful life.

In that effect of adopting the FASD was for us to set up a $6.24m which is the present value of the liability at the point in time these facilities were placed in service.

The amount recorded in includes a depreciation from the in service date of each facility of $1.5m and accretion expense of $2.9m from the in-service date to the beginning of this fiscal year for a total amount of $4.4m.

This amount was then reduced by an accrual of $750,000 that the company had established in prior years for its issue resulting in a pretax charge of $3.65m.

The net charge after a tax benefit of $1.41m was $2.24m.

In additional the company reported appreciation expense of $24,000 and accretion expense of $74,500 in the first quarter.

These non-cash charges will continue in future periods to depreciate the assets recorded and to accrete the liabilities to the amount required at the end of their useful lives.

Having tried to explain the adoption of this new FASD we would like to put the charge recorded in perspective to our overall operations.

The company currently owns in excess of 3.7m square feet of buildings which are carried on our books at a net book value of approximately $125m.

These buildings are insured for an excess of $200m or over $75m more than the net book value.

We believe the amount of $75m is a conservative estimate of the excess market value of the real estate and does not include any amount for increases in land value.

The company also owns essentially all of its office equipment including computers, laundry equipment and vehicles which have a net book value significantly less than their replacement or market value.

We believe it is important to keep these factors in perspective when you consider the impact of the requirement to adopt the FASD.

Looking ahead we continue to believe 2003 will be another challenging but good year.

In our November conference call we provided guidance that we expected revenues to be between $585m and $595m for fiscal 2003 and that income per share before the adoption of FASD 143 would be approximately 1.60 per share.

We continue to believe these are reasonable estimates for FY 2003.

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

During the quarter we maintained our focus on improving sales rep productivity.

We continued to hire better qualified candidates, continue to train intensively, spent even more local sales time coaching, monitoring and assisting new reps.

At the same time we saw our turnover rate continue to drop.

Meaning there were more experienced people in the field making prospect calls.

Despite the continued sluggishness in the economy our professional sales organization ran about 17% more volume in this year's first quarter than they did in a comparable period last year.

As Ron pointed out some of this was due to our decision to wrap up the sales staffing.

During the first quarter we had about a 5% more reps than we did during the same period a year ago.

But that was only part of the difference.

Sales averages were also up about 11% quarter to quarter and the actual number of new accounts sold was up by a similar amount.

So the combination of more people selling more helped to get productivity moving.

We continued to focus on improved databased management in order to get reps involved in a greater number of high potential selling opportunities and we continued to push for a balanced sales approach that emphasized no program or business but didn’t ignore current rental users who are close to the end of service agreements with our present suppliers.

We also carefully monitored activity to ensure that the preponderance of sales time is going to targeting more mid to large size prospects.

We know we can’t ignore small accounts but we also know that the slightly longer sales time that goes into closing a larger account is more than repaid in the higher weekly revenues they produce.

Speaking of larger accounts our national account team continues to build on the context of a relationship foundation they have established with high profile customers and prospects around the country.

With a full staff of field territory managers and a full compliment of well-trained in-house account executives we have seen the implementation and execution of programs constantly improve.

We are increasingly recognized as a serious player in the national accounts arena and as a result of that coupled with the continuing help of our people we expect to see a solid increase in national sales accounts this year.

We are hoping for an overall economic Improvement later on in this fiscal year.

But for the present we are comfortable that our sales organization is in good shape to deal with whatever comes their way.

We see no reason to expect less than a continuing strong performance throughout the balance of the year.

John.

Thank you, Dennis, now we'll give you a couple minutes to prepare some questions.

We'll be happy to respond to anything you might have.

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 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 a three.

If you are using a speakerphone please lift the headset.

One moment for the first question.

Alex Paris with Barrington Research.

Please go ahead.

Sorry I got on the call late so you might have addressed this but I was just hoping that you can comment on internal growth within the core laundry business and then growth that resulted from acquisitions made over the last 12 months.

Well, Alex, the growth that we're reporting now for the quarter is all internal growth.

Okay.

The laundries themselves were up about 1.5% in the U.S.

And.

The difference that a 4.4 was the GreenGuard operation in the UniTech operation.

Great.

Also did you repurchase any stock during the quarter?

We repurchased 60,000 shares, Alex Alex, very small number of shares.

Okay.

Thank you.

The next question is from Rick [Dotay] from Columbia Management Group.

Good afternoon.

To quantify some of the cost side of the equation, healthcare costs I think you brought up.

You said you had some wage inning inflation.

Sales is up.

Maybe if you can quantify that.

One thing you didn't mention that I thought might be impacting you here is energy prices are back up again.

What are you seeing on that front?

Well, in the healthcare area, the quarter over quarter increases and these are a little lumpy because we're self-insured but the quarter over quarter numbers were about $500,000.

So up from the prior quarter.

Up from a year ago's quarter.

Year over year.

The wages were relatively flat with the exception really of additional sales people.

Okay.

Now we traditionally and this year is no different we give wage increases January 1st so we're --

We're going to have some wage pressures Rick --

We held the line very well a year ago.

I think this year the wages are -- it was difficult to do it two years in a row so I think we're going to see some increment moving forward.

What kind of percent?

We have pretty much a flat 2% raise last year and I think it will be a little higher than that.

I think we targeted 3% but just going into effect right now.

Okay.

We hope it won't be significant.

Well I mean the other side of the equation is not that good still.

Exactly.

Whatever success you're having is because you're throwing money at sales.

Right?

On the new business side.

Try to be more positive.

Sorry.

We're spending more dollars in sales, more sales crew to get the revenues moving up.

Right.

We have finely seen some productivity in the sales force.

I think that's important.

That's the important aspect.

What -- what are the sales year over year in this quarter up?

The sales expense?

Sales expense itself?

Yeah, percent.

They are up about I think about about 0.3% year over year as a percent of revenues.

You have head count up over 5%?

Right.

And it's only up 0.3% a in dollars.

Yeah, because the head count is recent and.

Okay, back loaded?

Right.

Okay.

And what about on the energy front?

Well, we've been experiencing the energy on the fuel, the gasoline for the vehicles the last three months.

Yeah.

We have been trying to get that from our customers at this point.

You're trying.

You are seeing maybe a 1% increase or 2% increase from adjustments in the customers?

That is correct.

Okay.

On this -- all right, I'm trying to look at how you classify it.

The fair market value change in the interest rate, how much -- are those -- what's the termination date on those?

October of 2004.

Okay.

And they tend to be pretty volatile, right?

Well, they are.

I mean they have been going in one direction for a long time.

I don't think interest rates can go much lower, but, yes, that could -- I would be extremely surprised if it was anything but a positive string going forward.

Basically be seven more quarters of adjustments.

Okay.

You know, there's something like $3.5m credit sitting there that's going to be about 500,000 a quarter depending how interest rates go forward.

Okay.

And the -- anything in the hopper on the acquisition side?

We're out there looking.

We haven't seen anything that we want to pay up for.

I like those words.

Prices are big, I'll tell that to you.

Let somebody else do that stuff.

Thank you.

All right, Rick, thanks.

The next question is from Douglas Pratt with Wells Capital.

I think my questions have largely been answered but could you elaborate on sales in what you refer to as a niche area?

Special I guess special uniforms?

Yeah, we are really talking primarily about flame retardant garments.

We recently established a new initiative in that area and we are going to be attacking that very heavily within the next three to six months.

How big a market is that now?

How big do you think it could be?

It's a huge market.

We're not really sure of the total potential out there.

But we're looking to get to the 2m to 5m range in, you know, relatively short period of time.

And also what future benefits do you think you can continue to get out of the Mexican manufacturing movement?

Well, I think we're nearing the benefit of that.

I mean really what has happened is there's a delay in recognizing the benefits as we manufacture the goods and bring them into our supply inventory.

We can't really reap the benefits until we actually place them in service and amortize those in the field.

So I'd say we're close to 80% of the way there but I mean there's some he benefit to go because we're still ramping up efficiency at the shirt plant, the second plant, but we don't -- I mean -- there's some additional benefit.

We're getting close to reaping the full benefit.

I see.

Finally, what was your capital expenditures for the quarter?

A little less than $10m.

We will be putting out the Q tomorrow.

Thanks very much.

Thank you.

The next question is from the line of Bruce Simpson with William Blair & Company, please go ahead.

Good afternoon, guys.

Hello, Bruce.

So to look at the components of internal growth, Dennis I think you said 17% more volume than '01Q, should I look at that as 17% more revenue from new business written then?

It is 17% up in terms of weekly sales written.

It's not total revenue that is coming into the corporation.

Okay.

And 5% of that you said is from more head count and the other 12 ostensibly is from better production out of the existing guys.

That is correct.

And then a lot of talk lately about pricing.

Can you give any comment on that over overall?

Are new uniforms going out at lower absolute levels than a quarter or a year ago.

I would say they are continuing to decline on a regular basis.

Pricing is extremely competitive right now.

In all areas of the business.

And could you quantify?

Are you talking things are a penny cheaper?

Are they 10% cheaper than whatever frame a year ago?

I think from a year ago you're probably more on the 10% cheaper.

Okay.

And now is that all built in to the number that you call shrinkage that offsets new business written?

No, no, not at all.

When I say 10% cheaper we are really focusing largely on bigger accounts right now and so obviously that's ach more competitive arena.

The smaller accounts, the pricing is probably down just 2 to 5%.

Okay.

And is pricing now as low as you have seen it in this cycle or was it worse last year and has rebounded?

I think it's lower than last year.

And I'm not sure where that bottom is to be honest with you.

In terms of the headcounts of the clients thundershower servicing.

Where are we now?

Does it feel as if the headcount has stopped deteriorating?

I'll take that one.

We watched that week to week and the month of December it ran relatively flat and then the first week in January we took a pretty good whack so we continue to see the reduction of wearers as versus reduction we call it in, you know, it's not at the pace that it was last year's first quarter but it's certainly improved over that but it's still negative.

And looking upon that same kind of analysis to the actual number of clients, which I think some of your competitors called lost business whether that's competitive loss or out of business, are people still going out of business or has that stopped?

No, I think we're still seeing the out of businesses, the competitive movement on the accounts, every company in America is under pressure to make profits and when their contracts are coming up there's more and more biding opportunities, they are putting stuff out to bid and it is competitive pressure.

For the quarter we ran about 2%.

So, you know, it's indicative for the year, we say we lose about 8.

Okay.

That's a combination of competitive losses as well as your clients just shutting the doors.

That's any customer that quit for any reason.

Okay.

And then turning over to the balance sheet for a moment, I guess I wasn't exactly certain.

I thought I heard John say something about one of the reasons that debt was lower was due to something about being behind in the process of invoicing?

Well, I'll let John do it but we put in a new accounting system.

Yeah.

September 1st.

It’s People Soft It's made poor John's hair turn black.

Go ahead, John.

Well, we've had a few issues and one of the issues is that it's a little bit more complicated the voucher invoice and we were surprised.

I don't think we were forewarned but we had gotten behind in vouchering the bills which is kind of a problem with getting their books closed at the end of the fiscal year, you know, we implemented it for the beginning of this fiscal year.

We stopped vouchering the old bills, the old way, August 31, we voucher them the new way and it caused us a delay in getting our August of 2002 numbers which pushed the audit back, but it's –I mean that's -- it took us long tower get the bills out, we held the books open and then when did he we did close the books we had more accounts payable than we than we would have for bills that were for the firth quarter so the accounts payable is up significantly year to year but I'm not 100% sure that's the only reason.

I think it's also we've captured more bills related to the balance sheet than we have in the past because of the new system.

We're working through the problems and we think it's going to be a big den Ben benefit moving forward.

Did I hear you say, John, you thought it impacted the reported number of your long- long-term debt or not?

Well it did in the fact we were late in paying some bills.

We actually borrow or pay down our debt every day, Bruce.

Yeah.

So if we had not paid some bills because we were late in paying them we had more money in the bank and less borrowing.

Okay.

That's the explanation.

So what is then an accurate number on --

I guess that probably should have been down $4m or $5 less than it was.

Probably went from -- yeah, 86 to 74.

It should have been closer to 78 to $79m in debt.

Okay.

If we'd been able to pay those invoices on a more timely basis.

We were optimistic we were going to get that caught up to the end of February.

Okay.

So then the accounts payable was up and I notice also your receivables were up.

The receivables really shouldn't have been impacted by that.

The real receivables were up but they were consistent with what they were up a year ago.

If you looked at the gross growth over November of 2001 I think you will find they are pretty much in line.

And then a big part of that is they have a bill big budge in sales and I don’t think they have ever written off a bill but they are slow payers with the government and the utilities so there's a seasonal spike in those.

Okay all right.

And going forward just in building a model tax rate we should look at 38.5 instead of 38.0.

That's where we're planning to model for the year, yes.

I guess overall as a last question just as you guys look forward, it sounds as if almost as if your business is moving in a slightly different direction than the overall industry.

The industry is a tough or tougher than it's ever been in terms of competitive pricing and at the same time you guys have your, not only is your headcount in sales growing but those people are beginning to become more productive, so guess what I'm trying to get at is, you know, what's your optimism versus realism level as of January '03?

Does '03 feel like it's going to be in general a less painful year than the last couple of years to be in this business?

Well, I'll speak first and then the other people can take a shot.

I think one thing and it's hard to quantify but I think the reality is that this quarter quarter's comparison versus a year ago, I mean a year ago was after 9/11 and it was a tough quarter so I think in some ways it was maybe a relatively easy comparison from the sales side.

It's hard to quantify that but I think there's a factor in there.

And Dennis and Ron you can add your thoughts.

I think this year -- it's just a little bit easier out there.

I think people are making decisions a little more quickly than they were last year.

Our target remains 15% growth in new sales.

Which, again, does not have the same impact on overall revenue but that is a good target.

We think it's a realistic one and even though pricing is slightly lower, we feel that we are going to have a pretty good year in the sales department which would include our national account division.

Anything you would like to add?

The pluses with the slower economy that the turnover in the sales force is down somewhat somewhat, that helps us get more productivity out of the sales force.

The whole general work force hasn't got the turnover.

People on the job longer become more productive.

I think like we say, we have some wage pressure we're seeing and it's the health insurance, those are our two big concerns on the cost side.

I know I promised that was my last one.

John, anything on -- a calculated number yet for cash flow or should I wait for the Q?

Wait for the Q.

Okay.

Thanks a lot, guys.

Very good.

Take care, Bruce.

The next question is the is from the you line of Michael [Grefens] from the from Robert W. Baird.

No programmer rate this quarter?

Do you have that figure?

It's in the 35 to 250% range -- 50 50% range.

That's a slight decline from what you experienced last quarter?

Yes, it is.

Also I noticed in your press release you said you had 144 facilities now versus the last several quarters you had stated 150 facilities.

Is there any consolidation in your plants or is it basically --

No, I think that's just --

We're checking that right now.

We closed a couple of small branches is what we did do.

Okay.

It shouldn't be that kind of number.

We have not consolidated any plants.

Okay.

All right.

That's actually all I had.

Thank you.

Ladies and gentlemen as a reminder to register for a question please press the one followed by a four.

The next question is from Douglas Pratt from Wells Capital.

Actually my next question was answered, thank you.

Once again ladies and gentlemen if there are any additional questions at this time, please press the one followed by the four.

I'm showing no further questions.

Please continue.

In closing let me just say that with the slow economy we are taking a prudent conservative approach in setting our expectations for the year.

But in that regard we feel confident about our prospects and remain optimistic we can hit our projected numbers.

I want to thank you for your continued interest in UniFirst and we look forward to presenting our results to you throughout the rest of the year.

Thank you.

Ladies and gentlemen that does conclude the conference call for today.

We thank you for your participation and ask that you please disconnect your line.--- 0