UniFirst Corp (UNF) 2003 Q2 法說會逐字稿

Ladies and gentlemen thank you for standing by.

Welcome to the UniFirst Corporation's 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, you will need to press the 1 followed by the 4 on your telephone.

I would now like to turn the conference to Mr. John Bartlett, senior vice president with UniFirst Corporation.

Please go ahead, sir.

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

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

Joining me are Ronald Croatti, UniFirst's president and CEO and Dennis Assad, vice president of sales and marketing.

This call will be on a listen-only mode until the completion of our prepared remarks.

This 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 +ACI-anticipate+ACI- and +ACI-should+ACI- 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 costs of materials, fuel and labor, economic and other developments associated with the war with Iraq and the ongoing war on terrorism, unemployment levels, demand and price for the company's products and services, improvement in underperforming operations and the outcome of pending and future litigation and enviRonaldmental matters.

Now with the disclaimer over, I'll turn it over to Ronald for his comments.

Thank you, John.

I'm pleased that even in very unfavorable market conditions, we can report that our revenues are holding up and that our sales teams continue to show good success in virtually all our markets around the country.

Still, the quarter which ended March 1 turned out to be the toughest any of us anticipated.

We knew going into the year that we'd continue to be challenged by the economy.

It hasn't yet turned the corner.

And by international uncertainties, it could work to keep the lid on recovery.

Unfortunately, a number of these negative impacts we feared came together to affect us during the second quarter.

We listed these in our release, but I'll touch on them again.

Work force reduction: the economy continues to shed jobs, particularly in industrial sectors that have been traditionally heavy users of the uniform programs.

For example, we've seen over 30 straight months of job decline in the manufacturing sector.

That's a category where our business has historically shown considerable strength.

It's true that some areas have shown relatively stable or even slight growth, but in many cases these jobs that are holding on are lower skilled lower wage service positions, while those that are disappearing are the higher skill, higher wage manufacturing assembly jobs.

And it's many of these that have been significant users of our full-service uniform rental program.

Climatic impact.

After a couple of years of relatively mild winters, much of the nation was hit this year with unusual severe winter weather, including colder than normal temperatures.

In some cases storms affected our plant operations, causing lost work days and additional expense and catch up with service.

The weather and the cold also resulted in an increased fuel consumption both at facilities and in vehicles.

The result was we were buying more fuel to produce essentially the same results.

Geopolitical and terrorism.

Fuel and energy prices were bid up due to the social unrest in Venezuela, political unrest and the threat of war in the mid-east.

Fuel prices at the pump increased as much as 25+ACU- from the beginning to the end of the quarter and prices for heating oil and related fuels like diesel were up even higher.

Even the natural gas we mostly use to fire our plant boilers was trading at significantly higher levels than a year ago.

All this conspired to push +ACI-fuel and energy costs up nearly a full percentage point over a compatible period in fiscal 2002.

Labor and health care, expenses associated with paying our people for the work they do, providing them with health coverage they need to remain healthy on the job jumped about a half a percent over the same period a year ago.

Much of the wage expense increase can be related to monies paid for performance to more successful sales people and more of them.

While health care increases simply affect the continuation of a long-term trend to continue to challenge all of us.

A combination of all these factors caused us to see our overall expenses run about 3 points higher in the quarter just completed than the comparable period a year ago.

On an adjusted basis, revenue for the quarter were up over 4+ACU- with virtually all of it coming from our laundry operations.

We actually had better than expected success in selling new business.

And one result is higher merchandise expense related to goods put in service for new customer installations.

But even though new sales held up well, the positive impact was diminished by the current customer losses and shrinkage within our accounts occurring at the same time.

And unfortunately this pattern is likely to continue, at least for the near term.

So while we expect to see continuation of sales momentum, we also expect to see some degree of continued account shrinkage as a result of general economic conditions.

That means we are proceeding with the greatest in fiscal care.

We're going to do everything we can to exercise even tougher cost controls than we have up to this point.

We'll be looking at each and every cost center for potential savings.

We'll be evaluating all areas of our business to uncover places where possible restructuring can produce cost-reduction benefits.

There's no immediate plan for work force cuts.

But I would instruct that a strict hiring freeze and that all of our areas of business undertake a thorough evaluation of present man power utilization to see where there are places where reduction might make sense.

In short, I'm challenging every member of management to find a way of cutting costs without reducing customer value.

This was a difficult period, but I know we have the resources to deal with it.

So now, to explain how we're using some of the resources on the sales side, let me introduce vice president of sales and marketing, Dennis Assad.

Thanks, Ronald.

As was pointed out, our professional sales team has been selling at an accelerated pace as compared to a year ago.

In the second quarter we were about 10.5+ACU- ahead of the comparable period in fiscal year '02.

For the first six months we were 13+ACU- ahead of last year's performance.

Certainly some of this is due to the fact that we simply have more feet on the street, about a 3+ACU- increase in professional sales reps.

But beyond that we're seeing fundamental mental improvements, too.

For example, we think professional sales averages are up 11+ACU- on a six month to six month comparison basis.

In addition to that, our turnover is down by about 8+ACU- as compared to a year ago.

On the national account side we're making good progress.

Not just in winning more business, but also in establishing the kind of elevated profile that is more often getting us a seat at the table when big deals are being discussed.

This, and the factors mentioned previously, caused us to believe we're moving in the right direction and gives us confidence that we can continue to build our performance to date throughout the balance of the year.

Even with the soft economy, opportunities remain for properly targeted sales programs.

Ronald mentioned earlier job losses in the manufacturing sector have had a negative impact.

That's certainly true.

But it doesn't mean that there aren't still plenty of opportunities.

This simply means we're having to increasingly shift our direction from some of our old reliable user categories to emerging user areas that will represent better growth for the future.

This, of course, includes the entire service sector as well as areas like retailing, wholesaling, communications and transportation.

Some of these areas might not have traditionally been a major focus for us but ones which will experience higher levels of growth in the future.

As we look through those target areas we recognize we'll be focusing more on uniform benefits like security, image and branding as opposed to pure functionality benefit +AFs-inaudible+AF0- in many of the manufacturing areas, plus we'll be facing more work force adjustment as we deal with female and older workers.

That may require changes in the products we offer and the types of service we wrap around them.

But that's simply the necessary evolution of our marketplace mission.

It's what's required of us if we are to be effective in providing true +AFs-inaudible+AF0-solutions.

That's really what we're selling, not products or services, but solutions.

We anticipate continued sales progress as we move through the months ahead.

An end to the conflict into the Middle East and a turnaround in the economy can only improve the results we'll achieve.

Now I'll turn it over to John Bartlett.

Thank you, Dennis.

As Ronald explained, the second quarter of fiscal 2003 was disappointing from a financial standpoint.

The winter quarter's always challenging for our company.

And this year proved to be much worse than usual.

We not only struggled with the difficult economy and lower employment, but also suffered the most severe winter in several years and significantly higher energy costs.

Fiscal 2003 has also been challenging from an accounting standpoint, due to the implementation of the new accounting system at the beginning of the fiscal year.

As with most new implementations, it came with some problems.

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

First I'd like to note that the second quarter of fiscal 2003 was a 13-week quarter versus a 14-week quarter in fiscal 2002.

That's how reported revenues declined from +ACQ-151.5 million in the second quarter of fiscal 2002 to +ACQ-146.4 million in fiscal 2003, or 3.4+ACU-.

On a comparable 13-week basis, revenues increased 4.1+ACU- year over year.

This net increase was substantially all from our laundry business and included approximately 1+ACU- from acquisitions and price increases.

The balance was net internal growth in our basic laundry business.

On the positive side we experienced the following.

Our net garment merchandise was lower in fiscal 2003 primarily due to more profits realized from our transition to manufacturing in Mexico and good control of garment utilization.

However, our non-garment merchandise costs such as mats and facility service products increased resulting in an overall increase in merchandise costs.

Our UniTech nuclear business continues to perform well and on the year to date basis is above the prior year.

However, the second quarter earnings were lower than the second quarter of fiscal 2002.

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

We continue to see a year over year increase in our health care costs, we incurred significant energy cost increases including natural gas for our boilers and fuel for our vehicle fleet.

These year over year increases were well in excess of +ACQ-1 million.

The overall effect of these and other variations was that income from operations declined from +ACQ-11.8 million in the second quarter of fiscal 2002, to +ACQ-6.5 million in the second quarter of fiscal 2003, or 45+ACU-.

And from +ACQ-25.9 million to +ACQ-21.2 million or 18+ACU- for the first six months of the year.

Our net interest expense was +ACQ-382,000 in the second quarter of fiscal 2003 versus +ACQ-3.5 million in the prior year., which included a +ACQ-2.3 million charge related to interest on an RER.

For the first six months net interest expense declined to +ACQ-1 million primarily due to the special interest charge for the RER as well as lower interest rates, lower levels of borrowing and the benefit from our swap.

The income tax provision was 38.5+ACU- for both the second quarter and the first 26 weeks of fiscal 2003, versus a provision of 38+ACU- in both periods for fiscal 2002.

Finally, net income decreased from 26.8+ACU- from +ACQ-5.2 million to +ACQ-3.8 million in the second quarter and basic income per share decreased from 27 cents to 20 cents.

For the six-month period income before the cumulative effect of an accounting change decreased from +ACQ-12.8 million to +ACQ-12.4 million or 2.8+ACU-.

And basic income per share before the cumulative effect of the accounting change declined from 67 cents to 65 cents.

Effective at the beginning of fiscal 2003 the company adopted FAS 143, accounting for asset return obligations.

This new accounting standard requires that liabilities be recorded for the estimated costs of retiring long-lived assets at the end of their service lives.

The adoption of FAS 143 results in the cumulative charge net of tax, +ACQ-2.2 million, or 12 cents per share which we recorded in the first quarter of fiscal 2003.

Therefore net income at the first half of fiscal 2003 was +ACQ-10.2 million or 53 cents per basic share, or a 20.3+ACU- decrease from last year's +ACQ-12.8 million or 67 cents per basic share.

We believe the balance of 2003 will be challenging.

In our January conference call we provided guidance that we expected revenues to be between +ACQ-585 million and +ACQ-595 million in fiscal 2003.

We reiterate this revenue guidance as we believe our sales and marketing efforts have been and will continue to be successful.

We now believe that basic income per share for the year before the cumulative effect of the adoption of FAS 143 will be between +ACQ-1.32 and +ACQ-1.40 per share.

That concludes our prepared remarks.

And now we'll give you a couple minutes and be happy to respond to some questions.

Ladies and gentlemen if you would like to register for a question, please press 1 followed by the 4 on your telephone.

You will hear a three-tone prompt to acknowledge your request.

If your question has been asked and you wish to withdraw, you'll need to press 1 followed by 3.

If you're using a speaker phone, please lift 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, please press 1 followed by the 4 at this time.

Our first question comes from the line of Bruce Simpson with William Blair.

Please go ahead with your questions.

Hello, John and Ronald.

Good afternoon.

What I'm trying to get at is basically whether or not you have the sense that the employee head counts at your clients are continuing to deteriorate.

Do you have any anecdotal evidence that you feel like it's stabilized?

And if the answer is it looks like it's still deteriorating, is there any way to say whether that's accelerating or decelerating and so forth?

Bruce, I'll take that one.

We've seen more shrinkage within our accounts the month of February and March, greater than from September through January.

It really accelerated probably the last week or two in January, and it's been going at a pretty good clip.

And Ronald, can you be any more specific as to either geography or the type of client or the size of client that feels like it's laying people off?

It's pretty much across the board.

The next thing is, I guess, pricing, have you seen anything to indicate that the kinds of weakness in pricing that you saw over the last year has abated given +AFs-inaudible+AF0- public announcement of their pricing?

No, we haven't really experienced that in the field yet.

Our prices are pretty much similar to our last report.

Our national account pricing has been in the vicinity of 10+ACU- down and on the smaller accounts we're probably in the 2 to 5+ACU- range.

We've not seen that change over the past couple of months.

Okay.

And are you willing to give any kind of a breakout as to the components of internal growth?

Well, on the laundry - in the second quarter, the 4+ACU- -- 13-week period over 13-week period was essentially all in the basic uniform rental business side.

A big piece of that was we had a relatively large direct sale which accounted for, I think, about a third to a half of that.

And the balance, Bruce, it's really hard to -- it's really, we were selling new business, coming in the fRonaldt door and the shrinkage and lost accounts going out the back door and that results in the rental business probably about a plus 2+ACU-.

We look for a plus, but we don't think there's been a very minimal amount of price increase in that, and about 1+ACU- from acquisitions.

Okay.

So rental, about 2+ACU-, and the balance of that 4+ACU- comes from this large direct sale, you said?

Yeah.

Maybe not the whole 2+ACU-, but a pretty good piece of it, yeah.

Okay.

And then beyond that, as you said, pricing impact on organic growth is sort of flattish on this period?

Yes.

Is there anything that you can provide about the head count within the sales force, productivity levels, turnover and so forth, how satisfied you are with that effort to make those folks more productive?

Actually, we're very satisfied at this point.

As I mentioned earlier, productivity's up about 11+ACU- over the two six-month periods.

So we're real pleased with that.

Overall, again, the growth in sales is up 13+ACU- for that period.

So we're real pleased with what's happening out there.

We feel the last couple of years are starting -- recruiting and changes, and our processes have really helped.

And it's starting to have an impact out there right now.

And we're just, you know, hoping that continues.

Okay.

Can you give me any kind of quantity fiction as to turnover, either an absolute number or where it is relative to where it was before?

Well, the only thing I could tell you is that over the two six-month periods we were down 8+ACU-.

So we feel that that's an improvement.

But generally we don't give out the total number.

Okay.

I guess my last thing is just on competitive situation.

Any changes you've seen really in the six-month period year to date beyond the pricing we've talked about in terms of anybody being more or less aggressive or changes in geographical penetration and so forth?

There haven't been many changes at the field level.

And actual account arena, I think all the big companies are extremely aggressive there.

But all in all, I think that things have remained pretty steady over the past six months.

For the business that you're winning competitively, or for the business that you're losing competitively, are you taking that away more from the national accounts than you are from the small local accounts?

No.

We're taking more away at the local level than we are at the national account level.

However, that's beginning to change.

We've recently landed several good size accounts that really haven't been implemented yet.

So we know that that number's going to change over a short period.

And for those accounts that you're losing, I'm kind of curious.

Do you lose them to the local guys or to the national accounts?

Well, again, we're losing them, you know, across the board.

I mean, we haven't really lost a lot of national accounts.

Like we've lost extremely few.

So the losses that are occurring primarily are in the field, but some of them are being lost to competitors who gain national accounts and we lose the local situation.

So primarily, though, everything is happening at the local level.

Changes to the, you know, quote, unquote, no programmer, you've seen as the recession wears on, is it less and less of a component of new growth?

Our program and businesses, a little bit.

Again, we try to keep it at the 50+ACU-, 55+ACU- level if we can, and we see that it's in the mid to high 40s at this point.

So it is dwindling somewhat.

Okay.

Any kind of new business initiatives underway in terms of introduction of new products that you're studying?

Well, I had mentioned in the last Webcast that we are going to begin focusing quite a bit on the FR business, flame retardant business.

Yeah.

And we hope that that will be a lucrative market for us.

But we're just beginning to come out of the organization stage and implementation.

So we can't really report on any of the results at this point in time.

Okay.

Did the green guard business contribute materially to internal growth in either direction this quarter?

No.

It was relatively -- it was up a little bit, but relatively -- not material.

Okay.

And John, I don't think I got a balance sheet.

I don't know if that was not attached with the press release or if it's not ready or --

You should have.

Okay.

Just after the call maybe I'll call you.

I think I printed one out on the Internet.

It's out there, so.

All right.

That's it for me.

Thanks for your time, guys.

Okay.

Our next question comes from the line of Rick Dotay from Columbia Management Corporation.

Please go ahead with your questions.

To clarify, Dennis' comment on pricing, that relates only to, I assume that relates only to new business?

That does not refer to the existing base of business, the down 10+ACU- for national, down 2 to 3+ACU- for the smaller accounts?

Yes, that relates to new business only.

Okay.

You may have addressed this, but you know, I know the contracts call for price increases in your existing business.

What has been the experience there?

You know, I guess half a percent or a percent?

Anything?

We've been running about a half to three quarters of a percent.

Certainly it's not living up to our capability in terms of our contract terms.

But essentially it's been about a half to -- between a half and a point from the past couple of years.

And then to go back to the pricing on the new business, what is the discipline there, if there is any, on, you know, at what level -- is there a level at which you walk, or are you just -- you do it at any price?

No, there's definitely a level that we walk.

But I have to admit that we've been aggressive at the national account level, but we definitely walked away from many deals.

And the feeling is that you're not losing business right out of the gate on the national account stuff, you're bidding down that at that level?

That's correct.

You know, we're just lasting longer through that sales cycle than we have in the past through a little more aggressive pricing.

But, again, we're getting to the point, you know, when you're halfway, three quarters of the way through the negotiations where they start really trying to reduce the cost structure and we just walk away at that point in time.

Okay.

And then lastly on the balance sheet, the receivables picture, what have DSOs done in the recent past, including this quarter?

I think the receivables are about the same level they were in November.

We feel comfortable with the levels and I know they're up a little bit over the end of the year last year, but they're not significant.

There's nothing in there that you're concerned about?

No.

Obviously, --

It's basically the same.

You feel like your reserves are okay there?

Yes, absolutely.

Okay.

Thank you.

Once again, ladies and gentlemen, if you do have a question, please press the 1 followed by the 4 at this time.

Our next question comes from the line of Bruce Simpson with William Blair.

Please go ahead with your follow-up questions.

Hi, guys.

Just a follow-up.

John, to clarify the guidance number, I think you said 132 to 140.

So that's outside of FAS 143, right?

That's correct.

And is that inclusive or exclusive of the swap interest that you anticipate?

Well, it's inclusive, but one of the reasons we have a fairly wide swing is that's a pretty big unknown.

Probably, you know, we thought that we'd get a little more benefit in the first six months than we've gotten.

And depending on what happens, it could turn around substantially.

So what is that swap number that's implicit?

Well, right now -- I'm guesstimating it should be around +ACQ-750,000 in the next six months benefit from that.

Pretax benefit?

Right.

All right.

And then on a different issue, I did want to ask a little bit about acquisitions out there in the industry.

You know, lots to talk about how they had gotten up to record levels.

Just has the total volume of acquisitions dried up beyond kind of the high profile ones of Omni and so forth, or are there continue to be little runs that are recorded out there at high pricing levels?

Bruce, this is Ronald.

I think there's still little ones out there.

And pricing is up there.

That's the only thing I can tell you.

I mean, guys are talking to more than one person.

Okay.

And so that contributed, what maybe about 1+ACU- to your total top line growth in this quarter?

Yeah, that was the acquisition we made in July of last year in Springfield, Missouri.

It was about a +ACQ-5 million a year deal.

And so that's, you know, that's about +ACQ-100,000 a week that we have this year that we didn't have a year ago.

The last thing is, I was curious about the estate situation.

Are there shares that need to be sold.

Can the company participate in repurchase?

Could you just get me updated on all that?

There are some shares.

The estate is, I believe, trying to sell about 200,000 shares.

We're essentially told by the attorney that we shouldn't purchase them.

And so we really have not been in the market to buy shares.

Okay.

And can you share, or,you know, public matter, private matter as to where you are in the disposition of those 200,000?

I don't know exactly.

My understanding is they've only sold, perhaps, maybe 10,000 shares.

They're going to do it over an 18-month period.

But we're not directly involved in it.

It's actually being handled by William Blair and I think Merrill Lynch.

Well, one of those sounds at least like a pretty formidable institution.

Thanks a lot for your help, guys.

See you later.

Thank you.

Our next question comes from the line of Rick Dotay from Columbia Management Group.

Please go ahead with your follow-up questions.

Yeah, you answered it.

It's over an 18-month period, so whatever that is a month.

It's not --

The intent is not to affect the market.

Exactly.

So it's not really 200,000 shares out there today, so.

Okay.

That's all I had.

Thanks.

Gentlemen, there are no further questions at this time.

Please continue with the presentation or any closing remarks.

We certainly appreciate everybody's time and effort.

We're confident we can keep the sales effort going, and we're going to do our very best to try to get our costs under control.

Over the next six months and hopefully we have more positive news for next quarter on our earnings.

We thank you for your time.

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.--- 0